California sprints to install batteries but can’t find parts

Dan Finn-Foley, energy storage expert at PA Consulting, explains how supply chain constraints are impacting California’s race to add batteries to its electric grid.

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California is racing to add batteries to its electric grid in an attempt to prevent blackouts, cut greenhouse gas emissions and prepare for the closure of the state’s only nuclear power plant in 2025. A plan finalized by state regulators last month calls for almost quintupling California’s storage capacity over the next four years.

But the Golden State faces significant hurdles that could scramble its plans. Shipping bottlenecks have delayed construction of new projects. Demand for raw materials used in lithium-ion batteries, which account for the vast majority of utility-scale projects, outstrips supply. And permitting and connecting all those new batteries to the grid is a difficult puzzle itself.

How California navigates those challenges could determine the trajectory of the U.S. electric sector’s transformation, analysts said.

Dan said: “California is effectively a proof of concept for an accelerated energy transition that many are advocating for nationwide and worldwide. If there are supply chain efforts that hold that back, it raises the stakes for transitions in other areas.”

Batteries represent the next chapter in California’s energy transformation. The state has long focused on boosting wind and solar generation to curb emissions. In 2020, renewables accounted for a third of the state’s power generation. California nevertheless remains highly reliant on natural gas, particularly when the sun goes down, and it has faced a series of reliability crises. The state experienced rolling blackouts during the summer of 2020, when the combination of climate-charged heat waves and a lack of generation saw electricity demand exceed supply.

Those challenges have been compounded by the scheduled shutdown of the Diablo Canyon Power Plant, a 2.2-gigawatt nuclear facility slated to close in 2025. As part of the decision to shutter the plant, state regulators directed power companies to identify clean power sources that could meet demand without sending greenhouse gas emissions soaring.

Enter energy storage. The vast majority of storage systems use lithium-ion batteries, which generally can dispatch power for up to four hours. These systems are increasingly paired with solar, storing excess electricity generated during the day to be used during the evening or times of peak demand. Advocates hope batteries can address the state’s reliability issues while facilitating an expanded build-out of renewables.

Hurry, hurry, wait

In February, the California Public Utilities Commission provided an initial answer by finalizing a plan that directs utilities to install 14.7 GW of battery storage by 2032. The plan calls for a rapid scale-up of batteries in the short term, increasing from 2.5 GW this year to 4.6 GW in 2023, 10.6 GW in 2024 and 12.5 GW in 2025.

Many analysts expect California will meet its long-term goal, but they say the state will need to overcome supply chain constraints to satisfy its near-term targets.

The storage industry has grown by leaps and bounds in recent years, even in the face of supply chain constraints wrought by the Covid-19 pandemic. American utilities installed about 3 GW of battery capacity last year, bringing total utility-scale capacity nationwide to 5.7 GW. The U.S. Energy Information Administration anticipates almost 6 GW of utility-scale storage capacity will be installed this year.

Many of the difficulties can be traced to the onset of the pandemic, when battery manufacturing slowed amid economic lockdowns, particularly in China where much of the production is centered. Now, the surge in demand has left manufacturers scrambling to keep up.

California has to sought to address shipping challenges in part by creating a task force that has prioritized unloading vessels carrying battery components at state ports, CESA’s Morris said. Battery components are also increasingly placed on top of other cargo so they can be unloaded first, he said. California ultimately succeeded in installing 1.8 GW of storage capacity last year, according to EIA figures.

Bigger challenges have stemmed from rising demand of raw materials like lithium, graphite and cobalt, all of which are used in lithium ion batteries. The increase has largely been stoked by automakers’ push to scale up production of electric vehicles. EVs account for about three-quarters of the global market for lithium-ion batteries, while storage systems represent about 6 percent.

‘Going to be tricky’

A growing number of developers are seeking to revisit the contracts they signed with utilities when commodity prices were lower. BNEF, for instance, estimates the average cost of a four-hour battery was $227 per kilowatt-hour in 2021. When the company conducted a survey of developers recently, developers quoted costs ranging from $250 per kWh to $400 per kWh.

One of the bigger questions going forward is developers’ ability to procure materials for projects for which they have yet to sign contracts for supplies, analysts said. A growing number of contracts are indexed to the price of raw materials. The short-term pains may ultimately prove beneficial to the industry, prompting developers to experiment with new battery technologies and diversifying their supply chains, said Dan.

He adds: “Yes, there could be short-term disruption, but you could see this used not as an excuse but an enabler for further policy and investment in stronger economic supply chain. It will be a net benefit to the industry to have a more diversified and mature supply chain.”