The long view: how to profit from battery technology

Electric cars are driving what is set to become much broader demand for batteries. Who are the likely winners and losers?

In the clean, green future we all look forward to, the roads will be free of fume-belching vehicles and our society will be powered by natural energy from the sun, the wind or even tidal power. You’ll breathe more easily. ‘

There’s just one problem with this idyllic vision: we are going to need better batteries than anyone has yet been able to manufacture at scale. Without those batteries, all our journeys will need to be short, or punctuated by long stops for recharging. And we will need to accept that power is not available in our homes, offices, factories and public buildings if the sun isn’t shining or the wind isn’t blowing. Right now, the batteries required to store energy for society’s needs simply don’t exist.

Far-reaching implications

‘Whoever figures out the holy grail of energy storage is going to make an absolute fortune, and not just in the energy industry,’ says Kent Moors, an energy industry consultant who runs the Oil & Energy Investor newsletter. ‘The implications are far-reaching across almost every industry you can imagine, and some you can’t.’

As Moors says, the size of the prize is almost unimaginable. Even between now and 2020, global demand for batteries for electric cars and energy storage is likely to more than double, according to analysts at investment manager Bernstein. Research from the energy research business Bloomberg NEF suggests that demand for lithiumion batteries will increase by almost 1,700 per cent between 2014 and 2030. Add in the ubiquity of consumer electronics devices, which also need more portable power, and the stakes are even higher.

No wonder that investors are rushing to put their money into battery technology businesses. Venture capital groups have invested more than $1 billion (£770 million) in energy storage technology companies over the past 12 months alone, according to the specialist market intelligence group Cleantech – a new record by some margin.

Nor is it only small start-ups and technology innovators that are raising record amounts of resource; the large energy and automotive industry incumbents are also focusing on batteries, either through their own research and developments or by acquiring other companies. Tesla and Panasonic are together investing $5 billion in a giant new battery manufacturing plant. Earlier this year, BP invested $20 million into the Israeli battery company StoreDot.

Conscious of their societies’ needs, governments are providing funding for battery technology development too. Not least, the UK government last year launched the Faraday Challenge, which has £250 million of taxpayers’ money to hand out to battery developers over the next four years.

‘By 2030, roughly half of the cars trundling round our street are going to be either electric or plug-in hybrid versions, and all of those vehicles – we make 1.7 million cars a year in the UK – are going to need battery packs,’ says Simon Edmonds, director of manufacturing & materials at Innovate UK, the government agency running the Faraday Challenge. ‘Batteries need to cost less than they do now, they need to last much longer, and at the end of their life we need to be able to recycle them and recover their materials.’

So how might that be achieved? Well, battery technology development is essentially proceeding along two paths. One set of developers is attempting to improve the lithium-ion batteries on which we increasingly depend today; the chemistry of these batteries can be reconfigured in all sorts of ways to address some of the problems with the current generation of products, such as relatively short lifespans, their tendency to wear out quickly and the way they generate large amounts of heat.

A graph showing how demand for lithium-ion batteries is projected to rise by 2030

 

Lithium-ion and alternatives

Tweaking and improving this technology can deliver rapid gains: for example, while the 2016 Nissan Leaf electric car had a range of 107 miles, the new Tesla Model 3 is capable of driving 310 miles on a single charge. And there could be even bigger gains to come with ideas such as solid-state batteries, which would often still use lithium but would not rely on liquids; Toyota has a prototype which charges in just eight minutes.

Still, the downside of focusing solely on lithium-ion is that there will be a ceiling to improvements. So, in the other corner, innovators are focusing on alternatives. They hope the batteries of tomorrow will be better than lithium-ion – and they’re also conscious that dependency on one technology is dangerous, given natural resources shortages; supplies of lithium, and particularly cobalt also needed for lithium-ion batteries, are finite. The lithium price rose 240 per cent in 2018 alone.

One possibility is to use an alternative material to lithium to build batteries that essentially work in the same way. Magnesium is one idea, while graphene and sodium are also contenders. More ambitiously, another option is to move on to a different technology altogether. Some battery specialists are still convinced hydrogen fuel cells have an exciting future, for example.

None of these technologies are as yet commercially viable, however. And from investors’ perspective, there are two big worries: the first is that where technologies are competing, there will be winners and losers – no-one wants to put money into the latter, so everyone is cautious; and the second is that the money flooding into lithium-ion threatens to drown out rival ideas.

These dilemmas make for some uncomfortable conversations. Cleantech’s 2018 ranking of the 100 most potentially impactful businesses in its space – the index is widely watched – contained only a handful of energy storage businesses.

‘Investors are reluctant to engage with energy storage start-ups unless they have established and proven technology or have a niche application that is not being served by alternative battery chemistries,’ the consultancy warned. ‘The competition that exists in the lithium-ion market also causes concern about market share, with one of our expert panellists going so far as to suggest that this technology is not the future.’

Still, winners will eventually emerge. ‘Battery technology is undergoing the biggest disruption in its 150-plus-year history, driven by the need for better solutions in areas such as electric vehicles and renewable power,’ says Michael Kolk, head of the global chemicals practice at management consultant Arthur D Little.

Brighter future insight? 

Its research, published earlier this year, suggests a brighter future powered by batteries is now coming into sight. In the automotive sector, electric vehicles will be economically competitive with those powered by internal combustion engines when the price of the former falls to around $100 for each kilowatt hour of use; we are already down to $190. Similarly, rapid falls in the price of batteries for energy grid use mean this option is now only 50 per cent more expensive than using gas-fired units to back up renewable energy plants. Arthur D Little predicts the battery market will be worth $90 billion a year by 2025.

Tomorrow, in other words, is almost here. There are innovation challenges to confront and a struggle over which technologies will dominate (and therefore where investors should place their bets). Nevertheless, batteries are set to underpin a dramatic transformation of our society.

Powering up returns? How to invest in battery tech

The di­fficulty with investing in nascent technologies is the risk of redundancy. Put your money into Betamax and you’ll lose a packet if VHS triumphs (younger readers may need a crash course in video technology here).

For this reason, ‑ financial advisers are extremely wary of trying to profit from a pure-play investment in battery technology, whether through individual stocks or via a collective fund.

At independent ‑ financial adviser Informed Choice, Martin Bamford’s comments are typical. ‘For investors absolutely determined to take massive risks, there is the Global X Lithium & Battery Tech ETF, which aims to track the performance of the Solactive Global Lithium index,’ he says. ‘Personally, and for my clients, I wouldn’t touch it with a bargepole unless I had a very, very large investment portfolio and wanted to allocate a tiny proportion of my overall wealth to such an area.’

There are other ways to get exposure to this area, however, while diversifying risk. Both technology funds and socially responsible investment and environmental funds often take stakes in the energy storage sector.

At Chase de Vere, for example, Ben Willis, head of portfolio management, picks out Liontrust Sustainable Future Global Growth. ‘One of the key focuses of the fund is on efficiency, in particular, the move away from traditional energy methods, the transition from fossil fuels, and new e­fficient recycling technologies.’

Other options include Scottish Mortgage investment trust, with its sizeable investment in Tesla, and Baillie Gi­fford Japanese, with exposure through businesses such as Toyota and Sumitomo Metal Mining, a key supplier of materials to Panasonic’s lithium-ion batteries operation.

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