The U.S. energy storage market scored a record-breaking third quarter, putting 2,354 MW and 7,322 MWh of new residential, commercial and utility-scale projects online, according to the Energy Storage Monitor/Q4 2023 report from industry analysts Wood Mackenzie (WoodMac) and industry advocates American Clean Power Association (ACP).

But the sector faces “multiple headwinds … resulting in a volatile near-term pipeline and difficulty in bringing projects to mechanical completion,” the report says, downgrading its predictions for total capacity by 2027 from about 66 GW to 63 GW, a 5% drop.

With WoodMac pegging U.S. market size at present at 8.3 GW and 24.7 GWh, even reaching the reduced target could require substantial growth.

Frank Macchiarola, ACP’s chief policy officer, hailed the numbers as clear evidence that “energy storage is increasingly a leading technology of choice for enhancing reliability and American energy security.” ­

“It will be essential to our future energy mix,” he said.

A 2022 analysis from the National Renewable Energy Laboratory estimated that, depending on the energy mix, the U.S. might need between 129 GW and 368 GW of storage to reach President Joe Biden’s goal of a 100% clean electric power system by 2035.

The WoodMac-ACP report highlights a number of key figures and trends on the current state of the market and the challenges ahead:

• • Grid- or utility-scale storage continues to be a primary driver of market growth, jumping from 1,261 MW in the third quarter of 2022 to 2,158 MW for the same quarter this year, a 71% increase.
  • Community, commercial and industrial (CCI) and residential storage both posted modest year-over-year increases: 3% and 4% respectively. CCI capacity stands at 30.3 MW, while residential is at 166.7 MW. California leads the residential market, with 78.4 MW installed in Q3 alone.
  • Despite the record-breaking Q3, storage market growth is hobbled by project delays, with 82% of projects originally scheduled to come online from July through September now pushed back. But these delays could result in ongoing growth in 2024, the report says.
  • The grid-scale pipeline is particularly volatile, with 86 GW of projects announced and 453 GW sitting in transmission interconnection queues, a 36% increase over Q3 2022.
  • But prices continue to fall for grid-scale lithium-ion battery storage systems, with WoodMac noting that “as of November 2023, [the] lithium carbonate spot price reached its lowest level since 2021.” However, while system prices are down, other “balance of plant” costs and labor costs are on the rise, the report said.

While not specifically mentioned, the impact of the energy storage tax credits and other incentives in the Inflation Reduction Act are incorporated into the report’s analysis, according to Vanessa Witte, senior research analyst for energy storage at Wood Mackenzie.

Thus, the increase in project labor costs is due partly to a tight market for skilled labor, but also “administrative fee increases due to fulfilling the prevailing wage and apprenticeship requirements” that are part of the IRA’s tax incentives, the report says.

Waiting for Long Duration

As with solar and wind, the headwinds for storage are all too familiar: supply chains, permitting and interconnection. But Witte sees more nuanced and transitory issues at play.

“A near-term headwind is the increased cost of capital, which also increases the [due] diligence for these projects,” she said in an email to NetZero Insider. “As interest rates and inflation come down next year, this will likely calm down as well. For supply, as opposed to last year, where the supply issue was centered on the availability and price of cells, it is now centered on substation equipment, such as transformers, circuitry, switchgear[s], etc.”

Macchiarola sees the industry playing a strong role in the energy transition and in building out domestic supply chains. But he said, “streamlined permitting and evolving market rules” will be needed to “further accelerate the deployment of storage resources.”

Another critical trend to monitor is that growth in capacity may not be matched by growth in storage duration. Across all sectors, the average duration is just over three hours.

The capacity of a storage project is measured in megawatts or gigawatts: the energy it produces, in megawatt- or gigawatt-hours. Duration is a measure of how long a project can produce energy at its capacity. Thus, a 2-MW, 6-MWh project would have a three-hour duration.

As renewables increase on the grid ― and fossil fuel plants are retired ― longer-duration storage will be needed to provide a range of grid support and backup services.

“Duration is growing, generally speaking, but not over four hours,” Witte said. “There are no market signals to incentivize four-plus hours. … There are a handful of states that have average duration at or over four hours, but not many, [and] these systems are typically solar plus storage.”

“Paired systems fit better with a four-hour (or slightly longer) duration for the firming ability of the paired system versus standalone that just plays into the wholesale market,” she said. “Batteries are not typically getting revenue from ancillary services and capacity markets.”

A still-emerging market, long-duration storage is not yet on WoodMac’s radar, Witte said.

“Long duration is growing. We expect to see more traction next year in terms of pilot projects and increased manufacturing,” she said. “But again, there are no market signals for four-plus hours, so the only [companies] actually utilizing longer than four-hour are utilities, for the reliability aspect, and again, these are few and far between.

“One- to four-hour dominates and will still dominate in the next 10 years for sure.”