Checking in on Energy Storage Costs

Checking-in on Energy Storage costs
September 2019

Blink and you’ve missed something.

The energy storage market, seen as slowing down in 2018, has been on fire in 2019. If your understanding of batteries and storage is based on what you saw a year ago, it’s out of date. Actually, if your understanding is three months old, you’re still out of date! The size of energy-plus-storage projects has jumped, while their price has plunged.

Let’s look at the numbers. Based on the data collected by Bloomberg New Energy Finance in their annual battery price survey, the best available industry pricing benchmark, the average battery pack price fell 85% in the eight years from 2010, reaching an average of $176 per megawatt-hour in 2018 (see graphic).

Battery Prices 2010-2018

Battery technology has driven a price decline of the same magnitude as that which we’ve observed for solar energy. And as we’ve observed with solar, understanding the competitive position of an energy source using prices of the past, or even the present, leaves planners well out of date. Price being quoted for renewables-plus-storage of only five years ago, in the 20 cents per kilowatt-hour range – making them far more expensive than thermal electricity alternatives – have given way to prices 50-75% below this level, as we’ll see below. In only a few years, storage has gone from a niche concept to the new game in town. And much in the same way that solar energy price “records” have been being set continuously, each being greeted by disbelief that prices can reach this low, solar-plus-storage price records are now the stuff of headlines.

Four 2019 examples from different US states illustrate the bigger and cheaper trend.

  • Hawaii. In January 2019 the Hawaiian Public Utilities Commission approved contracts for six projects, with a capacity of 247 MW of power and 998 megawatt-hours of storage. This was the second largest “solar-plus-storage” project globally, behind only Moss Landing in California. The price range for the six projects came to between $0.08-$0.10/ KwH, prices cheaper than both Hawaii’s gas peaker plants and current cost of baseload fossil fuel plants (around 15 cents, given the high cost of transporting fuel to the islands). Developers include AES, Innergex, Clearway and 174 Power Global.
  • Florida. In late March 2019, Florida Power & Light Company announced it was building the world’s largest battery energy storage system, The FPL Manatee Energy Storage Center. At 409MW capacity, the project is claimed to be four times larger than the largest battery currently operating worldwide. FPLC also announced that the plant would help accelerate the decommissioning of two 1970s-era natural gas power units. Manatee Energy Storage Center would be linked to an existing PV plant, and start operating in 2021. FPL expects customers will save more than US$100 million through the change. This was a twist for FPLC’s existing modernization program which had focused on replacing oil-based power plants with U.S.-produced natural gas units. The natural-gas units were no longer the cheapest alternative for FPLC.
  • Nevada. Nevada in 2018 announced a huge solar-plus-storage procurement at then world-record prices, just below four cents a Kilowatt-hour. In June 2019, the Berkshire Hathaway-owned utility beat the one-year old record, announcing three new solar projects totaling 1,200 MWs paired with 590 MWs of storage. One of the projects, at 690 MWs, would blow past FPLC’s Manatee project to become the largest solar plant in the US. The winning bidders were developers 8minute Solar Energy, EDF Renewables and Quinbrook Infrastructure Partners with Arevia Power. 8minute said its project could run 65% of the time during peak summer hours, more than double the 30% average for solar in Nevada. 8minute said its project, at 300 megawatts of solar and 135-megawatts of 4-hour storage, will sell electricity at $0.035/KwH, a new world record low.
  • California. In early September, 2019, Los Angeles’ municipal utility approved the contract for Eland, a project for 400 MWs of solar power with up to 300 MWs and 1,200 MWHs of energy storage. Winning bidder 8minute offered a power-plus-storage rate of less $0.04/KwH for 25-years. The effective capacity of the project is expected to be 60%. Buyer LADWP is the largest municipal utility in the U.S., serving more than 4 million people.

With these there are now 9 energy-plus-storage projects underway with a capacity of over 100 MW (The Biggest Batteries Coming to a Grid Near You: the 100 MW Club is about to get a lot busier). With these new utility procurements dominating the news, the US is expected to regain the position of the world’s largest market for energy storage. 2019 is also widely expected to be the first year in which energy storage investments top $1 billion, from $500 million in 2018. Interestingly, the world’s largest market for storage in 2018 was South Korea, helped by a combination of strong incentives to reduce reliance on imported oil and coal and its well-developed domestic technology sector. South Korea procured over 1 GW of energy storage in 2018. However, fires related to Lithium-ion batteries have occurred at some 35 locations in the country, leading regulators to significantly slow down procurement. Problems appear to have been related to battery management systems rather than the batteries themselves, and similar issues have not been reported from other markets.

Interestingly as well, one can note that the world’s largest market for energy storage these last two years was not the one which might have been expected: China. In related technologies China has become by far and away the world’s biggest market for solar energy, and has an even larger lead in electric vehicles and vehicle batteries (almost 99% of the electric buses on the road today are in China). Yet China does not have a similar leadership position in solar-plus-storage – yet. China brought on-line a reported half-gigawatt of energy storage in 2018, equal to previous installed capacity, but well behind the US and South Korea. This surprising slow market development seems to stem from administrative regulations, which have compensated storage on an essentially cost-plus standalone basis, and the relative novelty of solar auctions to date in the country. With the announced administrative changes from China’s National Energy Administration, integrating storage into spot market pricing, demand is expected to jump substantially. Wood Mackenzie projects China’s cumulative energy storage capacity to grow to 12.5 gigawatts in 2024, a 25-fold increase in the current installed base, and about 14% of the projected global market in 2024. Looking at China’s track record in solar and in batteries, this may well be under-estimated. India also began to procure energy storage in 2017, and tendered for just under 100 MWs in March of this year. To date, India, though the second largest global market for solar power now, is a tiny player in storage. Lack of policy clarity has been a major issue, with a set of 2017 tenders having been cancelled without explanation early in 2019. Prime Minister Modi has launched a National Mission on Transformative Mobility and Battery Storage, under which a program will support the setting up of battery gigafactories across India. One can also expect the energy-plus-storage market in India to grow substantially.

Where to from here?
Looking forward, four key items stand out in attempting to foresee the renewables-plus-storage market of the future.
1) Still-lower prices and continued fast demand growth. Bloomberg NEF projects, based on a historically observed experience curve showing prices dropping 18% for every doubling of volume, that average prices of battery packs will fall from the current $176/KwH to around $94/Kwh by 2024 and $62/Kwh by 2030. Based on BNEF’s calculated present $0.06-0.07 premium to add four-hour storage to renewables, this would imply prices of energy-plus-storage falling below $0.06 per kilowatt-hour fairly widely – well below the cost of producing energy from greenfield coal plants. BNEF’s latest report on the battery market states “batteries co-located with solar or wind projects are starting to compete, in many markets and without subsidy, with coal- and gas-fired generation for the provision of ‘dispatchable power’ that can be delivered whenever the grid needs it (as opposed to only when the wind is blowing, or the sun is shining).” As we have been seeing already in several states, these declining prices will lead to rapid substitution – for investments in new electricity capacity — of renewables-plus-storage for fossil-fuels. Wood Mackenzie estimates that by 2024 global cumulative capex investment in energy storage will top $70 billion. This is a big deal, and a big disruption – or better put, yet another big disruption – for “traditional” energy markets. We can, in tandem with this growth, expect sharply declining demand for gas-plants (and so continued historically low natural gas prices). Wood Mackenzie projects that over 6 GW of planned gas-peaker capacity is at risk of cancellation in the US in the next few years; if storage costs continue to decline at double-digit levels annually, as they have done, then gas cancellations just in the US could run to 15 GW, or 80% of planned additions through 2026. In markets where natural gas is more expensive than it is in the US, substitution may occur even faster.
2) The hunt for the Next Big Thing continues. There is, of course, a catch to the rosy picture of renewables-plus-storage. It’s not in the well-publicized issue of the cost of cobalt, a key raw material for lithium-ion batteries of which more than half comes from war-torn Democratic Republic of Congo: costs of cobalt had spiked in 2016-7, but have fallen since as more efficient battery processes reduce demand. The catch is that lithium-ion batteries work well for providing critical four-hour storage, but not more. So while they are rapidly are becoming the best bet for dispatchable peak power, they don’t yet provide the equivalent of baseload, available 24-hour a day power. The search for the best longer-duration options continues. Pumped-hydro, which uses extra power to pump water uphill which can be used to turn a turbine and generate electricity when needed, is cost-effective but capital and space-intensive, so cannot be used in that many places. Flow battery technology gathers a lot of interest, but prices are prohibitive today for deployment, so much depends on whether the technology will gather the kind of cost-reduction which lithium-ion has.
3) Emerging Markets lag far behind. If we look at trends in relative economic growth, electricity consumption, and solar energy investments, we would expect that in the near future Emerging Markets would account for a large share, and certainly more than half, of demand for a centrally important energy technology such as storage. Yet unless we consider OECD-member South Korea to still be an Emerging Market, these countries account for less than 5% of today’s renewables-plus-storage market. By contrast, Emerging Markets account for roughly 2/3 of all solar and wind investment globally. The big bottleneck in emerging economies’ adoption of energy storage at scale is – and will continue to be — administrative capacity. We can see in the booming US market the amount of work which went into setting standards, regulations, and procurement programs. And we can see that in the two biggest emerging economies, China and India, policy choices have contributed to a slow rate of adoption to date. It seems that now China may have found a better procurement approach, but time will tell. We can also expect, as a corollary to this issue, that there will be a very large need for capacity-building, policy and technical support across emerging economies, to help them on the next stage of power availability and cost reductions. We can also expect that their success in doing so will have a very large impact on how big the storage market becomes, and how fast. Failure to get the procurement and regulatory environment right will likely mean a smaller global market than now estimated. Success, especially in China and India, may imply a significantly larger global market for battery storage than analysts are now projecting.
4) A push from policies? Wind and solar generation, in their early growth years, benefitted from significant policy support and subsidies. Now both technologies have reached the point that they are outcompeting alternatives on an economic basis without subsidies. In contrast, energy storage has benefitted significantly less from subsidies, as has renewables-plus-storage. For wind and solar in their early years, the medium-term question in forecasting market size was whether they would lose subsidies. For energy storage, a key medium-term question may be the exact opposite: will storage see new subsidies and policy support that it has not previously? If so, then the market may become much larger much faster than analysts presently predict. In an age of fiscal constraints and anti-renewables stances like that of the current US President and the oil and coal industries, this may seem far-fetched. But as Infrastructure Ideas has noted previously, energy policies may become substantially different in the future. Such a change depends largely on one’s views on the unfolding of climate change. If extreme weather events – floods, storms, wildfires and drought – continue to rapidly become more frequent and severe, as seems to be the case, and if data shows that keeping emissions even close to, let alone below, 2 degree warming scenarios has become essentially impossible, then the likelihood of more drastic climate-related policy actions increases substantially. Infrastructure Ideas sees this as the likeliest scenario, and probably within a five-year horizon from now. In such a scenario, “organic” growth of renewables and storage in electricity generation – as impressive as that growth now looks – may come to be seen as far short of what is wanted by voters and policy-makers. And in such a scenario, subsidies and other preferential polices favoring renewables-plus-storage combinations become one of the likeliest policy tools – further accelerating the current “organic” growth of storage. Stay tuned to the Weather Channel…

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