Enabling renewable energy with battery energy storage systems

With the next phase of Paris Agreement goals rapidly approaching, governments and organizations everywhere are looking to increase the adoption of renewable-energy sources. Some of the regions with the heaviest use of energy have extra incentives for pursuing alternatives to traditional energy. In Europe, the incentive stems from an energy crisis. In the United States, it comes courtesy of the Inflation Reduction Act, a 2022 law that allocates $370 billion to clean-energy investments.

These developments are propelling the market for battery energy storage systems (BESS). Battery storage is an essential enabler of renewable-energy generation, helping alternatives make a steady contribution to the world’s energy needs despite the inherently intermittent character of the underlying sources. The flexibility BESS provides will make it integral to applications such as peak shaving, selfconsumption optimization, and backup power in the event of outages. Those applications are starting to become more profitable as battery prices fall.

All of this has created a significant opportunity. More than $5 billion was invested in BESS in 2022, according to our analysis—almost a threefold increase from the previous year. We expect the global BESS market to reach between $120 billion and $150 billion by 2030, more than double its size today. But it’s still a fragmented market, with many providers wondering where and how to compete. Now is the time to figure out where the best opportunities will be in the rapidly accelerating BESS market and to start preparing for them.

Here are some questions—and answers—to help BESS players formulate their strategies.

What are the main opportunities?

The best way to get a sense of the opportunities associated with BESS is to segment the market by the applications and sizes of users. There are three segments in BESS: front-of-the-meter (FTM) utility-scale installations, which are typically larger than ten megawatt-hours (MWh); behind-the-meter (BTM) commercial and industrial installations, which typically range from 30 kilowatt-hours (kWh) to ten MWh; and BTM residential installations, which are usually less than 30 kWh (Exhibit 1).

Exhibit 1

Battery energy storage systems are used across the entire energy landscape.

We expect utility-scale BESS, which already accounts for the bulk of new annual capacity, to grow around 29 percent per year for the rest of this decade—the fastest of the three segments. The 450 to 620 gigawatt-hours (GWh) in annual utility-scale installations forecast for 2030 would give utilityscale BESS a share of up to 90 percent of the total market in that year (Exhibit 2).

Customers of FTM installations are primarily utilities, grid operators, and renewable developers looking to balance the intermittency of renewables, provide grid stability services, or defer costly investments to their grid. The BESS providers in this segment generally are vertically integrated battery producers or large system integrators. They will differentiate themselves on the basis of cost and scale, reliability, project management track record, and ability to develop energy management systems and software solutions for grid optimization and trading.

BESS deployments are already happening on a very large scale. One US energy company is working on a BESS project that could eventually have a capacity of six GWh. Another US company, with business interests inside and outside of energy, has already surpassed that, having reached 6.5 GWh in BESS deployments in 2022. Much of the money pouring into BESS now is going toward services that increase energy providers’ flexibility—for instance, through firm frequency response. In the long run, BESS growth will stem more from the build-out of solar parks and wind farms, which will need batteries to handle their short-duration storage needs.

Exhibit 2

Battery energy storage system capacity is likely to quintuple between now and 2030.

Revenue models for FTM utility-scale BESS depend heavily on the dynamics of the regions that providers are entering. Most utility-scale BESS players pursue a strategy of revenue stacking, or assembling revenues from a variety of sources. They might participate in ancillary services, arbitrage, and capacity auctions. For instance, many BESS installations in the United Kingdom currently revolve around ancillary services such as frequency control. Italy has BESS players that have broken through by winning one of the country’s renewables-focused capacity auctions. The opportunities in Germany revolve more around avoiding costly grid upgrades. The BESS players that have gotten traction in the FTM utility segment have understood the value of responding individually to countries and their regulations versus using one monolithic strategy.

Where is the value in the commercial and industrial segment?

Commercial and industrial (C&I) is the second-largest segment, and the 13 percent CAGR we forecast for it should allow C&I to reach between 52 and 70 GWh in annual additions by 2030.

C&I has four subsegments. The first is electric vehicle charging infrastructure (EVCI). EVs will jump from about 23 percent of all global vehicle sales in 2025 to 45 percent in 2030, according to the McKinsey Center for Future Mobility. This growth will require rapid expansion of regular charging stations and super chargers, putting pressure on the current grid infrastructure and necessitating costly, time-consuming upgrades. To avoid this, charging station companies and owners may opt to put a BESS on their properties. Partnerships have already formed between BESS players and EV producers to build more EVCI, including in remote locations.

The next subsegment of C&I is critical infrastructure such as telecommunication towers, data centers, and hospitals. In this subsegment, lead-acid batteries usually provide temporary backup through an uninterruptible power supply during outages until power resumes or diesel generators are turned on. In addition to replacing lead-acid batteries, lithium-ion BESS products can also be used to reduce reliance on less environmentally friendly diesel generators and can be integrated with renewable sources such as rooftop solar. In certain cases, excess energy stored on a battery may allow organizations to generate revenues through grid services. Several telecommunication players and data center owners are already switching to BESS as their uninterruptible power supply solution and for the additional benefits BESS provides.

The third subsegment is public infrastructure, commercial buildings, and factories. This subsegment will mostly use energy storage systems to help with peak shaving, integration with on-site renewables, self-consumption optimization, backup applications, and the provision of grid services. We believe BESS has the potential to reduce energy costs in these areas by up to 80 percent. The argument for BESS is especially strong in places such as Germany, North America, and the United Kingdom, where demand charges are often applied.

The final C&I subsegment consists of harsh environments—applications for mining, construction, oil and gas exploration, and events such as outdoor festivals. The source of the growth will be customers moving away from diesel or gas generators in favor of low-emission solutions such as BESS and hybrid generators. A main factor driving adoption in this segment is upcoming regulations (including the European Commission’s sustainability-focused Big Buyers initiative and Oslo’s plan for net zero on construction sites by 2025). Many of the companies that make the switch will start by converting to hybrid genset solutions rather than immediately moving completely to BESS.

What about the BESS residential consumer play?

Residential installations—headed for about 20 GWh in 2030—represent the smallest BESS segment. But residential is an attractive segment given the opportunity for innovation and differentiation in areas ranging from traditional home storage to the creation of microgrids in remote communities. From a sales perspective, BESS can be bundled with photovoltaic panels or integrated into smart homes or home EV charging systems. Tailored products  will help residential customers achieve goals such as self-sufficiency, optimized self-consumption, and lower peak power consumption—and they may mean higher margins in this sector. Our recent consumer survey on alternative energy purchases suggests that interest in a BESS product will come down to a few factors, starting with price, safety, and ease of installation (Exhibit 3).

How might we think about our strategic positioning?

In a new market like this, it’s important to have a sense of the potential revenues and margins associated with the different products and services. The BESS value chain starts with manufacturers of storage components, including battery cells and packs, and of the inverters, housing, and other essential components in the balance of system. By our estimate, the providers in this part of the chain will receive roughly half of the BESS market profit pool.

Exhibit 3

Price, performance, safety, and good warranties top the list of what home buyers seek in a battery energy storage system.

Then there are the system integration activities, including the overall design and development of energy management systems and other software to make BESS more flexible and useful. We expect these integrators to get another 25 to 30 percent of the available profit pool.

Finally, between 10 and 20 percent of the profit pool is associated with sales entities, project development organizations, other customer acquisition activities, and commissioning (Exhibit 4).

What’s going on in the area of battery technology that we need to know about?

From a technology perspective, the main battery metrics that customers care about are cycle life and affordability. Lithium-ion batteries are currently dominant because they meet customers’ needs. Nickel manganese cobalt cathode used to be the primary battery chemistry, but lithium iron

From "Enabling renewable energy with battery energy storage systems", McKinsey & Company.