7 minute read
Energy Storage
Energy Storage: An Electrifying Investment Opportunity
Written By Davis Donley
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While the world moves away from carbon to wind and solar power, the energy storage market represents a $1.2 trillion opportunity as storage plays a key role in the electric grid’s transition to renewable energy. Energy storage is crucial in decarbonizing the energy grid because it can help mitigate the intermittency of wind and solar and help deliver power when required. While the cost of electricity from solar declined 89% in the last decade, renewables must be paired with energy storage systems to deliver energy reliably. Due to the tailwinds of government subsidies and investment, a massive total addressable market, renewable energy’s dramatically declining cost curve, and the growing emphasis on ESG among institutional investors, the energy storage industry is a promising investment opportunity. In 2021 alone, venture capitalists invested $49 billion into climate tech amidst government subsidies and increasing investment interest in Environmental, Social and Corporate Governance (ESG) themes. Investors have widely lauded the dozens of electric vehicle IPOs in the last couple years, such as Rivian and Lucid Motors. As capital pours into EVs and share prices climb dramatically, investors base their enthusiasm on government subsidies for EVs and the opportunity stemming from their addressable market. Investor sentiment surrounding electric vehicles and EV components has reached high levels
market. Investor sentiment surrounding electric vehicles and EV components has reached high levels of fervor, meanwhile energy storage stocks remain under the radar.
of fervor, meanwhile energy storage stocks remain under the radar. While EV stocks have the makings of a bubble, neglected cleantech industries such as energy storage have a much greater potential for capital appreciation. In the mid-2000s, countless cleantech companies were founded by entrepreneurs, and investors poured more than $50 billion into them. Rather than solving the issue of climate change, the first cleantech bubble emerged. Many of the cleantech startups during this period went belly up, and the United States was no closer in tackling climate change. As investor sentiment towards cleantech reaches levels of fervor, investors now wonder if this time will be different.
Fortunately for investors, tailwinds have emerged for cleantech companies to thrive commercially in a way that was not possible in the mid2000s. The first difference between today and the cleantech bubble is that renewables are now price-competitive with fossil fuels. In 2009, electricity from solar power was over four times more expensive than electricity from natural gas. By 2019, significant innovation in cleantech has resulted in both solar and wind energy becoming cheaper than any fossil fuel source. For instance, the price of electricity from solar declined 89% in the past decade. Moreover, the relative cost of renewables in comparison to fossil fuels will only decrease in the coming years as technology improves. Secondly, the cost of lithium-ion batteries has decreased by 80% between 2010 to 2019. Lithium-ion is the most popular battery in energy storage due to its cycle life, performance, and cost. Overall, the decreasing costs of renewables combined with rapid cost reductions in battery hardware enabled energy storage companies to become economically viable. A second fundamental difference between the cleantech bubble and present day is the corporate focus on ESG. Hundreds of American companies have pledged to reduce their net emissions to zero in the coming decades and have begun acting accordingly. The world’s largest companies have already begun partnering with energy storage companies, as without inexpensive long-duration energy storage, the goal of net zero emissions is impossible. “You must have enough storage to last for extensive periods,” says Shankar Ramamurthy, chief executive of the Energy Internet Corporation, an energy technology and storage firm. For intense energy users such as data centers to reach their net zero targets, warehousing infrastructure must run on renewable energy, which can only be paired with energy storage. The $555 billion budget deal focused on cutting carbon emissions by 2035 is yet another catalyst which will help the energy storage industry. In order to decarbonize the grid, the Biden administration has placed market incentives and research and development behind energy storage. Moreover, a tax credit for storage paired with solar has accelerated deployment of energy storage. As a result, global energy storage deployments will nearly triple in 2021 compared to last year. The global battery energy storage systems market size was valued at $3.4 billion in 2019 and is projected to grow at a compound annual rate of 27.2% over the next decade. Analysts anticipate that rising demand for reliable power supply in industries such as industrial, telecom, data centers, marine, and medical are expected to drive energy storage growth. Data centers are in desperate need for uninterruptible power supplies as losses incurred due to power outages exceed $50 billion annually in the US. Due to recent power outages, the residential storage markets, particularly in Texas in New York, will continue to surge. The US and China are estimated to command 70% of global energy storage by 2030. According to an analysis from Wood Mackenzie Power & Renewables, “total demand for energy storage between this year and 2030 could be close to 1TWh worldwide.” Another fundamental shift from the mid-2000s cleantech bubble is
that cleantech startups now have software at their core, making them more scalable and capital efficient.
The mid-2000s cleantech companies were mainly biofuel, EV, battery, and solar panel startups. These businesses had high capital expenditures due to the development of large-scale manufacturing and production strategies. Many energy storage companies today are hardware agnostic with a software focus, enabling scalability of their businesses. In the cleantech bubble, there were hundreds of highly capital-intensive businesses with undifferentiated products, with the goal of decarbonizing the world. Few of these companies survived. In 2021, energy storage companies are often software-centric, so the cleantech landscape looks very different. For example, Tesla deployed 1,295MWh of energy storage in the third quarter of 2021 and has recorded a 96% compound annual growth rate in deployments over the last four years. Tesla’s success proves that a differentiated product with superior technology in the cleantech space can achieve tremendous growth. While the energy storage industry itself is poised for explosive growth, picking individual stocks within the industry is an entirely different challenge. The financials and fundamentals of cleantech companies are sounder than they were during the cleantech bubble, but competition has also become more fierce. Reduced costs of renewables, coupled with a drop in prices for lithium-ion batteries, has led to numerous energy storage companies developing unique long-duration technologies. The $1.2 trillion market opportunity over the next three decades is promising for the industry, but a trillion-dollar market means ruthless, bloody competition. Peter Thiel, co-founder of PayPal and famous venture capitalist, recounted his experience during the cleantech bubble: “in the 2000s, I listened to dozens of cleantech entrepreneurs begin fantastically rosy PowerPoint presentations with all-too-true tales of trillion-dollar markets—as if that were a good thing.” In the mid2000s, cleantech companies enticed investors with promises of a massive total addressable market, but they failed to differentiate themselves from their competitors. Thiel notes that “Customers won’t care about any particular technology unless it solves a particular problem in a superior way. And if you can’t monopolize a unique solution for a small market, you’ll be stuck with vicious competition.” High growth industries, such as energy storage, attract top-talent creatives and entrepreneurs, making it difficult for investors to pick the winners. In the initial phases of the infant energy storage industry, there will be many small competitors, many of whom will likely not survive. As a result of the hundreds of SPAC IPOs in 2020 and 2021, numerous cleantech companies have gone public and received substantial funding. With so many small energy storage companies going public, it’s difficult to measure the competitive advantages of each and which one can capitalize on the massive total addressable market. Warren Buffett, chairman and CEO of Berkshire Hathaway, has avoided energy storage just for this reason, writing that “understanding the economic characteristics of a business is different than predicting the fact that an industry is going to do wonderfully. So when I look at the internet businesses or I look at tech businesses, I say this is a marvelous thing but I don’t know who’s going to win.” The energy storage industry is a promising story as storage sits at the intersection of the grid transition, but it’s still in its infancy, making it too difficult to invest in individual energy storage stocks. Investors often discuss the first mover advantage of companies and believe that simply because a company enters a market first that it has the ability to absorb large market share. Investing in innovative energy storage companies may seem appealing today, but investing in the first mover does not yield good returns if other firms disrupt them with superior technology. For the energy storage market, it would be much wiser to invest in the last mover, the company which makes the last great technological innovation and enjoys years of monopoly profits. No matter how much the world needs energy storage to decarbonize the grid, only companies that offer a unique and superior solution to the long-duration storage problem can generate profits for shareholders.
