From pv magazine print edition 6/24
Using a battery to power a mobile phone – or watch, or laptop – is obviously no big deal. On April 16, 2024, however, the kinds of batteries that power cellphones and watches went quite a lot further, becoming the largest source of power for one of the world’s biggest electric grids.
The grid in question belonged to the California Independent System Operator (CAISO) and at just after 8 pm, batteries covered almost one-quarter of its more than 25 GW of demand, beating the amount of electricity obtained from gas turbines, hydro plants, and interconnectors. What happened at CAISO is likely to become a common event not only in California but also, potentially, in other markets transitioning to electricity systems dominated by renewables, from South Australia to the United Kingdom, in a trend that underscores the growing importance of batteries to society.
Batteries are already vital for consumer electronics and increasingly for transport, with electric vehicles (EVs) already accounting for 44% of new two-wheeler sales and 43% of new bus sales in 2023. At Alexa Capital, we expect batteries to dominate in stationary storage, trucks, trains, ships, and possibly even planes.
What is driving this remarkable adoption across sectors? Energy storage has been widely used for decades, with massive amounts of hydropower capacity built out during the 20th century. What has changed the picture more recently, and enabled batteries to become a kind of “jack-of-all-trades” to be used across various different industries, is the advent of lithium-ion technology.
“Lithium-ion (Li-ion) batteries … with their Swiss Army knife-like versatility, offer an array of applications that extend far beyond their current use,” states a new report on energy storage from Alexa Capital. “Their capacity to store and discharge energy on demand is not just reshaping our energy systems but is also setting the stage for a radical shift in transportation paradigms. In short, batteries are a key building block for our increasingly digital, distributed, and decarbonised economy.”
Energy density
The key to Li-ion’s versatility is its unparalleled energy density, which outstrips the nearest competing battery technology by more than three to one. This is what has enabled batteries to go from starting car engines to powering entire cars – or supporting grids such as CAISO’s.
Along with their technical superiority, the outlook for Li-ion is being driven by three major tailwinds. The first one is that, notwithstanding its widespread use today, Li-ion is still a relatively new technology and it continuously benefits from ongoing performance improvements and also cost reductions.
Li-ion’s energy density has been rising in line with the technology’s cumulative market size and the rate of improvement has quickened since 2012. That was the year Tesla launched its Model S sedan and made EVs trendy.
Thanks to the production improvements and economies of scale that have emerged since, the cost of Li-ion is expected to fall from a current level of around $153 (USD) per kWh of capacity to between $50 and $83 by 2030.
Gaining traction
A second tailwind for Li-ion is that much of the innovation and cost reduction we are seeing today comes from the automotive industry – and the electrification of transport will continue to power the market for batteries well into the future.
Indeed, transport electrification is just getting started, with EVs only beginning to reach cost parity with internal combustion engine (ICE) vehicles in 2024 – and even then, only in certain regions and among certain vehicle classes.
Today, for instance, an electric sports utility vehicle (SUV) in Europe or a small car in China can be bought for the same price as its ICE equivalent. In the United States, however, buyers may have to wait until 2026 for electric SUVs to reach price parity. In India, car owners may be waiting until after 2030. Nevertheless, the fact is that EVs are rapidly reaching price parity with ICEs in most global automotive markets. Since EVs have lower running costs than ICEs, once drivers go electric there is little reason to go back so it will not be long before all new cars are battery-powered.
China is already halfway there, with battery electric vehicles (BEVs) and plug-in hybrid EVs (PHEVS) making up 50% of new car sales in the first fortnight of April 2024, according to Chinese Passenger Association figures. Headlines concerning an EV sales slowdown in 2023 overlooked the fact that the figures still showed a 35% year-on-year sales increase – a level of growth that would be hard to find in any other sector. This tremendous market growth is a good sign for Li-ion performance and pricing and it is not just the auto industry that is hungry for Li-ion.
‘Beak’ shaving
A third tailwind is that countries with growing levels of solar generation need batteries to help overcome the energy “duck curve” of electricity demand minus solar supply (see chart above). Demand dips around midday as solar covers most consumption but soars in the afternoon and evening as PV generation drops and extra loads – mostly from residential air conditioning, cooking, TVs, and so on – come online.
The duck curve is a headache for grid operators because it increases the need for peaking power in the evening. If provided by gas turbines, this peaking power is expensive and polluting. The period of maximum demand – up to around four hours from roughly 6 p.m. to 10 p.m. – is right inside the range that can actually be met cost-effectively with Li-ion battery storage. Hence, grids that suffer from a duck curve can almost eliminate it by adding Li-ion battery storage to solar generation capacity.
Storage additions can be procured by the grid operator but are likely to happen naturally through market forces. Solar plant operators are unlikely to get much money selling electricity to the grid as more and more PV plants are built in their area because all of them will be producing energy at the same time.
Meanwhile, the mismatch between midday and evening levels of solar production will increase the value of electricity that can be dispatched after 6 pm. Hence, it will be increasingly worthwhile for generators to invest in battery systems that can store daytime solar energy and sell it to grids in the evening. This is essentially what happened on the CAISO grid in April 2024 and it is likely to become the pattern in any market that is seeing high levels of solar production. Plus, it is important to note that taking advantage of this kind of pricing “arbitrage” is not the only reason to invest in Li-ion batteries.
The technology can also take advantage of numerous other revenue-generating opportunities, from providing grid ancillary services such as frequency regulation and voltage support to offering synthetic inertia and “black-start” capabilities or helping relieve congested grids and defer infrastructure investment.
It is thanks to this ability to provide multiple grid services that battery energy storage has been able to scale without relying on government subsidy. That scaling will only increase as markets continue to embrace clean energy, making the Li-ion battery storage value chain an enduringly safe bet for investors.
About the author: Gerard Reid is a co-founder and partner of UK-headquartered Alexa Capital. He has spent more than 20 years focusing on investment banking, equity research, fund management, and corporate finance with a focus on the energy transition and digitalization. He was previously managing director and head of European cleantech research at Jeffries & Co. To find out more about capital market opportunities in energy storage, see Alexa Capital’s “Investing in the Energy Storage Revolution” report.
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