ENERGY STORAGE

Storage businesses must future-proof now or risk extinction

The energy storage industry is at a crucial phase of its development, only those companies that effectively plan how to extend the lifetime of their technology will survive

BEN COOK

August 17, 2023

  • Individual storage companies need to urgently consider how to grow their businesses
  • Industry at crucial phase of development where smaller storage businesses could be muscled out by bigger players
  • Business that don’t plan now will be most vulnerable when margins get tighter

The energy storage industry is entering a pivotal era when competition will intensify and some market players will fall by the wayside as the market leaders take a more strategic approach to the development of their business. Indeed, the best energy storage companies will have looked at ways of extending the longevity of their technologies even before they officially launched them. While this may be counterintuitive, professors at Harvard Business School concluded that considering life extension at the pre-introduction stage had three key benefits:

1. It generates an active rather than a reactive product policy

Considering product life extension “systematically structures” a company’s long-term marketing and product development efforts in advance, one professor at Harvard Business School argued, rather than each effort or activity being merely a “stop-gap response to the urgent pressures of repeated competitive thrusts and declining profits”. The argument is that the life-extension view of product policy enforces thinking and planning ahead, that is, thinking in a systematic way about the moves likely to be made by potential competitors and about potential changes in consumer reactions to the product. This school of thought can be seen as having particular relevance to the energy storage sector when you consider that towards the end of November 2022, US-based Energy Vault, which had long extolled the virtues of gravity and kinetic energy-based storage, performed a high profile pivot to the selling of conventional battery storage. This was viewed as the type of reactive product policy that Harvard Business School had warned against, though Energy Vault did not abandon gravity-based storage completely, but rather described the move as a “technology diversification across energy storage mediums”. In addition, the point about how customer reactions to a product can change is an especially pertinent one for the energy storage industry, particularly when you consider that while the vast majority of the public support the use of renewable energy, public opposition to the siting of energy storage systems in certain communities is a persistent problem, despite storage being a key component of the global energy transition.

2.  It lays out a long-term plan designed to breathe new life into the product at the right time

Harvard Business School professor of marketing Theodore Levitt believes that many activities designed to increase sales and profits of existing products or materials are often undertaken “without regard to their relationship to each other or to timing – the optimum point of consumer readiness for such activities or the point of optimum competitive effectiveness.” Levitt argues that careful advance planning, long before the need for such activity arises, “can help assure that the timing, the care, and the efforts are appropriate to the situation”.

3. Arguably the most significant benefit of engaging in advance, pre-introduction planning for sales-extending activities later in the product’s life is that the practice forces a company to adopt a wider view of the nature of the product

For companies interested in continued growth and profits, successful new product strategy should be viewed as a “planned totality” that looks ahead over some years, Levitt says. New product strategy should try to forecast the likelihood, character, and timing of competitive and market events. Though Levitt acknowledges that prediction can be “hazardous and seldom very accurate”, he argues that it is far better than not trying to predict at all. His belief is that every product strategy and every business decision involves making a prediction about the future, about the market, and about competitors. “To be more systematically aware of the predictions one is making so that one acts on them in an offensive rather than a defensive or reactive fashion – this is the real virtue of preplanning for market stretching and product life extension,” he argues.

Source: Harvard Business Review

Why should energy storage companies consider ways of extending product lifetime now?

It’s vital that the energy storage sector now takes stock of its position on the ‘industry life cycle’. The industry life cycle refers to the evolution of an industry through four phases based on the characteristics of businesses commonly displayed at each phase. The four phases of an industry life cycle, according to the Investopedia website, are: introduction, growth, maturity, and decline. Broadly speaking industries are born when new products are developed, though there is significant uncertainty regarding market size, product specifications, and main competitors. In time, consolidation and failure whittle down an established industry as it grows, and the remaining competitors minimise expenses as growth slows and demand eventually wanes.

What are the 4 industry life cycle phases?

Introduction Phase
The introduction, or start-up, phase involves the development and early marketing of a new product or service. Innovators often create new businesses to facilitate production and proliferation of the new product. Information on products and industry participants is often scarce, so demand is generally unclear. Consumers of the goods and services need more information about them, while the new providers are still developing and refining the offering. The industry tends to be highly fragmented at this stage. Participants are often unprofitable because expenses are incurred to develop and market the offering while revenues are still low.

Growth Phase
Consumers in the new industry now understand the value of the new offering, and consequently demand grows rapidly. A handful of important players become apparent, and they compete to secure market share. Immediate profits are generally not a top priority as companies invest in research and development, or marketing. Business processes are refined, and geographical expansion is often a feature. Once the new product has demonstrated viability, larger companies in adjacent industries often enter the market through acquisitions or internal development.

Maturity Phase
The maturity phase starts with a ‘shakeout’ period, during which growth slows and focus shifts towards cost reduction, with market consolidation a feature. Some companies succeed in achieving economies of scale and this negatively impacts on the sustainability of smaller competitors. As maturity is achieved, barriers to entering the market become higher, and the competitive landscape crystalises. Market share, cash flow, and profitability become the key objectives of the surviving companies now that growth is relatively less important. Price competition becomes a significant factor as product differentiation declines with consolidation.

Decline Phase
The decline phase signifies the end of an industry’s ability to support growth. Obsolescence can negatively impact demand and lead to declining revenues. Margin pressure becomes more common and this forces weaker competitors out of the industry. Further consolidation is common as participants look for synergies and gains from scale. Decline often signals the end of the viability of the incumbent business model, resulting in industry participants being pushed into adjacent markets. The decline phase can be delayed with major product improvements or repurposing, but the endgame is ultimately unavoidable.

In which phase of development is the energy storage industry?

The answer to this question, to a degree, depends on which part of the world we’re talking about. However, more broadly speaking, there is an element of consolidation – with some storage companies merging and making acquisitions – but there is still considerable fragmentation and there are a large number of companies, even some of the bigger players, that are unprofitable due to investments being made in research and development. Demand is certainly growing rapidly – with the energy storage market predicted to grow in value from $44.7 billion in 2023 to $87.2 billion by 2028 – but it’s not immediately obvious which companies are the dead certs to become market leaders. Given all these considerations, the energy storage industry can be said to be transitioning from the ‘Introduction Phase’ to the ‘Growth Phase’.

What steps should storage companies take to future proof their business?

Yes, the industry is still in its relative infancy, but it is precisely for that reason that market players need to take steps now to secure the future of their business in what will be an increasingly competitive market. These steps include:

–   Anticipating moves that could be made by competitors

–   Anticipating possible changes in public sentiment towards your product (for example, determine how your offering compares to competitors’ products in terms of fire risk, or considering how ESG concerns could potentially impact on take-up of lithium-ion battery storage systems)

–   Plan sales drives well in advance to ensure the timing is right and ensure such drives are given due consideration

–   Take time to forecast the likelihood, character and timing of possible future market developments.

Energy storage companies that fail to take these steps will be the most vulnerable when the market turns, margins get tighter and weaker players fall by the wayside.

What options are open to energy storage companies?

There are four key actions that could contribute to success in the battery energy storage market, according to McKinsey. They are:

Focus on underserved needs in the value chain

In a nascent industry such as energy storage, companies should consider other products and services that they could provide, “whether through organic moves or inorganic ones”. For example, could a system integrator do battery packaging in-house? Or co-develop a new cell chemistry with a battery manufacturer? Or perhaps a battery manufacturer could develop system-integration or service capabilities to appeal to a specific BESS segment, such as utilities?

Serious consideration should be given to software. Storage system value is expected to evolve from simple hardware into the software that controls and enhances the system, unlocking the opportunity to capture bigger customer segments and higher margins. Battery storage companies need to develop these capabilities early.

Make supply chains more resilient

Vital battery storage components (ranging from battery cells to semiconductors in inverters and control systems) are dependent on complex supply chains, which are vulnerable to shocks from a range of sources, such as raw material shortages and regulatory changes. Strategic partnerships, multi-sourcing, and local sourcing should all be considered when developing your supply chain strategy, but you should bear in mind potential technological developments. Along with battery storage components, a potential bottleneck is engineering, procurement, and construction (EPC) capability and capacity, especially in the context of front-of-the-meter applications. Developing strategic partnerships with major EPC players in preparation for major BESS installations is vital if battery storage projects are to be successful.

Concentrate on the most important features of the product 

Ensure product specifications have a laser-focus on what customers actually care about. Creating a customer segment strategy that informs the product’s direction and vision will increase the odds that every feature matters to customers. This is vital because price competition will be ever-present in the battery storage sector. An effective product ‘roadmap’ will also enable your business to more easily develop a unique selling proposition. For example, integrating with existing customer infrastructure could eliminate barriers to entry for many customers.

Think big and move fast

Battery storage currently has a high profile and revenues are growing quickly, so now is not the time to adopt a conservative approach. Yes, there is still considerable fragmentation in the market, but some of the major players are beginning to build market share. This poses a challenge for smaller battery storage companies in particular, which may have started life as research projects and now possess valuable intellectual property. Now is the time for these companies to take some calculated risks in order to increase their prospects of gaining market share, rather than losing out to major players.

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