BNY Mellon Investment Management
From oil to batteries: Why battery storage?
Paul Flood, Head of Mixed Assets at Newton Investment Management, a BNY Mellon company
Paul Flood highlights battery storage as a key investment area for long-term returns.
The correlation between CO2 emissions and rising temperatures and sea levels is an uncomfortable truth. One that Paul Flood, head of mixed assets at Newton, says should not be ignored from an investment standpoint. As much of the world agrees with the transitions needed to change our legacy energy framework, various government subsidies and incentives have focused on the green agenda. This has subsequently created economies of scale in hydro, wind and solar energy sectors, and created new sectors entirely.
Since 2018 there has been an influx of global green investment across a variety of sub-sectors. The interest in investing in “clean” assets is not just part of a strategy to back areas of growth, Flood stresses the importance of being part of the solution to climate impact.
Inefficiency in renewable energy sources
While there have been successes in global efforts to transition to cleaner energy, there are still problems to be solved.
While renewables such as hydro, wind and solar are integral to meeting a net zero future, he says, they are not faultless in their design. Flood illustrates this with the solar power duck curve.
“With solar energy you get huge amounts of electricity generated for short timeframes in the middle of the day when there’s not a lot of demand,” explains Flood. “As a result, utility companies see a massive drop in demand at midday. Then in the evening the TVs and kettles are switched on and demand surges. It’s very inefficient.”
In the quest for a more renewable future, Flood argues energy loss is a problem that needs addressing. Enter battery energy storage systems (BESS).
Reportedly BESS can aid in making renewable energy more efficient – by capturing energy and storing it in rechargeable batteries – a problem that as renewables continue to grow in dominance will become more pronounced.
Commodities and geopolitics
The BESS investment space is not without problems or competition.
There were an estimated 10.3 million EVs sold globally in 2022. That figure is expected to increase to 45.4 million by 20301.
With EV and battery production set to increase, a race to obtain the natural resources needed is underway as identified by Newton’s resource competition sub theme.
Yet a challenge is that technology is constantly evolving. But this doesn’t negate opportunity. For example, Flood notes with BESS construction, the advancement into higher nickel content batteries allows for better range and faster charging.
Between 2020 and 2030, nickel demand is projected to go up 15 times over the next decade, while lithium is projected to rise by 14 times1.
In 2023, only 5% of the global nickel supply is expected to be used for batteries. As BESS and EVs continue to grow over the next decade, Flood expects that figure to increase to just under 40%.
“The problem with nickel is that there are few areas that you can get it,” says Flood. “One of them is Russia, so we need to think about the implications of further sanctions on Russian exports.”
Flood stresses that if nickel sales were banned out of Russia it could cause significant problems. Another location Flood highlights is Indonesia which is tied with Australia for global reserves. The country produced 1.6 million tonnes in 2022, more than any other country.
However, nickel mining in Indonesia is opposed by several environmental groups due to the resulting pollution of oceans. Alongside these concerns, Flood highlights the process of High Pressure Acid Leaching (HPAL). This is when low-grade nickel is refined into high grade class one nickel, which is what is needed for batteries.
“The problem with [HPAL] is it’s very carbon intensive. There are a lot of environmental concerns with Indonesia, given the impact on coral reefs,” says Flood. “We have to ask; Are our EV and green companies willing to see the carbon intensity of their product increase dramatically?”
The renewable sectors have seen intense and decarbonisation industries, in line with Newton’s natural capital micro-theme.
“We think BESS manufacturers – such as Samsung SDI – will be the key winners in this race,” says Flood. “It doesn’t matter who wins the EV race, you need a battery to power an electric vehicle.”
Source: Bloomberg New Energy Finance. Includes renewable energy, nuclear, hydrogen and energy storage
The value of investments can fall. Investors may not get back the amount invested.
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1, According to data from Rho Motion, Macquarie Commodities Strategy, March 2023
For Professional Clients only. This is a financial promotion and is not investment advice.
Any views and opinions are those of the investment manager unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.
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