Solar-plus-storage: a new dawn for renewables
To date, power grids have struggled to cope once intermittent renewables reach around 30% of electricity generation. This is because of fluctuations in supply, in what one could term a “challenge of success”. Renewables overproduce at the wrong times for demand (midday) and under-produce at the right times (sunset, dinner and TV hours). Concerned utilities and policymakers point to the risks exemplified in the “California Duck Curve”1, which shows solar power tailing off at sunset just before peak demand occurs. This puts huge pressure on typically fossil fuel-powered “peaker” capacity to rapidly ramp up. On the flipside, at midday, solar might produce more energy than can be used (“over generation”) at zero marginal cost, forcing the grid operator to curtail supply, thus reducing the environmental and economic benefits of having cheap solar there in the first place.
We cannot stop at 30% renewables if we are to decarbonise the electricity supply. Energy storage and a smarter, more digitalised grid will help to solve this problem of renewable integration, but until recently their use was in small pockets and pilot schemes. This looks set to change.
Bloomberg New Energy Finance (BNEF) reports that the cost of lithium-ion batteries has fallen 24% in the past year to an average of $209/kWh. This is a fifth of the cost in 2010. By 2025, BNEF predicts that battery costs could fall below $100/kWh2.
As a result of the rapidly improving economics of storage, BNEF expects cumulative storage deployments to grow from 3GW in 2016 to 124GW by 2030, with the industry attracting $103 billion of investment over the period.
BNEF forecasts utility-scale applications to account for most of the volume initially. Several markets such as Japan, Mexico and Chile now require storage to be co-located with new renewable deployments.
In India and California a number of renewables-plus-storage tenders have been issued. Australia’s recent review3 of the electricity market included the recommendation that new renewable projects be “firmed” by building or contracting with dispatchable resources like energy storage.
In the medium to long-term, BNEF expects commercial, industrial and residential applications will dominate the mix. Less generous tariff structures for rooftop solar will push consumers to self-consume more of the solar energy they produce. For example, in 2019 variable “time-of-use”4 rates for residential customers will likely be introduced in California and will help to build the economic case for combining rooftop solar with storage.
As battery costs decline and awareness grows, residential storage may eventually follow a similar pattern of technological diffusion as washing machines and colour TV (within its addressable market). On the commercial side, corporate procurement of renewables is being driven by companies’ growing commitments to reduce their carbon footprints. Again, as storage costs fall it will become increasingly compelling to deploy storage to maximise the value of their renewables. In short, energy storage appears to be approaching an inflection point and we believe it presents a number of opportunities for investors over the next few years.
1. https://energy.gov/eere/articles/confronting-duck-curve-how-address-over-generation-solar-energy ↩
2. BNEF 2017 Global Energy Storage Forecast, November 2017↩
4. http://www.cpuc.ca.gov/General.aspx?id=12194 ↩
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.