Despite the hype, batteries aren’t the cheapest way to store energy on the grid

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Tesla Powerwall installed in garage

Tesla Powerwall installed in garage

There are many different kinds of energy storage technologies, each with its own advantages and drawbacks. Lithium ion batteries are the most popular form of storage at the moment, but according to Roger Dargaville, Deputy Director of the Melbourne Energy Institute, they are not always the cheapest option. Nevertheless, lithium ion will probably be the dominant option, not because of economics, but because of human behavior. Courtesy of The Conversation.

Storage is the word of the moment in the energy industry. Since Tesla unveiled its Powerwall, politicians, commentators and industry have hyped storage – and particularly batteries – as the solution for getting more renewable energy into electricity grids and reducing our reliance on fossil fuels.

The concept of storage is simple. A storage system takes power off the grid or from a local generation source and puts it back onto the grid or uses it locally later. It seems like a good idea if you have too much energy, or it is cheap at some times of the day and expensive at others.

So could storage be the answer, and how much would it cost?

The costs of storage

Of course storage isn’t free. It comes with both a capital cost (buying it in the first place) and a running cost, which is related to the cost of electricity to charge the battery and the round-trip efficiency – how much power is lost in the charging and discharging cycle.

To be a sensible economic investment, the benefits have to outweigh the costs. In other words, the savings on your energy bill have to be greater than the capital costs plus the running costs.

There are many different kinds of storage technologies, each with different characteristics. Lithium ion batteries are attractive as they operate effectively at small scales, are lightweight and have good round-trip efficiency. But they are currently expensive per unit of storage capacity.

Pumped hydro at the other end of the scale operates at very large scales, has good round-trip efficiency and is very cheap per unit.

Flywheels (or rotors) have low round-trip efficiency and don’t store a lot of power, but are able to dispatch lots of power in a short time and can also contribute to frequency stability.

Other storage technologies include compressed air, cryogenic (liquid air) energy storage, flow batteries and hydrogen. Each has its respective pluses and minuses.

Dargaville 1


Each of these technologies will have an appropriate place in the grid to be installed. Lithium ion batteries are a logical choice for a small-scale distributed application, while pumped hydro will work best at the large scale for grid management.

Flow batteries, liquid air and compressed air are in-between technologies in terms of scale, and flywheels and capacitors are most useful at the substation level for voltage and frequency control.

Batteries versus hydro

Let’s focus on lithium ion batteries and compare them to pumped hydro storage.

Lithium ion batteries are coming down in cost at a significant rate. Bloomberg has plotted the costs of lithium ion alongside solar PV. This shows the two technologies share a similar cost curve gradient, with lithium ion reducing from US$1,200 per kilowatt hour to US$600 per kWh in five years (not including installation costs).

Dargaville 2

As more batteries are built, the price gets cheaper. Bloomberg New Energy Finance

So where does lithium ion need to get to be cost-effective? Imagine a home with a 4.5kW rooftop PV system and variable electricity rate (for instance off-peak cost of 20c, shoulder of 26c and peak of 40c, similar to this tariff).

In such a home a 7kWh battery needs to cost less than A$7,000 fully installed to actually save the homeowner money. In other words, the cost per kWh of storage should be roughly A$1,000 to break even. Currently, batteries cost A$1,000-3,000 per kWh, so they are on the cusp of being cost-effective.

However, there is an important catch here. Retail electricity rates tend to exaggerate the true range in costs between peak and off-peak. The difference in the wholesale market (where retailers buy their electricity) is around 5-10c per kWh, much less than the 20c range in current variable rates. If retailers begin to lose market share, they may respond by reducing or removing these variable rates. That would make peak rates cheaper and mean that batteries would need to be correspondingly cheaper to be cost-effective.

For instance, a flat electricity rate of 25c per kWh means that batteries would need to cost around A$300 per kWh to be cost-effective. That’s less than a third of their current costs.

You could argue that using batteries also reduces the cost of the network itself. By reducing loads at peak time, we can reduce or even remove the need for infrastructure upgrades (substations and additional power lines, for instance).

But this is only true if electricity demand is growing. If demand is flat or falling, then distribution networks will tend to be under-used. Therefore reducing peak demand will not result in any savings.

Overall demand in the National Electricity Market has declined significantly since 2009, so the benefits of storage on the grid will be negligible other than in high-growth corridors. Demand has rebounded in 2015-16 and it will be interesting to watch and see if this is a resumption of the steady increase or if the demand stays low.

Dargaville 3

Demand in Australia’s National Electricity Market has been falling.

Pumped hydro, on the other hand, is a relatively inexpensive storage technology (already at around A$100 per kWh) as it can store large amounts of energy using a very inexpensive material.

All you need is some water and the means to pump it uphill. So while it can’t be used everywhere, there are many places in the National Electricity Market where it is possible. There are already 1,500 megawatts of pumped hydro in the market (Shoalhaven, Wivenhoe and Tumut 3).

This would be a more logical solution – cheaper and easier to control by the market operator. But in the same way that rooftop PV has gained more popularity than large-scale solar (even though the latter should be cheaper), distributed storage in the form of lithium ion batteries may be the eventual winner, not because of economics but because of human behaviour.

Editor’s Note

This article was first published on The Conversation and is republished here with permission.

Dr Roger Dargaville (@rogerd70) is the Deputy Director of the Melbourne Energy Institute. He is an expert in energy systems and climate change, specializing in large-scale energy system transition optimisation, and novel energy storage technologies such as seawater pumped hydro and liquid air energy storage. He has conducted research in global carbon cycle science, simulating the emissions of carbon dioxide from fossil fuel and exchanges between the atmosphere, land and oceans as well as stratospheric ozone depletion. He leads a research group of PhD and Masters students working on a diverse range of energy related topics including disruptive business models, EROI, transmission systems, bioenergy, wave energy and high penetration rooftop photovoltaics systems. He coordinates the subjects Renewable Energy and Climate Modelling as part of the University of Melbourne’s Master of Energy Systems degree.


  1. 小杜 says

    Is this an old article, or am I missing something?

    The price for Lithium storage in SA is already far cheaper than that $1000AU / KW point. SolarQuotes has some math up on their blog that shows running costs of 23c per KWhr for the Tesla 2.

    Surely the author must be aware that his math is already outdated?

  2. Alex Mason says

    Given that the author talks about ‘energy’ not just ‘electricity’ it’s odd that heat storage isn’t mentioned. That’s a huge issue. And heat storage is dirt cheap. Also he seems to ignore the fact that people may buy large domestic batteries for other reasons, namely because they’re in their electric car.

  3. Wouter Schram says

    “Currently, batteries cost A$1,000-3,000 per kWh”. Very strange statement, as the highest-profile home storage system, Tesla’s Powerwall, already is much cheaper. And BNEF reported that battery (pack!) prices plunged to 350 $/kWh already ( Costs would be even lower, reportedly around the 200 $/kWh already.

    Also, the comparison between hydro and batteries is not extremely relevant as they are two completely different products. Which one is more optimal depends on your specific purpose. To give some obvious differences:
    * Hydro as a much larger reaction time than batteries.
    * How would you use hydro when more PV electricity is produced than LV grid capacity?
    * Countries like Denmark and the Netherlands don’t have mountains

  4. Rick says

    I don’t know where he gets his data from but storage is much cheaper than that. Also he’s just stating an obvious fact that of course depending on the application there are cheaper solutions. Easy statement since Li-ion is still at its infancy in terms of tech lifecycle. Let’s revisit in 2020 when there’ll be more than 100 GWh/year production capacity vs only 30 GWh today…

  5. Hans says

    I agree with the other commenters that the use of outdated prices invalidates most of the argument of the article.

    There is also an application that is overlooked by the author. In large parts of the world the cost of electricity from PV systems has dropped well below retail rates. Feed in tariffs, if present at all, often have done the same. In this situation cheap battery storage makes it financially attractive to build PV systems with a high self-usage of the produced power. These systems are not necessarily the optimal solution for the grid as a whole, because often PV power will be stored with an energy loss at times when the owner is not at home, but when the grid could use the power very well. However, it will make it possible to build PV systems that would otherwise not be financially attractive, especially in the case of PV-hostile vertically integrated utilities.

  6. says

    A rather lame article, as noted by other comments. Even the headline gets off on the wrong foot. “Batteries aren’t always the cheapest option”??? #Batteries are almost never the cheapest option for #EnergyStorage, that would be #Thermal which the author somehow completely missed in canvassing types of storage, yet mentioned such out there options as cryogenic?

  7. says

    Judging from the negative comments above, Dr. Dargaville has stirred up a hornets’ nest of outraged defenders of battery energy storage. Frankly, I don’t see what the fuss is about. Read the title: “Despite the hype, batteries aren’t the cheapest way to store energy on the grid”. Sounds like a reasonable thesis to me. The author does support it.

    The reference to storing energy on the grid makes it clear that the article is about large scale electrical energy storage — or if one must be pedantic about it, storage of energy that can be more or less easily converted to and from electrical energy. So disparaging the article for failure to discuss thermal energy storage seems a bit out of bounds.

    I’m also puzzled by Mr. Schram’s statement that “the comparison between hydro and batteries is not extremely relevant as they are two completely different products.” Of course they’re completely different products. That doesn’t alter the fact that one is much cheaper than the other for grid-scale electrical energy storage.

    Perhaps the commenters feel that the lower cost of pumped hydro over batteries for energy storage on the grid is so obvious that it’s not worth writing about. But it’s evidently not obvious to the policy makers and investors whose plans for a clean energy future are predicated on a continuing plunge in the cost of battery storage.

    It may be that the plunge will continue long enough and fast enough to bring those plans to fruition. But fundamental issues, including supplies of lithium, the difficulty of recycling, and the limited lifetime under deep cycling, make that far from a sure bet. So I, for one, agree with the author that it’s time we paid more attention to alternatives to battery storage.

  8. Tim McCreary says

    Roger Arnold’s insights are not only the most reasonably couched, but cogent as well.

    Ever since UPS systems were supplied for black-start, short-term DCS support, etc., there’s always been a recognized penalty for double-conversion. And while Tesla et al may be able to advance small-scale, home models, that’s not where real demand is (other than aggregated such as AC requirements on a hot day)…grid level demand. Is anyone going to suggest that batteries, solar, wind can start even one steel mill requiring 250MW for cold start? The real load demands from manufacturing, as just one example, are mind-blowing in scale.

    And while some profess to loath the issues of coal mining and coal power generation, they will completely overlook the huge environmental costs associated with high-tech batteries both in mining exceeding rare minerals (which means huge amounts of earth must be removed and processed to gain fractional amounts of minerals) AND the disposal issues. Are we not chaining ourselves and the future to mountainous landfills filled with spent lithium ion batteries? And what of the present? Imagine a freeway accident in which a semi powered by lithium and several cars get piled up in a fog-bound incident with batteries crushed and innards spilled…as these things will invariably happen. What Telsa and the like are doing is shoving the real, total costs out to the future! That is disingenuous and even fraudulent.

    As an aside, I am always amazed at how strident and ascerbic the responses are from certain respondents. Rather than use thoughtful, scholarly responses, these kind love to revert to name-calling, insults (veiled or outright) and spout purported ‘facts’ and ‘figures’ with no substantiation. Anyone who can post a response on Linked-In can also start an intelligent discussion outlining an opposite position. There is no need nor call for lack of civility.

    • Mike Hopkins says

      Tim McCreary, interesting observation that others engage in name calling which is what you appear to “spout” as you put it. How did you conclude that the real demand is at the substation level. The real means is by definition at the point of consumption and that point is also the highest value of storage, avoiding all the peak infrastructure and line losses you seem to think are fine.

  9. Alex Mason says

    I think this comment thread risks escalating into something unnecessarily hostile… . I think the problem on the internet is that it’s easy to write things that are more direct and less polite than one would say if one were speaking to someone face to face. It’s a bit like people behaving badly when they get behind the wheel of their car. On re-reading it, I see that my own comment sounds far more antagonistic than I intended – perhaps borne of frustration of working on heat policy for many years and feeling that the subject gets insufficient attention compared to electricity – despite (in the UK) meeting about half as much final energy demand.

    Interesting point on industrial demand. And certainly something we need to solve at some point. I guess my plea would be that we not let the question of how to decarbonise steel mills (or aviation, or other hard to treat sectors) distract attention from the huge amount of progress that we could make right now on the more low hanging fruit – for example reducing emissions from buildings through energy efficiency.

    On the impacts of battery production, this is clearly an important issue. Given the urgent need to decarbonise the transport sector (which essentially means cars) I’d like to see massively more investment in cleaner and cheaper battery technology.

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