January 30, 2020
The Economics of Electricity Storage
Professor Brian Sturgess

Governments attending the United Nations Climate Change Conference in Paris in 2015 affirmed that a global shift to sustainable energy is essential to avoid the damage of catastrophic climate change. The shift has been facilitated by the rapidly declining cost in investment in renewable energy sources such as wind and solar PV which has significantly increased their importance in the global energy system in the last decade. These positive economic drivers are intensifying and the share of renewables will rise exponentially in the 2020s. 

The main disadvantage of renewables is that power generation is variable depending on sunlight and favourable wind speeds which means that an increased reliance on renewables requires complementary investment in energy storage systems. Energy storage plays a key supporting role in the global transition from fossil fuels to renewables and as the importance of these energy sources decline the transformation of power supply networks will need a large rise in the supply of storage capacity. 

Energy storage enhance the ability of electricity markets to adapt to variations in supply and demand. Large scale storage systems can be used to improve the reliability and profitability of power generation and distribution activities (grid level storage). Increasingly, renewable installations are paired with parallel investments in storage capacity. 

Smaller scale energy storage units (behind-the-meter storage) can offer more reliable and cheaper off-grid electricity for homes, businesses and institutions with the added potential of exporting surplus energy. Paired solar PV and storage is also extremely efficient and cost effective at smaller scale installations.

Complementing the revolution in renewable electricity generation a rapid adoption in the availability of storage capacity will help create a global decentralised and decarbonised energy system. This is already happening in energy markets across the world as the growth in storage capacity is leading to a rapid decline in the cost of installation creating a virtuous circle similar to that experienced in the solar PV market.

There are many types of storage systems and the technology is evolving, although the rapid growth in electric vehicles means that lithium ion batteries are seeing the fastest growth in volume with consequent falling installation costs. This is producing economic opportunities to install storage across many sectors stimulating market demand and supply growth. 

In this rapidly evolving sector Envirotech Energy Management (EEM) will act as a technology and business partner providing advice to clients on the advantages and disadvantages of different energy storage or combined generation and storage solutions bespoke to their commercial, professional or social requirements.



Energy Storage Supply


Energy storage is a means of varying energy supply to match energy demand across different time periods. Storage is a necessary complement to the increased use of the more volatile generating capability of renewable sources of energy. 

There are a number of energy storage technologies available although pumped hydro remains the most used worldwide for large scale storage to cope with demand fluctuations. The shift to renewable energy use is expanding the use of more flexible battery storage technologies such as lead acid and sulphur, but the most dramatic economic growth has occurred in the market for lithium ion batteries. 

The demand for lithium ion batteries is rising rapidly, but fortunately the long-run supply curve of battery storage capacity slopes sharply downwards exhibiting falling manufacturing costs as volume increases. In response to these greater manufacturing volumes the energy storage sector has been enjoying significant economies of scale combined with cost reducing learning curve effects which is reflected in falling prices. The rising volume of lithium battery output has been largely stimulated by their use in the transport sector and the rising penetration of electric vehicles electric vehicles (EV).  In 2018, the International Energy Agency estimated that lithium ion batteries accounted for 88 per cent of total deployed capacity up from 30 per cent in 2012.

Increased volume has produced a sharp fall in the price of battery storage capacity. In 2009 Deutsche Bank reported that the cost of lithium ion batteries at US$650 per kilo watt-hour (kWh) and forecast that the cost would halve by 2020. By 2015, a report by Moodys the credit rating agency, noted that battery storage prices had already halved from their level in 2010. This cost-reducing process has continued and in a recent report BloombergNEF estimates that battery prices have already fallen in real terms adjusted for inflation from above US$1,100 kWh less than a decade ago to US$156 kWh in 2019 and forecasts that average prices will be close to US$100 kWh by 2023. 


 

Demand for Storage

Positive economic forces also mean that the number and type of buyers of energy storage technology is growing. Data from the International Energy Agency indicates that there has been a massive expansion of global storage capacity in recent years, excluding pumped hydro. The increased investment in storage by utility companies (grid level storage) and by businesses, institutions and households (behind the meter storage) produced an annual rise in deployment of new storage capacity from 200 MW in 2013 to just over 3 GW in 2018. The global growth in deployment is shown in the Chart.



Global Deployed Storage Capacity GW

Large scale storage increases the flexibility of utilities as generation shifts increasingly to renewables. The deployment of grid scale storage increased by 200 per cent from 2015 to 2018. Large grid-scale storage capacity is attractive to utilities, grid operators and independent power supplies because it can be used to smooth volatile electricity flows, to provide a back-up service in case of failure and to improve the efficiency and profitability of the assets of power generators and distributors by absorbing excess demand. System failures due to excess demand or generating failures are dangerous and costly to suppliers and customers. 

In January 2020, a fine of £10.5 million has been levied by industry regulator Ofgem on three utility companies after a power outage in the United Kingdom in August 2019 left hundreds of thousands of homes and businesses without electricity in the southeast of England. The shift to renewables from fossil fuels necessitates an increase in the use of and demand for large scale storage facilities to balance the energy market to avoid such power disruptions. In a 2019 a survey by the British Chamber of Commerce found that a third of businesses had suffered a power cut in the last year 


The benefits of the technology and the risks of supply disruption has expanded the demand for energy storage beyond utilities. The market for smaller scale storage solutions now includes a wide variety of businesses and institutions of differing sizes as well as households. The IEA reported that the most significant change in 2018 over 2017 was the rapid rise in demand for energy storage from behind-the-meter customers which doubled to 1.9 GW accounting for 61 per cent of deployed capacity from less than that half the total the year before.  

The demand for battery storage depends on a number of economic influences. The lithium ion batteries used in electric vehicles are a large part of the capital cost of a vehicle so the demand for them depends to a significant degree on the relative cost of using combustion engines. In contrast, the commercial and household demand for energy storage is a function of the cost of storage, the technical efficiency and life of the batteries (the number of charge-discharge cycles), the cost of electricity input into the system, the current and expected level of electricity prices, the rate of interest and the impact of any subsidies and incentive schemes. Most of these factors are driving the demand by many companies to invest in electricity storage.

 

Governments and Storage Markets

All new markets benefit from favourable public policies. Falling costs of battery storage helped by the roll-out of electrical vehicles is stimulating behind the meter demand by households and businesses, but the growth in these markets, in addition to the demand for grid scale storage, depend crucially on supportive government policies. 

Positive government support to install storage in Korea ensured it was the leading country deploying both grid level and behind the meter storage in 2018 with 26 per cent of total capacity deployed followed by China, 19 per cent, the United States, 13 per cent and Germany, 10 per cent. In the United States in 2019, the governor of New York State legislated for a Green New Deal which aims to achieve a fully decarbonised energy supply by 2040, including a target of 3 GW of storage by 2030. In California, the Self-Generation Incentive Program (SGIP) has been extended to 2024, presenting an opportunity for increased deployment of behind-the-meter storage in commercial and industrial facilities. 


 

The Future

The economic forces that are driving the global market for energy storage are only still stirring and the sector is due for even more rapid growth. According to a recent report by Bloomberg NEF, the global energy-storage market is predicted to rise to a cumulative installed capacity of 942 GW from 8 GW in 2018 by 2040. Much of this will be investment in lithium ion batteries in the next few years and manufacturing capacity for lithium-ion batteries is expected to increase threefold by 2022, driven by the booming the EV market.

A rise to 942 GW will require an additional US$620 billion in investment expenditure which will have a multiplier effect on aggregate demand and GDP particularly in those economies already increasing capital expenditure on renewables for generation. In all cases, realising this potential growth requires a favourable policy environment with relaxed planning requirements along with incentive schemes.  

In the developed world falling battery costs will continue to drive demand particularly for behind-the-meter customers while the shift towards renewables in the energy mix will increase demand for grid level storage. Bloomberg BNEF estimates that the capital cost of a utility-scale lithium-ion storage system will fall by around 52 per cent by 2030.

In developing economies, energy storage will complement investment in renewables and bring secure electricity supplies to many of the estimated 800 million who lack access. The World Bank has recently announced an initiative to support energy storage deployment in developing countries, allocating US$1 billion while hoping to raise an additional billion from other sources. 

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