November 10, 2020

Renewables’ Biggest Obstacle to Being Good Long-Term Investments?

A lack of decent battery storage capability. The race is on to improve that, though.

Reported by Sarah Min

Art by Lou Beach

Batteries have changed everything since the modern lithium-ion battery was developed nearly half a century ago. Enabling a mobile world, they have powered innovations in smartphones and laptops. Soon, they may also pave the way toward a fossil-free future.

Advancements in technology, plus the help of several tax incentives, have made solar and wind power more commercially viable than they have ever been. Moreover, now that Joe Biden has been elected president, and China has pledged its own commitment to sustainability, leaders are expecting a surge in renewable infrastructure. Solar and wind investments are poised to take off.

But that still leaves the problem of how to store renewable electricity. More science and engineering are required to solve the problem of insufficient storage capacity. If they can solve that puzzle, then renewable investments can soar to new heights. If not, a lot of investment dollars will have gone to waste.

Surge of Interest

As the saying goes, the sun does not always shine and the wind does not always blow. That is why experts find it virtually impossible to talk about solar and wind power without also addressing the problem of battery storage. For that reason, some general partners are expanding their renewable investment strategies to include storage investments.

“We’re starting to see more activity on the storage side, instead of just the generation side, which is critical for solar and wind,” Andrew Maday, senior vice president at Callan’s private equity consulting group, said earlier this fall.

Investors are piling into renewable stocks, which have outpaced the overall market. Since January, solar and energy investments have easily outstripped broader benchmarks such as the S&P 500, which has jumped 9% year to date. Alternative energy stocks, undeterred by the pandemic, have climbed to new heights: Canadian Solar skyrocketed 79%, American clean energy company First Solar increased 55%, and SunPower has shot up a whopping 275%.

Meanwhile, battery storage stocks have also seen a surge in activity. Since January, utility provider NextEra Energy has gained 25%, home solar energy firm Enphase Energy has skyrocketed 299%, and Elon Musk’s Tesla has lapped the others with 390% gain thus far this year.

Investor sentiment is turning against fossil fuels. Solar stocks are surprising analysts this year with particularly strong earnings beats, suggesting these buzzy shares have a bright future ahead of them. For example, First Solar reported earnings per share of $1.45 in the third quarter, a 138% jump from analyst expectations of $0.61. It pulled in $19.2 billion in revenue last year, up from $16.7 billion the prior year.

Tellingly, a growing number of solar and wind generation sites are supplied with batteries, says a May report from the US Energy Information Administration (EIA). According to the federal agency, there were 53 such paired (electricity production plus battery storage) sites in 2019, up from just 19 paired sites three years prior. The trend is expected to continue, particularly as investors expect a surge of interest in renewable infrastructure.

Size, Cost, Longevity

But battery storage has lots of challenges to surmount. While costs have come down in the past 40 years, battery capabilities have not changed too significantly. Investors, researchers, and firms are all hoping for chemical advancements that will bring down the size, cost, and longevity of batteries. That way, they can be more broadly useful to the wider society and bring down the cost of powering electric vehicles and power grids.

“We’re waiting on breakthroughs, and breakthroughs are hard to predict,” said Bernadette Johnson, vice president of market intelligence at Enverus.

Some firms believe a breakthrough is at hand, although an expensive one. Tesla recently announced that it will produce lithium-ion batteries free of cobalt.

Cobalt is not only more costly than manganese or nickel, the other materials that go into lithium-ion batteries, it is also tied to unethical child labor practices in the Congo. The company hopes that getting the chemistry right will bring down the cost of its electric vehicles. Meanwhile, Tesla Energy is making large batteries, called Megapacks, aimed at powering big swathes of the electrical grid.

However, perfecting cathode chemistry is tricky. Unstable batteries can explode or catch fire. Samsung had to recall its line of Galaxy smartphones after consumers reported they caught fire. Poorly made lithium-ion batteries also grounded the entire fleet of Boeing 787 Dreamliners.

Location Matters

There are other problems. Wind and some solar generation often occurs in remote locales, with insufficient power line capacity to export it to more populous areas. The site may have enormous battery storage capability. But if the juice is bottlenecked there, that storage is moot. The result is that the wind farm or solar field turns out to be a bad investment.

Storage of renewable power varies from state to state. Some states provide tax incentives for renewable storage, and others don’t. More than 90% of renewable energy and storage capacity in the US is concentrated in just nine states, including Texas, which has 46% of the sites, according to the EIA. Other states include Arizona, California, Florida, Georgia, Hawaii, Illinois, New Mexico, and Nevada.

In Nevada, a project called Gemini Solar is expected to add more than one gigawatt of renewable energy and storage capacity. And in April, Virginia’s governor opened the way for solar, wind, and storage construction after signing a clean energy act to get to zero carbon emissions by 2050.

All of this is good news for renewable investments. Investors just need to keep a keen eye on the factors that will help investments succeed.