The electricity grid is in a state of flux. Low-cost renewables and the increased use of distributed energy generation represent profound challenges to the operation of a grid built on the assumption of power being provided predominantly by large, centralized generation sources, and consumed as soon as it is produced. In particular, the old model of stable baseload power being supplemented by gas and hydro for peaks in demand is giving way to a world where renewables predominate, supported by other, flexible generation assets for when the sun isn’t shining or the wind not blowing. The severe pressures on power utilities in Europe and elsewhere (and their share prices) reflect the magnitude of this transition.
To confront the challenge of maintaining a reliable and affordable electricity supply while also providing acceptable returns to shareholders, utilities and network operators must adapt their business models, technology portfolios, and approaches. In particular, they must become more agile, being both flexible and adaptive in how they develop, deploy and manage grid assets.
Energy storage is seen as one key tool for improving the flexibility and adaptability of the grid. For example, by smoothing the output from renewable sources and storing energy in times of high generation for later release, when demand is strong. When it comes to storage, battery technologies have attracted particular interest due to their scalability, efficiency and rapid response. Additionally, there are strong synergies between battery use for energy storage and in other applications such as electric vehicles and consumer devices. However, regulatory uncertainty, commercial arrangements, technology maturity and associated costs represent barriers to their implementation. Despite those, the industry has invested heavily in battery technologies, supported by a continuous reduction of their cost, attractive incentives and evolving regulatory frameworks.
There remains considerable uncertainty in the details, timing and extent of the role batteries will play in grid management. How, then, should network operators and utilities position themselves to take advantage of the opportunities presented and react to changes in the marketplace?
We recommend adopting a flexible approach to the business model and partnering – new, more agile approaches and partnerships will be required to fully exploit the opportunities presented by grid battery storage. In addition, we believe market players should develop portfolios of assets and technologies, to avoid being tied to one particular technology approach.
Industrials and large companies may have a truly compelling case to invest in battery storage, for various reasons, such as need to cope with power-outage issues (especially in South Asia and Africa), company commitment to sourcing 100 percent power from renewables (e.g., Google, Apple and Facebook), and paying high tariffs for their electricity (such as in Italy).
Industrials have the option of outsourcing their battery-storage operations to power utilities or aggregators, or collaborating with DSOs and TSOs, potentially earning extra revenues by providing auxiliary services to the grid (such as voltage stability or black start). While we see few applications of this business model to date, it can provide a particularly good alternative for system operators that have their hands tied regarding their roles in storage activities.
Battery storage is a relatively young industry, and such projects do not have track records of five or more years of real returns, which makes the bankability for storage a challenge. However, recently, private equity, infrastructure and technology companies have successfully raised significant money for new storage project financing. This behavior is similar to the caution demonstrated by investors in early solar projects. However, as more data, in terms of revenues and returns, becomes available from the storage projects under operation, investor confidence will grow.
Battery storage is a much-debated part of the energy market solution, with both energy majors and technology providers investing heavily into research, development and try-outs to create successful business cases. The challenge is not technology: differences in market and regulatory conditions can make identical solutions worthwhile or pointless, as economic viability is determined by the revenue and profit models within the regulated energy industry in individual markets.
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