Battery investment cycle protects margin downside

We have supported dozens of battery projects through investment case development across UK, NW Europe, Italy & Spain.  What is the number one concern that investment committees have in approving projects? Margin cannibalisation by other batteries.

“The threat of battery cannibalisation is often misunderstood and overstated”

This is a rational concern. The requirement for the shorter duration balancing services that lithium-ion batteries provide is not unlimited. Battery saturation and erosion of returns is a key risk factor that needs to be properly understood & quantified.

However the threat of cannibalisation is often misunderstood and overstated. Let’s look at why.

Cell investment: running to stand still

As new wind & solar capacity comes online, there is a continuous requirement for investment in new batteries to support system balancing. In addition ageing cells from existing battery sites need replacement as they degrade.

Generation assets typically have economic lives of at least 25-30 years, whether they be renewable or thermal. A battery site and balance of plant have a similar life span. But the life of battery cells is significantly shorter.

Battery cells degrade as they are cycled and require replacement after somewhere between 8 – 15 years (depending on technology & nature of cycling).  Cells currently in operation (i.e. installed across 2015-20) are more likely to have lives towards the lower end of that range, given steeper cell capex declines & technology improvements incentivise earlier replacement.

Taking the UK market as a case study, we put show an illustrative estimate of the annual requirement for battery cell investment in 2025 & 2030 in Chart 1.

The chart shows a high annual cell investment requirement driven by a combination of:

1. New cells to keep up with renewable build
2. Replacement of degraded existing cells.

This equates to an annual cell investment requirement in the range of 20-25% of total installed UK battery capacity through the 2020s. By the 2030s, around half of this required annual cell investment is set to be driven by replacement of degrading existing cells.

It is this ongoing requirement for new cell investment that significantly reduces the risk of structural cannibalisation of battery margins.  Significant investment is required each year just to maintain existing capacity (running to stand still).

Short investment cycles protect battery downside

The high annual requirement for cell deployment means that battery cell investment responds much more quickly to market price signals than other generation technologies. For example:

• Overbuild: if batteries are deployed too fast, price signals decline choking off investment in new cells & quickly restoring price signals
• Underbuild: if battery investment falls behind requirement, rising price signals support more rapid deployment pulling down price signals.

The requirement for a high level of continuous investment in cells is unique to batteries. Battery cell investment is both shorter cycle and more granular than renewable & thermal generation projects.

The dynamic of high ongoing cell investment requirement helps to anchor battery returns around the Long Run Marginal Cost (LRMC) of cell investment, and in doing so reduces downside risk e.g. from overbuild & cannibalisation.