Solar and wind energy are both experiencing tremendous growth rates and their investment opportunities are well documented. While much attention and capital is given to the CleanTech sector these days, how do investors know when we have saturated the best opportunities and begun chasing riskier firms? Which parts of the CleanTech sector have room for growth, and which ones are destined for failure? One sector, batteries, appears to have a few unique characteristics within the CleanTech genre that make it one of the more promising areas for investment.
In the past two years we have seen oil go from $40 to $147 and back again. With oil still relatively cheap, consumers are nonetheless switching to more fuel efficient automobiles, including many new lines of hybrids offered by manufacturers. The average new car purchased during the recent cash for clunkers program in the US was 24.9 mpg while the car traded in averaged 15.8 mpg. Ignoring the clunker program, in June 2009 hybrids were 3.05% of the new car market share, up year over year 2008 even when gas was over $4/gallon. Electric vehicles (EVs) are now being offered, and up to a dozen new lines will be introduced to the market in the next 5 years. This past spring, President Obama further increased CAFE standards for US automobiles up to a whopping 35 mpg- a standard that virtually guarantees a robust hybrid market to satisfy the increased efficiency needs.
And as for oil prices, a factor which may be the largest single driver of hybrid sales, a recent International Energy Agency (IEA) flagship report described the majority of the world’s top 800 oil fields have passed their peak production and are declining at a rate twice as fast as previously believed. The IEA estimates that by 2010 oil companies will have to commit to projects producing almost as much oil as Saudi Arabia if the world is to avoid a supply crunch by the middle of the next decade. It further adds, “Current global trends in energy supply and consumption are patently unsustainable.” If this IEA report is even partially correct we can expect an eventual surge in oil prices, and a consequent spike in demand for transportation based on electrons, not fossil fuels.
As noted, consumers are choosing more fuel efficient transportation even in a cheaper oil environment. They are likely doing this for reasons including: economic, environmental and geopolitical issues. According to a study from Thomas Weisel Partners and using Toyota, Honda and Ford hybrids- the payback periods for the hybrids without tax benefits ranged from 3.4 to 7.0 years. Clearly, driving habits, fuel prices and type of hybrid affect this equation significantly, but it is clear with existing vehicles that the premium for batteries is not too high to eliminate the economic benefit with today’s pricing assumptions for most consumers.
The problem for the battery sector right now is not competition, but manufacturing capacity. OEMs are hesitant to sign long term supply agreements with battery companies that do not have the capability to produce- while battery suppliers are attempting to raise cap-ex but need manufacturing capacity to prove they can produce revenues. In early August, the US administration proved their support to help overcome this chicken and egg issue by granting over $2B in funding to various battery companies like Ener1, A123 Systems and Johnson Controls Inc.
- Long term low oil prices
- Technological Issues (little improvement to cost or capacity)
- Supply Concerns (Raw materials and manufacturing capacity)
- Technological competition ( Improved NG cars, ultra capacitors, diesels or fuel cells)
- Larger market potential in consumer electronics, military applications & utility grid peak shaving
- Improving technology curve to help costs and increase capacity
- Growing consumer/govt. demand to minimize fossil fuel use
- Potential, future surges in oil prices
While transportation is the key to battery sector growth, commercial electronics, military applications and utility applications will only add to this very large market potential. The opportunities for companies vary as widely as do the battery chemistries, satisfying the unique characteristics of the automobiles and products that demand this product. The battery sector will have several large winners, and the race is just now beginning.
UPDATED (Nov. 18): See this report, published by the Electrification Coalition, which makes a very similar argument presented in a well organized PDF. The coalition is also blogged about by my colleague Sascha here.
4) Thomas Weisel Report, Race for the Electric Car, Spring 2009
DISCLOSURE: Author owns shares of Ener1