In the future, when investors look back at the year that represented the turning point for clean energy, 2016 may be it. The industry overall is growing at a breath-taking pace, but perhaps not for the reason that some investors think. Energy storage rather than solar power and wind power are the real factors that are driving a revolution across the electrical power industry.

Energy storage changes the equation, not only in the renewables space, but in the conventional utility space as well. The concepts of spin/non-spin reserve costs, peaker prices, and a variety of other conventional concerns for utilities, lose meaning in the context of efficient and cost-effective energy storage. While energy storage was available previously, it’s only today that costs are coming down substantially. Tesla’s economies of scale on battery storage are well-known, but small start-ups like Orison are finding ways to lower costs in innovative ways as well. The graphic below from a recent EPRI presentation highlights the role that multiple layers of costs savings can play in creating economical battery storage.

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Investors have often been disdainful of energy storage in the past. That’s a crucial mistake. Like many ultimately revolutionary industries, energy storage was overhyped initially. The technology was not cheap enough initially to be ready for mass consumption by utilities either for in-front-of-the-meter or behind-the-meter storage previously. That’s not uncommon though – biotech first started getting a lot of attention immediately after the dotcom bubble, but it took a decade before investors started to see major profits from the industry. Today, biotech is one of the hottest sectors in the market.

Energy storage appears to be taking the same path. Tesla is looking to vertically integrate with the Solar City acquisition for instance. This is a risky play that may or may not work given the sporadic growing pains in Tesla’s core business. Outside of household names like Tesla, many small energy storage companies are developing rapidly as well.

Take my favorite energy storage story, Orison. The company has developed a plug-and-play battery which requires no installation, and is cheap enough to be attractive to either utility customers or residential adopters. Orison’s battery is inexpensive enough that it makes sense in many areas of the country simply as a way to arbitrage differences in peak and off-peak electrical prices regardless of whether the user has solar power or not. That’s a crucial point – if energy storage makes sense economically independent of renewables usage, it creates significant incentives for mass adoption. Related: ‘’Would Iran, Saudi Arabia, Venezuela Cut Output?'' Rosneft Chief Rejects Freeze

Mass adoption is exactly what is likely to happen over the next couple of years. Orison is in the process of ramping up production and is now raising venture capital from select investors. Unfortunately, mass investors cannot invest directly in the most promising firms like Orison at present, but it’s likely they will be able to in a few years.

In 2020, when investors look back at the last decade, 2016 may well be the year that energy storage hit its inflection point. The industry is seeing insane levels of demand growth both from utilities and non-utilities. For instance, the residential and commercial business side of the market are more significant than many detractors believe. That market is small, but growing even faster than the utility side of the market is – a whopping 405% in 2015 for instance.

The market is likely to continue growing at a breath taking pace. GTM Research which produced the report on 2015 growth is forecasting 1 gigawatt of installed storage by 2019 (up 5 fold from present levels), and 1.7 gigawatts by 2020. That will make the market worth roughly $2.5 billion with plenty of runway for future growth. For now, investment options are limited outside of VCs and select industry players, but investors should definitely be watching the sector for the future.

By Michael McDonald of Oilprice.com

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