At the time of writing this article, the Covid-19 pandemic still had a firm grip on the world with no reliable and widespread cure within reach. And while there will be a day when this crisis is resolved, its impact on global economies and industries will likely still be felt for a long time after the virus is under control and life has returned to (the next) normal.
The energy storage industry is no exception. But what is the actual impact of Covid-19 on the market, in particular, in the longer-term? And how should energy storage players adapt to weather the pandemic’s effects or become even more successful?
In this two-part article, Apricum provides the bigger picture of “energy storage vs the virus” by examining its impact on the fundamental market drivers and outlining the key mindset and behavioral shifts that we expect to see in a post-pandemic world.
A quick recap: Where we are currently
Like all industries, the energy storage business is significantly impacted by the pandemic due to site access problems and difficulties to get permissions in times of lock downs as well as a general economic downturn. This will certainly affect activity in 2020.
However, we are not aware of any larger scale project under construction that has been cancelled or delayed for a longer period. Quite the opposite, grid battery contracts of impressive size have been announced over the last few months, like Southern California Edison’s (SCE) 770 MW storage procurement in May, one of the largest ever seen. Temporary slowdowns in the execution will typically not lead to an abandonment of a large grid battery project given the often multi-year development cycles. Moreover, if utility-scale energy storage qualifies as “critical infrastructure” site access is granted even in times of a lockdown, as seen, for example, in California and Italy.
Behind-the-meter storage companies in general are likely to feel a stronger impact, though: Many C&I customers will have to cut back on investments outside their core business, so the purchasing of an energy storage system might be considered non-essential for the time being. In the same spirit, homeowners might want to defer major household spending to 2021 and beyond.
Overall, there will certainly be fewer installations in 2020 compared to forecasts prior to Covid-19. However, compared to 2019, analysts still expect significant year-on-year growth for the total energy storage market.
The longer-term view: Checking the fundamentals
So much for the immediate fall-out. But to get the bigger picture, we need to understand the longer-term implications of Covid-19 on energy storage by assessing the outbreak’s impact on the fundamental drivers of the storage market. At Apricum, we distinguish three drivers:
- Demand for services that energy storage (but also non-storage solutions) can serve
- Competitiveness of energy storage to these non-storage solutions
- Suitability of regulatory and market frameworks to allow energy storage to play to its competitive advantages
How Covid-19 impacts demand for services energy storage can provide
At the highest level, energy storage serves demand for more flexibility in the power system. This flexibility can be required, for example, to defer investments in grid infrastructure when electricity demand exceeds transmission capacities or to improve the system’s resiliency to better deal with extreme weather events. But predominantly flexibility in the power system is needed for the integration of variable renewable energy.
Energy storage helps to deal with the variable energy flows from solar PV and wind power generation and is a key infrastructure component to allow for higher renewable energy shares in the power mix, therefore any impact of the pandemic on renewable energy expansion would have an implication for storage as well.
In fact, many renewable energy projects have been deferred due to Covid-19-induced delays in project execution, and, for unsubsidized projects, declining power prices and an overall reluctance of the typical off-takers such as automotive, tech and chemical companies to invest right now. Again, behind-the-meter PV installations is the segment expected to be hit hardest for similar reasons to energy storage as mentioned above. Analysts overall predict 2020 to be the first year for the PV sector with a decline.
But the overarching trend towards a rapidly growing share of renewable energy in the global generation mix is not affected by Covid-19, given the increasing competitiveness to fossil fuel based alternatives in more and more of the world’s regions and the overall urge to decarbonize. The decrease in RE installations in 2020 is likely to be more of a delay than a loss, in particular given the multiple economic stimulus programs that governments are establishing around the world to jumpstart their post-pandemic economies, with total spending in the trillions: If only a fraction of that would be earmarked for climate-friendly infrastructure, a strong rebound could be already expected in 2021.
A promising sign, for example, came from the European Commission with President Ursula von der Leyen taking the position that the short-term damage from the crisis must be repaired in a way that also invests in the long-term future. Consequently, the proposed EUR 750B Next Generation EU recovery program focuses on investments in a “green, digital, social and more resilient” EU. The money raised would strengthen existing EU programs, such as the European Green Deal that aims to deliver more renewable energy next to efficient infrastructure and clean mobility.
Of course, governments could also decide to use the money to support more traditional industries considered strategic such as in the USA, where the government has provided tailored and targeted relief for oil and gas while dismissing most requests by the renewable energy sector so far. This could, in the worst case, even lead to a redirection of cashflows pre-pandemically reserved for cleantech.
Bringing economies back to life, however, is a situation almost tailor-made for pushing clean infrastructure such as renewables as it boosts growth, creates jobs and low interest rates make those anyway necessary investments cheaper than ever. A large portion of the upcoming economic recovery packages are therefore very likely to include “green” elements.
In any case, the fundamental demand for energy storage to provide flexibility for enabling more renewable energy is unbroken and might even accelerate with increased government support for cleantech investments.
How Covid-19 impacts the competitiveness of energy storage
The second fundamental driver of the energy storage market that we need to assess regarding the impact of Covid-19 is the (cost) competitiveness of energy storage to other, non-storage solutions that can address the same demand.
In the short term, cost competitiveness will be impacted by price fluctuations caused by the disruption of the supply chains, long after the time of the first Chinese lockdown and related factory closures earlier this year. This is because of the ripple effect on the supply chain when the manufacturing and purchase of storage systems decline and suppliers of materials and components consequently reduce operations. Once deferred storage demand is later renewed, it will take a while to re-start the supply chain.
But again, for the bigger picture it is more important to assess the longer-term impact on the fundamental drivers of energy storage cost decreases. The competitiveness of stationary lithium-ion batteries, for example, benefits enormously from the convergence of the power and the transport segment and the rise of electrified mobility. The reason is that significant cost decreases are achieved through economies of scale from the mass manufacturing of battery cells primarily to serve electric vehicle (EV) demand, but also for stationary storage. As cells make up 40% to 50% of the cost of an energy storage system, declining cell costs have a large impact on overall system costs.
Stationary battery cost decreases are therefore closely linked to the continued boom of e-mobility -unfortunately, automotive OEMs are among the businesses hardest hit by Covid-19. As an immediate impact, many OEMs and supplier factories closed, leading to a substantial decline in car output in 2020 and financial difficulties for the whole industry. EVs will not be exempt from this short-term impact.
But after the crisis is resolved, overall car sales will most likely return to normal or might even increase as consumers could choose personal transport over mass transit and ride sharing due to hygiene fears. In fact, according to the China Association of Automobile Manufacturers, Chinese car purchasing increased by 4% in China after the lockdowns were already lifted in April 2020 versus April 2019, followed by another 15% in May 2020 versus May 2019. It was the first increase in monthly year-over-year sales in 19 months.
To what extent EVs would be part of a recovery of car sales will depend significantly on the way governmental support for the automotive industry is designed, a centerpiece of many economic stimulus packages.
In Germany, for example, the government has launched several measures to promote e-mobility specifically, including but not limited to doubling the state’s share in EV subsidies and the exemption of the vehicle tax for purely electric cars until 2030. Most remarkable is that all ICEs (internal combustion engine vehicles) were excluded from the economic stimulus programs and will even see a higher vehicle tax depending on the CO2 emissions, a big sign in favor of EVs.
In contrast, China’s Ministry of Industry and Information Technology is reportedly considering temporarily easing EV manufacturing quotas as well as delaying new emission rules by six months. But at the same time, the government decided in late April that the EV subsidy, scheduled for termination by the end of 2020, should be extended by another two years. Although this measure is not considered sufficient by many market observers, it still signals that the Chinese government stands behind the EV industry, which was seen as a way of transitioning from a technology follower to a leader in the automotive sector, reducing oil dependency – and dealing with the increasing issue of air pollution.
Overall, the trend towards e-mobility appears unbroken and the mass production of battery cells, as well as associated economies of scale, is set to increase. In fact, there are currently about 18 Li-ion battery cell factories in the making in Europe alone, adding up to a capacity of ~240 GWh/a by 2024. Capacity build-ups are being pushed forward seemingly unaffected by the pandemic: Just in May, Norwegian utility Agder Energy announced its plans to build the country’s first 32 GWh Gigafab through a JV called “Morrow”.
And while economies of scale is probably the most important driver of lower energy storage costs, there are other cost down trends with little or no exposure to Corona such as the increasing standardization and efficiency in manufacturing, the reduction of costly raw materials like cobalt in battery chemistries as well as an increased energy density through improvements in the electrode design.
All in all, we expect the competitiveness of energy storage to continue to improve, despite Covid-19, also reflected in recent predictions by analysts that lithium-ion battery cell prices will fall by almost 50% between now and the end of the decade.
So far in our assessment, we find a growing demand for flexibility, which energy storage could provide in an increasingly competitive way compared to non-storage alternatives. But this does not help if there is no fair market access and a lack of schemes to monetize the benefits energy storage can provide.
Therefore, stay tuned for part two of this article, in which we complete taking stock by assessing the longer-term impact of Covid-19 on the third driver of the energy storage market: Regulatory and market frameworks that allow energy storage to play to its strengths. To prepare for future success, we also discuss three key mindset and behavioral shifts we expect in our industry post-pandemic and how to best respond.
With thanks to www.energy-storage.news where this article first appeared.
We focus here on lithium-ion batteries as they accounted for about 80% of annual front-of-the-meter stationary energy storage installations in 2019 according to Wood Mackenzie