Potential difference: assessing the prospects for batteries3 February 2018
The deployment of renewable energy over the last decade has created unprecedented challenges for the planning and operation of power systems. Consequently, battery storage technologies have attracted great interest, as they allow utilities and network operators to adopt a flexible and adaptable approach to managing the electricity grid, balancing supply and demand. This article looks at the potential future role that batteries might play in grid management, the drivers and barriers to greater battery storage use in major markets, and new opportunities for industrial companies and investors. Kurt Baes, Florence Carlot and Adnan Merhaba, Arthur D. Little
The electricity grid is in a state of flux. Low cost renewables and the increased use of distributed power generation represent profound challenges to the operation of a grid built on the assumption of power being provided predominantly by large, centralised generation facilities and consumed as soon as it is produced. In particular, the old model of stable baseload power being supplemented by gas and hydro for peaks in demand is giving way to a world where renewables predominate, supported by other, flexible generation assets for when the sun isn’t shining or the wind is not blowing. The severe pressures on power utilities in Europe and elsewhere (and their share prices) reflect the magnitude of this transition.
To confront the challenge of maintaining a reliable and affordable electricity supply while also providing acceptable returns to shareholders, utilities and network operators must adapt their business models, technology portfolios, and approaches. In particular, they must become more agile, being both flexible and adaptive in how they develop, deploy and manage grid assets.
Energy storage is seen as one key tool for improving the flexibility and adaptability of the grid, for example, by smoothing the output from renewable sources and storing energy at times of high generation for later release, when demand is strong. When it comes to storage, battery technologies have attracted particular interest due to their scalability, efficiency and rapid response. Additionally, there are strong synergies between battery use for energy storage and in other applications such as electric vehicles and consumer devices. However, there are barriers to the implementation of battery storage, such as regulatory uncertainty, commercial arrangements, technology maturity and associated costs.
Drivers for use of batteries
Grid battery storage remains a small business today, with less than 1 GW deployed. Nevertheless, several recent developments clearly demonstrate that the sector is taking off.
There are a number of specific drivers generating increased interest in battery storage, such as rising renewables penetration,increasingdecentralisationand tight flexible-capacity margins.
We believe the key factors driving the attractiveness of battery storage are renewable penetration (grid and distributed) and the flexible-capacity margin. A selection of countries have been mapped against these two drivers, allowing the identification of countries with high potential for battery deployment. This is shown in Figure 1. Broadly, these fall into two categories:
- Countries with high renewables penetration and moderate capacity margins (Archetypes I and II in Figure 1). Germany is the classic example, although Spain, Portugal and Denmark share similar characteristics.
- Countries/regions with moderate renewables penetration but low firm- capacity margins (Archetypes III and IV in Figure 1). The prime example here is the United Kingdom, although California, Belgium and Greece demonstrate similar characteristics.
Limited development of the battery market
While the benefits of deploying battery technologies for grid management are clear, so far there has been very limited development of the grid battery market in Europe. Why is this? We see three main reasons: cost; regulations; and alternatives.
The costs of batteries are too high for most grid applications to be viable at present, other than where local regulations incentivise deployment. Typical ranges for battery costs by energy stored and power delivered are shown in Figure 2.
However, the cost of batteries is reducing sharply. The industry has invested heavily in battery technologies that can also be used within electric vehicles and consumer electronics, such as lithium-ion technology. The cost of lithium-ion battery packs is reducing by 10–15% per year, and if this pace of development continues, they will fall to $100–150/kWh by the early 2020s. At this point many grid applications will become economically viable.
Legislation and regulation
At present, in most countries regulatory barriers prevent the deployment of battery storage on grid, except in Italy, where the regulatory framework has been amended. System operators are therefore restrained from developing battery storage solutions beyond pilot projects because of the regulatory definition of battery storage and the role the regulator expects the system operator to play. The development and ownership of batteries by TSOs certainly raise questions about market distortion and the funding of regulated monopolies, but there seems to be a clear case for their deployment in this way, in markets where conditions are not appropriate for commercial deployments.
It is therefore imperative that clear regulatory frameworks and market mechanisms are established to allow the development of storage assets, with clear targets for deployment. For example, California’s Public Utilities Commission requires utilities to build energy storage capacity and has clarified the market rules for battery aggregation.
There is a strong argument for providing direct incentives for use of battery storage systems to catalyse their development and bring costs down, which has worked in the renewables sector. The strong influence of regulation can be seen by contrasting Germany and Spain, two European countries with relatively high renewables penetrations. In Germany the residential storage market is booming because of the incentives provided (such as 30% investment grants and low interest loans), reducing stress on the grid. In contrast, battery deployment in Spain remains very limited, despite their potential added value for grid operators.
Alternatives to batteries?
Batteries are far from being the only option for balancing supply in a distributed energy grid with high renewable use. Other important options include interconnectivity, fast ramping fossil fuelled plant, demand side response, and other storage technologies.
Interconnectivity: Good regional and international interconnectivity helps in two ways. First, the intermittency of renewables decreases over large areas – it is always sunny or windy somewhere. Second, integration over a large area allows for a greater mix of power sources to be utilised. For example, the proposed 1.4 GW UK–Norway interconnector will allow the UK to import predominantly hydro power from Norway, while interconnectors to France can utilise the large amounts of nuclear power there.
Fast ramping fossil-fuelled plants: Fast- start and rapid-ramp fossil-fueled plants have played a key role in meeting peak power-supply requirements for many years and will remain important in the future.
Demand side response: Demand side response (DSR) is another emerging approach for balancing the grid. Demand response refers to the reduction of electricity demand in response to either price signals or automated controls. This is already established in the generation market and, to some extent, in the industrial sector. The business model of incentivising end consumers to reduce their consumption or switch to “behind-the-meter generators” in response to grid requirements has been widely tested and enabled through regulatory changes.
Other storage technologies: Other storage technology options under development include compressed air energy storage, thermal energy storage, and kinetic energy storage (such as flywheels). Pumped hydro storage is mature and will continue to be used where geographic conditions allow. Some companies are experimenting with local pumped storage in combination with renewable sources such as wind.
Batteries for network operators, utilities and industrials
There remains considerable uncertainty about the details, timing and extent of the role batteries will play in grid management. How, then, should network operators and utilities position themselves to take advantage of the opportunities presented and react to changes in the marketplace?
We recommend adopting a flexible approach to the business model and partnering – new, more agile approaches and partnerships will be required to fully exploit the opportunities presented by grid battery storage. In addition, we believe market players should develop portfolios of assets and technologies, to avoid being tied to one particular technology approach.
Industrials and large companies may have a truly compelling case to invest in battery storage, for various reasons, such as the need to cope with power outage issues (especially in South Asia and Africa), company commitment to sourcing 100% power from renewables (eg, Google, Apple and Facebook), and paying high tariffs for electricity (such as in Italy).
Industrials have the option of outsourcing their battery storage operations to power utilities or aggregators, or collaborating with DSOs and TSOs, potentially earning extra revenues by providing auxiliary services to the grid (such as voltage stability or black start). While we see few applications of this business model to date, it can provide a particularly good alternative for system operators that have their hands tied regarding their roles in storage activities.
The future of the battery storage industry
Battery storage is a relatively young industry, and battery projects generally do not have track records of five or more years of real returns, which makes the bankability of storage a challenge. However, recently, private equity, infrastructure and technology companies have raised significant money for new storage project financing.
This behaviour is similar to the pattern demonstrated by investors in early solar projects. However, as more data, in terms of revenues and returns, becomes available from the storage projects under operation, investor confidence will grow.
Battery storage is a much debated part of the energy market picture, with both energy majors and technology providers investing heavily in research, development and try- outs to create successful business cases. The challenge is not technology; it is market and regulatory conditions. Differences in such conditions can determine whether a particular technology is worthwhile or pointless. Economic viability is determined by the revenue and profit models within the regulated energy industry in individual markets.