Batteries – charging the energy transition

Batteries – charging the energy transition

The cost of generating energy from renewable sources has plummeted over the last decade, with the price of solar power down by over 90% and wind by more than 70%. Yet cheaper renewable power is, on its own, insufficient to drive the energy transition. It also needs, like power from gas or coal, to be dependable and available on demand. Achieving this involves converting infrastructure designed for hydrocarbons for renewables.

• Storage is at the heart of renewable infrastructure. The weather, not demand, determines the supply of energy from solar and wind. Pumped-storage hydropower – where cheap off-peak energy is used to pump water to a higher elevation, with the water being released and moving through turbines during periods of high demand to generate electricity – is still the most widely deployed energy storage technology. But the growth in new storage now lies in batteries. They are vital if increasing power from renewable sources is to be stored to meet surges in demand. Batteries are also central to electrifying transport.

• Lithium-ion is the most widespread and commercially viable battery type. They are used in grid storage and electric vehicles, as well as appliances such as smartphones and laptops. There are significant synergies between manufacturing and using batteries for EVs and for energy storage. For instance, when an EV battery has lost the capacity to power a car it can be repurposed for static, domestic electricity storage, perhaps linked to solar panels. Similarly, smart charging systems allow owners to charge EV batteries from the grid when energy demand, and prices, are low.

• As battery production ramps up, manufacturers are learning more efficient processes and are benefiting from economies of scale. There has been huge progress made in making batteries lighter, smaller, higher voltage and cheaper. The price of lithium-ion battery cells has fallen by 97% in the last three decades. Goldman Sachs’s researchers predict that average battery costs are likely to almost halve in the next three years.

• Cheaper batteries are making EVs more commercially viable. The 75kWh battery in the Tesla Model S 75D costs around $13,000 today; according to Our World in Data, a battery of the same capacity would have cost over $500,000 in 1991. If battery costs decline as rapidly as is widely expected, EVs could soon achieve cost parity with combustion engine vehicles in the US on an unsubsidised basis.

• Battery storage capacity in the grid is rising, but not fast enough to keep pace with the rapid increase in renewable energy generation. Last month the FT reported that European power prices fell below zero for a record number of hours this year, driven by surging solar supply around midday in the summer months, and insufficient storage capacity. Negative energy prices may be a consumer’s dream, but they are a symptom of an incomplete energy system and a mismatch between energy supply, demand and storage.

• Battery production is a growth sector, but one that is just as subject to the vagaries of competition, government policy and fluctuating demand as any other sector. Such factors explain why, in recent months, several battery makers have announced plans to slow production.

• Northvolt, the Swedish battery maker founded in 2017 and lauded as Europe’s answer to China’s battery makers, is cutting 20% of its workforce. In July, SK On, a giant South Korean battery maker building factories in America to supply Ford and Volkswagen, said that it was in a state of “emergency management”. Several firms in the US, including LG Energy Solution, Freyr and GM’s Ultium Cells, have paused or delayed battery projects.

• Battery manufacturers face huge upfront investments, and, as with civil nuclear power, demand for their product is highly dependent on government regulation and incentives. Weaker than anticipated incentives and consumer demand have forced many carmakers to push back the transition to EV production. Consumer worries about charging infrastructure and range have also weighed on the transition as have the generally higher cost of EVs.

• There is an important geopolitical aspect to all of this. Europe and the US are anxious to avoid being dependent on China for battery supply. The EU and the US government have belatedly followed China’s lead by offering incentives to domestic battery production. Earlier this year the US imposed 100% tariffs on Chinese imports of EVs, effectively rendering them uncompetitive in the US market. The EU followed by imposing tariffs of up to 45% on Chinese EVs for the next five years.

• China has a formidable lead in battery production. It produces more than 80% of the world’s battery cells and is by far the biggest processor of battery metals. China benefits from subsidies, scale, low labour costs and first-mover advantage, which has led to deep knowledge and networks. China also has access to raw materials. It, along with Australia and Chile, accounted for 90% of lithium mining in 2022.

• Batteries are vital to the energy transition. Their price has fallen sharply over time and seems set to fall much further. Along with the similar progress on solar and wind power, this offers a powerful tailwind to the energy transition. Yet, as the recent travails of western battery and auto manufacturers confirm, that transition is unlikely to be smooth or linear.

OUR REVIEW OF LAST WEEK’S NEWS

The UK FTSE 100 equity index ended the week down 1.3%. Stock markets around the world saw modest falls last week as the yield on US 10-year treasuries hit a three-month high amid a reassessment of the pace of Fed rate cuts and uncertainty over the US election.

Economics

• Early estimates of activity in October from surveys of purchasing managers suggest an acceleration in growth in the US, continuing contraction in the euro area and continuing but slightly slower growth in the UK
• Manufacturing activity continued to lag behind services activity with a fall in activity in the US and the euro area and slowing growth in the UK
• The International Monetary Fund said that “the global battle against inflation has largely been won” and called for a “triple pivot” on global economic policy – cuts to interest rates, lower public borrowing and reforms to boost growth
• UK chancellor Rachel Reeves confirmed that she plans to change the government’s fiscal rules in the upcoming budget, changing the way that debt is measured to allow extra investment
• The BBC reported that the chancellor plans to raise £20bn by increasing employers’ national insurance contributions
• The UK government published an impact assessment that showed its Employment Rights Bill is expected to cost businesses at least £0.9bn and no more than £5bn a year
• Sentiment in the UK manufacturing sector fell in October at the fastest pace in two years, according to the Confederation of British Industry
• UK consumer confidence ticked down in October following a larger fall the previous month
• UK car production fell 20.6% in September compared with the same month last year, as factories reduced production of existing models to readjust for new zero-emission vehicles, according to the Society of Motor Manufacturers and Traders
• New car registrations in the EU fell 6.1% in September compared with the same month last year, highlighting the ongoing pressures in the sector
• Gold prices reached a fresh record of $2,748.38 per troy ounce, amid geopolitical uncertainties and falling global interest rates
• The Bank of Canada lowered interest rates by 0.5 percentage points to 3.75%, its fourth consecutive cut amid inflation rates currently below the bank’s 2% target
• Listed Chinese companies have bought back over $33bn of their shares so far in 2024, a record high

Business

• HSBC announced an overhaul of its structure that included creating separate business units in the UK and Hong Kong 
• Aerospace company Boeing’s latest pay offer was rejected by its 33,000 striking workers
• Returns of UK online retail orders are expected to reach £27bn this year, according to analysis by Retail Economics, with “serial returners” contributing approximately 25% to total returns 
• UK music exports rose to record levels of £775m in 2023, according to figures from trade body BPI
• Heathrow Airport saw record passenger numbers of 30.7m between June and September this year, attributable to the Olympic games and large music concerts taking place over the summer
• The UK government proposed legislation to modernise data laws, claiming it would unlock “the secure and effective use of data for the public interest”
• Troubled UK utility Thames Water is seeking an additional £3bn in financing from creditors as it warned it could run short on cash by Christmas

Global and political developments

• Israel launched a major air strike against Iranian missile manufacturing and air defence sites
• Iran's leader Ali Khamenei said the attack should not be "exaggerated or downplayed", which was widely interpreted as meaning that Iran does not plan an immediate response
• The oil price dropped in early trading on Monday morning in Asia on relief that the Israeli attack avoided Iranian oil facilities
• Former US president Donald Trump overtook vice president Kamala Harris for the first time since August in The Economist’s forecast of the US presidential election winner. The Economist forecast that Trump now has a 53% chance of winning, compared to 47% for Harris
• On Sunday night the Polymarket betting website put the probability of a Trump win at 65%
• Ms Harris remains ahead of Mr Trump in the national opinion polls, although her lead has narrowed since September
• Japan’s ruling coalition led by the Liberal Democratic Party has lost its parliamentary majority in a surprise outcome that creates significant political uncertainty
• The Moldovan public narrowly voted to back EU accession in a referendum beset with allegations of Russian interference
• India and China reached an agreement on patrolling their shared border in a bid to ease previous tensions on the issue
• The US confirmed that North Korean soldiers entered Russian territory, amid fears that North Korean soldiers will support Russia in fighting in Ukraine
• Turkey launched air strikes into Northern Iraq and Syria following an attack at a Turkish aerospace company which killed five people

And finally… Dunedin Airport in New Zealand caused a stir after asking departing passengers to keep their goodbye hugs with relatives to a maximum of three minutes in an attempt to keep passenger traffic flowing - love is in the air-port