Last month Lux Research released a bottom-up evaluation of the cost effectiveness of eight energy storage technologies in six grid-scale applications throughout 44 countries, including all 50 U.S. states. Their report titled "Grid Storage under the Microscope: Using Local Knowledge to Forecast Global Demand" predicts that annual global demand for grid-scale energy storage will reach an astounding 185.4 gigawatt-hours (GWh) by 2017 and represent a $113.5 billion incremental revenue opportunity for an industry that currently generates sales of $50 to $60 billion a year.
In the grid-scale sector alone, Lux predicts an average year-on-year demand growth of 231% from 2012 through 2015 when the growth rate moderates to 43% per year for 2016 and 2017. The forecast is tempered, however, by a cautionary note that demand of that magnitude can't be satisfied because "Believe it or not, the grid storage market will be supply-constrained in 2017."
Technologies and Players
The eight energy storage technologies Lux evaluated for their new report are summarized in the following table, along with the price and performance metrics highlighted in beige. Comparable price and performance metrics from a recent Sandia National Laboratories "Energy Storage Systems Cost Update" are also presented and highlighted in green. While there's room to quibble over the details and users of Lux's Smart Grid Storage Tracker and Demand Forecaster can fine tune the price and performance variables to suit their analytical needs, the parallels between the two sets of system cost estimates are close enough to lend substantial credence to Lux's basic assumptions.
Based on a comprehensive evaluation of various local factors including "utility market structure, generation technology compositions, peak power demand, demand growth rate, infrastructure growth rate, penetration and growth rate of intermittent renewable energy sources, grid reliability, [time of use] electricity rates, commercial demand charges, and outage costs," Lux concluded that Japan, China, the United Kingdom, Germany, and the State of Arizona will be the top five regions for grid storage and collectively account for about 58% of global demand in 2017. Japan and China will each account for about 18%; United Kingdom and Germany, will each account for about 9%; and the US will account for about 23%, with Arizona alone accounting for 4% of global demand.
Some of the more surprising conclusions in the Lux report related to the relative importance of the various grid-scale applications by 2017. For me the biggest surprise was the conclusion that the current killer apps, ancillary services and renewable energy integration, will only account for 1.4% of global demand in 2017 while renewable energy time shifting will account for an impressive 54% of demand, or $61 billion in annual revenue potential. I was also surprised by the conclusion that high spreads between peak and off-peak electricity prices would create a major market opportunity in the residential and commercial sectors, which account for 28% and 17%, respectively, of the 2017 demand forecast.
Based on their in depth evaluation of application requirements and the price and performance of the eight energy storage technologies they evaluated, Lux reported that:
Li-ion takes the early lead, but fades to cheaper alternatives. Li-ion batteries for [power] applications capture nearly 80% of the market in 2012, but quickly fade as cheaper molten-salt and flow batteries become available in the ensuing years. By 2017, Li-ion batteries capture only 13% of the market, yielding 33% to vanadium redox batteries and a nearly even split of the rest of the market between sodium sulfur, sodium nickel chloride, and zinc bromine flow batteries at 19%, 15%, and 19%, respectively. This indicates the short timeframe Li-ion battery developers have to reduce their costs. In the long run, systems with discharge durations between two hours and four hours are the "sweet spot" size for most grid applications. Currently, Li-ion batteries are sought-after due to their availability and proven performance. Flow batteries and molten salt batteries, both of which perform well for longer discharge applications, have shown comparable performance to Li-ion batteries at a fraction of the cost and are currently limited by their availability and proven reliability. Flywheels retain 2% of the market in 2017 and find their niche in relatively small frequency regulation market and other niche applications that require rapid discharge capabilities, short durations, and an extremely long cycle life.
Many participants in the lithium-ion battery sector are developing and demonstrating grid-scale energy storage products. To date, the highest profile player has been A123 Systems (AONE), which has shipped over 90 MW of storage systems for ancillary services and renewables integration. While Johnson Controls (NYSE:JCI) has been quiet about its plans to package and sell lithium-ion batteries for stationary applications, I have to believe the global footprint and sterling reputation of its building efficiency unit will make it a formidable competitor in the commercial markets.
Sodium Nickel Chloride, or Zebra, batteries have been a relatively low profile chemistry for years. They were originally developed by Daimler for use in electric vehicles but failed to gain much traction in that market despite a decade of solid performance in a 3,000 vehicle fleet that's logged over 150 million kilometers. In 2009 General Electric (NYSE:GE) announced plans to build a NaNiCl factory in New York. In 2010, Italy's Fiamm bought a controlling interest in Swizerland's MES-DEA, the sole European manufacturer of NaNiCl batteries, and is now doing business as FZ Sonick. Both firms are rapidly ramping their marketing efforts on grid-scale systems.
The largest manufacturer of sodium sulfur batteries is Japan's NGK Insulators (OTC:NGKIF), which was the global leader in grid-scale storage for the over a decade with an installed base of over 300 MW. NGK had a spotless safety record until late last year when they suspended NaS battery sales and asked customers to refrain from using installed systems pending completion of an investigation into the cause of a battery fire in Japan. Last year, NGK accounted for roughly 54% of the grid-scale energy storage market. While NGK's market share will fall as other technologies gain traction in the grid-scale markets, its revenues should continue to ramp because of rapid overall growth rates in the sector.
There have been no publicly held companies in the vanadium redox battery space since China's Prudent Energy bought VRB Power Systems in January 2009. At present, ZBB Energy (ZBB) is the only publicly held company that's active in the zinc bromine battery space. ZBB is actively exploring markets for a both zinc bromine flow battery that was originally developed by Johnson Controls and novel technology agnostic control systems that can integrate and manage a variety of conventional and renewable power sources and energy storage technologies.
I was a bit surprised that lead-carbon wasn't included in Lux's list of 2017 market leaders. When I asked the analyst why, he explained that the two leading developers of lead-carbon batteries, Axion Power International (NASDAQ:AXPW) and East Penn Manufacturing, were currently launching new products and conducting demonstrations, but didn't yet have enough price and performance history to warrant inclusion at anything beyond placeholder values. He also agreed that if Sandia's price and performance estimates prove accurate, lead-carbon could be a formidable competitor and garner a substantial market share.
While Lux's bottom-up demand analysis contemplates an enormous ramp in new demand over the next five years, they acknowledged that the global battery industry can't satisfy that demand with existing and planned infrastructure. They didn't drill down into the details for the current report, but I think it's critical for investors to understand the magnitude of likely shortages and the market dynamics that are likely to flow from crushing supply constraints.
In its new report Lux predicted that lithium-ion batteries could account for up to 13% of $113.5 in demand by 2017, or roughly 20 GWh of batteries. To put that number in perspective, last year Lux reported that total global manufacturing capacity for large lithium-ion batteries would grow to about 30 GWh by 2017, which means demand from stationary applications alone could absorb almost two-thirds of global manufacturing capacity. This is good news for lithium-ion battery manufacturers in the short-term because it will help absorb an expected glut of manufacturing capacity. Over the long-term Lux believes lithium-ion batteries are not economically sustainable for grid-scale applications because:
Li-ion batteries developed for transportation applications are energy dense storage devices. Stationary storage projects rarely value this metric, resulting in wasted value for grid-tied Li-ion battery systems. Rapidly evolving technologies with equivalent or superior performance metrics and substantially lower costs and higher resource availability will take over the majority of the grid storage market in the coming years.
For decades the battery industry has striven to standardize battery chemistries, formats and manufacturing methods. As a result, batteries are usually viewed as fungible commodities with little product differentiation or brand loyalty. In the final analysis, purchase decisions for grid-scale storage systems will be driven by the customer's specific power and energy needs and the ability of a particular battery chemistry to serve those needs at the lowest total cost of ownership. Absent a clearly demonstrable performance advantage, comparable products within a technology class will invariably be forced to compete on the basis of price, which will ultimately compress margins.
Any time there are several competing uses for a supply constrained commodity, the buyer that's willing to pay the highest price will get the first call on available production. If electric vehicle manufacturers are willing to pay up and outbid grid-scale storage users, they'll undoubtedly get enough batteries to satisfy their needs. If automakers are not willing to pay a higher price, battery manufacturers will undoubtedly serve their own economic interests first. On balance, I believe rapid growth in grid-scale energy storage will create substantial secondary problems for electric vehicle manufacturers who are already grappling with fundamentally uneconomic products.
As former director of Axion Power International, I'm intimately familiar with the work that's being done in the field of lead-carbon battery technology. Based on everything I know, I believe that Sandia's cost estimates are reasonable and that lead-carbon batteries will be a good choice for a large number of grid-scale storage applications that don't require extreme performance. It doesn't take much market share in a $113.5 billion niche to make for a very successful company.
Disclosure: Author is a former director of Axion Power International (AXPW) and holds a substantial long interest in its common stock.