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California Energy Markets / Bottom Lines

[March 2, 2018 / No. 1477]

California's Battery Market: What's in Store?

Electric power is unique: For the most part, it remains the only energy commodity that we consume in real time. The immense current cost of battery technology partly explains this trend. Investors, meanwhile, require reassurances over the technology's bankability before it becomes a viable option. However, this may soon change. Costs are falling and, thanks to regulatory incentives supporting their development, batteries are likely to play an increasingly significant role within America's grid.

This is especially true in California, the country's early vanguard for battery deployment. Following significant investment in renewables (the natural complement to battery technology) and accompanying regulatory support, the Golden State has the largest pipeline of battery installations in America. California already has around 149 small battery projects in development, creating a cumulative pipeline totaling 4 GW in future storage capacity. And once greater regulatory—and economic—incentives arise in other states, the full extent of battery technology's disruptive surge on the grid could become apparent.

California Beaming
Certainly, California appears well-primed for battery industry growth thanks to the rising proliferation of renewables—mostly from solar power. Estimates suggest that renewable sources generated around 30 percent of California's energy consumption last year, and this number should grow sharply through 2030, where the state has set a goal of 50 percent renewable energy. The perennial challenge, however, is ensuring a stable grid despite renewables' intermittency: They cannot produce power unless the sun is shining or the wind is blowing. Without being shored up by other technologies or peaking assets, a renewables-intensive grid could become unreliable.

Energy Storage Options Versus Applications

Here, energy storage provides the missing link in renewables' plight. It allows the grid to store excess energy for use during times of heightened demand or intermittent generation from renewable sources. The future market ramifications seem evident. Batteries could eventually replace California's rapidly aging combustion-turbine capacity; this is currently what provides support for renewables, but it is already becoming far less profitable due to weaker market conditions (including diminished demand growth). In turn, new gas-fired projects become less likely than before and even improbable under some sets of assumptions; and this even begs the question whether current gas capacity could be shuttered if battery prices reduce enough.

The cost of batteries is also declining. A utility-scale battery storage unit providing four hours of electricity bears similar costs to a gas peaker plant. Crucially, with no moving parts and no fuel requirements, its maintenance costs are reduced while long-term operation costs are more stable and predictable compared to gas turbines. It is scalable: More units can be added as needed without disproportionate cost. Moreover, it can provide a near-instant response to heightened demand—in less than a millisecond. On the other hand, gas turbines require several minutes to load the grid.

Playing Economic Catch-Up
Yet, there is a rub. To date, battery storage solutions have shown muted progress. While they are the perfect complement to surges in renewables capacity, they remain too expensive for widespread adoption in a merchant market, as either a capacity or energy resource.

Arguably, California's ambitious renewables portfolio standard has hitherto encouraged battery developments above other stimuli. In 2016, Gov. Jerry Brown increased funding for battery storage projects and also tasked the state's largest investor-owned utilities with deploying an additional 500 MW of battery storage capacity, in addition to their pre-existing pipelines.

Despite robust regulatory support, the economic argument for battery proliferation has yet to be won. Today, installation costs are around $500/kW; this figure may need to decrease to around $300/kW before management teams reach the point of no return. And with pressure on U.S.-based power generators to trim their balance sheets, the timing may not be opportune for embarking on capital-intensive projects.

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Similarly, the equity and debt markets require assurances. Their aims of maximizing returns are less long-term than the energy market's decarbonization objectives. Markets may also be perturbed by the investment risk. Despite battery prices steadily declining, efficiency gains have been slower to materialize: Some projects are still reporting power losses over 15 percent, which is moderating expectations. Adding further doubt is the lack of certainty over the rate of decay and the asset life of utility-scale batteries.

As such, the economic argument for battery development is still playing catch-up. But given that the momentum behind battery development shows little sign of slowing, it's one the industry could eventually win. With regulatory support in place, advancements will likely come during the next three to four years.

In the meantime, we expect independent power producers to prepare for the potential downside and opportunities ahead. Where possible, management teams will likely brace for the future, by aggressively shrinking costs and future-proofing their positions. Others, meanwhile, could begin to fall by the wayside as they cling to a bygone generating system. What's more certain is that America's grid is slowly converging toward storage technologies. –Michael Ferguson, director, U.S. energy infrastructure, S&P Global Ratings

Bottom Lines is excerpted from Energy NewsData's California Energy Markets publication. If you aren't a current subscriber, see for yourself how NewsData reporters put events in an accurate and meaningful context—request a sample of California Energy Markets.

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