01 Sep 2020
Aanand Venkatramanan | Head of ETF Investment Strategies, Index Funds
The unveiling of the world’s largest battery storage project is an important step in the global transition to using more renewable sources of power. It should also spur us to do more, faster.
These developments are particularly timely, as California grapples with a heat wave which has put its electricity infrastructure under immense strain, not least from demand for air conditioning, resulting in severe blackouts.
California’s problems stem in part from the retirement of much of the state’s gas-powered generators, but also from the lack of battery storage attached to its solar panels. As we argued last year, batteries are essential for harnessing the potential of renewable energy.
New record-breaking battery storage installations are an encouraging sign that policymakers are taking action. Major utility companies in California have already met a target of contracting 1,325 megawatts worth of storage capacity by 2020, according to the state’s Public Utilities Commission, while BloombergNEF has forecast that 2,090 megawatts will be installed in California by the end of next year. Each megawatt can serve an estimated 750 homes in the state.
Even that expansion is unlikely to be sufficient, however. The California Independent System Operator, a non-profit overseeing the operation of the state’s bulk electric power system, transmission lines, and electricity market, has claimed that to help California achieve its ambitions of cutting its grid’s CO2 emissions to zero over the next 25 years, it will need to install up to 15,000 megawatts of battery storage. Those 15 gigawatts could power 10-11 million homes, although that number could be higher as batteries will mainly be deployed to tackle renewable energy’s intermittency or demand-supply mismatch.
This is in line with our own thinking. We use a database from Clean Horizon, an expert consultancy on the energy-storage market, to quantify the market opportunity further. This is created from the bottom up and tracks every single megawatt-level energy storage project in the world, seeking to capture every global announcement of new energy-storage projects while filtering out those which lack size or credibility. Focusing on the pipeline of likely projects gives a good indication of what installed capacity will be in one to two years’ time.
This process suggests that the market for energy storage is expanding rapidly, with a 20-30% compounded annual growth rate. Our confidence in these projections is reinforced by the actual recorded growth in operational energy-storage projects in recent years, as shown in the chart above.
These trends imply heavy investment in batteries, and so BloombergNEF has estimated that the global energy-storage market will grow by around $620 billion over the next 20 years.
How those hundreds of billions will be spent is far from certain. For example, lithium-ion may currently be the leading technology for a wide range of battery use cases (California’s giant new battery is lithium-ion), but it is possible that in a few years’ time we will be using alternative technologies.
To highlight just two options among many, sodium-sulphur batteries are less sensitive to external temperatures and are already being used for stationary energy storage in warmer parts of the world, while flow batteries – currently based on vanadium – are characterised by a very long duration and have the potential to offer low-cost grid and/or behind-the-meter storage solutions. The technology has not yet reached a sufficient level of maturity to be commercially viable, but we will continue to monitor market trends.
Of course, energy storage is just one component of the battery ecosystem; there is also immense demand from electric vehicles. Investors looking at this long-term growth theme, then, should bear in mind that while the battery market is fully charged, it isn’t static.
Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.