Where can investors find exposure to the energy storage sector?
19th November 2014 13:21
by David Prosser from interactive investor
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Anyone who has ever spent Christmas Day morning searching for batteries for their children's new toys will be familiar with a problem that the global energy industry faces on a grand scale: the demand for electrical power is unpredictable, so unless you have a means to store power, that unpredictability can be hugely challenging.
In developed economies, this difficulty was addressed in the 20th century through the construction of electricity grids and related infrastructure, which enable us to plug into power systems that constantly generate the electricity we need at home or in the workplace.
There are many problems with this solution, however. For one thing, the infrastructure in large parts of the world, particularly in developing countries, is unreliable or non-existent.
Energy storage technology
Also, constant power generation is only possible if you have fuel that is always on tap. But as the whole world moves away from fossil fuels towards renewable energy sources, that's harder to guarantee - the wind won't always blow and the sun won't always shine.
In any case, many of the things we need energy for can't be plugged into a grid, or at least not all the time. Your children's disappointment when they can't play with their new presents is no different from the frustration you feel when your mobile phone runs out of power miles from home.
The answer to all of these difficulties lies in energy storage technology: devices and systems capable of storing electricity that we can access whenever we want, rather than as it is generated. And a new wave of far more sophisticated storage technologies, developed to meet our ever more complex demands for power, is now on the verge of turning the energy industry on its head.
There are two levels at which energy storage technologies have the potential to be disruptive. The first is at the level of the grid, where power generation and supply companies would love to be able to store massive amounts of the electricity they produce.
"Energy storage on a large scale is the holy grail of an integrated energy system," says Lee Clements, a director of , a specialist in environmental and sustainable investment.
Exciting story
So far, however, technologies that work at scale remain tantalisingly out of reach. There are now projects that can store power in water or compressed air, but these have had relatively limited success, either because they only work in very specific circumstances or because they're prohibitively expensive.
Much more promising, however, is the second level at which storage technologies can operate: in smaller-scale individual applications. "The focus is on new generations of batteries and particularly lithum-ion batteries," says Clements.
The exciting story here is the convergence between three completely separate industries that all require an energy storage solution.
First, there is consumer electronics, with people requiring ever-better batteries for devices such as phones, tablets and laptops. Then there's the electric vehicle industry - cheaper and better batteries would be a massive boon for sales of electric cars on a global basis.
Third, there's the household energy sector - as more people install renewable energy generation facilities such as solar panels or wind turbines at home, the demand for storage solutions that enable reliance on these facilities for power, rather than having to use the grid on cloudy or wind-free days, is increasing all the time.
Advances in lithium-ion batteries initially came from the demands of the first of these industries, but the same technology is now being used, albeit on a larger scale, by electric vehicles and to a lesser extent households.
Car Storage
"The automotive market is well on its way to displacing consumer electronics as the biggest user of energy storage," says Cosmin Laslau, an analyst at technology consultant Lux Research. "As that happens, it will lead to further scale and a new round of cost reductions, which will impact stationary applications as well."
By 2020, this is a market that will be worth $50 billion (£30 billion) a year, concludes Lux's most recent report on the energy storage market. Around $21 billion of those revenues will come from the electric vehicle market, with consumer electronics generating $27 billion and residential applications producing the rest.
The important point to grasp, however, is that from an energy storage perspective, the distinctions between these market segments will be largely irrelevant. For example, , the US business known for its electric vehicles, is currently investing $5 billion in a "Gigafactory" in Nevada that will have 50 gigawatts of battery storage capacity by 2020. Around a third of this capacity is earmarked for the residential market.
It isn't difficult to imagine, in the not too distant future, homes that have no connection at all to traditional electricity grids, generating the power they need from renewable energy sources and storing it in batteries so that electricity is always available - including for the charging of electric cars and mobile electronic devices using similar battery technology.
"What we're talking about here is an ecosystem of integrated batteries," says Charlie Thomas, who runs Jupiter Asset Management's and its
Companies set to benefit
From an investment perspective, this is a compelling proposition. With so much demand for storage from several different quarters, those able to supply it are in a strong commercial position.
In fact, says Thomas, "there has been a big consolidation of battery manufacturers, so that only a handful of companies can do mass production". These are led by Asian giants such as Samsung and LG, which now have armies of engineers working on battery technology.
Beyond the big firms, however, there are smaller suppliers to the sector. These include companies such as Germany's SMA, which specialises in solar invertors, and Infineon, which produces the electronics that control energy storage devices and applications, as well as of the US, which manufactures battery separators, and the French firm Saft, with its growing industrial battery business.
On the other hand, warns Thomas, there are considerable risks for investors. At least three separate types of battery technology are competing to serve the storage market, he says, and "there will be winners and losers that aren't yet apparent".
Also, he points out, parts of the energy storage market remain dependent on government subsidy. For example, from a financial perspective it does not yet make sense for homeowners to invest in a system combining both generation and storage, because the cost of doing so will take far too long to recoup from what they would save on buying electricity. As a result, take-up is significant only in countries such as Germany, where subsidies are available in the residential market.
Costs falling fast
Nevertheless, battery costs are falling fast - the price of a lithium-ion battery in an electric vehicle has fallen 40 per cent to around $500 per kilowatt hour since 2009 and is expected to be as low as $160 within a decade.
"Over the coming decade, advancing energy-storage technology could make electric vehicles cost-competitive, bring electricity to remote areas of developing countries, and improve the efficiency of the utility grid," insists James Manyika of the McKinsey Global Institute.
By then we might also be closer to technologies capable of maintaining grid-level storage. "That would be the absolute game-changer," says Thomas. "It would be massively disruptive for so many industries."
You can see his point. With storage capacity at this level, the world could switch to renewable sources of energy and cope with demand volatility for grid power. Goodbye, fossil fuel power generators and the oil industry.
Fund and trust recommendations
There are very few pure stock plays on battery manufacturing, says Thomas, with the sector now in the hands of broader electronics giants such as Samsung. Investors do have the option of investing in companies such as SMA, Infineon, Polypore and Sa, but these are difficult bets to get right for investors without an in-depth knowledge of the technology.
Moreover, there have already been some high-profile casualties. In 2012, for example, US lithium-ion battery specialist A123 filed for bankruptcy, just three years after raising $380 million in an initial public offering. A similar fate befell Ener1, another storage firm, despite high-profile support from US government officials.
Given these difficulties, it makes more sense for most investors to get exposure to energy storage via an environmental or clean technology fund that has investments in the sector. Examples include:
BlackRock BGF New Energy
Run by the well-respected duo Robin Batchelor and Poppy Allonby, this top-performing open-ended investment company holds a number of energy storage stocks.
Invesco PowerShares Clean Energy
The tracks the WilderHill New Energy Global Innovation Index, which includes a dedicated basket of energy storage stocks.
Impax Environmental Markets
Jon Forster and Bruce Jenkyn-Jones manage this closed-ended fund. Â has a strong long-term performance history and ongoing exposure to themes that take in energy storage, such as energy efficiency and infrastructure.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.