Addressing the impending energy storage undersupply

The Federal Government, through ARENA, has extended funding of $175 million to support 4.2GWh of energy storage across six projects, operational by 2025.

Recently, Victoria also announced its intention to legislate 2.6 GW of energy storage capacity by 2030 and at least 6.3 GW by 2035. The target – which includes short, medium and deep duration energy storage systems – is one of the most ambitious of all Australian states and territories and sets a precedent for the rest of the country.

But while these moves may be welcome tools in our clean energy transition, some market analysts are concerned our impending requirements for storage may not be met.

KPMG Partner Sally Torgoman argues that a lack of diversity in our storage options – and an inhibition to unlock new forms of generation that reduce our reliance of storage – is putting us at risk of a major power undersupply.

Ahead of the Australian Energy & Battery Storage Conference, Ms Torgoman and fellow KPMG Partner Nick Harridge discuss our options for a more sensible and balanced market.

Reduce need for storage

Reinforcing the grid with renewable energy sources that have complementary profiles could keep the lights on whatever the weather; and relieve the pressure on storage systems.

The use of day-biased solar and night-biased onshore and offshore wind is a good starting point, Ms Torgoman says, but in the event of a storage undersupply, Australia will need more mainstream renewable options to ensure grid stability.

“Solar and wind are quite complimentary, but we ideally need a third or fourth option in the mix. Wave-based energy is great as, unlike solar and wind, it is tidal and more predictable, with a complementary generation profile. But there may be times when we need further options to fill in the gaps left by all three.

“I don’t see diversifying our renewable options as an easy fix – there is a lot of work involved in finding another mainstream source.

“Nor do I see it as a silver bullet – there will of course be times when all sources of generation are stretched. But it could help tie us over until the storage supply market catches up, without stressing the electricity market.

“As we saw in some US states with high penetration of renewables, when there is low wind and solar resource availability, it is difficult to charge the batteries – and hence batteries play less of a role”

Expand Lithium mining

Global production of lithium – one of the most commonly used components in batteries – has been around 550kt of lithium carbonate equivalent and that is forecast to rise to 1,000kt by 2024.

At that level it would take around 100 years to produce enough lithium to have 2 billion lithium-ion EVs (or equivalent stationary lithium batteries) in service, highlights KPMG partner Nick Harridge.

He says while this figure ignores other uses of lithium – and the potential to meet some of this demand through circular minerals – it still highlights the infancy of lithium mining.

“Lithium investment is really just beginning to meaningfully increase in Australia. Mining investment is increasingly turning towards it and other critical minerals. Given that the price of lithium has surged in the last year, the incentive to invest further in lithium production and circularity remains very high,” he said.

Mr Harridge estimates lithium production would need to grow by around 12 percent on average each year until 2050 to put two billion EVs on the roads.
Given that lithium production is expected to grow at nearly double that pace in the near term – and that lithium investment is likely to accelerate – that pace of growth over time is reasonable, he says.

“If we assume that lithium production continues to increase by 20 percent per year until 2030, then production would need to rise by around 7 percent per year thereafter to meet EV demand. With other producers coming online, the pace of growth in Australia could slow to this and the world would still be able to meet total demand for lithium.”

Diversify the storage market

While pumped hydro is a promising alternative to batteries, it comes with limitations. Large, location-specific, and topography-reliant, pumped hydro projects cannot always be constructed where they are needed and always require magnitude to reach economic viability.

To complement pumped hydro and existing battery technology, Ms Torgoman recommends we explore new battery materials and diversify our supply chains.

“At present, we are at a risk of over-relying on a single source of battery to meet our storage needs. As we move further towards our renewable targets, we will need far more storage capacity,” she said.

“Chemical flow batteries [which are currently being worked on] could ease pressure on the overburdened lithium market. They could provide a deeper storage option than their lithium counterpart and would not be under competing pressure from the [lithium-heavy] electric vehicle market.

Make storage more investible

A focus on how storage solutions enter the market is also worthwhile, Ms Torgoman argues.

“At present, the conditions for storage investment are not ideal. There is a constant reliance on arbitrage and FCAS revenue, which essentially means we are banking on the market being volatile to justify investment in batteries.

“This winter has really exposed how vulnerable the energy sector is to market shocks, so a more sustainable investment strategy is needed.”
Ms Torgoman welcomes the federal government’s Capacity Investment Scheme, which promises to unlock around $10 billion of investment in batteries and long duration storage.

The scheme will involve tenders for a revenue underwriting mechanism, along with regular auctions to determine a price for a “revenue floor”. This will offer more certainty to financiers looking to back a battery or storage project.

“We are really pleased to see the federal government addressing storage investment along a scheme similar to that of NSW, but more work needs to be done to get the conditions right and drive the next wave of projects,” she said.

Ms Torgoman cautions the market not to solve problems with extravagant and complex solutions – a move she says will lead to fast escalatory behaviour and increase prices – leaving the market to suffer the reverse impact further down the track.

Build and stabilise the retail market

An equal priority in the push to land more storage investment will be a focus on where batteries end up in the retail space – and ensuring consumer uptake is high. However Ms Torgoman admits a stable economic climate may be a prerequisite.

“Of course, you need good economic conditions generally to establish a strong retail market for batteries. It is hard to ensure steady custom when your end product will be subject to huge amounts of inflation.

“That said, we shouldn’t just give up. There are absolutely measures we can take now to bolster the retail market for storage.

“More collaborative models to counter balance inflation and seek economies of deployment is imperative if we are succeed as an industry”.

Sally Torgoman and Nick Harridge are Partners at KPMG

Sally is a partner in the Commercial Advisory & Transactions team in NSW, specialising in Energy within KPMG’s national Infrastructure, Assets & Places division. For more than 18 years, Sally has focused on major projects and transactions in energy generation, transmission, distribution, and retail. She is a dual qualified electrical engineer and lawyer with deep expertise in clean energy and decarbonisation-related investments across wind, solar, batteries, pumped hydro, transmission, hydrogen and gas infrastructure. Prior to KPMG, Sally worked with private enterprise and large corporate organisations cementing her capability to deliver commercial services to private and public clients.

Nick Harridge is the National Mining &Metals Leader and has more than 25 years’ experience working with global and domestic energy and resources clients. His career started in Perth, and included a stint working in the UK before settling in Melbourne. In his role as Transaction Services Partner, he has assisted numerous clients with acquisitions, disposals, IPOs, demergers, mergers, joint ventures and private equity leveraged investments. He has significant experience identifying and evaluating financial risks and opportunities, sizing synergies and integration evaluation, financial analysis, SPA negotiation, working capital analysis and reporting publicly on forecast and pro forma financials in prospectuses. His current work often centres on the pressing issues in the mining sector today, with its increased focus on environmental and community expectations, as well as innovation and technology to drive continuous improvements in production, processing and sustainability.

Join Sally Torgomon at the Australian Energy & Battery Storage Conference in February 2023.

Learn more and register your place here.