By Andrew Wetzel, CFA, Principal, Managing Director of Sustainable Investments
The confluence of factors driving change in the power generation system is enough to make one’s head spin. Some factors such as shifting economics, decarbonization, and electrification have been in place for years, while others like the emergence of Artificial Intelligence (AI) have become impactful more recently. Recent abrupt changes in energy policy only exacerbate the level of uncertainty around the supply/demand balance. What is clear is that the cost of power and thus electricity is increasing as demand outpaces supply. Higher prices are a clear market signal that more capacity and improved system efficiency are required.
Change in the energy system takes time. Over the last 15 years, the proportion of power generation capacity that is non-hydro renewables went from just under 5% to about 35%. This shift was driven by improving economics, with the levelized cost of electricity falling 60% for solar and 50% for wind over the last decade according to BloombergNEF. As Lazard’s 2025 levelized cost of energy report shows, before subsidies and tariffs, solar and on-shore wind are competitive (and in some cases cheaper) relative to low cost natural gas-fired generation. Beyond improving economics, a growing understanding of the need to decarbonize electricity production was, and continues to be, an important driver.
On the demand side, many parts of our economy are electrifying, including transportation, heating, and industrial processes. More recently, the race to build computing infrastructure to support AI capabilities has supercharged power demand as we’ve discussed in past notes. With AI deployment just beginning, the power industry is scrambling to bring new supply to market in any way possible. The challenge here again is time – it takes three to seven years to build new gas-fired generation, which is further constrained by inadequate turbine capacity. Other options, such as nuclear, take even longer to develop.
The answer of course is to build more renewable energy, which is cost-competitive and available to build now. As the CEO of one of the largest utilities, Nextera Energy Inc. recently noted, we will have a real power shortage problem in this country without renewables. Voracious demand, higher power prices, and limited options mean that renewables will be built despite headwinds emanating from Washington DC.
The wrinkle is in capacity factors as previously discussed, meaning that the output from wind, and in particular solar, is lower than other forms of baseload generation. The 35% renewables capacity noted above represents only 15% of actual power generation because of intermittency. The solution is battery energy storage systems, or BESS.
BESS is a fairly broad term covering different types of battery systems, chemistries, durations, and applications. What is generally true is that BESS does not include physical or mechanical means of storing energy, including solutions like pumped hydro. The typical BESS system is similar to the lithium-ion batteries used in EVs, though increasingly with heavier and lower-cost chemistries such as lithium iron phosphate. There are also emerging long-duration BESS systems based on iron-air and zinc-bromine reactions.
The reality is that the increase in intermittent power resources and an explosion in power demand have created significant strains on an aging, and in some ways antiquated, electricity grid. BESS can play many roles in improving system efficiency and firming solar and wind assets. As the chart on the following page shows, energy shifting in the power sector is the primary growth driver along with commercial and residential applications. In all three applications, the use cases are storing low-cost renewable energy when it’s abundant and deploying when demand is elevated, arbitraging system pricing spreads, and creating capacity to meet peak demand. Lower storage costs driven by manufacturing scale are enabling utilization growth.
As noted last quarter, BESS maintained favorable treatment in the OBBBA, with incentives to build domestic capacity. For investors, there is a clear growth opportunity in BESS, with BNEF anticipating over 15% annualized growth through 2030, more than double the expected growth in solar energy. While there are interesting small public and private BESS companies on our radar, we are most interested in how BESS system development will create tailwinds for large electrical products companies, independent power producers, and others in the ecosystem. The power system is changing, and BESS will likely play an increasingly important role.
