The Rise Of Battery Storage And Its Implications

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Includes: FSLR, PCRFY, SPWR, TSLA, VSLR
by: Simple Investment Ideas
Summary

Cost-effective battery storage technologies are becoming increasingly important for modern-day industries.

Increasing economic forcing functions will drastically accelerate battery cost reductions.

Battery technology is entering a developmental phase of positive reinforcement, with cost-reductions increasing the demand for batteries, which subsequently sparks more cost-reduction innovations, thus further increasing demand, and so on.

Current battery innovation will have transformative effects on the energy industry, battery industry, and transportation industry.

Battery technology has been around since the 1800's, but has only recently started to become an area of intense focus. While batteries have traditionally been used as a source of energy storage for small-scale electronics, there have been no strong economic forcing functions pushing for truly low-cost battery technologies. With the rise of electric transportation and distributed generation, the entire dynamic of the battery industry has begun to change.

The emergence of technologies reliant on electrical storage is finally starting to provide the economic incentives for meaningful battery innovation. While such technologies are still somewhat niche, the demand for cost-effective battery technology is strong enough that meaningful battery cost-reductions are finally taking place. Such battery-cost reductions further raises the demand for battery-reliant technologies, which in turns gives the battery industry even more incentive to innovate for cheaper batteries, thus creating a positive reinforcing loop.

Rapidly decreasing battery costs have immense implications, with the potential to disrupt several huge industries. With the rise of battery storage, baseload generation reliant on fossil fuels will quickly become irrelevant. The advantage that fossil fuels hold over other forms of energy is that they function as a natural form of energy storage, with incredibly high energy densities to boot. Regardless, this indisputable advantage is quickly being eroded by innovations in the energy-storage arena.

Although fossil fuels have been absolutely vital for economic development, these fuels have the huge unintended consequence of causing pollution and climate change. While this classic trade-off problem of choosing between the environment and economic development has been plaguing humanity for centuries, this problem may soon become irrelevant with the introduction of cost-effective battery storage.

Implications on the Energy Industry

The broader energy industry will be greatly impacted by cost-effective battery technologies. The utility industry and the distributed solar industry, in particular, will be massively affected by cheap storage technologies. Declining costs of battery storage would fundamentally change the economics of both these industries, and could potentially change the entire paradigm of electricity generation.

Distributed solar would benefit the most from cost-effective battery storage devices. Although solar manufacturers such as First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) would gain tremendously, residential solar companies such as SolarCity (OTCPK:SCTY) and Vivint Solar (NYSE:VSLR) would have the most to gain. Currently, the main roadblock to mainstream acceptance of distributed solar is its lack of storage, and subsequently its reliance on the utilities. With the costs of solar technology quickly decreasing, the only obstacle left for the mass adoption of distributed solar is cost-effective storage. The good news for distributed generation is that viable storage devices are set to beavailable within 5-10 years.

Cost-effective battery storage, of course, represents a huge threat to the utilities industry. Electrical utilities mainly rely on centralized generation, with energy dense fossil fuels as its main source of energy. The main advantage of these fossil fuels, as was discussed earlier, is the fact that these fuels act as natural energy storage devices. With the rise of cheap artificial storage devices such as lithium-ion batteries, fossil fuels will slowly be made obsolete for electricity generation.

This is what a typical electrical storage device looks like. The cost of such storage devices are slated to decrease dramatically in the near-term future.

Source: SolarCity

The Battery Industry

Although it seems to make sense that battery manufacturing companies would profit the most from a potential battery-storage revolution, this may not actually be the case. While the scale of battery manufacturing would certainly increase, this does not automatically translate into increased profitability. If the barriers of entry for the battery industry are not sufficiently high, battery companies may experience significant downward pricing pressures from an influx of competition.

Situations like this have occurred numerous times in the past, where although demand for a said product increased exponentially over time, supply had increased even faster due to increased competition. The solar manufacturing industry is a prime example of such a scenario. Despite unprecedented levels of demand for solar starting in 2008, solar panel manufacturers' valuations plummeted several fold over this period due to a competition-induced supply glut. If the battery industry is not wary of such an outcome, history may repeat itself.

Only time will tell how the battery industry fares in the midst of increasing demand. While enormous profits are entire possible for battery companies currently ahead of the curve, whether or not these companies would be able to keep such an edge over the long-term is debatable. Panasonic (OTCPK:PCRFY), for instance, should benefit immensely in the short-term from its massive investments into battery technology (Nevada Gigafactory investment), but may not be able to hold onto its lead in the long-term as more competition floods the industry.

Electric Transportation

The transportation industry could also see a paradigm shift with the advent of cheap battery storage. Already, the automobile industry is becoming more electric, with Tesla (NASDAQ:TSLA) leading the way. In fact, Tesla is so reliant on battery technology that it is currently building its own lithium-ion battery Gigafactory. The company's Gigafactory ambitions are so large that upon completion, Tesla would be the largest battery producer in the world by far.

Tesla's potential impact on the battery storage industry cannot be understated, as the company has been one of the prime catalysts in sparking the recent battery innovation craze. In addition, the company's influence is even crossing over to the distributed generation industry, where many companies' storage availability timeline is based upon Tesla's battery cost-reduction roadmap.

Electric transportation has inherent advantages over ICE based transportation, such as energy efficiency, torque, increased spacing, lower-risk of injury due to fires/explosions, etc. These advantages even carry over to aircrafts such as jets or commercial airliner. The only exception to this rule are rockets, where fossil fuels are needed due to Newton's 3rd law of motion.

Potential Obstacles

While battery storage ambitions have certainly hit a fever pitch in recent years, it is easy to forget that battery innovation has been notoriously slow in the past. If future battery innovation continues to follow its historical path, whole industries would be at peril. For instance, the business roadmaps of distributed solar companies and electric vehicle companies would almost certainly be derailed, due to these companies reliance on battery technology. Despite this risk, it is extremely likely that battery innovation would only accelerate into the future, given the massive new economic forcing functions pushing for cheaper batteries.

Conclusion

While it seems as if battery technology is still a long way off from mainstream penetration, cost-reduction projections suggest otherwise. For instance, the cost/kWh for battery packs are expected to decrease over 30% by 2017, with a 50% cost reduction as being more likely. This means within 2 years, the cost of battery-storage technology will roughly halve.

With the advent of cost-effective large-scale battery technology, many industries will undergo unprecedented transformations. Battery companies such as Panasonic, solar companies such as SolarCity, and automotive companies such as Tesla all stand to gain immensely from cheaper battery technology. While battery prices have historically decreased at around 10% a year, the added economic forcing functions of all these industries will supercharge this cost-reduction process.

Disclosure: The author is long SCTY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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