Go Big or Go Home: The UK’s Chance to Win at Energy-Storage Innovation

Technology Policy Science & Innovation

Go Big or Go Home: The UK’s Chance to Win at Energy-Storage Innovation

Paper
Posted on: 25th August 2022
By Multiple Authors
Olamide Oguntoye
Policy Lead, Science & Innovation Unit
Ariana Kiran Singh
Senior Operations Analyst

    Executive Summary

    Executive Summary

    We’re still in the early days of energy-storage innovation, but the established global tech superpowers are already pulling ahead. China controls three-quarters of the global production of lithium-ion (Li-ion) batteries, the energy-storage technology that powers most electric vehicles and everyday devices, while the United States comes in second.

    But although large energy storage (LES) – which is a segment of the energy-storage market for powering communities and industries for several hours, days and months – is an increasingly important part of the power-grid landscape, a clear innovation leader is yet to emerge. Several promising LES technologies, particularly the long-duration types, are still in the early days of development. But as the global supply of renewable energy grows, the need to accelerate LES innovation and deploy proven solutions at scale increases.

    For the UK, the question is whether it steps up and become a global LES innovation leader, or whether the country remains fixated on meeting basic energy needs with imported technology?

    If it is to be the former, the UK must do several things.

    First and foremost, it must get better at delivering demonstration support programmes, complete with an incentive for the nascent technologies. This will have a significant impact if the government mitigates other investment risks and implements necessary market reforms. Second, the UK must grow its annual investment in LES innovation by at least a factor of five before 2030 to secure a global leadership spot.

    Beyond that, it is also critical to prioritise high technology-performance standards, engage collaboratively with the market, diversify the demonstration portfolio and simplify the funding framework.

    If the government gets this right and helps scale LES technologies at speed, there is a huge opportunity. The world’s need for LES will grow as net-zero windows tighten.

    A Long Wait for Large Energy Storage

    A Long Wait for Large Energy Storage

    LES is a lynchpin of modern energy systems. The wind blows and the sun shines, but not all the time, which means that as the world adopts more renewables, intermittent supply becomes an ever-growing problem. Coupled with intermittence are issues like the large fluctuations in energy-distribution patterns that make energy grids less stable, posing a major infrastructure and economic risk.

    To address these energy-system issues means getting better at balancing energy supply and demand, which is where LES or utility-scale storage comes in.

    In the UK, where a growing supply of renewable energy causes a grid saturation up to 30 to 40 per cent of the time, some estimates suggest that must achieve a tenfold increase in large energy storage capacity to keep the grids stable.

    Figure 1 – Services provided by large energy storage

    Source: IRENA

     

    LESs are very large batteries that can improve energy-system flexibility, providing energy for hours, days and months when primary supply is limited. They can help with variations in energy demand, making the grid more responsive and reducing the need to build backup power plants. The technologies can support system stability, and capacity shifting and optimisation, vital for industries with remote or unreliable grids. They can also improve flexibility in off-grid systems with a high dependence on fossil fuels (Figure 1).

    Compared with alternatives like building backup fossil-fuel power plants, or expanding transmission networks, LESs, depending on the technology, may have potential advantages including the low cost of marginal capacity, shorter lead times and better scalability.

    But despite their promise, several LES technologies have struggled to scale. A study shows that by 2040, large storage capacity must increase by about 400 times, while costs need to fall by 60 per cent to reach net-zero targets. The IEA expects energy-storage capacity to need to grow by a factor of ten by 2025 and by over 30 times by 2030 to remain on track for net-zero targets (Figure 2). We are not close to these numbers even though the low-carbon window is getting tighter.

    Figure 2 – Installed storage capacity relative to a "net-zero by 2050" scenario (excludes pumped hydropower storage)

    Source: IEA

    Note: NZE = Net-zero emissions by 2050 scenario.

    Behind-the-meter refers to customer-sited stationary storage systems that are connected to the distribution system on the energy user’s side of the meter.

    For the UK, which has one of the most advanced markets for grid flexibility services, the global LES gap poses a range of questions: should the country seize the opportunity and become a global LES innovation leader, or should it stay fixated on meeting basic energy needs with imported technology? And if it must step up, then what's holding back LES innovation and what should UK policymakers do differently?

    The Promise of Next-Gen Solutions

    The Promise of Next-Gen Solutions

    Large energy storage is not new. Since the 1800s, engineers have stored energy by pumping water for storage in times of excess energy supply and then releasing it when supply is short. Today, pumped-storage hydropower (PSH) remains the most widely deployed LES solution globally, accounting for 93 per cent of all utility-scale energy storage in the US.

    But PSH is heavily constrained by geography, and it suffers from land-use and environmental issues. Most of the PSH existing today is built for diurnal cycling (every six to 24 hours) and not suitable for longer durations. Aside from those facilities with very large reservoirs, PSH can have capacity costs of hundreds of dollars per hour, making it economically prohibitive for various storage applications.

    Lithium-ion batteries are an increasingly promising alternative. With their widespread use in electronic devices and electric vehicles (EV), Li-ion is a mature storage technology gradually making its way into the large storage segment. Utility-scale storage plants, from Tesla’s 300-megawatt Victorian Big Battery in Australia to California’s Moss Landing megawatt energy plant, which is set to become the world's largest Li-ion storage facility, are already making an impact.

    But Li-ion batteries generate concerns about how they might fit into the wider LES market. First, from a technical perspective, it is unclear how well Li-ion can perform for long durations – often an LES requirement. Second, on an economic basis, there is a range of technologies that are potentially more cost effective if deployed at the right scale. Third, from the supply-chain point of view, Li-ion comes with significant risks from its use of cobalt, which has been labelled a "conflict metal", resulting in the potential to cause geopolitical tensions. Waste is another issue.

    Li-ion clearly has a place in large energy storage, but there is no indication that it alone can address all the needs of the LES market. Historically, LES was not a primary target for the technology. On the other hand, the LES landscape is rich with alternatives ranging from electromechanical to thermodynamic technologies. Some technologies not only supply energy in the form of electric power but also as heat or hydrogen, which means they can be versatile and, as such, can form the basis of a strong business case.

    Figure 3 – LES-technology cost projections (weighted power cost versus round-trip efficiency)

    Source: Nature

    Alternative storage technologies are worth developing further, particularly those that promise to outperform Li-ion in specific use cases, for instance where power is required for an especially long time. Flow batteries, thermal storage and power-to-X solutions are some of the promising alternatives.

    Liquid-metal batteries are one example. As an alternative electrochemical battery, liquid metal combines the ability to separate storage capacity (the amount of energy the battery can hold) from power (the rate at which a battery can provide energy) offering high scalability at a low marginal cost. US start-up and pioneer in liquid-metal batteries, Ambri, signed a deal to build a 250-megawatt demonstration plant using liquid-metal batteries to power a data centre in Nevada. In 2021 it netted roughly $144 million of new funding from Bill Gates and other investors.

    Pumped thermal-energy storage using reciprocating pumps is another example. It is a viable option for large-scale and long-duration storage. Thermal storage is attractive because of its potential to provide both heat and electricity. US start-up Malta, a spinoff from Google X, has forged partnerships with Siemens, raising roughly $50 million in its 2021 series-B funding round.

    Successful Demonstrations: The Chicken-and-Egg Problem

    Successful Demonstrations: The Chicken-and-Egg Problem

    The question about what is holding back alternative solutions continues to be a policy challenge, given the growing need for LES and the limitations of traditional technologies.

    Several barriers have emerged, but one with an immediate implication for innovation policy is the limited number of successful demonstrations. In a classic case of chicken and egg, a dearth of successful demonstrations makes investors hold back funds, which in turn limits the opportunity to develop pilots. Next-gen technologies have proven technically viable and are now ready for the next stage of the innovation cycle. However, without a strong track record of active installations, the likelihood of wider deployment is limited.

    Figure 4 – Maturity levels for selected LES technologies

    Source: TBI analysis

     

    The challenge presented by a paucity of successful demonstration connects to broader issues, including weak market signals in the LES segment, uncertain revenues and high upfront capital cost. Development costs can be exceptionally high and combining these with renewables can be more expensive compared with natural-gas plants, which are often the default solution for backup power.

    Intertwined with these issues is the fact that investors see a bigger immediate opportunity for energy storage in EVs, meaning LES is considered a lesser priority. The EV-battery market is not only several times larger than LES but could also provide an entry point to the latter in the future, which is why more innovation capital flows towards EVs. Companies like Tesla are building a gigafactory to take the scale of EV-battery production to the next level, while Indian battery-recycling company Attero is planning a billion-dollar expansion.

    Crossing the Chasm with Demonstration Support Programmes

    Crossing the Chasm with Demonstration Support Programmes

    Innovation policy has an essential role in driving the new generation of storage technologies into the mainstream. For the UK – and others looking to scale such technologies – developing a comprehensive support programme is critical. Such a programme will need to include proposals for facilitating the deployment of utility-scale grid-connected plants, the provision of R&D grants for design optimisation, as well as cost reductions and improved performance reliability.

    Some countries have already made a good start. The US Department of Energy (DOE) has a support programme targeted at LES with more than ten hours' capacity, with the aim of reducing LES costs by 90 per cent within a decade. The EU, through its innovation fund, also provides grants, blended finance, thematic growth and credit-enhancement instruments to support the development of large energy storage projects.

    Big Ambitions in the United States

    The US made headlines in 2021 for tripling its utility-scale energy-storage capacity. Although the majority of the additional capacity comprised Li-ion battery systems able to store between two and four hours of energy, the rapid expansion shows the country’s growing appetite to beef up its position in LES.

    LES is a key part of the US's R&D programmes for energy. In December 2020, after congress passed a spending bill and endorsed the need to further accelerate innovation in the energy sector, energy innovation received a $35 billion boost. The US’s Better Energy Storage Technology (BEST) Act, which provided $1 billion to support grid-scale energy-storage innovation, underscores the importance of R&D in LES.

    In July 2021, the DOE launched the "Long Duration Storage Energy Earshot", which aims to reduce the cost of grid-scale energy storage by 90 per cent by 2031. The department recently launched a request for information on structuring its $505 million budget for long-duration energy storage, with the aim of delivering affordable, reliable and clean electricity.

    The growing support for LES in the US is attracting further investor interest. More battery-storage facilities are now being built close to generating facilities, with about 75 per cent of power storage added in 2021, mostly co-located near solar farms. In the coming years, developers are looking to add 25 gigawatts of utility-scale non-hydroelectric energy storage, which is more than double the total capacity at the end of 2021.

    China Doubling Down on Li-ion Success

    China’s growing dominance in Li-ion batteries has made it displace others like Korea and Japan, who were once the world-leading battery providers. Today China controls more than three-quarters of the global market for Li-ion batteries while having six-of-the-ten biggest EV-battery producers. It ramped up battery production for storage by over 140 per cent last year.

    In the LES segment, China is leading the pack in terms of projects and investment. Since 2015, China has added more utility storage capacity than most other countries, and now has an ambition to rapidly expand to over 30 gigawatts (excluding pumped hydro) by 2025. To put this into perspective, the expansion would mean a tenfold increase from 2020 figures.

    While Li-ion technology underpins most of China’s non-hydro large energy storage projects, innovation and the development of alternative technologies remain important. China has several large vanadium redox flow battery (VRFB) projects in development. A compressed-energy storage system was recently connected to the gird in Jiangsu, one of China’s most densely populated provinces, while two compressed-air storage startups raised $50 million and $48 million respectively in funding rounds. At the start of 2022, a partnership between Shanghai Power Equipment Research Institute (SPERI) and Sumitomo SHI FW began exploring the potential of liquid-air energy-storage (LAES) technology.

    China’s National Development and Reform Commission (NDRC) and the National Energy Administration set out a five-year plan for energy storage (2021–2025), outlining the ambition to convert decommissioned thermal-power units to energy-storage facilities while aiming to cut the cost of electrochemical energy-storage systems by 30 per cent.

    Given its growing renewable-energy capacity, its solid grip on lithium-battery production and its formidable position in the global supply chain for energy storage, China is poised to lead the world in delivering new LES solutions at scale.

    Beyond facilitating access to project capital, a well-designed support programme will include mechanisms to incentivise investment and to distribute risk efficiently between market players. Mining companies, data centres and industrial customers willing to cover the cost premium are crucial to building the market and driving down the technology costs and should therefore be considered in policy design.

    Managing Risks

    Managing Risks

    A policy intervention to support specific technologies risks picking winners and introducing market distortions. For example, LES technologies mainstreamed through government intervention could find their way into the short-duration flexibility market, where they will compete with small-scale batteries and flexible-demand solutions. The LES technologies will likely crowd out assets in the short-term market if there are no additional policy interventions. In the capital-intensive world of grid infrastructure, giving a competitive advantage to one class of technologies could render assets worth billions of dollars underutilised or stranded.

    There are also broader risks of combining demonstration support with other government interventions that can multiply complexity, reducing the overall effectiveness of interventions. Energy markets are often highly regulated and amending the complex web of regulations to promote new technologies can have significant consequences. Yet technologies favoured by their access to additional government support might also be less valuable than expected.

    Successful demonstration support programmes would require policymakers to take the following proactive steps.

    • Prioritise: Defining high-potential projects is vital from both the risk-mitigation and the cost-effectiveness perspective. Developing the technical parameters for large energy storage, for example through benchmarking against the energy-storage capacity cost and discharge efficiency of Li-ion is a good starting point. Evaluating decarbonisation potential is another. Some projects may show a potential to further de-risk investments in technologies through innovative business models. Governments must prioritise the options on the grounds of their potential. A tiered support system that reflects differences in technology maturity, capital intensity and potential can improve overall programme effectiveness.
    • Collaborate: LES demonstration projects can be too risky and capital intensive for one market player to undertake independently. Working collaboratively to spread risks efficiently between project partners is vital for success. Public-private partnerships are essential not only to develop projects but also to build knowledge centres and expert communities. The demonstration programme should also include collaborations with upstream and downstream players to optimise manufacturing efficiency through cost-effective sourcing and automated assembly measures. Estimates show that manufacturing and supply-chain improvements can reduce LES capital expenditure by between 15 and 30 per cent.
    • Diversify: It often takes more than one demonstration project to gather enough insights to lower the risks of the next innovation phase. Government support for demonstration projects must include a robust portfolio covering different technologies, geographies and external factors. A complementary intervention for governments is to facilitate LES application in diverse markets, including wholesale, power-purchase agreements, balancing mechanisms, ancillary services and long-term capacity markets. The markets create an opportunity to diversify business models, improving the viability of successive project iterations.
    • Simplify: Maintaining a robust portfolio of demonstration projects means providing access to various funding instruments, including grants, loans, blended finance and credit schemes. It also means managing multiple technologies with different profiles, business models and operating contexts, all of which can complicate the support-dissemination process. Governments must simplify processes to ensure funds are available, accessible and quickly distributed. Standardising as much as possible the process of identifying, validating and selecting projects is critical to guaranteeing programme effectiveness. Simplifying the process of permit issuance to site developers and operators will also help minimise operational bottlenecks.

    Like most other policy interventions, a demonstration support programme is not a silver bullet. There are other underlying issues to address to make large energy storage technologies succeed. Weak market signals and restrictive energy-market regulations are areas that require complementary policy intervention. Policymakers must explore additional options to help drive scale and lower cost, including long-term systems planning and support policies, regulation and market design.

    While demonstration support programmes are an essential policy tool, it is also crucial to design the programmes to allow them to subside as market signals improve.

    There are many lessons to learn from other clean technologies that have seen a remarkable cost reduction in the last decade. Solar and wind, for example, provide a rich experience on insights for developing tendering processes that reward best-performing technologies against determined criteria. Applying the best practices from these other clean-technology areas will take such policy tools for LES technologies far.

    A Leadership Opportunity for the UK

    A Leadership Opportunity for the UK

    The UK lags behind its peers in the race for energy-storage innovation. Records of patents and scientific-research outputs on energy storage show that countries like China and the US are ahead of the curve. The UK's annual RD&D investment in grid storage must grow at least five times by 2030 for the country to attain a spot in the global top three, ahead of Japan and Korea (Figure 5). Within the wider context of global contributions to energy innovation, the UK is not exceptional.

    Figure 5 – Estimated public RD&D spend on grid-scale storage ($m)

    Source: TBI

    But all hope is not lost. The UK still has an opportunity to lead the rest of the world in the large storage segment. It is the country with the world’s largest installed capacity of offshore wind and is becoming an attractive destination for investors looking to fund LES. One report shows that by early 2022 the pipeline of LES projects in the UK had nearly doubled in less than 12 months.

    Programmes like the £68 million fund to accelerate long-duration energy storage have shone the spotlight on a few promising projects. Others like the Energy Entrepreneurs Fund and the Flexibility Innovation Programme have also played a key role.

    But to consolidate its leadership in LES, the UK needs more than a panoply of green-innovation initiatives. Rather, it needs a comprehensive vision for the long-term future of the LES sector. The vision must be clear on the route to market for emerging LES technologies and explicit about how operators will gain optimal access to multiple revenue streams.

    Realising this vision requires taking a proactive approach in supporting demonstration projects as well as redefining the incentive structure of the flexibility market. If the UK takes this path, it can minimise risks and maximise investment in LES innovation. The opportunity is here. Now is the time to seize it.

    Lead Image: Getty Images

    Charts created with Highcharts unless otherwise credited.

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