As Asia gears up for a shift to renewable energy, energy storage has come to the fore. But the transition to cleaner power can be a bumpy ride. To navigate the uncertain landscape, countries have to monitor trends in technology, costs and electricity markets closely. By Ganesh Padmanabhan, head of project finance, Jern Siew, executive director, project finance Australia, and Suvro Sarkar, senior vice-president, group research energy sector, DBS Bank.
The accelerated shift from thermal power such as coal-fired and gas-fired plants to renewable sources such as wind and solar power systems has also hastened the expected challenge: the need to address their intermittency.
Solar farms typically have a plant load factor of only about 16% to 18% while wind farms have a plant load factor of 35% to 40%. Energy output is also dependent on the time of day and seasonal patterns. These result in demand-supply mismatches and the curtailment of renewable energy during low-demand periods.
The quest for a stable renewable energy supply to the power systems – whether or not there is sunshine or wind – is thus pushing countries to seek more resilient and affordable solutions.
Energy storage is one enabler in driving global energy transition, by ensuring round-the-clock (RTC) power regardless of weather conditions. Despite its game-changing potential, however, complexities abound in terms of the technology used for storage, the cost of storage and policy support, and the revenue model trends in different electricity markets.
Demand-side flexibility
Trends in digitisation have paved the way for the use of more renewable sources. While the supply from wind and solar energy is inflexible or intermittent, demand can be calibrated accordingly, using digital solutions to encourage and discourage moments of energy consumption.
Through pricing incentives and smart metering, customers are encouraged to shift their demand to times when electricity is more plentiful, or demand is lower. This mitigates the impact of less predictable generation, which will progressively dominate the grids. Energy efficiency and demand flexibility have ensured grids remain stable in many European countries such as Germany, where renewables account for more than 50% of electricity generation, without requiring a huge build-out of energy storage.
The digitisation of energy systems could be accompanied by increased decentralisation. Instead of a nationwide network, there would be more microgrids where generators interacted directly with consumers. Such decentralisation could reduce the scale and risks of energy projects, making them more bankable and attracting more financiers.
Supply-side innovations
While flexible demand has allowed for more intermittent power sources to be integrated, energy storage remains a primary solution for a temporal shift of intermittent generation and achieving dispatchable renewable energy as a source.
There are various technologies supporting this. Energy storage through batteries and pumped storage is currently commercialised (albeit not economical in all markets) while storage in the form of molecules such as hydrogen is still being developed. All of these are mediums to better utilise solar and wind resources and extend generation hours.
A common technology currently employed is the grid-level battery energy storage system or BESS. China is leading in this area, with its gross energy storage capacity addition reaching 22GW in 2023. This makes up 36% of the world’s total additions, according to BloombergNEF (BNEF). India has also launched ambitious targets for the development of battery storage, aiming for 34GW by 2030 to power the electric vehicle sector in particular.
Both China and India have now reached critical inflexion points in the deployment of grid-level energy storage options, as the proportion of generation from renewables has reached about 15% of total electricity generation, prompting policy calls for higher investments in storage to ensure grid stability. Emerging economies in Asia will have less demand-side flexibility and supply-side options will be more critical.
For developed economies, such as Australia, that are undergoing energy transition, the pathway to Net Zero 2050 is met with increasing demand from electrification of transport, industry and households. The Australian Energy Market Operator predicts the country’s electricity demand to double from current levels in the next decade. To meet this increase in demand, the supply of new renewable energy developments has to be supported by energy storage capacity, including BESS and pumped hydro, with a target of 50GW of new storage needed to achieve net-zero goals.
The market is responding. For Australia’s National Electricity Market, where renewable energy can meet up to 72% of generation demand, 2023 saw a record 3.7GW of construction commenced for big battery projects across the country,
This notable uptick in the development and deployment of BESS is driven by market price fluctuations during intra-day peak demand periods and the imperative for frequency control. In this evolving landscape, BESS emerges as a pivotal component within the renewable technology portfolio, crucial for maintaining equilibrium between supply and demand. As Australia strides towards achieving its ambitious 82% renewable energy target by 2030, BESS plays a vital role in addressing the nation's energy balancing requirements.
The decreasing costs of battery storage technology – down 75% from a decade ago – have given such goals a boost. The technology also provides the most scalable type of grid-scale storage and can be installed anywhere, as opposed to pumped hydro systems (PHS), which require certain favourable geographical terrain and face headwinds in securing social licences in certain jurisdictions.
With the proliferation of electric vehicles, the manufacturing costs of batteries could decrease further with scale. Still, questions linger over the ecological impact of minerals such as nickel and cobalt that are used to produce batteries. This means supply chains have to be rigorously examined.
Pumped hydro systems, where water is pumped into a reservoir and then released to generate electricity when needed, is another widely-used technology due to its low running costs. But there are similar environmental concerns due to the potentially disruptive nature of building dams.
At present, the capital costs of battery storage systems are still on the higher side. They will need to come down in the next five to 10 years to make storage a more feasible solution with proper revenue streams available to developers.
Lastly, a word on hydrogen. While it is touted to cover up to a third of backup power for periods without renewable energy, which is the augmented supply, the primary use case will likely be to substitute grey hydrogen. Each has its pros and cons. In the long term, hydrogen could be vital in supporting the demand side flexibility and consequently integration of variable renewables in the electricity system. Nevertheless, huge obstacles remain in the storage and transportation of hydrogen.
Co-location or standalone storage
Battery energy systems may either be standalone or paired, which means being co-located with renewable generation sources. These are also known as round-the-clock (RTC) renewable projects – which may offer a more cost-effective solution for developers, given the economies of scale in the construction phase. Thus, RTC projects are increasingly gaining popularity, from the US to India and Australia.
Costs aside, revenue streams are a priority for stakeholders. Looking at individual energy markets to determine the most financially feasible revenue model is one way to maximise earnings.
The trends in storage and business models in Asia-Pacific emanate from how each of these countries is progressing with its capacity additions.
One example would be how Australia’s National Electricity Market trades on a five-minute settlement basis as a merchant market, with the clearing price set by the participant whose bid meets the last MWh of demand for that interval. In such electricity markets, an arbitrage model allows providers to profit by buying low-priced energy from the grid and selling it at higher prices. Arbitrage opportunities arise from intra-day demand peaks and troughs, with demand traditionally highest in the morning and early evenings, and lowest in the middle of the day. This effect is even more pronounced during summer and winter seasonal cycles.
Arbitrage revenue alone may not be enough though. The storage business model needs an environment with a competitive wholesale market, as well as frequency control and ancillary services (FCAS) markets for diverse revenue streams.
In Australia, the increasing non-synchronous generation and retirement of large coal fired power stations have seen a market for such FCAS grid stability services develop for BESS and other firming technologies. BESS fulfils a fast response gap for frequency control in the national grid, and we have observed BESS participants supplement their business models from FCAS services alongside intraday price arbitrage opportunities.
In addition, a rethink of electricity tariff design is also needed to make RTC projects more viable, with incentives such as higher on-peak tariffs, and targeted government funding focused on renewables bundled with storage.
Australia’s storage projects have historically focused on standalone BESS, but in recent years, there has been a rise in projects involving solar and wind coupled with BESS that are expected to be commissioned in the next two years.
As of 2022, BNEF estimates Australia had 1.4GW/ 3.5GWh of cumulative energy storage capacity (excluding pumped hydro), of which 60% is standalone and 40% paired. Such paired solar and BESS (RTC) projects are expected to grow at a compound annual growth rate (CAGR) of 37% by 2025, based on the data available.
However, battery system costs for grid-scale storage in Australia are 30% to 40% higher than in China, and storage build-out costs in Australia are likely to remain elevated relative to other APAC countries given its import dependence on materials, batteries, high labour wages and regulatory requirements. Nevertheless, a well-established merchant market for tariffs and strong incentive and subsidy programmes will continue to support RTC project deployment in Australia.
DBS Bank has supported clients in expanding their strategic footprint in the Australian energy storage sector. Among other BESS projects, DBS was the mandated lead arranger and modelling bank for Vena Energy’s 100MW/150MWh Wandoan South Battery Energy Storage System, the first utility-scale battery to be financed by commercial banks in Australia. Now completed, Wandoan BESS is capable of powering approximately 57,000 average-sized Australian households annually.
India is another market that is increasingly seeing a rise in new age renewable energy tenders, including RTC projects featuring energy storage and renewables and even conventional power sources such as thermal power bundled in. The latest regulatory directives put in place a 2030 target of 43% renewable power and 4% energy storage obligation for purchases by local power distribution companies.
To make projects more attractive, viability gap funding for 4GWh of grid-scale batteries has been proposed in India, apart from the Production Linked Incentive (PLI) Scheme to incentivise the local battery value chain.
Pumped hydro seems to be generating more interest recently too. Recent government guidelines aim to ease implementation challenges, speed up environmental clearances, increase the pool of available sites and improve the financial feasibility of PHS projects. For example, this is done by providing budgetary support for enabling infrastructure such as roads and transmission lines. This has resulted in a reasonably large pipeline of 53GW of PHS projects under various stages of discussion in India, compared with the current capacity of less than 5GW.
DBS has helped stakeholders land on a model that works in India, which is not known for its deep merchant market. The country's first RTC project by green energy producer ReNew incorporates solar and wind sites, allowing wind power to operate when solar energy is not available. The mix allowed the company to bid the lowest tariff while selling almost 20% of power on the open market.
To effectively address the intermittency challenge, while energy storage solutions such as BESS and RTC projects are key to addressing intermittency and ensuring a stable supply of renewable energy, there have to be more diverse revenue streams for storage providers. The ability to generate higher returns will be pivotal in driving the direction of energy storage in the future.
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