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What are the prospects for battery investments?

Green power Energy efficient rechargeable batteries to conserve power

Power is a problem. Not in terms of production [if we neatly gloss over the ESG implications], but in terms of our ability to store it rather than make and immediately use it.

This is where batteries step in; and the recent performance of battery stocks suggests that investors are expecting a future in which we will increasingly be reliant on them.

While industry professionals admitted to Expert Investor that the market is still in a state of flux, they believe there are some opportunities.

Recent performance

Axel Haus, team head of qualitative research at German index provider Solactive, explains that the firm’s battery index is outperforming many benchmarks.

“Since the end of last year, the performance stands at 67.15%, and since the trough on 23 March, the index returned 138.61%,” Haus says.

The Solactive Battery Energy Storage Performance-Index tracks the price movements of a portfolio of companies active in the value chain of battery production.

The index was rebalanced on 14 April, to count 13 stocks, and since then some of the positions rose enormously, Haus says.

“To give some examples, the stock prices of BYD, Tesla, and LG Chem increased by 203.16%, 203.02%, and 118.50% since 15 April 2020.

“It appears that market participants seem to see a bright future ahead for companies active in the fields of battery energy storage in general and lithium production; manufacturing of chemicals for battery production, battery production, heavy duty and high-end battery manufacturing; or consumer batteries manufacturing in particular,” he notes.

Legal & General Investment Management, citing research from BCC Research published in May this year, said that the global market for large and advanced batteries reached $64.1bn (€54bn) in 2019 and is expected to reach $109.9bn by 2024, with a CAGR larger than 10%.

Further, the broader market for energy storage is expanding rapidly with a 20-30% compounded annual growth rate.

Standardisation of batteries

Haus says that the size of the battery investment opportunity depends on whether it becomes widely-used for energy storage and in cars.

“The potential can be huge, but the question is whether there will be one standard or plenty,” he explains.

However, he believes that it is unlikely that only one standard will surface, as different technologies have different advantages.

“For instance, it is not unlikely that hydrogen engines can be a standard for heavy-duty machines, such as ships or construction machinery, whereas battery-energy storage will likely be used for electronic vehicles and the future car,” Haus says, adding that battery energy storage technology is also complementary to other technologies.

In light of ongoing consolidation of energy storage companies and a strong increase in the valuation of some hydrogen stocks, Haus concludes that “the market seems to price in that there is enough room for different standards”.

Net zero transition and value streams

Another driver of the battery opportunity is the transition by governments, including the EU and the UK, to net zero greenhouse gas emissions by 2050.

Thomas Jennings, head of optimisation at Kiwi Power, a UK solutions provider for distributed energy, says that the case for battery investment is shaped by the low-carbon transition.

“The closer you actually get to making your network net zero, the more flexibility you need, because the function is that you will have more and more intermittent generation; therefore, the opportunity continues to grow for energy storage in this space,” he explains.

Jennings says that the firm’s ‘co-optimisation’ model will be able to make around 40% more revenue from a storage asset, even when greater numbers are connected to the grid.

Rather than locking an asset into one market area, co-optimisation refers to storage asset managers using their assets in different electricity markets to gain maximum value, by changing to higher valued markets at the right time – which Jennings calls ‘the switch’.

It is a technique that blends industry expertise with an algorithm that makes up to 17,500 decisions per asset, based on a mix of weather forecasts, market data and trends, and other insights, according to a commentary by Jennings.

The method also allows increased profit by closing shorter term contracts with the national grid.

Jennings writes that “most current revenue strategies rely heavily on a longer-term view based on just one or two value streams within the ancillary services market – understandably, because this is where the value currently sits. However, all of that is about to change, the question is when.

“As more storage projects come online and begin to participate in the ancillary services market, the price will inevitably fall. As this happens, other shorter-term value stream opportunities that are not currently being leveraged due to their relative value and risk profile, will become increasingly attractive,” he argues.

He believes that, by early 2021, “half-hourly markets [will be] worth so much more” and that taking the risk to switch to these from monthly market contracts will pay off.

The potential of the ‘switch’

Haus takes a more cautious stance on whether the switch will take place.

“Finding efficient ways to store energy is one of the missing steps to enable the breakthrough of renewable energy sources. ‘The switch’ will likely depend on this efficiency,” he says.

But Haus believes that, independent of the switch, batteries “will still be an exciting investment case – even after the outstanding performance that we have already observed”.

Taking an optimistic view, Jennings argues that gains from the switch could even help to overcome the barrier of costs that hinder storage uptake today.

Elena Johansson

Senior Reporter

Part of the Bonhill Group.