Title: The State of Energy Storage
Speakers: Dan Anziska and Vaughn Morrison
Dan Anziska (00:08):
Everyone’s talking right now about the renewables supply chain of the future a few years from now. But what about today in a year from now? What do you see going on?
Vaughn Morrison (00:24):
Well, right now, most of the supply is coming through China directly or indirectly in some form. Although many of the raw materials are available in South America and other countries, most of the cell manufacturing is done by a handful of suppliers in China, even where supplied through US domiciled suppliers. So right now there’s a heavy concentration in lithium ion and cells provided by or through Chinese suppliers.
Dan Anziska (01:01):
What are the main issues right now with China suppliers?
Vaughn Morrison (01:07):
It’s all centered around change in tariffs, change in law risk. It should surprise no one to know that relations between the US and China on a trade level and in any number of ways are not at their healthiest point. That coupled with the fact that the White House across administrations has felt that energy and energy storage in particular represents a national security issue, creates a heightened regulatory risk around that Chinese source of supply.
Dan Anziska (01:47):
But isn’t there a tension in that? Because doesn’t the administration want increased reliance on renewables energy? But to get there today and tomorrow, don’t you really need to rely on these Chinese suppliers?
Vaughn Morrison (02:04):
There’s no alternative today and in the immediate future. So it is a paradox for this administration and it’s something that they’ve attempted to address through some specific provisions in the Inflation Reduction Act and other legislative initiatives. But building out that domestic supply chain takes time. So for now, developers who are successfully implementing energy storage projects in the United States are doing so with some exposure to US-China trade relations.
Dan Anziska (02:37):
Are you seeing that there’s short-term winners and losers, larger storage companies are getting access to supply, whereas the smaller or newer entrants are struggling?
Vaughn Morrison (02:52):
Absolutely. Getting the attention of a major supplier, a credible supplier requires a big commitment, big financial backing. And that absolutely favors the big buyers.
Dan Anziska (03:05):
Let’s talk about Inflation Reduction Act. Briefly, if you’re a potential investor looking into the US marketplace, what would you identify as the three biggest benefits that the IRA provides?
Vaughn Morrison (03:24):
By far the largest benefit is the availability of the investment tax credit for energy storage, which is a 30, 40, even 50% tax credit applicable to standalone storage that didn’t exist prior to the Inflation Reduction Act. That together with some of the adders to the investment tax credit for domestic content, I think will help onshore some of that supply chain and improve supply chain stability for the entire industry. Those two things I see as the biggest benefits of the Inflation Reduction Act for standalone storage. So how are our domestic supplier clients looking at the opportunities under the IRA?
Dan Anziska (04:13):
It’s a great question because taking a step back for 30 to 40 years, cell production, battery production was almost exclusively done abroad. You mentioned China earlier. A lot of it was in China, also some in Japan and Korea. And certainly at the component and the raw mineral level, all of that was done abroad. So the IRA in combination with the bipartisan infrastructure law that was passed also last year, have provided all sorts of tax and other grant and loan benefits to domestic suppliers. That being said, this country has all sorts of regulations, both on the federal as well as the local level that one needs to address. It goes from siting a potential factory or an extraction site. It goes to all sorts of provisions that the Department of Energy will rely on in terms of accessing grants and loans for the suppliers. So it’s a complicated process.
And then there’s the issue of actually building a massive factory and deploying hundreds of laborers with a multidisciplinary skillset. So our clients on the supply side are seeing perhaps a three to five year horizon on average to actually get a gigafactory up and running. So flipping it back to you, you have to handle the hard stuff. That’s great in five years from now if everything goes to plan. But how do developers and manufacturers of automobiles address this present to five year conundrum?
Vaughn Morrison (06:35):
Yeah. It is time sensitive because there are certain markets like ERCOT where the grid transforming so quickly that a standalone storage project is worth half of what it’s worth today in only five years. And for folks whose revenue model relies on those kinds of merchant revenues, you have to work with lithium ion batteries produced largely in China. And there have not been significant issues clearing customs with those modules to date, but anyone who’s been following the Uyghur Forced Labor Prevention Act or other US-China trade policy relating to cybersecurity knows that the other shoe could drop at any time. And that’s one of the risks you run and is inherent in the energy storage industry in the next three to five years.
Dan Anziska (07:39):
The most significant combination of grant and loan programs really began last year under the bipartisan infrastructure law. And the focus has been on battery supply chain. Now, the US auto manufacturers, including companies like General Motors and Ford, and of course Tesla, have been focusing on developing their own lithium ion batteries for some time. So what we’ve seen in the past year has been a combination of players seeking grants and/or loans from the Department of Energy all the way from the top, from the OEM level for batteries they’re not getting loans or support to build their vehicles themselves to the main components which are anode, cathode separator, as well as the lithium and the metals themselves that are relied on in the batteries. And the vast majority of folks who have received loans have been US companies, though there are a few foreign-owned companies, but it’s been mostly, I would say, 75 to 80% US owned.
Some of these companies are real kind of emerging startup types, but for the majority of them, there is an established record. And that would be our client Albemarle, for example, who has been a well established US lithium company for a while. Our client Entec, which has been for a while an established US battery separator manufacturer. So those guys have gotten grants. And I’d have to double check in terms of loans kind of where that is in the process because the loan is kind of a more complicated application process. You’ve also seen anode and cathode producers. You’ve seen producers of the metals themselves getting grants in loans. And then you’ve seen almost most interestingly companies like Redwood Materials getting massive loan guarantees for recycling of spent lithium ion batteries. So it really is at the component level, I would say, of the batteries as well as at the what’s known as the raw material level.
But it’s really the metal level or the mineral, rare earth minerals. People call them different things.
Vaughn Morrison (10:28):
Let me ask you, do you think there is actually the political will in the US to onshore the raw materials extraction process? Just given the permitting challenges those types of projects face?
Dan Anziska (10:41):
There’s that. And then there’s the other challenge, which is like finding the stuff, finding the workforce to actually do the extraction work. You’ve mentioned the permitting and the siting. So a lot of the areas where that is occurring are already permitted for mining and actually often it’s mines where other extraction occurred. But it’s very complicated because of those local permitting issues. And then the question becomes if you can get the extraction from a aligned country that is covered under the IRA, under the domestication provisions, like a Mexico or a Canada, for example, and the cost there is much lower and the infrastructure to extract is greater, why not just get it from one of these other locations?
Vaughn Morrison (11:36):
Yeah. So in the DOE grant process, what is the DOE really looking for there? Is it a market establishment or is that presumed? Or is it really more of a technology track record?
Dan Anziska (11:51):
I think in terms of the technology, it’s interesting. All of these lithium-ion battery and component companies will certainly claim, and I think rightfully so, to have technology patents as well as know-how. And that’s all important, Vaughn. It’s not easy to build things like anodes and cathodes and separators. That is a misnomer. That is complete commodity. Anyone could start it up. You really, it takes a long time to have a track record. The qualification processes are long. They’re a year to two years often by battery manufacturers. The cycle’s longer for vehicles because obviously you don’t want your car battery stalling out in six months. Shorter for utility scale generally. But these are very complicated. What the DOE will say it’s looking for is an established business that will not embarrass them where they give money and a year or two later the company’s in bankruptcy because it just doesn’t have the track record and relationships and frankly, controls to run the business.
But there’s other things they’re looking for. And I’ve routinely had these conversations with clients, which is it’s great to get free or very low interest money, especially in this higher rate environment from our government. But there are strings attached. You have to use prevailing wage rates for the construction itself. There are ESG requirements that are tracked. There are other community benefit agreements and other supports for the local community if you’re going to be citing a mine or a gigafactory. The expectation is that you as the loan recipient or grant recipient are going to be swimming in the same general direction as this administration’s focus. And companies have to understand that. I think there’s been good buy-in on both sides recognizing that companies can overall achieve what this administration really wants, which is they don’t just want companies building this stuff. They want it to be beneficial to the local community.
But at the same time, the administration, I believe, is getting more nuanced or sophisticated right now in its assessment, recognizing you need established business people track record.
Vaughn Morrison (14:46):
Well, you mentioned the expectation of commitment benefits to the surrounding community. That does seem to be a theme throughout the Inflation Reduction Act, and much of this administration’s industrial policy, which at least I’m hopeful actually makes this a stickier set of policies in that it brings in the community so that there’s more stakeholders that would prevent an adverse change in law in the next administration, and would otherwise support the policy environment in favor of renewable energy.
Dan Anziska (15:20):
It’s a great point, Vaughn, and the vast majority of the sites that have been for the companies that have been awarded these grants are in so-called red states. So you are seeing more of a bipartisan acceptance of the benefits of these programs. So I agree with you, that’s a good development if both sides support it. Vaughn, thanks so much for this conversation. It’s always great chatting with you about these cutting edge issues. Wish there were more concrete answers, but we will continue to track.
Vaughn Morrison (15:57):
Thanks, Dan. Great chatting with you as always.
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