WHEB Commentary

Energy storage – electrifying potential


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The saga of Hinkley Point C has had more twists and turns than a Weston-super-Mare roller coaster and with every passing day the project appears more expensive and ill-judged. Because of its vast expense, Hinkley Point has unintentionally illuminated the very real progress that is taking place in energy storage technologies. These technologies offer an alternative approach to providing secure and low carbon power at a reasonable price.

Energy storage is commercially viable

Energy storage technologies such as pumped hydro[i] have been a valuable part of electricity grids for many decades. However, in recent years the rapid growth in intermittent renewable technologies such as wind and solar has driven interest in alternative storage technologies such as batteries, fly-wheels and compressed air storage.

The role of storage technologies is though not limited to the services so crucial to renewable integration. In fact, the most attractive applications for energy storage today are found in providing frequency regulation services for the grid, helping to defer more expensive grid upgrades and, offering consumers alternative sources of power during periods of grid-based peak pricing. A recent McKinsey study, for example, found that utilising energy storage technologies as an alternative to grid-based electricity would already be profitable for many commercial customers such as hotels, offices and schools[ii].

Grid-scale deployment has accelerated in 2016

Market forecasts for electricity storage for stationary applications already anticipate a market in excess of US$30bn by 2024 growing from about US$2bn this year. This represents over 700MW of capacity up from less than 500MW in 2015[iii]. The US, and California specifically, is already well-advance in deploying the technology and is set to further extend this lead with the fast-track deployment of five new energy storage projects to address a potential shortage of peak power generation capacity following the shutdown of the Aliso Canyon natural gas storage facility earlier this year[iv].

Grid-scale electricity storage is also moving to commercial reality in the UK with the National Grid awarding over 200MW of storage capacity in late August 2016. This capacity will provide enhanced frequency response to the grid and while the request for tenders was neutral on the type of technology it preferred, 61 out of the 64 sites that were successful in the auction will use battery technology[v]. Indeed, with much of the its existing fossil-based generation fleet expected to be obsolete by 2030, the UK may be particularly well-placed as an early adopter of grid-scale battery technology[vi].

Lithium ion technology leads

Lithium ion based batteries have emerged as the favoured technology in commissioned energy storage projects accounting for nearly 90% of energy storage projects in the last eighteen months[vii]. This lead, combined with the use of lithium ion technology in battery electric vehicles (BEVs) may well prove pivotal in enabling the technology to benefit from economies of scale that further reinforce its cost advantage over peers. The technology has already seen cost reductions per kWh of over 60% since 2010 and these are anticipated to fall at least another 30% to less than US$200/kWh by 2025[viii].

Investment opportunities

Currently the energy storage market is still dominated by small private companies. A Bloomberg New Energy Finance (BNEF) study found that 40% of all energy storage firms are privately held and only 5% are publicly listed. A further 22% are the subsidiaries of larger companies. As a listed equity investor, getting access to the anticipated growth in the energy storage market is far from straight-forward. Most of the small listed companies are still not yet profit-making, and their larger cousins are buried deep within large electric equipment conglomerates like ABB, Schneider Electric or Siemens.

It is our belief that the energy storage market is likely to be dominated by the large electrical engineering businesses that are already deeply involved in the electricity value-chain. There may also be an important role for the car companies such as BYD, Tesla, Daimler and Nissan that have already established commercial businesses aimed at residential and commercial battery applications. These car companies may also be well-placed to find secondary markets for battery packs that are no longer suitable for BEVs but could still be used in stationary applications.

WHEB’s investment positioning

Notwithstanding the rapid recent growth in energy storage technologies and the promising trends we describe above, outside of pumped hydro, the energy storage market still constitutes a very small drop in a very large ocean. As far as the FP WHEB Sustainability Fund is concerned, our current exposure mirrors the early stage of this market. We own a handful of companies that have a strategic interest in the market such as Murata Manufacturing which recently acquired Sony’s energy storage business; Canadian Solar, a solar panel manufacturer that is also developing residential energy storage applications; and Johnson Matthey, which is primarily focused on automotive battery technologies but is also well-positioned to address the stationary energy storage market. We do also of course continue to monitor the energy storage market as it matures, looking for further opportunities to invest in this exciting new technology.

[i] http://www.bbc.co.uk/bitesize/standard/physics/energy_matters/generation_of_electricity/revision/3/

[ii] McKinsey&Company, ‘The new economics of energy storage’, August 2016 http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/the-new-economics-of-energy-storage?cid=other-eml-alt-mip-mck-oth-1608

[iii] CLSA and Energy Strategies Group, ‘Battery ram – Storage set to shake things up, March 2015

[iv] Bloomberg New Energy Finance, ‘Aliso Canyon Leak: Energy storage and demand response’, 24 August 2016 https://www.bnef.com/core/insight/14852

[v] Bloomberg New Energy Finance, ‘Batteries win biggest energy storage competition of the year’, 27 August 2016

[vi] Barclays Equity Research, UN Energy Revolution: A £251bn investment opportunity to 2030, 19 August 2016

[vii] Bloomberg New Energy Finance, ‘Britain is about to take a great (battery) leap forward, 25 August 2016 http://www.bloomberg.com/news/articles/2016-08-25/biggest-battery-contracts-move-u-k-closer-to-grid-scale-storage

[viii] Tesla estimates that it could achieve costs of US$100-$200/kWh by 2020 (http://www.eia.gov/conference/2015/pdf/presentations/straubel.pdf) .

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