Investment bank says wide deployment of battery storage will hasten the demise of fossil fuels and utilities that remain focused on centralised generation. It tips rapid fall in costs and a $400bn storage market by 2030.
And it also warns that the battery phenomenom will be even more profound than the solar revolution currently sweeping the globe, and will sweep aside any traditional utilities that remain focused on centralised generation.
The predictions of Citigroup analysts are a reprise of predictions it made in August last year, when it predicted that battery storage costs could fall to around $230/kWh by 2020, and eventually be as low as $150/kWh. The global market for battery storage could be worth more than $400 billion by 2030.
The significance of its latest update is that these forecasts, and their potential impacts, are included as part of its analysis of the 10 major investment themes for 2015.
The issue is therefor rapidly moving beyond those with a narrow focus on utilities and energy markets, it is now part of mainstream financial thinking, and because of that will have a profound influence on capital flows across the globe.
Citi says improvements in battery storage both in terms of operational performance and economic terms should expand and accelerate the trend for corporates and households to become self-sufficient in terms of electricity generation.
It cites six areas where fossil fuels and traditional utilities focused on centralised generation are at risk.
- Renewables: Storage would reduce both the cost of intermittency and the physical grid constraints that prevent deeper renewables penetration. The result would be a boost to the growth of renewables.
- Coal: If storage can be competitively used to “firm” intermittent resources, renewables can become a true substitute for baseload generation. In many markets, baseload is dominated by coal-fired power. And because of growing policy pressure to displace coal in markets ranging from the US to China, policy is likely to emphasize the substitution of firm renewables for coal-fired generation.
- Oil: Where oil is still used in the global power sector, it is often used in a peaking capacity. If storage is also deployed as a utility-scale peak shaving asset, storage might start to push out the stubborn oil-based generation still holding on as peaking capacity.
- Natural gas: In the near to medium term, natural gas’s complementarity with renewables makes gas a winner in any scenario with increased renewables, as gas continues to be the best option to balance intermittency in many places. But it too would pose challenges to the utility model in many countries, as any former base load fuel supply would bring lower returns to the utility based on lost peak/ high priced demand load.
- Gasoline: If storage were developed that promoted the growth of electric vehicles, this would significantly erode gasoline demand let alone demand growth, which, along with strong North American production of oil and gas, would put pressure on oil prices.
- The structure of power markets: Electricity is one of the few non-storable commodities. Large scale storage could change that, linking spot prices to forward prices in a transformation that would make electricity markets trade more like oil or gas markets. The implications for power forward curves and asset finance would be significant.
Picking the winners in battery storage is a bit more complicated, because – like the solar industry – battery makers will be squeezed by severe pricing pressure from users on the demand side, and unavoidably high procurement costs on the supply side.
That means that profits will come from new business models, away from the simple sales of hardware, towards a service model that includes after-market services, in the same way that the biggest profits are being made in the solar leasing business rather than manufacturing.
Citi says the storage battery market is likely to develop as an infrastructure business that involves the supply of services and solutions, not just hardware and the winners will be those who come up with solutions that increase the convenience for users and make a long-term commitment to infrastructure.
It says that the rise of distributed solar generation and battery storage does not necessarily mean the death of the utility model.
It notes, for instance, that energy distributors could be well placed, as SA Power networks recently suggested. But those who rely on the dispatch of power generators in the grid are at risk. This is partly behind the thinking of European utility giant E.ON and NRG in the US in adapting their business models.
“Our key takeaway is that US utilities will eventually adapt and join the party,” the Citi analysts write.
“Why? Three main reasons include 1) it makes economic sense to do so, 2) it helps diversity the utilities fuel mix to help insulate them from volatility and 3) it is a good hedge against upcoming EPA environmental legislation.”
In its report last year, Citigroup suggested that many countries would be at “grid parity” for solar systems with battery storage by 2030, including Australia, parts of the US, Italy, Spain, Germany, and Portugal, while Japan, South Korea and the UK may not be far away.
Its latest report underlines the main themes that are likely to influence battery storage.
Chief among these is the potential of a global and binding agreement on greenhouse gas emissions being reach in December at the UN Climate Change Conference in Paris. That would require a bigger push for energy efficiency, demand response, renewables and e-mobility, making battery storage a crucial piece of the energy system puzzle.
But even if that agreement was not reached, new environmental targets in the US, and battery storage mandates in the US (over and above the 1.3GW plan for California) will drive deployment.
And on the technology front, the increased penetration of electric vehicles should continue to push down the cost of batteries for cars with parallel effects for energy systems battery costs.
It cited projects such as Tesla’s Giga-factory in Nevada with plans for 2020 battery production (in GWh) from that plant alone to exceed today’s global production. Over and above this, a number of independent companies all have ambitious commercial plans.
“The more they grow in customer numbers and partnerships, the more likely it is that battery storage costs will be declining,” the analysts write.
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