Go big or go home (Batteries Part II)

Blog_9

Returning now to the mini-series I was writing on batteries after I briefly interrupted that flow with the update on Social Capital (flow…get it?). If you missed the first part, you can find it here. High level recap, batteries will play a big role in carbon-free energy production and deployment, with applications ranging from automotive transportation to energy storage to shipping and aviation to commercial and residential power. Out of all of these use cases, I am most interested in utility-scale battery storage because it will allow grids and energy systems to move away from fossil fuel and coal electricity generation and towards 100% renewable energy. This shift will be key to decarbonizing the economy, since energy is a horizontal, connective tissue across industries and economic actors.

Part of this interest in what energy flows through the grid was sparked by the horrible events in Texas in early February of this year (summary in this explainer video from Yale Climate Connections). The blackouts resulting humanitarian disaster got me thinking through how fundamental and, at times, how taken for granted dependable access to electricity is for most Americans. The unconscious expectation that the heat or AC will work when we need it, the lights will always turn on, and fresh, potable water will gush out of a faucet whenever we turn it on requires a grid and underlying energy sources that are well-adapted to their environment, capable of handling surges in supply and demand across the population served, and financially feasible to maintain over time.

Unfortunately, that’s not what happened in Texas. The Texas blackouts reinforced a trend pointing towards what is becoming a reality in other places: tail events with extremely low probability of occurring paired with astronomically high expected damage associated with their occurrence (which, by the way, is a combination that seems to be a feature of climate change rather than a bug) can completely annihilate systems we previously believed to be reliable. Those miscalculations can have devastating human costs, including death, as we saw in Texas. How is this related to utility-scale batteries, you may wonder? In the case of Texas, utility-scale batteries would have acted as a safety net, providing hours of power from stored renewable energy and closing the gap between peak demand and supply, without being subject to the same weather risk a diesel generator or natural gas peaker plant might be in the same situation (especially in the context of the deep freeze in Texas, where it was so cold that un-weatherized oil and gas supplies froze). Given the important role these batteries will play going forward, I wanted to understand more.

The Technology

So what is a utility-scale battery? It is what it sounds like — a gigantic battery connected to a distribution or transmission network (also known as a grid) or some energy generating asset (like a solar panel facility or wind farm) that captures generated energy and stores it; these batteries typically offer 1MW of storage capacity or greater. Today, Li-ion battery technology makes up the largest share of installed utility-scale battery storage (nearly 90% of total large-scale batteries in 2016, according to the US Energy Information Agency (IEA)), helped along by falling costs of Li-ion driven by growing demand for and manufacturing of EVs, which also rely on Li-ion. According to the EIA, the cost of utility-scale battery systems have fallen about 70% from 2015 to 2019 and US National Renewable Energy Lab projects a further 45% decline in costs through 2030. Falling costs usually point to more widespread deployment, and as evidence of infrastructure vulnerabilities mount the pull to invest in utility-scale batteries will only grow stronger.

The Value Proposition

There are a few major value propositions to utility-scale battery storage, a few of which the Texas example have illustrated. Most importantly, utility-scale batteries make possible a massive expansion of renewable energy on the grid. They do this by capturing and storing renewable energy supplied above and beyond what is demanded at a given time, thus making it possible for renewable energy assets like wind or solar to produce at maximum capacity all the time and not produce energy that eventually gets wasted. Instead, the battery catches all the surplus and stores it for later, when the intermittent resources are no longer generating sufficient energy to meet demand. In the optimal outcome of deployed utility-scale batteries, they would capture and store any energy generated that exceeds demand at a given time and then feed it back to the grid when needed, meaning utility-scale batteries could displace natural gas peaker plants, which typically fire up when demand for energy exceeds what can be supplied by existing grid energy resources. As an example, in the evenings people are in their homes cooking, watching television, doing laundry, etc. and solar assets cannot produce to meet demand (since the sun is down). Typically, a gas peaker plant would kick in to help match the demand for energy, but if instead a utility-scale battery had been storing excess energy produced throughout the day, or over weeks or months or more, any demand above and beyond what the grid could supply at a given time could be fulfilled by the stored renewable energy rather than by fossil fuels.

The battery essentially smooths over the energy supply function, reducing dependence on fossil fuels to supply the energy of ‘last resort’ to the grid. Smoothing out the supply curve also means energy producers do not have to go into overdrive to meet demand and can instead operate their energy assets at optimal levels of output, which reduces wear and tear and extends the lifespan of the energy asset. Smoother supply functions can also give grids and consumers a better window into prices and can firm up expectations around future costs of energy, which makes both happier.

Lastly, utility-scale batteries offer a service called frequency regulation. Frequency regulation is a key component of a stable grid, and utility-scale batteries provide the service much more rapidly and for less money than other options, like generator inertia or manually adding / subtracting generating assets to the grid. This seems like a service that battery companies could monetize in the future, since it makes grids more efficient overall and could be a good go-to-market motion for grids not yet penetrated by utility-scale batteries. Today, there are few regulations on the books outlining precisely the monetary value of these kinds of services and as the market for this technology grows, it’s likely that more specific contracts and statutes will be needed to clearly delineate between the different goods and services a utility-scale battery facility can provide. However, I see a world in which some pretty innovative grid service packages emerge, including tiered combinations like paying for storage, paying for storage and supply to peak demand periods, storage and frequency regulation, etc.

Other Considerations

Another key benefit of utility-scale batteries is that they facilitate access to electricity in extremely remote communities, without having to import diesel. For example, Ta’u, an island in American Samoa, shifted away from all diesel electricity to solar power, thanks to a 6MWh utility-scale battery storage system and 1.4MW of solar panels from Tesla. Since every nation, rich or poor, will play a role in reducing greenhouse gas emissions and lowering atmospheric concentration of carbon dioxide, being able to deploy this technology to underserved, infrastructure-light communities is crucial to building carbon-free energy regimes globally. I also hold the view that many developing countries, particularly in South Asia and sub-Saharan Africa, will do a technological leapfrog when it comes to energy infrastructure (kind of like China did with going straight to mobile and skipping desktop computing entirely) and upgrade directly from no electrification / low-tech diesel generators / aging legacy fossil fuel-based infrastructure to utility-scale battery technology and renewable energy, with no intermediate upgrades to natural gas or hybrid infrastructure with both fossil and renewable inputs. Demographic trends in both regions and their implications for economic and population growth all but require their economic growth to be built on the back of clean energy — this will be crucial for their own domestic economies as well as future global greenhouse gas emissions.

While the value propositions of utility-scale batteries are clear, there is definitely still a major barrier to widespread deployment in the form upfront cost. While overall costs for battery capacity are falling, utility-scale batteries are still a major infrastructure investment that require upfront capital to get off the ground. While this is a challenge, it is also an opportunity for new and innovative financing mechanisms to play a role in facilitating or de-risking these investments. Utility-scale batteries are fixed, stable assets and will generate long-term revenues that are relatively predictable given the right informational inputs. Based on these characteristics, it is not hard to imagine a world in which some new financial product derived from the long life and fixed, contracted revenues emerges to sweeten the deal for investors. Outside of new financial products, federal and state governments could provide incentives through policy to stimulate greater investment in storage technologies by grids, utility providers, and other market players. Lastly, simple market forces will probably do a lot to bring down costs: having utility-scale batteries on a grid is a competitive advantage, since they provide frequency regulation services and can help close gaps in demand and supply, and those grids with this advantage will win energy consumers on price. This will drive other grids to adopt the technology, and the growth in demand will help further drive down costs.

Lastly, I know I spent a lot of time on Li-ion batteries since they account for most all utility-scale battery storage on the market today. However, there are other battery types, some of which focus on ultra-long duration storage (think over months or seasons), that I am also interested in. One of these is flow battery technology, which is particularly well-suited to long duration storage thanks to its low energy density and long cycle life — they can last up to 30 years (!!) with little to no performance degradation. (Here’s a helpful article I found on them). This seems like it would be a perfect match with many of the utility-scale battery use cases outlined above, and as costs for flow battery technology fall I am curious to see how its share of the battery storage market changes. New emerging battery technologies suited for large-scale applications will hopefully help diversify our energy infrastructure beyond the traditional Li-ion options on the market today, since those are currently exposed to extreme supply chain and geopolitical risk.

In general, I am very excited to see utility-scale battery deployment in the US grow over the next decade because I think they are the key to a fully decarbonized, renewable energy future across the country. I think there’s a lot still for me to understand on the tactical ways this will happen: for example, how does a utility-scale battery get connected to a grid and start actually storing power and supplying it back to the grid? How is the energy fed into the grid metered out to customers, and how are electricity prices determined off the back of that? These are questions I’d like to answer, along with understanding in more detail how the market for energy on a grid even works, who pays for what, and what services are needed to keep a grid running reliably. For my next piece, I am going to focus on all things grid. If you know of any resources on the topic or if you have any feedback on this piece, feel free to tweet me @thegreengraham or email me at theexistentialinvestor@gmail.com.