NEW MARKET The storage sector only took off two years ago indicating there is a lot of learning and growth to come
AMBIGUOUS OUTLOOK
Batteries are not yet economically attractive in much of the world
KEY QUOTE
Policy and regulatory reform are only just beginning to make headway even in some of the world’s major jurisdictions
The global energy economy must eventually be based upon renewable energy if the world is to have an even chance of limiting the global temperature rise to 1.5°C—and grid-connected storage will play a vital role.
A grid-connected storage market—or “front-of-the-meter storage”—is complemented by customer-sited storage for individual residences or commercial buildings. Industrial consumers can use storage to cut consumption peaks and provide backup power if there is a blackout. Meanwhile, vehicle-to-grid storage is also set to become more popular.
The power stored in batteries is dispatchable, sometimes almost instantaneously, which is not the case with gas-fired peaking plants, which have traditionally supplied dispatchable power and storage advocates hope to replace.
Elsewhere, batteries can provide ancillary services or frequency control services—the so-called FCAS market—which still is a niche use, says Kashish Shah from Wood Mackenzie, a market research group. These services will be required more often by grid operators as they manage increased variability on a grid caused by greater renewable energy penetration.
Shah also notes a newer service that grid-connected storage can provide, inertia, which is standard with conventional fossil, nuclear and hydro generators. It occurs when a large power plant fails, and mechanical generators continue rotating even for a few seconds. This has been assumed in a conventional grid but with the growth of invertor-based systems, batteries can instead provide this synthetic inertia, says Shah.
POWER SHIFTS
All of this shows how important grid-connected storage systems will be to nations’ power networks and why national governments are taking a serious look at how to incentivise them effectively.
Still, energy shifting continues to be the primary use case for energy storage. Residential storage market share jumped in 2022 due to higher-than-expected deployments in Europe and delays in utility-scale renewables projects in the US, according to Helen Kou from BloombergNEF, a clean energy finance analyst.
In 2022, energy shifting represented 54% of deployments and will make up 73% by 2024, before declining to 66% by 2030, says Kou, as other grid requirements take hold.
A significant rise in deployments expected in 2024 is largely due to additions in California because of mandates requiring utilities and energy providers to buy around 15.5 gigawatts (GW) of clean firm capacity between 2023 and 2027.
Other markets such as the US Southwest, Germany and India have announced auctions for solar paired with storage for firm capacity. Market developments in China, Singapore, the UK, Ireland, Italy, Sweden and Slovenia show that an ancillary service market is viable, according to BloombergNEF, but it will make up a smaller portion of deployments over time, Kou adds.
PLAYING CATCH-UP
The energy storage market only really took off two years ago, says Wood Mackenzie’s Vanessa Witte, but the IEA has tracked a steady growth of battery storage for six years. Yet, policy and regulatory reform are only just beginning to make headway even in some of the world’s major jurisdictions.
The European Union (EU) issued a new electricity market policy—which addressed the necessity of storage—in March 2023. Australia, which has a vibrant storage market, issued some key storage policies late in 2022. And the US, the world’s largest storage market, enacted the Inflation Reduction Act (IRA) in August 2022, which offers stand-alone storage projects a generous Investment Tax Credit (ITC).
Over the last year, provinces in China, as well as India, South Korea, Greece, Turkey and the US state of New York, have also announced new or expanded ambitious targets for energy storage, says BloombergNEF’s Kou.
RAPID PROGRESS
In the US, the new and sweeping IRA legislation—with roughly $370 billion for addressing climate change—offers an ITC of around 30% for a stand-alone storage system with local content. Previously, only storage paired with solar was eligible for a tax credit and that was being phased out. Storage is also now eligible for a tax credit for US-based manufacturing of batteries of up to $45 per kilowatt-hour (/kWh).
The IRA has triggered conversation elsewhere in the world, says Julia Souder of the Long Duration Energy Storage (LDES) Council, a global trade group. She notes however that storage owners are still having to wait for the Department of Treasury’s guidance for eligibility, which had not been issued as of late March 2023.
Buoyed by the IRA, BloombergNEF predicts that US total cumulative storage capacity will reach 120 GW by the end of 2030. The projection was increased by 24% because of the IRA, which also instituted tax credits for wind and solar, says Kou.
Over-arching renewables backing, as well as storage goals and incentives, drive energy storage uptake, say analysts. The US had 14.5 GW of storage as of the start of 2023 and is forecast to have 668.5 GW by 2030, according to Wood Mackenzie’s Witte.
ENERGY VAULT The search for storage technologies that can provide power for over ten hours is accelerating
EARTH SHOT
In May 2022, the US Department of Energy unveiled an LDES “earth shot” grant to help commercialise emerging technologies that power the grid for ten or more hours. The initiative provides $505 million in funding over four years.
But headwinds in the US include problems with interconnection queues, with storage developers sometimes waiting years and having to pay high fees. According to the Lawrence Berkeley National Laboratory, as of the end of 2021, more than 1.1 terawatts (TW) of storage capacity and solar were in the US grid’s interconnection queues.
Many storage stakeholders would prefer “cluster” studies for interconnection where several projects could be considered for interconnection at once, meaning that a single leading project would not have to bear the financial burden of an interconnection analysis.
In mid-2022, the US Federal Energy Regulatory Commission proposed a “first ready, first served” rule for clusters of proposed new storage and generation projects, instead of considering projects individually in the order in which they applied.
According to Wood Mackenzie’s Witte, the US connected 4 GW of in-front-of-the-meter storage in 2022. From 2023-2027, Wood Mackenzie expects about 60 GW of grid-scale storage to come online. California, Texas, and the Southwest will continue to be key US markets in the near term, BloombergNEF predicts.
GOLDEN STANDARD
California, an early adopter and the national leader has an aggressive climate mandate. Regulators have ordered the state’s three major investor-owned utilities to add 11.5 GW of new clean energy for system reliability by 2026, says Witte. Then in February 2023, regulators told the utilities to add 4 GW more clean energy capacity for reliability purposes from 2026-2027.
The state had a target of 15 GW of energy storage and demand response capacity by 2032, which has already been met. Many developers are hoping that other states follow California’s leadership, adds Witte.
California’s grid operator does not offer a formal wholesale capacity market, but it does have a mandatory resource adequacy requirement. The market is lucrative for storage owners, with monthly payments varying from $8-12/kWh, says Kou, depending upon the type of battery, off-taker and when the contract was signed.
LONE GRID
Texas, meanwhile, is a merchant market. The state has seen a “mass frenzy” of potential deployments, with nearly 74 GW of storage projects in the grid operator’s interconnection queue as of March 2023, says Kou. BloombergNEF sees only 24 GW of capacity online by 2030. Even so, many developers are looking to take advantage of volatile real-time energy markets and ancillary service products.
The state has no capacity payment market, but demand for storage is high due to extreme temperatures and significant new load from, for instance, bitcoin mining facilities. A rapid uptake of wind and solar capacity is also helping to propel the market.
Texas’ growth could create more consistent and lucrative arbitrage possibilities. Price spreads grew in 2022 even though charging costs were higher. A one-hour battery cycling once daily could have made $46,227/MW between January 1st, 2022, to December 1st, 2022, Wood Mackenzie notes.
However, state regulators voted in January 2023 to introduce a new pay-out to thermal generators which will likely favour gas economics, said BloombergNEF. This is an attempt to make the state’s electricity system more reliable. Texas’ grid—which is isolated from the rest of the US—has twice become unstable during recent major storms that caused generation outages.
“We expect year-on-year deployments of batteries [in Texas] to drop over time, given current deployments of renewables and no additional market revenue streams, like a capacity market,” says Kou.
EMPIRE STATE
New York, so far a relatively small storage market, has an aggressive goal of 6 GW of storage by 2030, with three key procurement programmes to help accelerate deployments.
Growth is expected to be robust enough, although there are delays because of, again, long interconnection queues, high costs and high population density making siting of storage tricky. Cost inflation as a result of supply chain constraints and downward pressure on capacity prices also play a part.
The state also has unusually strict fire codes and national codes should be instituted, says Wood Mackenzie’s Witte, but this will increase the cost barrier to new storage projects. Li-ion batteries do occasionally catch fire and the flames cannot be extinguished simply with water. Pacific Gas & Electric’s 182.5 MW battery at Elkhorn in central California caught on fire in September 2022 and although no one was hurt, a major road had to be closed and the news made waves across the state.
“Setting loftier targets without reforms to fundamental barriers to deployment means New York customers will overpay significantly for energy storage and that the target may not be met,” a BloombergNEF report concluded.
CHINA RULES
Meanwhile, the world’s second-largest storage market, is also shaping up to help boost its own storage capacity market—and essential supply chain—further.
China is expected to overtake the US by 2030 when it comes to storage capacity. Its storage projects are government-backed and there is no wholesale electricity market, says Wood Mackenzie’s Shah. The country had more than 20 GW installed as of the end of 2022. Xiaoyang Li, also at Wood Mackenzie, says that at least 130 GW of storage capacity will be added by the end of 2030.
The country has ambitious provincial targets. Although no official national target has been released by the National Energy Administration, 19 provinces have set storage goals. Wood Mackenzie does not expect all of these targets to be realised, but they show “provincial governments’ passion for supporting energy storage system (ESS) markets”, Li says.
Twenty-three provinces have released regulations for EESs to pair with renewables and 30 provinces released regulations for EES to join in the ancillary services. Renewables integration policies, the main driver for deployment, are compulsory nationally, says BloombergNEF’s Kou.
China’s difficulties include an immature business structure and low financial returns in the near term, Li adds.
MATERIALS MATTER
Raw material costs for Li-ion batteries remain high, though China dominates this market. But competition with the growing electric vehicle sector means grid-connected energy storage developers lack the bargaining power to keep costs low.
Projects are becoming uneconomical in the short term due to rising costs of raw materials, particularly lithium carbonate, which mostly originates in China.
Battery-related costs account for approximately 70% of total storage project Capex, says Li. Wood Mackenzie sees this supply chain barrier to be just a near-term concern but then it becomes a driver to support China’s ESS market growth over the long term.
In January 2022, the Chinese government released an Implementation Plan for Energy Storage Development. It represents a massive scaling up of energy storage with the creation of new commercial opportunities, including the opening up of wholesale power markets, says Kou. A minimum 30% reduction in cost for battery-based energy storage systems has also been proposed.
As of March 2023, more than a dozen provinces had released details on how standalone energy storage projects could participate in local energy and ancillary markets, likely leading to a boost in energy shifting and ancillary services. But some of the provincial rules are not clear enough.
At issue are a lack of profitable business models and an unstable policy environment, says a recent BloombergNEF report, 1H 2023 Energy Storage Market Outlook. Although efforts have been made to expand revenue streams, it will take time for national planning and guidance to be rolled out to local levels, resulting in a lack of clear business models.
GLOBAL COMPETITION
Storage capacity will need to grow in all markets to help make the energy transition a reality
CREATIVE THINKING
Meanwhile, the rest of the world’s storage markets are left trying to compete with the behemoths. They are having to think creatively in order to do so.
Australia is a global leader in energy storage in terms of progressive programmes, though the amount installed is still relatively small. In 2023, project developer Akaysha Energy plans to reach financial close on the world’s largest grid-connected battery, the 909-MW Waratah Super Battery, indicating the confidence investors have in the Australian market.
To be commissioned in 2025, it is supported by the government of New South Wales via a System Integrity Protection Scheme contract and network augmentation services with the transmission network operator Transgrid.
In December 2022, Australia’s national government proposed the Capacity Investment Scheme (CIS) to drive new renewable dispatchable capacity. The government estimates it will unlock $10 billion of investment in clean dispatchable power.
Open tenders will determine which projects gain CIS support to help decrease risk for investors and spur more investment, said the government. An auction is expected in the first half of 2023.
An agreed revenue “floor” will help cover project operating costs and debt repayments, with the government paying the difference when revenues fall short and a share of profits returned whenever revenues exceed an agreed-upon “ceiling”.
The scheme is expected to complement existing state-based mechanisms and will begin holding auctions in the first half of 2023. By 2030, BloombergNEF expects more than 10 GW of capacity to be installed. Even so, Australia’s storage market will fall from fourth place globally to eighth by 2030, predicts Kou.
Australia has an effective mix of a liberalised market and some judicious devolved governments, says Wood Mackenzie’s Shah. Three provinces have storage goals: New South Wales has a goal of 2 GW of installed long-duration storage by 2030. Victoria has a goal of 2.6 GW by 2030 and 6.3 GW by 2035, while Queensland wants 16 GW of storage by 2035, says BloombergNEF.
AMBIGUOUS AMBITION
The subtitle of BloombergNEF’s latest storage market report is Ambitious targets, ambiguous outlook. This is because batteries are not yet economically attractive in much of the world. Lawmakers and regulators are still yet to take the necessary steps to ensure that they compete fairly with other technologies. If the battery sector relies solely on subsidies, this can lead to dwindling deployments when the subsidies are phased out, summarises BloombergNEF.
The 2020s have been called the decade of energy storage. Nearly 140 GW of storage capacity will be added globally in 2030 alone, up from 6 GW in 2021.
But to get on track with the net-zero scenario, annual additions have to pick up to an average of more than 80 GW per year globally from 2022-2030, says the IEA.
Getting the right policy and market frameworks for storage is crucial to secure investments. The US National Renewable Energy Laboratory has estimated a capital cost of $2,000/kW for six-hour Li-ion battery storage. The IEA’s storage capacity target of 2030, therefore, equates to an almost $1.5 trillion market over the next decade, or a market of almost $200 billion a year, Oliver Warren of advisory group DAI Magister wrote recently.
Warren cited Pitchbook, a US-based capital market company, which estimated that in 2022, the annual investment worldwide into “promising” storage companies was a paltry 4.5% of what will be needed, or $9 billion. Storage is simply not yet on track to accommodate the energy transition needed for a net-zero future. •
TEXT Ros Davidson PHOTO Jenson