Revisiting energy storage
Electricity storage offers a wide range of business opportunities
The growth case for using renewable energy (RE) remains very much intact ― the effects of a global economic downturn notwithstanding ― and the prospects for wind and solar photovoltaic (PV) power appear particularly strong. While some markets saw a dip in RE growth rates during the financial crisis in 2009, overall growth continued. Some countries, such as the U.K. and China, have even defined more ambitious growth targets.
However, these technologies will have to overcome a key hurdle: the challenge posed by their intermittent nature. Unlike other forms of renewable energy, such as hydropower and geothermal energy, energy generated by wind and solar PV fluctuates. These fluctuations pose a sizable challenge to their integration into the power grid, and their widespread adoption as bona fide mainstream power sources.
Strong growth in fluctuating RE generation is producing an increasing need for compensation mechanisms. Once the share of wind and PV has increased to around 20 percent or more of actual electricity generation, compensation power in the range of 30 to 40 percent of the average vertical grid load will be required to balance RE fluctuations.
There are several methods of compensating for variability in electricity generation from fluctuating renewable ― interregional compensation (often referred to as grid extension), conventional backup capacity, demand-side management, and large-scale electricity storage. Electricity storage is considered to be a key enabler of the large-scale deployment of fluctuating RE generation capacity around the world.
A gradual increase in the storage business will take place over the next few years, driven by increasing penetration of RE generation and the need to manage fluctuations and by the growing technological maturity of the key storage technologies, especially batteries. Today, the storage market is worth around 1 billion euro per year. The Boston Consulting Group expects annual global market volumes of 2 billion euro to 3 billion euro per year in the next few years, increasing to 4 billion euro to 6 billion euro per year after 2015 and to more than 10 billion euro per year after 2020.
Potential business opportunities
Electricity storage offers a wide range of business opportunities to a wide range of stakeholders. Obvious market participants are utilities, in their capacity as operators of storage facilities, and technology providers. However, other players ― in the chemical industry and in the automotive sector, for example ― and even financial investors may discover that storage is an attractive means of entering a new segment of the energy business in which stakes are yet to be claimed.
Indeed, one-third of venture capital companies polled in January of 2010 listed electricity storage as their number-one investment focus. While this indicates that some of the relevant technologies are still in their infancy, it also shows that now is the time to start considering storage-related business opportunities, before the best lots are taken.
There are four main groups of potential stakeholders that might want to consider entering this market: power generation players, suppliers, end-product companies, and financial players.
Power generation players: In addition to power generation companies such as utilities, power system stakeholders such as municipalities and grid operators may benefit from running electricity storage facilities — to mitigate grid bottlenecks through Transmission and Distribution (T&D) deferral, for example, or to better leverage their existing generation assets through stabilization of conventional generation.
Suppliers: Business opportunities exist for raw-material sellers, for battery producers, and for technology companies that serve the energy industry, including the following:
• Producers of lithium, in particular, but also of vanadium (for redox-flow batteries) and copper (for cabling), and, to a lesser extent, mining companies and raw-material producers interested in greening their remote operations through the use of RE generation paired with batteries for reliability
• Battery producers that are building up large production capacities in anticipation of the takeoff of the e-car market and are looking to broaden their footprint by supplying batteries for stationary applications in what is likely to become an even more profitable sector
• Producers of energy technology and components such as pumps, compressors, turbines, inverters, switchgear, and other devices (such as ABB, whose Dynapeaq product line ― available today ― integrates high-voltage switchgear with battery storage solutions)
• Manufacturers of RE technology such as wind turbines and PV modules, as well as project developers and operators (such as IPPs) seeking to integrate their fluctuating-generation assets, either voluntarily or owing to potential changes in legislation
End-product companies: Energy storage capacity could enable these companies to provide more innovative products to their clients and to enhance their own operations. In particular, many automotive OEMs are looking into leveraging their e-car capabilities in the grid storage arena. Using e-cars for vehicle-to-grid energy storage may become an option as soon as a sufficient fleet of e-cars is on the road.
While there are a number of challenges to be overcome (such as the control system, consumer interest and privacy issues, and the capacity of the charging infrastructure), innovative business models are being developed around the use of decentralized e-car batteries as virtual storage facilities.
Financial players: In addition to venture capital companies, private equity will come into play once the market has matured. The renewable-energy sector has been attractive to private-equity players, helped by generous feed-in tariffs for RE generation.
While all of these players will identify and evaluate potential storage-related business opportunities from a different perspective and with a different focus, we propose a general four-step approach.
Step one: Thoroughly understand the storage technologies and their potential applications and operational models. Given the many independent parameters involved in determining the operational profitability of individual applications, this is a precondition for identifying business opportunities. For example, there are currently five competing lithium-ion battery technologies under consideration in the market. Since each one has different implications for raw-material and component requirements, stakeholder companies need to understand each technology in order to make sound investment decisions.
Step two: Analyze and quantify the relevant end market. This involves the analysis of key trends, market drivers, and growth factors. On the basis of the analysis, realistically quantify market demand, starting from the relevant applications and taking into account regional focus and specific regulations.
This step is, of course, particularly important for power-generating companies. But it is equally important for private-equity players, whose investment success depends on, among other things, selecting the right setting and timing of their market entry ― not too early, when the market is not yet mature owing to high technology costs and low RE generation, and not too late, when the presence of many players means that the best claims are already staked.
Step three: Identify the technology that best meets market demand. Given the technical requirements of the particular application, select the most suitable storage technology. Alternatively, a company may choose to leverage a particular technology because of existing in-house capabilities or in response to external factors such as government or financial incentives.
In that case, the potential applications of the chosen technology must be identified. Both approaches are legitimate and depend on the individual company’s starting position. Whereas future operators will in most cases start by singling out relevant applications, potential technology providers will most likely start with a specific storage technology.
Step four: Determine the implications for the relevant market of each stakeholder. Technology providers will analyze storage technology road maps in order to determine and assess the related investment case.
A mining company, for example, can look at the attractiveness of the identified commodities relevant to the chosen technology and determine the profitability of any corresponding capital-expenditure projects. An automotive OEM will develop a view on the timeline of available storage technologies and apply that to its view on the development of the e-car market. It then can tailor its e-car strategies accordingly.
Electricity storage offers an exciting option for a much wider range of market players than is generally assumed.
Corporate electricity-storage strategies based on a thorough assessment will have the best chance of succeeding in this field of business. Because the financial return on a storage investment is strongly contingent on finding a location with a suitable set of parameters, there is a clear first-mover advantage for the operators of energy storage facilities. It is therefore essential to evaluate opportunities in this sphere quickly.
This article was provided by The Boston Consulting Group.