Rise of energy storage set to drive down energy prices, McKinsey says

18 July 2017 Consultancy.uk

Investment by consumers and businesses in renewable energy solutions increasingly make economic sense, as prices come down, a new McKinsey report has found. The study shows that grid and power operators face considerable challenges from the rise of a complementary phenomenon, battery storage, while the disruptive changes mean that operators will need to act quickly to remain competitive, as well as carefully consider their investment strategy developments.

Grid and power operators face the potential of disruption much sooner than many anticipate, according to a new study from McKinsey & Company, titled ‘Battery storage: The next disruptive technology in the power sector’. The study explores the rapid rise of battery storage systems, and their potential impact on consumers’ behaviour and various grid and generation operators.

Economic value of battery storage

Since 2016 prices for storage systems have fallen to around $230 per kilowatt-hour, compared with almost $1,000 per kilowatt-hour in 2010, with the rapid decline largely due to increased need for storage solutions in the automotive sector. The development this spurred has spilled over into, among others, home-storage systems.

The economies of utilising energy storage varies by market segment, but for customers, it is particularly useful for storage and self-consumption, as a medium economic utility today, and rising to high utility by 2020. For commercial customers, it is already economically viable to demand charge reduction.

The technology was also found to have various benefits for utilities operators, including frequency regulation and renewable-energy-technology firming and smoothing – particularly when costs come down further. Energy storage development also benefits power reliability and backup improvements, while in the near future, additional benefits may arise for utilities, including creating local capacity and distributed and transmission investment deferral – largely to offset risks from technology changes.

Grid defection

Risks ahead

New innovations are also set to introduce various risks to grid and power operators as their traditional business models are disrupted by consumer behaviour and government policy. The need to transform the energy network in light of climate change, has across almost all of the globe become paramount – creating incentives for governments to support consumers and businesses to add renewable capacity to their respective homes and premises. Resulting policies have already begun to affect the decision making process of energy operators.

The McKinsey paper also suggests that operators face considerable new challenges from the rising capacity and decreasing expense of energy storage. As the price of storage falls further, consumers and businesses are increasingly able to generate and expend their generated capacity as needed – allowing for partial grid-defection. The shift is set to become increasingly economic from around 2022 for consumers. With full grid-defection, as per the current scenarios, available from around 2030.

The need for change, coupled with technological advance and changes in consumer behaviour, mean that grid operators and generators will need to carefully handle the transition – to avoid investment in assets that become stranded due to future innovations.

According to the conclusion of the consulting firm’s document, four factors will be paramount in navigating the changes: “how quickly storage costs fall; how utilities adapt by improving services, incorporating new distributed energy alternatives, and reducing grid-system cost; how nimble third parties are; and whether regulators can strike the right balance between encouraging a healthy market for storage (and solar) and ensuring sustainable economics for the utilities.”

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