Why batteries could be the smartest investment to help save the planet
It’s no secret that our way of life is under threat. Climate change is not only causing average global temperatures to soar, but also changing precipitation patterns, creating more droughts and heatwaves, contributing to sea level rises and leading to stronger, more destructive storms.
All of this spells a grave danger for our present society. Threatened by challenges such as drought and rising sea levels, millions will be forced to migrate or face worsening living conditions. The only solution is to decarbonize our economy as quickly as possible.
The main energy generation technologies we can use to do this are wind and solar, which are not only mature and established but also cheaper than anything else we have today. But the intermittency of these energy sources poses a problem for their growth.
Critics point to the fact that they are unreliable because the sun doesn’t always shine, and the wind doesn’t always blow. But for the investors looking to fund the growth of renewables, a more vexing problem is what happens when the sun is shining, and the wind is blowing.
Wind doesn’t just drive one or two turbines, but all the turbines in a given region. And the sun doesn’t just power one or two solar panels, but all the arrays at the same time. If there are only a few wind turbines and solar panels on the electricity system, that’s not a big deal.
But when most of the system’s energy is coming from wind and solar, there is a real danger of oversupply. And if you are trying to sell energy into a market that is swamped with it already, the value of your product goes down.
Going back to basics, the market value of intermittent renewables is mainly affected by three intrinsic properties:
- How closely supply matches day-ahead markets, which is where the majority of electricity trading takes place. Any intra-day mismatch between actual delivery and the forecast supply and demand at day-ahead stage can be very costly at short notice.
- Transmission congestion issues, which can indirectly impact the market price and the value of generation based on its location on the system.
- When energy is produced, taking into account supply and demand unpredictability and storage constraints.
Empirical data [JD1] suggests that the value of intermittent wind generation is around 110% higher than that of constant electricity sources at low penetration levels.
But once the market share of wind tops around 30%, price cannibalization starts to happen, and the value of output falls to between 50% and 80% of that of continuous generation.
The same thing happens with solar once it reaches just 15% penetration, because its generation is concentrated in fewer hours.
As wind and solar penetration has risen in Europe, the average return for renewables production has dropped to the point where it now sometimes goes negative—that is, markets pay customers to take electricity off their hands.
Last October, for example, the European grid data analysis firm EnAppSys revealed that negative day-ahead pricing had affected Europe’s main electricity markets twice as often last year as it did in 2019, and up to four times more than between 2015 and 2018.
This poses a dilemma for investors because investing heavily in solar and wind results in diminishing returns, lessening the incentive to invest more. And that’s exactly the opposite of what investors need when humanity is facing a climate crisis.
According to the International Energy Agency, global investment in renewable energy totaled USD$281 billion in 2020.
But the Organisation for Economic Co-operation and Development estimates that $6.9 trillion a year will be needed up to 2030 to meet the world’s climate and development objectives. Investors need to be encouraged to spend a lot more, not less. Thankfully, though, there is a solution to this problem.
Battery storage can play a key role in shifting demand and generation patterns, allowing excess energy to be stored so it can be sold at times of greater need—and value.
Not only that, but batteries can also help today’s wind and solar plants create new value streams by offering services that are hard to achieve using turbines and PV panels alone.
Increased penetration of variable renewables has caused serious concerns over the reliability of power systems because it makes it harder to control system constraints such as frequency, reliability and grid congestion.
But batteries can address all of these issues, and grid operators are usually prepared to pay a premium for their services. Indeed, in many markets battery storage projects have taken off without the need for incentives precisely because they could offer valuable ancillary services.
For investors, this means that on-site colocation of battery technology can increase the profit margins of wind and solar farms and even provide new arbitrage opportunities.
Therefore battery storage, whether connected to the grid, behind the consumption meter or co-located with variable renewable energy installations, provides the perfect solution to the growing challenge of diminishing returns and very real system reliability concerns as renewables’ market share increases.
That in itself means batteries could play a key role in helping to save the world we know. But there’s more. To meet our climate goals, we can’t just change the power sector. We also need to move around in a low-carbon fashion.
This will require converting our internal combustion engine-based cars, trucks and motorbikes to electric vehicles, which in turn will need to tap into the electricity grid for their energy. And that requires careful planning.
Research has shown that if just 0.25% of the 24 million vehicles in Texas were to try fast charging at the same time it would bring down the state’s grid. The only way to intelligently manage the mass rollout of vehicle electrification is by using batteries the take the strain.
That’s a whole other opportunity for investors—and another reason why batteries will be vital in saving the planet.