Power play, the rise of battery storage

Ivor Frischknecht, Managing Partner and CIO, Asia Pacific Sosteneo (part of Generali Investments ecosystem)

The infrastructure sector has a significant role to play in achieving net-zero carbon emissions. To achieve this goal, the world must pivot towards massive deployment of variable renewable energy sources like solar PV and wind power, which are now the most cost-effective form of new electricity generation. However, wind and solar are not always available, so storage is emerging as a critical enabler for this transition to clean energy.

Batteries and pumped hydroelectric storage are the only technically mature forms of bulk energy storage today, and batteries can be installed quickly and much less controversially than large dams. For a few hours of storage, they are also less expensive. As a result, 2023 witnessed a record influx of battery energy storage additions globally, setting the stage for a +27% compound annual growth rate until 2030. This surge in battery storage adoption stems from the many benefits it offers in addressing the challenges posed by renewable energy integration.

We all know that when it is dark or cloudy there is no or little solar power. Similarly, wind power is limited in low wind conditions. The worst situation is when both combine, resulting in a new German word: Dunkelflaute, literally translated as a ‘dark lull’. This variability poses a significant challenge to the grid, as supply may not align with demand patterns. Batteries bridge this gap by charging when the supply of energy is plentiful (and cheap) and discharging when demand for energy is high (and expensive). This process, known as ‘time shifting’, allows battery owners to capitalize on energy price arbitrage while effectively making these variable renewable power sources ’firm’.

Beyond time shifting, batteries offer a range of valuable grid services. Their instantaneous response enables system operators to maintain stable frequency and voltage, preventing overloads, outages and other system problems. These system strength services have until now only been provided as a by-product of heavy rotating generators such as coal, gas and hydro. Additionally, batteries can serve as an alternative to traditional network expansion, which can be both capital intensive and complex to execute due to agricultural and community impacts. By strategically placing and managing batteries, we can also enhance the resilience of our power supply, enabling households, commercial buildings, and even city blocks to run autonomously for a period of time, avoiding blackouts if there has been physical disruption to the energy system.

Importantly, battery storage assets can provide infrastructure style returns with contracted revenues, much like power purchase agreements for renewable generation assets. This can be achieved through offtake agreements for the storage capacity with energy companies or other market participants. Furthermore, system support agreements with market operators, networks or nearby generators can provide additional revenue streams. These mechanisms help ensure long-term, stable, and predictable cash flows for battery asset owners.

The energy transition represents transformational change. It is complex and extensive, affecting all aspects of energy production, distribution, and usage. Batteries have a vital role to play as a key ‘enabler’ of more renewable energy generation. Energy grid managers and regulators are increasingly waking up to the value of battery storage, leading to favorable market and regulatory conditions for large-scale batteries, particularly in countries like the UK, USA, Australia and Italy.

For investors, battery storage infrastructure presents an opportunity to achieve both attractive financial returns, underpinned by long-term contracted revenues, and positive sustainability outcomes by supporting the integration of renewable energy. As the world transitions towards a cleaner and more sustainable energy future, battery storage will continue to be an indispensable asset.