Batteries are set to play a critical role in delivering a low-carbon future, largely as a result of the role they will play in transforming the future of transportation by rapidly accelerating the adoption of electric vehicles (EVs) and the decarbonisation of the electricity grid.

This article first appeared in ESI Africa Issue 1-2020.
Read the full digimag here or subscribe to receive a print copy here.

The switch from fossil fuels to renewable energy alternatives and the electrification of energy is one of the key elements of delivering carbon-neutral economies. Limiting climate change to 2oC (or even lower) requires both the transport and power sectors to significantly decarbonise by 2050.

Battery storage represents both the most feasible alternative to fossil fuels in many transport modes and an important way to balance the intermittency of wind and solar electricity generation. Investors seeking to play in this transformation should focus on material battery developers, manufacturers, and deployers. As such, these are the conclusions of Edison Group’s latest report into the sector, Battery charge: The rise of lithium-ion—options and implications.

Electrically charged: Rise of lithium-ion batteries

For years, the role of the lithium-ion (Li-ion) battery remained in question, with those attempting to realise its full potential inevitably confronting barriers in manufacturing, cost and market acceptance.

However, the chemistry involved in the manufacturing process is rapidly improving and the report anticipates the engine of the market’s performance gains to be improvements in chemistry and design. This will lead to cost decreases, allowing the battery – previously too costly to be viable in many industries – to become a powerful disruptor.

Advancements in anode materials have led to storage improvements of up to 181% and charging speeds of as little as six minutes while cathode developments have led to a 44% capacity increase. Additionally, though still in its early stages, the arrival of solid-state technology in the future promises to revolutionise the applications of Li-ion batteries by making them smaller, more efficient and safer.

The report identifies the Li-ion battery market trebling in the next decade. However, the question is not if but when to expect sectors such as transport, raw materials, nickel (class 1), oil and gas, as well as power to see the implications of the battery’s rise. The lynchpin of this change will be Li-ion reaching price parity with fossil fuel equivalents by the mid-2020s.

Transportation and the demand for EVs

It is difficult to understate the size of the transformation that will occur. Arguably the shift to EVs will be one of if not the most significant industrial transitions in the next 30 years. Many (mostly European) countries have set long-term targets to ban the sale of petrol/diesel cars and over 94 cities (with a combined population of 700 million inhabitants) have announced plans to restrict them.

Car makers are gradually responding, spurred on by ever stricter CO2 emissions targets. The research forecasts that EVs (including hybrids) will account for 38% of new car sales by 2030, with growth expected in other transport modes along with the electricity sector.

An analysis of the report’s findings make it clear that the rise of the EV is an inevitability rather than a possibility. “We believe investors should be asking themselves when, not if, EVs will start to dominate the market,” states Dan Gardiner, Director at Edison Group and author of the report.

The key to this conclusion is in the price of batteries versus fossil-fuel competitors. Since 2010, the price of Li-ion battery packs has fallen on average 18% a year to $176kWh in 2018. Investors can safely expect EVs to reach price parity with fossil fuel alternatives by 2024 in most markets.

Once this line has been crossed, it will be cheaper for car makers to sell EVs on average, which should result in an increased adoption rate across markets. Current estimates have the sales of EVs growing from 2% as of 2018 to between 25% and 46% by 2030, making for sales of 23-43 million and an EV fleet of 125 to 250 million.

Assuming there are no significant policy changes during this timeframe, the report projects China to account for 50% of the market by 2030 and penetration of new sales reaching almost 50% in Europe, with the US coming in somewhat lower at 30%. The wider acceptance of EVs as an alternative to fossil fuels additionally stands to significantly reduce the amount of CO2 emissions put into the atmosphere annually.

If more governments treated climate change as an urgent issue and made meaningful responses in the form of policies (subsidies, taxes, and targets combined with charging infrastructure investment and parking incentives), these estimates would substantially increase.

Proof that batteries can decarbonise the grid

There is clear evidence that batteries will play a crucial role in the decarbonisation of the electric grid. Estimations by one of the world’s largest investor-owned energy companies, National Grid, show current UK electricity consumption rising by nearly 50% by 2050, a figure partially driven by EV charging and heating.

If national climate objectives are realistically going to be met, all of this power must come from intermittent sources such as wind and solar power. This will then result in an increased demand for rapid storage growth to ensure power consumption needs are met, even when power sources are not producing energy.

While the role that storage will play in the energy market has yet to be defined, significant investment into infrastructure has been witnessed, such as in Australia. While National Grid estimates the UK will need a further 8GW of storage by 2030.

While some investors may worry about the disruption Li-ion batteries threaten to cause in oil and gas industries, these batteries also present great opportunities to capitalise on a new industry still in a relatively young phase.

Investors who want to gain direct exposure should look to these areas of the supply chain for opportunities:

Material developers/suppliers: This includes not only the mining sector (lithium, cobalt and nickel) but also companies, such as Versarien, Nabaltec, IBU-tec and Ohara, are developing better materials to drive battery improvements.

Battery manufacturers: The market is still relatively fragmented, which means that scaling will be a key marker in the drive towards cheaper batteries. As some manufacturers grow, it will also put pressure on smaller competitors to expand. Two such companies to watch are LG Chem and CATL.

Battery developers: There are two key players here – Tesla and BYD – but investors looking for other avenues into this sector can look to energy storage funds like GRID and GSF.

According to Gardiner, the research shows clear signs that demand for Li-ion batteries will rocket and trigger the most significant industrial transformation in decades as the demand for electric vehicles soars and there is a further significant impact on sectors across the economy, such as power, raw materials and oil and gas. ESI