Despite Setbacks, Energy Storage Market is Charged for Growth
Looking back at the past three years, it’s difficult to have an optimistic outlook on the energy storage sector. After all, investors have witnessed the insolvencies of several energy storage companies including A123 systems, Ener1, and Beacon Power. In addition, all three of the aforementioned companies were recipients of federal funding that was intended to help cross the so-called “valley of death” that lies between the laboratory and commercialization.
Nevertheless, private sector investment continues to flow into the energy storage sector, albeit at a more modest pace than previous years, accounting for just over $250 million in 2012 according to GTM Research’s database of venture capital activity. Additionally, companies such as LightSail Energy and Ambri represent bright spots in a landscape that has been mired by overpromise and underperformance.
What explains the difficulties of these companies, and what can the industry learn from these tumultuous times in order to avoid a repeat of history?
The Need to Provide Solutions, Not Technologies
One theme that is apparent in looking back at the past several years is that vendors attempted to provide solutions for poorly defined problems in nascent markets with uncertain demand. For example, lithium-ion battery manufacturers received the lion's share of federal funding largely in anticipation of a burgeoning electric vehicle market, which never materialized at the levels originally anticipated.
In addition, the lines between grid-scale applications and transportation applications were blurred, with some assumption that economies of scale could be realized somewhere in the middle.
Ultimately, the combination of these factors resulted in a level of demand well below that which was originally expected, leading to an oversupplied market that was artificially kept afloat by governmental funding.
While there have been successful demonstrations of new battery chemistries at the grid scale, the scalability of these deployments remains uncertain, especially without continued federal support, and with regulatory structures that have yet to recognize and monetize the full value of services provided.
Given the capital-intensive process of commercialization innate to the storage industry, it will be critical for vendors to develop solutions jointly with end-users in order to address clearly defined problems, rather than by attempting to provide solutions retroactively.
Numerous Stakeholders, Concurrent Value Streams
In the U.S., there are approximately 3,200 utilities operating in a mixture of regulated and deregulated markets. Add the commercial and industrial sector to the mix, and the landscape becomes even more complex for project developers.
Furthermore, storage project finance is unlike traditional project finance, given that numerous value streams can traverse different areas of the grid for the same project.
A 2010 report by Sandia National Laboratory identified 26 key applications of energy storage both on the grid and behind the meter, and GTM Research and Azure International’s China Grid-Scale Energy Storage: Technologies & Markets 2012-2016 report discusses thirteen key applications. While the exact number of applications is inconsequential, it is clear that in order to maximize return on investment, projects should depend on more than one revenue stream.
For example, the ancillary services market is generally considered to be a high-value market for storage projects. However, storage must be able to compete against incumbent fossil fuel-based generation sources in an era of historically low natural gas prices -- much like electric vehicle battery makers must compete against increasingly efficient internal combustion engines and micro-hybrids.
Regulatory measures such as the pay-for-performance scheme recently implemented under FERC 755 that is now in place markets such as PJM and NYISO, and a similar market mechanism in pilot in ERCOT, represent critical steps in the right direction. However, project developers should be wary of depending too heavily on a single revenue stream.
In PJM, for example, approximately 1 gigawatt of frequency regulation resources are currently required, and even with a growing percentage of renewables in the generation mix, the long-term growth opportunities for the frequency regulation market are limited.
Disruptive Technology in an Incremental Market
The process of estimating the level of growth in the storage market is complicated by the fact that the utility industry typically operates on long-term budget cycles with depreciation schedules ranging from fifteen to 30 years, while venture capitalists typically expect returns within a much shorter range.
However, the combination of technological breakthroughs, regulatory and policy support, and exposed critical infrastructure shortcomings via events like Superstorm Sandy has the potential to accelerate the deployment of energy storage technologies.
Thanks to all that tuned into the live event! Here's the video: