Full charge ahead: the relentless rise of the battery market
The future really is electric, with the humble battery at the centre of an evolving and expanding value chain that stretches all the way from mining scarce metals and mixing electrolytes and active materials; to assembling the individual cells into battery modules in giant gigafactories; to recycling them at the end of their useful lives.
Demand, based on two core applications, is rising exponentially: the rapid adoption of electric vehicles (EVs) will require over 5,000 Gigawatt hours (GWh) of capacity by 2040, up from less than 250 in 2020 – a compound annual growth rate of 17%, forecasts Wood Mackenzie. Demand for energy storage, while still much smaller, is expected to grow rapidly, by 11% compounded between 2020 and 2040, from 51 to over 420 GWh.
While their priorities are somewhat different, with vehicle makers looking for safety, performance and lower battery costs, whereas utilities emphasise storage capacity and a reduced total cost of ownership, the two markets interconnect. The more EVs are hooked up to the electricity grid to recharge, the more utilities will need to balance surges in demand - on top of the instability already created by intermittent renewable energy.
All of this means “batteries will become a vital component of energy strategy, not only for certain industries but for entire countries and the world as a whole,” argues William Turlington, Head of Mining, Metals and Industries Finance, Americas for Societe Generale. It is, therefore, no surprise to see investment flooding into the sector with new projects starting almost weekly, while established companies from Volkswagen to Tesla are also ramping up capital spending and assessing vertical integration opportunities.
Source: Wood Mackenzie, 2022
This fundamentally positive outlook should not, however, be allowed to obscure some very real challenges. The first is how quickly the underlying technology can improve. In truth, batteries are still quite inefficient. Today’s lithium-ion cells have six times the density of energy storage of the original carbon-zinc models; but they are about 40 times less dense than the energy stored in gasoline.
Nor are they completely safe – battery fires are rare, but they do occur – and there is something of a trade-off between safety and performance. Within the lithium-ion family, so-called NMC (nickel manganese cobalt) batteries can provide an average EV with a range of 500-600km on a single charge. By contrast, LFP (lithium, iron, phosphate) cells are cheaper and safer but generate less power.
For now, there is enough demand to soak up all production. And market segmentation can help too, with NMC units going into top-of-the-range cars while LFP batteries are more suited to city run-arounds. However, to accelerate mass consumer adoption of EVs, performance and safety will have to improve and costs come down further. One potential solution is solid state batteries, which do away with the volatile electrolyte between anode and cathode. But these are still under development and at least five years away from commercialisation.
Source: Wood Mackenzie, 2022
A second issue that has rapidly grown in importance is how to source and transform the scarce metals and minerals that are key components of the battery cell. This is not only a question of securing a reliable supply at an acceptable cost and in an ESG-compliant manner but, increasingly, about getting hold of them at all. Many of these metals, after all, are mostly (or only) found in developing countries and then sent to China for processing, creating difficult geopolitical issues for western customers. Lithium, for example, is currently facing a supply bottleneck, which will hopefully correct; but there may be an actual shortage of nickel and cobalt in the long term.
Either way, prices are rocketing: raw materials today account for up to 80% of a lithium-ion battery, estimates Benchmark Mineral Intelligence, up from 40% in 2015 – and the battery, in turn, is the most expensive part of the EV.
Every challenge, of course, harbours an opportunity, both for entrepreneurs and investors. There are a number of new ventures along the battery value chain that mine and process natural graphite in North America. Since graphite is needed in virtually every battery, this makes these companies highly attractive, secure and sustainable suppliers for cell manufacturers.
There’s also considerable opportunity for companies that are developing highly efficient Advanced LFP batteries with plans to license this technology to others, like vehicle manufacturers, and even to help them reconfigure their production lines to adopt it.
Such companies, like their peers, are hungry for investment, says Mr Turlington who advises several North American advanced battery companies producing cells for energy storage use. Generally, these firms are looking to secure a strategic equity investor who may also sign a multi-year offtake agreement for a slice of their production. Once such an anchor is in place, that unlocks further equity and debt financing from institutional investors. But structuring such deals is complicated and requires patience.
The need for institutional money is huge, however, since car makers and other strategic investors only have capacity to supply a portion of what is needed. “We believe private capital should play a key role in financing this critical infrastructure, and we have been spending a lot of time educating institutional investors about the battery market,” says Mr Turlington. Given the decades of double-digit growth forecast for the battery industry, that sounds like a good investment.