Storage developers predict more growth as battery costs fall again

Storage project developers are expecting the sector’s growth to amp up following news that lithium-ion battery costs are dropping once more. 

“Now that prices are going lower again, certain markets start to make sense that this time last year didn’t, from a pricing perspective,” said Andrew Gilligan, director of commercial strategy at Fluence, the world’s second-largest battery storage system integrator. 

“Certainly, from a megawatt or megawatt-hour perspective, pipelines will increase since your dollar-per-kilowatt-hour price is going down,” he added. “Lower prices will unlock more economically viable deals and segments of the market.”

A November BloombergNEF report found that global lithium-ion battery pricing fell 14% from 2022 to 2023. This comes after a 7% uptick — the first on record — from 2021 to 2022. Gilligan confirmed some energy storage projects may have been canceled or postponed after lithium-ion’s downward cost trend stalled last year. 

“There were still projects that would happen even in a higher-price world, but there were some that got pushed out,” he said. 

Paused projects may be revived this year, though, as the price of lithium-ion battery packs, which are key to vehicle electrification and most stationary energy storage projects, hit a new low of $139 per kilowatt-hour of capacity, according to BNEF data.

The price- cut was thanks to lower costs for components and raw materials, because of both increased production capacity across the battery value chain and lower-than-expected demand. 

“Expectations across the industry may have been too high,” wrote BNEF energy storage analyst Evelina Stoikou in an email. “Demand for batteries for EVs and stationary storage has increased year on year, but some automakers and battery manufacturers have started cutting their targets related to electric vehicle and battery sales in the near term.”

Falling costs

Battery costs are now expected to keep falling for the rest of the decade, in part thanks to the adoption of new cathode chemistries. Recent years have seen a move away from batteries that require expensive materials such as cobalt. Already, said Gilligan, 90% to 95% of stationary battery storage projects use lithium iron phosphate batteries that have no cobalt at all. 

But BNEF’s Stoikou said that these material changes are just one variable in the price reduction equation.

“Changes to cathode and anode materials at the cell level, new pack designs and improved cell manufacturing processes will be key to reducing prices to 2030,” she said.

Gilligan said these cost reductions are expected to improve the viability of energy storage projects beyond major markets such as Australia, the United Kingdom, and the United States (especially Arizona, California, and Texas). The U.S. markets to watch, he added, include the PJM Interconnection and Midcontinent Independent System Operator. 

However, these U.S. markets were set to grow even without recent battery cost reductions, thanks to the impact of the Inflation Reduction Act. The law offers a 30% investment tax credit for standalone energy storage systems, which rises to 40% for projects using domestic content. Fueled by the IRA, grid-scale energy storage installations across the country set a new record in the second quarter of 2023, according to a quarterly U.S. Energy Storage Monitor report from research firm Wood Mackenzie and the American Clean Power Association.

Most upcoming U.S. projects are expected to use Chinese-built batteries. Stoikou noted that developers are seeking “flexibility in their supply to take advantage of low cell and rack prices in China, where competition has been fierce.”

But the law favors domestic materials and manufacturing with a higher tax credit, which could help boost demand for U.S.-made products, Gilligan said. 

More favorable economics could attract new players to the energy storage market. 

One example is Ørsted, the world’s largest offshore wind developer, which has a 40-megawatt battery project in West Texas and is now building a 300-MW, four-hour storage scheme — one of the largest lithium-ion projects in the U.S. — in Arizona.

“The confluence of declining lithium-ion pricing as well as new incentives in the IRA have created an important opportunity for investment in storage projects, which are critical to ensuring grid reliability and resiliency,” said an Ørsted spokesperson in a written statement. “Ørsted is actively monitoring opportunities to build battery energy storage projects that complement our existing portfolio in the U.S.”