The Battery Boom Begins

Batteries are emerging as a big part of the global energy scene. New technology will produce cheap energy-storage batteries causing the end of the internal-combustion engine and a shift from fossil fuels to solar power. A battery-driven world threatens to rip the electric utility industry apart.

When RWE posted a loss of €2.8 billion for 2013 - after writing down €4.8 billion on power plants - its chief Peter Terium, blamed the “crisis in the conventional electricity generation business”. Returns for Germany’s second largest utility were hit by the rise of renewable energy which is increasingly replacing fossil fuels. He said the industry faced the worst structural crisis in the history of energy supply and that conventional power generation was fighting for its economic survival. 

Like many other big power companies, RWE is struggling with the huge amounts of renewable energy flooding the market. Thermal power generation - the very backbone of its business – has become a lot less profitable, because of weaker energy demand and the rise of wind and solar.

Cheap solar and falling energy storage costs have encouraged a growing minority of consumers to switch to solar. Consumers in emerging markets, and some developed countries, can generate rooftop power for less than it costs to buy electricity from a utility. Grid parity - the point at which the cost of solar, plus electricity storage, is cheaper than conventional power - is already here for some consumers and fast approaching for millions of others.

Given the high electricity prices it’s no surprise that solar power is rapidly gaining ground. In fact, the solar power industry is poised to play a dramatically bigger role in global energy markets for one significant reason. It’s cheaper today than it was even a couple of years back. For years, low-cost solar was viewed as ‘fringe’ rather than mainstream. Even as recently as two years ago, no-one truly thought of solar as a substitute for oil and gas fired power. But there has been a widespread installation of solar panels as homes and businesses everywhere see its value. And, when absolutely anyone can turn their roof into a power plant, the electricity market is badly disrupted. In the US distributed solar power today makes up just 0.2% of the retail electricity supply. What’s important is the rate of adoption. Suddenly it’s growing extremely quickly at 50% per year. Estimates put the total addressable market for distributed solar at 24% of US electricity sales, half of which would come from homes.

People know that the cost of burning coal to generate electricity makes up only 10% of their bill - the rest is grid maintenance. They are also aware that prices reflect an over-investment in electricity transformers, poles and wires.

The problem with solar was always the high cost of the battery-powered storage packs that allow people to draw down on stored energy at sunset. Battery costs needed to plummet for solar to make commercial sense. That day has almost come. What’s important is that the crossover point has arrived much sooner than anyone had calculated.  Big strides in battery technology will soon cause prices to collapse to levels that will fundamentally alter the electricity landscape.

For a start, a dramatic fall in storage costs will boost electrification. Solar is a tiny but rapidly growing part of the global energy market. If its cheap, then demand will be limitless. Solar could potentially double capacity and even transform the global energy trade. Developing markets — which represent more than half the world's population — will definitely see massive growth in solar in coming years. Installed capacity growth for 2015 is forecast to reach 60 Gigawatts reaching an accumulated 200 Gigawatts of installed capacity.

Going off-grid

Second, if rooftop solar can compete head-to-head with fossil fuels it presents a real and present danger for the legacy utility businesses.  Clearly, if it’s cheaper to get clean, reliable energy at home, staying connected to the grid doesn't make sense. If a large number of homes and businesses become self-sufficient, the chances of consumers moving off-grid are good in countries with lots of sunshine.  Millions of customers representing billions of dollars in utility sales are already defecting from the grid. And in a few more years there will be hundreds of millions generating and storing their own energy. This will usher in a time of major change. A mass movement off the grid damages the base-load argument that coal, gas and nuclear energy is critical to for peak hour supply. Thanks to grid priority, solar grabs a big chunk of peak hour demand slashing the utilities’ price premium.

While rooftop solar still requires some degree of grid supply at night, solar-plus-battery allows people to unplug from the grid completely.  In Hawaii (which has the world’s highest electricity bills), grid defection is rife. In Japan, homes with wholly self-sufficient solar and storage systems account for 60% of leading home builder, Sekisui House’s total orders. 

The trouble for utilities is the early adopters of solar speeds up the utility ‘death spiral‘. The first people leaving the grid push up the rates for everyone else. As demand falls, the grid operator forces rates still higher and so even more people find a way to quit. Rates go up again. Solar eats into utility revenues very quickly. For instance, wholesale energy prices in Queensland have slumped to unheard of lows as the boom in solar continues. Many utilities are choosing to shut down traditional power plants rather than sit on stranded assets.

Solar power then holds the potential to disrupt the global energy industry. We are not saying the days are numbered for legacy utility businesses. Nor, do we expect a mass move off-grid right away. We think the grid will remain but it will likely have a much smaller user footprint. In future, countries will have both central and distributed power generation.

The solar threat to the grid is real but people will still need access to the grid for back-up especially in countries that have little sunshine. The question is how do traditional grids get paid? The regulated return model will become obsolete. And even if utilities have government support, the mix of power will have to change. And so too will the way we pay for that power. But if the cost of connection for back-up can’t be justified then the role of last resort supplier is problematic. Utilities cannot avoid being seriously hurt, possibly fatally.  Solar has become too cheap for governments to ignore. It’s a politically charged issue and a tough problem for governments to solve. They want to encourage renewables; but they don’t want the grid to go bankrupt.

Disrupting old industries

Few can see a time when the bulk of the world’s power is generated by solar But, what people miss are the huge changes in that are happening right now with energy storage. What’s important is we are on the brink of new battery technology which will slash battery prices and make solar affordable. That’s the tipping point for investors. Of course, batteries are about more than just solar; there are other ways investors can profit from the energy sector. The big next step in battery demand will come from electric cars and specifically automakers like BMW, Porsche and Tesla which are all pushing electric and hybrid cars. Even Bentley will produce one. BMW said it would increase its battery orders from Samsung SDI by a quarter from 2016. 

Bringing down battery costs is central to making electric vehicles affordable for the mass market. That’s why everything changes with Tesla’s plan to build a massive battery production facility which will produce more lithium-ion battery capacity than exists in the entire world today.

Such will be the volume produced by the new Gigafactory that 30% will be immediately knocked off the cost of its battery packs in 2017. That's the year Tesla plans to start production of its lower-cost electric car. Tesla models will then have the same sticker price as a next generation BMW 5 series.

Electric cars and hybrids currently make up 4% of US car sales. Cutting the cost of producing lithium-ion batteries should boost sales dramatically. A boom in the use of electric vehicles is estimated to push the energy storage market to $50 billion by 2020. So in ten years the battery market will have quadrupled and that’s enough of a disruptive innovation to scare every single utility and every carmaker out there. These cars, which require so much more electricity, will drive up the demand up for solar disrupting a second industry – one that hasn't changed in a hundred years.

Elon Musk’s plans to develop the Gigafactory are one of the most exciting stories around. He's putting himself front and centre of this move to use solar as a reliable source of power for everything from cars to aircraft. Everyone is going to need batteries. Tesla's plans to disrupt a trillion dollar car industry as well as a trillion dollar electric utility industry, stops and starts with producing cheap battery packs that allow solar energy to be discharged at night. No question, Musk has his eyes on more than cars. The car market is just the first hurdle.

How long will it take?

The story will take time to filter through. It’s not as if everyone will want a personal power plant just like not everyone will switch to an electric car overnight. But as with the iPhone, once the early adopters start buying,  everyone else will follow. Remember smartphones were only released in 2007; penetration has taken less than seven years. 

The investment opportunity means looking all the way through the battery supply chain to the raw materials and processing companies. A typical high powered lithium ion battery contains nickel, graphite and lithium, as well as copper and aluminum. Demand for these metals could soar. Materials suppliers like Sumitomo Metal Mining could see a new a demand driver for nickel which makes up 40% of a lithium ion battery. The sheer volume of materials eventually needed could affect both the metal miners as well battery cell manufacturers like Panasonic and Samsung SDI.

We think batteries are on the cusp of enormous growth as costs fall to levels that make electric cars and energy storage economical. There are now more than 100,000 electric cars on America's roads. Two and a half years ago that number was just 345. High demand from China for electric cars tells us that the battery industry, and the eco-systems surrounding it, is poised for exponential growth as it infiltrates both the energy and the transport sectors.

Technology is moving faster than we ever expected. We've already seen that happen with solar generation. Costs fell fast and efficiency improved a whole lot quicker than most thought possible. Scientific leaps in the battery industry underscore the fundamental change in the consumption and production of energy. The scale of the change here is almost too large to grasp.

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