Energy storage industry at “inflection point,” says investment bank Lazard

In its first in-depth analysis on the costs of energy storage, US investment bank Lazard says storage is already competitive in some situations – particularly at the utility scale and in providing services such as frequency regulation that was previously the province of conventional fuels. Lazard for the past eight years has been producing an annual in-depth analysis of generation costs, tracking the fall in the costs of solar and wind energy in particular, and how they are now beating conventional fuels.

The latest analysis shows wind and large-scale solar PV beating all conventional technologies on cost by a widening margin. And Lazard is hinting that battery storage is likely to follow the cost trajectory of renewable energy and be competitive without subsidies in many applications. In some cases, it already is.

In its first report, Lazard compares a range of storage technologies and how they might be applied to the energy system, ranging from “front of the meter” applications such as grid integration and services, to “behind the meter” applications such as micro-grids and rooftop solar. Its principal finding is that some energy storage technologies are already cost-competitive with certain conventional alternatives in a number of specialised power grid uses. This includes grid stability and substituting for peaking gas plants.

The second finding is that because storage costs are expected to decrease significantly in the next five years, driven by increasing use of renewable energy generation, governmental and regulatory requirements, and the needs of an aging and changing power grid, then those cost-competitive applications will broaden quickly.

“Although in its formative stages, the energy storage industry appears to be at an inflection point, much like that experienced by the renewable energy industry around the time we created the LCOE study eight years ago,” said George Bilicic, vice chairman and global head of Lazard’s Power, Energy & Infrastructure Group.

Still, Lazard says that battery storage is not yet cost-competitive to the point where it can drive the “transformational scenarios envisioned by renewable energy advocates.” In that it refers to grid defection, pointing to the issue of battery life rather than capacity. But it may not be far away. “Based on our analysis of storage technologies and our experience with LCOE, we expect to see rapid declines in the costs of energy storage,” Bilicic says.

Indeed, the study says that lithium is expected to experience the greatest capital cost decline over the next five years (a fall of 50 per cent), while flow batteries and lead are expected to experience five-year battery capital cost declines of  around 40 per cent and 25 per cent respectively. “Lead is expected to experience 5% five-year cost decline, likely reflecting the fact that it is not currently commercially deployed (and, possibly, the optimism of its vendors’ current quotes).”

It notes most of the near to intermediate cost declines are expected to occur as a result of manufacturing and engineering improvements in batteries, rather than in balance of system costs (e.g., power control systems or installation). “Therefore, use case and technology combinations that are primarily battery-oriented and involve relatively smaller balance of system costs are likely to experience more rapid levelized cost declines.” Lazard says.

“As a result, some of the most “expensive” use cases today are most “levered” to rapidly decreasing battery capital costs. “If industry projections materialize, some energy storage technologies may be positioned to displace a significant portion of future gas-fired generation capacity, in particular as a replacement for peaking gas turbine facilities, enabling further integration of renewable generation.”

Lazard says energy storage appears most economically viable compared to conventional alternatives in use cases that require relatively greater power capacity and flexibility, as opposed to energy density or duration. This includes frequency regulation and – to a lesser degree – transmission and distribution investment deferral, demand charge management and microgrid applications.

This confirms the findings of Australian utilities such as Ergon Energy, which says that a series of grid-scale battery storage installations is reducing the costs of grid upgrades and expansion by around one third. It may also be useful as the Australian Energy Market Operator looks to source more locally-supplied frequency generation when the last of the coal-fired power stations closes permanently next march. Lazard says its LCOS (levelised cost of storage) analysis identifies 10 “use cases,” and assigns detailed operational parameters to each.

Here are some of its key graphs:

The first is the comparison with various storage technologies and their applications at grid scale. The grey bar shows the cost of the gas peaked, the light blue the current cost range, and the dark blue to anticipated cost declines. Substituting for peaking gas and grid upgrades, and providing frequency regulation, appear the most cost competitive areas.

The next graph shows the behind the meter options, this time comparing with a diesel engine. It shows commercial and industrial use, and possibly micro-grids, to be the best options, although it should be noted that this is US-based, so may not apply in other areas (such as Australia) with different tariff structures.

Lazard also makes the point that the value of battery storage may not be in a single use. this is a point made by other analyses, noting that stacking various value propositions could make storage a viable proposition now.