Author's note: This marks the third entry in our globetrotting series profiling the world's top storage markets. The first entry explores how storage developers tackle the volatility in the U.K. market. The second installment delves into why Germany's residential sector thrives as large-scale storage stalls.
South Korea proved itself the dark-horse winner of the global energy storage deployment race of 2018.
The nation had long been central to the storage industry as the home of two top lithium-ion manufacturers, LG Chem and Samsung SDI. But there wasn’t much to discuss on the deployment front.
Last year, a hearty government incentive kicked off a storage installation gold rush, which thrust South Korea ahead of the U.S. for annual installed energy storage capacity. It delivered 1.07 gigawatt-hours for the year according to Wood Mackenzie data, and is on track to beat that in 2019.
The peninsular country’s geopolitical circumstances make storage strategically useful in a way that few others countries have experienced. The presence of a domestic battery manufacturing base converts storage development into a national economic imperative.
With strong government involvement, South Korea accelerated its storage market in a way that sent ripples around the world. The deployment boom brought challenges of its own. Now policymakers must confront whether they rationed economic fuel for a long, sustainable burn, or doused the flames for a short-lived but brilliant burst.
Almost an island
South Korea's physical landscape sets the operating parameters for the energy system.
The nation functions as an islanded grid, even though it’s attached to the mainland. The adversarial regime to the north precludes cooperation on electrical generation and transmission. The ocean surrounds the rest of the country, enveloping a number of islands, which have to balance even smaller grids.
As such, South Korea must provide for itself. If it follows through on commitments to build a high share of renewable electricity over the long term, this will create a strong driver for storage to balance intermittency internally (not unlike the U.K., or Israel, another grid islanded by geopolitics more than geography).
Renewables have not yet reached enough scale to make batteries a necessity. The government hopes to get to 10 percent renewable electricity in 2023 and 20 percent by 2030. In the meantime, the grid runs largely on nuclear power and fossil fuels, but the landscape has been stingy with ancient dinosaur juice. All of those fuels have to be imported.
As the eighth-largest energy consumer, South Korea had to become a top-five importer of liquefied natural gas, coal and crude oil, according to the Energy Information Administration.
Available grid capacity reaches nearly 100 gigawatts. Coal supplies the lion’s share of the grid with 40 percent of generation, nuclear follows with 30 percent and natural gas delivers 22 percent. Non-hydro renewables only produce 4 percent of South Korea’s electricity.
The upshot of this state of affairs is that the government has good reason to shift some grid services from fossil fuels to batteries, thereby freeing up the imported fuels for generation. Setting aside the relative economics of batteries and gas plants, minimizing reliance on imported fuels makes the country incrementally more energy secure.
Lastly, the economic landscape looms large in South Korea’s storage strategy.
Hometown heroes LG Chem and Samsung SDI supply batteries to many of the landmark grid storage projects in the U.S. and elsewhere, but they’re just part of the value chain represented in Korea’s industrial sector.
Another Korean battery manufacturer, Kokam, was acquired by SolarEdge as part of the inverter company’s expansion into other cleantech markets. Industrial conglomerate LS makes inverters, among many other devices. Doosan delivers a range of power products and services, and offers distributed energy management through its GridTech division. Korean automaker Hyundai committed to commercializing used electric vehicle batteries for stationary storage, through a partnership with integration specialist Greensmith.
The cluster of leading high-tech firms suggests an instance of the “what’s good for General Motors” principle of economic development.
“By promoting the market, creating a market locally, South Korea is providing revenue-generating opportunities for these companies to grow and capitalize these learnings and efficiencies and become more competitive in the global market,” said Ravi Manghani, energy storage research director at Wood Mackenzie Power & Renewables.
To the extent the government can jump-start a domestic storage market, it will enhance the fortunes of its storage tech cluster, in turn strengthening the South Korean economy and its industry’s position in the world markets.
The government has pursued this goal with a suite of policies, but we’ll start with the most dramatic.
The Renewable Energy Certificate (REC) program awarded a five-times multiplier to the offtake rate of wind and solar generators with batteries attached. That’s massive, although it steps down in the years following 2018.
Most systems tracked by WoodMac's database feature power capacity of 20 to 50 percent of the generator, delivering 1 to 2 hours of energy at full capacity, Manghani said. They’re better suited to balancing minute-to-minute shifts in variable renewable capacity than bulk-shifting renewable generation for peak times.
This incentive launched in 2016 with the goal to get 800 megawatt-hours deployed and initiate a sustainable storage industry. The response of market actors moved faster than anticipated.
After deploying less than 100 megawatt-hours in 2017, Korea delivered 1.07 gigawatt-hours in 2018, more than any other country, according to WoodMac. In 2019, it will likely add another 1.26 gigawatt-hours, an increase in absolute terms, but a much smaller rate of growth.
The exact policy tool may be more dramatic than you see elsewhere, but this experience will prove instructive for many other jurisdictions grappling with how to help their young storage industries. Take New York, which long shied away from a storage mandate in favor of "market-based solutions," versus Massachusetts, which opted to boost the credits for solar attached to batteries.
Many states and nations are trying to find the right balance between speed of growth and long-term health — and we’ll discuss the pros and cons of this propulsive growth below.
A different South Korean government program wrapped up in 2018, installing 500 megawatts of storage for frequency and fast frequency response. Transmission grid operator Kepco identified substations and other grid nodes where fast-reacting grid services were most needed, and the industry got to building.
This program reflected a geopolitical need to be smart about fuel imports, Manghani noted.
“By relying on storage to perform these fast frequency response services, you’re freeing up traditional generators to provide energy services,” he said.
These programs don’t necessarily exclude foreign companies from participating, but the outcomes suggest that, practically speaking, they are destined for domestic companies. Korean batteries supplied Korean integrators to serve the Korean grid.
Two other initiatives round out the bunch. Public buildings have a requirement to add a certain amount of storage by 2025, for resilience and demand management. And commercial and industrial customers, especially large conglomerates, are encouraged to deploy storage to manage their demand.
There isn’t yet much to speak of in the tiny residential battery segment.
Short-term gains versus long-term growth
The hefty REC booster undeniably succeeded in accelerating the country’s deployment timeline. It reached a gigawatt-hour delivered in a year before even the U.S., and it will break that threshold again this year.
The longer term success remains more complicated to adjudicate. The global cleantech industry has seen incentive-based bubbles grow and pop more times than it’s worthwhile to recount. Will South Korea join that list because it moved unsustainably fast, or did it help its industry reach sufficient scale for healthy, long-term growth?
Samsung, which by its own count supplied 50 percent of Korea’s storage market in 2018, affirms that the market is here to stay.
“In any industry, the industry grows on the basis of the government's...policy, but when it reaches the growth stage, it becomes a market environment in which the industry can survive,” spokesperson Yongdoo Shin told me an an email last month. “The [energy storage] industry is closely linked to the renewable energy industry, and we anticipate sustainable growth over the long term.”
The proof will be in the pudding, or in how long the pudding lasts before it's gobbled up. Deployment projections anticipate a slower rate of growth this year, with a drop coming shortly thereafter.
“What you end up creating is a boom-bust cycle,” said WoodMac's Manghani.
If the market follows those predictions, the U.S. will easily reclaim the largest storage market title this year, with an expected 1.68 gigawatt-hours to be deployed.
The end of the REC market does not spell doom for Korean storage deployments. The country has committed to higher levels of renewable energy, which must be balanced within a geographically isolated system (and many smaller island grids). Renewables integration and the scarcity of imported fossil fuels will remain persistent long-term drivers for storage development.
The battery manufacturers would have found customers elsewhere without the government-backed building boom; their sales shouldn't be the metric of success. The bubble helped establish a new wave of installers; we'll have to check back to see if they stick around after the money dries up, or if they become prominent in overseas development.
Ideally the arrival of a gigawatt-hour market confers some tangible change on the industry, taking it to new heights of learning by doing and making subsequent projects cheaper. Otherwise, taxpayers just bought a bunch of batteries at a premium.
Side effects include:
Even if it fizzles, the gold rush will leave a mark, both nationally and globally.
One local legacy of the incentive was a number of battery fires. The exact number is hard to pin down, in part because it keeps growing. Korean news outlet Today Energy reported a tally of 16 fires in Korean energy storage plants. The article details two fires that broke out on the same day — Monday of this week.
Installers around the world have used Samsung and LG Chem cells for years without incident. The new variable here was the influx of newcomer installers attracted by the scent of hefty subsidies.
The seasoned American integrators I spoke with frame this as a textbook illustration of the value of experience: You let a bunch of untested integrators build battery plants in a rush to collect a fat check, and there are bound to be problems. Of course, finding seasoned veterans in a country with a brand new storage industry would have required hiring some international firms.
For its part, Samsung urged caution in describing the various fires, because authorities are still investigating the causes, but the company initiated safety precautions nonetheless.
“Samsung SDI checked hundreds of installation sites and strengthened measures to protect the battery from external shock,” Shin said. “We are reinforcing the safety systems in consideration of external factors, as well as battery cells.”
As for global effects, the rapid uptick in local buyers rippled out through the world’s storage markets. Incentive-based projects locked down cell shipments within South Korea, contributing to the supply crunch that hit foreign markets over the past year.
Many U.S. developers grumbled about this state of affairs. It manifested more quantitatively in WoodMac’s U.S. storage deployment forecast from December. The analysts revised their 2018-2020 forecast down by 21 percent, largely due to supply constraints delaying utility-scale projects.
Things should get back on track after 2020, with the forecast through 2023 only down by 4 percent. But three years of reduced installations marks a setback for the fledgling U.S. industry, which is a testament to the unparalleled influence South Korea's internal storage policy has had on world markets.