Battery Bonanza: Lessons from Two States

Commentary by Cy McGeadyandNitika Nayar

Published September 3, 2024

A wave of new battery storage is following the surge of renewables in the U.S. electric power sector. Battery storage offers an attractive balancing mechanism for a grid facing surging demand growth, worrisome reliability forecasts, efforts to decarbonize, and upward pressure on electricity rates. But how far can battery storage take the grid?

The Numbers on Battery Storage

The story of renewables over the past two decades has been one of precipitously falling technology costs, especially for onshore wind and solar. In recent years battery prices have followed a similar trajectory. Bloomberg New Energy Finance data shows that battery storage costs hit a new low of $139 per kilowatt-hour (kWh) in 2023, down from $780 per kWh in 2013-an astonishing 82 percent decrease in just over a decade. The battery storage market has benefited enormously from its overlap with the vastly larger market for electric vehicle batteries and the hundreds of billions of investment dollars that sector attracts.

The rapid fall in cost has enabled a rapid rise in deployment. As of June 2024, the United States has achieved a notable milestone with nearly 20 gigawatts (GW) of installed battery capacity, with another 35 GW in planning, according to the latest Energy Information Administration data. The rate of growth in recent years has accelerated: 2023 saw 6.5 GW of deployments, versus 4.1 and 3.3 GW of deployments in 2022 and 2021, respectively. Interconnection queue data shows this rapid growth may even accelerate with over one terawatt of battery storage projects in queues across the country. This rapid scaling places the United States as the second-largest battery storage market in the world after China.

Below these topline figures, the data reveals a story of stark concentration: over 70 percent of installed capacity is housed in just two states, Texas and California. While these are the two largest states in terms of electricity demand, their share of battery storage capacity (70 percent) far outweighs their share of nationwide demand (19 percent). Though similar in scale, the two states represent very different commercial environments. How and why batteries thrive in both environments tells us much about the future of battery storage.

California: A Planned Battery Boom

Policy drives the deployment of battery storage in California. The state's battery ambitions originate from its target of achieving 100 percent zero-carbon electricity by 2045. Battery storage is crucial to balance out the variable production of the state's large solar and wind portfolio. California was an early pioneer in energy storage policy, mandating in 2013 that its major utilities procure 1.3 GW of storage capacity by 2020.

Following a heatwave-driven blackout in 2020 and another close call in 2022, California's Public Utilities Commission (CPUC) began ordering substantial new volumes of battery storage through its Resource Adequacy (RA) mechanism. This policy model requires the state's utilities and load-serving entities to procure capacity rights in long-term contracts from resources able to inject energy into the grid at specific hours. These contracts provide a stable and bankable revenue stream for battery project developers that is then complemented by revenues from participation in California Independent System Operator energy and ancillary service markets. The RA mechanism sits within the CPUC integrated resource planning process, which establishes target volumes for new resources in line with state climate goals and reliability requirements; the latest plan calls for an additional 15 GW of battery storage by 2035.

Texas: A Market-Driven Battery Boom

In contrast, the Texas battery boom can be characterized as largely market driven. Unlike California, there are no mandates or procurement orders for battery storage issued by state authorities. Instead, the Electric Reliability Council of Texas (ERCOT) market structures have created a highly attractive investment profile for private developers. Revenue in Texas is largely derived from participation in ancillary service markets, which procure specific reliability capabilities-such as frequency regulation or the newly introduced ERCOT Contingency Reserve Service-rather than simple electricity production. Batteries have been able to outcompete gas-fired generators in these markets. Batteries also participate directly in the energy market, where volatility from expanding renewable capacity and strong demand growth help create arbitrage opportunities.

Importantly, the investment opportunity created by these price signals can be rapidly pursued by private project developers, thanks to a light-touch, a fast permitting landscape, and a unique grid interconnection process called connect-and-manage, which allows new resources to move through interconnection queues far faster than elsewhere in the country. These factors allow batteries to move from development to commercial operation in just two to four years.

Underlying Forces

Despite differing markets, permitting processes, and policy models, both California and Texas are deploying substantial battery storage capacity. What common factor drives this shared outcome? Renewable deployment is one explanation, as the two states likewise lead the country in wind and solar deployment. Renewable intermittency benefits from the storage's firming abilities; the surge in hybrid projects in interconnection queues, where batteries are paired with on-site renewables, supports this view. But many Midwest and Great Plains states have as large or larger renewable portfolios on a share-of-generation basis yet remain far behind in storage deployment. Renewable intermittency can be managed in other ways, such as with gas-fired generation and integrated transmission systems.

Reliability concerns offer a stronger explanation for what is happening in Texas and California. Alongside the aforementioned California reliability events, Texas suffered through considerable system failure during the 2021 Winter Storm Uri. Load-shedding events such as these reflect grids straining under enormous pressure amid a transforming resource mix and surging demand growth.

In California, rapid renewable deployments and the retirement of dispatchable thermal generation have introduced a significant hole in California's supply portfolio. Policymakers have identified batteries as a solution and implemented policy mechanisms that draw private development into the state.

In Texas, a similar need for new supplies exists, but this is primarily driven by rapid demand growth. The open market structure in Texas allows competitive load-serving entities and corporate buyers to sign contracts with battery projects that provide hedging against price volatility and help balance the intermittent profile of wind and solar, which make up the vast majority of new generation capacity.

How far batteries can go as a solution to these supply-side problems remains to be seen. In California, the price of RA is rapidly rising, partially contributing to the state's high electricity rates. Meanwhile, gas-fired power plants remain online through out-of-market reliability-must-run contracts due to supply gaps that short-duration battery storage cannot fill. In Texas, the battery storage boom will likely eventually saturate ancillary markets and limit the economic viability of new projects. Whether current market structures can deliver enough battery capacity to maintain reliability amid surging demand growth in Texas is unknown. Eventually, new market mechanisms or state intervention may be needed to deliver other forms of dispatchable capacity and preserve system reliability.

Conclusions

The success of batteries in the open and competitive landscape of the Texas market demonstrates the inescapable fact that batteries deliver considerable economic value to the power grid and the ratepayer. California, where aggressive policies place the state at the leading edge of grid decarbonization, shows that policy must eventually prioritize dispatchable technology, and today battery storage is the only option available at scale. In both states, batteries deliver valuable reliability services and make important contributions during peak load periods.

Other states can learn from both California and Texas. Policymakers can enable battery storage deployment, whether through market mechanisms or regulated utility proceedings, benefiting ratepayer, reliability, and climate objectives. Most crucially, state and federal policymakers should focus on enabling battery projects to move faster through clogged interconnection queues.

On the other hand, it is abundantly clear that today's battery storage technology is not a cure-all. Battery storage cannot fill the supply gap or solve all reliability concerns. More transmission, long-duration storage technology, enhanced geothermal energy, and nuclear power are needed as well. A major task for state and federal policymakers is ensuring that these technologies are integrated into grids at the scale and price necessary to sustain the U.S. energy advantage in the global economy.

Cy McGeady is a fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Nitika Nayar is an intern with the Energy Security and Climate Change Program at CSIS.

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