The truth about the booming battery energy storage market

Battery storage is flexible, can be deployed quickly and has a wide range of applications. It also generates a multitude of value streams – not to mention that battery prices are falling faster than expected. According to one forecast, the energy storage market could reach annual sales of more than $26 billion by 2022, growing at a compound annual growth rate (CAGR) of 46.5%. However, the sector’s dynamism is not entirely due to these factors. Advances in adjacent digital technologies such as artificial intelligence, blockchain and predictive analytics are enabling integrated solutions and innovative business models that would have been almost unthinkable just a few years ago. Startups around the world are rapidly commercializing smart grid “behind the meter” batteries for the benefit of electricity users, utilities and grid operators.

In this issue of Smart Insider, we recommend a report from Deloitte titled “Challenges and Opportunities Facing the Global Battery Energy Storage Market”, which comprehensively analyzes the progress made in the development and deployment of integration and other forms of battery solutions.

1. Market driving factors

1. Cost and performance improvements

Energy storage in various forms has been around for decades. So it begs the question: why has battery storage taken over? And why now? Perhaps the most obvious answer is falling costs and improved performance, especially for lithium-ion batteries. This is also due to economies of scale in manufacturing, which are being boosted by the expanding electric vehicle market. As the chart below shows, the cost of lithium-ion batteries is falling dramatically. However, based on the nine countries we analyzed, it is clear that falling costs are only part of the story.

▲Lithium-ion battery prices fell 80% from 2010 to 2017 (US dollars/kWh)

2. Grid modernization

Many countries are implementing grid modernization programs to increase resilience to severe weather events, reduce system outages associated with aging infrastructure, and improve overall system efficiency. These programs typically involve deploying smart technologies within the established grid to enable two-way communications and advanced digital control systems, as well as integrating distributed energy resources (i.e., renewable energy, fuel cells, diesel or natural gas power plants, energy storage assets, and microgrids).

In summary, we find that the development of battery energy storage is inseparable from the efforts to modernize the electric grid, including the transition to a smart grid. The digital grid supports prosumers to participate in intelligent system configuration, predictive maintenance and self-healing, which paves the way for the implementation of tiered rate structures—all of which opens up space for battery energy storage to create value by adding capacity, peak shaving and/or improving power quality. Although smart technology has existed for some time, the emergence of battery energy storage has helped to realize its full potential, and vice versa.

▲Cumulative energy storage deployment in countries around the world from 2018 to 2030

3. Global Renewable Energy Movement

Broad-based policies to support renewable energy and emissions reductions are also driving the use of battery storage solutions around the world. The critical role that batteries play in offsetting renewable intermittency and reducing curtailment is clear, but the pursuit of clean energy by all types of electricity users is still growing in both degree and prevalence. This is particularly true in the corporate and public sectors. As noted in a recent Deloitte report, Real Business: Policies of Corporate Procurement Competitors Driving Renewable Energy Growth, large multinational corporations are leading the way in procuring renewable energy around the world. In fact, many have publicly committed to 100% renewable energy in the next two decades or sooner through programs such as RE100 and the Renewable Energy Buyers Alliance. This bodes well for the continued growth of renewable energy and the likely continued deployment of battery storage to assist in integrating more distributed energy resources.

4. Participation in the wholesale electricity market

While renewable energy and battery storage are often mentioned together in the same sentence, battery storage can help balance the grid and improve power quality from any generation source. This shows that there are growing opportunities for battery storage to participate in wholesale electricity markets around the world. Almost all countries we analyzed are transforming their wholesale market structures to carve out a place for battery storage to provide capacity and ancillary services such as frequency regulation and voltage control. While these applications are still in their infancy, they are seeing varying degrees of success as policymakers work to remove barriers that prevent storage from participating and regulating the market.

Take Germany’s Primary Control Reserve (PCR) market, for example. Participants in this market generate revenue by winning weekly auctions and are paid for providing the capacity needed to balance the grid. Although the PCR market has been open to storage providers for the past few years, battery storage did not become important until 2016, when system costs continued to fall, making it possible to obtain a viable return on investment. Unlike conventional power plants, battery storage can react to system imbalances almost instantly and be fully operational in less than 30 seconds.

However, unlike the United States, Germany does not offer compensation for this rapid response, so German battery suppliers compete directly with existing companies, such as natural gas peaking power plants. On the one hand, this undifferentiated competition effectively reduces capacity costs, but on the other hand, it also leads to rapid market saturation, meager profits, and unstable economic conditions for battery energy storage suppliers. Failing to have sufficient room for growth in the PCR market, German battery energy storage solution providers are increasingly looking to the secondary reserve market and distribution deferral as their potential new value streams.

As in Germany, some grid operators in the United States have also introduced battery storage to their systems for competition. The opening of the U.S. wholesale electricity market to suppliers of fast-response resources such as batteries is largely due to Federal Energy Regulatory Commission (FERC) Orders No. 755 and 784, issued in 2011 and 2013, respectively. The orders provide for rewards for speed of response and accuracy of response in the ancillary service market. As battery suppliers are invited to participate in the frequency regulation market, grid operators have begun to encounter some unprecedented challenges, which come from the imbalance between the mix of fast-ramp and slower-ramp resources, dispatch parameters and signal-related matters, and other technical requirements.

Looking ahead, however, our findings suggest that the benefits of integrating batteries into wholesale electricity markets will outweigh these growing pains, as policymakers around the world are increasingly taking action to reward fast-acting battery storage for its contribution to balancing grid operations. Chile’s National Energy Commission, for example, has drafted a new ancillary services regulatory framework that recognizes the contributions that battery storage can make. Similarly, Italy has opened up its ancillary services market as a pilot for renewable energy and storage projects, introducing it as part of its overall regulatory reform efforts. Meanwhile, on February 15, 2018, FERC issued a final rule taking further steps to remove barriers that prevent electric storage resources from participating in capacity, energy, and ancillary services markets within its jurisdiction.

5. Financial incentives

Government-funded fiscal incentives in the countries we studied further reflect policymakers’ growing awareness of the benefits that battery storage solutions can bring to the entire electricity value chain. In our study, these incentives include not only reimbursing a percentage of the battery system cost through tax rebates or direct reimbursement, but also providing financial support through grants or subsidized financing. These incentives are particularly generous in energy security issues, such as Italy’s 50% tax break for residential storage installations in 2017. Or for countries with an economic interest in battery manufacturing, such as South Korea, where government-backed investment in energy storage systems increased capacity by 89 megawatt-hours (MWh) in the first half of 2017, up 61.8% from the same period last year.

6. Elimination of FIT or net electricity settlement policy

As consumers and businesses seek ways to get higher returns on their solar photovoltaic (PV) investments, low prices or a decline in popularity of solar feed-in tariffs (FITs) or net electricity settlements are driving further deployment of behind-the-meter systems. This is happening in Australia, Germany, the United Kingdom, and Hawaii. These regions have the most mature solar markets, in part because electricity prices are high enough to make solar economically viable.

While this is not yet a global trend, it is reasonable to assume that as FITs are phased out, owners of solar PV installations will use batteries as a means to consume more power themselves, shift loads to avoid peak charges, and/or provide grid stabilization services by charging or discharging batteries to utilities or aggregators when needed. For example, residential storage certificates in Honolulu, Hawaii, grew 1,700%, or 18 times, in 2017. This surge was driven in part by the state’s elimination of net metering in 2015 and restrictions on participation in subsequent incentive programs for sending power back to the grid.