Areas of Interest

Set out below is an excerpt from our March 2018 quarterly update to investors.

Please note that the information is suitable only for wholesale investors, as defined by the Australian Corporations Act.

 

Energy Storage and Utility-scale Batteries

Given that electricity generating technologies, and the electricity market itself, are evolving, it is logical that investing opportunities will arise. The discussion below sets out some characteristics of the situation and attempts to determine likely beneficiaries of future changes.

 

The electricity market is changing

The biggest machine yet created by humans is the electrical power grid. In its entirety, the grid consists of the machinery that generates electrical energy, the wires that distribute electrical energy from generators to end users and dispersed substation machinery.. [The Institutional Strategist, 2018].

Whilst the above quote is referring to the US grid, any developed country’s grid, including Australia’s, is a very large and complex “machine”.

Furthermore, the electricity market has undergone significant disruption due to concerns with pollution and climate change. The backbone of electricity generation for the past several decades, coal, has gone out of favour because it contributes to climate change and pollution.

Nuclear has at times seemed a major contender to take over as the generation method of choice. However, concerns over the risk of nuclear accidents have rained on nuclear power’s parade. Whilst there is still significant nuclear generation taking place globally, its advance is under a cloud for the time being at least.

Renewable technologies have captured the world’s attention and it would be difficult to have avoided discussions about various “green” technologies in the media, politics and “at the water cooler”.

There are many players in the renewable space, however, solar and wind generation of power dominate.

Another feature of the energy market, particularly in Australia, is the proliferation of rooftop solar and its attendant decentralisation. 111MW of new capacity was registered in January 2018 alone, with 1.2GW for 2017. The transmission part of the electricity infrastructure may well be facing a funding crisis as more and more consumers are using their own self-generated power. Cheap and simple storage of power from rooftop solar would be a significant development in this area.

 

Challenges

The move to renewables raises challenges. Let’s look at some of those, along with possible solutions.

As widely publicised by severally scientifically-minded politicians, the sun does not shine 24 hours per day. Nor does the wind blow constantly.

Intermittency is a feature of solar and wind generation and finding a simple way to deal with it is perhaps today’s holy grail of renewable energy. Put simply, for the grid to work, it has to produce enough energy to meet demand; not just the total demand per day, but the level of demand at every location and at every minute of the day.

Quite apart from generation, electricity networks face a number of other challenges including aging infrastructure, breakdowns, failures, storms and market gaming. Politics might also be included in the list but that aspect is not dealt with here.

See the full graphic at this link

Energy storage

In one sense the problem of intermittency is a simple one to solve; just generate the electricity when it’s convenient then store it and use it later. Most of us do this every day; the electricity generated when we drive home is stored in the car’s battery and then used later when we next start the car.

What’s different with grid (or even single home) electricity is, first and foremost, scale. An average car battery can deliver 1.2kWh (that is, 1200W for 1 hour) before it’s flat. At the time of writing, live data suggested that, in total, Australia was consuming 26,222MW (see graphic above).  To keep Australia going for one hour, we would need about 22m car batteries; not really very practical.

For the grid, we need to store electricity (or, more accurately, energy that can be used to generate electricity) on a very large scale. There are already several methods available for such storage (discussed a little later).

Whilst the cost of generating energy from solar and wind is declining, energy storage is a (large) expense which is not generally thought to be necessary for traditional generation technologies. However, that’s not really the whole story.

Benefits of energy storage go beyond time shifting

The role of storage as a method of providing usable electricity using the intermittent generation from, say, solar and wind is straightforward. Not as obvious however, is batteries’ ability to provide other services to the grid. As part of the so-called “frequency control and ancillary service” (FACS) market, generators provide services which help to maintain the stability of the market, for example ensuring that voltage and frequency remain within specified limits.

Another factor is “peaking” which is the introduction of generation sources at times of peak demand.

The new South Australian battery, it turns out, has been very good at providing services to the grid. As Renew Economy has said, “While the battery might be small in the context of the National Energy Market, it is important to remember its capabilities and role. It may well be a gamechanger, by delivering services not previously provided by wind and solar PV”.

This has played out dramatically over the 2017/18 summer. 

On Sunday, January 14, something very unusual happened.

The Australian Energy Market Operator called – as it often does – for generators in South Australia to provide a modest amount of network services known as FCAS (frequency control and ancillary services).

This time, though, the market price did NOT go into orbit, and the credit must go to the newly installed Tesla big battery and the neighbouring Hornsdale wind farm.

The big gas generators – even though they have 10 times more capacity than is required – have systematically rorted the situation, sometimes charging up to $7 million a day for a service that normally comes at one-tenth of the price.

Rather than jumping up to prices of around $11,500 and $14,000/MW, the bidding of the Tesla big battery – and, in a major new development, the adjoining Hornsdale wind farm – helped (after an initial spike) to keep them at around $270/MW.

This saved several million dollars in FCAS charges (which are paid by other generators and big energy users) in a single day.

[Renew Economy] Link to article here

One would expect that battery providers are going to find grid operators very welcoming. Whilst we hear plenty in the press, especially from politicians, that renewables and batteries just don’t have the grunt to be meaningful, we might not have been getting the full picture.

US authorities also seem keen to introduce more storage with several government-mandated batteries on the way. [Renew Economy and Wall St Journal here and here].

From the above discussion, it would appear that energy storage would be beneficial for the grid in several ways;

  • Helps to overcome intermittency of generating technologies;
  • Provides time shifting so that generation can occur when convenient or practical and supply can occur when demanded;
  • Helps to “condition” the grid by providing frequency control and ancillary services (FCAS);
  • Helps with high demand periods (“peaking”).

 

We are now ready to look at how energy storage might be provided i.e. the technologies that are likely to deliver it. Below is a list split into batteries and non-batteries.

 

Storage methods other than batteries (but which are still sometimes referred to as “batteries”) include:

  • Pumped hydro
  • Flywheels
  • Compressed air storage
  • Thermal eg. Molten salt towers

Battery storage methods:

  • Lithium-ion batteries
  • Other battery chemistries eg. Zinc-air. High energy density. Hearing aid size to grid size. See here for more detail.
  • Flow batteries (batteries which can be charged and discharged at the same time) of various types
    • Zinc-bromine, RedFlow in Aus (eg. 0.4Mwh Smart Grid in Newcastle, NSW)
    • Vanadium redox batteries (VRBs)
    • Iron-chromium

See here for comparisons between flow battery types.

The more promising of these are discussed in more detail below.

Pumped hydro means using “cheap” or excess electricity to pump water uphill into reservoirs and then releasing it to run down and generate “expensive” electricity or to meet otherwise unmet demand. As with all storage, timing is everything.

It should be noted that not all electricity storage methods actually store electricity. In fact, by sheer size, pumped hydro schemes are easily the biggest.  The largest of these, San Luis California, is 126,352MWh. See a table of global energy storage projects here

Australia’s Snowy Hydro Scheme is a large example of pumped hydro (and non-pumped). Another project is the Kidston pumped hydro project in Qld which has the potential for 2,000MWh – see details here.

As well as requiring certain natural features which are not always available, damming or otherwise altering watercourses can be  viewed as an environmentally unsound activity so this adds difficulty to any new project, especially if the project has green credentials (eg. Solar and wind).

Molten salt tower. These are very interesting; they use mirrors to focus a lot of solar energy onto a salt-filled concrete tower – much like a steam boiler but using the sun and salt instead of fire and water.

An example is the proposed Aurora project in Port Augusta, South Australia. During the day, the hot (over 560oC) salt is used to generate electricity via steam turbines (up to 135MW load). At the end of the day’s sun, a fully heated salt reservoir can continue to provide another 8 hours at 135MW i.e. 1,100 MWh before the salt is too cool (at “just” 290oC). See more on the project here.

Vanadium redox batteries (VRBs) have been around for some time; Hydro Tasmania installed a VRB system in 2003 but it was not a success.

Nevertheless, there is renewed interest in this area and development continues. Details are scant but a 200MW VRB system is being constructed in Dalian, China. See more on the project here.

Lithium-ion batteries are being used extensively in numerous ways; in mobile phones, portable computers, as storage for rooftop solar systems, electric vehicles and, increasingly, for large scale storage by utilities.

An example is the 129MWh Tesla battery at “Hornsdale” in Jamestown, South Australia.  Installed in late 2017 it was, at the time, the largest battery in the world (of course it was a bank of batteries).

It is difficult to pick the technology which will win the race however, Li-ion appears to have the jump on all others battery technologies for now. That conclusion is based on a number of factors

  • There is large scale production of Li-ion batteries and it’s increasing all the time. Estimated production in 2016 was 45GWh for consumer products and 25GWh for electric vehicles. Production is forecast to increase dramatically in the next few years – see chart below.
  • Price is coming down quickly – see chart below. We are aware of a project which requires a utility-sized battery. From the initial quote on the battery until the final quote a little over two years later, the price had dropped by two thirds.  
  • In order for Li-ion to be displaced, another technology would have to clear the venture capitalists’ high bar: twice as good or half the price.

 

Vanadium

Let’s take a small detour here for a riddle: What do sea cucumbers and Damascus Steel have in common? The answer, “vanadium”.

Vanadium is a metal which is used to impart rust resistance and additional strength to various materials, most notably steel. It can add these desirable qualities in very small proportions, from 0.1 to 3% of an alloy. Unknown to the Middle Eastern craftsmen who, from the 13th to 17th centuries, were using Damascus Steel to create swords and knives renowned for their strength and durability, vanadium was at least partly responsible for the steel’s outstanding characteristics. And the sea cucumber? The Holothuroidea sea cucumber has blood cell pigment which is 10% vanadium – there was once a scheme in Japan to harvest them to extract vanadium!

We came across vanadium due to our interest in batteries and that led us to an Australian firm, Protean Energy (POW.ASX), which has a 50% interest in a prospective vanadium mine in South Korea.

As noted, vanadium is used largely in steel. South Korea is the 6th ranked steel-producing nation, it’s 2017 output was 71mt. South Korea is also very much interested in battery production, for example LG, Samsung and SK announced in 2017 that, together, by 2020 they were going to invest AUD3bn into developing Li-ion batteries [Korea Times].

The vanadium market is complicated; sources are varied (mining is one source of many) and the level of dormant supply is difficult to determine. Vanadium has however seen recent price increases. There is the potential for significant demand increases from two sources.

The first is the recent call for improvements to the strength and quality of rebar (steel used in concrete) for Chinese buildings. The addition of vanadium to the steel is a method of achieving that improvement.  The second is the possibility that vanadium battery technology improves such that it plays a part in the introduction of utility-size batteries.

It is early days for Protean in this venture but we will continue to monitor its progress.

 

Conclusion

Our investigation into the area of utility-scale energy storage suggests two things.

Firstly, utility-scale batteries have a bright future; they are very helpful for intermittent power generation such as solar and wind. Additionally, they provide benefits to the grid which go beyond straightforward supply of electricity. These benefits help to condition the grid and to meet demand spikes.

Secondly, lithium-ion batteries currently enjoy a commanding position. Widespread use in electronic devices and motor vehicles, and now in grid applications means that they will be difficult to replace.

Dramatic increases in production and ongoing cost reductions will add to the entrenchment of Li-ion as the dominant technology. Nevertheless, the unchallenged continuation of Li-ion’s lead is not assured; technologies such as vanadium flow batteries and as-yet-unknown technologies will continue to be developed.

Whilst we have made good money from lithium businesses in the past, we currently feel that shares are already pricing in a lot of this success so we see better risk/reward situations elsewhere, but that may change.

Nevertheless, we believe that our investments (across the funds) in rare earths, copper, graphite and graphene (HXG, GPX, KGL, TLG, PEK) mean that the fund has some exposure to the large-scale battery theme. Our investment in WND is also likely to benefit from growth in the use of large-scale batteries.

The case for holding those businesses is strengthened by this investigation. The utility-scale battery area is one that we will continue to watch, looking for opportunities as they arise.