Resolving Energy Storage: the Sector's Holy Grail?

As both the world population and the rate of urbanization continue their rapid growth, energy consumption irrevocably does the same. By 2040, global demand for energy is forecast to be 43 percent higher than today. This in turn creates concerns with regard to the security of energy supply. "Energy consumption per capita is already increasing rapidly across all major emerging economies and looks likely to continue. Without further efficiency gains and assuming the convergence of energy consumption toward OECD levels, we see incremental energy demand from key emerging markets almost equaling 2.5 times the current total for Europe and the US combined," said Eugene Klerk, Global Thematic and ESG Research at Credit Suisse. Efficiency gains, notably with regard to the transport of petroleum products and biofuels, are likely to be achieved in the coming years, but that is not enough. There is thus a pressing need for new energy solutions such as the resolution the energy storage issue, which is linked to improving battery technology, and a greater use of renewable energy sources. "Storage is the holy grail and potentially the largest disruption to the sector in decades," explained Vincent Gilles, Head European Utilities Research.

Resolving Storage Issue Would Reshape the Entire Sector

No developed country would accept or could afford to be without power beyond a couple of minutes. Because power cannot be stored, the energy sector's traditional business model tends to overcompensate for security of power supply making peak generation a very profitable part of their business. "Cheap and reliable storage removes this incitement and would have a very negative impact on the profitability of traditional power generation," said Gilles. But today's energy prices remain largely distorted by subsidies, slowing down the seemingly obvious drive towards competitive clean energy. This year alone, global energy subsidies are likely to reach 5.3 trillion US dollars, with coal being the biggest beneficiary, according to IMF estimates (see fig. 1). "If commodity prices fully reflected the costs (of local environmental pollution), oil, natural gas and coal prices would be multiples of current levels," said Gilles, adding "efficient pricing would increase the call on non-fossil fuels."

Energy Storage Capacity – A Totally Underdeveloped Market

Worldwide storage capacity is currently only 2.2 percent of the annual global energy production capacity, so the growth potential appears solid. To achieve this, current research focuses on new material, new chemical compositions for alternative battery types and the development of redeployment strategies for electronic vehicle (EV) batteries. Resolving the energy storage issue is, indeed, key to make renewable energy such as solar more attractive. Why? Because renewables suffer from the "variable" energy effect. Solar or wind energy, for example, is at times being produced when it is not needed or vice versa. "Increasing storage capacity would reduce variability. Additionally, having greater storage capacity across the utility network would improve power quality and reliability of [energy] supply more broadly," said Klerk. Industry experts forecast that storage costs could decline up to 75 percent between 2012 and 2030. "This, in conjunction with falling photovoltaic (PV) module prices should make an integrated solar-storage unit competitive relative to other energy sources," Klerk underlined.

"New Energy" Soon More Profitable Than "Old Energy"

Alternative energy sources are becoming more efficient and as a result much cheaper. Returns from alternative sources of energy are as a consequence climbing quickly, while those of traditional power generation companies are declining. "Within 5 years, on a non-subsidy basis, it is likely that 'new energy' will be more profitable than 'old energy' for investors," Gilles stressed. One of the key drivers is the accelerating decline in costs in the "first generation" of alternative energy such as wind and solar. In many regions, onshore wind is already at "grid parity," i.e. competitive with fossil fuel. The development is similar with regard to solar energy. Utility scale solar costs have dropped by 60 percent since 2011, making solar cost-competitive (without any subsidies) in at least 15 countries compared to the cost of building a new natural gas power plant. Compared to coal, solar energy is, however not yet economic, but only approximately 25 percent away. Last year, solar represented nearly a third of the new generation capacity build in the US, clearly driven by declining installation costs. "We think solar growth is underestimated and could be closer to 21 MM BOE (million barrels of oil equivalent) by 2040. However, even with this pace of growth, fossil fuels would still account for more than 70 percent of the energy supply, with substantial coal fired CO2 emissions and with fragility in the oil complex due to the underlying decline rate on existing production. More assertive energy efficiency and energy transformation seems required," said Edward Westlake, Co-head of the Global Equity Oil and Gas Research (see fig. 2).

Battery Costs Are Falling Faster Than Expected

Improved energy storage and the market for EVs are directly correlated to battery costs. "Current battery costs are actually below where industry experts had predicted by this time," said Dan Galves, US Automotive and Auto Parts Research analyst. The example of Tesla, the producer of fully EVs, shows that battery-powered cars are much more than a niche segment. "There is no reason the rest of the industry can't catch up," he said. The market share of Tesla's Model S has reached nearly 20 percent in its price segment, despite supply constraints, an immature distribution system and without advertising. "A growing demand for battery-powered vehicles will drive increased investments in battery capacity, driving costs down further. These energy storage batteries create a more stable (electricity) grid, typically consuming off-peak power that enables a higher proportion of power generation to come from renewables," Galves noted. All these factors enable cheaper power, which in turn further reduces operating costs of EVs. This in turn creates scale, leading to lower battery costs, pushing the adoption of EVs even higher. The number of EV models is thus likely to soar in the coming years (see fig. 3). And the autonomy of pure EV models is growing fast. Tesla already achieves an autonomy exceeding 200 miles (322 kilometers) but several models from other carmakers are likely to reach that milestone by 2020, according to recent announcements. Traditional carmakers cannot rest on their laurels any longer.