Smart investors know it pays to look beneath the surface. On the face of it, the global renewables sector is on a high, buoyed by a record US$1.8t investment in clean energy in which saw the biggest ever absolute increase in new capacity — 507GW, two-thirds of it solar.2
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But dig a little deeper, and the picture isn’t quite so rosy. Last year’s surge puts investment on track to increase global renewables capacity by two and a half times by , which, while encouraging, still falls short of the COP28 target to triple renewables capacity by that date.3 And challenges loom on the horizon that may slow progress just as acceleration is needed.
Years of underinvestment in infrastructure means network gridlock has now reached acute proportions in many markets, depriving developers of a timely route to market and eroding the value of investments. Grid upgrades and expansion are urgently needed. In Europe alone, annual investment in distribution grids must double to €67b (about US$73b) by , according to the EY-Eurelectric Grids for Speed study.4 Projects locked in grid queues are tying up money that would otherwise be cycling through the system, exacerbating an already tight capital market where investors face much higher costs. Rates of grid curtailment are increasing, from 2% in to 8% in in the US, UK, Germany and Ireland, as the share of renewables in the system doubled.5
Battery energy storage systems (BESS) can be part of the solution to network challenges and, as we explore in this edition of RECAI, offer lucrative revenue opportunities for sophisticated investors — if they target the right regions and consider four factors.
Read in RECAI 63:
Investor interest is also on the rise. But this isn’t an easy market to master. BESS investments are a long-term commitment; projects typically run for 20 years or more with battery upgrades. They are also highly localized and carry more risk than some other clean energy investments. Success requires understanding the dynamic interaction of regional variations, electricity market design, technology and financing — as well as an acceptance of volatility.
To help cut through the complexity, EY teams have identified and ranked the attractiveness of the world’s top global battery investment markets for the first time. (This assesses factors including installed capacity and pipeline, as well as government support, such as tenders, subsidies, policy and deployment targets.)
In many markets, ancillary markets, particularly frequency response services, have typically made up much of BESS revenue. But market saturation is seeing prices drop and the stack shifting toward energy arbitrage and capacity markets. For example, in the UK, ancillary services made up 84% of BESS revenues in but, so far in , are only contributing 20%.16 Across Europe, it is a similar picture.
In the future, optimization and the right bidding strategy will be critical to ensure maximum returns on storage assets. Value opportunities will become more localized as renewables proliferate and volatility increases. Negative or zero-price events, already on the rise, will become more frequent, strengthening the role of storage.
Continuing to capture value in a fast-changing market requires agility. This demands both a flexible mindset and the artificial intelligence (AI) and digital tools that enable fast, insight-driven shifts.
“Understanding and leveraging AI and digital tools for optimized storage trading strategies can help companies de-risk investments, navigate regulatory changes quickly, and better monetize opportunities presented by new market structures and market volatility,” explains EY Global Energy & Resources AI Lead Ana Domingues.
Mastering data and monitoring technology evolution can guide smart decisions as technology evolves. For example, the move toward longer duration batteries and emerging competitiveness of alternative storage systems, such as hydrogen and vehicle-to-grid technology, could erode the future business case.
BESS projects are capital-intensive, requiring financing and active management throughout their life. This means investors should ensure finance and offtake strategies with buyers are linked. For example, they should consider whether the goal is long-term contracted revenues or if they are willing to take merchant risk for a potentially higher return. Investors also need to accept a level of volatility and a longer-term view over various cycles.
The complexity of BESS projects means success will depend on investors having differentiated capabilities across the value chain, as well as strong management teams with local market capabilities. Relationships with landowners can smooth the development process, as can understanding local planning regimes and regulation, as well as offtake markets.
The ability to reduce capex is vital to scaling up BESS investment. Costs of grid-scale BESS are expected to fall by around 20% to 30% across key markets by , but reductions may be offset by volatile commodity prices and supply chain bottlenecks. For example, slow lead times in building transformers can delay the connection of new BESS projects to the grid.
China Mainland’s dominance of the battery supply chain amid growing resource nationalism and protectionism in many markets could impact the viability of future projects. Battery recycling could help mitigate some risks, and more companies including Iberdrola, Glencore, and FCC Ámbito, are collaborating on lithium-ion battery circularity solutions.
Ambitious decarbonization targets are driving a clean energy push in many markets, marked by record-breaking participation in offshore wind and solar tenders, as well as innovative projects in carbon capture and hydrogen.
While the top of our rankings remains relatively unchanged, Canada (9) and Japan (10) enter the top 10, with investors attracted by more opportunities in offshore wind. Spain (12) has dropped four places as investors feel the impact of continued low prices, while Italy (13) and Greece (16) have climbed up the ranks.
In a year when about half the world will be voting in elections, Argentina’s rise of three places (to 26) under a government determined to build a more sustainable, clean energy system is a reminder of how quickly government policy can impact investment.
Seyed Madaeni is co-founder & CEO of Verse, whose Aria software helps organizations procure the best clean power options for their business.
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In recent years, technology improvements have given rise to a pivotal new asset class in the clean energy landscape: energy storage.
When most people think of large-scale clean energy, they conjure images of big wind and solar power farms connected to the grid. That is changing as energy storage technologies evolve and scale. We are witnessing the emergence of energy storage as a novel and versatile asset class.
Although there are different forms of energy storage (thermal, long-duration, etc.), many storage projects consist of large-scale lithium-ion batteries linked to the grid that can absorb excess renewable energy and direct it back into the grid when energy demand would otherwise be met by generators powered by fossil fuels—in turn, reducing carbon emissions. According to research published in , some energy storage technologies “allow 90% CO2 reductions from the same renewable penetrations with as little as 9% renewable curtailment.”
Like any traditional power plant, these energy storage systems are owned by private investors who generate revenue from selling and trading the electricity that’s in their storage assets in wholesale markets. If we ignore the myriad benefits energy storage brings to power grids and just look at it as a binary transaction between sellers and buyers of electricity, it’s fair to say that the energy storage developers (sellers) have been the main beneficiaries of these transactions—which is due to information asymmetry, among other reasons, such as developers typically having more information about assets and power grids than the buyers.
However, buyers of power also stand to benefit financially from this flexible, smart asset class while simultaneously reducing their carbon footprints—and more should consider investing in this asset class.
Buyers of power are already making headway in energy storage investments. According to a Reuters article, the “Reuters Events Energy Transition Insights” report found that “energy storage is set to overtake solar as the leading technology for energy transition investments in the next three years.” Specifically, 43% of those who responded indicated that their organizations “planned to invest in the technology within the next three years.”
At a time when the call to action for reducing carbon emissions has never been louder, energy storage presents a uniquely flexible solution. It stands out for its ability to absorb and dispatch energy on demand, offering clean energy buyers a powerful tool to reduce their carbon footprint. By charging these storage systems with renewable energy and deploying the energy when the grid has high carbon intensity, these smart assets can create substantial carbon benefits, allowing organizations to take tangible steps toward their decarbonization goals.
An energy storage asset that’s charged entirely with renewable power can significantly alleviate carbon emissions when operated strategically. Corporations with a vision to minimize their environmental impact can finance these assets, leveraging them to actively contribute to a cleaner grid. When buyers invest in renewable projects such as energy storage through power purchase agreements (which my company helps facilitate), they can dictate how the assets should be operated, requesting that the storage asset operations align with their corporate carbon reduction strategy.
The opportunity to engage in energy arbitrage, using storage to mitigate economic and energy costs while contributing to carbon reduction, presents an attractive financial and emissions-reduction proposition that I’ve observed some buyers are beginning to embrace wholeheartedly. By timing the discharge of stored energy to coincide with peak grid emissions, these "smart assets" not only provide financial benefits but also offer a credible means to claim responsibility for tangible emission reductions.
In my time building software to help companies sell and optimize energy storage assets, I’ve seen firsthand the factors that buyers exploring this new asset class need to keep in mind.
First, they should avoid investing in technology just because it looks trendy or cool. Instead, leaders must get to the heart of why they want to invest in a particular technology.
For starters, buyers should clearly understand their organizational objectives, whether financial, environmental or both, and use those objectives to guide their research on energy storage investment opportunities. It's vital to approach this technology with clear goals and an understanding of its role within a broader energy portfolio. Energy storage, with its potential to provide more control over costs and carbon footprints, can be a crucial component of a company’s overall strategy, particularly those aiming for high levels of hourly matched clean power.
Investing in energy storage doesn’t just provide a pathway for reducing carbon emissions; it’s also a pathway for potential savings on electricity and energy costs. By starting with a review of their objectives, buyers can pinpoint the energy storage investment opportunities that are most aligned with their specific strategies and build the right portfolio of assets.
Moreover, buyers should be willing to embrace new technologies in this space, such as long-duration energy storage (LDES). It may not end up being the right investment in certain cases, but keeping an open mind enables leaders to explore all the possibilities—and arrive at an optimal solution. The companies that are most willing to explore new technologies stand to remain the most competitive moving forward.
As buyers consider investing in energy storage, they should be aware that while regulations in the United States have progressed, they remain behind the fast-paced evolution of this new asset class.
As noted in Energy Storage News, the Inflation Reduction Act “brought with it investment tax credit (ITC) incentives for standalone energy storage, answering one of the industry’s biggest asks of policymakers.” That’s a move in the right direction, but I believe that further regulatory support and clarity are essential to unlock the full potential of energy storage in carbon reduction. Current regulations do not fully recognize the capacity of energy storage as a mechanism for reducing emissions. For instance, in my view, the U.S. Department of the Treasury’s initial guidance on section 45V of the IRA (regarding green hydrogen production tax credits) lacked specificity on how energy storage might qualify for the tax credit. Last year, my company submitted comments to the U.S. Department of the Treasury explaining how energy storage can play a role in reducing carbon emissions on a 24/7 basis. Other stakeholders in this space should make their voices heard. By pushing for regulatory frameworks that acknowledge the environmental benefits of energy storage, we can encourage investment and deployment, ensuring that assets are leveraged to their utmost potential and driving collective carbon reduction efforts.
The rise of energy storage as a new asset class can help organizations forge a path toward not only reducing their carbon footprints, but also achieving significant financial benefits.
The stakes of delaying action in this arena are high. Consider a report from the International Energy Agency, which noted that worldwide, energy-related carbon emissions increased by 0.9% in . This increase, the agency explained, was “lower than feared.” It is in our collective best interest to reduce carbon emissions as much as possible, as quickly as possible, and buyers of power who have a stake in energy storage can contribute to that reduction—while also mitigating their electricity costs.
In a world where organizations are rapidly expanding, securing affordable, reliable and clean power is paramount. The intermittent nature of renewable generation underscores the necessity of integrating storage solutions to ensure a reliable and sustainable power supply. By proactively investing in energy storage alongside traditional renewables like wind and solar, organizations can navigate the challenges of a shifting energy landscape, making informed decisions that benefit not only their bottom line but also the planet.
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