4/12/2016 The new economics of energy storage | McKinsey & Company

Sustainability & Resource

Productivity

Article
August 2016

Theneweconomicsofenergy
storage
By Paolo DAprile, John Newman, and Dickon Pinner

Energystoragecanmakemoneyrightnow.Findingtheopportunitiesrequiresdigging
intoreal-worlddata.

E
nergystorageisafavoritetechnologyofthefutureforgoodreasons.

Manypeopleseeaffordablestorageasthemissinglinkbetweenintermittent
renewablepower,suchassolarandwind,and24/7reliability.Utilitiesareintriguedby
thepotentialforstoragetomeetotherneedssuchasrelievingcongestionand
smoothingoutthevariationsinpowerthatoccurindependentofrenewable-energy
generation.Majorindustrialcompaniesconsiderstorageatechnologythatcould
transformcars,turbines,andconsumerelectronics(seesidebar,Whatisenergy
storage?).

Others,however,takeadimmerview,believingthatstoragewillnotbeeconomicalany
timesoon.Thatpessimismcannotbedismissed.Thetransformativefutureofenergy
storagehasbeenjustaroundthecornerforsometime,andatthemoment,storage
constitutesaverysmalldropinaverylargeocean.1In2015,arecord221megawattsof
storagecapacitywasinstalledintheUnitedStates,2morethanthreetimesasmuchas
in201465megawatts,whichwasitselfabigjumpoverthepreviousyear.Butmore
than160megawattsofthe2015totalwasdeployedbyasingleregionaltransmission
organization,PJMInterconnection.3And221megawattsisnotmuchinthecontextof
atotalUSgenerationcapacityofmorethanamillionmegawatts.

Ourresearchshowsconsiderablenear-termpotentialforstationaryenergystorage.
Onereasonforthisisthatcostsarefallingandcouldbe$200perkilowatt-hourin
2020,halftodaysprice,and$160perkilowatt-hourorlessin2025.Anotheristhat

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identifyingthemosteconomicalprojectsandhighest-potentialcustomersforstorage
hasbecomeapriorityforadiversesetofcompaniesincludingpowerproviders,grid
operators,batterymanufacturers,energy-storageintegrators,andbusinesseswith
establishedrelationshipswithprospectivecustomerssuchassolardevelopersand
energy-servicecompanies.

Inthisarticle,wedescribehowtofindprofitablepossibilitiesforenergystorage.We
alsohighlightsomepolicylimitationsandhowthesemightbeaddressedtoaccelerate
marketexpansion.Theseinsightscouldhelpforward-thinkingcompanieswinan
earlytoeholdinamarketthatintheUnitedStatescouldreach$2.5billionby2020
sixtimesasmuchasin2015.4Theultimateprize,ofcourse,ismuchbigger.Asthe
technologymatures,weestimatethattheglobalopportunityforstoragecouldreach
1,000gigawattsinthenext20years.

Wheretocompete:Modelinsights

Identifyingandprioritizingprojectsandcustomersiscomplicated.Itmeanslooking
athowelectricityisusedandhowmuchitcosts,aswellasthepriceofstorage.

Toooften,though,entitiesthathaveaccesstodataonelectricityusehavean
incompleteunderstandingofhowtoevaluatetheeconomicsofstorage;thosethat
understandtheseeconomicshavelimitedaccesstoreal-worlddataonelectricityuse.
Moreover,therehasbeenatendencytoaveragethedatawhendoinganalyses.
Aggregatingnumbers,however,isnotusefulwhenevaluatingprospectsforenergy
storagebecauseidenticalbuildingsnextdoortoeachothercouldhaveentirely
differentpatternsofelectricityuse.Conclusionsdrawnbasedonaveragestherefore
donothavetheprecisionneededtoidentifywhichcustomerswouldbeprofitableto
serve.

Inourresearch,wewereabletoaccessdatafrombothutilityandbatterycompanies.
Onthisbasis,wefoundthatitisquarter-hour-by-quarter-hourorevenminute-by-
minuteusethatrevealswheretheopportunitiesare.

Toidentifytodaysdesirablecustomers,webuiltaproprietaryenergy-storage-
dispatchmodelthatconsidersthreekindsofreal-worlddata:

electricityproductionandconsumption(loadprofiles),atintervalsof
secondsorminutesforatleastayear

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batterycharacteristics,includingpriceandperformance

electricitypricesandtariffs

Usingbothpublicandprivatesources,weaccesseddataformorethanathousand
differentloadprofiles,dozensofbatteries(includinglithiumion,leadacid,sodium
sulfur,andflowcell),anddozensofelectricitytariffandpricingtables.

Ourmodel,shownintheexhibit,identifiesthesizeandtypeofenergystorageneeded
tomeetgoalssuchasmitigatingdemandcharges,providingfrequency-regulation
services,shiftingorimprovingthecontrolofrenewablepoweratgridscale,and
storingenergyfromresidentialsolarinstallations.

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Exhibit

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Themodelshowsthatitisalreadyprofitabletoprovideenergy-storagesolutionstoa
subsetofcommercialcustomersineachofthefourmostimportantapplications
demand-chargemanagement,grid-scalerenewablepower,small-scalesolar-plus
storage,andfrequencyregulation.

Demand-chargemanagement

Somecustomersarechargedforusingpowerduringpeaktimes(apracticeknownasa
demandcharge).Energystoragecanbeusedtolowerpeakconsumption(thehighest
amountofpoweracustomerdrawsfromthegrid),thusreducingtheamount
customerspayfordemandcharges.OurmodelcalculatesthatinNorthAmerica,the
break-evenpointformostcustomerspayingademandchargeisabout$9perkilowatt.
Basedonourpriorworklookingatthereductionincostsoflithium-ionbatteries,this
couldfallto$4to$5perkilowattby2020.Importantly,theprofitabilityofserving
prospectiveenergy-storagecustomersevenwithinthesamegeographyandpayinga
similartariffcanvaryby$90perkilowattofenergystorageinstalledperyearbecause
ofcustomer-specificbehaviors.Anotherinterestinginsightfromourmodelisthatas
storagecostsfall,notonlydoesitmakeeconomicsensetoservemorecustomers,but
theoptimumsizeofenergystorageincreasesforexistingcustomers.

Grid-scalerenewablepower

Energystoragecansmoothoutorfirmwind-andsolar-farmoutput;thatis,itcan
reducethevariabilityofpowerproducedatagivenmoment.Theincrementalpricefor
firmingwindpowercanbeaslowastwotothreecentsperkilowatt-hour.Solar-power
firminggenerallycostsasmuchastencentsperkilowatt-hour,becausesolarfarms
typicallyoperateforfewerhoursperdaythanwindfarms.

Small-scalesolar-plusstorage

Ataresidentiallevel,thecombinationofsolarandstorageisonlyworthwhilewhen
specificmarketandregulatoryconditionsareinplacetomakethevalueofstorage
greaterthanthecostofinstallingit.Thiscanhappen,forexample,whenexcess
productioncanbestoredforlaterconsumption;inthatcase,consumersneedtobuy
lesspowerfromthegridandthuscuttheircosts.

Frequencyregulation

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Electricitygridsexperiencecontinuousimbalancesbetweenpowergenerationand
consumptionbecausemillionsofdevicesareturnedonandoffinanuncorrelatedway.
Theseimbalancescauseelectricityfrequenciestodeviate,whichcanhurtsensitive
equipmentand,ifleftuncheckedandallowedtobecometoolarge,evenaffectthe
stabilityofthegrid.Storagesystemsareparticularlywellsuitedtofrequency
regulationbecauseoftheirrapidresponsetimeandabilitytochargeanddischarge
efficiently.

Ourmodelconfirmsthatstoragecanbeprofitableinselectfrequency-regulation
markets.Theeconomicsdependonthecontext.Ideally,batterieshoverarounda
specificstateofchargetominimizetheamountofstoragerequired.

Howtocompete:Thestateofbatteries

Batterytechnology,particularlyintheformoflithiumion,isgettingthemost
attentionandhasprogressedthefurthest.Lithium-iontechnologiesaccountedfor
morethan95percentofnewenergy-storagedeploymentsin2015.5Theyarealso
widelyusedinconsumerelectronicsandhaveshownpromiseinautomotive
applications,suchasplug-inhybridsandelectricvehicles.Pricesforlithium-ion
batterieshavebeenfallingandsafetyhasimproved;moreover,theycanworkbothin
applicationsthatrequirealotofenergyforashortperiod(knownaspower
applications)andthoserequiringloweramountsofenergyforlongerperiods(energy
applications).Collectively,thesecharacteristicsmakelithium-ionbatteriessuitable
forstationaryenergystorageacrossthegrid,fromlargeutility-scaleinstallationsto
transmission-and-distributioninfrastructure,aswellastoindividualcommercial,
industrial,andresidentialsystems.

Ourmodelconfirmsthecentralityoflithium-ionbatteriestoutility-scaleenergy
storage,butwithtwoimportantcaveats.First,itiscriticaltomatchtheperformance
characteristicsofdifferenttypesoflithium-ionbatteriestotheapplication.For
example,welookedattwomajorlithium-ion-batteryprovidersthatwerecompeting
toserveaspecificindustrialapplication.Themodelfoundthatonecompanys
productsweremoreeconomicthantheothersin86percentofthesitesbecauseofthe
productsabilitytochargeanddischargemorequickly,withanaverageincreased
profitabilityofalmost$25perkilowatt-hourofenergystorageinstalledperyear.

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Second,insomespecificapplications,nonlithium-iontechnologiesappeartowork
better.Fordemand-chargemanagementandresidentialsolar-plusstorage,certain
lead-acidproductsaremoreprofitablethanlithium-ioncells.Forlarge-scalefirming
ofwindpower,ourmodelshowsthatflowcellscanbemoreeconomicthanlithium-
ioncellsforallbuttheshortestperiods(lessthananhour)andareprojectedto
continuetoleadoncostthrough2020.

Policyandmarketlimits

Ourmodelsuggeststhatthereismoneytobemadefromenergystorageeventoday;
theintroductionofsupportivepoliciescouldmakethemarketmuchbigger,faster.In
marketsthatdoprovideregulatorysupport,suchasthePJMandCaliforniamarketsin
theUnitedStates,energystorageismorelikelytobeadoptedthaninthosethatdonot.
Inmostmarkets,policiesandincentivesfailtooptimizeenergy-storagedeployment.
Forexample,theoutputfromintermittentrenewable-energysourcescanchangeby
megawattsperminute,buttherearefewsignificantincentivestopairrenewable
energywithstoragetosmoothpoweroutput.

Anotherissueisthattariffsarevariedandnotconsistentlyappliedinawaythat
encouragesenergy-storagedeployment.Thus,customerswithsimilarloadprofilesare
oftenbilleddifferently;someofthesetariffsprovideincentivefortheadoptionof
storagetothebenefitoftheelectrical-powersystem,whileothersdonot.Pairingload
profileswithappropriatetariffsandensuringthattariffsarestablecouldhelpbuild
theeconomicbusinesscaseforenergystorage.

Finally,theinabilitytobringtogetherdetailedmodeling,customerdata,andbattery
performance(dueinparttopolicychoicesandruleslimitingdataaccess)makesit
difficulttoidentifyandcaptureexistingopportunities.

Whatthefuturemayhold

Ourworkpointstoseveralimportantfindings.

First,energystoragealreadymakeseconomicsenseforcertainapplications.This
pointissometimesoverlookedgiventheemphasisonmandates,subsidiesforsome
storageprojects,andnoneconomicortough-to-measureeconomicrationalesfor
storage(suchasresilienceandinsuranceagainstpoweroutages).

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Second,marketparticipantsneedtoaccessthedetaileddatathatcouldallowthemto
identifyandprioritizethosecustomersforwhomstorageisprofitable.Giventhe
complexityofenergystorage,deploymentismorelikelytofollowapushversusapull
salesmodel,favoringentrepreneurialcompaniesthatfindcreativewaystoaccessand
usethesedata.

Third,storageprovidersmustbeopen-mindedintheirdesignofenergy-storage
systems,decidingwhetherlithium-ion,lead-acid,flow-cell,orsomeothertechnology
willprovidethebestvalue.Astrategythatemploysmultipletechnologiesmaycarry
incrementalcosts,butitmayalsoprotectagainstsuddenpricerises.

Fourth,healthymarginsarelikelytoaccruetocompaniesthatmakeuseofbatteryand
load-profiledata.Theuniquecharacteristicsofindividualcustomerswillfavor
tailoredapproaches,includingthedevelopmentofalgorithmsthatfindandextractthe
greatestvalue.Strongcustomerrelationshipsarerequiredtoaccessrelevantdataand
todeliverthemosteconomicalsolutionasregulationsandtechnologiesevolve.

Fifth,howtousestoragetoreducesystem-widecostswillrequiresomethought.
Examplesmightincludepricesignalsthatarecorrelatedwithsignificantdeviationsin
powergenerationandconsumption,rulesthatrewardtheprovisionofstoragetoserve
multiplesitesincloseproximity,andtariffsthatfavorselfconsumption(orload
shifting)ofrenewableelectricity.

Themostimportantimplicationisthis:thelarge-scaledeploymentofenergystorage
couldoverturnbusinessasusualformanyelectricitymarkets.Indevelopedcountries,
forexample,centralorbulkgenerationtraditionallyhasbeenusedtosatisfy
instantaneousdemand,withancillaryserviceshelpingtosmoothoutdiscrepancies
betweengenerationandload.Energystorageiswellsuitedtoprovidesuchancillary
services.Eventually,ascostsfall,itcouldmovebeyondthatrole,providingmoreand
morepowertothegrid,displacingplants.Thatmomentisnotimminent.Butitis
importanttorecognizethatenergystoragehasthepotentialtoupendtheindustry
structures,bothphysicalandeconomic,thathavedefinedpowermarketsforthelast
centuryormore.Anditisevenmoreimportanttobeready.

1. This article does not consider pumped storage, the most common type of storage. It is
used for hydro projects.
2. Peter Maloney, After record year, U.S. energy storage forecasted to break 1 GW
capacity mark in 2019, Utility Dive, March 7, 2016, utilitydive.com.

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3. PJM serves all or part of Delaware; Illinois; Indiana; Kentucky; Maryland; Michigan;
New Jersey; North Carolina; Ohio; Pennsylvania; Tennessee; Virginia; Washington, DC; and
West Virginia.
4. The 2015 year-in-review executive summary, GTM Research, March 2016,
greentechmedia.com.
5. The 2015 year-in-review executive summary, GTM Research, March 2016,
greentechmedia.com.

Abouttheauthor(s)

PaoloDAprileisanassociatepartnerinMcKinseysRomeoffice;JohnNewman
isanassociatepartnerintheSanFranciscooffice,whereDickonPinnerisasenior
partner.

TheauthorswishtothankHusseinAbdelhalimandBenediktBattkefortheir
contributionstothisarticle.

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