Will Batteries Follow The Same Cost Curve As Solar PV?
The renewable energy industry, and the solar sector in particular, is hailing the arrival of battery storage as the next major driver of exponential growth. Battery storage complements energy-generating equipment like solar panels and wind turbines by providing control over the timing and volume of energy exports and imports to and from the grid, thereby mitigating the intermittency issues of solar and wind. High penetration of solar projects in certain regions has caused a depression in wholesale power prices during daylight hours (i.e. the duck curve in California), which limits the value of adding more solar by itself because it will just produce more energy at the same, now much less valuable, time. Adding storage to the generating plant allows the energy produced to be "time-shifted" to a more valuable part of the day.
On the utility side, proponents are starting to anticipate the day when natural gas-fired peaker plants are made obsolete by solar + storage power plants which can perform the same function, i.e. start and stop on demand.
The key to batteries delivering on these promises is the expectation that their cost will decline dramatically, much like the cost of solar has in recent years. Having witnessed an exponential decline in the cost of solar photovoltaics (PV) due largely to vast increases in production scale, many people assume a similar trajectory for batteries. But is it safe to assume this will happen?
Solar PV
First let’s see why solar went on the trajectory it did. Solar was a niche market until about 10 years ago. The manufacturing base was small and the upfront production cost was far too high to compete on an industrial scale with fossil fuels, hydropower, and even wind power. The latter half of the decade saw a huge run-up in the price of polysilicon, the key component of solar cells:
Source: Bloomberg News / The Washington Post July 23, 2013
This huge increase in the price of a key component actually was the catalyst to the emergence of solar as a major industry, because the price signal unlocked vast quantities of supply that brought the cost down dramatically as can be seen in the above chart. This was possible because a huge, robust, mature supply chain already existed to deliver the same commodity to the semiconductor market – huge foundries run by the likes of Taiwan Semiconductor and Intel that build integrated circuits at incredibly massive scale. High-purity polysilicon happens to be a major component of both semiconductor devices and solar PV, and thus the suppliers are the same.
In 2008, the American producer Hemlock was the largest silicon supplier to both the solar and semiconductor industries. Hemlock and five other large producers—Wacker, REC Silicon, MEMC Electronic Materials, Tokuyama, and Mitsubishi – expanded capacity at that time. The result was a massive and rapid increase in global production capacity:
190,000 megatons in 2010 was a 90% increase over the year before.
This expansion occurred even before China got into the game. Overall from 2005-2015, 60-80 emerging small and medium-sized producers entered the polysilicon market. The Wall Street Journal reported that between 2010 and 2017, the U.S. share of polysilicon production fell from 29.1% to 11.3% of the global total. As of the end of 2017, the Chinese have about 319,000 megatons of poly capacity, or 70% of the global total according to Bernreuter Research.
This massive expansion of an already well-developed supply chain was enabled at least in part by the fact that silicon happens to be the most abundant material on earth! It is readily available all over the world and easy to process.
Batteries
Now let’s consider the battery industry. Lithium-ion has come to the forefront as the main technology. Recent history shows an encouraging cost curve:
There are indeed a few parallels with solar PV which would support the notion that batteries are on track for continued significant cost declines:
1) As with polysilicon, the supply chain originated a while ago and a parallel industry is driving its continued development. Lithium-ion batteries were first made for consumer products (computers, cell phones, etc), and now the main driver of production is the electric vehicle (EV) industry.
Yoshino, A. 2012. The Birth of the Lithium‐Ion Battery. Angew. Chem. Int. Edit. 51:5798–5800
Most experts have aggressive growth forecasts for EVs for the foreseeable future as countries move towards tackling the climate change and pollution-related problems of internal combustion cars and trucks.
2) There is a price signal from a key commodity input – lithium - that could garner more production of the input:
3) Some Chinese companies are aggressively expanding battery production. BYD Co (ticker BYDDF for the H shares in Hong Kong / BYDDY for the ADR) is the world’s largest supplier of batteries for mobile phones and also the largest manufacturer of EVs, and it plans to expand its battery production capacity from 28 GWh this year to 60 GWh by 2020. CATL (publicly traded but only in China) is a battery manufacturer with 17 GWh of capacity currently that is building a new facility with a planned capacity of 24 GWh by 2020.
Furthermore, these companies ought to benefit from the fact that China has significant lithium reserves:
The established outlook for the battery market is a reflection of the positive indicators summarized above. Bloomberg New Energy Finance predicts a 66% fall in the cost of lithium-ion batteries between 2017 and 2030.
However, there are certain important issues to consider which indicate that storage and solar PV may not be on the exact same glide path:
1) Cobalt, another key component of the version of lithium-ion battery technology primarily in use today, is concentrated in Congo. The global supply of cobalt sourced from Congo in 2017 was 66% according to Benchmark Mineral Intelligence. An investigation by Amnesty International in 2016 discovered child labor present in every stage of mining cobalt, and the latest research by the United Nations Children's Fund (UNICEF) estimates 40,000 children are working in these mines. The country itself is very politically unstable - millions of people have been displaced and thousands of refugees are fleeing to neighboring countries. If that isn’t a bad enough backdrop for producers, the government passed a law early in 2018 raising royalties on minerals across the board. Royalties on cobalt specifically could go up 5x if the government designates the metal as a strategic substance.
2) Chinese lithium deposits are relatively expensive to extract and process versus other reserves around the world:
3) The basic design of lithium-ion batteries may not allow for much more fundamental improvement. In an interview that Greentech Media conducted with Ted Wiley, who built the energy storage business at Tesla, Wiley stated – “Our view is, just from a chemical standpoint, [lithium-ion] is not capable of declining another order of magnitude”. Wiley is now working on developing super long-duration storage using other technologies.
4) Although it is the leader for now, lithium-ion may not end up being the final dominant battery technology. Currently the main potentially competitive alternative for powering cars is hydrogen fuel cells, an application which is being developed and commercialized by at least Toyota and Honda. Development and roll-out of hydrogen vehicles is at a much earlier stage than lithium-ion EVs, but hydrogen has at least one key advantage in that these fuel cells charge up much more quickly than an EV battery. It is interesting to note KPMG’s Global Automotive Executive Survey of 2017, where 72% of auto executives stated a belief that battery EVs will fail because the problem of charging time is just too important. 78% of them believe that fuel cell vehicles will be the “golden bullet” solution. This is the current opinion of 1,000 executives throughout the global automotive supply chain (i.e., the decision-makers).
Also, there are alternative designs of lithium-ion battery systems that do not use cobalt, which would be good for eliminating Congo from the supply chain while not representing an abandonment of lithium-ion technology. But even transitioning to a technology that is similar but with key fundamental differences in chemistry will necessarily slow down the growth as suppliers and manufacturers have to develop new expertise, retool factories, and adjust their processes.
Conclusion
The battery industry has momentum and factors working in its favor. Power markets will increasingly benefit as energy storage is added to the electricity grid, both in conjunction with renewable energy systems and on its own. However, projections that figure the cost of battery systems will follow a similar path as solar PV did over the past decade-plus are likely too optimistic. Solar PV benefited from a long sustained period of consistent cost declines because it was extremely lucky to grow out as a byproduct of semiconductor manufacturing, perhaps the most ideal supply chain that exists in any industry. No alternative technologies to polysilicon or thin film PV rose to compete on a commercial scale, and no unique challenges prevented China from stepping in to apply state support and scale production to new heights. We cannot expect every industry to benefit from such a fortunate combination of factors, let alone for as long as solar PV has enjoyed it.
Sources:
https://about.bnef.com/new-energy-outlook/#toc-download
https://worldview.stratfor.com/article/how-china-muscling-lithium-ion-batteries
https://www.wsj.com/articles/will-new-tariffs-hurt-the-u-s-solar-power-industry-1510628400