Recently, L.E.K. Consulting has undertaken multiple projects where the rate of battery uptake has been a significant consideration. This work has involved the commercial analysis of batteries of different sizes that play different roles within the power system. It has also meant developing a deeper understanding of battery revenue streams, configuration requirements and chemistries.
In addition to our work with clients, we also had the pleasure of hosting Women in Energy in our Melbourne office in July for a ‘Batteries and Breakfast’ event. This provided an excellent opportunity for discussing the impacts batteries will have on the energy transition and to provide a networking forum for women working in the energy sector.
Battery storage has historically not played a significant role in the National Electricity Market (NEM), but this is expected to change rapidly over the next decade. By 2035, total storage capacity is expected to exceed 36GW, based on the Step Change scenario in the Australian Energy Market Operator (AEMO) 2024 Integrated System Plan (ISP). This is an increase from around 1GW in 2020 and represents a dramatic increase in both utility-scale and distributed storage (consumer energy resources, or CER) (see Figure 1).
The rise of storage, both in the NEM and around the world, is driven by the operational need to ‘firm’ renewable generation, increasing attractive conditions for trading and declining battery costs.
At an operational level, batteries help firm intermittent renewable generation, which is rapidly replacing fossil fuels through the global energy transition. Batteries can store renewable energy when production exceeds consumption and discharge when additional electricity supply is needed, making them highly complementary with intermittent renewables. Moreover, batteries can play an important role in supporting grid frequency control and system strength and in reducing pressure on electricity networks by reducing demand at peak times.
In energy-only markets like the NEM, intermittent renewables create periods where wholesale market prices are low or negative and also drive high prices in periods when renewable energy is in short supply. This increase in price volatility improves the returns available for batteries, through both cheap charging when prices are low and higher prices when batteries are selling energy into the market. This trend towards higher volatility is expected to accelerate across Australia due to the exit of coal assets and delays to projects such as transmission lines and additional hydroelectric generation via Snowy 2.0.
The outlook for large-scale battery energy storage systems
Since 2015, the average lithium battery price has declined at a -13% CAGR, driven by advancements in technology, economies of scale and increased competition among battery original equipment manufacturers (OEMs). New global production facilities have also expanded production capacity faster than the rate of demand growth, creating short-term opportunities to secure batteries at favourable prices. Price declines are expected to continue, particularly in the large-scale market as OEMs such as Telsa have increasingly been diverting resources into ramping up large-scale battery production (see Figure 2).
The shift in underlying economics for large-scale batteries is driving a rapid increase in proposals for large-scale battery development. In 2024, there was over 28GW of battery capacity at the proposal stage in New South Wales (NSW). However, to date, only 1.7GW has been committed or is currently operational. As of May 2024, there are only seven operational battery storage projects in NSW.
This discrepancy highlights the challenges associated with financing and developing large-scale battery storage projects. There are low barriers to the early-stage development of battery sites. Yet executing developments requires access to substantial amounts of capital, specialised project development capabilities, navigating complex approvals processes, and access to key equipment, such as transformers, where global supplies are constrained. This makes for a market where rapid growth is likely but projects progressing beyond the proposal stage are likely to be delivered by a smaller set of larger firms.
The rise of battery storage capacity in Australia represents a pivotal shift in the energy landscape as batteries offer an increasingly cost-effective means to address the variability of renewable energy and ensure grid stability. While challenges remain in terms of financing and implementation, the ongoing decline in battery prices and the growing demand for energy storage provide a promising outlook for the market.
For more information, please contact us.
L.E.K. Consulting is a registered trademark of L.E.K. Consulting. All other products and brands mentioned in this document are properties of their respective owners. © 2024 L.E.K. Consulting
10312024091059