10 Factors that Prove Energy Storage is on the Rise
On June 19th, I sat on a panel for the ACORE REFF Wall Street Energy Storage Workshop with Richard Baxter of Mustang Prairie, Kris Zaldo of Invenergy, and moderator Rob Gramlich of Grid Strategies.
The aim of the workshop was to educate our renewable energy finance audience on the opportunities in energy storage and alert them to near term actionable changes in the market. Given that many attendees were from the financial sector, the main message was: deploy your capital in storage starting today. You’ll be glad you did.
For any conference, one must be aware of anchoring and confirmation bias, i.e., the firm grasp on unsubstantiated evidence that is strong enough to serve as an anchor for personal belief, and the confirmation of that belief by additional unsubstantiated evidence. The operative word is unsubstantiated. Find data for beliefs that appear to be unquestionable, and then question them again.
One anchored belief I heard at the workshop was that storage is not yet competitive with gas peakers. As you’ll see in our article in IJGlobal’s recent 2017 Renewables Report (starting on page 7), this is not the case. Here are my additional points:
- Li-ion costs have been consistently dropping 8-15% per year since 2009 and have no sign of stopping. The rate of cost decline matches the one previously witnessed for NiMH. The automotive market is what the NiMH and Li-ion cost curves have in common, except the Li-ion market volume, due to the technical ability for Li-ion to provide long range to electric vehicles, is orders of magnitude larger. The scaling of Li-ion deployment has not yet reached its limits and will not see it within the next 5 years, perhaps not even the next 10. Keep in mind that the stationary storage market is ~1/10th the size of the automotive market, and if that scale remains constant, the multi-GWh/y growth of the automotive market translates to GWh/y of growth for the stationary market within a 3 year time frame.
- Lower cost means more opportunity for projects which are increasing in both scale and quantity. While the dropping cost reduces the value of individual deals, it increases the value of total deals. Case in point; in 2016 we saw the biggest projects deployed (ever!) with the Tesla and Altagas projects serving Aliso Canyon with 80 MWh each. Then AES beat those projects with 120 MWh. Ladies and gentlemen: grid scale storage is very much a commercial activity.
- Battery energy storage is not a maturing or emerging technology. It is commercial and off the shelf. There are companies now that have a decade of deployment history, there is a contract template to follow that is a bolt-on to the solar PPA model, and the independent engineering (IE) process for project finance is established and DNV GL leads this space.
- There is no need to become distracted by announcements of the next greatest energy storage technology or safest battery. Li-ion storage is a commodity and is reaching commodity pricing. Safety has challenges but is an understood issue and is not uniquely exclusive to any particular battery technology. Presently Li-ion and Vanadium Redox flow batteries are at near cost equivalence, yet Li-ion’s pricing pressure in the market will force any other technology to compete or succumb.
- Low energy storage cost means that duration is getting cheaper and cheaper. In 2010, anyone proposing battery storage as a solution for long duration storage (competing against pumped hydro), would have been ridiculed due to cost and lack of confidence in the technology. Today, the geographical constraint and long permitting processes for pumped hydro make it a local solution obviously excluded from the national conversation. Fast permitting and low cost means that the 1-hour duration limit is a thing of the past; 4 hours is common today and there is nothing stopping a 10+hour battery storage solution at the utility scale as costs continue to come down. Storage can be permitted in less than 9 months.
- Li-ion is following the same cost reduction trend as NiMH and it is no coincidence; it is driven by the automotive sector with increasing volume for the first-generation hybrid cars such as the Toyota Prius, Honda Insight and later the Civic, the Ford Fusion hybrid, and others. The automotive battery market is 10 times the size of the stationary storage market. Each year the number of total global electric or hybrid cars grows by tens or hundreds of thousands of units, which represents gigawatt-hours of battery volume growth annually (for reference the entire present California market is 1.3 GW if sized by the storage mandate in that state). NiMH battery costs dropped from ~$8,000/kWh in 2001 to $3,000/kWh in 2009, just in time for Li-ion to take over. In 2009 Li-ion battery costs were $1,000-$1,200/kWh at the cell level. Today they are < $200/kWh at the cell, and $350-500/kWh at the system level for projects > 10 MW. Behind the meter (BTM) systems are typically high cost due to complexity installed costs, but can be estimated at $700-$1000/kWh. Storage projects installed for less than $400/kWh are within grasp if not occurring already.
- There is absolutely no technical, economic, political, supply, or societal indication that Li-ion cost declines will plateau in the next 2-3 years, meaning that system installed costs at $250-300/kWh should be expected by 2020. That is not a far future number; it is now approaching the tactical planning schedule at the corporate level. An institutional investor with deployable capital can consider the storage market open for business. Today, it is a question of whether the risk is worth the early position in the market. Next year, it will be a question of whether it is worth investing late in the game.
- BTM solutions are utility solutions. In aggregate they meet distribution planning and capacity constraints and ease planning for utilities. No utility should disregard DER or distributed storage as an irrelevant factor in grid planning; simply refer to the following:
- Intent of the California 1.3 GW storage mandate which allows utilities to pay aggregated DERs and storage operators to meet capacity needs via a Resource Adequacy Agreement
- FERC’s recent NOPR on using distributed energy and storage as part of a wholesale market solution
- The announcement of some utilities that they are cancelling distribution upgrades due to the capacity being met by DER
- Storage is competitive with gas peaking plants today when permitting and fuel costs are considered over the project life. There is also a soft cost benefit; when a gas plant takes 4 years to plan, the plant capacity is grossly over sized to account for two uncertain timelines; first the application is over sized to account for the delay between the application for the permit and the commissioning date; and then the asset is over sized to account for system growth over the term of the project life. Over sized = capital cost. Storage systems, on the other hand, can be deployed in less than 9 months and modified to increase capacity during the asset life, meaning that such over-sizing (and therefore inflated cost of electricity) is unnecessary. This real time upgrade flexibility avoids the overcapacity capital issues and allows systems to flexibly match the cost of electricity delivery with the actual service being provided. Storage is just more flexible… period.
- Storage as a peaker—even as a base load asset when coupled with solar (thereby making solar dispatchable)—is at grid parity in electricity markets where the cost of electricity exceeds $0.13/kWh, as stated by Dr. Ryan Wartena, President of Geli at DNV GL’s Energy Executive Forum. This applies to the areas of the highest urban concentration in the US. This means that solar + storage can be deployed independent from policy or incentive in many markets today.
These factors indicate that the storage market will only get bigger. The market can grow fast or it can grow faster; the latter will occur when project developers and energy project lenders take immediate action to build storage projects. The growth of the storage market is certain and there are several opportunities to make a killing. Happy hunting.
Read Paul Gardner’s follow up blog to learn how these factors apply in a European context.