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Battery bubble or boom? It’s complicated

Battery bubble or boom? It’s complicated
FILE - An employee works at a battery energy storage facility in Saginaw, Texas, April 25, 2023, that is owned and operated by Eolian L.P. The U.S. Department of Energy on Friday, Sept. 22, announced a $325 million investment in long-duration battery storage projects. (AP Photo/Sam Hodde, File)

A battery bubble may be forming. What happens if it pops? Episode 70 of the Factor This! podcast answers that question by taking an intimate look at the two top battery markets in the U.S. — California and Texas — and their diverging trajectories. Subscribe wherever you get your podcasts.

Battery storage is booming in the U.S., and for good reason.

So much intermittent renewable energy on the grid demands flexible resources to fill gaps. And, short of reverting to fossil fuels, batteries are the best answer to support the energy transition.

Investors have poured billions of dollars into battery storage development to cash in, largely based on speculative opportunities. But there's one problem: markets have been slow to evolve, leading to an uptick in consolidation and growing uncertainty about the path ahead.

Could a battery bubble be forming?

"Market by market," answered Cody Hill, who leads independent power producer REV Renewables' battery storage division. "Generally, no. There is so much load growth. There's so much that's happening."

"ERCOT? I mean, yes," Hill said, referencing Texas' market.

Watch the full episode on YouTube

More on Texas in a bit.

REV Renewables, which began its spinoff from LS Power in 2021, developed some of the first battery storage projects in California. The state boasts more than 6,600 MW of installed storage capacity to lead the nation, up from 770 MW just four years ago. The state is projected to need 52,000 MW of energy storage capacity by 2045 to meet electricity demand.

The battery boom in California can be attributed both to ambitious state procurement mandates as well as a market structure that allows batteries to support resource adequacy needs, like power generators, as opposed to being relegated to ancillary service programs with limited needs.

In 2013, the California Public Utilities Commission approved the nation's first energy storage mandate, requiring the state to procure 1,325 MW by 2020. Following blackouts in the summer of 2020, the CPUC ordered an additional 11.5 GW from clean energy sources, which was followed by an order for an additional 4 GW in 2023.

California's ban on new natural gas generation "opened the door" for the battery boom, since storage is one of the only resources that can fill that gap, cleanly, according to Renae Steichen, REV's director of regulatory affairs and the incoming chair of the California Energy Storage Alliance.

Two battery energy storage systems developed by Convergent Energy + Power in Orange County, California, are now operating, providing grid resilience for Southern California Edison. Convergent said it would operate and maintain both lithium-ion battery energy storage systems. The systems are 9 MW/36 MWh and 6 MW/24 MWh.(Courtesy: Convergent)

Other states are getting the itch. Maryland recently passed a mandate for 3 GW of energy storage capacity by 2033. Michigan will require 2,500 MW by 2030. New York intends to procure 6 GW by 2030 if approved by regulators. Illinois could be next.

But while new markets are opening up, none are quite like California. The Golden State's ambitious clean energy targets, paired with a deepening "duck curve" and favorable market structure, create a sound economic opportunity yet to develop anywhere else.

So let's talk about Texas, the second-largest battery storage market in the U.S. with around 2 GW installed as of 2022, according to the Energy Information Administration. Battery developers, backed by billions in private equity, have flocked to ERCOT, in part due to favorable permitting and interconnection rules that have made Texas a hotbed for clean energy growth.

But the market opportunity for battery storage is somewhat limited. The majority of battery systems in Texas range from 1-2 hours in energy capacity, and asset owners are battling over a finite amount of capacity set aside to support daily grid management needs, often referred to as ancillary services.

The battery storage analysts at Modo Energy report that around 70% of operational storage capacity in ERCOT was reserved for ancillary services in 2023. Early next year, the analysts expect the capacity of batteries reserved for ancillary services to exceed the capacity of capacity awarded to storage.

"We do expect to see saturation happen in battery-dominated ancillary services in the next few months," Modo Energy analysts wrote last month.

Ancillary services is a "shallow market," as Hill describes. Grid operators like CAISO, ERCOT, or PJM only need a few hundred megawatts to meet their needs. It's a good starting point for battery storage, but "it's not going to scale." Meanwhile, the arbitrage opportunity that makes California attractive is more muted, due to relatively low solar penetration that prevents cheap charging.

What Texas does have, to its detriment and the benefit of battery owners, are high-frequency price scarcity events as a result of extreme weather and skyrocketing load growth.

Hill believes that first-mover developers in ancillary services-dependent markets can be successful, but the outlook for Texas battery development is "not for the faint of heart."

"(There are such) low barriers to entry, and it's easy to get in there to build lots of stuff, and so many people raised so much money to go build so much stuff in the last few years," he said. "It's a very tough market."

Transmission lines outside Houston, Texas (Courtesy: BFS Man/Flickr)

Saturation in the Texas market is becoming an increasingly common topic of conversation among battery players. An uptick in M&A among the state's leading development shops further complicates the outlook.

Broad Reach Power offloaded its battery assets to ENGIE in August for a reported $1 billion, and Jupiter Power was gobbled up by BlackRock late last year.

Are market constraints and consolidation cause for concern of a battery bubble? Not everyone is convinced.

Jason Burwen, vice president of policy and strategy for the battery storage IPP GridStor, doesn't believe in the theory that a bubble is forming. But even if one does, and it pops, the industry will continue to grow.

Burwen believes the "boom-bust" dynamic is a hallmark of the Texas market, and isn't exclusive to storage. That shouldn't be the reason for developers to stay away, he said. He believes battery storage deployment will dwarf estimates in the coming years.

"It just might not be the first owners of those batteries who get to profit from it," Burwen acknowledged.