Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: efficient energy storage could be a panacea for the energy industry, saving billions and making use of abundant natural resources such as sun and wind. We are not there yet, but over $5bn have been invested in battery storage technology projects in the last 25 years, during which time the cost of the storage battery has fallen 90%. Batteries are becoming increasingly cost efficient and are easily scalable. Against this background, the storage industry could be worth as much as $50bn by 2030. Auto parts manufacturers (who also see the potential of electric cars), existing battery manufacturers and grid infrastructure operators are all seeking to establish a foothold. While still early days, Tesla may potentially be the best-placed to take a lead.
Everybody loves the sunshine. It typically conjures up images of the beach, picnics, barbecues and the like. It is warming and pleasant (especially, thinks the author of your piece, when writing this on a grey London day in September). More fundamentally, the sun is also a powerful source of energy. For many years, however, it has proven a largely insurmountable challenge how to store efficiently the sun’s (or wind’s) energy. If this were possible, then the benefits to economies around the world would be significant. Technology, in the form of large-scale batteries, is making the theoretical an increasing reality. Investors are entitled to remain sceptical given many similar false dawns in the past, but for those businesses that do succeed in getting it right, the opportunities and potential upside are significant.
Global energy consumption is forecast to double over the next 50 years according to the Energy Information Administration, a US Government body. As we have discussed in previous Helicon Thoughts notes, how to deal with such a demand conundrum, particularly against a backdrop of ageing, unreliable or even non-existent grid infrastructure is likely to prove a major challenge for national administrations around the world. Correspondingly, there is a high logic for seeking to create diversified energy portfolios comprising a variety of sources of energy. Moreover, ever-high levels of geopolitical uncertainty reinforce arguments for seeking to gain energy independence wherever possible.
Intermittent sources of renewable energy such as solar and wind have many attractive characteristics – they are abundant, carbon-friendly and can help drive energy independence – but have long been held back by the lack of energy storage. Put simply, the sun does not always shine nor does the wind always blow, particularly when demand for electricity is high. One clear problem, for example, is that electricity demand is obviously higher in winter, just as the sun sits lower in the sky and the days are shorter. In reality, therefore, most grid companies around the world are forced to maintain additional power stations (usually running on fossil fuels) to meet energy shortfalls, unable to benefit fully from the sun/ wind.
Batteries, however, could store the power from renewables when it is generated and release it when needed. Cheap and effective grid-scale storage could help overcome irregularities in supply and also help manage demand requirements. The Pacific Northwest National Laboratory, a research body in the US, has estimated that 100 gigawatts of new generation and associated transmission and distribution capacity could be avoided through to 2020 via the development of storage technologies, potentially saving the US at least $50bn p.a. To provide context, this cost is equivalent to building 200 new large gas-turbine power plants.
At present, grid-scale storage is dominated by pumped storage hydro (PSH) solutions. According to the Electricity Power Research Institute, an American think-tank, PSH is the most favoured storage option accounting for around 98% of bulk storage capacity at present. While the technology has been in existence since the 1930s, there is a need for appropriate geography (compliant hills and valleys to pump water up and down). It is also expensive and time-consuming to build. Compressed air energy storage is another potential option currently favoured by some. Here, air gets released from underground caverns to drive a turbine that produces electricity. Nonetheless, the process is neither efficient nor cheap.
The humble battery, however, offers a potentially compelling solution. Batteries were first invented in 1800 by the Italian, Alessandro Volta. On a basic level, they are devices that consist of one or more electromechanical cells that convert stored chemical energy into electrical energy. As with many other future trends, a combination of falling costs and improving technology is making the battery an increasing viable option for energy storage. The cost of lithium-ion batteries, for example, has fallen by over 90% in the last 25 years according to Bernstein, a US equity research firm. During this period, over $5bn cumulatively has been invested in improving battery technology. At present, most electricity storage batteries come in at a cost of about $1000/kWh. Industry consensus suggests that when levels of around $250/kWh are reached, they may be economic and able to compete with other alternative storage solution options.
Today, the industry is at an exciting (and admittedly still somewhat uncertain) stage, where many competing battery formats and underlying technologies are being developed. The US battery energy storage market is probably the most advanced in the world and benefited particularly from over $250m of stimulus funding via the 2009 American Recovery and Reinvestment Act. The German, British and Italian governments have also been leading advocates of investment in new battery technologies. Some projects are already operational. The Notrees plant in Texas (jointly funded by Duke Energy, a utility, and the US Department of Energy) has been storing wind power in batteries since 2013 and can operate at a maximum level of 36MW of power. Other operational projects can be found in Elkins, West Virginia (managed by AES, another utility) and also as far afield as Alaska and Rokkasho in Japan.
A further 700MW of new energy storage projects involving battery technologies have been announced in the last 12 months (year to 31 March) according to Navigant, a research consultancy. The majority of these have been in the US, with California leading the way. The state declared earlier this year an ambitious project whereby its electric utilities will need to invest 1.3GW in energy storage throughout their systems by the end of the decade as a means to save cost and capitalise on local climactic conditions (i.e. lots of sun). The states of Texas and New York have made similar announcements. In Europe, there are active government plans for deployment in Germany, Spain, Austria, Italy and the UK among others.
The most ambitious project, however, saw ground broken in Reno, Nevada in June. Tesla, perhaps more renowned for its electric cars, commenced the construction of what it terms the ‘gigafactory.’ Built in conjunction with Panasonic and likely to cost up to $5bn when complete (estimated by 2020), Tesla believes that its complex will be able to manufacture storage batteries on a mass-market basis that can be sold to utilities and heavy industry as well as to households for their own needs. Such batteries would also be used for Tesla cars. Chief Executive Elon Musk said in August that it had already received reservations for its products totalling $1bn.
There is no clear definition what constitutes the battery energy storage market as it depends on whether both hardware and software are included and also which end-markets (utilities, residential, autos etc.) are considered. Irrespective, the assumptions made by most consultants and investment banks suggest that its growth potential is significant. New worldwide installations of energy storage capacity are expected to increase from just 121MW in 2011 to over 12,000MW by 2021, representing a 100-fold increase in annual deployments over a 10-year period, according to Pike Research, an industry consultant. Another research body (GTM Research) forecasts a 250% expansion in the storage market between 2015 and 2018. Against this background, the market could be worth between at least $20bn and up to $50bn within the next 10-15 years’, depending on the exact scope of analysis.
Some of the uncertainty in forecasting may stem from the fact that the industry is still at a nascent stage. Not only do battery storage solutions have to compete with other alternative energy storage options but also among themselves, with a range of rival battery formats under development. Tesla favours lithium-ion batteries (which many scientists consider to be technically superior), but other projects are using lead-acid, nickel-cadmium or sodium-sulphur solutions. Relative cost and efficiency will play a role in which of these wins out. Cost may also play another role in the pace of adoption since all utilities (the primary purchasers of such batteries in the near-term) clearly need to earn a regulated return on the capital they deploy. For the industry to develop further over the medium-term, regulators will also need to consider how incentives are structured for consumers to switch between the grid and personal battery usage. Some sceptics have also highlighted that the toxicity of materials used in developing such storage batteries may result in a potential safety hazard.
Given the current state of the industry, there are few listed pure-play businesses which allow investors to access the energy storage theme directly. Unsurprisingly, however, many businesses from different industries are seeking to gain a foothold. Much of the current pace of innovation is being driven by auto parts manufacturers keen to be involved in the development of future electric vehicles (e.g. Bosch, Continental and Magna International). In addition, existing players within the battery manufacture industry (Hitachi, NEC, Panasonic, Samsung, Toshiba) are also active, as are the large grid transmission equipment businesses (ABB, GE and Siemens).
Perhaps the most interesting potential player within the space remains Tesla. Jeff Straubel, its Chief Technology Officer describes Tesla as “an energy innovation company.” It is arguably one of the best-placed businesses, benefiting from an early-mover and potential scale advantage as well as its relationship with Panasonic (its 50:50 partner in the gigafactory project). Nonetheless, there are high execution risks attached to Tesla’s strategy, the business is still loss-making and, even on 2016 estimates, Tesla trades on over 30x consensus EBITDA and at least 100x consensus earnings. One final consideration is that most listed solar and wind plays remain around 50% below their 2007 all-time high levels. If battery energy storage technologies are finally proven to work, and end up being scalable, then these companies may get to enjoy their time in the sun again…
Alexander Gunz, Fund Manager, Heptagon Capital
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