The world is going electric as it transitions to clean energy, mostly from renewables. I recently wrote about how renewable energy cannot easily respond to the large fluctuations in energy demand that occur throughout the day, nor during temperature extremes, thus the need for utility grid-level battery solutions. This week we’ll explore energy storage solutions for mobility. In other words, this is mostly about electric vehicle (EV) batteries – a much wilder and more early-stage world than one would imagine when seeing the growing number of EVs on the road.

Why now?

Multiple factors are making this an opportune time to look at this sector:

Geopolitics are creating multiple tailwinds

Governments worldwide are pushing for cleaner energy, such as in the 2030 Agenda for Sustainable Development signed by all members of the United Nations in 2015. But, as the deadline nears, pressure is intensifying as the world is not on track to meet those goals. At this month’s COP27 in Sharm El-Sheikh, UN Secretary-General António Guterres warned that the world is on a “highway to climate hell” and repeatedly hailed renewables as “the only credible path” to real energy security.

Domestically there is growing support. For example, the U.S. Department of Energy has funded $209 million for twenty-six new laboratory projects focused on electric vehicles, advanced batteries, and connected vehicles. In addition, the Inflation Reduction Act of 2022 includes significant extensions, expansions, and enhancements of credits intended to support the widespread adoption of electric vehicles for both individual and commercial use, as well as incentivizing efforts to on-shore parts of the electric vehicle manufacturing supply chain.

Past underinvestment likely means accelerating future funding in the space. According to Bloomberg, in 2021, global investment in the low-carbon energy transition totaled $755 billion, up from $595 billion in 2020 and just $264 billion in 2011. According to Bloomberg’s New Energy Outlook, energy transition investment needs to average $2.1 trillion between 2022 and 2025, about three times the total in 2021, to get on track for net zero goals. It will further need to double again to $4.2 trillion over the years 2026-2030.

According to the International Energy Agency (IEA), the invasion of Ukraine further emphasized the need for nations to have greater resilience when it comes to satisfying their energy needs, which means, for most, pushing faster toward renewables.

Technology is reaching a price and performance tipping point

As with any new technology, the first generation is expensive and has relatively poor performance compared to later generations. Think about the price and quality of flat-screen TVs when they first came out, or for those of you who can remember this far back, the size and functionality of the first mobile phones, which looked and weighed more like bricks than the portable computers you have in your pockets and purses.

As adoption grows and supply chains get sorted out, prices tend to go down and performance increases. This relationship between price and cumulative installed capacity is called the ‘learning curve.’ For lithium-ion batteries, this learning curve means that prices have dropped an average of 18.9% every time the installed capacity has doubled. That means that the price of lithium batteries has declined a whopping 97% over the past three decades.

A battery with a capacity of one kilowatt-hour would have cost $7,500 in 1991 but was just $181 in 2018 – that’s a 41x decline, and prices are still falling steeply. The cost of Li-ion batteries halved in the four years between 2014 and 2018. To put this decline in prices in context, in 2018, the battery for a Tesla Model S 75D (which has a 75 kWh battery) would have been around $13,600, but in 1991 it would have been $564,000.

Many investors and fund managers are increasingly looking to build portfolios that reflect their preferences for clean energy solutions

Harvard announced last year that it no longer invests in fossil fuels. Instead, it will use its $42 billion endowment to support the green economy. In 2020 the University vowed to work with its investment managers to create a path to “net zero” greenhouse gas emissions by 2050. Early in 2022, Apollo Global Management pledged not to invest in fossil fuels in its next buyout fund. They are not alone and the trend is likely only going to grow from here.

The Problems

Over the past thirty years, the lithium-ion battery, developed by Professor John Goodenough (imagine having him grade your papers) in the 1970s, has come to dominate electric energy storage, particularly in transportation. While battery-powered transportation removes vehicle emissions, it has its own problems:

Raw materials

The two biggest lithium-producing regions are Australia and Chile, with China and Argentina producing to a lesser degree. In addition, over half of lithium, cobalt, and graphite processing and refining capacity is in China.

The rapid increase in EV sales during the pandemic tested the resilience of battery supply chains, and Russia’s invasion of Ukraine further exacerbated the challenge. At the same time, prices of raw materials such as cobalt, lithium, and nickel have surged. Russia supplies 20% of global high-purity nickel. The price of nickel is up over 80% over the past five years and nearly 50% over the past three years. Demand is only going to increase. For example, the supply of lithium would need to rise by up to one-third by 2030 to match the demand for EV batteries to satisfy the pledges and announcements in the International Energy Agency (IEA) Announced Pledges Scenario (APS) and as you’ll read later, this kind of growth will be exceptionally challenging.

Supply chains.

Despite the nearly ubiquitous Li-Ion battery, there is a stunning lack of battery manufacturing outside Asia-Pacific. In 2021, the region accounted for 90% of global battery manufacturing, but the recent pandemic and geopolitical tensions have increased the desire for manufacturing capacity in the West. Around three-quarters of all lithium-ion batteries are produced in China alone, which is also home to 70% of the production capacity for cathodes and 85% of the production capacity for anodes – both are critical components of batteries.

While Europe is home to over 25% of global EV production, very little of the supply chain, apart from 20% of the world’s cobalt processing, is in the region. Likewise, the United States has an even more minor role in the global EV battery supply chain, producing only 10% of the world’s EVs and is home to just 7% of battery production capacity. With Asia-Pacific dominating EV and battery production, most battery cell companies are not listed on US exchanges and/or are part of conglomerates.

Temperature sensitivity

Lithium-ion batteries perform best and live longest when kept at a comfortable temperature of between 68 and 77 degrees Fahrenheit. During normal operation, Li-ion batteries can typically withstand a temperature range of -22F and 140F, and during recharge, they can withstand temperatures between 32F and 122F. The thing is, these batteries generate a lot of heat during operation, and their temperature must be brought down to within operating ranges. At high temperatures (between 158°F and 212°F, or 70°C and 100°C), thermal runaways can occur, causing a chain reaction that destroys the battery pack and can cause fires.

During fast charges, Li-ion batteries must also be cooled down. This is because the high current going into the battery produces excess heat that must be extracted to preserve the high charging rate and not overheat the battery. They may also need to be heated as cells cannot be charged below 32F.

Potential Solutions

Since Li-ion batteries will likely dominate for many years, the focus is on making them safer, more resilient, last longer, and recycle as much as possible at the end of their useful life.

One of the significant challenges with lithium-ion batteries is to widen their operating temperature range. A paper recently published in the Proceedings of the National Academy of Sciences (and really, who doesn’t subscribe?) discusses progress engineers at the University of California San Diego have made in developing lithium-ion batteries that can perform well at temperature extremes. With these batteries, electric vehicles could travel farther on a single charge in cold climates and would put less demand on cooling systems to keep from overheating in hot climates, extending range.

Another problem is the useful life of a Li-ion battery. As a battery charges and discharges, the maximum potential energy it can hold and distribute slowly starts to degrade. Anyone with a smartphone, tablet, or laptop has experienced this lovely phenomenon. It is one thing to purchase a new phone after a few years when your current one’s battery doesn’t last, but it is entirely different when talking about a car. The problem is compounded by the reality that many car manufacturers are dealing with the weight of the battery by incorporating it into the overall frame, making it impossible to swap out.

Jeff Dahn, a professor at Canada’s Dalhousie University and research partner with Tesla (TSLA) since 2016 is working on what is being referred to as the 100-year, 4-million-mile battery. Tesla’s current Lithium Iron Phosphate battery has lower energy density than more widespread Lithium-Ion alternatives but is cheaper, more durable, and allegedly safer, too. They can last up to 12,000 charge-discharge cycles. In contrast, Professor Dahn’s NMC 532 cells (the 4-million-mile battery) showed no capacity loss after nearly 2,000 cycles, and his team’s paper extrapolates this to imply a 100-year lifespan.

Current potential lithium-ion alternatives

A paper in the August edition of the journal Nature by MIT Professor Donald Sadoway and 15 others at MIT described an aluminum-sulfur battery made from inexpensive, abundant materials. In their experiments, Sadoway’s team showed that the battery cells could endure hundreds of cycles at exceptionally high charging rates, with a projected cost per cell of about one-sixth that of comparable lithium-ion cells. This technology has spawned a new company called Avanti, which has licensed the patents to the system.

Another option is a graphene battery, which can be so thin as to be essentially just two-dimensional. Graphene Manufacturing Group Ltd (GMGMF) is working on such a solution. Graphene conducts electricity better than copper and can do so at a fraction of the weight, with five times the energy density of a typical lithium-ion battery. One of this technology’s many challenges is how to mass manufacture the thin sheets. The Chinese carmaker GAC recently announced the development of a graphene-based battery that can be recharged to 80% in eight minutes.

In 2017 the Samsung (SSNLF) Advanced Institute of Technology (SAIT) announced a breakthrough with a graphene battery but then went silent. As I mentioned earlier, alternatives will arrive but will likely take decades to get to widespread use.

Another option comes from Solid Power, in which both BMW (BMWYY) and Ford (F) have invested. The company is a leading producer of solid-state batteries for EVs. Its technology is expected to produce and scale next-generation all solid-state batteries that can provide an extended range at a lower cost and make for safer electric vehicles using existing lithium-ion battery manufacturing infrastructure.

Regarding battery recycling, there are not many publicly traded options for investors

  • Umicore SA (UMICY) treats pollutants, metals, and other industrial materials, generating the majority of revenue from cleaning technologies, including emission control devices, components for rechargeable batteries, and recycling solutions. Approximately half of the total sales derive from Europe.
  • Li-Cycle Holdings Corp (LICY) is a Canada-based lithium-ion battery resource recovery and the leading lithium-ion battery recycler.

Other ways to invest

Here are two ETFs for investors looking for a diversified way to invest.

  • Like most of the market, Global X Lithium & Battery Tech ETF (LIT) is down this year, falling around 15%, but has gained more than 180% over the past three years. The fund seeks to provide investment results that generally correspond to the price and yield performance, before fees and expenses, of the Solactive Global Lithium Index.
  • Amplify Lithium & Battery Tech ETF (BATT) is also down for the year, around -25% YTD, but is up over 120% from its March 2022 lows. The fund seeks investment results that generally correspond to the price and yield of the EQM Lithium & Battery Technology

There are a few options for those preferring to invest in natural resources used in Li-ion batteries. To keep up with demand, experts predict that existing suppliers will all need to double their output every two to three years for the next ten years. But, according to Albermarle (ALB) president Eric Norris, no one has yet been reliably able to accomplish that, which means price pressures will continue.

  • Albermarle is the world’s largest lithium producer, with salt brine deposits in Chile and the U.S. and hard rock joint ventures in Australia. The company is also a major producer of oil refining catalysts, so this isn’t a pure green energy play.
  • Lithium Americas Corp (LACis developing three lithium production assets: two brine resources in northwestern Argentina and a clay resource in Nevada, U.S., but currently has no lithium production. The company expects the first Argentina resource to enter production in early 2023 and the Nevada project to enter production in the middle of the 2020s, with the second brine resource, Pastos Grandes, to enter production in the late-2020s.
  • Livent Corp (LTHM) is another pure-play lithium producer that operates a brine resource in Argentina and downstream lithium hydroxide conversion plants in the U.S. and China, with an additional 50% stake in a fully integrated Canadian lithium project.
  • Piedmont Lithium Inc (PLL) is a U.S.-based lithium extraction company that recently announced it was selected for a $141.7 million grant from the U.S. Department of Energy under the President’s Bipartisan Infrastructure Law. The company’s portfolio of lithium assets is located in Tennessee, North Carolina, Canada, and Ghana.

Much of the battery manufacturer space is pretty Wild West, with some companies enjoying market caps of over $1 billion with little to no revenues.

  • Freyr Battery (FREY) went public last year via a SPAC and is a Norwegian-based emerging producer (meaning no revenues yet) of clean battery solutions. It aims to design and manufacture high-density and cost-competitive lithium-ion batteries with a reduced carbon footprint for electric mobility, stationary energy storage, marine and aviation applications. Rumor has it KKR is in talks with the company to invest half a billion.
  • Enovix Corp (ENVX) develops and produces advanced silicon-anode lithium-ion battery development and production. It is developing its 3D cell technology and production process for the electric vehicle and energy storage markets. Cantor Fitzgerald initiated coverage in September with an overweight rating and a $25 price target.
  • SES AI Corp (SES) develops and is engaged in the initial production of high-performance Li-Metal rechargeable batteries for electric vehicles (EVs) and other applications. The company is an integrated Li-Metal battery manufacturer with material, cell, module, AI-powered safety algorithms, and recycling capabilities.
  • Amprius Technologies Inc (AMPX) went public just last September via SPAC and produces silicon anodes for high energy density lithium-ion batteries primarily used for existing and emerging aviation applications, including unmanned aerial systems, such as drones and high-altitude pseudo satellites.
  • QuantumScape Corp (QS) is another “pre-revenue” company. It is engaged in developing next-generation solid-state lithium-metal batteries for electric vehicles. It claims to have developed an anode-less cell design, which delivers high energy density while lowering material costs and simplifying manufacturing.

The bottom line is that as the world moves towards emission-free transportation, the demand for li-ion batteries and their components will experience accelerating demand, which creates enormous opportunities in this surprisingly nascent investment arena.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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