For renewables to be regarded as truly sustainable, they need to be effectively and resourcefully harnessed. Meanwhile, the economic viability of energy from renewable sources will only increase if there is a decrease in the cost of storing it, along with advances in efficiency.
To explain, energy storage systems provide a means of storing energy so that it can be converted from electricity into mechanical, chemical or thermal energy, making it available when it is needed at a later time. Renewable energy, such as solar and wind, is the source of this. Examples of energy storage systems include flywheels, pumped hydroelectric storage, supercapacitors, and batteries.
Investment-wise, it is being taken ever more seriously. As the pursuit of achieving a more sustainable future has become more aggressive – and urgent – the energy storage market is rapidly expanding and 2023 has been a breakthrough year.
For example, the International Energy Agency (IEA) has said global investment in battery energy storage exceeded US$20bn in 2022, and was expected to pass US$35bn by the end of this year.
In July, Carlton Power, an energy infrastructure development company, received planning permission to build the world’s largest battery energy storage scheme in Greater Manchester, England. It is expected to be operational in 2025.
Only this month, Volvo Cars launched its new Energy Solutions business, focusing on energy storage and charging-related technologies to “support the transition to a smarter, more sustainable and more efficient energy grid”.
Among those technologies is bi-directional charging, which would allow customers to use energy stored in the battery of their Volvo at a later date, such as when grid demand is higher and more expensive. The company said this technology could eventually be used to provide power to the owner’s home, or even charge another Volvo electric car. This would have the effect of reducing energy grid demand while also incentivising the customer. Volvo’s car business aims to be fully electric within the next six years and it sees energy storage and efficiency as something which goes hand-in-hand with this.
Meanwhile, US company Energy Vault Holdings announced this month that it has licensed five of its gravity energy storage systems to be deployed in five provinces across China, which is the largest energy storage market in the world. Indeed, Bloomberg’s latest Energy Storage Market Outlook, released last month, noted China and the US have the biggest potential market for energy storage, showing these are the countries where investment opportunities abound.
As per Energy Vault’s press release, gravity energy storage systems are “grid-scale” and provide an “alternative to long technical life energy storage assets like pumped hydro plants” which currently account for about 90% of global energy storage capacity. It says the scope of that project could reach US$1bn.
When considering the merits of investing in new energy storage technology, a wide spectrum of factors should be considered. For asset managers, the first attraction should be that it tightly aligns with ESG principles, therefore making it attractive for capital for investment. Second, whether it can open up other revenue streams.
For example, energy storage opens opportunities for things like Energy Price Arbitrage, where energy storage assets acquire electricity at a low price, taking advantage of price differentials in the electricity market. This can provide frequency gaps or voltage support services to the grid, resulting in revenue from grid operators who rely on this rapid response to maintain grid stability. Similarly, energy storage can smooth the asynchronous and intermittent output of renewable energy sources (wind and solar), enabling traders to optimise the sale of renewable energy when market prices are favourable.
For private equity investors, the same merits above for asset managers still hold true. But there is also the diversification element to consider. Energy storage offers diverse opportunities within the broader energy and infrastructure investment landscape, allowing private equity firms to rebalance their portfolios by adding assets that have low correlation with other sectors, potentially reducing overall risk.
This is true with any new trending technologies, and energy storage is an industry characterised by continuous innovation and technological advancements. So private equity firms can leverage their expertise across their other competencies to support the development and scaling of emerging energy storage technologies – likely gaining a competitive advantage.
Finally, energy storage investments offer a lot of exit strategies, including selling projects to utilities, infrastructure funds, other investors, or initial public offerings (IPOs).
With the huge market that is developing for energy storage, it is important to understand the key factors that drive it.
Behind the wheel
First, and most simply, major players like the US, China and Middle East and North Africa (MENA) countries are deploying more solar and wind energy to meet their power needs. With a record US$495bn invested in renewables globally last year, it therefore follows that the market for energy storage is also expanding.
The automotive industry is another vital driver. The US Environmental Protection Agency says 4.6 metric tonnes of carbon emission is emitted by a typical passenger per year. However, the wider sustainability shift and improving infrastructure means the electric car market is booming. The IEA says electric car sales more than tripled from 4% in 2020 to 14% in 2022. With that has come a greater appetite for battery storage investment and innovation – such as that announced by Volvo.
Third, the world’s growing instability has made fossil fuels less viable. In the space of two years, we experienced the shocks of the pandemic and global lockdowns, followed by Russia’s invasion of Ukraine, with both causing massive disruption to supply chains and arguably quickening the transition to renewables. Fourth, government incentives – such as tax credits in the US for those who invest in renewable energy including battery storage technology – have been another factor.
Successful asset management and trading strategies in this sector require a deep understanding of market dynamics, risk management and a proactive approach to capitalise on opportunities. Identifying metrics and market signals to help with this is crucial. However, regulatory and policy considerations can also significantly impact the profitability of energy storage investments.
Overall, if a successful energy transition from conventional means to renewable sources is to be accomplished, the role of energy storage will be critically important as the very future of renewable energy is dependent on improving energy storage technology. This year has been a game changer for the sector. More private involvement and investment can be expected in 2024 – and this will only improve the landscape.