What Does It Mean For the Grid When Battery Costs Fall 85% In One Decade?

by Bob Shively, Enerdynamics President and Lead Facilitator

Cost-effective energy storage has long been the “holy grail” of the electricity business. While storage through pumped hydro has been available for years, acceptable locations are limited, and total global capacity is only 161 GW. This has left the industry dreaming about a ubiquitous low-cost way to store electricity. It appears that this day may be soon approaching. According to Bloomberg New Energy Finance’s Battery Price survey, the cost of lithium ion batteries has fallen 85% since 2010:

Source: Bloomberg New Energy Finance 2018 Battery Price Survey

Cost reductions have come through product design improvements including:

• higher energy density
• longer cell life
• reduced costs for ancillary systems
• scaling as more batteries are manufactured
• learning curve improvements

While further cost reductions are forecast, the level of reduction will slow down. Lithium ion battery cost projections for the next five years show a continuing decrease in the 30 to 45% range, although rising commodity prices, tariffs, or product availability could make the reductions smaller. But it is clear that batteries, once too expensive to consider for most grid applications, are now cost-justified for some grid applications.

Batteries and their uses

Batteries have the potential to provide a variety of benefits to the grid and/or to consumers. Lazard’s Levelized Cost of Storage Analysis identifies 10 key potential sources of value associated with storage:

1. Wholesale demand response: Providing reduced customer usage that is offered into wholesale markets in competition with other sources of supply. Storage fulfills consumers' electric needs during the reduction.
2. Energy arbitrage: Time-shifting electric supply from low-cost to high-cost time periods and/or absorption of excess renewable output for later use.
3. Frequency regulation: Providing the grid operator automatic frequency response through rapid charging or discharging of batteries.
4. Spinning/non-spinning reserves: Providing the grid operator a source of supply that can be ramped up upon receipt of a dispatch order.
5. Resource adequacy: Supplying capacity that is reliably available during system peaks.
6. Transmission or distribution deferral: Supplying capacity located on a specific transmission path or distribution circuit that can be called upon during demand peaks, thus deferring the need for capacity upgrades.
7. Utility demand response: Providing reduced customer usage – backed by storage used to provide consumer needs during the reduction – that participates in utility demand response programs.
8. Bill management: Using storage capabilities to reduce the customer’s bill, either through trimming demand to reduce demand charges or time-shifting usage to take advantage of time-of-use price differentials.
9. Local incentive payments: Providing storage capacity at an authorized grid location to enhance distribution system reliability or resiliency in return for a payment.
10. Backup power: Providing supply to consumers during utility outages.

Even with falling costs, cost-effectiveness of batteries is limited to specific cases, and determining where batteries make sense requires a case-by-case analysis. In its analysis, Lazard found that the most common cost-effective use is in commercial applications where a specific battery installation can provide multiple value streams including customer bill management, integration of rooftop solar, and provision of grid services to the utility or in wholesale markets.  Such value stacking opportunities will likely grow as service providers gain more experience with extracting maximum value. 

The future

Battery installations are growing rapidly. A recent analysis by IHS Markit predicted 4.3 GW of installations worldwide in 2019, increasing to 10.6 GW annually in five years. In addition to lithium ion batteries, other new battery technologies with near-term potential include flow batteries, advanced lead batteries, and new generations of lead-acid batteries.

Growth of battery storage will have widespread impacts on the grid. Renewables will be easier to absorb, price differentials between time periods may be reduced, gas peakers may no longer be the lowest-cost form of flexible capacity, transmission and distribution owners may be able to squeeze more capabilities out of existing capacity, and consumers may have new ways to reduce energy costs while enhancing reliability. While batteries will not become ubiquitous overnight, we may experience a new reality in which electricity storage is a common resource rather than a future dream. 

Want to explore emerging storage technologies and the economics of each as well as their applications throughout the electrical system? Enerdynamics' seminar Energy Storage: Applications, Technologies, and Economics may be for you! Call 866-765-5432 ext. 700 or email info@enerdynamics.com for details.

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