To Investors,
I’m enjoying learning about the energy sector in South Africa, especially as it relates to what the future electricity system in South Africa will look like. Today I want to talk about the multiple roles that battery energy storage systems play for the electricity grid.
Primarily batteries play the vital role of storing energy produced/harnessed today, for consumption at a later stage. But as an investor there’s more to analyse than just energy storage.
One important factor that energy investors would look at pertaining to battery systems is the battery chemistry being used. Globally, there are two dominant chemistries: lithium-iron phosphate (LFP) batteries and nickel-manganese cobalt (NMC) batteries. LFP batteries are increasingly more preferred for grid use vs NMC batteries.
LFP batteries are “beating” cobalt-based batteries for grid use because grid-scale storage prioritises total lifetime cost, safety, and reliability over raw energy density.
Currently, LFP makes up 80–95% of new grid and commercial energy storage deployments worldwide (including almost 100% of South Africa’s BESIPPPP projects). NMC is mostly left for EVs where space and weight matter more.
Here are the top 3 reasons why LFP wins for grid applications:
1. Much Lower Lifetime Cost (the biggest reason)
Globally, LFP cells cost 20–30% less upfront (recent industry pricing puts LFP costs ~$220–240/kWh vs $280–320/kWh for NMC).
Over 10 years, LFP’s total cost of ownership (TCO) or levelized cost of storage is 30–40% lower because it degrades far slower.
Here’s a basic math example:
By year 10, if LFP still holds 70–75% capacity; and if NMC is down to 55–65%, that means NMC systems often need expensive augmentation (extra batteries or replacements) by year 7–8, while LFP keeps delivering full revenue for longer.
2. Superior Safety & Thermal Stability
LFP batteries almost never go into thermal runaway (fire/explosion). Thermal runaway temperature for LFP batteries is >270°C vs ~150–200°C for NMC batteries.
For giant grid installations (hundreds of MWh), fire risk is a deal-breaker. That means if LFP batteries are used, insurance is cheaper, permitting will be faster, and utilities will sleep better at night. This is especially important in a hot country like South Africa.
3. Longer Cycle Life for Grid Duty
Grid batteries get cycled hundreds of times per year due to frequency regulation, daily arbitrage, and daily use. A cycle is charging the battery to full capacity, then discharging all energy.
LFP handles 2,000–8,000+ cycles with minimal loss.
NMC typically manages 1,000–3,000 before it needs replacement.
A higher cycle capacity means that LFP batteries are more cost effective because they would last more than twice as long as NMC batteries, thereby significantly reducing the cost of replacing batteries for the electricity system – keeping the economics of grid-scale battery systems worth it. 730 cycles/year × 15-year PPA = 10,950 cycles total. LFP’s 8,000+ cycle rating comfortably covers the full contract life. Battery technology is increasingly improving which means that each new BESIPPPP bid window could give the South African grid access to increasingly enhanced technology at lower costs.
Here’s a summary table of LFP batteries vs NMC batteries:
Among advocates for renewable energy sources backed by battery storage, you rarely hear people talk about a crucial point impacting the cost of an investment into battery systems – which is that some energy is lost when it’s stored in batteries because of the following reasons:
Inverter Losses: Converting alternating current from the grid to direct current for the battery; and back again.
Chemical Resistance: Heat generated inside the cells during the “shuffle” of ions.
Parasitic Load: Batteries need Air Conditioning to stay at their optimal temperature and the energy used to run the fans and cooling systems comes from the battery itself.
This loss of stored energy is referred to as the roundtrip efficiency (RTE) – an effective tax on a battery system investment.
RTE measures how much energy is recovered from a battery energy storage system (BESS). RTE is an important consideration in BESS investments because it raises the cost of energy by forcing the operator to charge the system to a higher rate to maximise the energy available to dispatch, and raises the cost of energy, at the same time squeezing margins for energy traders. We’ll look more into this in the next section.
Generally, here’s how the RTE for different storage systems compares:
Lithium-Ion (LFP/NMC): 88% to 94%.
Pumped Hydro (like Eskom’s Palmiet or Ingula): 70% to 80%.
Green Hydrogen (Storage via Electrolysis): Can be as low as 30% to 40%.
RTE also impacts energy traders, and I’ll mention a point about the 6pm crisis, which I wrote about in a previous letter to this group.
The 6pm crisis references the fact that energy costs spike between 5pm and 8pm, and in the mornings between 5am and 7am in South Africa due to residential activity during these times. This means that as an energy trader you have an arbitrage opportunity where you can gather and store energy that you buy at lower prices during the day when demand is low and the sun is at its brightest, then sell it at higher prices during peak demand hours. BESS make this arbitrage opportunity harder to pass up, especially if you can keep the roundtrip efficiency high and keep your costs of ownership low.
One thing to keep in mind however is the real cost of stored energy, which I alluded to in the previous section.
RTE directly impacts the “real” or effective cost of stored energy because losses mean you have to input more electricity than you get out. This raises operational costs, especially in systems paired with renewables like solar, where you’re essentially wasting some free energy. It also influences metrics like the levelized cost of storage, which is the total lifetime cost per unit of energy delivered.
In simple terms: to get 1 kWh of usable energy from the battery, you actually need to charge it with (1 / RTE) kWh. So, if RTE is 80%, you need 1 / 0.8 = 1.25 kWh input for every 1 kWh output. If electricity costs R0.10 per kWh, your effective cost per usable kWh becomes R0.10 × 1.25 = R0.125 — a 25% markup due to inefficiency.
Here’s another example: Imagine a home solar battery system storing excess daytime solar energy for evening use. If it has 90% RTE, for every 10 kWh stored (from free solar), you get 9 kWh back – losing 1 kWh. Over time, this means you might need a larger solar array or buy more grid power to compensate, increasing upfront or ongoing costs.
So, in grid-scale applications, low RTE can reduce revenue from services like peak shaving (storing cheap off-peak energy and selling during high-demand periods) by 10-20% or more. Higher RTE (e.g., 95% vs. 80%) can shorten payback periods by years and lower the overall cost of energy by reducing waste, making systems more economical for things like EV charging or backup power.
Now let’s get into a more critical role that grid-scale battery storage systems have; which is frequency regulation.
In South Africa, the electricity grid must run at a constant 50 Hz for everything to work safely. 50 Hz is a fixed, permanent standard chosen over 100 years ago and is now locked into every piece of equipment in the country: generators, motors, transformers, factories, appliances, trains, and even your fridge. In South Africa, motor speeds, transformer sizes, and electronics are all designed exactly for 50 cycles per second.
If power supply suddenly falls short of demand (e.g. a big factory switches on or a power station trips), the frequency drops below 50 Hz.
If there is too much supply, frequency rises above 50 Hz. Even small deviations (0.1 – 0.5 Hz) can damage equipment or cause blackouts if not corrected quickly.
Batteries fix this in milliseconds.
When the frequency drops, the battery instantly discharges power into the grid (raises frequency back to 50 Hz).
When the frequency rises, the battery instantly charges/absorbs power from the grid (lowers frequency).
This is called primary frequency response or frequency regulation.
Unlike coal or gas plants (which take minutes to react), batteries respond almost instantly because they have no moving parts – only chemical reactions and power electronics.
In the BESIPPPP projects, this service is paid for separately and helps keep the entire national grid stable, preventing load-shedding and allowing more solar/wind to be added safely. It’s like having thousands of “shock absorbers” spread across the country.
This all now brings us to the importance of South Africa’s battery energy storage independent power producer and procurement program (BESIPPPP). This program positively affects electricity costs by primarily keeping them down. 4 additional summary points:
I had already mentioned above that batteries play a vital role in frequency regulation. Extended frequency variations can be damaging and costly to the national grid.
When energy demand spikes, there’s more energy to deploy without having to go into the market and face exploitation.
Diesel or gas peakers may be more expensive to deploy during peak hours, especially given diesel’s vulnerability to macroeconomic events and oil market fluctuations.
Total BESIPPPP bid contracts awarded so far is ≈ 1,744 MW of battery power capacity (roughly 7 GWh of energy storage when you factor in the 4-hour duration), across 3 bid windows. Additionally, prices have dropped sharply – Window 3 bids were apparently 40% cheaper than Window 1 on average. Almost all of these projects are using LFP chemistry — exactly why we see such strong cost, safety, and longevity advantages playing out in South Africa.
For investors, this combination of falling prices, 15-year PPAs, and LFP’s long cycle life is translating into attractive risk-adjusted returns with built-in inflation protection.
Again, I’m excited about the future of the electricity system in South Africa and what it will look like. What I’m also excited to see play out is the shift of the electricity system from being a predominantly extraction-based system, to implementing more manufacturing based energy through renewable energy modules like solar, wind, and batteries. Based on the fact that solar, wind, and battery module prices are falling, a manufacturing- and technology-heavy electricity system is the utopia we should strive for in South Africa.
On my journey to becoming a master capital allocator, another lesson down, a billion more to go.
I hope you all have a great start to your week!
-Wandile Sithole
Founder & Chief, Self-Taught MBA
