Beyond Declining Battery Prices: 6 Ways to Evaluate Energy Storage in 2021
Balance of systems, software, supply chain constraints, and reliability and performance guarantees all weigh on total costs. The energy storage market in the United States is booming, with 476 megawatts of new projects installed in the third quarter of 2020 alone, up 240 percent over the second quarter, according to industry analysts at Wood Mackenzie. 2021 is expected to be another record-breaking year for storage, but with technological innovation accelerating across the market, renewable energy asset owners need to carefully select safe and reliable systems to protect their storage investments. As the market accelerates, these are a few of the essential questions asset owners should be asking. 1. Evaluate pricing beyond the cell When analysts speak about declines in storage pricing, they are referring to battery pricing, which continues to decline every year. Bloomberg New Energy Finance’s latest report states that current lithium-ion pricing stands at about $137 per kilowatt-hour and will drop as low as $100 per kWh by 2023. However, purchasers of energy storage systems may see substantially higher prices for their projects, depending on a range of factors. For example, the lowest pricing for lithium-ion batteries is generally available for either a major supply contract or for very large-scale deployments of 500 megawatt-hours and above. Since most projects today are not that large, that $137 per kWh figure will be closer to $150 to $170 per kWh, and perhaps as high as $200 to $210 per kWh on the battery-pack level, depending on the size of the project. Beyond battery pricing, the total cost of a fully integrated battery energy storage system will also include the thermal management system, battery management systems, and power conversion system, as well as fire prevention and suppression technology, SCADA and metering. When considering all-in pricing, many storage companies are building their systems in standardized, modular containers that are quicker and easier to install and connect to the grid. While this kind of system may simplify the evaluation process, these business models may include ancillary services, such as operations and maintenance contracts, performance guarantees and liquidated damages. In short, based on price alone, conducting an apples-to-apples evaluation of storage systems from different suppliers is challenging, if not impossible. 2. Evaluate the chemistry and safety Procurement and pricing evaluation also need to consider the variable of battery chemistry. In 2021, the two leading choices are lithium nickel manganese cobalt (NMC) and lithium ferro (iron) phosphate (LFP). NMC has a higher energy density — energy stored in proportion to weight — which also increases the risk for overheating and thermal runaway when overheating, which can lead to fire quickly spreading from one battery cell to another. NMC is also more expensive and at present only available from a limited number of suppliers. Based on its chemistry alone, readily available LFP is expected to replace NMC in the next few years as the less expensive and safer of the two battery chemistries. LFP is safer because it has a lower energy density and discharges at a steady, sustained rate. In general, LFP chemistries will also last longer than NMC, even at higher rates of charge and discharge, reducing the frequency for replacement and augmentation during the lifetime of a project. However, because LFP cells have lower energy density than NMC cells, they require more space to store the same amount of energy. Nevertheless, NMC storage is a mature technology and will remain competitive and effective for all applications. The biggest challenge here is to reduce the risk of thermal runaway and safety failures in integrated systems. 3. Assess supply chain and availability Another major consideration is assessing the battery system’s supply chain in the context of the commissioning date. Global demand for battery products is increasing with electric vehicle adoption, rechargeable consumer electronics, and utility-scale solar and wind projects coupled with stationary energy storage. Consequently, once the battery chemistry is chosen, other considerations include system capacity, timing and the risk of supply-chain disruptions. For example, a 2-gigawatt-hour project will likely have different supply-chain challenges and much longer lead times — two or three years — than will a 5 MW/20 MWh project that can come online within 12 months. Longer timelines can raise concerns about core metal shortages, especially for lithium, nickel and cobalt, that could delay the production of storage systems. It is critical to monitor such supply-chain shortages and assess a manufacturer’s suppliers, supplier commodities and commodity pricing, all of which may affect the cost of purchasing storage. 4. Evaluate bankability and quality As with pricing, evaluating energy storage quality requires a systemwide approach. Although battery quality may be the top concern, the quality of the enclosure, thermal management systems and the power conversion system (PCS), or inverter, are equally important. Just as with solar projects, when the PCS fails, so does the storage system. Even if due diligence has led to the selection of the highest-quality battery with the best energy management software, the PCS can cause a complete shutdown of revenue for days or even longer. In terms of assessing battery cell quality, with so many new storage companies entering the market, it is increasingly important to commission a manufacturer bankability report that includes both financial and technical due diligence. Second, asset owners should conduct a thorough on-site factory audit that reviews the entire manufacturing process. The evaluation includes a factory acceptance test, which verifies that the cells and systems are being built to design specifications and are safe to operate. Finally, it is critical to perform in-line production monitoring and final product audits to verify the storage system’s individual components. 5. Evaluate battery management software A battery system’s software is another increasingly sophisticated component of an installation that needs evaluation for various “value-stacking” applications. Utilities and developers are now using storage systems for peak-demand shaving, frequency regulation and resiliency, and the storage company or its vendors will manage those applications with software. If the software cannot properly and optimally manage charging and discharging at the right amount and the right time, then the chosen storage system may thin the value stack and reduce project profitability. Additionally, rudimentary battery management software can decrease cell longevity, causing premature battery augmentation or replacement outside of warranties and performance guarantees. In worst-case scenarios, it can fail to detect and prevent a thermal runaway event, thus putting the entire energy storage system at risk. 6. Evaluate performance guarantees Finally, asset owners should independently review any contracted performance guarantee, as well as the warranty. While a standard warranty covers parts and labor, the performance guarantee ensures that the battery system will produce the required amount of power and energy or be available for a certain amount of time for the life of the project. Performance guarantees are evolving with storage technology and markets, but the trend is toward flexible and throughput guarantees that address the owner’s current and potential future value-stacking applications. Independent energy storage supply management and quality control Energy storage technologies have been steadily evolving, but as we head into a period of accelerated growth, innovation and deployment, these considerations should not be overlooked when developing your energy storage strategy and purchasing an energy storage system in 2021. As new manufacturers and technologies enter the market, managing the supply chain and ensuring quality and safety become more complex and critical tasks. Energy storage will play a critical role in fostering a global transition to a clean energy economy, but at the end of the day, there is no shortcut or replacement for quality.