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Anchor Group
WHITE PAPER
Utility-scale energy
storage at an inflection
point
By Dweep I. Chanana
April 2019
EXECUTIVE SUMMARY
Demand for utility-scale energy storage is poised to explode, with a project pipeline of
15GW globally. Emerging markets, in particular India and China, will see the bulk of this
growth. Anticipating this explosion, and extending work done with some of our inves-
tors and clients – leading energy firms in Europe and India – we set out to map the uni-
verse of battery storage technologies, and over the past 6 months landscaped over 85
companies. What we found was a market poised to grow rapidly, with several emerging
vendors looking to challenge the incumbent technology and an opportunity for leaders
to substantially reshape the market.INTRODUCTION
Energy storage is a USD
Regardless of which analysis you read, energy storage is poised to grow
620 billion investment
exponentially in the years ahead. Bloomberg New Energy Finance
(BNEF), in its last energy outlook, called energy storage a USD 620 billion opportunity through
investment opportunity through 2040. According to Wood Mackenize, 2040, according to
deployments in the USA grew 80% last to reach 777MWh. Bloomberg New Energy
The picture was very different even a year ago, with projections much Finance.
more conservative and widespread deployment largely elusive, with high
costs making many business cases uneconomical. As a result, announce-
ments of new energy storage capacity, particularly for larger batteries,
had largely been limited to high-cost diesel replacement – such as on
remote islands, areas with no grid connection – or had depended on
“smart grid” incentives, as in Europe, or where electricity prices were
high, as in Australia.
The dynamic has changed permanently
$1,000
at the start of this year with the industry
embarking on its best growth years. US $800
storage deployments are expected to $642
$599
double in 2019, then triple in 2020. The $540
global energy storage pipeline of pro-
$350
jects stands at 15GWh. Substantial and $273
$209
continuous declines in the price of ener-
gy storage, in particular Li-Ion (see Fig-
ure 1), have drastically altered the busi-
2010 2011 2012 2013 2014 2015 2016 2017
ness case and made many more applica-
tions economical. Figure 1: Price of Li-ion battery (USD). Source: Deloitte.
THE MARKET OPPORTUNITY – BUT WHICH MAR-
KET?
With a pipeline of over
Storage is not a single market and not all segments will grow at the same
15.2 GW of storage
pace. In this paper our focus is specifically on the market for large-scale
batteries deployed for grid-scale applications. globally, new battery
This may seem counter-intuitive as energy storage has largely been asso-
projects are set to dwarf
ciated with the market for electric vehicle (EV) batteries and for behind- even planned
the-meter (BTM) applications in residential and commercial sites. Prior installations of pumped
to Q4 2018, smaller-scale BTM batteries in residential and commercial
hydro.
sites had grown faster than the utility-scale market for 4 consecutive
quarters in the USA. These segments have also attracted more invest-
ment dollars, as demonstrated by the recent acquisition of Sonnen (a
German leader of BTM batteries) by Shell and Tesla’s acquisition of Max-
well Technologies (a technology company that makes ultracapacitors).
The end of 2018 marked a turning point, however, when this segmentfinally outperformed.
While other applications have a head start, their growth trajectory is far
less certain and subject to certain limitations to adoption. These include
a weak grid edge that is incapable of charging even a fraction of today’s
installed base of cars, automotive OEMs actively testing alternatives such
as fuel cells, and the fragmented nature of the EV ecosystem, with no
single player able to drive change.
By contrast, the power & utilities (P&U) industry is significantly more
concentrated with players able to drive scale. Policymakers, particularly
in emerging markets, see in storage a solution to the intermittency of
renewables that does not involve expensive grid-infrastructure upgrades
that Europe and the USA have had to undergo. We therefore expect fu-
ture energy regulation to
encourage, or even require, 4500
renewable power projects to 4000
be developed in conjunction 3500
with storage. 3000
2500
This is particularly true of 2000
emerging markets, which 1500
are expected to add over 1000
80GW of storage over the 500
next decade, and account 0
for a significant part of the 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
impending growth. The mar-
ket for energy storage in Figure 2: Projected annual stationary energy storage deployments, India. (MW).
India, for instance, will grow Source: IFC.
exponentially (see Figure 2),
with the country expected to soon require storage to be included in eve-
ry new renewable energy project. Indicative of this trend, India recently
announced its first large-scale storage projects, tendering over 3.6 GWh
of storage capacity alongside wind and solar projects.
Such policy moves provide a massive impetus to storage deployments
and will likely bring the cost curve down even faster than currently antic-
ipated. And with three markets (China, USA, and India) expected to ac-
count for 50% of storage deployments, the right regulation can lead to
adoption very quickly.
THE RATIONALE FOR UTILITY-SCALE STORAGE
Driving this impending growth in storage is the shift that has already tak-
en place in the energy mix away from fossil fuel based to renewable en-
ergy.
New installations of renewable energy had already outpaced additions tofossil fuel power generation in 2017. Last year renewable energy con-
tributed a third to global power capacity and solar power became cheap-
er than coal, with Germany generating more total energy from renewa-
bles. The same is expected to happen across the globe, with the share of
coal in the Indian energy mix expected to fall from 57% today to 38% in
less than a decade.
Given the zero marginal cost of renewables, there is little doubt that the
future of energy is green. If there is one problem, it is that these “new”
sources of energy are neither deterministic nor on-demand. Energy stor-
age has thus been considered a part of the solution, meant to smoothen
out the energy supplied by renewable sources, in order to replace fossil
fuels for peak power capacity. Falling prices have made that a reality. In
December 2018, Credit Suisse confirmed that utility-scale storage and
solar were also cheaper than gas peaker plants.
According to recent MIT analysis, a renewable system combined with
storage in central Texas “would deliver electricity at 13 cents per kWh If 2017 was the year that
with today’s lithium-ion batteries, but at only 6 cents with the flow renewable energy
batteries that are likely to dominate long-duration grid storage.” That is
generation displaced
competitive with the cost of power generated from natural gas com-
bined cycle, the cheapest form of fossil fuel energy. fossil fuels as the
If 2017 was the year that renewable energy generation displaced fossil
preferred new energy
fuels as the preferred new energy source, 2019 may well be the year source, 2019 may well be
that energy storage grows to make renewables replace or threaten a the year that energy
large portion of peak and baseload power.
storage grows to make
Despite the obvious economic benefits of doing so, little effort has been
renewables replace or
expended till date on how to systematically transform renewables into a
more deterministic energy source. Why?
threaten a large portion
of peak and baseload
power.
THE BARRIERS TO ADOPTION
The most obvious barrier to widespread adoption of storage has been
economic. Despite steep reductions in the cost of batteries, till last year
only a small set of use cases had a favourable return on investment
(ROI). This is why deployments on islands has remained one of the most
widespread applications of storage and explains its popularity on Hawaii
or Australia, where electricity is expensive.
Ironically, the falling price of storage is also a constraint, as it has re-
warded those that wait. Storage is typically a long-term investment, with
IPPs in India seeking solutions that can align with the PPA duration and
last for 25 years. As companies decide which solution to adopt, they
have few incentives to buy batteries that may be outdated or cheaper
within months. As a result, battery rental models, such as those propa-
gated by Aggreko, are highly attractive. Regulators face the same dilem-ma – issue hybrid tenders today, or wait to capture a lower price of elec- tricity? Between 2017 and 2018 India cancelled four solar plus storage tenders across the country, before embarking on a highly ambitious plan to integrate storage into solar projects earlier this year. Regulation, ironically, has been both supportive of storage and has hin- dered its further growth. In many cases, batteries rely on monetizing grid services (e.g. frequency response or grid balancing) to make a business case viable. However, these incentives rarely differentiate between the generally superior characteristics of batteries, such as substantially faster response times, versus traditional providers such as gas peaker plants. Raw material constraints and concerns around safety have also limited applicability. Companies we work with have avoided investing into Li-ion, in particular, because they worry about constraints on lithium supply or are unwilling to commit to widespread deployment of the technology in high temperature conditions. Fire safety concerns have also prevented the technology’s adoption in a host of BTM applications, including in da- ta centers and telco towers. Finally, the lack of maturity of some technologies and risk aversion from buyers and investors also constrains growth. Several of the technologies we analysed are extremely promising in the price points they can achieve and the characteristics they offer. However, with few deploy- ments, most have insufficient proof points that prevent customers from large-scale deployments. In turn, with limited deployments these tech- nologies remain expensive, creating a vicious cycle that constrains alter- natives to Li-Ion to emerge. The most forward looking customers, as a result, have started to evalu- ate technologies not as they are today but how they might be once pro- duction reaches scale. INNOVATION IN UTILITY-SCALE STORAGE This calculus is already driving action amongst the leading solar develop- ers, who see storage as an emerging competitive edge. And the most ambitious are not only looking to be spectators in this evolution, but to drive technology development by combining captive demand with in- vestment and manufacturing capability to bring costs for one or more technologies down to the right price point. Our work with some of India’s leading IPPs has convinced us that storage is at an inflection point. Over the past 6 months we therefore undertook an analysis of over 85 energy storage solutions, screening 22 in depth. This analysis covered a number of technologies at various stages of de- velopment - including Li-Ion, flow batteries, energy conversion (e.g. pow- er-to-gas), and gravity (pumped hydro, mechanical) or kinetic-energy
(flywheel) solutions (see Figure 3). We Flow Battery
discovered an immense amount of inno- 23%
vation, the emergence of new technolo-
gies, and the evolution of old approach-
es.
Li-ion remains the most deployed battery Solid-state Fuel cell
technology today. Given its relative ma- 50% 4%
turity, improvements amongst Li-Ion
battery and ESS vendors are primarily Kinetic
focused on innovation of the manufac- energy
9%
turing process, cell architectures, or Power-to-
overall packaging - as attempted by gas
NorthVolt, PowerRoll, and QINOUS. This 14%
is to be expected, given that OEMs have Figure 3: Distribution of companies screened, by technology type.
likely achieved all the economics of scale
possible. If Li-Ion is to fall to the anticipated USD 100/kWh price point by
2020 as forecasted by Moody’s, such innovation will be key.
Beyond Li-Ion, however, a wide
range of contenders are seeking 5%
5%
to challenge the established or- 2%
3%
der (see figure 4). This includes
both new technologies, but also 8%
companies such as Nant Energy, 48%
that seek to disrupt more tradi-
tional approaches such as
18%
pumped hydro and to make
them more easily deployable.
While some of these are years 11%
away from commercialization
Lithium-ion Lead acid Sodium-sulfur Flow batteries
and others may suffer from prac-
Lead carbon Nickel cadmium Sodium chloride Others
tical constraints, a few stand out
– because they promise costs of Figure 4: Global battery technology market share. Source: ScienceDirect.
between USD 50-100/kWh today,
if produced at scale.
Generally, emerging technologies are seeking to differentiate along the
following vectors:
1. Cost at scale: The most critical differentiator is production and
lifecycle cost at scale. This is a metric Li-Ion vendors are looking to
improve through process innovation and scale. Flow battery man-
ufacturers, on the other hand, emphasize longer lifetime, better
performance, and better economies in longer duration deploy-
ments, to drive costs below today’s Li-Ion solutions.
2. Raw material availability and sustainability: Another vector of inno-
vation has been to develop batteries using raw materials that areeither abundant or environmentally friendly and easily recyclable.
This includes companies such as Aquabattery and Broadbit that
offer to build flow- and solid-state batteries from nothing but wa- Oil & Gas companies
ter, salt or sand. concluded 13 M&A and
3. Separation of power and energy: Li-ion batteries offer a linear rela- investment deals in
tionship between power and energy. Thus, 1MW of power for 4
energy storage in the
hours requires 4MWh of storage. Several solutions today can side-
step this constraint – in particular flow batteries and power-to-gas last 2 years.
solutions, where the addition of a larger tank can increase storage
capacity at very low cost, leading to superior economics for larger
capacity systems.
4. Optimizing segment value proposition: Finally, some companies
have chosen to build solutions optimized for a particular segment
or application. QINOUS, for instance, chose to focus on the C&I
segment, while CellCube has chosen to focus its development of
flow batteries for utility scale deployments, despite having started
out in the C&I segment. The logic of such innovation is to achieve
superior performance and economics by focusing on the overall
package and delivery of the solution.
INVESTING IN ENERGY STORAGE
In any rapidly changing market environment, it can be challenging to
identify which bets to make – either financially or strategically. Investing
into energy storage today presents a similar dilemma and the answer of
where to invest will depend on one’s perspective.
As a financial investor, energy storage projects are likely a good bet, not
unlike renewable energy projects a few years ago. They offer secure long
-term cash flows secured against relatively certain regulatory frame-
works or with certainty of the economic case over at least a 10-year peri- Investors building new
od. This can explain why SUSI Partners, a Swiss asset manager focused business cases in energy
on renewables, has over the last few years moved from financing gener- storage should look for :
ation to storage.
1. Application
Investing in energy storage technologies, on the other hand, is fraught
specificity
with risk. The landscape of companies that have sought to disrupt the
market for batteries is littered with those that ran out of money or simp- 2. Hybrid solutions to
ly could not compete with the falling price of Li-ion. The experience of extend ROI
PV cell or module manufacturers in Europe, who were wiped out by Chi- 3. Technology
nese competition as the PV industry picked up, also offers a cautionary
validation and
tale. Given the long gestation period for new technologies and the con-
stant erosion of margins, financial investors should likely only invest into lifecycle modeling
a portfolio of technologies or in companies that have proven technology 4. Innovative business
viability and are backed by a meaningful project pipeline. And any invest-
models
ments must be done with the view to exit to a strategic in the foreseea-ble future.
It is those strategic investors that are buying into storage. Oil & Gas com-
panies, for instance, concluded 13 deals in the last 2 years, according to
Mercom. This includes Total’s USD 1.1bn acquisition of Saft and Shell’s
recent acquisitions of Sonnen and Limejump.
For strategic investors, energy storage technologies present a unique
opportunity. As new solutions reach technical maturity, they require
more deployments and production at scale. This requires customer ac-
cess and strong balance sheets, both hard for an emerging vendor to
secure on their own. Thus, strategic investors can make informed invest-
ments into or partnerships with companies, and leverage their own cap-
tive base of clients or projects to drive volume and scale. In doing so, it is
helpful to watch for the following:
1. Solutions are application specific: It is important to understand
which specific niche a particular solution may grow to occupy. This
may be narrower than utility-scale – for instance, some solutions
may be more economical for 8-hour duration deployments, while
others may be more appropriate to be deployed in a “plant” for-
mat rather than in containerized solutions (see Figure 5).
2. Hybrid solutions can improve ROI: Combining different batteries
into a single solution can be helpful to improving ROI. For in-stance, a fast-response Li-ion battery can be combined with power
-to-gas solutions that have superior cost at higher capacities. In
Thailand, Li-Ion batteries have been married to flow batteries to
deliver more economical microgrid solutions.
3. Technology validation is not easy: When buying into a technology,
validating its characteristics presents a particular challenge. Grid-
scale deployments require storage solutions that can provide cer-
tainty on performance for 10-25 years (the typical length of a
PPA). However, few technologies have been around for that long
in real-world conditions, requiring a particularly close look at
claims made by vendors.
4. Lifecycle modelling is required: For the same reason, it is important
to model solutions over the entire expected lifecycle of a battery.
This can be complex and requires covering all parameters includ-
ing capex, discharge cycles, efficiency (in real-world scenarios),
and O&M costs. Once a full model has been developed, compari-
sons between various solutions can be made more accurately.
5. Business models matter: Conventional wisdom assumes storage
technologies will be sold, but this may not be the case. Marrying a Just as generation is
technology with the right business model can be key, but is largely
becoming distributed, so
not being considered. Rental of batteries, as pursued by Aggreko,
can accelerate adoption, allow for technology upgrades that cap- too is storage. For
ture greater margin over time, and allow one to secure market committed players, it
share early. Virtual aggregation of distributed systems into virtual- offers the same
ly managed “power plants” is also likely to emerge as a preferred
business model for new energy companies, as it greatly enhances
opportunity today, as
the value proposition of storage systems. solar PV or wind did over
the last decade.
CONCLUSION
The utility scale market is poised to grow rapidly, outpacing all other
storage applications in the near term. For proponents of clean energy,
renewables combined with storage stand at the cusp of dominating all
other energy sources. For market participants, this heralds a new era of
growth and opportunity.
Pumped hydro has long been the solution of choice for large-scale grid-
stabilization and today accounts for 95% of all utility-scale storage instal-
lations globally. However, just as generation is becoming distributed, so
too is storage. With a pipeline of over 15.2 GW of storage globally, new
battery projects are set to dwarf even planned installations of pumped
hydro.
Lithium-ion remains the single largest battery type being manufactured
or deployed today. However, we believe that in the years ahead this will
change. Challengers have been busy reinventing old approaches and de-veloping new technologies. As storage becomes cheaper, regulators will seek to insert longer-duration batteries to turn intermittent renewables into smoother sources of energy, while rewarding batteries for providing other grid services. As the demands of utility-scale storage grow and newer technologies reach commercial maturity it may make sense to look at a range of alter- natives for specific segments of the FTM market. However, technologies will need to be matched with production capacity, sales channels, and the right business model, to achieve success. For those early movers that can provide all three, storage offers the same opportunity today, as solar PV or wind did over the last decade.
Anchor Group is a Swiss cross-border investment and de- velopment firm, advising corporates, family businesses and investors on mid-market and growth-stage M&A, in- vestments and new business development across Europe and India since 2007. Our team combines over 25 years of investment, M&A, operational and corporate development experience with leading industrial and financial services firms. We partner with our investors and clients to define industry priori- ties, identify innovations, and to help businesses grow. CONTACT INFORMATION Dweep I. Chanana dchanana@aii-group.com Niwedita Sahay nsahay@aii-group.com Anchor Group Switzerland: +41 44 245 1026 India: +91 33 4006 9784 info@aii-group.com
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