September 28, 2015

By William Pentland

The rapidly declining price of large-scale lithium ion batteries is likely to be bad news for independent power producers (IPP) and utility companies in the United States, according to a new report by Moody's Investors Service.

Credit: G0d4ather

Over the past five years, lithium-ion battery prices have plunged by more than 50 percent. If prices continue to decline at this pace, energy storage applications could become economically viable for customers in the commercial and industrial sectors as early as 2018.

In particular, Moody's thinks low-cost batteries would make peak shaving applications attractive for customers in the commercial and industrial sectors, which could satisfy a portion of their peak power demands with a battery that charges at night and is used during peak load hours.

These developments have negative credit implications for utilities and especially for merchant generators, which would likely see lower revenues for sales of both energy and capacity. Regulated utilities will see a smaller impact, but will face cost-shifting issues.

"New York City stands out as the most promising economic market for peak-shaving because of its high demand charges, followed by California, Hawaii and the northeastern states," said Swami Venkataraman, a vice president and senior credit analyst at Moody's. "Current battery prices are only about 20 percent to 25 percent greater than breakeven levels for peak-shaving applications in New York City."

According to Moody's analysis, other battery applications like grid-based storage are less likely to become economically viable in the next five years.

In the long term, merchant generators such as Calpine, NRG Energy and Dynegy, could face lower capacity prices if commercial and industrial demand for power materially drops during the peak hours of the day. Moreover, cheaper batteries would also have negative credit implications negative for regulated utilities, including Southern California Edison, Hawaiian Electric and Consolidated Edison of New York. As cheaper batteries reduce monthly bills for commercial and industrial customers, regulated utilities will need to raise prices for other customers to make up for the lost revenues, according to Moody's.

"Peak shaving will lower power bills for commercial and industrial customers, which will lead to regulated utilities shifting costs from battery customers to non-battery customers to recoup the revenue losses," said Venkataraman.

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