The global grid-connected storage market could grow at a unit CAGR of 35 percent through 2022, if an IHS Markit projection cited by AES (NYSE:AES) and Siemens (OTCPK:SIEGY) proves correct. At that rate, global annual installations would grow from 1.3 gigawatts in 2016 to about 8 gigawatts in 2022.
IHS Markit also projects that storage battery prices will fall, driving industry growth; as a result, revenue CAGR would be lower: 16 percent through 2025.
AES and Siemens hope to capture a large part of this growing market through their planned battery joint venture, named Fluence. To date, the two firms “have deployed or have been awarded 48 projects totaling 463 MW of battery-based energy storage across 13 countries.” AES brings to the joint venture a specialty in utility-scale batteries, while Siemens has developed behind-the-meter batteries for commercial and industrial users.
AES, reflecting on the IHS Markit projection, said in an earnings presentation that it is “well-positioned to take advantage and see it as an upside to our outlook.”
For perspective, AES’s annual revenue has declined 26 percent since 2012 (from $18.13 billion to $13.47 billion), while Siemens’s revenue has declined 13 percent since 2012 (from $100.77 billion to $88.14 billion).
AES Batteries: Grid Services, Renewables Integration, and Cost Savings
AES is a larger battery player than Siemens, as it was operating 116 MW of energy storage projects worldwide as of June 2016, “with an additional 278 MW under construction or in late stage development.” (This compares to 463 MW of deployed or awarded projects for both firms.)
AES has three selling points for its grid-scale batteries: “improving the reliability of the electric grid, mitigating the intermittency of renewable generation, and lowering costs to operate the system.”
Competition and Suppliers
The most notable competitor is recent entrant Tesla (TSLA), which is catching up to AES and Siemens with its South Australia contract for 100 MW of battery storage.
Suppliers to all three firms could benefit. Battery suppliers for Fluence’s battery systems are expected to be the same as those that AES has used to date, including Samsung SDI (OTC:SSDIY) and LG Chem (OTCPK:LGCLF); Tesla’s batteries are from Panasonic (OTCPK:PCRFY) and Samsung SDI. AES battery systems have also incorporated power conversion systems from Parker Hannifin (PH).
Cross-Selling Opportunities
AES has purchased sPower, previously the largest independent solar developer in the U.S. Meanwhile, Siemens has partnered with the wind turbine manufacturer Gamesa. Presumably, AES and Siemens will have an interest in selling solar and wind farms to electric utilities, along with reasonably priced batteries to add value (i.e., reliability, renewables integration, and cost savings).
Sales Challenges
Electric utilities are traditionally cautious and slow to change. That could present sales challenges to the AES/Siemens joint venture and its competitors.
Just last year, a utility owned by AES, Indianapolis Power & Light, projected no significant use of batteries until 2032—see the dark purple wedge at the top right of the following graph. This is despite the utility’s deployment of 20 MW of AES batteries in 2016—a relatively modest amount compared to the purple wedge that grows to about 500 MW in the graph.
Source: Indianapolis Power & Light Company presentation on its 2016 integrated resource plan.
If and when one of AES’s own utilities—Indianapolis Power & Light or Dayton Power & Light—becomes a major customer of Fluence, that could be a signal that the economics of renewables plus battery storage are becoming too good to resist.
Risks
The grid-connected battery market is small and may not grow as IHS Markit predicts—e.g. if other storage options prove to be more cost-effective. Even if this market grows, any industry player mentioned here may fail to become or remain a significant market participant, and/or profit margins may be slim, or nonexistent. Even if a market participant profits meaningfully from this market, such profit may be exceeded by losses elsewhere in the company, such that the stock price falls. Or a stock market downturn could take down the share prices of firms mentioned here, regardless of their profits. For additional risk considerations, see company reports filed with the SEC.
Conclusion
The grid-connected battery market, and the firms participating, bear watching because the market may grow rapidly. AES sees its participation in the battery market “as an upside to our outlook.” It may be a good sign for AES and Siemens shareholders that the two companies are expanding their technology and service offerings to include grid-connected batteries, as electric grids worldwide incorporate an increasing amount of renewables.
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