Batteries lead charge for more efficient, flexible grid

Katya Peremanova, Associate Analyst, Moody's Investors Service And Swami Venkataraman, CFA, Senior Vice President, and Graham Taylor, Vice President - Senior credit officer, Moody's Investors Service

Katya Peremanova, Associate Analyst, Moody's Investors Service

The cost of Lithium-ion batteries is plummeting. Decreasing prices, along with increasing efficiency, have made the incorporation of battery storage systems into power grids more viable and cost effective. Many view storage as an ideal way to help harness the erratic nature of renewable energy sources like wind and solar. It can also decrease the need for investments in transmission and distribution, while allowing industrial customers to save on utility demand charges.

Battery storage costs have fallen from 900 dollars a kilowatt-hour in 2009 to less than 300 dollars per kilowatt-hour in 2016. In a July 2016 auction for 5600 megawatts of ancillary services for National Grid’s network in the UK, battery developers accounted for 95 percent of the project sites that bid for contracts, a sign of the storage industry’s momentum. In January 2018, Xcel Energy reported an “all-source” solicitation for resources received exceptionally low priced bids, with wind plus storage averaging just 21 dollars per megawatt-hour and solar plus storage averaging 36 dollars per megawatt hour, indicating a faster-than-expected fall in storage costs. However, for various utility segments, the credit implications for battery storage are both positive and negative.

Battery costs are declining faster than expected

Battery costs have followed a similar trend as solar panels, in that the prices have fallen by more than 75 percent since 2009. More importantly, costs have declined faster than expected. Price forecasts for 2020 made only a few years ago were breached in 2016, just as forecasts have in the past severely underestimated the rate of decline in solar PV capital costs.

Also, lower storage costs generally increase demand for electric cars and, hence, for more power generation. These costs only refer to the battery pack. A fully installed system will include costs such as inverters, control systems, land and labor.

Batteries ease integration of growing renewable penetration

Moody’s expects that battery storage will allow far larger amounts of renewable energy into the grid without a dramatic increase in costs. Without battery storage, the growth of intermittent renewables such as wind and solar could otherwise lead to rapid increases in the cost of keeping the transmission network in balance and within an acceptable frequency range. This is especially true of small or island power grids, since large regional markets managed by centralized grid operators can significantly reduce integration costs by spreading wind variability over a large pool of resources.

Swami Venkataraman, CFA, Senior Vice President, and Graham Taylor, Vice President - Senior credit officer, Moody's Investors Service

However, battery storage can significantly curtail these constraints. Researchers at Imperial College London estimate that 10 gigawatts of new distributed storage in 2030, as well as higher demand and greater interconnection with Europe, could significantly reduce solar and wind integration costs in Great Britain. They estimate total annual savings to the electricity system of 4 billion pounds in such a scenario, with savings on generation expenses and distribution network investment significantly exceeding the additional cost of storage and interconnection.

Batteries provide grid benefits to both utilities and customers

Utilities typically impose a fixed-demand charge on commercial and industrial customers, which is based on their peak demand for electricity. These customers could satisfy a portion of their peak demand with a battery that charges at night and is used during peak load hours. Reduced demand charges paid by these customers to the utility could be used to recover their investments in battery systems. The table below highlights breakeven all-in installed costs of battery storage for such applications in some of the key markets around the US.

Battery storage has other benefits for utilities. They can be a cost-effective way of absorbing irregular demand surges. Known as “peak shaving” battery storage allows network operators to spend less or avoid costs on new generation and conventional network reinforcement. Moody’s also expects that the use of batteries will reduce the need for some investment in transmission and distribution infrastructure, such as the transformers and cables that bring in generation from power plants located far away to meet peak loads. Many regulators expect that the reduction in these expenses, and other benefits such as lower on-peak power prices due to peak shaving, will result in overall cost savings to the system. An example is Consolidated Edison of New York’s (A2 Negative) Brooklyn-Queens project that used a combination of storage, rooftop solar and energy efficiency to reduce grid capex by 1 billion dollars.

Moody’s anticipates that the scale of future energy storage installations will partly depend on how aggressively individual governments decarbonizes electricity supplies, and on how rapidly battery costs fall. A more ambitious decarbonization target will require higher battery capacity to counterbalance more intermittent wind and solar energy. On the other hand, a less ambitious target involving more flexible gas-fired generation will require fewer batteries. Savings are maximized if batteries are deployed early in the development of a low-carbon grid rather than being retrofitted onto a previously existing system.

Storage

Utilities

Transmission and Distribution

Energy Efficiency