Published April 17, 2023 | 3 min watch
Key Points
- The battery value chain will need a huge amount of capital to develop verticals like EVs and storage and grow critical mineral mining and battery production capabilities.
- Investment into mining is changing, with auto OEMs partnering with mining firms to ensure that supplies come online and they secure the batteries they need.
- The stationary storage battery vertical is growing fast, but it’s still a tiny fraction compared to automakers’ demand, creating interesting competitive dynamics in procurement.
In many ways, batteries are the key component for the energy transition. They will power transportation, replacing internal combustion engine cars with EVs. And they also have a vital role to play in helping to balance the load on the grid that will come from intermittent renewable power sources.
Billions of dollars of investment, if not trillions, will be required to scale from where the battery market is today to the size and efficiency that is required for this future demand. But accessing that funding is easier said than done, given the nature of the battery business today.
“The dilemma we're facing is that, as it stands today, these companies are mainly startups, and they would ordinarily appeal to VC-type investors. But you can't go and raise billions of dollars of capital from VC investors, who are writing cheques of the tens of millions. You need investors that are clubbing together to write tickets greater than $200-$300 million to ensure that these projects are fully funded,” Paul Betts, Managing Director in M&A Europe at RBC Capital Markets explained.
“You can't go and raise billions of dollars of capital from VC investors. Battery firms need investors that are clubbing together to write tickets greater than $200-$300 million to ensure that their projects are fully funded.”
PAUL BETTS, MANAGING DIRECTOR, M&A EUROPE, RBC CAPITAL MARKETS
Battery companies need to appeal to sovereign wealth funds, pension funds and infrastructure funds, but these investors have strict investment critieria that current battery companies don’t usually follow. What often happens is that the startup can’t get sufficient investment, fast enough, as the market saw with Britishvolt, which needed to raise $5.5 billion to bring 38 gigawatt hours of capacity online. Getting that kind of investment requires significant ticket sizes, and while infrastructure investors are working to understand the space, they are not yet comfortable with the risk-return provile.
Automakers team up with miners
For automakers, this difficulty in the early part of the value chain is threatening their ability to satisfy regulatory and customer demand for EVs, leading to a novel solution. In the last 12 to 24 months, car manufacturers have increasingly turned to partnerships with miners to secure the future volumes of nickel, cobalt, lithium and other materials they will need. RBC Capital Markets advised General Motors (GM) last year on its $79-million investment into Queensland Pacific Metals to secure supply of nickel sulphide. GM has also invested more recently into the Thacker Pass mine in the US.
“These cheque sizes are getting bigger and we’re seeing a lot more capital being invested through automakers into mining,” said Betts.
Investment is also heating up on the technology side, as new innovations and new chemistries are developing. Group 14 recently raised $600 million, led by its owners and decarbonization partners, and Form Energy, an iron air battery technology company raised $400 million led by TPG and GIC.
On the manufacturing side, however, the challenge is in finding the firm, binding offtake contracts that infrastructure investors are looking for. OEMs will sign binding offtake contracts once manufactures have completed abcd sample testing, but that process can take up to two years. The question is how you bridge the gap from starting up to the end of b-sample testing.
“What we are seeing now is that a lot of battery manufacturers are realising that utility companies are able to sign binding offtake contracts a lot more quickly, because the health and safety issues are not as onerous as they are for for mobility. And so from that perspective, batteries are pivoting towards focusing on stationary storage and supplying customers. Our Next Energy, a US battery manufacturer, for example, has announced a JV with Berkshire Hathaway to instal stationary storage capacity in their solar plant in the US,” said Betts.
The boom in stationary storage
In the next year, there’ll be around 27 gigawatts of capacity in stationary storage installed globally, which makes for an exciting marketplace for investors. But to put that in context, the top ten largest storage developers’ pipelines added together is still only around 10% of Volkswagen’s orderbook for batteries in the next three years.
“Clearly, automakers are really making a play into this space in a very serious way and then that leads to some interesting competitive dynamics for stationary storage players, particularly in procurement,” said Ross Board, Director in EMEA Energy Transition for RBC Capital Markets.
“Clearly, automakers are really making a play into this space in a very serious way and then that leads to some interesting competitive dynamics for stationary storage players, particularly in procurement.”
ROSS BOARD, DIRECTOR, EMEA ENERGY TRANSITION, RBC CAPITAL MARKETS
Countries that have been early movers in stationary storage, such as the UK, are also becoming saturated. The UK has nearly two gigawatts of installed capcity, built on a revenue-siupport contracts that reward for flexibility and response time from the national grid. But people are increasingly bidding into these contracts to the extent that it is reducing the price, exposing investors to merchant trading, which is a very different risk profile for a typical infrastructure investor.
