The new rules of competition in energy storage

The costs of energy-storage systems are dropping too fast for inefficient players to hide. The winners in this market will be those that aggressively pursue and achieve operational improvements.

Energy-storage companies, get ready. Even with continued declines in storage-system costs, the decade ahead could be more difficult than you think. The outlook should be encouraging in certain respects. As our colleagues have written, some commercial uses for energy storage are already economical. Still more uses will become attractive for utilities, industrial customers, and households, because lower system costs, combined with developments such as the rollback of solar incentives, will make it financially sensible to store power rather than export it to the grid.

The more the cost of an average system goes down, though, the less room storage developers will have to undercut competitors, which will force them to squeeze every dollar of savings out of processes like customer acquisition, engineering, permitting, system integration, and installation. This is essentially what happened in the solar photovoltaic (PV) business from 2005 to 2015, when a 75 percent drop in the cost of PV modules compelled solar developers to focus on operational efficiency, triggered a major restructuring among module manufacturers (including several bankruptcies), and compressed profit margins.

As the market evolves, we expect a relatively small set of energy-storage companies to win big, taking share away from less cost-effective rivals. In this article, we look at how the cost profile of energy-storage systems is changing and what companies in the sector can do to boost their chances of success.

Going down: Battery and balance-of-system costs

During the past five years, several factors have caused the costs of energy-storage systems to drop across the board. Global demand for consumer electronics and electric vehicles spurred investments in battery-pack manufacturing that brought down the unit cost of each pack. Meanwhile, other hardware such as inverters, containers, and climate-control equipment also became cheaper, thanks to design advances and efficiency gains in manufacturing and supply-chain management. And “soft” costs (customer acquisition, permitting, and interconnection, among others), as well as engineering, procurement, and construction (EPC) costs, declined as companies gained experience and streamlined their processes.