Monthly CIO Note: Battery Storage - Trend or Fad?

For a long time, the debate around the financial and practical viability of deploying renewable energy at scale centred around intermittency. Critics would level a basic charge: the sun doesn’t always shine and the wind doesn’t always blow.

Of course, this is true. But what is also true is that technology doesn’t just stand still. And many infrastructure specialists believe that BESS is answering those critics.

Battery storage systems, which enable excess electricity to be stored when supply exceeds demand and release it when demand climbs, are becoming invaluable for utility companies and grid operators to manage demand fluctuations and keep the lights on.

Storage Scales Up

The growth in BESS has been notable. In Europe, roughly 21.9 gigawatts of new BESS capacity was added to grids last year, a 15% increase on 2023. To put this into context, 21.9 gigawatts is equivalent to the power output of nearly 22 large nuclear reactors.

In the US, battery storage capacity is also surging, growing more than ten-fold in just four years to 2024. Around 12.3 gigawatts of capacity was added to the US energy grid last year alone, a 30% increase on 2023.

This growth has been significantly propelled by investors seeking infrastructure assets which can both complement and diversify income streams. According to a report by S&P, total global investment in battery storage by private infrastructure players hit a record USD 17.9b by August 2024, USD 1.5b more than the deal volume recorded for full year 2023. These figures suggest BESS is now a fixture in the infrastructure investment landscape.

Innovation at the Core

A number of factors are fuelling this boom and enhancing the proposition for infrastructure investors, with new battery technologies at the forefront.

Lithium Iron Phosphate (LFP) batteries, created with a new battery chemistry commercialised in recent years and which excludes cobalt, are safer and have a longer cycle life. The exclusion of cobalt also makes them up to 40% cheaper. Given the concerns that surround cobalt mining, they also deliver significant ESG benefits. The projections are for LFP to remain the dominant chemistry for another decade or longer, while battery packs are also getting smaller and storing greater amounts of power. The combination of cheaper, smaller, and more powerful batteries is reducing costs and driving higher profitability.

Underpinning the boom is the strength of the renewables market itself. The boom in batteries is a response to a critical market need. It is estimated that BESS capacity must grow 800% by 2030 and 34-fold by 2050 to keep up with the growth of solar and wind.

Navigating a Market in Transition

Despite the impressive numbers, some market participants urge caution. BESS is expanding from a very low base and growth levels are indicative of a nascent industry. Right now, EVs still dominate battery demand, with BESS expected to comprise around 20% of the market by 2030.

BESS are becoming a critical pillar of modern energy infrastructure networks.

As an industry in its early stages, BESS presents both a significant opportunity for infrastructure investors and, experts say, is also a reason to tread carefully. BESS profitability relies more on arbitrage opportunities flowing from wholesale price volatility than on the fixed price energy contracts investors may be more familiar with. And revenue models are shifting. A recent Rabobank note warned about this shift, commenting that deal structuring now requires more attention to compliance risks, timing and the specifics of the particular energy market.

That said, higher price volatility is an important driver of BESS revenue, and can play a role as a hedge within a wind and solar portfolio. Ancillary services such as black start, where power plants are restarted after a total outage, and inertia, where batteries emulate the role of traditional spinning turbines to dampen power surges, are also critical to the BESS proposition.

To navigate these challenges and seize the opportunities in the battery storage space, a diversified, multimanager approach is key. Taking this approach as an investor enables focused identification and deal selection: the right projects with the right teams at the right price at the right time.

As governments move towards renewable energy and net zero goals, BESS, which enables the decoupling of generation and consumption and smooths grid complexity, will play a big role. As of 2023, 33 countries offered fiscal or financial incentives for energy storage. The expert consensus is that the future of BESS, while not without risks that need managing, looks bright.