Vantage Point Advisors’ Energy Blog April 2021

Biden’s American Jobs Plan Illuminates the Need for Affordable Battery Technology

As the first quarter under President Biden comes to a close, the Administration’s support for further development of green energy sources and the move away from fossil fuel reliance continues.  This move was recently reinforced in the American Jobs Plan.  Although referred to as an “infrastructure plan,” much of the proposed spending will be on improving the electric grid and investing in growing U.S. plug-in electric vehicle (EV) sales.  Among automakers, Tesla remains the EV leader, but GM and Ford have already begun producing lower-priced electric vehicle alternatives.  Key to all of these initiatives is improved battery technology, in terms of storage, life, and economics.

According to S&P Global’s Market Intelligence, U.S. imports of lithium-ion batteries from Asia, especially China, are surging in sync with America’s rising appetite for electric vehicles, consumer electronics, and battery peaker plants.  Imports of lithium-ion batteries jumped 86% in the last three months of 2020 to 43.7 million kilograms, growing eight times faster than a year before, according to data from Panjiva. China shipped a 48% share of the imported lithium-ion cells and packs in the fourth quarter of 2020, followed by South Korea with 26%. Germany accounted for another 7% and Japan supplied 6%.[1]  This acceleration of imports comes as the U.S. federal government reviews the risks of the country’s rising reliance on foreign sources of critical battery metals and system components and seeks to stimulate domestic manufacturing, as President Biden ordered in February.

Electricity 101: Capacity and Energy

Electrical energy is required to heat homes, light the streets, and run manufacturing equipment.  Considering a 100-Watt light-bulb as an example, if left on for one hour it would require 100 watt-hours.  Sources of electrical energy come in two forms: firm and non-firm.  The term “firm” refers to electric power that is guaranteed by the supplier to be available, typically produced by natural gas, coal, and nuclear generating facilities.  Green power alternatives, such as wind, hydroelectric and, solar power, are non-firm given changing wind patterns and the earth’s rotation.  A generating facility with a capacity of 100 megawatts (one million watts) that runs for one hour produces 100 megawatt hours of electrical energy.  In the case of wind power, however, if the wind is not blowing the capacity of the generator is effectively zero.  However, adding battery storage to the mix creates additional firm capacity from these non-firm generation sources, greatly increasing their value to end users.

Battery Production and Dependence on China

The U.S. has had some recent success establishing a foothold in lithium-ion battery production. Electric carmaker and energy storage system supplier Tesla Inc. partnered with Japanese electronics giant Panasonic Corp. on a large-scale lithium-ion battery manufacturing plant in Nevada, and Tesla plans to ramp up another site in Fremont, California. Other projects are moving more slowly. Two major South Korean battery suppliers, LG Chem Ltd. and SK Innovation Co. Ltd., are in a protracted legal battle over intellectual property that threatens a planned lithium-ion battery factory in Georgia.  Meanwhile, China is going all-in on lithium-ion battery production, with more than 50 such lithium-ion “megafactories” now in operation and at least 50 more planned, according to Benchmark Minerals Intelligence.

Battery Peakers[2] – Bringing Scale to Battery Storage

On California’s Monterey Bay, two of the world’s biggest lithium-ion battery storage stations are emerging as critical new assets for the state’s clean energy transition. Across the country in Manatee County, Fla., meanwhile, Florida Power & Light Co. is building its own big battery complex, to be integrated with a nearby solar farm, while its affiliate NextEra Energy Resources LLC has dozens of contracts to build such projects nationwide.

These facilities are forerunners of a new era in the power sector that researchers at the U.S. National Renewable Energy Laboratory have deemed “the rise of battery peaking power plants.” Capable of supplying two to six hours of stored electricity to thousands of homes during periods of peak demand, battery peakers have entered a period of accelerated growth centered in the Southwest.

 

Future Cost Improvements[3]

A new report from researchers at the Massachusetts Institute of Technology (MIT) says that the rate of improvement for lithium-ion cells that power electric cars has been grossly underestimated because most analyses have only measured one battery performance characteristic: energy capacity.  The current cost of making batteries is limiting the ability of electric vehicles and home batteries to achieve mainstream adoption, and although costs are expected to drop in coming years the researchers say how this is measured differs considerably from report to report.

In December, BloombergNEF reported that battery pack prices fell below $US100/kWh for the first time for e-buses in China. But while $US100/kWh for battery packs is cited as the point at which EVs will reach purchase price parity with combustion engine vehicles, the industry average still sits at $US137/kWh.

The paper from researchers at the Institute for Data, Systems, and Society at MIT notes that li-ion battery prices have dropped by 97% since their introduction commercially in 1991, and other than a few exceptional data points in 1995 and 2008, the decrease in prices has been consistent.

On top of that, the researchers also note that in batteries used for energy storage, the improvements in price could be greater again, because the performance characteristics generally focused on by past research are not as exacting for storage applications.

Key Takeaways

As evidenced during the Texas Snowmaggedon last month, when many wind and solar energy sources went offline during the record-breaking cold snap, the grid operators were forced to implement rolling blackouts.  Improving battery technology and the development of large-scale storage options (“battery peakers”) would effectively convert solar and wind power sources into firm capacity, resulting in improved energy reliability.

WTI Strip Prices Increase

Considering April 5th’s price decrease, spot prices and near-term futures prices for the WTI contract have not changed much over the past month.

The oil price curve remains in “backwardation” reflecting the market’s expectation of lower future sport prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on April 5, 2021, as well as the predicted crude oil prices based on options and futures markets.  The blue lines are within one standard deviation (σ) of the mean, and the red lines are within two standard deviations.

Based on these current prices, the markets indicate that there is a 68% chance that oil prices will range from $47.50 and $71.00 per barrel in mid-July 2021.  Likewise, there is about a 95% chance that prices will be between $32.00 and $93.00.  By mid-September 2021, the one standard deviation (1σ) price range is $45.50 to $73.50 per barrel, and the two-standard deviation (2σ) range is $29.50 to $101.00 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful.  If someone asks you longingly if oil will be over $100 per barrel again soon, you now can respond with “the markets indicate there is only a 2.5% probability that oil prices are expected to get to $101 per barrel by this September, so I wouldn’t count on it.”

For more information, contact:

Gregory E. Scheig, CPA/ABV, CFA, CMA
Vantage Point Advisors
Managing Director / Energy Practice Leader
Certified Mineral Appraiser
180 State St., Suite 225, Southlake, TX 76092

214.254.4801

gscheig@vpadvisors.com

 

 

 

[1] S&P Global Market Intelligence, “US lithium-ion battery imports jump as China seizes market share”, March 29, 2021, https://platform.marketintelligence.spglobal.com/web/client?auth=inherit#news/article?id=63271388&keyproductlinktype=58&utm_source=mialerts&utm_medium=realtime-minewsresearch-newsfeature-energy%20and%20utilities-the%20daily%20dose&utm_campaign=alert_email

 

[2] S&P Global Market Intelligence, “Battery peakers represent a potential 100-GW opportunity in US”, February 25, 2021, https://platform.marketintelligence.spglobal.com/web/client?auth=inherit#news/article?KeyProductLinkType=2&id=62699050

 

 

[3] “Re-examining rates of lithium-ion battery technology improvement and cost decline”, Micah S. Ziegler and Jessika E. Trancik, Published on 23 Mar 2021, Energy Environ. Sci., 2021, Advance Article

https://doi.org/10.1039/D0EE02681F