The falling cost of storing energy is emerging as a key enabler of electric vehicle and renewables growth. The oil and gas industry is taking notice
When the Aliso Canyon gas storage site in Southern California had to be shut down in the summer of 2016 following a massive months-long leak, utilities warned that the region was facing a prospect of crippling energy shortages. The site supplied fuel to a network of gas-fired power plants across the region that kept the lights on and air conditioners pumping during times of high demand, like summer heat waves. With the site out of commission, regulators and power generators were left scrambling to plug the power gap. They turned to an untested option: stacks of lithium-ion batteries that could hold power to be dispatched as demand peaked, serving a similar function as the gas stored under Aliso Canyon. In just six months, an unprecedented build-out of grid-scale battery storage was installed across Southern California by Tesla, AES Energy Storage, AltaGas, Powin and other big names in the burgeoning energy storage business, heading off the risk of outages.
It was a coming-of-age moment for the nascent energy storage sector, proving both the technology and the improved economic competitiveness of utility-scale storage. It also added fuel to the sector's quick rise. Installed battery storage capacity rose more than 55% in 2017 alone, from 459 megawatts to 715MW, driven in large part by the 100MW Aliso Canyon replacement project. It's still a tiny market, but its backers see boom times ahead, and the prospect of transforming the energy grid in a way that makes managing supply and demand smarter. At the same time, it enables intermittent wind and solar sources to take a larger share of the mix without compromising reliability.
A typical storage installation includes stacks of lithium-ion battery packs connected to an integrated system, housed in a climate-controlled casing, and looks fairly similar to a computer server. While things like inverters, the housing, cooling systems and the real estate it sits on are all important elements in the cost, the batteries themselves make up close to two-thirds of the overall outlay.
Squeezing out efficiency
Those batteries have become far cheaper, far quicker than most thought possible. The cost of lithium-ion batteries has plunged from $600 a kilowatt hour in 2013 to $209/Kwh this year, according to data from Bloomberg New Energy Finance (BNEF). This is thanks largely to growing economies of scale driven by surging demand for lithium-ion batteries for electric vehicles, and more recently, grid-scale projects. Ventures like Tesla's enormous Gigafactory 1 in the Nevada desert will continue to squeeze more efficiency out of the battery manufacturing process. A recent survey from BNEF predicts costs will fall towards $100/Kwh by 2025, a crucial level for electric vehicles to compete with their petrol-fuelled rivals, and an encouraging sign for those utilities looking to integrate more batteries into their grid.
The plummeting battery price is set to supercharge growth. Given the industry is still in its infancy, growth forecasts are all over the place—but all point upwards. GTM Research, a consultancy, says growth to 17.5 gigawatts is possible over the next decade as major utilities start to put energy storage at the centre of their development strategies. The Energy Storage Association, an industry trade group, laid out an even more ambitious plan in November that envisioned 35GW of installed storage in the US by 2025. BNEF says storage is set to see the same sort of exponential growth that the solar industry has witnessed over the past decade. It envisages around 25GW in the US by 2025, jumping to around 75GW by 2030, with tens of billions of dollars to be invested in the nascent technology.
Energy storage's potential is too transformational to ignore
The forecasts would require a lot to go right for the young industry. First and foremost, the projected cost reductions need to materialise. Regulators, utilities and consumers will also need to embrace new rules that put a premium on the flexibility, resilience and multitude of services batteries provide to the grid. They will also have to rate plans that respond in real time to energy usage, increasing prices at times of higher demand—when power stored in batteries could be deployed to meet peak requirement. The wide embrace of smart meters—nearly half of all US households already have them—and other technologies have set a strong foundation for these changes. But the utility business is highly regulated and very risk-averse, meaning change could be slow to come and will likely be piecemeal. For its backers, the potential to make the grid smarter and more flexible is energy storage's real appeal.
Major utilities in 15 states, including California, New York and Florida, are building storage into their long-term plans. In the short term, these are mostly focused on batteries' potential to replace natural gas peaker plants, which mostly sit idle until they are needed to meet surges in demand. This is the first significant market where storage might make inroads. Around 20GW of new gas-peaking capacity is planned for the next decade, a market energy storage developers are already eyeing. For now, the gas-fired peaker plants are cheaper to build and run than battery systems, but batteries' falling costs could bring parity in the next five years, according to GTM Research. "I don't see any reason why we would build another gas peaker plant in this country from 2025," Shayle Kann, a senior advisor at GTM, told a conference recently in San Francisco.
Backing up renewables
The more significant opportunity, however, is for energy storage to grow alongside renewables. Affordable and widespread batteries are the best hope for addressing what has been a glaring Achilles heel for both wind and solar energy—their intermittency. Putting batteries alongside wind and solar installations—or closer to customers—would help smooth out supply when the clouds roll in or the wind dies down, a necessary component of a system in which wind and solar account for more and more generation. In this way, storage is in a sort of race with carbon capture and storage technology, which seeks to solve a major problem for fossil fuel-fired plants—their carbon emissions. Progress on CCS has been halting, at best, but a breakthrough could ensure a long-term future for fossil fuels even in a carbon-constrained world. Alternatively, if energy storage proves to be viable on a large scale, it would facilitate an accelerated roll-out of renewables, at the cost of coal first, but eventually also gas.
The industry's ambitions are throwing up a new challenge: how to source all of the lithium, cobalt, and other materials involved in ramping up production of lithium-ion batteries. These battery-related materials have been some of the best bets in commodity markets over the past couple of years. The price of lithium doubled from July 2016 to early 2018 as major battery manufacturers like Tesla, LG Chem and others scrambled to lock in long-term supply. The price per pound of cobalt has more than tripled over the same period.
On top of surging prices, there are also lingering concerns over the supply chain for these materials. There appears to be plenty of lithium about, but the industry will need miners to step up production in a big way to avert a supply crunch. Chile holds about half the world's lithium reserves, and its deposits in the Atacama Desert will be crucial to keeping up with global demand. Cobalt presents a different sort of challenge. Much of the world's reserves are in the Democratic Republic of Congo, and human rights and other groups have already raised concerns over the use of child labour and other governance issues.
Oil firms sign up
There's also a debate raging within the energy storage industry about future battery technologies. Nearly everyone recognises that today's lithium-ion battery technology isn't likely to be able to carry the industry to its largest ambitions. Batteries that are safer, hold more energy and can be deployed for longer will be needed. Electrochemists are working on dozens of new types, though there are no clear leaders in the pack. For now, lithium-ion holds a huge advantage in cost and scale and will continue to dominate.
Oil majors have taken notice of the coming storage boom. The industry's forays into storage have been relatively limited so far, which isn't necessarily a surprise considering the technology's early stage and the fact that it's outside the core business of getting fossil fuels out of the ground and to consumers. Total's $1.1bn acquisition of French battery maker Saft in May 2016 is by far the most significant move, and is among the biggest deals yet in the young energy storage sector.
$100/kWh—Lithium-ion battery cost by 2025
Further investment from oil majors seems inevitable as energy storage grows. Shell and Statoil look like the most likely to move next into storage with their increased focus on renewables and electricity, a strategy meant to gird the majors in the transition from fossil fuel molecules to electrons. Shell's new energies unit is focused on electric vehicles, renewable energy and electricity marketing. Storage seems a natural next step. Statoil is making similar moves into clean power, and sees energy storage as a part of that business. It made a major investment in energy storage developer Convergent in December 2016 and plans to install a large battery system at its first-of-a-kind Hywind offshore wind project in Scotland.
The battery's journey from the smartphone to the electric vehicle to the power grid is well underway. Battery costs are falling and the industry is racing ahead into new markets. Whether the economics shake out in a way that facilitates the mass adoption of energy storage remains an open question. Uncertainties over the supply chain and battery technology will also prove vexing. But energy storage's potential is too transformational to ignore.