30 / 12 / 21 - 4 minute read
The great energy transition is underway, with energy infrastructure at the heart of a tectonic shift towards a low carbon global economy. Savvy investors sit poised, with dry powder ready to deploy into assets that will power the global switch from fos
Large scale energy storage infrastructure is likely to play a critical role in decarbonising electricity grids around the world, a crucial pathway to net-zero by 2050. When it makes sense for infrastructure investors to allocate capital to this emerging asset type is less clear. Energy storage technology is nascent, applicable regulatory frameworks are immature, and most energy storage projects still involve government support. Despite this, global energy storage capacity is forecast to grow quickly, and so is the interest of international infrastructure investors in this asset type.
As the term is most often used now, energy storage relates to the storage of intermittent, renewable sources of electricity such as wind and solar to decarbonise the global energy sector. In the past, electricity grids did not require masses of energy storage because the incumbent coal- and gas-fired power plants could balance demand and supply to create a reliable system.
Baseload power was generated continuously by these power plants with low running costs and stable output levels. Dispatchable generation tended to come from open-cycle gas turbines known as ‘peakers,’ characterised by their ability to ramp up generation quickly, often within 15 minutes, to meet peak spikes in demand for electricity.
The global economy is moving away from fossil-fuel power generation, and renewables are increasing their share of the energy mix in electricity grids worldwide. However, because renewables are intermittent (meaning they only generate power when the sun shines and the wind blows), they can only be a source of dispatchable power if used in conjunction with energy storage.
Globally, capacity for energy storage is forecast to grow at a compound annual growth rate of 31% over the next decade, resulting in 741 GWh of cumulative capacity by 2030. Close to half of this growth is forecast to come from the US (49% or 365 GWh), followed by China (21% or 153 GWh). In Europe, Germany and the United Kingdom are expected to be the most active markets for energy storage investment. In Australia, South Australia continues to be where most energy storage investment activity occurs.
Energy storage can be defined between front-of-the-meter (FTM) and back-of-the-meter (BTM) capacity. These refer to where the energy storage is located, with household battery systems being an example of BTM energy storage. The Power play report focuses on FTM energy storage as this is where the types of large-scale energy storage assets that infrastructure investors are seeking are located.
Large-scale energy storage ticks many boxes for infrastructure investors looking to allocate to assets that will power the decarbonisation transition. Philosophically, the long-term investment case also makes sense.
Pumped hydro is the incumbent technology, making up the vast majority of the world’s electricity grid storage today. Global capacity is set to increase, and significant investment is required to modernise existing brownfield pumped hydro assets worldwide. PATRIZIA sees opportunities for investors but also points out the risks associated with these capital intensive, long-duration assets with complex sustainability aspects. Skilled transaction structuring and asset management will be key to the long-term success of such investments.
Lithium-ion batteries are emerging as another critical large scale energy storage asset. An investment in battery technology may diversify a highly contracted portfolio, de-risk existing renewable assets and provide a vehicle to participate in potential future markets. This is despite regulatory and revenue uncertainty, which both remain opaque and can make building an investment base case challenging.
Underground hydrogen storage is the third energy storage technology that will likely become mainstream as the energy transition progresses. However, salt cavern storage is localised, and opportunities to deploy capital into this type of energy storage asset is likely to remain limited for some time yet.
Large scale energy storage assets may not be for every investor. Still, the PATRIZIA report cautions that there is danger in dismissing what will likely be one of the next megatrends in infrastructure investment. In deciding whether to deploy capital into large-scale energy storage, investors should consider a collection of factors, including risk appetite, existing portfolios, and the project's specific characteristics (as for any deal). However, this asset type will be propelled forward by significant structural tailwinds.
Download the report Power play:Large scale energy storage in a decarbonised grid