I will begin each of my series of posts by focusing on what I think clearly demonstrates that we are undergoing both an energy transition and economic transformation, which requires significant investment and is increasingly seen as an attractive opportunity (Energy Storage: A New Asset Class Buyers Of Power Should Consider Investing In).
BESS includes a mix of technologies – from Battery (lithium-ion, flow, lead acid, sodium), Thermal and Mechanical (flywheels, pumped hydro) to Emerging Technologies (compressed air, superconducting magnets, underground pumped storage, and hydrogen storage). I often say that geothermal energy is the “Rodney Dangerfield” of renewables. Storage is a crucial component of our future transportation (electric vehicles) and stationary electricity systems, and is critical to meeting the resiliency and reliability demanded by consumers. Renewable energy expansion, energy transition policies, EV adoption and the rise in digitalization will all drive growth in BESS. Significantly increased investments are needed to reach global decarbonization goals. While the transportation segment is expected to be the fastest growing in the BESS market, this article will focus primarily on the electricity side of the decarbonization equation.
Most people knowledgeable about how power gets delivered to customers will agree that one of the biggest challenges we face as we increasingly electrify is underinvestment in our grid systems. There are separate systems, rather than one national system, because of how the country is structured. As a result, the efficiency and effectiveness of each solution will have to be evaluated based upon the energy’s end use.
The second significant challenge for our grid system is growing renewable energy deployment and the electrification of other sectors of the economy. This growing penetration is burdening a system that was not designed for decarbonization, necessitating a critical level of investment. BESS facilitates the decoupling of consumption from generation, reduces unnecessary transmission, and ultimately serves the grid. Even utilities increasingly see BESS technology as a solution to defer the cost of grid upgrades and circumvent expansion challenges (both regulatory and capital constraints) (Batteries Can Be a Game Changer for the Power Grid If We Let Them).
Underinvestment in the grid and growing penetration of renewable energy are key drivers behind the advancement of storage technology, enabling standalone options to be off the grid. These technology solutions are being pursued in the shape of Microgrids, Smart Grids, Off Grid Community Services, and EV Charging Infrastructure. The importance of these solutions is that they are making our electricity greener, cheaper, accessible and more secure.
Microgrids are a group of local, interconnected DERs independent of the traditional grid, with the ability to connect or disconnect from it. The advantage of Microgrids is that they act autonomously and improve reliability and resilience to grid interruptions. Advanced Microgrids “enable local power generation assets (traditional generators, renewables, and storage) to keep the local grid running even when the larger grid experiences disruptions.” Additionally, they can supply energy to a local grid in remote areas, where connection to the larger grid is not an option. Advanced Microgrids are more cost-efficient, “extend the duration of energy supplies, and produce revenue via market participation” (Microgrids | Grid Modernization | NREL). In May 2024, the U.S. Department of Energy (DOE) Office of Electricity announced $10.5 million in funding for microgrid R&D to bring solutions to underserved and Indigenous communities in the United States with the aim of decreasing costs and reducing project times (Energy Department Announces $10.5M for Microgrid Solution Projects in Underserved and Indigenous Communities).
With Smart Grids, an electricity network utilizes digital technologies to monitor and manage electricity loads, coordinating with generators, grid operators and other electricity market stakeholders to maximize system “reliability, resilience, flexibility and stability” and cost-effectiveness. Here, too, we see a lack of much-needed investment. Even as it accounts for 75% of new investment in digital grid infrastructure, digitalization of the distribution grid has fallen behind. Without significant increases in investment we will not meet the 2050 Net-Zero goal, which would require a doubling of investments by 2030 (estimated at 600 billion USD annually) (Smart grids – IEA).
The United States is the second largest global market for BESS, due primarily to state targets, mandates, subsidies and utility procurements driving the market. The global market tripled in 2023, and is expected to exceed that in 2024, adding more than 100 GW hours of capacity (Global Energy Storage Market Records Biggest Jump Yet | BloombergNEF).
As was explained in a recent EY article, “Will growing volatility see battery investment charge ahead or power down?,” there are a number of compelling reasons we at MAC are bullish about investing in Energy Storage Solutions. A few key reasons are:
- Revenue stacking potential: Unlike other renewables assets, battery operators will “stack” revenues to make investment worthwhile. Regions that allow BESS to participate across multiple markets (i.e., ancillary, energy arbitrage and capacity) offer the best opportunity to do this. There is a growing shift from ancillary to energy arbitrage and capacity markets as paths to generate revenues.
- Energy price volatility: Higher volatility — usually in places with high penetration of solar and wind generation and lower degrees of interconnection — increases energy arbitrage opportunities for BESS (i.e., the ability to store power when it’s free or cheap and then sell it back to the grid when prices are higher).
- Intelligent grid infrastructure and operations: Markets with a modern, digitized grid enable batteries to compete with other technologies in the race for dispatch. BESS can respond far more quickly than most existing technologies such as gas, but optimizers need to be able to use sophisticated technology, including artificial intelligence (AI), to interface with system operators (EY).
Policy signals have been sent to support BESS strategies. The Biden Administration enacted significant new incentives for BESS. In addition to the standalone energy storage tax credits for projects in excess of 5 KWh, the Inflation Reduction Act (IRA) also offers a 10% domestic content adder and an advance manufacturing credit for US-produced battery components. The IRA enacted the long-sought investment tax credit (ITC) under Section 48 of the Internal Revenue Code (Code) for standalone energy storage facilities, as well as a new “advanced manufacturing” production tax credit (PTC) under Section 45X applicable to the US-based production of clean tech equipment and critical minerals, including energy storage equipment. (Wood Mackenzie Power & Renewables/American Clean Power Association, US Storage Energy Monitor, at 5 (Dec. 2023)). The European Union (EU) and United Kingdom (UK) also see BESS as a crucial component to addressing climate change, and have enacted policies to support the technology. The EU regulation focuses on permitting, effectiveness of energy markets, the grid, and non-discrimination against energy storage projects in tariff regulations. In furtherance of the view of a Circular Economy, the EU Batteries Regulation was adopted, taking a full life-cycle approach to sourcing, manufacturing, use and recycling of batteries (Batteries – European Commission). Similarly, the UK enacted the Energy Act 2023, which includes a specific framework for energy storage (Energy Act 2023).
In conclusion, BESS is on track to continue playing a crucial role in addressing grid challenges and meeting decarbonization goals. As renewables continue to occupy an increased portion of the electricity mix, BESS will follow a similar trajectory. The assistance of policy incentives encourages investments and adoption.