Battery prices are collapsing. Here’s how to profit

All of a sudden, the price of lithium ion batteries is collapsing. Here’s how you can profit.

All of a sudden, the price of lithium ion batteries is collapsing.

It’s collapsing because giant new battery factories are starting to come on stream. Tesla’s “gigafactory” in the Nevada desert gets most of the publicity. But that’s just one of them. Big Asian producers like LG, Samsung and Panasonic have built gigafactories of their own. And even though a few of these factories aren’t finished yet, battery prices are falling fast.

Larsh Johnson is the Chief Technical Officer of an energy efficiency business called Stem. He says he’s paying 70% less for batteries than he was 18 months ago, and he expects to save a further 70% in the next 18 months.

Big price drops are always exciting. Let’s tease out how investors can profit from this one.

The fall in battery prices has created winners and losers.

At least in the short run, battery manufacturers lose out. They make less money on each battery they sell. They’ll be hoping that falling prices spurs more demand for batteries, as consumers figure out new uses for them (more on that later).

And falling battery prices are great news for consumers, and for a lot of companies. Back in December I wrote about complementary goods. They’re things that get more valuable when the price of something else goes down. Here’s what I said then:

A complementary good is one you normally use together with another good. Sky subscriptions and TVs are complements. So are petrol/cars, builders/concrete, computer hardware/computer software, and houses/mortgages.

All else being equal, demand for a product increases when the prices of its complements decrease.

For example, if a new airport makes it cheaper to get to Cornwall, demand for hotels in Cornwall goes up. More people are flying to Cornwall and need a room. When computers become cheaper, more people buy them, and they all need operating systems, so demand for operating systems goes up, which means the price of operating systems can go up.

Batteries complement lots of things – mobile phones, laptops and electric cars for example. But I’ve been looking at one business in particular which will really benefit from falling battery prices: commercial energy storage.

Commercial energy storage is about private businesses using batteries to help manage their power needs. It’s an old idea. But given all the changes we’re seeing in the battery industry, it’s starting to catch on.

A few companies have been using batteries for years to protect themselves from power cuts. But that’s not the main “use case” for commercial energy storage.

Companies mainly buy batteries to cut energy costs. Like a high-tech storage heater, a commercial battery charges up during off-peak hours when electricity is cheap, and then draws down during peak hours.

You might have heard of Tesla Motors’ Powerwall. The Powerwall is basically a giant battery you keep in your garage. You use it to store electricity from solar power, or to store cheap off-peak electricity.

Commercial energy storage is basically the exact same as the Powerwall, but it’s for businesses. Commercial batteries is a hotter area than residential batteries because businesses are better able to afford the up front cost of a battery, and because they’re more likely to need one.

Fast forward to 2021…

Rav Manghani, an energy analyst, has been looking at the commercial storage market, and he reckons things are about to get interesting. He looked at a sample of 102 medium and large energy customers in the US (in the US, the States have their own electricity market and pricing).

He says at the moment, commercial storage only makes sense in the seven most expensive energy markets: Hawaii, California, Massachusetts, Kentucky, New Hampshire, Michigan and New York. In those markets, the investment in a battery repays between 5-10% per year.

But because the price of batteries is collapsing, that’s about to change. By 2021, he says, commercial energy storage will make sense in lots more markets.

Energy companies are closing in on the commercial battery market. Sonnen, which is mainly focused on residential customers, has started to move into the commercial space. And Greensmith, which is focused on big industrial customers, is beginning to market a commercial battery too.

SolarCity, Elon Musk’s solar energy company, is a big player in commercial batteries too. Musk’s Tesla Motors is planning to buy SolarCity. He’s trying to make the case to his shareholders that batteries and solar cells and electric cars are complementary – that customers will walk into a Tesla showroom and come out with a full end-to-end energy and transport setup, from solar to battery to Tesla vehicle.

I won’t weigh in on Tesla and SolarCity right now. That’s a story for another day. But I’m interested in the commercial battery market, in the US, the UK and other markets. Average energy prices in the UK are almost twice those in America, which would make batteries even more attractive over here.

The economics of this business are attractive, and getting better.

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