The ‘compression’ of the system integrator layer in the BESS industry

Going beyond Industry 1.0: changing role of system integrators

“In general when we look at any technology, it goes through this evolutionary arc of: first, you have technology components and there’s a huge need for somebody to put the solution together and make it work. That’s a kind of ‘Industry 1.0’. During that period, the system integrators were fairly dominant, you heard a lot more about Stem and Fluence than LG Chem or SDI,” he says.

“Then as the battery as the components start to refine and it’s clear what the commercial solution is, then these component vendors try to kind of move down and start to encroach in that system integration layer. And then typically you end up with a kind of consolidation.”

The move of lithium-ion battery and BESS OEMs (original equipment manufacturers) like Sungrow, CATL and BYD into selling directly to project owners instead of going to market via system integrators was noted by Energy-Storage.news in an interview with market intelligence firm IHS Market in early 2022. This is particularly the case with those more mature players, as we heard from numerous owner-operators earlier this year.

The changing role of system integrators in BESS can be compared to large industrial conglomerates in the gas turbine market, where a similar trend towards a standardisation of the technology and thus a smaller role for the company putting them together has been seen, Schnakofsky explains.

Same trend as in gas turbine industry

“This is very similar to the gas turbine industry, that’s the arc that it followed. It was initially fairly concentrated, and then it started to to to open up. Right now when somebody buys a gas plant, they hire a construction company and everything is pretty much a la carte. It’s no longer Mitsubishi or Siemens or GE providing a fully ‘wrapped’ scope. So we are following that evolution in BESS.”

“So we see initially again the battery technology companies supporting system integrators, but as it’s become pretty clear what the technology solution should be, we see customers trying to buy the components directly, and we see components suppliers trying to sell those components directly. So you kind of have this, let’s say, compression of that system integration layer.”

That system integration layer is now primarily centred around the energy management system (EMS) or control system plus the necessary engineering and support to get the system put together, he adds.

“I think CATL has been one component OEM that’s been very clear about their ambitions of selling the systems directly. In general, I think most of the lithium-ion OEMS would rather sell the full system to an end-user rather than sell to a system integrator and stay within that scope of work. This trend continues.”

BESS project execution is ‘not trivial’

But, there are some things that system integrators will always do better, Schnakofsky says, though he acknowledged his bias in his position at one.

“I think the problem that’s been in the industry is that executing that is not trivial and there’s a couple of reasons. One is that the things that make you good at making cells are very different than the things that make you good at deploying a system. The resources, the types of issues, the customer management, the types of resources that you have to have are very different.”

“The project business is messy and varied, whereas making cells, you have to be like a cookie cutter, that’s what makes your product valuable.”

“I think the second thing is there’s these regional language issue where because a lot of these cell OEMs are in China/Asia, trying to come to the US with a standards barrier, cultural barrier and knowledge barrier makes it very, very difficult to then support something that’s happening you know 12 time zones away.”

Though not naming names, Schnakofsky says some OEMs have been more successful than others in executing their strategy. And, like others, he believes the market is big enough to accommodate both approaches.

“I feel that the market is large enough that different customers are going to find different fits for what they need,” he says.

“Obviously I’m biased, I’m part of a system integrator but what I would say is that people still ultimately need software to operate the system, you still need to have the know-how on how to properly size and configure systems, and deploy them on time and so on.”

“You cannot make a successful project by buying best-in-class cells from CATL and then shopping around for the cheapest software and then hoping that it all comes together at the end of the day.”

However, the trend does mean that system integrators will need to be very efficient and very lean.

“The integrators that continue to operate and I think will have a significantly narrower scope and a significantly narrower layer in the overall value stack than, let’s say, five to 10 years ago, because you have to stay competitive.”

“So there’s clearly a lot of cost pressures and so on. And I think there’s a lot of pressure for us to let’s say to stay relevant and continue to deliver value. And in our case, we do it by having an extremely lean cost structure. We know that there are these big market waves and it’s important to stay within the sweet spot to continue to ride those.”

Prevalon’s relationship with contract manufacturer Clou

Prevalon Energy’s main BESS contract manufacturer is China-based Clou Electronics, part of conglomerate Midea Group, which is known in large part for air conditioning systems.

Schnakofsky emphasises that, contrary to some people’s views, using contract manufacturing is absolutely not a case of “we designed this thing and then we sent it to a sweatshop somewhere for manufacturing”.

“The BESS contract manufacturing model is one of symbiosis where you are co-developing a solution. In our case, we have certain capabilities and we look to augment those capabilities. We are trying to get to a scale and price point as fast as possible, so why reinvent the wheel when there are companies that are already very good?”

Prevalon is deeply embedded in the technical engineering resources of Clou’s contract manufacturing and the various layers involved in it. That includes co-designing a solution, picking the components and together working on the supply chain, from day one. Various prototype runs and certifications precede full volume production, and Prevalon personnel are present during that production for quality control (QC) on an ongoing basis.

“As projects have gotten so big, the big shift in the industry has been to focus on solving problems at the factory stage. The building blocks of a BESS project are simple, but the complex part is that it’s a hundred or hundreds of these put together. So you need to be able to address issues at the factory and manufacturing stage. That also means needing a very integrated design between your contract manufacturing supplier and your own IP.”

Finally, we ask Schnakofsky for his views on the implications of the US’ China tariffs and the Republicans’ One Big Beautiful Bill (OBBB) on the BESS industry, to which he says it is still “too early to tell”. One thing that does seem clear is that prices are likely to go up after several years of price falls.