Florian Mayr at cleantech advisory and consultancy group Apricum examines how the energy storage industry can best adapt to the "next normal" and the ways coronavirus has changed the world. Read Part One, which was published on the site last week, here.
Welcome to part two of our article on assessing the longer-term effects of COVID-19 on the energy storage sector and the way forward. We last left off with a discussion on the implications of the pandemic on the three key drivers of the energy storage market. We looked at the first driver: How COVID-19 impacts demand for services energy storage can provide and the second driver: how COVID-19 impacts the competitiveness of energy storage.
Let’s now continue with the third driver. We will then round up our assessment by examining key mindset and behavioural shifts we expect post-pandemic and how to best respond as an energy storage market player.
How COVID-19 impacts regulatory and market frameworks for energy storage
Even if energy storage is the most competitive solution to serve the growing need for flexibility, this does not help if there is no governmental buy-in to remove regulatory barriers for market access and to allow for the monetising of the benefits energy storage can offer. In many regions, the required adjustments to hundred-year-old power market frameworks to accommodate energy storage has progressed remarkably slowly so far, often due to a lack of “perceived” urgency by the authorities.
At the end of the day, COVID-19 could accelerate this process significantly. On the one hand, as already mentioned, due to “green” economic stimulus programs aiming for vast additions of renewable energy to the power mix, a key demand driver for energy storage.
On the other hand, by providing first-hand experience of the actual benefits energy storage can provide in a high-renewables scenario, as the pandemic has already caused a temporary, but substantial increase in solar PV and wind generation shares over the last few months.
This is because existing renewable energy plants are generally less exposed to lower electricity demand and declining prices as many of them have fixed price contracts and are granted priority access to the grid. So, while COVID-19 lockdown measures have resulted in weekly electricity demand decreasing by 10% to 30% across affected regions according to the International Energy Agency (IEA), the overall share of variable renewables reached record levels in many countries, for example in Italy, Austria, Belgium, the Netherlands and Germany.
This led to an even greater need for flexibility and energy storage to mitigate the impact of curtailment, price cannibalisation and negative power prices for renewable energy plant operators, e.g., by shifting renewable energy to a different time of the day, as well as to balance the variable power flows for grid operators. In particular, where market frameworks allowed for access and profitable operation, energy storage demonstrated its merits. For example, the Balancing Mechanism (BM) and the Optional Downward Flexibility Management in the UK were considered key for the stability of the grid during lockdown with energy storage eagerly contributing thanks to sizeable returns.
Of course, most of this is temporary (for now) as electricity demand and prices are expected to recover eventually. Nevertheless, the situation serves as a “postcard from the future” and thereby fosters the understanding of the need for storage in a world where renewable energy dominates. And governments spending billions on the expansion of PV and wind power plants will want to avoid extensive curtailment due to outdated regulations and inefficient energy markets preventing energy storage being able to provide the required flexibility.
Finally, COVID-19 might have created the sense of urgency needed to speed up the necessary reforms of the frameworks governing energy storage.
Adjusting to the “next normal” of energy storage
In summary, the three fundamental drivers of the energy storage market seem to be intact and not impacted by COVID-19 in the longer term:
- Demand for flexibility will further progress due to continued build-out of renewable energy
- Competitiveness will further improve mainly due to the ongoing ramp-up of cell manufacturing capacities and related economies of scale
- Regulatory and market frameworks will further adapt due to the “green” focus of economic recovery programs and the need for energy storage to take effect, among others
All in all, energy storage is likely to continue, or, in the case of suitable economic stimulus programs, even accelerate its growth trajectory of pre-crisis times soon.
But despite the fundamental drivers remaining unchanged, Covid-19 will certainly leave its mark on the post-pandemic energy storage world. To continue being successful and participate in the predicted growth, players in the energy storage market should ask themselves: what are the mindset and behavioural shifts caused by the pandemic that are likely to persist after the crisis? And, of course, how do I need to adjust my business model accordingly?
Here are three examples of mindset and behavioral shifts Apricum expects to see.
- Urge for resiliency: The Covid-19 pandemic and the related lockdowns constitute a global crisis at a dimension unprecedented for most of today’s population. People were confronted not only with their own vulnerability but also the vulnerability of things they took for granted, such as fully stocked shelves in the supermarket or attending a soccer match. This experience triggered a strong sensitivity to external shocks and a desire for resiliency that is likely to remain after Corona. This also includes resiliency of power supply: while you could say Covid-19 never jeopardised grid-based electricity delivery, neither did it impact the supply of, say, toilet paper. Increasing power resiliency is an inherent “feature” of energy storage, which should be highlighted specifically in the product design, value proposition and overall marketing in the post-pandemic world.
- Increased digital expectations: With most of their sales staff, customers and other stakeholders in lockdown, many companies had to prioritize and significantly accelerate their digitalization efforts to deliver and keep business going. This affected various areas including retail, e.g., of residential storage systems, but also how to conduct “public consultations” for large-scale grid projects, which were often moved to TV and internet during times of lock down. It is likely that stakeholders will have become more used to convenient, digital ways to interact with a storage company, and will not want to switch back to the old ways requiring physical interaction and local presence, at least not to pre-Corona levels. Energy storage companies should therefore use the “digital momentum” built up during the crisis to improve, enhance and expand the digital experience to meet the increased expectations of their stakeholders.
- Re-evaluation of risks: Not only customers and other stakeholders, but also storage companies themselves will undergo certain mindset shifts. One of them is a lower tolerance of risks the business model is exposed to, as Covid-19 has shown how rapidly incidents that were perceived as low probability like a global pandemic – can become reality. For example, energy storage players will certainly re-assess their supply chain exposure risks to global disruptions. However, despite an increasing expansion of cell manufacturing capacities outside Asia as mentioned above, a no-matter-what-it-takes shift of the energy storage supply chain to, e.g., Europe is neither likely nor desirable from an efficiency standpoint. De-risking measures of energy should instead involve diversification from single- or dual- to multiple-supplier strategies, with suppliers not concentrated in the same country. Significant efforts will be required in terms of research and due diligence to find suitable new partners. Importantly, these suppliers should have localized supply chains of their own to avoid simply moving disruptions further up the chain.
Overall, business model flexibility will be more important than ever. The pandemic has shown that significant market disruptions can occur quickly and unexpectedly, so industry players need to be able to react swiftly to deal with both new challenges and opportunities. Those who succeed in identifying changing trends early on and adjusting the business model accordingly have a good chance to emerge from the crisis stronger than before.
Cover Image: Developer Broad Reach Power carrying out work in the first half of this year in Texas. Image: Broad Reach Power.
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