What’s driving the boom in grid-scale batteries?
Energy storage is critical to scaling renewable power. It is also an exercise in capturing market forces, creating an opportunity to buy low and sell high in an evolving grid system.
The intermittent nature of electricity production from renewable sources such as solar and wind often doesn’t line up well with demand. Solar output tends to peak around midday and then approaches zero just as demand for power hits its high in the early evening, when people return home from work. Meanwhile, wind energy output can unexpectedly slump or surge at different times, in addition to its more predictable seasonal swings.
These fluctuations in supply would not be a problem if all the excess energy could be stored and dispatched when needed. But instead, when supply outstrips demand, electricity prices fall or go negative.
“It’s like any commodity,” said Lefteris Strakosias, Investment Director, Energy Transition, at alternative asset manager Gresham House. “During COVID-19, we saw US oil prices briefly go negative because no one wanted to take physical delivery – and storage costs were prohibitively high.”
Fransje van der Marel, a Senior Partner at McKinsey, leading the firm’s work on commodity trading and risk, provided a striking example of how a supply-demand mismatch could influence short-term prices.
“In the small country that I come from, the Netherlands, in May we had a lot of sun that wasn’t predicted by weather models and there was also a lot of wind,” she said. “The Netherlands sends a lot of power to Germany, but because it was a public holiday in Germany, there wasn’t enough demand. That led to negative prices of EUR350 per megawatt-hour, compared to the usual wholesale price of around EUR70. If you can’t turn it off or store it, you have a big problem because you’d lose five times as much as you’d normally earn from selling that power.”
The rise of negative prices
The trouble is, it is not feasible to simply turn power plants off and on at will — especially older ones that run on coal or nuclear.
According to Strakosias, that’s where energy storage comes into play, effectively taking responsibility for that excess generation.
“When prices go negative, you’re effectively being paid to solve a problem,” he explained. “You can then reinject that energy into the grid later in the day, when it’s more valuable and the system actually needs it.”
Negative electricity prices are becoming more frequent as renewables become a bigger part of the generation mix. In 2024, renewables’ share of net electricity generation in the European Union reached 47%.
At the same time, the occurrence of negative prices has hit an all-time high in Europe’s major markets (see Figure 1). As such, scaling storage will be crucial to smoothing supply and allowing Europe to further increase renewables’ share of the electricity mix.
For now, Roman Boner, CFA, Senior Portfolio Manager at Robeco, said that power price fluctuations “have created a lot of arbitrage opportunities.” So attractive are these opportunities that, according to a recent Bloomberg article, traders are coming out of retirement and investment firms, utilities and hedge funds are expanding teams to cover short-term power markets.
“There’s a lot of money to be made,” said Boner. “Traders just need to make sure that they buy when it’s cheaper and sell when it’s high. And in the process, they’re creating more interesting investment cases for owners of batteries.”
Energy storage can be a lucrative opportunity, especially in markets that have a supportive regulatory framework. “In Ontario and Quebec, for example, storage operators tell us they have internal rates of return on their projects of 20% or 30%,” said Boner. “That’s because the local regulator understands the grid is outdated and it must deal with more intermittency, so they put the right incentives in place to attract storage companies.”
Balancing risk and return
Buying low and selling high typically accounts for 20% to 50% of energy storage operators’ revenue and is expected to increase to 60% in some markets by 2030, according to a recent analysis by van der Marel and her colleagues. The rest comes from providing ancillary services that stabilize the power grid.
But she warned that as storage capacity ramps up, the gap between energy price lows and highs is likely to narrow.
Meanwhile, Igor Makar, Member of Management, Private Infrastructure, at Partners Group, outlined the rationale for investing in a combination of renewables and energy storage projects to diversify risk.
“They are not perfectly correlated: while renewables benefit from high power prices, battery storage benefits from changes in power prices,” he said. “When power prices are higher, the changes may be larger, but that’s not necessarily the case. There can also be large changes in prices at lower absolute values. As a result, when you diversify it into battery storage, you have this additional element of diversified exposure.”
Makar added that the development risks of renewable energy and battery storage differ considerably. “Renewable energy, for example, often takes much longer to develop and to obtain permitting approvals. Usually it requires significantly larger sites for deployment, whereas battery storage requires smaller sites, usually shorter permitting, shorter construction periods.”
He also stressed the benefits of co-locating energy storage alongside a renewable project. “You can take out a very small part of the site and put in a battery storage project and augment your portfolio,” he said. “It’s not detrimental to the energy generation as long as you have sufficient grid connection for both to be serviced.”
In fact, van der Marel noted that co-location can result in cost savings of more than 10% across both the renewables and storage elements by sharing infrastructure and engineers. “The capex will be lower and it also helps with risk management because you’re in control of when the power from your renewables is used to charge the batteries.”
Charging forward
Global energy storage capacity has grown rapidly over the past five years (see Figure 2), driven primarily by the installation of grid-scale lithium-ion battery storage systems built alongside renewable power projects. BloombergNEF expects growth of energy storage to peak at 35% in 2025, followed by a compound annual growth rate of 14.7% to 2035.
Growth has been hastened by steep declines in the price of lithium-ion batteries. Makar explained that one of the factors driving that price reduction is economies of scale. “The size of production and deployment of battery storage has reduced costs significantly. The supply chain has also become much more established. And the technology has improved as well, in terms of degradation of the batteries, allowing suppliers to offer longer warranties.”
Lithium-ion storage batteries, which discharge energy for four to six hours, are adequate to address intraday fluctuations in renewable energy supply. But long-duration technologies are needed to smooth seasonal variation.
“In the Northern European winter, it’s dark and there’s hardly any sun or wind,” explained van der Marel. “But there’s a lot of power demand. Factories are running even harder because it’s cold outside and they need to be heated.”
The most promising long-duration technologies include compressed air, molten salt and flow batteries, all of which are currently not commercially viable, but could become much cheaper as they scale.
“My hope is we can do the same thing with long-duration storage as we did with lithium-ion,” said van der Marel, adding that the first step was to narrow down the list of possible solutions. “If we have 20 technologies, we can never get to scale. We need to take one or two and then produce, produce, produce, and make better, make better, make better, so that we can go down the cost curve.”
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