The rise of battery storage and its implications for the renewables sector

Jim Simpson and Chris Shelton examine the potential for battery storage across the GCC and why Africa can provide inspiration



The upward trend of renewables has grabbed headlines over the last few years, particularly due to the falling costs of solar photovoltaic (PV) power and countries increasing their renewable commitments in the wake of the Paris Agreement reached at COP21.

The Middle East, in particular, is undergoing a significant transformative period, as it moves to diversify away from its oil sector and reach its renewable energy targets. Specifically, the UAE is aiming to produce nearly half of its electricity via renewables by 2050, whilst Saudi Vision 2030 includes a target of 9.5 gigawatts by 2050.

Renewable energy sources like the sun and wind are affected by location, weather, and time of day. It therefore follows that renewables energy generation creates a variable supply of energy. Intermittent renewables are challenging as they disrupt the conventional methods for daily operation of the grid. The power fluctuates over multiple time horizons, forcing the grid operator to adjust its day-ahead, hour-ahead, and real-time operating procedures.

In order for the Middle East to achieve its sustainable energy goals, policy makers and procurers need to strongly consider the intermittency of renewable energy supply and look to viable storage solutions to ensure long-term success and uptake.

Storage, including battery storage, may provide the solution, smoothing out the inconsistent output from renewable sources by increasing the reliability of energy supply and storing excess energy when demand for power is low. Batteries also reduce carbon dioxide emissions and can respond in milliseconds to increased grid demand, unlike fossil-fuel plants, which can take up to a few hours to ramp up.

Battery prices have also fallen by almost half since 2014, causing large-scale battery projects to emerge around the world. According to Bloomberg New Energy, in 2017 developers announced lithium-ion battery projects with a total capacity of 1,650MW per hour, four times the total announced in 2016.

With this fall in cost, the demand for batteries being used ‘behind the meter’ has increased – acting as part of a hybrid power plant helping to smooth generation output, in combination with renewable energy plants like solar PV, onshore, and offshore.

Storage, including battery storage technologies, have been widely hailed as a crucial tool to enable widespread integration of renewables, unlock grid flexibility, and bolster grid reliability, and are widely anticipated to have the greatest impact on the African energy sector.

Inspiration abroad

With the Middle East’s diversification and sustainability goals in mind, Africa is one region we can look towards to learn more about battery storage and how this can be harnessed to benefit the renewables utilities sector in the Middle East.

Traditionally, African countries have depended on fossil fuel-based plants and unreliable grid infrastructure to generate power. Battery storage may well facilitate renewable energy by evening out the distribution of electricity whilst breaking Africa’s dependency on unreliable grid infrastructure through the development of off-grid renewable plants. Small, renewable, off-grid solutions combined with battery storage is arguably the new sustainable alternative to the traditional centralised generation model.

Whilst the use of battery storage on a utility-sized scale may still be a few years away for Africa, the off-grid sector of the energy storage market has progressed in recent years with the support of export credit agencies and development banks.

Recently, French company Engie announced its acquisition of Fenix International, a US-based company that specialises in selling off-grid rooftop systems to customers in East African nations like Uganda. In October 2017, BBOXX, a company specialising in the distribution and financing of plug and play solar systems across Africa, announced its success in closing a deal on a $5m facility in Rwanda.

BBOXX is currently the largest off-grid utility in Rwanda and Essential Capital Consortium, a fund managed by Deutsche Asset Management (of the Deutsche Bank Group), will finance BBOXX to further develop its off-grid solar and battery system in the country. The $5m facility will be managed by Banque Populaire du Rwanda. Furthermore, in the summer of 2017, the World Bank announced that it would provide $150m in credit for the funding of off-grid solar energy in marginalised communities of Kenya.

Overcoming risks

Regardless of scale, there will always be a degree of technology risk that comes with financing storage assets like batteries. In particular, battery life is a crucial bankability aspect of the energy storage sector. The cycle life of a battery is the number of charge and discharge cycles a battery can complete before losing considerable performance. Current battery schemes are said to operate at 80 per cent of capacity after five years and face a gradual decline after that.

Nevertheless, technology risk, such as declining battery performance, can be mitigated. For instance: creditworthy suppliers that stand behind extended contractual warranties of 10 years (this is quickly becoming a market standard); operation and maintenance agreements from a reputable provider such as AES Energy Storage, Stem, Renewable Energy Systems (RES), and Advanced Microgrid Solutions (AMS) that specialise in storage asset management; and good technical advice, which will all play a factor on financial institutions’ lending decisions.

It should also not be forgotten that the performance and reliability of batteries are constantly improving with technological advancements driven by the increased levels of investment from the falling battery prices.

While energy storage projects attract financing from developing finance institutes (DFIs), the financing of energy storage projects is still relatively new for commercial banks in Africa. So far, Standard Bank, Africa’s largest commercial bank, has only financed power generation based on independent power purchase contracts without on-site storage facilities.

However, it has been reported that Standard Bank is now aiming not only just to provide local currency financing for working capital, but to also take on the challenge of financing start-up and higher risk projects involving new technologies, such as battery storage.

We understand that Standard Bank has set up a team to explore various project financing options for different kinds of distributed power, off the grid, and energy storage projects.

Leveraged public financing from African governments and international or regional development banks should also help reduce the financial risk perception of local commercial banks.

Building legal and environmental frameworks

Regulation of energy storage assets remains limited. The lack of regulation and uncertainty placed a burden on the early projects, but this is slowly starting to change. Western governments have started to recognise the need for a legal framework addressing the energy storage market. For example, the UK has taken steps to change the rules of taxes being levied on power inputs to charge a battery.

The US Federal Energy Regulatory Commission (FERC) has also been addressing the issue of whether to class storage as a generating or transmission asset, or a hybrid of the two categories. This decision is important because the cost of transmission assets can be recovered from transmission customers in the rates charged by the grid.

African governments will have to make equivalent considerations in order to attract investment and facilitate the growth of the energy storage sector that could potentially solve Africa’s power deficit.

The environmental impact of lithium-ion battery production and disposal should also be taken into consideration. Lithium originates primarily from a hard rock ore or brine; a naturally occurring concentrated solution of lithium. The hard rock ore is mainly found in Australia, Argentina, and Bolivia, and obtaining the final product from its ore involves the clearing of land, digging of mines, and storage of waste rock.

For brines, the main environmental concern of extracting lithium is the impact it has on water supply in desert areas, particularly for countries like the United Arab Emirates and Saudi Arabia. Beyond the environmental impact of extracting lithium, there is a supply chain risk that also requires consideration.

Are countries like Australia or Bolivia willing to export its lithium without restriction, and at what price? To minimise the risk, these factors will have to be dealt with contractually as far as possible.

On the disposal front, the finite cycle life of batteries means that batteries will need to be upgraded and replaced from time to time. Devising a scheme to recycle and deal with lithium-based waste will be essential in relieving the environmental and economic concerns of battery storage projects.

To date, large-scale lithium battery recycling has yet to be seen and therefore, comprehensive government policies will be important in ensuring sustainable growth and development of the energy storage market.

Past examples in the renewables sector have shown that public-private-partnerships enabled by sound policies and government leadership have the ability to mobilise significant levels of financing. The same can be true for energy storage projects when backed by strong political commitment and sound technical rationale.

As the Middle East looks ahead to a non-oil dependent future, many lessons can be learned from Africa. And while there’s still a long way to go, advancements in battery storage solutions mean our renewable energy goals are more achievable than ever.

Jim Simpson is a partner and Chris Shelton is an associate at Winston & Strawn