Inès Letellier, ESSEC Business School student, and Alexanne Dieu, LSE Alumna, analyse investment in Battery Energy Storage Systems to identify the factors that will either slow down or accelerate the pace of its usage.

Battery Energy Storage Systems: Full charge ahead? By Inès Letellier and Alexanne Dieu.

Substantial increase in BESS investment and storage capacity

BESS – or Battery Energy Storage Systems – are energy storage technologies playing a crucial role in the renewable energy storage sector. By storing electricity from renewable energy sources (wind, solar, hydro, among others), they are able to release it during peak demand periods, power outages, or times of high electricity prices. Batteries for energy storage are essential for balancing energy supply and demand, stabilizing the grid, reducing the cost of electricity and diversifying sources of energy dependence.

In the last decade, global installed battery storage has increased substantially, from 1 GW in 2013 to c.96 GW in 2024, with over 40 GW added in 2023 alone. Total investment in battery storage was 40 billion USD in 2023, up 300% from 2021, an increase due to more regions adopting supportive policies and higher penetration of intermittent renewable energy, in turn providing expanded opportunities for profitable battery storage operations.

Global deployment of battery storage is projected to continue increasing rapidly in the coming years. Indeed, depending on the IEA’s 2030 assumed projection, global installed battery storage capacity is set to increase from 9 to 14-fold over the next six years. This is equivalent to tripling BESS investment, reaching approximately 90-140 billion USD (depending on scenario assumptions) by 2030, with some estimates going as high as 150 billion USD. However, reaching such a high level of investment depends on how some key challenges are addressed in the next few years.

A Lack of unified regulation and the challenges linked to unequal market access

Focusing on the European market, one main challenge for investment is the lack of a clear, stable and unified regulatory environment. While EU member states are collectively targeting deployment of around 45 GW of storage by 2030 through National Energy and Climate Plans, regulations differ widely from country to country.

The first key issue is grid connection: some countries have incentivised BESS development by applying exemptions from certain grid fees (for example in Germany and Belgium), while others suffer from high grid-related fees and administrative backlog (e.g., Netherlands). Another challenge is that BESS do not always have equal access to power markets when compared to other technologies.

Typically, a BESS should be able to operate on three different types of markets: the capacity market, wholesale market for arbitrage, and ancillary services. In Germany & the UK, BESS have access to all three markets, however, in some other EU countries the access to ancillary services is still limited.

Finally, uncertainty over long-term revenues is a key barrier to investment that can be partly overcome by supportive regulation. For instance, Terna (Italy’s grid operator), has developed a favourable capacity market providing 15-year fixed price contracts to BESS projects to compensate for storage availability; however, in Spain the lack of a functional capacity market is hindering further BESS development.

Diversified battery storage technologies, and a resulting uncertain investment environment

More so than just a lack in unified legislation, BESS are also subject to a lack in unified technologies – in turn creating uncertainty for investors. The current market for grid-scale storage batteries is dominated by lithium-ion batteries. The first li-ion chemistry to have penetrated the market: NMC batteries (nickel manganese cobalt), are energy-dense and able to deliver bursts of energy quickly – ideal for applications that require high instantaneous power.

Although LFP (lithium iron phosphate) batteries, the successor to NMCs, are less energy-dense, they have a longer lifespan, cheaper and emit less GHG on a lifecycle basis. Accordingly, the LFP is well suited for applications that prioritize sustained power delivery and longevity, particularly: grid-scale energy storage.

As of 2023, LFPs represent 80% of BESS capacity, and will likely remain the dominant chemistry in the near future. Whilst sodium ions are less energy dense than lithium ions, sodium is abundant and cheap. Na-ion batteries will be present on the BESS market by 2030 with c. 10% of annual capacity.

With significant R&D already underway in China, the first Na-ion batteries will come mainly that country, but the technology is set to expand further beyond that region. Although Na-ion batteries could in theory be 20-30% cheaper than li-ion, competing on cost will only be possible if manufacturing is scaled up to levels comparable to li-ion and if lithium prices increase.

Due to the existence of various technologies, the uncertainty regarding which will be dominant, has already had an implication on investment, with certain projects being re-powered from NMC chemistries to LFP. Technology obsolescence risk therefore remains a prominent part of the credit risk analysis.

A geographically concentrated global value chain, subject to tariffs and protectionist measures

Regarding raw material supply and extraction, Australia produces almost 45% of the world’s lithium, DRC accounts for 65% of the global cobalt production, and Indonesia represents 55% of total nickel supply. China then undertakes well over half of global raw material processing for lithium, cobalt and natural graphite and has almost 85% of global battery cell production capacity.

Battery metals and their ensuing processing are thus highly geographically concentrated and are therefore vulnerable to geopolitical disruptions, and thus vulnerable to supply shocks and constraints. The BESS value chain is also particularly subject to tariffs and protectionist measures.

In 2024, the US more than tripled the tariffs paid on batteries and battery parts imported into the US from China, from 7.5% to 25%. This raised costs for US BESS integrators by 11 to 16%. Tariffs and protectionist measures retaliating against the dominance of Chinese battery supply hide behind critiques of harmful environmental and social impacts, associated with the extraction, processing, and use of mineral raw materials. In the trade-off between cost, availability of supply, and autonomy, the US and the EU are choosing autonomy.

In the US, as seen from recent tariff policies under the new Trump administration; and in the EU, through legislations such as the Critical Raw Materials Act and the EU Repower Plan. Yet, unless the EU is prepared to lower their decarbonization ambitions, moving away from Chinese production and supply of storage batteries altogether is not possible. Although battery production is set to diversify in the coming years, the share of China in li-ion battery manufacturing capacity will remain high (67% in 2030).

By imposing tariffs, the EU is accepting to pull the brakes on BESS cost reductions and therefore possibly weaken its transition efforts. European start-ups like Vanadis Powers, Genista Energy and VoltStorage focusing on vanadium redox and iron-salt batteries, could be instrumental in upcoming years to ensure BESS security of supply and facilitate the energy transition, if they are themselves able to break into the European market.

A future for battery part recycling and second-life applications?

Critical is also the need to recycle battery metals. Recycling of battery metals like nickel, cobalt, and lithium has grown rapidly, with recovery rates in 2023 reaching over 40% for nickel and cobalt, and 20% for lithium.  Moreover, the market value of recycled metals grew nearly 11-fold between 2015 and 2023, with 40% of this growth occurring in the last three years. Scaling up recycling could reduce new mining needs by 25-40% by 2050, aligning with global climate goals, and cutting emissions from lithium, nickel, and cobalt production by 35% by 2040.

Battery metals recycling would therefore also reduce the amount of financial investment needed in new mining. This progress has mainly been driven by recent EU policy support and regulation, most recently the Clean Industrial Deal which aims to have 24% of materials circular by 2030. Complementary to governmental support for recycling, EV manufacturers, Volvo, Renault, and Nissan have also committed to repurposing their EV batteries for a second life application in energy storage services, suitable to their reduced performance capabilities.

The second life-battery supply for stationary applications could exceed 200 GWh/year by 2030. EV battery packs could also be processed to extract valuable rare-earth materials. Expanding battery recycling and reuse is essential for reducing environmental impact, conserving resources, and supporting the transition to sustainable energy systems.

BESS: One solution within a myriad

Although BESS will play a significant role in providing grid flexibility to power systems which are characterised by an increasing share of variable renewables, it is important to realise they are part of a series of options. These options include providing other types of storage (e.g. pumped hydro storage & thermal power plants) and adapting demand response, for instance through flexible operation of electrolysers or curtailment.

In the Announced Pledges Scenario, which assumes that governments will deliver on all announcements made, the IEA expects that batteries will represent only c. 10% of flexibility supply in 2030, and this number will rise to c. 34% by 2050. The remaining flexibility supply relies on the development on other demand response (c. 34% by 2050), smart electric vehicle charging (c. 23% by 2030) and hydro storage (c.9%). BESS are crucial, but they represent only a part of the solution for decarbonizing our power systems.

Click here for a list of references used in this article.

Useful links:

• Link up with Inès Letellier and Alexanne Dieu on LinkedIn
• Read a related article: Speed Meets Circularity: How Can High-Performance Automakers Close the Loop?
• Discover ESSEC Business School and the London School of Economics.

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