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UBS AM: Time to scale up?

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Energy storage technologies, such as batteries, can offset the intermittency of wind- and solar-power generation by charging during sunny or windy hours, and discharging after the sun sets or after the wind stops blowing. Energy-storage project costs have fallen almost 80 percent in the past 10 years, helped by massive research and development spending, significant technological improvements and growing economies-of-scale that came with the popularization of electric vehicles. Mark Saunders,  Co-head of Energy Storage at UBS Asset Management tells us about the solutions that smart energy storage offers us in Time to scale up?

In the US, the installed capacity of energy-storage projects more than tripled in 2021, and is expected to surpass 10GW in 2022. We have really reached a tipping point, and investments from institutional investors will only accelerate as the asset class matures. That is why energy storage is more exciting now than before. By charging when there is an oversupply of renewable electricity, and discharging during high demand hours, energy storage can essentially provide the reliability that was traditionally offered by thermal-power generation.

The grid is a very delicate system, where supply and demand must be perfectly matched at all times, while voltage and frequency must remain stable within narrow limits. Energy storage is an economic way of enhancing the reliability of our grid without costly investments in new transmission lines. For example, during extreme weather events, a local grid can draw electricity from a nearby energy-storage project, rather than importing it from distant generation resources that may have been affected by natural disasters.

Investors are certainly already giving the sector a lot more attention in recent years, but we are still in the early innings of the investment cycle, so the number of investment opportunities will only grow. Although energy storage is a relatively new type of investment, it is already displaying attractive investment characteristics. It provides an essential service, and it has high barriers-to-entry and upfront costs, high margins and long asset life, while the industry is also growing rapidly.

Although this is an exciting sector for investors, the learning curve is also quite steep. There is a technology and engineering aspect that investors must understand. But revenue maximization is also quite complicated. Unlike traditional infrastructure investments, energy storage thrives in volatile commodity-price environments. Therefore, investors must understand the underlying commodity-price dynamics, as well as other sources of income, such as ancillary services or contracted revenues. To optimize revenues, thousands of decisions are made in real time, with the help of advanced software and algorithms – for example, when to charge, when to discharge, which service to bid for, at which hour or minute, etc., while still operating within technical or contractual constraints. Therefore, having expertise across power markets, commodities trading, advanced analytics, technology and engineering is needed to maximize the value of a project.

UBS Asset Management’s energy storage team combined has overseen the development of around 3GW worth of renewables experience and 400MW of energy storage projects, equivalent to around 25% of the US market in 2020. The Team has a complimentary set of skills which can add value throughout life cycle of the market.

Here you can find the article 'Time to scale up' by UBS Asset Management.