Energy Storage Technologies for the Bulk Grid: Will Lithium-Ion Batteries Continue to Dominate Grid Storage?

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Eric Selmon Hugh Wynne

Office: +1-646-843-7200 Office: +1-917-999-8556

Email: eselmon@ssrllc.com Email: hwynne@ssrllc.com

SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

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March 1, 2017

Energy Storage Technologies for the Bulk Grid:

Will Lithium-Ion Batteries Continue to Dominate Grid Storage?

The scale of lithium ion’s deployment on the grid and in electric vehicles could present an insurmountable advantage over other technologies if these do not achieve significant cost reductions and installation increases in the next five years.

Portfolio Manager’s Summary

  • Since 2010, over half of global battery installations on the power grid have been lithium ion batteries, totaling over 1,280 MWh. Over 2015-2016, lithium’s share rose to over 60% of installations. (See Exhibit 3.) In the U.S., the comparable figures increase to 78% and 97%.
  • As explained in our note of February 16, Electric Energy Storage and the Bulk Power System, lithium ion competes with several other commercially deployed battery technologies whose performance characteristics are better suited for utility-scale energy storage. These advantages include longer discharge times (sodium sulfur, flow batteries), longer life (zinc air, sodium sulfur, flow batteries), greater safety (zinc air and flow batteries) and lower cost (zinc air).
  • Furthermore, lithium ion’s costs, both initial capital costs and levelized cost per MWh, are not much lower than these competing technologies. With larger scale deployment and further research and development, these technologies could offer technically superior alternatives to lithium ion at lower cost.  (See Exhibits 2 and 4).
  • While other technologies are currently competitive with lithium ion, lithium ion costs are falling rapidly due to its large scale deployment in electric vehicles and on the grid.
    • The cost of a lithium ion battery packs has dropped from $1,000/kWh in 2010 to $350/kWh in 2015 and as low as $190/kWh in 2016. (See Exhibit 5).
    • This cost decline reflects the rapidly rising production of electric vehicles, and should continue with future growth of electric vehicle sales. Annual sales of lithium ion batteries for EVs and other large format uses has increased 200-fold from a little more than 250 MWh in 2010 to over 52,000 MWh in 2016. (See Exhibit 6).
    • An experience curve plotting the cost of lithium ion battery packs against cumulative sales of large format lithium ion batteries (Exhibit 7) predicts a 16% price decline with each doubling of cumulative sales going forward. Based on average size of li-ion batteries for electric vehicles, the next doubling will occur after the sale of the MWh equivalent of ~4.4 million new light electric vehicles, compared to the MWh equivalent of ~1.5 million light EVs sold globally in 2015 and almost 2 million in 2016.
    • Regarding the balance of system costs for grid-scale lithium ion batteries, there is limited historical cost information, but as the most rapidly growing grid-scale energy storage technology lithium ion should also have an advantage here. (See Exhibit 8).
  • In our view, the economies of scale achieved in manufacturing lithium ion batteries, due to the rapid growth in electric vehicle production, and the power industry’s familiarity with the technology due to its dominance in grid-scale deployments to date, represent significant competitive advantages over other battery technologies, whose ability to penetrate the grid-scale market may be limited as a result. The window for these other technologies may be closing under the weight of lithium ion’s momentum.
  • Publicly traded companies with significant exposure to growth in grid-scale deployment of lithium ion batteries include AES, BYD (China), Leclanché (Switzerland), and TSLA.
    • Other companies that either supply components, such as power electronics for batteries, or lithium ion batteries, but where the scale of the potential impact appears to be much smaller, include LG Chem (South Korea), Samsung (South Korea), Parker Hannafin, and Saft (France).
    • Utility-scale solar inverter manufacturers, such as SMA Technologies (Germany), could also benefit as the required technologies are similar for grid-scale battery installations. Enphase and SolarEdge currently would only benefit from the growth of residential scale storage as they do not currently have inverters for utility-scale installations.
    • NGK Insualtors of Japan, the manufacturer of sodium sulfur batteries, is the only publicly traded companies with significant exposure to other battery technologies.
    • We do not cover any of the companies mentioned above. We only highlight these companies in order to provide investors with a list of firms involved in grid scale energy storage and not to provide an opinion on or analysis of any of these companies.

Exhibit 1: Heat Map: Preferences Among Utilities, IPP and Clean Technology

Details

As we wrote in our note from February 16, Electric Energy Storage and the Bulk Power System, we expect the electric power system to provide a rapidly expanding market for energy storage. Competing in this market are a range of electric energy storage technologies with different performance and operating characteristics. In this note, we provide an overview of these technologies and assess their potential for growth.

To help the reader conceptualize the key operational differences among the competing storage technologies, we have reproduced below a useful chart from the DOE/EPRI Electricity Storage Handbook published by Sandia National Laboratories in February 2015 (see Exhibit 2). The various storage technologies – ranging from supercapacitors, batteries and flywheels to large scale storage systems such as pumped hydro and compressed air energy storage — are plotted on two axes: a horizontal axis that shows the typical capacity range in MW of the different storage systems and a vertical axis that shows their typical duration of discharge. Note that both axes use a log scale.

Exhibit 2: Storage Technologies by Capacity in MW and Discharge Time (Log scales)

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Source: Akhil, Huff, Currier, Kaun, Rastler, Chen, Cotter, Bradshaw, and Gauntlett, DOE/EPRI Electricity Storage Handbook in Collaboration with NRECA, Sandia National Laboratories, February 2015, pg. 29, SSR analysis

Exhibit 2 illustrates on its horizontal axis the radical difference in the scale of electro-chemical and small-scale electro-mechanical storage devices on the one hand and hydroelectric pumped storage and compressed air energy systems on the other. Pumped hydro ranges from 100 MW to 1000 MW (1GW) in scale, and compressed air energy storage from approximately 50 MW to 1000 MW. By contrast, electro-chemical and small-scale electro-mechanical storage devices range from 1 kW and 50 MW. Even if we assume a modular deployment of the smaller devices, so that a series of batteries is deployed to provide 50 MW of storage, the capacity of a hydroelectric pumped storage system would typically range from 2x to 20x times larger.

On its vertical axis, Exhibit 2 illustrates the marked difference in the duration of discharge of the various storage technologies. The chart shows high power supercapacitors, flywheels, nickel-metal hybrid batteries, and nickel cadmium batteries providing short bursts of power measured in seconds or minutes. Lead acid, lithium ion, sodium and flow batteries can achieve substantially longer duration of discharge. These technologies may be deployed to provide frequency regulation, discharging for up to 30 minutes at a time, or to operate as peakers designed to discharge over four hours – and, in the case of flow batteries, potentially much longer. Importantly, however, even four hours of continuous discharge, although long enough for the vast majority of grid needs, falls short of the requirements that some independent system operators (ISOs) impose on capacity resources. Hydroelectric pumped storage and compressed air energy storage systems, which are intended to provide generation to meet peak load during the highest demand hours of the day, generally are designed to operate between four and twelve continuous hours.

Among battery technologies, flow batteries hold out the prospect of materially longer duration of discharge. In flow batteries, the electrolyte is stored outside of the cell, and is fed into the cell in order to generate electricity. A flow battery’s duration of discharge is thus a function of the volume of electrolyte; depending on the size of its electrolyte storage tanks, the duration of discharge of a flow battery can range from two to ten hours.  However, the power capability of flow batteries, which is determined by the size of the stack of electrochemical cells, remains relatively low, generally 100 MW or less.

The marked differences in power capacity and duration of discharge of the various storage technologies have important functional implications. Thus pumped storage and compressed air energy storage are utility scale systems designed to combine substantial power capacity with hours of continuous discharge. Their role on the grid is to serve as centralized sources of peak hour generation capacity. The smaller scale and, more importantly, the short duration of discharge of batteries and flywheels limit their suitability for this purpose. However, batteries can be economic sources of energy in applications requiring shorter term capacity commitments, while the smaller scale of batteries facilitate their deployment on a distributed basis on the grid. Thus, some utilities are deploying batteries to supplement the capacity of overloaded transmission lines, substations or distribution circuits during the limited number of hours per year when they are loaded beyond their design capacity. Consolidated Edison, for example, just announced a plan to build a 1MW/4MWh zinc battery in a trailer that can be deployed to locations around New York City as needed. A second and increasingly popular application of distributed storage is to decrease the peak demand of large commercial and industrial utility customers, whose bills often include a demand charge calculated on the basis of their peak power consumption for the month. Finally, the most important use of batteries on the power system to date has been to provide frequency regulation, the continuous balancing of the demand and supply of power on the grid. This is a role for which batteries are ideally suited: batteries can (i) discharge energy in fast, precise but short (less than 30 minute) bursts to supply increases in power demand or offset shortfalls in generation on the grid, and (ii) can also draw energy off the grid by charging when needed to offset drops in power demand or increases in the output of wind or solar resources. These capabilities also equip batteries to provide another ancillary service, spinning reserves. Batteries deployed as spinning reserves provide quick response capacity (within ten minutes) to meet the daily ramp in load during the morning and

afternoon hours, while late in the evening batteries can draw power from the grid to offset the often sharp decline in energy demand. Importantly, batteries deployed in the above uses often can often be used to arbitrage energy prices, charging during off-peak hours when power prices are low and discharging on-peak when prices are higher (sometimes referred to as “electric energy time shift”).

While the further construction of pumped hydro and compressed air energy storage faces significant geographical constraints, particularly in the United States, the deployment of batteries on the power grid has surged over the last decade. Globally, battery installations on the grid have risen 160-fold from 6 MWh in 2007 to 979 MWh in 2016 (see Exhibit 3). As can be seen there, sodium based batteries were the dominant technology through 2010, and remain a significant portion of annual installations. However, the surge in battery deployments since 2011 has been driven by lithium ion batteries. Before 2011, 90% of battery installations were sodium based, primarily sodium sulfur batteries deployed in Japan, and only 5% were lithium ion. Other battery types, primarily lead acid, were 5% of the total. By contrast, from 2011-2014, lithium accounted for 50% of installations, sodium based batteries fell to 36%, flow batteries were 6% and other chemistries were 7%. The market share of lithium ion rose further in 2015-16, when the technology comprised 61% of installations globally, sodium based batteries accounted for 30%, flow batteries for 7% and others 2%. In the United States, the dominance of lithium ion in recent years is even more stark: 78% of battery installations since 2010 and 97% since 2015 have been lithium ion.

Exhibit 3: Global Installations of Batteries for Grid Storage (MWh)

Source: U.S. Department of Energy, Energy Storage Database (www.energystorageexchange.org), SSR Analysis

Lithium ion’s surge can be explained by the dramatic fall in its costs since 2010. In Exhibit 4 we show the estimated cost of lithium ion battery packs for autos since 2010. Although there are significant additional costs for installing grid-scale lithium ion batteries, the largest cost is the battery pack, which is usually a reconfigured version of the large format batteries used for electric vehicles (“EVs”), as opposed to the small format used for consumer electronics. The cost of large format lithium ion battery packs has declined from $1,000/kWh in 2010 to $350 in 2015. Two of the leading EV manufacturers report a further decline in costs to $190/kWh in 2016, although this may not be reflected in grid-scale storage costs yet.

Exhibit 4: Estimated Cost of Lithium Ion Battery Packs in $/kWh (2010-2016)

Source: Bloomberg New Energy Finance, Visual Capitalist (www.visualcapitalist.com), SSR Analysis

The dramatic growth in the deployment of lithium ion batteries on the power grid since 2013 (see Exhibit 3) could reflect, with a brief lag, the impact of the large decline in cost of lithium ion batteries from 2010 to 2012 and again from 2014 to 2015. If that is true, the 45% decline in the cost of lithium ion battery packs reported by manufactures in 2016 may presage another boost to the growth of lithium ion on the grid.

When compared to the economic and operating characteristics other battery technologies, however, the recent surge in the deployment of lithium ion batteries on the grid is not an obvious result. Exhibit 5 presents the lower end of estimates for the initial capital cost per kWh and the levelized cost of storage per MWh over the life of each battery type, as calculated by Lazard and Enovation Partner in Lazard’s Levelized Cost of Storage 2.0 published in December 2016. As is evident there, even with recent cost declines, the levelized cost of storage (LCOS) for lithium ion batteries remains higher than that of zinc air batteries, and only slightly below that of sodium sulfur and vanadium flow batteries. Looking forward, however, if there is a lag in the installed cost of grid-scale batteries compared to the cost of large format battery packs, we could see a large decline in the cost of grid-scale lithium ion over the next year or two.

Exhibit 5: Estimated Installation Cost and Levelized Cost of Storage (LCOS) for Different Battery Technologies (Low-End of Ranges) (1)

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  1. The high ratio of installed cost to LCOS of lithium ion batteries relative to zinc air and other technologies is explained by the significantly higher efficiency of lithium ion over a full charge/discharge cycle (90%+ versus ~70% for zinc air,), which reduces their levelized cost of storage over the life of the battery.

Source: Lazard and Enovation Partners, Lazard’s Levelized Cost of Storage 2.0, December 2016

Taking into consideration the operating characteristics of the different battery technologies, the case for lithium ion is even more cloudy. Below is a list of key positives and negatives of other key battery chemistries. As can be seen there, zinc air looks very promising on cost, energy density and safety, rendering it attractive for distributed applications such as ConEd’s mobile battery unit. Flow batteries may be a better option as a peaker replacement and in meeting the capacity requirements of the more restrictive ISOs due to its much longer potential discharge times.

  • Zinc air:
    • Positives: lower installation cost than lithium ion, reflecting low cost materials; other advantages include very high energy density, long life, safety, and fully recyclable by-products.
    • Negatives: there have been few commercial grid-scale deployments; lower efficiency over the charge/discharge cycle than lithium ion.
  • Sodium sulfur:
    • Positives: near competitive with lithium ion; popular with some utilities (e.g., TEPCO, AEP) due to long duration of discharge (~6 hours); deployed at scale in Japan (766 MWh) and globally (1,260 MWh).
    • Negatives: operates at high temperature; may not be as well suited for short duration applications based on the absence of such installations.
  • Flow batteries:
    • Positives: flexibility in application provided by ability to scale the power capability and storage capability separately; can be designed for both long duration of discharge and high power capacity, so particularly suitable for peaking use; can be recharged instantly by replacing the electrolyte.
    • Negatives: lower efficiency (~70%); currently higher cost than lithium ion.

By contrast, the key advantage of lithium ion batteries is the rapid growth in the production of large format lithium ion batteries, driven by the demand from electric vehicles, and the ongoing economies of scale realized by the technology as a result. In Exhibit 6 we show the annual sales of large format lithium ion batteries in MWhs for both EV (in blue) and grid applications (in red). As can be seen there, the surge in lithium ion grid scale installations noted above is dwarfed by the growth in the deployment for EVs. Sales of lithium ion batteries for EVs has grown from ~250MWh in 2010 to over 52,000MWh in 2016, compared to just 591MWh for grid applications in 2016.

Exhibit 6: Sales of Large Format Lithium Ion Battery Packs (2010-2016)

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Source: EV Sales Blogspot (www.ev-sales.blogspot.co.il), U.S. Department of Energy, Energy Storage Database (www.energystorageexchange.org), SSR Analysis

If, as a result of these economies of scale, the cost of lithium ion batteries continues to decline faster than that of the other battery technologies, the operating advantages of the latter may not be sufficient to prevent these technologies from being crowded out of the market. Competing battery technologies may be limited to niche applications where lithium ion just will not work, and even there the scale of the research and development budgets dedicated to lithium ion technologies may overcome the technology’s limitations.

As important in this respect as the growth in the annual production of lithium ion batteries is the growth in the cumulative sales of lithium ion battery packs, as that represents the growing experience of lithium ion battery manufacturers and drives the experience curve. Experience curves are a visual representation of the concept of “practice makes perfect” – the more units produced, the lower costs go. Experience curves quantify the decline in production costs for every doubling of cumulative production volume and have been found to be applicable across many industries. Applying this concept to the data for lithium ion batteries results in Exhibit 7. This experience

curve predicts a 16% decline in lithium ion costs for every doubling of cumulative sales of large format lithium ion batteries, although the 2016 data point is already below the projected curve and could portend a steeper curve ahead.

Exhibit 7: Lithium Ion Battery Pack Experience Curve (Log scales)

Source: SSR Analysis

Based on the cumulative sales of ~110,000 MWh of large format lithium ion batteries by the end of 2016, and an assumed average of ~25 kWh/passenger vehicle, a doubling of sales would require the sale of an additional ~4.4 million EVs or the energy equivalent in stationary batteries. While global passenger EV sales were only 550,000 in 2015 and 775,000 in 2016, if buses and heavy vehicles are included, the equivalent of 1.5 million EVs were sold in 2015 and 2 million in 2016, suggesting the potential to double cumulative volumes in the next two years.

Robust historic cost information is not available for the other battery technologies, so it is difficult to develop a similar curve for them. Flow batteries and grid-scale zinc air batteries have been deployed in such low volumes that it is possible they could experience similarly rapid declines in battery costs. However, as both are only just being commercialized now, the scale of their deployment in the next few years will be critical to their remaining cost competitive with lithium ion.

Finally, lithium ion currently has an additional advantage for grid scale installations. While less than the cost of the battery packs, balance of system costs, including structures, power electronics, SCADA, safety equipment and installation costs, are a large component of the installed cost of grid scale batteries. The recent momentum of grid-scale lithium ion batteries compared to other battery technologies suggests that the lithium ion batteries could benefit from the experience curve for balance of system and installation costs as well (see Exhibit 8). This advantage could be particularly telling in comparison to flow and zinc air batteries, whose cumulative deployments have been a fraction of lithium ion’s to date.

Exhibit 8: Cumulative Global Deployment of Grid-Scale Batteries by Technology in MWh (2001-2016)

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Source: U.S. Department of Energy, Energy Storage Database (www.energystorageexchange.org), SSR analysis

In conclusion, the economies of scale achieved in the manufacturing of lithium ion batteries, due to the rapid growth of electric vehicles, and the power industry’s familiarity with lithium ion technology due to its dominance to date in grid-scale deployments, represent significant competitive advantages over other battery technologies, whose ability to penetrate that grid-scale market may be limited as a result.

Company Impacts

Publicly traded companies with significant exposure to growth in grid-scale deployment of lithium ion batteries include AES, BYD (China), Leclanché (Switzerland), and TSLA. Other companies that either supply lithium ion batteries or components, such as power electronics for batteries, but where the scale of the potential impact appears to be much smaller, include LG Chem (South Korea), Samsung (South Korea), Parker Hannafin, and Saft (France).

Utility-scale solar inverter manufacturers, such as SMA Technologies (Germany), could also benefit as the required technologies are similar for grid-scale battery installations. Enphase and SolarEdge currently would only benefit from the growth of residential scale storage as they do not currently have inverters for utility-scale installations.

NGK Insualtors of Japan, the manufacturer of sodium sulfur batteries, is the only publicly traded company with significant exposure to other battery technologies.

We do not cover any of the companies mentioned above. We only highlight these companies in order to provide investors with a list of firms involved in grid scale energy storage and not to provide an opinion on or analysis of any of these companies.

©2017, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

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