- From business decisions and legislative reforms to tech and finance, Conference Chair Florian Mayr unravels the six main factors behind the evolution of energy storage
Every year, the energy storage industry gathers in Munich for three days of networking, exchange and discussion during the smarter E’s electrical energy storage (ees) Europe conference, taking place in parallel to Intersolar, Power2Drive and EM-Power Europe Conferences. Since 2020, I have been honored to have been repeatedly selected by the conference organizers to act as the official Conference Chair. One exciting task of this role is identifying the discussion topics for the conference’s individual sessions. With the goal of triggering a lively debate that pushes the borders of the energy storage industry, these sessions take the form of panel discussions with industry experts and representatives from the most prominent market players.
As we all know, the energy storage industry is constantly evolving. In a market driven by technological advances and changing dynamics, these session topics are meant to not only reflect the hottest trends, but also stimulate insightful discussions on themes like where the market is heading and how we can best benefit from these developments or deal with related challenges. Together with my co-chair, I’ve identified the following six areas to watch out for and I, along with the Apricum team, am looking forward to seeing you in Munich for ees Europe.
“Since 2020, I have been honored to have been repeatedly selected by the conference organizers to act as the official Conference Chair.”
– Apricum Partner Florian Mayr
TREND #1. Business decisions by BESS integrators signal key trends in an ever-growing market
BESS integrators are positioned at the very core of the value chain for large-scale energy storage systems.
Integrators of battery energy storage systems (BESS) are positioned at the very core of the value chain for large-scale energy storage systems. Their decisions on which BESS component design to use, which product and software portfolio to offer, or which supply chain approach to be taken, signal the future requirements and trends in the energy storage market.
In line with demand for easier and faster deployment and a drive for further cost reduction in a massively growing market, one observable trend is an increasing degree of system standardization. While the majority of BESS integrators are still addressing the various market segments and applications via a rather diverse portfolio of products (especially based on customizable containerized solutions), the largest players (e.g., Fluence, Tesla, Wärtsilä) are currently shifting to more standardized, prefabricated and modular cabinets with some configuration options. Overall, the number of newly-introduced cabinet products has already exceeded the corresponding number of container products in the last few years. This goes hand in hand with the choice of centralized PCS that allows some level of flexibility for site adjustment and later expansions based on modular standard building blocks.
Another trend consists of an increasing degree in the comprehensiveness of the offering to address corresponding customer demand. Turnkey solutions including PCS, switchgear, transformers and other hardware and software are already the norm – often extending into EPC and O&M activities, particularly when BESS integrators can utilize existing service and software offerings from other business areas. However, significant differentiation potential reflecting the broad types of customers and corresponding requirements can be observed on the software side.
Furthermore, challenges in securing cell supply and corresponding customer concerns with respect to fast delivery, potential replacements and expansion are further shaping business decisions by BESS integrators today. For instance, LFP is poised to overtake NMC as the dominant BESS cell chemistry due to the overall lower exposure to fluctuating raw material prices and supply risks for nickel and cobalt (contained in NMC cells) based on geographic concentration and increasing geopolitical risks. Additionally reflecting LFP safety benefits, these considerations have already led to an increasing customer preference for LFP. To further de-risk the supply chain, most integrators apply a multi-sourcing strategy for battery cells (excluding players with their own cell production) despite disadvantages regarding quality assurance and cost.
TREND #2. Recent legislation finally acknowledges energy storage as a necessary piece in the energy transition puzzle
The European Commission presented a legislative proposal for the adaptation of the EU Electricity Market Design in mid-March 2023.
The pressing need to mitigate the impact of climate change and to deal with the ongoing energy crisis requires a new regulatory framework in Europe. This is why the European Commission (EC) presented a legislative proposal for the adaptation of the EU Electricity Market Design in mid-March 2023. But how would this new framework impact the energy storage market? How would the provision of flexibility be encouraged? How would existing entry barriers for energy storage be further reduced?
Overall, the draft considers energy storage as a key flexibility resource to enable the transition towards renewable energy that decarbonizes and de-risks the EU’s energy mix. This is backed by recommendations with concrete actions that EU countries shall take to ensure storage’s greater deployment such as:
- Removing barriers to energy storage on grid fees
- Requiring members to assess flexibility needs every two years and promote energy storage accordingly
- Identifying financing gaps for storage deployment and considering the need for financing instruments
- Strengthening the role of energy storage in capacity markets
- Fostering energy storage in off-grid areas.
Next to the Electricity Market Reform, the Net-Zero Industry Act has taken the center stage in the EU’s effort to secure the necessary supply chain for the intended deployments of energy storage systems.
The Act aims for 85% of local battery demand to be manufactured domestically, mostly through accelerating the approval process for manufacturing sites and reducing red tape and bureaucracy. This is accompanied by the Critical Raw Materials Act, targeting 10–40% of the mining, recycling and processing of critical raw materials to be done in the EU by 2030. In addition, strategic projects in 3rd countries will be supported with EUR 300B via the Global Gateway strategy – countering the Chinese Belt and Road Initiative. But not more than 70% of any strategic raw material should depend on one single 3rd country.
The most important takeaway from all of this: after years of neglect, EU authorities have finally acknowledged the role energy storage has to play in enabling the vast targets for renewable energy in Europe.
TREND #3. Technology is still driving the battery business: developments in lithium-ion BESS and potential replacements
Lithium-ion has an incumbent advantage from the economies of scale in manufacturing for the e-mobility industry as well as improved bankability related to the high number of installations and advanced technology maturity to date.
Technology is the key to ensuring that battery storage markets continue to develop at a rapid pace. For proof, one only needs to look at the way system costs have dropped drastically in recent years as a result of progress in the development of battery materials and battery cells and advancements in storage system technology.
Lithium iron phosphate (LFP) has become a cell chemistry option and is even preferred by some developers and owners due to increasing focus on ESG, improved cycle life, lower cost/kWh and increased safety compared to lithium nickel manganese cobalt (NMC). Longer cycle life helps reduce total cost of storage compared to NMC, even with LFP’s lower energy densities. But not everything is greener on the LFP side of the fence; developers, operators and owners are struggling to track LFP state of charge (SOC). SOC drift is more common in LFP batteries and can reduce the available capacity of the system. To offset this, cell manufacturers and integrators are placing increased focus on cell balancing and advanced BMS (both native and cloud-based) in hopes of reducing the need for costly, manual balancing. As stakeholders search for improvements to lithium-ion, sodium-ion batteries are on the horizon as a potential replacement for lithium-ion batteries. While production is just now ramping up for the first sodium-ion batteries, their potential for even lower cost/kWh and greater safety may have integrators and developers jumping ship when manufacturing has reached sufficient scale.
Particularly in the many stationary markets, opportunities for technological alternatives to the lithium-ion battery are being opened up. Most prominently, we see an increased focus on long-duration storage. Long-duration storage provides additional flexibility for electricity grids with renewable resources, for example by shifting renewable energy supply to match demand on a scale that is more relevant for consumption (e.g., storing wind power generated during the night for use in the afternoon). While lithium-ion batteries are the king of 1–6-hour storage, they are also being installed in 8–10-hour systems where technologies better suited for long-duration storage could be a viable replacement today. Long duration storage enables less-well-known battery technologies including sodium-sulfur, molten salt, nickel hydrogen, zinc-ion, iron air and redox flow batteries, in addition to mechanical and thermal storage technologies (e.g., gravity storage, cryogenic air storage). The key challenge with all candidate technologies is reducing cost to compete with lithium-ion, which has an incumbent advantage from the economies of scale in manufacturing for the e-mobility industry as well as improved bankability related to the high number of installations and advanced technology maturity to date.
TREND #4. Artificial intelligence is becoming a key element in battery energy storage
While recent advancement in generative AI tools like ChatGPT are still fueling disagreements on the role of artificial intelligence in the future of our day-to-day lives, use of AI algorithms indisputably remains one of the key differentiating factors in energy storage management systems. AI-powered software enables asset owners to achieve higher renewable penetration, improve asset efficiency, reduce cost and maximize returns from market participation. Key uses of AI algorithms for energy storage include dispatch optimization (e.g., for grid services, self-consumption or energy trading)and predictive maintenance, among others.
AI algorithms in operations and predictive maintenance help limit equipment downtime and repair costs by anticipating system failures
Dispatch optimization
To maximize economic benefits of an energy storage asset, operation should be balanced between maximizing revenue in the short term and limiting battery degradation long-term. Algorithms behind energy storage management systems take into account real-time market signals, energy generation and demand forecasts, opportunity cost as well as the technical characteristics of the specific energy storage technology applied, to find the optimal operating mode. Since optimization precision depends on the quality of the data inputs, more complex software would use predictive analytics to make bespoke forecasts of the related renewable asset generation based on weather, equipment characteristics and condition, as well as anticipate the demand profile based on the historical data. Optimization can be run on the level of individual asset, whole fleet or renewables-coupled system.
Predictive maintenance
As a common application of AI, algorithms in operations and predictive maintenance help limit equipment downtime and repair costs by anticipating system failures. The software would collect information from sensors and meters to detect anomalies in the data patterns. Machine learning is used to link historical failures to certain data signals, enabling the system to improve over time and detect a greater number of issues.
When implementing AI-based software, asset owners and operators need to keep in mind a few factors. First, as mentioned before, benefit of AI always depends heavily on the quality of available data. AI systems combine data from a variety of sources such as real-time info and historical data, but also need to use data from hard-to-quantify external disruptive events like weather conditions, recent market shifts, policy changes. Receiving inaccurate or out-of-date data on any one of these points can negatively impact the reliability of the entire AI output.
Second, especially for more novel applications, the algorithms often need continuous improvement and tuning. Service agreements with providers or internal team capacity allocation would need to take this work into account.
Finally, when results of the algorithm impact decisions and actions of teams, such as for predictive maintenance, internal processes would need to be carefully tailored to include new information. In these situations, lack of transparency behind AI recommendations is often a concern, so the organizations might need to make trade-offs between mathematically optimal solutions and explainability.
TREND #5. High electricity prices and volatility are an opportunity to wake up the dormant energy storage C&I segment
In 2022, skyrocketing electricity prices hit energy-intensive industries hard.
Even though the commercial and industrial battery storage market has been the subject of discussion for many years, most use cases were not economically viable because of low energy prices and relatively high system costs. As a consequence, the segment has been significantly lagging behind utility scale and residential storage deployments in most European markets.
In 2022, skyrocketing electricity prices potentially changed all of this and hit energy-intensive industries hard. This came along with substantial price variations at the European intraday electricity spot markets of up to 400% on a 24-hours basis, making electricity demand during peak hours particularly costly.
As one consequence, the installation of on-site renewable energy systems has become a prevailing trend for commercial and industrial consumers to lower the burden of costly electricity bills, further propelled by supporting incentive schemes and regulations. A prominent example is the new German rooftop PV mandate – from 2023, in multiple German states such as Berlin, Lower Saxony and Bavaria, new commercial buildings are obliged to be equipped with on-site rooftop solar systems.
But moreover, integrating battery energy storage systems is now being considered an economically favorable solution to maximize the benefits of on-site generated renewable electricity. By implementing so-called “peak shaving” strategies through drawing stored energy during high-price periods in the energy wholesale market, businesses can substantially reduce their electricity grid consumption next to the traditional use case of demand charge reduction.
The increasing attractiveness of C&I energy storage can also be observed by following the money. As a recent example, Pramac of Italy acquired REFUStor, and private equity investor Ara Partners obtained a majority stake in UK-based Wattstor.
TREND #6. Financing utility-scale storage: shift to continental Europe and availability of credit
2023 UK utility scale revenues have fallen over 50%
There is now an abundance of equity for financing grid-scale storage. Private equity, pension funds, infrastructure funds, utilities, and energy traders have all provided equity to storage projects. The past 18 months have been exciting for storage developers, who have grown in confidence and ambition.
However, that ambition may not be satisfied. In the most active market, the UK, high RTB asset prices are threatened by collapsing 2023 revenues from ancillary service saturation and falling gas prices. This is compounded by an excess of post-2026 projects. The UK’s dimming star will further accelerate the biggest storage trend of 2022: the industry’s shift to Europe. Italy, Belgium, Germany and Poland are the current focus, but subsidy distribution and evolving commercial and regulatory frameworks will render this constellation fluid.
Apricum’s growing concern is that the availability of credit could become the primary obstacle to storage deployment. First, the supply of credit may be inadequate to meet the exponential increase in storage power forecast to 2030, with the industry reliant on a small number of banks unable to finance an entire industry. Second, available lending structures are not always suited to local market design, constraining asset leverage ratios (or its commercial model). Third, while ever larger projects appeal to developers and TSOs, they demand ever greater risk concentration from their investors. Most lenders prefer 5x 100MW systems to 1x 500MW system. Lending appetite and products remain generally immature, and this needs to change for the storage industry to deliver its potential. But if supply is constrained, then asset returns will remain elevated.
In summary, the decade of energy storage is keeping up with expectations. Energy storage players are successfully adjusting their offering to an evolving market, also leveraging technology developments both in hardware and software to improve competitiveness to other flexibility options. Legislation is finally acknowledging the role of energy storage to enable renewable energy and to enhance security and cost of power supply, removing barriers and fostering wide-spread deployment. And while shortcomings in financing could impact energy storage deployment, challenges have been identified and we are working towards mitigation. Overall, the energy storage industry has taken many steps in the right direction.
HOW APRICUM CAN HELP
Apricum is a global transaction and strategy advisory firm dedicated to renewable energy and cleantech. We offer the alternative energy industry an integrated suite of growth-oriented consulting services for companies and investors. Backed up by the energy storage field’s top minds, deep local networks, and proven financial experience, we can maximize the value of your participation in the global energy market. Let us prepare and execute your next business transaction or design a specialized high-impact business model that drives the energy transition while creating growth and profitability for your organization and its stakeholders. If you would like to learn more about how we can enable your organization to compete and win in the booming energy storage space reach out to Florian Mayr.
