Investment in battery storage is an important, but far from straightforward part of the renewable energy transition.
A key part of ensuring the world reaches net zero by 2050 is investing in electric utilities’ transition from fossil fuel-based power generation and the integration of renewable energy sources into national grids. One of the biggest challenges for these low-carbon networks is to turn intermittent power generation into consistent electricity supply.
“Battery storage has a key role to play if the world is to establish a truly sustainable energy system – investing only in the upscaling of intermittent technologies won’t be enough,” Richard Lum, Co-Chief Investment Officer at energy infrastructure-focused investment manager Victory Hill Capital Advisors, tells ESG Investor.
Global installed battery storage capacity has been steadily growing, reaching 17 gigawatts (GW) by the end of 2020, according to the International Energy Agency (IEA), a 50% increase since 2019. Investment in battery storage grew by almost 40% during that 12-month period, reaching US$5.5 billion, the IEA noted, adding that investment in battery storage is expected to reach US$20 billion per annum in 2022.
Utilities transitioning away from fossil fuels have been investing in energy storage capacity. Last year, US electric utility Tucson Electric Power brought the US$25 million Wilmot Energy Center online. The 100 megawatt (MW) solar power system has 30 MW of linked battery storage. Charged by 314,000 solar panels, batteries will be utilised during times of peak usage or limited sunlight. Tucson has plans to increase the centre’s storage capacity to more than 1,400 MW over the next 15 years.
However, the IEA’s ‘2050 Net Zero Scenario’ will require total installed capacity to increase to 585 GW by 2030, the equivalent of a 38% annual growth rate. By 2050, installed capacity will need to reach 3,100 GW if it is to adequately support installed renewable energy infrastructure, the roadmap noted.
“Pairing battery storage systems with solar PV and wind to improve power system flexibility and maintain electricity security [should become] commonplace by the late 2020s,” the IEA said, forecasting global installed battery storage capacity to grow by 56% to reach 270 GW by 2026.
At least US$262 billion of additional investment in battery storage capacity will be required by the end of 2030 alone.
“Battery storage typically falls to the wayside when investors talk about investing in the clean energy transition,” says Eoin Maher, Portfolio Manager and Analyst of Global Equities at independent asset manager Unigestion.
“But it can maximise the efficiency of renewable energy, reduce the global carbon footprint and, more practically, better balance supply and demand across energy grids.”
Policymakers in the EU and UK are introducing measures to encourage investment. Most recently, the US Inflation Reduction Act, passed into law in August, introduced a host of financial incentives, including an investment tax credit for standalone energy storage and additional tax incentives for domestic BESS manufacturers.
There are a number of ways to invest in battery storage.
However, as with any emerging technology, there are challenges to overcome before they reach maturity and the full benefits can be felt by consumers and investors.
“Crucially, the standard battery, which is typically made using lithium-ion, is not well-suited for long duration storage and utilisation,” says Charles Boakye, Equity Analyst of ESG and Sustainable Finance at investment bank Jefferies.
According to research, a battery with 1 MW power capacity and 4 MWh of usable energy capacity has a storage duration of four hours, meaning that a utility can deploy the battery’s stored energy for a very limited amount of time before it needs to be recharged.
While four hours may be more than enough when electric utilities are managing peak flow times, it’s a different story when considering the potential ramifications of power not being generated for longer periods, as was seen in Texas only last year. The ‘big freeze’ left millions of Texans without electricity for days and caused hundreds of deaths.
Following increased scrutiny of Texas’ existing electricity grid, last month Swiss-based infrastructure fund manager SUSI Partners secured a 100 MW portfolio of ready-to-build battery storage systems in South Texas in partnership with SMT Energy. The assets are expected to start commercial operation during H1 2023.
However, there are also concerns about the shelf life of batteries used for energy storage.
Additional research indicated that the average lifespan of a battery averages just 8.31 years, meaning investors and operators in the space have to consider the financial and resource-related costs of both discarding and replacing batteries on a fairly regular basis.
Experts tell ESG Investor it’s crucial that investors channel capital towards entities working to improve the efficiency and shelf-life of batteries.
“There’s a lot of innovation going on behind the scenes, with [R&D teams] testing the strengths of different chemical combinations,” says Maher.
In Finland, the first commercial-scale ‘sand battery’ went online with a total energy capacity of 8 MWh and an 80-hour storage duration. Poured into a large steel container, hundreds of tonnes of sand is heated using renewable electricity and stored for later deployment.
The vast majority of batteries are made using other natural minerals, however, meaning that mining companies sit at the beginning of most BESS value chains.
“In the rush to construct and install bigger and better batteries, investors tend to lose sight of the pressures this has on natural resources and the potential ESG-related risks they are exposed to through mining companies,” says Victory Hill’s Lum.
The social and environmental impacts of mining are well-documented. Prolonged exposure to toxic pollution from copper and cobalt mines in the Democratic Republic of Congo has caused birth defects in miners’ children. Rio Tinto destroyed a 46,000-year-old Aboriginal cave system in Australia during an iron ore exploration. A toxic wastewater spill caused by a Glencore mine had a devastating impact on surrounding communities.
Further, if the world’s supply of batteries is going to increase in line with the IEA’s projections, pressure on global pools of natural minerals will heighten.
“The supply of natural minerals will struggle to keep pace with the rapidly rising demand [for batteries], particularly given the historic underinvestment in new resources over the past ten years and the long lead time to develop new mining projects,” according to Benedikt Sobotka, Co-Chair of the Global Battery Alliance and CEO of Eurasian Resources Group.
Moreover, given the finite supply of natural minerals on the planet, it’s important that “what is used is used sustainably”, Lum notes.
Ken-Ichi Hino, a Portfolio Manager for the Energy Storage Infrastructure team at UBS Asset Management, says that battery manufacturers are “really making a concerted push to make sure their suppliers are prioritising ESG-related themes when mining”. The mining companies, too, are increasingly aware that investors expect environmental and social concerns to be addressed, he says.
In 2021, Glencore announced a long-term partnership with Britishvolt – a UK-based investor in lithium-ion batteries – to supply them with responsibly sourced cobalt.
“As there needs to be a huge scaling of BESS, it’s important to make sure good practices are in place early on, giving investors the confidence to channel more capital into this space,” says Hino.
Moving to a 100% renewable energy grid – or as close to that as possible – means there are and will continue to be “huge investment opportunities in grid-scale battery storage”, says Boakye from Jefferies.
Investors can go straight to the source and invest in battery manufacturers like China based CATL, or battery storage solution providers like Swiss firm ABB. Alternatively, electric utilities that are heavily investing in their BESS capacity are also attractive options, experts say.
In December, Equinor acquired a 45% stake in battery storage developer Noriker Power, which gave the Norwegian energy company the ability to deploy batteries and storage assets across power markets, and also install batteries in proximity to its own offshore wind assets. NextEra Energy has invested in a number of renewable-plus-storage facilities, including the Babcock Ranch Solar Energy Center, a 74.5 MW solar power plant which incorporates a 10 MW battery storage project into its operations.
“Investors looking to invest in energy storage and batteries should look beyond manufacturing and development, as there’s a lot of value when thinking more long-term,” says Nitesh Shah, Head of Commodities and Macroeconomic Research in Europe at WisdomTree Investments.
Given the aforementioned shortcomings of lithium-ion batteries, there is growing interest in the development and scaling of solid-state batteries to improve cost effectiveness and energy efficiency.
Whereas lithium-ion batteries use liquid electrolytes and separators to keep the positive electrode from touching the negative electrode, solid-state batteries instead use solid electrolytes which carry lithium ions between the electrodes. As a result, they are able to store more energy more cheaply and are far less flammable.
“If investors can see this technology coming down the cost curve, I think it will address a lot of the challenges that exist within the battery storage market at the moment,” says Boakye.
As well as bolstering running times and overall lifespan, other companies are introducing solutions for recycling degraded batteries.
“The recycling industry is going to be very important in the longer term, although it’s currently quite a small part of the battery world,” says Shah. WisdomTree runs the Battery Solutions UCITS ETF, which includes investments in battery recycling companies.
“Batteries don’t last forever. Natural minerals are finite. Some companies are now thinking: how can we recycle the world’s existing supply?”
Prioritising a circular recycling approach, circular materials tech company Umicore recovers up to 95% of the copper, cobalt, nickel and lithium from used batteries and transforms them back into active cathode materials for the production of new rechargeable batteries. Canada-based Lithion Recycling has also developed a recycling solution that recovers components from lithium-ion batteries and regenerates the materials for reuse.
Ultimately, there is a “very strong virtuous cycle” between the deployment of renewable energy and the deployment of BESS which makes it an exciting area for investors, says UBS AM’s Hino.
“BESS sits at the intersection of two macro-trends: the upscaling of renewables and the exponential increase in the manufacturing of batteries worldwide.”