A match made in heaven

KEEPING COOL WITH

Hi there,

I’ll write a couple power sector pieces this month. While not my chief focus this year, I think I can set out some opinions and perspectives for the rest of the year (and the rest of the decade) here and not need to edit them much afterwards. Today’s newsletter is all about why solar + storage will dominate this decade.

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Last year, I discussed how one of the media's primary functions is advancing 'common knowledge,' i.e., what everyone knows everyone knows. In the past three years, climate media has exploded alongside exponential trends in climate tech in general. While many climate publications help advance climate tech as 'common knowledge,' a handful of publications stand out to me at this point. 

One example is Latitude Media. Their team delivers B2B news, research, and events on the next generation of climate deals, markets, and technologies.

Come for quality journalism and outstanding podcasts (e.g., Catalyst with Shayle Kann) and stay for the zany side of climate tech (see this piece by Maeve Allsup on ~space~ solar).

DEEP DIVE

Peanut butter and jelly. Shaq and Kobe. Milk and cookies. Caffeine and nicotine (er, sorry Mom!). Whatever your favorite couple, your favorite match made in heaven, get ready to add solar and (energy) storage to your list. Together, the two will absolutely dominate this decade.

Solar panels and batteries might not seem like the sexiest technologies to you. They’re a bit ubiquitous at this point. You’ve long carried a lithium-ion battery around in your pocket. And solar panels on rooftops aren’t exactly new anymore. Perhaps the prospect of nuclear fusion technology excites you more at this point. Or carbon removal. Or something else. 

That said, solar and batteries could be reframed and rebranded as pretty futuristic technology, when you really think about it. Solar is remote nuclear fusion energy, after all. It harnesses energy produced by the fusion reactions happening on the Sun all the time. From almost 100 million miles away. And batteries offer a way to move that energy through time, like a time machine. Pretty neat! Solar plus storage could be described as ultra-long-distance remote fission transported through time.

A match made in heaven

Why do solar and batteries (or other forms of energy storage) go so well together? For one, there's the day and night cycle, which is well documented. Batteries help make the highest and best use of solar by 'moving' it to when it's most valuable. There's so much solar in California, for instance, that there's often zero demand for it around midday. Batteries can move that energy to other times of day.

For many of you, that may be table-stakes stuff. Batteries also complement renewables well for a whole host of other reasons. For one, batteries can act as 'grid-forming' assets. There's a whole lot that goes into grids beyond having enough electricity at any given time. Grid-forming assets are resources that can help control voltage and frequency of grids. Not all power generation sources do this. Wind and solar can't. They adjust their output to match its voltage and frequency (‘grid-following’). Batteries, however, can help establish and maintain the grid's voltage and frequency. A meme from NERC offers insight into why that matters:

This is actually already a significant component of how battery operators make money. Many battery operators make most of their money providing 'ancillary services,' which includes things like voltage support, not just by taking advantage of price arbitrage throughout the day. Mind you, this isn't playing out flawlessly. Some battery operators are coming under scrutiny for overselling (and then not delivering on) their capacity to provide ancillary services. There's tension between operators' desire to maintain flexibility to make money on energy arbitrage and providing ancillary services. 

Batteries can also help replace other assets that serve as backup generation capacity. We don't talk about it a ton, but the amount of standby diesel generator capacity in the U.S. is staggering. In the Bay Area and South Coast regions of California alone, there is more than 12 GW of backup generator capacity. California's grid, on the whole, has about 80 GW of generation capacity. That means that (predominantly) diesel generators in two parts of the state alone could theoretically power 15% of the state's grid. That's bonkers! 

Solar + storage will ideally chip off some of that market, as they also reduce gas and coal use.

The BESS boom

The solar growth and technological improvement story is well-documented, so I won’t spend too much time on it here. The price of producing electricity via solar has fallen by about 15,000 times since 1957, when the first commercial solar panel was produced at Bell Labs. As per a good book I recently devoured, How Solar Energy Became Cheap:

The book itself is a few years old, and solar has continued its relentless climb and in recent years. I can let another chart from Nat Bullard’s decarbonization deck do the ‘writing’ here: 

Still, solar (or renewables) alone won’t bend the curve of carbon dioxide emissions globally as drastically as needed. That’s where the batteries come in. Batteries are on their own relentless improvement path and are now getting deployed at rates reminiscent of when solar started taking off a decade ago.

Less than ten years ago, there was basically zero battery energy storage on U.S. grids. In 2015, natural gas leaks from a gas storage facility in Aliso Canyon, California, forced Southern California Edison to close the facility temporarily. Reduced natural gas availability threatened to strain California’s grid. The state’s Public Utility Commission compelled Southern California Edison to install 20 MW (80 MWh) of lithium-ion battery storage capacity to firm up the grid. Tesla and several other manufacturers supplied the systems across a patchwork of projects, all of which were built in about six months (i.e., incredibly quickly).

Almost a decade on, a mad rush to build battery energy storage is in full swing. Like growth in solar, battery energy storage deployment in the U.S. is taking off exponentially. This trend is poised to continue; 2024 will be another good year for battery energy storage deployment. 

2023 U.S. battery storage capacity additions were more than twice as high as 2022 additions. Estimates for 2024 suggest it will be another good year for batteries. In terms of total U.S. utility-scale battery energy storage additions, forecasts range between ~75% and 90% growth year-over-year. And that’s on top of a rapidly growing denominator!

Why batteries are going to win

Similar to advances in solar technology, battery energy storage technologies have improved rapidly. Costs have come down. Prices for lithium-ion battery packs (the primary chemistry used for utility-scale battery energy storage) have decreased nearly six-fold over the past decade (see below) and have fallen 98% over the past three decades.

Global lithium prices also fell 75% in 2023 from 2022 highs. That's a helpful tailwind heading into this year: Sourcing raw materials for new battery energy storage systems at manageable prices is as, if not more feasible, in 2024 than in 2023 or 2022.

We can also look at data from publicly traded battery manufacturers to corroborate the fact that battery energy storage is booming. Take Tesla. Tesla isn't just a car company. Their battery packs are quite popular for energy storage, whether at the grid level or in people's homes. 

Tesla’s battery business for non-transport applications is booming, growing more quickly than its EV business. Tesla’s 2023 energy storage sales grew more than twofold from 2022, making the company more than $6B in revenue. In total, Tesla sold nearly 15 GWh of energy storage. With global deployments close to 100 GWh in 2023, Tesla enjoys 15% market share of global battery energy storage system deployments, at least at utility scales.

It’s also worth noting that these battery energy storage systems don’t include cobalt, the supply chain of which is mired in many, deep, structural and ethical problems. Tesla’s lithium iron phosphate megapacks don’t contain cobalt. Whether in cars or for the power sector, the transition off cobalt is happening. If you want to plunge into philosophical debates about whether that’s good, read the article linked above. Artisanal congolese cobalt mining is not fun stuff. But folks out there gotta eat, too. And many of them make their money mining.

Batteries aren’t just being deployed at utility-scale, either. Tesla makes battery energy storage systems for homes, too. And several early-stage companies, whether announced or not announced yet, will go after residential energy storage in a big way in 2024. More on that soon. In the same way solar capacity on grids benefits from batteries, rooftop solar owners will benefit from cheaper batteries that are easier to install and that are better managed. 

Finally, another continued tailwind for batteries is how challenging building more transmission continues to be in the U.S. More transmission is needed, too. But batteries are proving much easier to deploy. Building new transmission lines has become a meme because of how long it takes to secure necessary environmental, siting, right-of-way, and other approvals, as well as to marshal all the stakeholders needed for those processes. Battery energy storage is 'winning' in part because the alternative to moving energy through time – moving it through space via transmission lines – hasn't been winning. Without sufficient transmission, other assets, like batteries, are needed to valorize renewable energy's potential more fully. 

One of the biggest energy news stories so far this year was Pattern Energy's recent announcement that it raised $11B in tax equity and loan financing to build a 550-mile transmission line between New Mexico and Arizona and to develop 3.5 GW of new wind projects. This represents one of the largest clean energy infrastructure projects in U.S. history. Construction is already underway. That said, navigating permitting and approvals for the project took 17 years lol.

Suffice it to say that batteries have passed an inflection point, both in technological improvements and actual deployments. They’re following in solar’s footsteps. It’s hard to see their impact at scale right now, because, well, they’re just now starting to scale seriously. In a few years it’ll become clear how much additional gas and coal use on grids solar + storage is displacing, and what other improvements, be they in EV charging, the built environment, or other applications, batteries facilitate. 

What else needs to happen

It is well and good that battery energy storage additions are scaling in the U.S. The E.U. will follow suit. Where solar + storage is most needed is also in countries like, say, Indonesia. Indonesia has a massive solar opportunity based purely on how much sun it gets. And Indonesia is a rapidly growing country, from a population, GDP (and emissions) perspective.

60%+ of Indonesia’s electricity today still comes from coal. In many ways, the next most important story to me beyond solar + storage taking off in Western markets is whether and how learnings spread to Asia. I’m no expert on Indonesian energy and grid dynamics. But as much as phasing out coal in the U.S. is a win, it won’t matter that much globally if the same model doesn’t make a dent in coal demand in Indonesia, China, India, and other Asian countries.

To that end, there’s no shortage of challenges with battery energy storage the U.S. can help the rest of the world figure out. As notes Emma Konet, CTO of Tierra Climate:

Without diving too deep into the nitty gritty here, it’s noteworthy that, again, as we touched on earlier, many battery energy storage operators rely on providing grid services to make money right now. As opposed to what seems like their bread and butter should be, namely storing cheap energy and selling it at a later point in time.

All of this may evolve considerably as the market matures, and may evolve based on specific regulations in specific markets. Still, in 2024, there are a lot of open questions about how battery operators will make money going forward. There’s a risk that operators could sour on new deployments if the path to consistent and significant revenue doesn’t clear up soon (or if IRA incentives are revoked by a future, less climate-friendly administration…)

Mind you, all of this also impacts whether batteries actually help reduce emissions significantly. As long as batteries predominantly sell ancillary services, that is helpful to the grid, and can enable more renewable energy additions. But it’s not as impactful from a climate perspective as storing excess renewable energy to offset gas or coal use at a later point in time.

The net-net

Solar + storage is one of the biggest power sector stories out to 2030 and beyond. Nor does storage have to pair with solar, per se. It’s just that solar’s what’s ‘working’ right now on the generation front. I’m always agnostic with respect to what low-carbon generation sources get built, provided they do. Batteries can pair well with nuclear energy, too. If holistic stakeholder appetite improves for building more reactors again, great. Batteries are part of a ‘match made in heaven’ in that scenario, too.

Still, I’m putting a stake in the ground here to say I’m quite bullish on solar + storage. 2024 will be another great year for solar. And increasingly it’ll be the year for on-grid and home battery energy storage. The same will hold in 2025. And 2026. And 2027. And…

What’s your favorite match made in heaven? Hopefully you & your valentine next week <3.

Have a gr8 balance of your week,

– Nick