Here is a brief excerpt from an article written by David Frankel, Sean Kane, and Christer Tryggestad for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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The costs of energy-storage systems are dropping too fast for inefficient players to hide. The winners in this market will be those that aggressively pursue and achieve operational improvements.

Energy-storage companies, get ready. Even with continued declines in storage-system costs, the decade ahead could be more difficult than you think. The outlook should be encouraging in certain respects. As our colleagues have written, some commercial uses for energy storage are already economical. Still more uses will become attractive for utilities, industrial customers, and households, because lower system costs, combined with developments such as the rollback of solar incentives, will make it financially sensible to store power rather than export it to the grid.

The more the cost of an average system goes down, though, the less room storage developers will have to undercut competitors, which will force them to squeeze every dollar of savings out of processes like customer acquisition, engineering, permitting, system integration, and installation. This is essentially what happened in the solar photovoltaic (PV) business from 2005 to 2015, when a 75 percent drop in the cost of PV modules compelled solar developers to focus on operational efficiency, triggered a major restructuring among module manufacturers (including several bankruptcies), and compressed profit margins.

As the market evolves, we expect a relatively small set of energy-storage companies to win big, taking share away from less cost-effective rivals. In this article, we look at how the cost profile of energy-storage systems is changing and what companies in the sector can do to boost their chances of success.

Going down: Battery and balance-of-system costs

During the past five years, several factors have caused the costs of energy-storage systems to drop across the board. Global demand for consumer electronics and electric vehicles spurred investments in battery-pack manufacturing that brought down the unit cost of each pack. Meanwhile, other hardware such as inverters, containers, and climate-control equipment also became cheaper, thanks to design advances and efficiency gains in manufacturing and supply-chain management. And “soft” costs (customer acquisition, permitting, and interconnection, among others), as well as engineering, procurement, and construction (EPC) costs, declined as companies gained experience and streamlined their processes.

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From 2012 to 2017, battery costs fell more than 15 percent per year, for a total five-year drop of more than 50 percent. In aggregate, balance-of-system (BOS) costs—other hardware, soft costs, and EPC—declined even faster: more than 25 percent per year. Overall, the decline in BOS costs contributed more than three times the savings that the decline in battery costs did (See Exhibit 1).

The cost of a utility-scale system declined by more than 20 percent per year, mostly due to falling balance-of-system costs.

Our component-by-component analysis of further cost-improvement opportunities suggests that the costs of energy-storage systems will continue their rapid decline, with some variations by type of system (see sidebar, “How costs compare by type of system”). This decline could, however, be held up for several reasons. For example, utility and power-market regulators might enact rules or policies such as those governing permitting and interconnection that make storage systems costly and time-consuming to install. Investments in manufacturing might produce smaller improvements in efficiency than they did in the solar PV market. Tariffs could boost the cost of imported batteries and BOS hardware from low-cost manufacturing locations. Having assessed the potential for these developments, we think it is unlikely that they will materially impede cost reductions for energy-storage systems, and so we have not accounted for them in the two scenarios described below.

In our base case, the installed per-kilowatt-hour cost of an energy-storage system would decrease roughly 55 percent by 2025, thanks to continued advances in manufacturing scale and technology as well as improvements in storage-system engineering and design. There is also a plausible best-in-class scenario in which market-leading energy-storage manufacturers and developers deliver a step change in cost improvement: additional process-efficiency gains and hardware innovations could reduce the cost of an installed system by more than 70 percent (Exhibit 2). At that point, each kilowatt-hour of storage capacity would cost about $170 in 2025—less than one-tenth of what it did in 2012. In this scenario, battery packs could break through the $100 per-kilowatt-hour mark by 2020.

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Here is a direct link to the complete article.

David Frankel is a partner in McKinsey’s Southern California office, where Sean Kane is an associate partner; Christer Tryggestad is a senior partner in the Oslo office.

The authors wish to thank Jesse Noffsinger, Matt Rogers, Frederic Saggini, Giulia Siccardo, Willem van Schalkwyk, and Amy Wagner for their contributions to this article.
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