Growth of the U.S. Energy Storage Market
U.S. Annual Energy Storage Deployments Will Reach $2.5 Billion / 1.7 GW by 2020. The U.S. energy storage market will experience significant growth over the next five years across all end-user segments, resulting in a 1,662 MW ($2.5 billion) annual market by 2020. That’s 26 times the size of the 2014 market and 8 times the size of the 2015 market; or, in terms of market value, an 18-fold increase from 2014 and a six-fold increase from 2015. The behind-the-meter segment is expected to account for an ever-larger share of total MW deployed each year through 2020.
Investment Tax Credits (ITC) eligibility for energy storage projects is currently ruled by a number of private letters which the IRS issued since 2011. For storage + wind farms the IRS allows the full 30% ITC, while for solar + storage projects, the ITC is reduced by the amount of grid energy that was used to recharge the batteries. As a result, a storage device using 20% non-solar power is only eligible for 80% of the ITC. The same private letter established the concept of the “75% cliff”: standalone, or storage devices deriving more than 25% of its energy from the grid are ineligible for the ITC. The IRS is streamlining those rules in 2016.
Either way, storage will benefit from the ITC extension – especially if paired with renewables. GTM Research estimates an additional 0.5 GW of storage paired with renewables from 2016-2020, a 33% increase compared to a scenario with no tax credit extension.
Value Map: Battery storage systems can provide up to 13 services (use cases) to 3 stakeholder groups:
Standalone Storage: These are utility-scale (over 10 MW), front-of-meter installations. In 2015, most standalone storage installations were built in the PJM region driven by frequency regulation opportunities. Awards from California’s AB 2514 mandate procurement were announced in 2015, but has not resulted in any deployments in 2015;
Solar + Storage: In residential and commercial & industrial (C&I) applications, the predominant system configurations are solar plus 5 kW/10 kWh of storage (for the residential market), and solar plus 20 kW to 30 kW of storage (for the small C&I market), and over 50 kW systems for C&I market. The vast majority of C&I storage has been in California, mainly driven by demand-charge reduction opportunities. The residential segment continues to be diverse, with only a small number of projects deployed in 2015.
The residential sector will be one of the main beneficiaries of cost reductions and availability of additional use cases. Energy storage systems are typically sized and developed for multiple use cases, receiving multiple revenue streams – e.g. frequency regulation and energy arbitrage.
Battery Technologies: Integrators are promoting lithium-ion due to better density, ramping and cycle life. In 2015, Lithium-ion technologies made up 96% of all energy storage deployments, compared to 72% in 2014.  However, safety concerns and higher costs are barriers to lithium-ion’s wider adoption. Flow batteries and aqueous chemistries are gaining traction, particularly in long-duration microgrid applications.
- The residential and the commercial & industrial sectors will be dominated by third-party ownership models, i.e. no-money-down solar-plus-storage systems for peak demand management, aggregated demand/response and ancillary services applications.
- An increasing number of alliances are developing between solar and energy storage players, as well as partnerships with automakers, EV charging companies, home builders, and corporate end users.
- Time-of-use (TOU) shifting is the only value stream currently available to the majority of residential end-customers. Demand-charge reduction is the key value proposition for commercial customers. Solar-plus-storage systems can provide electricity bill savings of over 20% to a typical commercial end-customer.
- Solar-plus-storage will be more valuable in markets with steeper TOU charges, or where net energy metering reforms are implemented that result in the imposition of a less valuable value-of-solar tariff.
- The frequency regulation market in PJM, the main market for standalone energy storage installations, is not far from being saturated. However, demand for frequency regulation services could grow in other ISO/RTO, as mandated by FERC 755. With capital costs falling, peaker replacement will be another significant market for standalone energy storage.
Project Finance Concerns: Coupling storage with solar uses the same financing structures as standalone solar. However, financier are considering there are risks in technology and business models, thereby increasing the cost of financing. These concerns should be eased as financiers become comfortable with storage technologies and the associated business models.
Significant capital cost reductions are expected. On average, total installed system costs have dropped by 17% per year since 2010. This trend will continue, and as shown in the table below, the 5-year Levelized Cost Of Storage (LCOS) is expected to decrease materially for some use case and technology combinations. 
Headwaters' tracks capital raise, M&A and project finance activity in 12 segments across the alternative energy sector. Below is a snapshot of recent activity from the energy storage segment. The vast majority are capital formation transactions (VC/PE), with very limited M&A activity to date. The growing number of strategic investors that’s moving into the sector is expected to drive the project finance and M&A activity in the next 5 years.
1. GTM Research, www.greentechmedia.com/research
3. CrunchBase, www.crunchbase.com