Grid-Based Energy Storage; A $200 Billion Opportunity

John Petersen

Yesterday a reader sent me a copy of an exhaustive new study titled “Energy Storage for the
Electricity Grid: Benefits and Market Potential Assessment Guide”
that was commissioned by the DOE’s Energy
Storage Systems Program and prepared by Jim Eyer and Garth Corey.
I’ve been following the work in progress on this report since last
summer and have eagerly awaited the opportunity to shift my focus away
from the overhyped electric vehicle sector and focus on something with
real meat. It looks like my time has finally come. For technology types
that want a detailed understanding of what the various potential
utility-scale applications for energy storage are, the entire 232 page
report is a must read. Over the next few weeks I’ll try to extract
critical market data and translate that information into a form that
will be useful to energy storage investors.

The Eyer-Corey Report identifies 17 discrete grid-based energy storage
applications, discusses the performance requirements of each
application and assesses the 10-year market potential for each
application. The Report also includes a great summary that condenses a
couple hundred pages of detail in a single chart.

From an investor’s perspective, the problem with the summary table is
that it focuses on the operational needs of utilities rather than the
economic opportunities for manufacturers of energy storage devices. As
a result the summary table provides a range of discharge durations, a
range of power capacities and a range of economic benefits per kW of
nameplate power capacity. Since energy storage investors typically
think of market size in terms of megawatt-hours and market value in
terms of potential revenue per kilowatt hour of storage, we have to
take the calculations a couple steps further to arrive at a simple
translation that fits an investor’s perspective.

In an effort to translate the raw Report data into terms investors will
understand, I’ve calculated an average discharge duration and an
average economic benefit for each grid-scale application identified in
the Report, and then used those averages to calculate total potential
demand in MWH, system value per kWh and revenue opportunity to
manufacturers. I’ve also recast the data in terms of declining system
value per kWh. If you’re interested in more detail, I’ve posted a copy
of my Excel spreadsheet here. I’ve discussed this
methodology with Mr. Eyer and feel comfortable that my demand, value
per kWh and revenue opportunity calculations are at least in the right
neighborhood. Since we’re dealing with averages of numbers that start
with a wide range, the values are pretty rough, but they’re good enough
for a first pass. The summary results of my calculations are set forth
below.

The color coding in the table represents my attempt to segregate system
value per kWh into cool technologies like flywheels, supercapacitors
and lithium ion batteries, which are highlighted in blue, and cheap
technologies like flow batteries, lead-acid batteries, compressed air
and pumped hydro, which are highlighted in yellow.

Last summer I wrote about energy storage on the smart grid and said
that in terms of potential demand, the market would be 99.45%
Cheap
and 0.55% Cool. Depending on how you want to classify the
voltage support line that I’ve highlighted in orange, my estimate was
either spot on accurate or off by a half-point. Now that I can refer to
a reasonable third-party estimate of storage system values, it’s quite
clear that revenue opportunities in smart grid storage will be about
90% cheap, 8% cool and 2% in-between. Any way you cut it, the
substantial bulk of the economic benefit of energy storage on the smart
grid will flow to companies that manufacture objectively cheap energy
storage solutions. There will be meaningful niche markets in the $1
billion to $6 billion range for cool technologies like flywheels,
supercapacitors and lithium ion batteries, but those niche markets pale
in comparison to the immense opportunities for cheap energy storage
technologies.

The following table provides summary information on the pure play
energy storage companies that are actively working on storage
applications for the smart grid. To keep things as simple as possible
I’ve used the same color coding to segregate their planned product
offerings into objectively cool technologies and objectively cheap
technologies.

For several years the market has been enthralled with gee-whiz energy
storage technologies and estimates of market potential that run into
the billions of dollars for highly specialized niche applications like
frequency regulation. In the process, investors have lost perspective
on the question of how the niche applications fit into the overall
market. This dynamic has led to inflated expectations for companies
that are developing cool technologies and unrecognized value in
companies that manufacture the cheap energy storage technologies that
will do the yeoman’s share of the heavy lifting for the smart grid.
Unless I’m way off the mark, that dynamic will shift very rapidly as
outsized revenue gains begin to accrue to manufacturers of cheap
solutions.

When I started writing this blog I was convinced that energy storage
would become a major investment trend over the next several years
because cost efficient storage systems can substantially reduce waste
while enhancing the reliability of most alternative energy
technologies. Since then, the fundamental market drivers have developed
faster than I imagined and what I initially described as a rising tide
is rapidly becoming a full-blown investment tsunami. While rising tides
lift all boats, the critical points for investors to remember are:

• Percentage gains in the stock market are largely dependent on
  entry price and it’s much easier to bag a double or triple in a cheap
  stock than it is to get the same result in an expensive stock;
• While it’s all well and good to look a decade down the road and
  dream of a brighter future, America’s energy storage needs require
  solutions that can be implemented today instead of someday;
• In America we get up in the morning, we go to work and we solve
  our problems using the tools that we have in our toolbox, but we always
  remain ready to embrace new tools as they are developed, perfected and
  proven; and
• Successful investing requires constant diligence to adjust
  portfolio positions to a rapidly changing market and technical
  landscape and emerging technologies that are not ready for prime time,
  but will be someday.

Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and
has a large long position in its stock. He also has small long
positions in Enersys (ENS),
Exide (XIDE),
C&D
Technologies (CHP)
and
ZBB Energy (ZBB).

Read more….