Battery Storage & Compressed Air Energy Storage: Patterns of Innovation and Future Policy Proposals

Executive Summary

This essay will explore the patterns of innovation of two energy storage technologies in the UK: compressed air energy storage (CAES) and battery energy storage systems (BESS). Theories and frameworks will be utilised to unpack their innovation trajectories and inform policy recommendations to further improve the appropriability of these two technologies and lead to higher levels of technological diffusion.

Effective and affordable energy storage solutions have the potential to alleviate renewable energy’s greatest downfall, its intermittency. It could also facilitate the progress towards SDGs relating to affordable clean energy and industry, innovation, and infrastructure.

Firstly, CAES and BESS will be outlined and then compared using Pavitt’s taxonomy (Pavitt, 1984) as a framework to help initially understand their patterns of innovation. The UK provides a healthy environment for innovation to occur, with a strong history of personal capitalism (Teece, 1993) and tacit knowledge (Nightingale, 2014) allowing for commercialisation and diffusion of technology.

CAES and BESS do not act as ‘silver bullets’ to the problem of renewable energy intermittency, with both having sustainability and efficiency issues of their own. They do however have significant potential for increasing economies of scale and scope (Teece, 1993) that if exploited effectively can drive cost-cutting and efficiency improvements, enhancing their appropriability. The UK’s ambition to reach net zero by 2050 will attract public and private sector investment and combined with effective policy the UK could see technological improvements to help satisfy sustainability challenges and price-sensitive end users.

After analysing the patterns of innovation of the two technologies, this essay makes policy recommendations to help address the problem of renewable energy intermittency and SDG 7 & 9.4. Ensuring that in future renewable energy infrastructure of all scales is coupled with effective and efficient energy storage could speed the UK’s transition to a clean energy system. If supported by good policy, energy storage technologies have the potential to have positive sustainability impacts as well as increasing the technologies’ appropriability and attracting investment.

Introduction

Increased proliferation of energy storage technologies in the UK is key to exploiting the full potential of renewable energy and achieving net zero by 2050. Availability of long-term energy storage is essential in allowing the UK to meet the targets set out in the British Energy Security Strategy (BEIS, 2022) and help improve the country’s energy security by reducing reliance on imports. It would also serve to align the UK with SDG7 (Affordable and Clean Energy) and SDG9.4 (Industry, Innovation, and Infrastructure) (United Nations).

Renewable energy, such as wind or solar PV suffers from issues of intermittency, which present a significant obstacle to their effectiveness and grid penetration (Rugolo & Aziz, 2012). This intermittency means that in times of lower generation, the National Grid relies on other sources, of energy to meet demand, primarily gas in the UK (ibid). This threatens the UK’s energy system which has one of Europe’s lowest gas storage capacities; enough to supply just four or five winter days. In comparison, The Netherlands and Germany have nine times and 16 times the gas storage capacity respectively (The Guardian, 2021).

Energy storage capacity for renewable energy in the UK is expanding rapidly and is essential for the country to capitalise on growing renewable energy penetration and to ensure reliable distribution. The UK currently has just over 16GW of battery storage capacity either in operation, under construction or in the immediate pipeline across 729 projects nationwide (International Trade Administration, 2021). The need for increased storage capacity is highlighted by industry, with one senior figure commenting that ‘energy storage is one of the most important issues for the energy industry, and it has the power to dictate the pace, scale and cost of the energy transition’ (Drax Global, 2019). This sentiment echoes the Chandlerian philosophies of scale and scope (Teece, 1993) and may well prove vital for whether the UK can increase its renewable energy penetration effectively.

The UK government has recognised its importance and has recently released a further £32m in funding for five energy storage projects across the UK and emphasised the value in supporting cutting-edge projects led by UK innovators (GOV, 2022). Further policy is required however to incentivise investment in energy storage, and this policy must be introduced to complement the technologies’ patterns of innovation.

Throughout this essay I will compare and contrast two energy storage technologies: CAES and BESS. Theories and frameworks highlighted within this module will be utilised to analyse their patterns of innovation relating to the UK context, as well as reflecting on the strengths and weaknesses of policy implications, with suggestions for future policy considerations.

Energy Storage Technologies

Compressed Air Energy Storage

CAES is a modification of traditional gas turbine technology, involving compressing and storing air in underground caverns using low-cost renewable energy or electricity from the grid. This is then heated and expanded at periods of high demand, driving turbines, and in turn a generator which produces electricity (Wang et al, 2017).

CAES can provide long-term energy storage and has been shown to improve the integration of intermittent wind power in electricity generation (Lund & Salgi, 2009). The geology of the UK is particularly favourable to implementation of CAES due to the wide abundance of salt caverns found in salt deposits around the country (King et al, 2021).

Battery Storage

There are numerous different chemistries of BESS used in the energy industry, however this essay will focus on lithium-ion batteries as they make up 90% of the global grid battery storage (Peng, 2021). Lithium-ion batteries and can enable energy from renewable energy sources, such as wind and solar to be stored and then released at the point of demand (National Grid). Similarly to CAES, BESS can aid energy arbitrage by charging batteries when prices are low, and then discharging during more expensive peak hours (Bowen et al, 2019).

Comparison of the Technologies Using Pavitt’s Taxonomy

The mobilisation of tacit knowledge (Nightingale, 2014) is key to the innovation processes of both CAES and BESS. This involves liaison with the supply chain (Addis, 2016), specialist knowledge surrounding construction and distribution as well as marketing strategies of firms. Energy storage technologies and their development, construction and maintenance includes explicit knowledge relating to their designs and construction methodologies, however explicit knowledge must rely on tacit understanding (Polanyi, 2009). In this context tacit knowledge also relates to specific strategies for procurement, growth and diffusion of specific firms, locations in which they operate, or the nuances of the products supplied. The UK is well placed to capitalise on these innovations, being ranked the 8th globally for ease of doing business (World Bank, 2019). The UK has a strong science base but has failed in the past to marry pure science with R&D and technological engineering (Willetts, 2013); two distinct bodies of knowledge that whilst they interact, are independent of one another (Nightingale, 2014) and could hinder technological diffusion if not combined optimally.

Despite CAES and battery storage technologies being beneficial complementary assets to the renewable energy industry, they are not completely sustainable. In the case of CAES, during the expansion process of the compressed air, natural gas is combusted inside gas turbines and mixed with the compressed air to drive the turbines, creating greenhouse gas emissions (Luo, 2014). Lithium-ion batteries have been shown to be one of the most energy intensive batteries in their production and contribute to the depletion of global lithium reserves as well as being detrimental to human health in its extraction process (McManus, 2012).

Patterns of Innovation

The UK’s long history of personal capitalism (Teece, 1993) provides a healthy environment for the development of energy storage technologies within a liberalised economy, allowing both product and process innovation (Pavitt, 1984) to flourish. In recent years the UK’s system of innovation has been a hotbed for accelerated energy innovation and has resulted from the proliferation of public-private partnerships (Winskel & Radcliffe, 2014). As a result, energy storage such as CAES and BESS have grown in prominence.

Applying Pavitt’s Taxonomy

As shown in Figure 1, both CAES and BESS characterise scale intensive and complex capital projects. Both technologies will begin each application as a complex capital project, funded either publicly or privately, and progress through traditional project life cycles. Once operational, both will be operated and maintained by scale-intensive firms, focusing on cost-cutting and efficiency improvements. Both technologies also share a heavy emphasis on production engineering from webs of suppliers as their primary sources of technology, a process facilitated by international trade.

BESS are highly scalable with domestic BESS and electric vehicles (EVs) increasing in prominence over the last decade. Hence, users are strongly performance and price sensitive as they come into direct contact with the technology, and as such BESS undergoes both product and process innovations. When considering utility-scale BESS and CAES, process innovation is most prominent, with price sensitivity becoming the driving factor for grid energy provision. Cost reductions are paramount to increasing the reliability of renewable energy sources and helping these technologies surpass conventional fossil fuels (Kittner, 2017).

Chandlerian Scale and Scope

The volume and scale of businesses manufacturing and operating BESS and CAES are increasing. The combination of public and private funding with effective management, improved manufacturing processes and distribution and marketing networks (Teece, 1993) has, and will continue to allow both technologies to grow and achieve appropriability in a free market such as the UK. The three-pronged investment approach outlined by Teece (1993), with complementary assets such as tacit knowledge, global supply-chains and complex intra-industry knowledge of construction are likely to secure the UK as a global leader in energy storage technology.

Battery Storage

The manufacturing of batteries for energy storage experienced a steep price decline of 70% between 2010-2016. This can be attributed to technological innovations in the field and improved manufacturing processes in lithium-ion chemistries (Curry, 2017). The increased manufacturing of EVs as well as consumer battery storage units have been a catalyst for growth and cost reduction, as well as manufacturing on a larger scale, allowing capitalisation of economies of scale and scope (Robson & Bonomi, 2018).

CAES

CAES is less able to capitalise from economies of scale, as underground caverns need to be present in a locality for CAES facilities to be constructed. In the case of the UK, the geology is particularly favourable with the abundance of salt caverns across the country, and its complementary assets such as turbines and natural gas are made available through increasingly accessible global supply-chains (Baldwin, 2012). CAES systems are operated on a large-scale and supply electricity to national electricity networks. This reduces any potential for increased economies of scale, as the systems are not yet scalable and can only be operated at a commercial level.

Key Policy Considerations

Innovation must be aligned with effective policy to impart direction onto this technological innovation and transition away from our fossil fuel sculpted economy, reducing the negative externalities associated with this lock-in. The existing energy infrastructure in the UK is inadequate (Smith et al, 2005) and not conducive to rapid change, exacerbated by inertia of big business and government institutions.

The wheels are in motion, and the world is slowly transitioning to renewable energy; an area that has huge scope for financial gain as innovation in renewable energy and energy storage increase their appropriability and become more diffused. The current policy in the British Energy Security Strategy (BEIS, 2022) refers to energy storage in a vague way, and only talks of its potential as a complementary asset to renewable energy, rather than a central part of the energy infrastructure. The government should place a heavier focus on energy storage and technologies like CAES and BESS, as they form a central part of the integrated renewable energy system this country is striving towards. Policy must be pragmatic and implemented in a way that complements both technologies’ patterns of innovation.

Macro-level Energy Policy: The government should maintain a declining balance of fossil fuels versus renewable energy, to maintain performance in the UK’s energy system and allow the energy storage technologies to innovate in a sustainable fashion. This should involve amendments to the British Energy Security Strategy and place higher emphasis and increased government funding to energy storage projects.

Capitalise on scale and Scope: Government contracts for energy storage should focus on issuing high volume and large-scale contracts to consortiums which could benefit from their combined complementary assets as well as promoting efficiencies in construction and maintenance due to the large work-bank and scale. The UK has a strong science base, and this private sector operation will ensure that these technologies are commercialised by professional managers operating in a competitive environment (Teece, 1993).

Facilitate the global supply-chain: Scale-intensive and complex capital projects rely on a large web of suppliers to operate. The government should reduce barriers to trade by either reducing VAT or duty from energy storage related imports to allow firms operating in the UK to reduce costs, which is likely to encourage innovation and reduce costs for price-sensitive end users.

Incentivise Investment: The government should incentivise innovation investment by implementing an investment tax relief for businesses who invest in the UK energy storage sector. A similar model can be seen in the Energy Profits Levy that the government introduced in 2022 (GOV, 2022).

Conclusion

Renewable energy sources suffer from issues of intermittency, reducing their effectiveness and leading to stasis in the energy system, slowing the transition to a sustainable energy future. Energy storage technologies such as BESS or CAES, combined with targeted policy which complements their specific patterns of innovation have great potential to address the issue of renewable energy intermittency and help achieve SDG7 & 9.4.

Contracts for construction and operation of future BESS and CAES projects should be awarded to private sector firms and consortiums who can capitalise on their tacit industry knowledge, as well as exploiting their complementary assets and capitalising on the economies of scale and scope (Teece, 1993). Following analysis, BESS has higher scalability potential due to its potential for large scale manufacturing and use in any context. CAES is less scalable as underground caverns are required for localities to benefit from the energy storage technology, however the technology should not be overlooked.

Policy makers should assess the technologies’ patterns of innovation to inform good policy to increase their proliferation and appropriability in the UK. This can be achieved via a mixture of business incentivisation, reducing trade barriers, and increasing the scale and scope of complex capital projects to encourage innovation and commercialisation of these technologies. Further analysis is required to develop the policy suggestions and assess their intended impact on the energy storage technologies mentioned.