Renewable energy has long been held back by higher costs than traditional energy sources, but even as those have fallen the difficulties around intermittent power generation have created their own host of problems. Better energy storage would solve both problems by making load shifting strategies more practical, and according to Goldman Sachs analysts Brian Lee and Pat Archambault the growing popularity of electric vehicles is driving innovation.
“As demand for renewable electricity grows, we believe energy storage has the potential to serve as an increasingly disruptive force on a standalone and a complementary basis,” write Lee and Archambault. “Of the competing technologies, we see lithium-ion batteries (LiB) as having the most compelling near-term prospects given the potential for cost reductions driven by economies of scale tied to electric vehicle investments”, says Goldman in a report dated June 13th, 2014 titles “10 Questions Worth Asking”.
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Tesla has halved Lithium-Ion Batteries costs in the last four years
Tesla Motors Inc (NASDAQ:TSLA) has no choice but to focus on lithium-ion batteries production because the batteries represent both a significant production cost and performance factor for their cars, and it has managed to bring down the price per kilowatt-hour (kWh) by half in just four years with plans to half the cost again when its gigafactory comes online in 2020. As electric cars become more affordable, demand should grow opening the door for even more economies of scale.
Even so, Lee and Archambault calculate that integrating lithium-ion batteries into the energy grid to take advantage of still carries more than a 100% premium, ignoring government premiums. They expect slow adoption over the next few years (partially driven by subsidies and regulations) that accelerates as energy storage costs continue to fall.
Tesla Motors Inc (NASDAQ:TSLA)’s decision to open its patents to competition could speed up this process both directly by giving a technical boost to lithium-ion batteries manufacturers and indirectly by helping their rivals produce better electric cars (and increasing demand for lithium-ion batteries).
May be too early to make an lithium-ion batteries pure play
Tesla Motors Inc (NASDAQ:TSLA) has plenty to gain from these trends, but seeing as how the best case scenario is already priced into the stock, it’s probably not the best way for an investor to make a lithium-ion batteries play. Of lithium-ion batteries manufacturers and suppliers, Lee and Archambault only rate Samsung SDI Co Ltd (GR:XSDG) as a Buy, though Neutral-rated Polypore International, Inc. (NYSE:PPO) and Panasonic Corporation (ADR) (OTCMKTS:PCRFY) (TYO:6752) both stand to benefit as well.
Another approach is to invest in lithium producers like Rockwood Holdings Inc (NYSE:ROC). There’s currently an oversupply of lithium on the market keeping stock prices low, but when demand does eventually hit an inflection point and supply falls off its strong market position could be a boon for investors. Unfortunately, Lee and Archambault don’t expect that to happen for the next few years.