There are two global markets that drive the demand for energy storage: stationary (old-school power) storage and electric vehicles (EVs). For the short term — through 2025, which is only four years out — energy storage deployment is targeted to grow over 40% per year. Two factors are converging that are responsible for the uptick in demand for grid storage at scale: plunging oil prices (with no bottom in sight) and societal demands for clean energy.
How COVID-19 Brought Grid-Scale Storage Investing Into Focus
There was some thought and a lot of idle chat during the first months of the COVID-19 pandemic that the spring’s global lockdown would have a positive impact on greenhouse gas emissions. It did, for about a month; April emissions were down by about 17%. Since then, our carbon footprint has returned to Yeti-size. By June, CO2 emissions were back to 2019 levels. If there was a bright spot to this extremely temporary reduction, it’s that the need for clean energy had another moment in the spotlight, which is always good for my business.
Let’s be honest: we’re going to remember 2020 as the year of COVID-19. But on the clean energy front, 2020 will be equally memorable. This is the year that the big energy conglomerates shifted the conversation regarding energy transition from the anticipatory to the substantive. The death drop in oil prices due to COVID-19 was just a shot across the bow; other geopolitical factors have finally converged, making the switch from carbon to renewables the only real option going forward.
What happened? For one thing, public opinion has shifted against carbon fuel to greener sources of energy. I could spend all day arguing climate change, but when Shell, BP, and Equinor all realize that continuing to push fossil fuels has a commercial downside and the future is green, that’s all you need to read those tea leaves. Don’t think for a minute that these companies got all emotional about seeing baby ducks get a bath in dish detergent and changed their business models.
It’s All About OPEC
Oil prices have been more or less in free fall since 2014, and the cartel can’t control prices the way it could before the US, Canada, and Venezuela became equals in the oil fields. Back in the day, a lot of mutual back-scratching guaranteed revenues would justify the capital expenditures on developing reserves.
The COVID-19 recession pushed prices down further, to the point that several large energy projects are not financially viable anymore. For these ventures to be profitable, oil prices have to recover beyond what is realistic. Adding to that, the areas where reserves can be developed on the cheap are not politically attractive. Few companies want to do business with the governments (such as they are) in Libya or Venezuela.
In case the pandemic wasn’t enough to encourage CVCs to shift their investment focus, there is also the climate is changing — from catastrophic storms in the Caribbean that impacted the Gulf Coast to the raging, out-of-control wildfires in California. The California tragedies, with billions lost in property and GDP, rolling power blackouts, and the loss of life, happened in Silicon Valley’s backyard. It’s a wake-up call for the billionaire investor class and VC firms. Now, they’re looking at renewable energy storage systems as a stable bet against a fragile future.
The Grid Storage Challenge
While the quest for renewable energy at scale is sort of like the hunt for the end of the rainbow, there are two fundamental needs:
- Generating energy for immediate use
- Storing excess energy for later use
Sure, windmills and water are great. They provide some amount of on-demand energy. But the sun goes down. The wind dies down. If that’s your power source, you’re out of luck at night and when it’s still. Figuring out how to store that power at scale is the ongoing challenge, and it’s one that relies on batteries for grid-scale storage.
Finding the Real Value
So how would I recommend capitalizing on grid-scale investing? First, take a step back and quantify where the value is. No matter how great the battery technology is, there’s always a disruptor on the horizon. So the real value in grid storage is in capacity management. Greentech Media has a great article that digs into an MIT study on energy-system modeling as grid storage deployment penetrates upwards of 50% from wind and solar power. The researchers found that the storage system is just one piece of the puzzle. Renewables, natural gas plants, and the networks that collect and disperse the energy itself are equally important components,
“It turns out that capacity avoidance or capacity deferral is the biggest source of value for energy storage in that long-run context,” said co-author Jesse Jenkins, who now teaches at Princeton University. “Storage, as an asset, allows you to make better use of other fixed assets in the system.”
If this study really holds up, then the smart money is going into developing flexible storage systems that can manage capacity from a variety of energy sources.
Lithium-ion Still Leads in Battery Storage Investing
At this juncture (late 2020), the default grid-scale storage option is the lithium-ion battery. This is currently the most scalable technology. Why? It can store electricity that’s generated from a variety of sources — water, wind, and sun — and be implemented across the grid on an on-demand basis. Bloomberg NEF says the price of Li-ion batteries dropped 85% between 2014 and 2018. They’re on track to fall another 50% by 2030, making them, for the moment, the most cost-efficient means of grid-scale storage.
Global market demand for grid-scale storage systems is projected to grow at a CAGR of 33% between 2020 and 2025 (again, just four years away) with a market cap of $12 billion by 2025. The big players in manufacturing Li-ion batteries are primarily Asian: LG Chem, Samsung SDI, and Panasonic. On the domestic front, both Tesla and GM are making billion-dollar bets on Li-ion technologies.
Tesla is building “gigafactories” across the globe to produce both EV and storage system batteries under the Tesla Energy umbrella. There are three so far in Buffalo, Nevada, and Shanghai. GM may have forsaken Ohio for auto manufacturing, but they’re making up for it with a multi-billion dollar joint-venture investment with LG Chem in a Li-ion battery plant in Lordstown.
Trends in Grid Storage Investing
So with Fortune single-digit companies putting all this capital into grid storage, you’re probably wondering about the mere mortals of the VC firmament. If you’re a founder, the chances are good that you’re relying on VC investors, or a corporate VC if you’re lucky, to put some capital into your company. The good news here is that according to Mercom Capital Group, investor funding for grid storage (CVC, VC, debt, and public market sources) doubled from 2018 to 2019. The bulk of the investments in battery storage, energy efficiency, and smart grid technologies were led by VC firms.
Looking Past Lithium-Ion Technologies
Lithium-ion batteries are the only real game in town right now. But there are enough drawbacks to this technology to encourage investment in alternate batteries. For one thing, mining the lithium ranks right up there with smoking around your kids in terms of social responsibility. The environmental impact is intense. Most lithium comes from impoverished areas of South America. Mining eats up 65% of the water supply in lithium-rich areas of Chile. It’s also very toxic to the environment and flammable. Remember when those Samsung Note 7 phones caught fire a few years ago? Yep, the lithium batteries were the culprit, costing Samsung over $26 billion in market value.
There are other limits to Li-ion batteries that the industry hadn’t realized until we really tested the technology. For one thing, four hours is about what you get from a charge for an EV. Also, the ceiling for specific energy is about 300 watt-hours per kilogram. If renewable storage is going to be viable (read: profitable) for large-scale energy production, it’s got to do better than that.
There are emerging storage technologies on the horizon that may ultimately replace or offer an alternative to Li-ion batteries. Some that I’m interested in and think are the most exciting opportunities are:
- Flow- and solid-state batteries
- Pumped thermal electricity storage
- A gravity-based system
The Big Kahunas Throwing Capital at Grid Storage
If it weren’t risky, it wouldn’t be fun, right?
Investing in grid storage is not for the day trader. The arc from idea to production to market is long and bumpy. It’s also uncharted territory. There is no blueprint for turning salt water into an iPhone battery. I’d caution against putting money into a grid storage company unless you’re willing to set it on fire; too many companies are treading water at best while they try to scale up the technology.
But just for fun, here’s one place where the deep pockets are putting their capital. Shell led the acquisition of Sonnen, a German manufacturer of home energy storage (like a generator) for residential and small business use. The VC partners were GE Ventures, Munich Venture Partners, SET Ventures, and Inven Capital; they raised $169 million.
This is a success story, but for every one of these, there are dozens of bankruptcies. Three of the notable failures are Aquion Energy, Better Place, and Fisker. Even with a combined $5 billion from theoretically savvy investors, they wound up in the boneyard. If you have thoughts about where grid storage investing is headed, either now or after COVID-19 has passed, let me know about them.