Batteries: charging the energy transition
Storage is at the heart of renewable infrastructure.
The cost of generating energy from renewable sources has plummeted over the last decade, with the price of solar power down by over 90% and wind by more than 70%. Yet cheaper renewable power is, on its own, insufficient to drive the energy transition. It also needs, like power from gas or coal, to be dependable and available on demand. Achieving this involves converting infrastructure designed for hydrocarbons for renewables.
Storage is at the heart of renewable infrastructure. The weather, not demand, determines the supply of energy from solar and wind. Pumped-storage hydropower – where cheap off-peak energy is used to pump water to a higher elevation, with the water being released and moving through turbines during periods of high demand to generate electricity – is still the most widely deployed energy storage technology. But the growth in new storage now lies in batteries. They are vital if increasing power from renewable sources is to be stored to meet surges in demand. Batteries are also central to electrifying transport.
Lithium-ion is the most widespread and commercially viable battery type. They are used in grid storage and electric vehicles, as well as appliances such as smartphones and laptops. There are significant synergies between manufacturing and using batteries for EVs and for energy storage. For instance, when an EV battery has lost the capacity to power a car it can be repurposed for static, domestic electricity storage, perhaps linked to solar panels. Similarly, smart charging systems allow owners to charge EV batteries from the grid when energy demand, and prices, are low.
As battery production ramps up, manufacturers are learning more efficient processes and are benefiting from economies of scale. There has been huge progress made in making batteries lighter, smaller, higher voltage and cheaper. The price of lithium-ion battery cells has fallen by 97% in the last three decades. Goldman Sachs’s researchers predict that average battery costs are likely to almost halve in the next three years.
Cheaper batteries are making EVs more commercially viable. The 75kWh battery in the Tesla Model S 75D costs around $13,000 today; according to Our World in Data, a battery of the same capacity would have cost over $500,000 in 1991. If battery costs decline as rapidly as is widely expected, EVs could soon achieve cost parity with combustion engine vehicles in the US on an unsubsidised basis.
Battery storage capacity in the grid is rising, but not fast enough to keep pace with the rapid increase in renewable energy generation. Last month the FT reported that European power prices fell below zero for a record number of hours this year, driven by surging solar supply around midday in the summer months, and insufficient storage capacity. Negative energy prices may be a consumer’s dream, but they are a symptom of an incomplete energy system and a mismatch between energy supply, demand and storage.
Battery production is a growth sector, but one that is just as subject to the vagaries of competition, government policy and fluctuating demand as any other sector. Such factors explain why, in recent months, several battery makers have announced plans to slow production.
Northvolt, the Swedish battery maker founded in 2017 and lauded as Europe’s answer to China’s battery makers, is cutting 20% of its workforce. In July, SK On, a giant South Korean battery maker building factories in America to supply Ford and Volkswagen, said that it was in a state of “emergency management”. Several firms in the US, including LG Energy Solution, Freyr and GM’s Ultium Cells, have paused or delayed battery projects.
Battery manufacturers face huge upfront investments, and, as with civil nuclear power, demand for their product is highly dependent on government regulation and incentives. Weaker than anticipated incentives and consumer demand have forced many carmakers to push back the transition to EV production. Consumer worries about charging infrastructure and range have also weighed on the transition as have the generally higher cost of EVs.
There is an important geopolitical aspect to all of this. Europe and the US are anxious to avoid being dependent on China for battery supply. The EU and the US government have belatedly followed China’s lead by offering incentives to domestic battery production. Earlier this year the US imposed 100% tariffs on Chinese imports of EVs, effectively rendering them uncompetitive in the US market. The EU followed by imposing tariffs of up to 45% on Chinese EVs for the next five years.
China has a formidable lead in battery production. It produces more than 80% of the world’s battery cells and is by far the biggest processor of battery metals. China benefits from subsidies, scale, low labour costs and first-mover advantage, which has led to deep knowledge and networks. China also has access to raw materials. It, along with Australia and Chile, accounted for 90% of lithium mining in 2022.
Batteries are vital to the energy transition. Their price has fallen sharply over time and seems set to fall much further. Along with the similar progress on solar and wind power, this offers a powerful tailwind to the energy transition. Yet, as the recent travails of western battery and auto manufacturers confirm, that transition is unlikely to be smooth or linear.
A personal view from Ian Stewart, Deloitte's Chief Economist in the UK. To subscribe and/or view previous editions just google "Deloitte Monday Briefing”.
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