Refreshing blend or toxic technology cocktail?
as published in PV Magazine International November 2018 edition and the Solar Storage special edition released in cooperation with Energy Storage North America.
Battery storage is racing even faster than the PV market did a few years ago. Costs are plummeting, and new production lines are popping up all around the world. Smart people with smart ideas are leveraging venture capital and research funds. M&A activity is also accelerating with a new range of investors taking interest. But the technology battle is far from over, says Ragna Haupt-Schmidt, Partner at Energy Consultancy Everoze.
Revolutions in lithium-ion (Li-ion) chemistries and ground-breaking flow batteries are fighting head-to-head with hydrogen based systems for corporate investment. Everyone is trying to disrupt the market with myriad applications from high energy to high power, from long duration to frequency control, displacing diesel gensets or gas peakers. This article assesses technical developments and changing business models from a wider investor community perspective, including battery tech investors and new entrant solar system integrators. Taking the role of infrastructure-drinks-mixer, we ask; will combining battery storage and PV emerge as a refreshing investment blend or a toxic technology cocktail?
Surge in new investor types
The stats paint a clear picture. There is plenty of money around. VC funding for battery storage related investments amounted to US$ 539m in the first half of 2018, according to Mercom. This is a 12% increase from 2017, but scattered over ever more deals, 29 in total. This is on top of the increasing number of undisclosed M&A deals and of course the research funds made available to new innovative ideas.
Typical investors in this area so far have been VC arms of large energy firms, such as Shell Ventures, or Asian technology conglomerates, such as Samsung. However, there is a sudden surge of new investor groups. Financial investors are increasing their presence on the global battery playing field. For example this year $US80m was invested in the battery services company stem by Ontario Teachers’ Pension Plan and Singapore’s Temasek.
Both of these institutional investors have previously invested in solar PV assets. The solar arm of Banpu, a leading Thai coal player, has taken a stake in NRT, a Singaporean energy storage systems start-up. The industry is clearly going through a growing-up phase similar to that which solar PV underwent. Even project finance is reluctantly, but increasingly pouring into battery projects.
The battery storage industry is not only following a similar path to Solar PV, but it is also closely linked to it. Large renewable energy IPPs develop or buy utility-scale PV-storage projects displacing diesel gensets around the world. Some solar players are even screening investment opportunities in companies for the sole purpose of securing their own growing battery supply needs.
So what are the key questions that these new types of investors ask at the beginning of a project or even for a corporate Due Diligence (DD)?
Is lithium-ion a safe bet?
Yes and no. Lithium-ion (Li-ion) is still the dominant chemistry sold on the market with plummeting costs. Most commentators are comfortable with the strong demand predictions for many years to come. So, for project investors Li-ion batteries seem to be the best bet today.
However, VC investments in the first half of 2018 also covered many other chemistries and storage technologies. Investors seeking a stake in a company need to look deeper. On the one side there are battery technologies, that include various chemistries such as Li-ion (nickel-manganese-cobalt, silicon anodes etc), sodium-sulphur and flow batteries. Then there are fuel cell technologies which involve hydrogen or methanol. Finally other technologies, such as thermal, Compressed Air Energy Storage (CAES), liquid air or flywheels can also fulfil storage needs.
The competition is far from over. Ground-breaking research results are being announced on a seemingly weekly basis, claiming drastic cost reductions or increasing lifecycles. But what about sustainability and health considerations? Li-ion batteries have well-publicised issues related to current recycling and mining practices. It is not yet economically viable to recover lithium from old batteries; the cost of mined lithium is lower. And the recycling processes vary depending on the different battery types.
What if Li-ion follows a similar path to silicon in PV?
Crystalline silicon (c-Si) has been considered an intermediate technology from early on, soon to be replaced by thin film or other new breakthrough developments. These expectations have in reality been confounded and c-Si continues to endure. In energy storage, Li-ion has benefitted from technology improvements and scale effects, thanks largely to investments from the automotive sector. This left limited market share for competing technologies to date. Whilst Li-ion is the go-to product for now, if it’s supply chain fails to address sustainability concerns or the cost curve stalls, there is potential for disruptive technologies to make a much bigger dent in its dominant market share.
What if a new battery innovation claims to half battery costs?
The key question is by when can a cost reduction of a new technology be achieved. It is hard to beat Li-ion’s ongoing cost reductions. Despite current overcapacity, recent announcements by leading supply chain players such as BYD, CATL or LG Chem show that new production lines of Li-ion based batteries are being set up and existing lines are being expanded all over the world. Li-ion prices have plummeted to less than one third over the last six years, and they are expected to drop a further 2/3rd to as little as 73USD/kWh in 2030, as per the latest BNEF 2017 predictions. Investors need to be wary of declarations claiming that the new technology is able to compete with Tesla and ready to disrupt the market.
Should investors look for a ‘Swiss army knife’, or one application?
The answer is rather complex. When solar project sponsors approach this question, their natural instinct is to look for a battery – a solution which can cope best with the generation pattern of the sun, store energy for many hours during the day and discharge overnight. Sizing a battery to match this peak requirement to date has meant paying a hefty sum for extra capacity which is rarely used. Hence the main usage for batteries in grid connected environments has been for frequency response or ancillary services rather than for arbitrage purposes. The benefits of co-locating with a renewable energy plant have mainly come from savings on development, balance of plant and grid connection costs.
But it is this duck curve effect of solar that is one of the key drivers for further market development of storage systems. Longer duration batteries (4hrs+) will reach commercialisation in the next couple of years, even 8hrs+ are not ruled out anymore. With longer battery durations storage can even take on peaker roles, so that grid operators can maintain gas resources for those prolonged peaks that batteries would not meet. The recent Pacific Gas & Electric Corp tender in California for four gas peaker replacement projects using battery technology is paving the way for this trend which will surely follow in other jurisdictions.
Over the next five years, market requirements will continue to lean towards the high power applications, with grid operators pushing the markets towards providing short duration, fast response times and ramp-up rates. However, in the mid-term a market swing from power towards energy can be expected. More mature grid markets for battery storage, for example the UK or the US, have tended to be kickstarted by ancillary services, such as frequency control, but are already transitioning towards capacity services, arbitrage or similar.
For investors wishing to acquire a stake in an innovative battery company, it is important to assess the clarity of the vision of the new product. Selling into a wide range of markets or even trying to take on the niches that the big corporates already fill could be a risky approach.
What about the impact from big data, AI and V2G?
Are they supportive of the industry or slowing it down? The unfolding energy transition is not only impacted by evolving storage solutions and applications, but also the infrastructure needs they entail. Technology-led megatrends such as smart cities, EV-networks, colocation with renewables and vehicle to grid (V2G) solutions will determine how much of our current infrastructure will be obsolete ten years from now. Unlike before, where developments of the different industries were separate, today everything in the flexibility space is connected and influences each other.
The complexity of future systems and the objective of achieving overlapping yet different applications in one asset can have the effect of paralysing regulatory reform and the development of new laws.
On the plus side, software developments are clearly breaking new ground with big data analytics and machine learning algorithms being put to work on energy production data for large PV plants, allowing ever more accurate revenue predictions or health assessments. Artificial Intelligence (AI) is for example allowing stem to build AI-powered distributed energy storage networks in a more efficient and cost-saving way.
What about my PV-storage investment case right now?
There is no simple answer and a detailed assessment of each individual case is required. In the end the PV-battery game is all about revenues and their timing. The real uncertainty for investors lies in achieving a reliable revenue stream in the near term with the carrot of sky-rocketing upside in the mid-term future.
While solar revenues for renewables projects with government guaranteed tariffs or PPAs are rather safe, the crystal ball gazing required to predict stacked battery revenues and future power curves is still something infrastructure investors are getting used to.
In the case of a corporate investment the analysis goes even deeper. A highly patented product is not sufficient for the success of an overall venture. A plausible business plan detailing market, competitor analysis, technology, patents, costs, commercialisation as well as team capability are the minimum required information to weigh risks against potential returns. While investing in final stages of a new product development or building up a service provider appear highly challenging, these investments still bear lower risks than setting up a manufacturing plant or even capitalising a new luxury resort solely running on solar PV and battery storage. The sooner the revenues, the lower the risk, but also the lower the return. Return requirements for less risky PV-battery projects might range in the higher single digits to lower teens. A corporate invest can stretch far beyond 15 percent albeit on a shorter investment horizon.
The range of PV-battery investment opportunities is almost bewildering, as are the risks and the level of commitment required. The current enthusiasm of PV-storage players is leading to innovative business models and financial solutions. This might just fill the regulatory void left by governments around the world who are struggling to keep up with the pace of technological change. But whether you work in government or industry, finding the right blend of solutions in this complex and uncertain landscape is no easy task. A skilled drinks mixer is needed, blending quality ingredients with care to deliver a refreshing tonic for thirsty investors.
To send Ragna a comment on this article, please visit her LinkedIn page.