Wall Street analysts are once again cautioning the market not to underestimate distributed energy technologies. Over the years, Goldman Sachs, UBS and Morgan Stanley have all warned investors about the disruptive potential of wind, solar, batteries and electric vehicles on energy markets.
This week, Morgan Stanley says the growth of battery storage is "underappreciated" by many in the electricity business.
According to a new report from the firm, the U.S. addressable market for energy storage totals $30 billion without significant regulatory change. If the Federal Energy Regulatory Commission clears the way for storage deployments in deregulated markets, though, the storage market could become 70 percent larger.
That's bad news for companies with lots of natural-gas generation in markets favorable to storage, but good news for Tesla and LG Chem, which the analysts predict will control the industry.
Equity analyst Stephen Byrd and his co-authors calculate the actual annual demand for storage will rise from less than $300 million currently to $2 billion to $4 billion by 2020. For comparison, GTM Research pegs the U.S. storage market at $408 million for 2016, growing to $2.1 billion in 2020. That puts the Wall Street titan on roughly the same page as the clean energy research specialists when it comes to the growth of energy storage.
That's worth taking a moment to absorb.
One of the key obstacles storage vendors have encountered is a lack of access to capital for investment and project financing. Most banks have been leery of putting their balance sheet behind newly developed chemistries from companies that have only existed for a decade or less. With firms like Morgan Stanley offering stock assessments based on an expanded market for energy storage, new sources of capital could soon be opening up for battery makers.
The question, then, is which ones.
The authors think the market "will be dominated by two suppliers, Tesla and LG Chem," due to their prominent roles currently and their immense production capacity coming on-line in the next few years. The base case has Tesla reaching 30 percent U.S. market share, and the bullish case puts it at 50 percent.
This framing ignores a bustling menagerie of battery companies all jostling to break out, however. Tesla certainly has a lead on U.S. manufacturing with its Gigafactory, but it seems premature to crown it the king just yet. To take one example, utilities need to see how Tesla's Powerpack batteries hold up to real-world cycling in the field. If issues arise with the initial round of utility-scale battery deployments after a few years, it could hamper the company's market dominance.
There are also more competitors with massive production facilities. Mercedes-Benz, for instance, only recently entered the U.S. market, but has invested 1 billion euros in scaling its battery factories. Like Tesla, Mercedes-Benz aims to ride the coming wave of electric-vehicle sales to scale its stationary storage business.
There are also other established Asian mega-producers like LG Chem. BYD, Toshiba, NEC and Samsung SDI all rank highly in global storage deployments. It's true that LG Chem has a production base in Michigan to supply American electric-car makers, and the political winds are blowing in the direction of "Made in the USA." But those competitors enjoy similarly large factory facilities and global distribution networks, and should not be discounted.
Readers of the report could walk away with the impression that lithium-ion is the only game in town.
Flow batteries haven't posted the kind of run time that lithium-ion batteries have, and big capital wants to see more operating data before opening the checkbook. Proponents of this technology, though, think it is ready to carve out significant market share from lithium-ion for longer-duration applications.
Lithium-ion accounted for 96.2 percent of the U.S. market in Q3 2016, so alternative chemistries are unlikely to play a dominant role in the market by 2020. But they could develop into a more substantial role in the years beyond.
The authors observe that utilities will drive most of the storage sales: "There are numerous customer benefits that a utility can factor into its decision to invest in storage, and this 'scope of benefits' is, we think, much broader than the scope of any other business model."
Utilities are in a position to pay for multiple uses of batteries for the grid -- to integrate intermittent renewables, to defer transmission upgrades, etc. -- that improve the economics compared to what a merchant developer can monetize. The use applications of utility storage are becoming clear in California, thanks to a state mandate of 1.3 gigawatts of storage by 2020.
The Morgan Stanley analysts address the impacts of the storage surge in their evaluation of Calpine, which owns a fleet of natural-gas plants in California. "We expect the state to increase its current storage procurement targets, reducing the need for conventional gas generation. As a result, we are taking a more conservative view on CPN's California fleet."
The upshot: The authors reduced their price target for Calpine from $18 to $13.
This doesn't mean it's time to run out and buy any battery company stock you can get your hands on. But the analysis does indicate that advanced batteries are starting to shift investor calculations on the future profitability of certain fossil-fuel generators.