Blowing your cash on compressed air

The age of renewables is coming. Solar prices are falling exponentially and there’s no limit to supply. Naturally, you’ll want to profit from the revolution – but those getting rich in the gold rush may not be those panning for gold, but rather those selling picks and shovels.

If you want to sell shovels in a gold rush, look no further than energy storage. Conventional solar only works in the day time, and even concentrated solar power (which works by heating up oil or salt) typically only lasts about six hours after sunset before it quite literally runs out of steam.

Energy storage will unlock the renewables revolution. I’ve already looked at the increasing role of battery technology. That leaves two more options for the short-term storage of renewable power: compressed air and flywheels.

First, let’s look at where compressed air energy storage (CAES) fits into the mix. (For clarification, there’s a range of fundamentally similar technology, called “pumped heat electrical storage” (PHES) and “liquid air energy storage” (LAES). We’ll use CAES in the early part of the article to cover all three, but we’ll pick out specific firms later using the proper designation.)

Broadly speaking, you need energy storage to do three things. Firstly, you need to shave the minute-by-minute peaks and troughs – like when everyone switches on the kettle together (eg, during an ad break in Coronation Street). Then, you need to deal with the fairly predictable daily ups and downs in energy usage – wind turbines keep going at night, when everyone’s asleep, and solar is done by 10pm, when everyone’s still watching TV. Finally, you need to balance out seasonal demand – because your solar is dead by 4pm in winter, but your peak load hasn’t even started yet. Unless you are going to install lots of spare generating capacity, you need to somehow bring summer solar into the depths of winter.

Fundamentally, compressed air is great for the middle one. It’s not quite fast enough to start to deal with little demand bumps (flywheels may turn out better, and batteries are likely faster). And it hasn’t really got the kind of capacity to get you through the long dark winters (chemical storage is better). But it will keep on blowing every day, when the wind’s died down or the sun’s gone to bed.

But there’s more…

If you’re a renewables generator, particularly wind, you’ll have a problem. Your wind turbine is likely stuck on some Godforsaken hilltop or out in the middle of the sea. Onsite energy storage cuts the price of the big fat cable you need to lay. Better sale prices and lower capital costs. What’s not to like?  Iowa Stored Energy Park is taking just this approach – putting storage right next to the renewables. For an offshore wind focussed version of the technology, check out Nimrod (UK), or Hydrostor (Canada) – which we’ll discuss in more depth later.

So how does it work?

Fundamentally, all you need is a big cave, a compressor and a turbine. When electricity’s cheap, you blow air into the cave with the compressor. When electricity’s expensive, you let it out through the turbine, which powers a generator. Simples. (The PHES/LAES are slightly different, working on heat, not pressure, for storage).

What about the economics?

There are two fundamentals things you need to be aware of. Surprisingly, CAES is really not very good. The amount of energy recovered from a compressed air installation might only be up to 2/3 of what you put in. Current battery arrays can manage about 85%, so they’re a lot better. So why would anyone bother? The simple answer is that it’s really very cheap to build.

Furthermore, the technology is super simple – especially for the less sophisticated installations. This means it doesn’t break, so it’s got a good life expectancy, and thus a low “levelised cost”. This cost profile means you can soon expect to “blow” electricity into a hole for 4c per kWh, then retrieve it. So if your peak price is higher than your baseload by as little as 4c (plus efficiency losses), that’s a trade worth doing. Those numbers are already attainable – and the gap will only get bigger as we shift to mass renewables.

Sadly, suitable caves aren’t all that common – and firms such as Gaelectric are currently on the hunt for suitable locations. They’re going to be using an aqueous salt mining technique to create a massive empty bottle in the rocks, a kilometre below the Northern Ireland coastline. If you’d prefer a stateside play, try New York State Electric and Gas, which is going for similar salt cavern technology.

Of course there’s a bit more to the technology than that, and there are several technology variants. You can make small-scale units that rely on artificial gas bottles – great if you want modular storage that fits in a shipping container. If you’re currently stuck for caves, you can pump water into bags under the sea. Remarkably, this technology is already pretty long in the tooth – which means it’s reliable and bankable.

The first large-scale installation went up in the 70s, and McIntosh (Alabama) and Huntorf (Germany) currently own plants. You don’t need renewables to make it work – nuclear baseload energy is also super-cheap at night, which is how this got started.

So, there’s the basics covered. Let’s get on to how to make some cash using this method. It is important to note that some of the companies discussed here are unlisted and are more suited to experienced investors willing to take on more risk. To cautiously summarise the outlook for CAES, it’s got a future but it’s a part of the mix – not necessarily a global game changer in itself. Battery storage is significantly more efficient, and it’s getting cheaper really fast. That’s a big threat to CAES’ ability to scale. However, what’s great about CAES is that it’s very cheap to build. There’s always going to be a place in the energy mix for “peaker” technologies – that are expensive to operate but cheap to construct. CAES fits nicely into this category.

So how would I recommend you play it? Well the technology itself is pretty basic, and it’s far harder to get any patent protection on the core techniques than it is for, say, next-generation solar. Nevertheless, there are a few investments you might like to consider.

For the slightly timid, Gaelectric is a supplier that really “gets” storage. They’ve got investment in battery arrays (courtesy of Tesla), flywheels and their big CAES salt chambers (discussed above). They’ll give you exposure to a variety of both conventional cash-cow energy plays, and also the know-how that comes from developing their own technology. It’s likely better than working with a larger utility, which doesn’t necessarily have the exposure to really focus your money hard on CAES.

If you’d like to take a risk on a minnow, look at the UK’s own Highview. Their LAES technology is based on bog standard liquid nitrogen, not straight compressed air. Therefore, it can be used anywhere – so no caves required. What’s more, they can make use of waste heat (or cold) from any industrial processes – essentially getting some of their energy for free. Their technology is also great for boosting power plants – saving the cost of building expensive, semi-redundant “peaker” power plants to cover spikes in demand. They’re leaving the demonstration plant stage and are into their first scale build. My view is that the jury is out on which of the technologies will ultimately have the cost edge, so I’d look for flexibility of deployment over efficiency. Likewise, the UK firm Isentropic has a PHES solution that also clips neatly on to existing gas-fired power stations – but can also stand alone in a renewables world.

If you’re after something a little unconventional, or energy just isn’t your sector, keep an eye on PSA Peugeot Citroën. They’re bringing out a compressed air car soon. This is old technology, and it’s been used in mines for decades (you can’t burn petrol in a mine). However, it could end up giving battery-powered cars a run for their money. It’s certainly a gamble – but potentially a very profitable one. Remember how Boeing got started by going “all in” on a new technology (in their case, it was jets)?

If you’re more comfortable with pure technology plays in renewables support, you’ve got the luxury of choice. Hydrostor and Nimrod offer technology to support generators and grids that are coastal or offshore. They use inflatable bags under the ocean to store power, so there’s no need for a cave. In countries with a lot of coastline, it’s an excellent technology approach.

Alternatively, SustainX (already backed by Rockport Capital and Polaris Venture Partners) and LightSail Energy are well worth a good look – because they use small(ish) gas tanks, not huge caves, to store their energy. This makes it ideal for small-scale applications, and I can imagine them flogging their 4MWh shipping containers to every African village with a solar panel in a few years’ time. There’s going to be a couple of billion people hauling themselves out of poverty on the back of cheap renewables, and that super-flexible storage is really big news. I think that the advantage of shipping-container scale pushes the others into second place, behind these modular firms – but do keep an eye on the prices charged, as this new CAES technology hits the market. SustainX and LightSail do have a brilliant concept – but they have to remain competitive to survive and grow.

Category: Energy

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697.

© 2019 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑