Path to net zero

Since we first published a Q-Series on the Energy Storage theme, the market has developed ahead of our expectations, owing to technology-induced cost reductions and favourable policies. We forecast a US$385bn investment opportunity related to battery energy storage systems (BESS). We raise our global new BESS installation forecast for 2030E to 453GWh, implying a 41% CAGR in the next decade. We expect solar/wind plus storage grid parity in 2025E (previously 2027E) owing to faster cost reductions from BESS and solar/wind. There is a growing number of countries targeting net zero emissions, most noticeably China. Energy storage has a critical role in stabilising and integrating the renewables power generation, in our view. We expect more favourable policies and pricing mechanisms to support the development of energy storage.

Technology continues to reduce cost; parity expected in 2025E

We forecast a 69% cost reduction for BESS from now to 2025E. The resulting levelised cost of electricity (LCOE) for solar/wind plus storage would fall to below US$0.05/kWh, achieving cost parity with thermal power. Main drivers include: 1) battery cost reductions with technological improvements and higher energy density; 2) increased cycle life of BESS diluting the LCOE; 3) increased battery and power conversion system (PCS) efficiencies and higher depth of discharge (DoD). We foresee global new ESS installations growing from 9.4GWh in 2020 to 453GWh in 2030E, reaching 80% penetration. The US and China will likely remain the leading markets, representing over 70% of global deployed capacity in 2030E.

Supportive policies making energy storage more economical

We believe supportive policies and electricity pricing are critical to making BESS economically attractive. On the end users' side, widening the peak-trough electricity price difference is important to improving the profitability of energy storage. We estimate the current IRR is 6% in China but over 10% in the US, owing to higher electricity prices and larger peak-trough price differences in the US. On the power generator and grid's side, more comprehensive reforms are likely needed to help energy storage owners generate revenue and more profitable return from the services they provide. These include: 1) subsidies or stand-alone investment tax credits (ITC) for energy storage; 2) allowing reasonable return for power grids to add energy storage facilities; and 3) introducing an advanced power trading system to increase revenues for ancillary services.



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