The future for energy storage is bright.

Fighting global climate change has become an undisputed imperative of our time, and renewable energy and e-mobility are key elements in this battle. Energy storage is closely interlinked to both: The first pushing up its demand, the second pushing down its costs.

The prerequisites are there to indeed make the 2020s the proclaimed “decade of energy storage” with annual installation figures expected to multiply from today’s levels.

But what will the dominating utility-scale applications be driving this near-term boom? I see two main driving forces thriving particularly well in two specific types of electricity markets.

 1.      Utility-scale renewables-plus-storage

What is it about: Renewable energy power plants are paired with utility-scale energy storage to cover an increasing share of power demand when the sun is not shining and/or the wind is not blowing. This will first complement and later replace conventional electricity generation.

Why is it a driving force:  Renewables-plus-storage directly taps into the vast global demand for electricity. In contrast to many other storage use cases, this is an opportunity that is not going to be saturated soon. Gigawatt hours of energy storage for shaping and shifting renewable generation profiles can be deployed across the power system in various independent projects.

Also, contracts for renewables-plus-storage are usually awarded through longer-term contracts which makes project financing easily available, further benefitting the expansion of this application.

Last but not least, the falling costs of energy storage, in particular for longer duration technologies, will ensure renewables-plus-storage win over conventional generation during more and more times of the day in more and more geographies, eventually also including countries with less favorable renewable resources or access to cheap fossil fuels.

Where will it thrive (first): Regulated monopolized power markets are particularly well suited for renewables-plus-storage plants. Regulators usually oversee and approve the (often state-owned) utilities’ investments in power assets and therefore have a direct approach to implement clean energy targets.

Furthermore, since these utilities are vertically integrated and therefore control the entire energy supply chain from generation to transmission to end-customer supply, the various benefits of energy storage can be thoroughly assessed and realized in an easy, centralized way.

This is in contrast to markets where individual supply chain steps were unbundled to foster competition and allow for fair market access. Here, storage players must deal with a broader range of stakeholders who only see “their share” of the overall value storage can contribute and are usually tougher to convince.

Examples are the regulated markets of many U.S. states, where Integrated Resource Plans saw a surge of planned renewables-plus-storage projects in 2020, e.g., in Arizona where installations in 2020 have been almost 10 times the installations of 2019. In Chile authorities just announced an auction for 2,310 GWh of renewables-plus-storage to be conducted in the next year. Israel auctioned  168 MW PV/672 MWh storage in July and announced up to 2 GW/8 GWh of storage to be paired with renewables by 2030. South Africa is planning a tender of 80 MW/320 MWh.

It should be noted that regulated markets do not automatically represent a quick win for storage. For example, China has recently started to require energy storage being added to renewables plants, with pairing ratios between 5–20%, depending on the province. However, as obtainable power prices remain regulated, adding storage is not economically viable. Instead of boosting storage installations, it is expected that projects will be cancelled, deferred or realized with sub-standard components that could lead to faulty and unsafe storage systems.

Where unbundling hampers renewables-plus-storage deployment as described above, government-led auctions and tenders can be an easy circumvention that is increasingly applied. A good example is the Second Solar Auction in Portugal this summer that featured a very successful PV-plus-storage option. Also in Spain, an auction for 3.1 GW of renewables to be held still in 2020 is designed to allow the use of energy storage. Even in not-so-sunny Germany, the first Innovation Renewable Energy Auction in September awarded about 200 MW of PV-plus-storage projects this September.

And as a next step, corporate PPAs for renewable energy are likely to ask for storage as well, further fueling demand for this application.

2.      Stacking of merchant opportunities

What is it about: Stand-alone utility-scale energy storage that is not just targeting one, but combinations of multiple merchant markets such as balancing markets and wholesale markets, to stack and optimize different revenue streams.

Why is it a driving force: Covid-19 recently provided a picture postcard of a near future in which renewable energy dominates generation, highlighting the growing opportunities for storage in balancing and wholesale markets.

During lockdown measures in the beginning of the pandemic, the overall share of variable renewables reached record levels in many countries’ generation mixes due to low power demand and fossil plants taken off the grid. This led to an increased need for flexibility in the power system and provided better opportunities for arbitrage.

Individual balancing service markets, however, require limited volumes of storage and constitute smaller “pockets of opportunities” that can quickly close. But by opportunistically participating in multiple schemes, whichever is paying most at a given point in time, energy storage can remain profitable even in increasingly saturated schemes with falling prices.

And while participation at wholesale markets like day-ahead and intraday is more of an add-on to balancing services today, the tables might be turned in the near future: With more variable renewable energy, cannibalization of prices will increase, e.g., for PV generation at noon, leading to very low or even negative prices. At times where renewables are not generating and less conventional generation capacity is available, very high prices are the result. This creates price spreads wide enough to justify the investment in storage for charging at low prices and discharging at high prices.

While the pocket of opportunity for balancing services is closing, the one for wholesale arbitrage is opening, thereby balancing or even improving the combined business case.

As we have seen above, wholesale markets represent the overall electricity demand and constitute a very liquid opportunity. However, it should be noted that opportunities for arbitrage will eventually decrease with more storage shifting energy and peak prices consequently eroding.

But decreasing costs of storage will offset the impact of lower spreads and also balancing prices, thus keeping the combined pocket of opportunity open long enough to constitute the second driving force for this decade’s energy storage take up. Increasing capabilities for “precision bidding” based on AI (e.g., as already applied by Fluence and Tesla) will further help to keep the opportunity profitable for an extended period of time.

Where will it thrive (first): Access to the targeted merchant markets are key, so markets with a high level of deregulation are predestined to host this storage application. Examples are the European Union and US system operators under federal (FERC) jurisdiction following FERC order 841.

But this is not enough. To optimize participation in multiple markets, you need balancing schemes supporting short and flexible contract lengths as well as procurement close to real-time. The UK’s Dynamic Containment and Australia’s FCAS (Frequency Control Ancillary Services) are surely front-runners in this sense.

Last but not least, you need storage players with the capabilities to “ride this horse”. Market leaders like Fluence and Tesla already apply AI-based software for “precision bidding”, i.e., jumping to the most attractive scheme in a specific moment and thereby maximizing the value of the storage unit.

But that’s not all

While renewables-plus-storage and merchant opportunity stacking are likely to be the driving forces for the expected utility-scale storage boom in the coming years, other use cases will of course prevail next to – or in combination with them. For example, storage can defer investments in transmission infrastructure and avoid curtailment of renewable energy plants. An increasing number of extreme weather events will require more grid resiliency, which energy storage can provide by enabling islandable microgrids.

At the end of the day, it is storage’s ability to cater to a wide range of challenges in the power system that has triggered the “decade of energy storage”.

For questions or comments, please contact Apricum Partner Florian Mayr.

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