A storage bubble? High investment in nascent industry sows fears of a battery bust
Market reforms and continued innovation will be needed to see storage reach its potential, experts say
Investment and interest in energy storage technologies has never been higher — too high, in fact, for the comfort of some analysts.
The energy storage market added about 475 MWh in 2016, almost 300% more than 2015 numbers, according to GTM Research’s senior vice president Shayle Kann.
“This extraordinary amount of attention and investment to an energy storage market where not much is getting deployed has all the makings of a bubble,” Kann told industry representatives at the U.S. Energy Storage Summit in December. “That should give everyone pause – but it is not a foregone conclusion that the bubble will pop.”
A handful of policies and events have spurred investments in energy storage, particularly in California and the PJM Interconnect region, and companies like Tesla have brought batteries into the mainstream with sleek new products.
But rising interest and investment didn’t necessarily manifest itself in actual deployments or regulatory approval. Pacific Gas & Electric, for instance is under a mandate to procure 580 MW of storage by the end of 2020. But so far, only 70 MW of its first 76 MW in contracts were approved by the California Public Utilities Commission (CPUC), according to PG&E’s senior vice president of regulator affairs, Steve Malnight.
The commission rejected some contracts on the grounds that they were not cost-effective, Malnight said. “Buying solar to meet the RPS was easier. Storage is a more complex technology with a more complex value stream and we are still learning how understand and monetize that value stream and address cost-effectiveness.”
Tesla expects economies of scale to drive down energy storage prices to as low as $0.05/kWh by 2030, said Mateo Jaramillo, who was vice president of Tesla’s products and programs before departing the company after the conference.
“We bet the whole company on it,” Jaramillo said. “It will take a lot of work to get the battery, the power electronics, and the mechanical and electrical systems down the cost curve. But it is engineering work, not science work, and Tesla is doing that work.”
But the market is still a nascent one, GTM’s Kann warned, similar to what the photovoltaic solar sector looked like in 2005. Unlike solar at that time, “energy storage has so many values and is so versatile that it has to prove its capabilities in each use case,” Kann said.
If the potential of energy storage is to be realized, all three agreed, more supportive policies and market reforms will be key to ensuring the battery bubble does not pop.
Storage growth by the numbers
Data from the residential and non-residential behind-the-meter (BTM) energy storage sectors and from the utility-scale in-front-of-the-meter (FTM) sector underscore market’s nascence, according to Kann.
For the residential storage sector, the buildout moved between 2.5 MWh to 4.0 MWh per quarter because “for most residential customers, there is not an economic case [for battery storage],” Kann said.
California and Hawaii account for more than half of all residential battery storage capacity because of high residential solar penetrations and relatively high electricity rates, but other states lag behind. And in non-residential storage capacity, California accounts for 86%, with a buildout of 15 MWh to 30 MWh per quarter, Kann said.
Experience there could make the case for energy storage in other markets, he added. As commercial and industrial customers face higher TOU rates and demand charges, they could use battery storage to stow excess energy from rooftop solar arrays and off-peak, low priced generation for later use.
Utility-scale storage deployment has so far been almost entirely dependent on the wholesale market opportunity offered in the PJM region and on California’s mandate, Kann said. That is why 42% of total FTM deployments are in the PJM region, and 36% in California.
“This kind of deployment to a single or a few locations based on a particular set of conditions is indicative of a nascent market,” Kann said.
New market opportunities: Aliso Canyon and FERC action
Two key developments in 2016 hold promise for moving storage out of its early deployment phase and toward widespread, grid-scale adoption.
While the gas leak at Southern California Gas’s Aliso Canyon storage facility prompted concerns over shortages and environmental impacts, it also opened a path to more energy storage procurement.
Potential shortages in natural gas supply could hurt the SoCal Gas’ ability to meet demand from local power plants. But the CPUC’s decision to fast-track energy storage deployment to forestall any demand shortages played a part in boosting the market there.
By early 2017, Southern California Edison and San Diego Gas and Electric will have a combined 84.5 MW of storage online to help fill that gap.
“It is hard to imagine any other resource could be brought into service in the mere eight months since the state’s agencies called on the utilities and the storage providers,” Kann said. “And when the storage is online and shows it can fulfill its promise, that will be proof of concept.”
But Aliso Canyon is “a specific and unusual instance of an emergency where there is a mandate and utility procurements in the works and developers already working on originating assets,” Kann said.
To boost the future of energy storage “more places with the right supportive mechanisms,” will be necessary, he said.
State policy changes have already had some impact. Almost all rate changes on rooftop solar users—with the exception of fixed charges—have boosted the value proposition of adding storage. Some states are copying California’s example with mandates, incentives, and grid modernization planning. On the other hand, utilities are initiating pilots to test the grid services potential of storage.
But a recent effort by the Federal Energy Regulatory Commission to take a look at energy storage in wholesale power markets could dwarf all those efforts, Kann said. “It may be the biggest thing for energy storage in years.”
The FERC’s Notice of Proposed Rulemaking (NOPR) on energy storage requires regional system operators to develop rules guiding storage participation in their wholesale power markets. Storage historically has not owned a significant share of those markets, Kann said, but
The NOPR requires the regional system operators that serve 70% of U.S. electricity customers to develop rules governing the participation of storage in their wholesale power markets. Clarifying the rules and regulators could boost the economic viability of the resource, Kann said.
The rulemaking also specifies that system operators must make storage eligible for whatever capacity, energy, and ancillary services markets it can serve. Grid operators must also institute appropriate bidding parameters and a size requirement that makes it possible for smaller systems to compete as well.
If storage providers won just 1% of the bids in the capacity markets, the current installed storage capacity would be “be five times the current cumulative installed capacity of U.S. energy storage,” Kann said.
Tesla sees opportunity behind the meter
From Tesla’s point of view, the potential for growth has never been greater, especially since its purchase of sister company SolarCity, the nation’s leading rooftop solar installer.
By merging forces with SolarCity, Tesla is poised to become more than just a battery storage and car provider, officials said during the deal, by moving to an energy-as-a-service model. And since the deal, GTM Research reported that “Tesla expects recognized revenues from SolarCity in 2016 to increase from a total of $8.0 million to $44.0 million.”
By 2030, Tesla’s Jaramillo said the role of the role of energy storage in the electricity system will be across every sector, and include both BTM and FTM stationary applications and transportation electrification.
“A huge diversity of solutions will come to market because the solutions the competitive market is willing to compensate for will win out,” Jaramillo said. “Even Tesla, as big as our ambitions are, may not do all of those things. But the value streams available from storage will be enough of an incentive to drive solutions to the market.”