Decarbonising heating systems is vital for meeting climate targets, and heat pumps are the best way to do it.
The rise of renewables-plus-storage is a key milestone in the energy transition. As the share of renewable energy grows globally, providing backup generation becomes more important. Installing batteries to power systems is one of the best ways to do this, and comes with added benefits. Batteries enhance grid stability and enable renewables to provide a constant supply of electricity. This briefing explains what renewables-plus-storage systems are, and unpacks the economic forces driving their deployment.
As more renewables come online, the need to provide backup to generation becomes essential. An increasingly viable solution is energy storage. An energy storage project is designed to store electricity and disperse it at a later stage. Though an array of technologies store energy, currently most storage projects are pumped hydro plants. But battery storage is the fastest growing share of the market and holds much promise. Grid operators see batteries as the better option to keep the grid in balance, largely due to their ability to respond rapidly to imbalances in the system.
The size of a battery is measured in two ways. The power rating, measured in MW, indicates how much electricity a battery can absorb or release at any given time. This is often accompanied by the battery’s duration – the amount of time it takes to charge or discharge. Together these make up the energy rating in MWh.
For example, consider a battery with a 60 MW power rating and a 4-hour duration. This battery can supply 60 MW of electricity per hour (enough to power 45,300 American homes) for four hours. Further, if 60 MW flowed into this battery every hour, it would take four hours to charge. With this power rating and duration, it has a total energy rating of 240 MWh. Formally, this would be a 60 MW/240 MWh battery.
Storage projects are either built as standalone facilities or are connected to a power plant. A renewables-plus-storage installation entails an energy storage system connected to a solar or wind plant. Since these projects pair more than one technology (for example, solar PV and batteries) they are also known as hybrid renewables projects. Larger projects of this kind, known as utility-scale or grid-scale projects, are directly connected to the grid. Smaller projects are decentralised, with facilities often built in residential and industrial zones. A rooftop solar installation paired with a battery in a household is a good example.
Renewables are essential for decarbonising the power sector. But high penetration rates of renewables (the percentage of electricity generated by renewables) present a challenge to grid operators. Solar and wind are variable sources of electricity, meaning their generation fluctuates with the weather. This is why solar and wind are sometimes referred to as variable renewable energy. As a result, grid operators can struggle to match supply with demand, increasing the volatility of electricity prices.
Energy storage – and more specifically, batteries – can reduce this variability. Batteries can absorb renewable electricity when it is produced in abundance and discharge it when supply is low due to weather conditions. In this way, renewables with storage can provide a constant supply of clean electricity, rendering thermal power plants increasingly redundant. This paves the way for almost 100% clean energy power systems.
Though the energy storage market is still small, projections point to exponential growth. Globally, 1,676 GW of energy storage capacity will be added by 2050, up from 11 GW in 2019, according to BNEF. China, the US and India will be the leading storage markets, accounting for a third of global capacity by mid-century. China and the US are set to become the world’s biggest storage markets as early as 2026, while India’s storage installations are expected to accelerate this decade.
Simultaneously, renewable capacity additions will surge. Solar and wind installations are projected to reach over 7,740 GW and 4,000 GW, respectively, by 2050, up from 650.5 GW of solar and 637.5 GW of wind in 2019. Together, they are projected to account for 58% of global capacity and meet 56% of electricity demand by this time – an increase from 8.2% in 2019. China, Europe, India and the US will be the key markets.
The scale up of wind, solar and storage over the last decade has helped push down costs, making these technologies increasingly competitive (see Figure 1). Solar costs have plummeted 89% since 2009, while onshore wind and offshore wind have witnessed price declines of 63% and 58%, respectively. In addition, the price of utility-scale lithium-ion batteries has dropped 84% since 2012, and by more than half since 2018. Projections show that this will halve again by 2030.
Source: BNEF, 28 April 2020.
The same decrease in cost is true for hybrid renewables plants. In some parts of the world, the levelised costs of new renewables-plus-storage systems are already lower than those of new thermal generators, according to BNEF. In Australia, wind paired with storage already outcompetes new coal and gas plants, with solar-plus-storage expected to do likewise by 2022. By 2025, the same will be true in China and India, projections suggest. In Germany and the UK, new wind-plus-storage is already cheaper than building new fossil fuel power plants.
A surge in investment will help renewables-plus-storage further scale up. By 2050, capital flowing into solar, wind and storage is expected to reach USD 11 trillion. Almost USD 1 trillion will flow into energy storage, BNEF forecasts. By comparison, energy storage attracted USD 3.6 billion of investment globally in 2020. The US funded USD 1.2 billion worth of storage projects, followed by China (USD 0.8 billion), Korea (USD 0.5 billion) and Japan (USD 0.4 billion). Renewable energy capacity investments reached USD 303.5 billion in 2020, with China (USD 83.6 billion), Europe (USD 81.8 billion) and the US (USD 49.3 billion) leading the market.
Fossil fuel-driven thermal power generators have typically been used to provide a steady supply of electricity to the grid, known as baseload, as well as to meet sudden peaks in power demand. But the advent of renewables-plus-storage enables clean sources of electricity to perform the same functions.
Plummeting costs mean that it now makes more economic sense to build a renewables-plus-storage system than a thermal generator in many parts of the world. Increased installation will reduce further renewables-plus-storage costs to the point where they undercut even existing coal and gas plants. In other words, it will be cheaper to build new renewables-plus-storage than to continue operating existing fossil fuel plants.
Coal, already under immense pressure, will fall first. Renewables with storage projects are cheaper than 39% of the global coal fleet today. By 2025, this percentage will rise to 73%, according to the Rocky Mountain Institute. Also by mid-decade, Carbon Tracker projects it will be more expensive to operate Europe and China’s coal power plants than to build new renewables-plus-storage facilities.
Gas is also at risk. In some markets, a 200 MW battery powered by renewables can already replace a medium-sized gas generator. Solar-plus-storage projects are also already cost-competitive with new gas peaker plants in parts of the US. For example, in states like Arizona and California, these facilities are now eating into the generation share of gas plants, according to BloombergNEF.
Poised to become the most decentralised grid in the world, Australia has ramped up battery installations. Australia’s total installed electricity capacity is about 75 GW, with rooftop solar accounting for 11 GW – roughly 50% of all renewable capacity. Rooftop solar is also one of the main drivers in the country’s fast-growing renewable energy market. New solar and wind installations reached a record 6.3 GW in 2020. Nearly half that, about 3 GW, came from rooftop solar installations. By 2050, rooftop solar will meet 26% of Australia’s total electricity demand, BNEF forecasts.
In response to this growth, and to smooth its transition, Australia has sought to build up its energy storage capacity. Since 2018, it has announced 6 GW/9 GWh of energy storage projects, mainly to support renewables. This pipeline has been driven by state and national subsidies. In 2020, battery capacity installations more than doubled year-on-year, reaching 1.2 GWh of capacity. Much like solar, residential batteries are a major market driver for battery installations in Australia. There is an 11 GW pipeline of proposed battery projects and 900 MW will come online by 2024. This will double current capacity. One of the most notable batteries is the 150 MW/194 MWh Hornsdale Power Reserve, built by Neoen and Tesla to help balance South Australia’s renewables dominated grid.
Renewables-plus-storage projects are nearly cost-competitive with gas plants. As the rapid cost deflation in batteries continues, new gas plants will no longer be the cheapest option to replace coal power. Replacing the Liddell coal plant in New South Wales with a 1 GW battery powered by solar would lead to a 17% electricity price reduction compared to replacing it with a gas plant, according to RepuTex’s modelling. By 2025, the price of energy storage in Australia will drop by 27%, Wood Mackenzie forecasts. At this point, renewables-plus-storage will be cheaper than gas plants across the country.
The growing deployment of large renewables with storage systems will lead to more cost reductions, further pushing gas generators out of the market. Most notably, Neoen is planning a large hybrid project valued at AUD 3 billion that will consist of 1,200 MW of wind, 600 MW of solar and 900 MW/1,800 MWh of battery storage – nearly ten times bigger than the Tesla battery in Hornsdale. South Australia recently approved the Goyder project. In the first stage of this Goyder project, Neoen will provide 100MW of wind power and 50MW of battery to Canberra at a record low price (AUD 35/MWh).
A future grid dominated by renewables and supported by storage is the cheapest, most reliable and resilient option for Australia. Renewables supplied 60% of South Australia’s power in 2020, while electricity prices for consumers dropped by 57% to AUD 29/MWh. These were the cheapest rates in the country last year. The state’s batteries provided the backup to these renewables, preventing blackouts throughout the year. When a storm destroyed key transmission lines, South Australia’s batteries helped keep the grid running for two weeks.
A grid resembling South Australia’s would be cheapest for Australia as a whole. Integrating up to 50 GW of utility-scale solar, tripling rooftop solar and building 19 GW of energy storage would be the most cost-effective way to upgrade the country’s grid, according to the Australian Energy Market Operator, the body responsible for overseeing Australia’s grid. These upgrades would lead to a net AUD 11 billion in customer savings by 2040.
As California pursues an ambitious clean energy target, energy storage is key to building grid resilience. The state has set itself a 100% renewable energy target by 2045. So far, it has installed over 17 GW of solar and wind capacity, about 20% of its total. It has also moved away from fossil fuels, decommissioning 9 GW of gas power plants since 2014 – enough to provide electricity to nearly 7 million households. Yet natural gas still represented half of installed capacity in 2019.
Extreme weather has shown California’s grid to be vulnerable. During the heatwaves of August 2020, the state’s rooftop solar generation met power demand during the day, but there was a lack of battery capacity to soak up excess generation for evening demand. The vulnerability of gas plants to the extreme heat compounded the issue. Some gas generators tripped offline because of the heat, while other plants were offline for maintenance. Close to 1 GW of gas-fired generation was unavailable, equivalent to the electricity consumption of over 750,000 households, according to California’s Independent System Operator (CAISO), the body that oversees California’s grid planning.
In response, California’s main electricity regulator, the California Public Utilities Commission (CPUC), has ordered the state’s utilities to procure 3.3 GW of energy storage supplies. At the end of August 2020, the CPUC had announced that 1.2 GW worth of utility-scale batteries would come online within a year.
Renewables-plus-storage are turning gas power plants into stranded assets. Solar PV and wind already supply 20% of California’s electricity. They have overtaken the daytime generation of gas plants, leaving these to meet peak demand in the main. This has lowered the utilisation rate of gas plants and made them more expensive to operate. Following dramatic drops in price, solar-plus-storage facilities can now outcompete new-build gas peaker plants in California, according to BNEF.
Cost reductions are pointing to renewables-plus-storage plants soon undercutting proposed gas plants throughout the country. By 2026, renewables-plus-storage will be cheaper than 95% of the 68 GW of proposed gas generation across the United States, the Rocky Mountain Institute finds. Since 2018, USD 30 billion of investment in planned gas capacity has been cancelled as a result of deteriorating economics.
Utility-scale storage has seen an exponential growth in the US, with California leading the way. Despite the pandemic, US energy storage deployment reached a new record, rising to 1.5 GW/2 GWh by the end of 2020. More than half of this, 885 MW, is in California. By August 2021, California will have 1.7 GW of storage capacity, which will power 1.3 million homes. But this is still not enough to balance the state’s grid powered by renewables. California’s grid operator calculated that at least 12 GW of batteries is needed by 2030. To meet its goal of a carbon-free electricity grid by 2045, California will need to further ramp up its utility-scale storage capacity to as much as 48.8 GW.
Utilities will play a significant role in achieving this target. South California Edison (SCE) signed contracts for 1.4 GW of large-scale battery storage in 2020, bringing the company’s total installed and procured capacity to 2 GW. Meanwhile, Pacific Gas and Electric (PG&E) is adding two huge batteries to its portfolio. The utility recently commissioned the world’s largest battery, built with Vistra Energy. The 300 MW/1.2 GWh battery system will replace the idle Moss Landing gas plant and will be fed by renewable electricity. PG&E will also develop a 182.5 MW/730 MWh project with Tesla, scheduled for completion in 2021.
India can ramp up energy storage quickly to integrate more renewables. The government of India aims to install 450 GW of renewable energy by 2030 with an interim target of 175 GW by 2022. Today, India has close to 93 GW of renewables. To facilitate the integration of these renewables, the country will have to expand its battery capacity. At the end of 2019, India only had 12 MW/13 MWh of storage capacity. Tata Power’s 10 MW/10 MWh lithium-ion battery in New Delhi, built in collaboration with AES and Mitsubishi Corporation, accounts for almost all this capacity.
Though its storage market is currently small, India could already accelerate grid-scale storage installations, similar to South Australia and California. In both geographies, strong policy support has spurred on the rapid deployment of large-scale batteries. In turn, power price volatility and costs of maintaining the grid have dropped. The costs for developing battery storage are currently high, but this can change quickly with the right support. Favourable policies could incentivise utilities and developers to build bigger projects. Ramping up grid-scale storage capacity, especially for commercial and industrial consumers, would be a good starting point, as they have more capacity to absorb the slightly higher initial costs.
Projections point to a massive surge in India’s energy storage market. India’s Central Electricity Authority (CEA) has made unrivaled plans to expand battery capacity to 34 GW/136 GWh by 2030. By 2050, installed capacity will increase to 187 GW/667 GWh, making it the world’s third-largest energy storage market after China and the US, according to BNEF.
Competitive tenders help renewables-plus-storage facilities break new ground. In February 2020, India hosted its first “round-the-clock” auctions, designed to secure power available at all times. Two developers, ReNew Power and Greenko, submitted bids for renewables-plus-storage projects that undercut coal generators. They won 300 MW and 900 MW respectively. ReNew Power secured a weighted average tariff of INR 4.30/kWh (USD 0.06/kWh), while Greenko’s bid came in at INR 4.04/kWh (USD 0.057/kWh). Both bids are lower than the INR 5-7/kWh (USD 0.0694-0.0972/kWh) submitted by coal plants.
As more auctions lead to the installation of more renewables-plus-storage capacity, these tariffs will drop and put further pressure on coal. Across India, forecasts show tariffs for renewables-plus-storage projects dropping to INR 2.83/kWh (USD 0.039/kWh) by 2030, according to the Lawrence Berkeley National Laboratory. This would undercut most of India’s existing coal fleet. In Tamil Nadu, the levelised cost of a renewables-plus-storage facility is projected to drop from INR 4.97/kWh (USD 0.069/kWh) in 2021 to INR 3.4/kWh (USD 0.047/kWh) in 2030, according to a study. By contrast, the levelised cost of a coal plant will hover between INR 4.5-6/kWh (USD 0.062-0.083/kWh).
Decentralised renewables with storage are the best way to electrify rural communities. In 2015, Prime Minister Modi vowed to electrify every village within 1,000 days. Modi has claimed that he has fulfilled this promise, but supply is inconsistent and many households still lack access to electricity. Solar-plus-storage mini-grids are the cheapest way to bring reliable electricity to rural communities, according to Sustainable Energy for All. There are already close to 2,000 mini-grids in all of India, and Tata Power has laid out plans to build 10,000 renewable mini-grids to help expand access to reliable power in the country.
Sources: BNEF, media reports, grid operator reports. * Australia’s target is framed in generation capacity. This target was already met in 2019.** California’s target is framed as being 100% carbon free. It is unclear how much capacity that would entail exactly. An interim target for 2030 lays out that the state should install 36.2 GW of utility-scale renewables, 20 GW of rooftop solar and 12 GW of batteries.
Decarbonising heating systems is vital for meeting climate targets, and heat pumps are the best way to do it.
Offshore wind could generate more than nine times the country's projected electricity demand for 2050.