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The battery energy storage roller-coaster

2 Sep 2022 | 3 minute read
energy battery storage at a solar farm

Over the past many months, The Economist has had interesting insights and has significantly ramped up its reporting on climate change, renewables and associated resource use. Here we track some of the global trends reported in The Economist in respect of renewables and their green metals and link it to what we are seeing in practice.

Battery storage can apply both in the context of EVs and with regards to our transition from use of fossil fuels to an energy mix which includes use of renewables. There is therefore much overlap in the resources used to manufacture batteries (be it EVs or battery energy storage systems / BESS), so here, we simply adopt "batteries" as a generic and broad term (to identify the trends) but focus specifically on the BESS market later on.

Trends

The International Energy Agency

The International Energy Agency (IEA), predicts that wind and solar could account for 70% of power generation by 2050, up from 9% in 2020. This means there will be a huge demand for green metals that are important for renewables. The Economist reports that the IEA reckons that the market size of green metals would increase almost seven-fold by 2030. See The transition to clean energy will mint new commodity superpowers.

In respect of supporting the renewables infrastructure batteries play a very important role.

Emerging electrostates

Emerging electrostates (e.g. Congo (with 46% of global cobalt), Guinea and Mongolia) will benefit from mining of green metals. Chile is home to 42% of the world’s lithium. China is home to aluminium, copper and lithium. The local and global political economy will determine whether or not global mining firms will invest in those countries. Lack of investment can push the price of such metals up. China however is still spending a lot. See Why energy insecurity is here to stay and see The transition to clean energy will mint new commodity superpowers.

The sources for those green metals are linked to a few electrostates. Their governance and global politics can and will influence a project’s supply chain resilience.

Quality of mineral deposits

Quality of mineral deposits also matter. Lower grades push up extraction, processing costs and emissions. See The transition to clean energy will mint new commodity superpowers.

As emissions related reporting requirements increase and regulation catches up (see example below), this can add another layer of cost to projects.

Regulation

In the transition to net zero, regulatory pressures can of course add to cost increases. For example, we could see tariffs imposed on carbon-intensive imports or levies on lifecycle emissions (such as proposed within the EU). See Could the EV boom run out of juice before it really gets going?

We are likely to see increased regulation particularly in respect of reaching net zero goals.

EVs

Demand for EVs could grow six-fold by 2030, which is driving the investment in battery gigafactories. China is the world-leader currently in the battery industry (it houses 80% of the world’s current cell-manufacturing capacity). Prices of battery metals are expected to push battery costs up in 2022 for the first time in more than a decade. See Could the EV boom run out of juice before it really gets going?

The “resource” for batteries in EV and BESS systems have quite a lot of overlap. It will be interesting to see how the market develops and prioritises.

Innovation and recycling

A tight supply can however encourage innovation, recycling and a greater emphasis on circular economy principles. For example, minerals such as cobalt can be extracted from old batteries which can help meet 12% of total demand by 2040. See The transition to clean energy will mint new commodity superpowers and “Swappable batteries for electric vans and lorries make sense” which describes battery-swapping by Gogoro which uses standardised batteries.

Projects will need technical advisors who understand a changing market and its associated technologies/innovations. Re-cycling technical documents will not be possible across projects (with different battery suppliers).

The Economist states that based on manufacturers’ declared plans (if they should materialise), we will have 282 new gigafactories by 2031 (which will take global capacity to 5,800 GWh). Current supply from the big 6 established suppliers, BYD and CATL (China), LG, Samsung and SK Innovation of South Korea and Panasonic of Japan, adds up to 1360 GWh by the end of the decade. The balance will need to see newcomers. See Could the EV boom run out of juice before it really gets going? .

Newcomers will likely bring in new battery technologies which project teams particularly technical advisors will need to grapple with.

Limited interoperability

There is limited interoperability between battery manufacturers. “Manufacturers’ unique technologies and specifications mean that cells from one factory are usually not interchangeable with those from another” See Could the EV boom run out of juice before it really gets going? .

This is a really interesting point. Clients will need to know and interrogate the battery manufacturer and the “worth” of their battery warranties well in advance. This is because once the project kick-starts the client will need to very much be plugged-in to every facet of the battery supplier’s project and product.

Fossil fuels

There are also unintended consequences as we move away from fossil fuels. 80% of sulphur made is derived from refining fossil fuels. It also plays a key role in the production of green metals and the batteries that power them. So as the production of fossil fuels falls this can pose a supply problem. Demand for sulphur can increase from 246m tonnes today to 400m tonnes by 2040. We could see an annual shortage of between 100m and 320m tonnes equivalent to 40-130% of current production. See In the world of greenery, no good deed goes unpunished.

Knowing your supply chain and every component part / product is becoming more and more important. China enjoys a near monopoly with regards to refining green metals. Chinese refiners are also high emitters. America and Europe are still very reliant on Chinese suppliers. See Could the EV boom run out of juice before it really gets going?

So, what are we seeing in respect of battery storage contracts?

  • The market is complex, changeable and affected by multiple forces. It is a very commercially driven market. Each project is different and is dependent on the project sponsors, objectives (including climate related), finance and appetite for risk.
  • We are seeing long-term relationship building and time and effort being put in by client and contractor teams to understand the technology and output (performance / availability) requirements.
  • We are seeing typical contracts such as FIDIC or MF/1 but modified to deal with both commercial and market context. Here contracts are more heavily being influenced by battery warranties and supply chain/contracting party structures.
  • We are seeing typical provisions continue to be very relevant such as in relation to defects (often with a BESS and balance of plant split), liquidated damages, title & ownership, exclusions of liability and caps on liability but battery related warranties are also driving the approach. We recommend that all battery related warranties are considered and dealt with in advance as this will determine the success of the operational phase of the project.
  • We are seeing a number of interconnected documents between the EPC, maintenance phase O&M and associated warranties. Clarity is required with regards to how they "talk-to" each other, or do not do so, and if the latter an understanding as to what this means for the relevant party is important.
  • An understanding of the supply chain is key. This is particularly relevant in relation to dealing with unintended short supply of materials, dealing with price fluctuations and in monitoring emissions.
  • A good understanding of time-frames and programme is necessary to deal with "price-locks". Price is proving to be a big issue in this market (it can be volatile). We are seeing letters of intent or purchase orders being put in place, but it is always a good idea to keep this to the minimum.
  • Security documents are important due to the advance payments that are being made. That said, the tension in the market is making this very much a commercial negotiation point.
  • Appointing a good technical advisor is key, but we're also seeing that currently everyone in this space is pretty busy.
  • Insurance (works' insurance, third party liability and marine insurance) are of course very relevant, but soaring inflation means costs of reinstating a project has the potential to outstrip insured limits. Early discussions with your insurance advisor (and one with experience of the BESS market is best).

Suriya Edwards, Managing Associate, said; "I recently finished reading the comic book "World Without End" by Christophe Blain and Jean-Marc Jancovici, which provides a great overview of our reliance on fossil fuels and the shift towards renewables.  It highlights the importance we traditionally have ascribed to fossil fuels, and its effectiveness so far in energising our global economy. Today, we are still seeing the continued importance provided to it, for example, see Congo's recent oil block auction.  That said, we are very much noticing a definite shift in the market towards increased use of renewables.  The global trends reported in The Economist are also therefore reflected on the ground. Whilst we see this influence projects, we're also very much part of identifying solutions for our clients in order to deliver some fantastic green projects."  

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