Should we be concerned about price cannibalisation of battery energy storage systems?
There has been growing interest in a phenomenon known as price cannibalisation across the renewables sector in recent years.
As defined by Cornwall Insight, price cannibalisation is broadly the depressive influence on wholesale prices of intermittent sources of generation, in particular solar and wind: when it’s sunny and windy, in the absence of a fuel-price setting the marginal cost, generation is often homogeneously high.
New wind farms are unable to capture high wholesale prices because when it's windy, numerous other wind farms are driving the price down resulting in the so-called ‘cannibalisation’. Whilst ultimately this is dependent on the capacity factor of such units, and high cap-factor installations (like offshore wind) are likely to escape the worst of the cannibalisation, notwithstanding, it is a headwind for new, renewable installation.
With the proliferation in grid-scale storage projects, recently there has been similar noise in the sector about the potential price cannibalisation for battery energy storage systems (BESS) projects and whether this may lead to the stranding of future battery assets.
The uptick in large-scale battery storage projects in the UK has been significant. In 2012, the total capacity of battery storage was 2MW, it’s now roughly 1.2GW with a hefty 16GW in the pipeline (projects operating, in construction, or being planned [footnote1]). This does have the potential to saturate the market as it stands today and could potentially catalyse this cannibalisation effect, similar to that observed for wind and solar.
However, we are of the view that the tailwinds are undeniable and dwarf any cannibalisation risk posed by the pipeline.
The chart above shows the BEIS reference scenario for cumulative new build of generation by type for the UK through to 2040. The light green portion of the chart represents cumulative new renewable installed capacity – mostly wind and solar – which is 4.4GW in 2021, rising to 45GW by 2040, or 4GW every year by 2040. Every new GW of renewable, intermittent generation [footnote 2] – or the widening of the light green portion – drives the need for batteries, ameliorating the cannibalisation effect. Whilst the battery development pipeline may sound significant, it is dwarfed by new, renewable generation being installed every year.
Secondly, the benefits of large-scale storage and hence the way batteries operate, is not confined to trading in wholesale markets. This renders their ability to capture value less susceptible to cannibalisation driven by the diversification of selling in and out of multiple markets, multiple times a day.
Finally, the key driver in offer stacks of batteries is not set by a homogenous marginal cost, that for solar and wind is reasonably close to zero when the sun is shining or wind is blowing, further softening the cannibalisation effect. In essence, the marginal cost of discharging a unit of electricity from a battery is significantly more opaque than thermal and renewable generation and depends on a number of factors such as the temperature and corresponding chemistry of the battery. In many ways, the offers of a battery more closely represent the decision of a hydro generator, where the marginal opportunity cost, not the marginal cost, is a more important variable. Escaping this homogenous marginal cost will again reduce the cannibalisation influence.
The tailwinds implied by the need to electrify the global economy point to a cannibalisation risk for batteries that is likely to be much less acute than what is being observed for wind and solar.
1. Renewable UK: Energy Storage Project Intelligence
2. Noting that a portion of the renewable generation will be firm e.g., biogas