The revolution in energy grid and battery technology is happening at lightning speed — though you wouldn’t guess it by the recent reaction of the stock market.
January’s sell-off in growth stocks hit much of the battery sector hard. But the markets are fundamentally short term by nature and the revolution is taking place before our eyes. You’ll see it, of course, in the growing number of electric cars on the road. Who would now buy a hybrid, I wonder?
From another perspective, the pace of change is apparent to me as a non-executive director of the fast-growing listed fund Gresham House Energy Storage (Grid) — a fund in which I also own shares.
Grid, like its peers Gore Street and Harmony, invests in alternative infrastructure projects, in this case containers full of lithium-ion batteries hooked up to the National Grid. These batteries help smooth out the variable flow of electricity generated by wind turbines and solar panels.
All three funds are growing like gangbusters. Capacities at sites in Grid’s portfolio, for instance, are forecast to more than double this year. But their pace of growth will still lag behind the spiralling demand for UK renewable energy generation.
Ben Guest, fund manager at Grid, told me there’s a mismatch between the growth rate in intermittent renewables and battery storage.
“We currently have around 1,400MW of operational batteries in the UK in total. By comparison, deployment of renewables is in the range of 2,000-3,000MW per annum. While the need for batteries doesn’t increase one for one with the increase in renewables, it is clear that battery deployment has not kept pace with renewables,” he said.
Despite the market sell-off, battery technology remains by far the biggest area for investment in the energy transition story — one that is incredibly well-funded, not least by all those volatile new issues and special purpose acquisition companies (Spacs) such as Nio and Rivian.
For UK investors, many of the most interesting direct plays in utility-scale battery production are inaccessible, either because they are Chinese or listed on hard-to-access Australian and Canadian exchanges. In many areas, the Chinese increasingly dominate.
Guest at the Grid fund, a big buyer of batteries, says he sees little prospect that China’s position at the forefront — with market share of around 80 per cent — will change. “CATL and BYD [Chinese battery makers] and other companies are adding manufacturing lines at an incredible rate,” he says.
That doesn’t mean it’s too late for the European newbies, such as Britishvolt, whose plants are still a couple of years away. But the Chinese are not waiting for the competition to come to them. Ganfeng Lithium, for instance, has been active in the hunt for acquisitions, bidding for development projects in Mexico and Argentina and securing agreements on buying up output from Australian and Malian projects.
If this wasn’t complex enough, buyers and vendors are clear that input costs are increasing and order backlogs are building up. Will Smith runs the Westbeck Volta Fund, an active equity fund, and his long-short strategy includes not only the technology players, but the miners.
To him the cost pressures are increasingly obvious, with raw materials in high demand, supply chains hit by the pandemic and political challenges around some mining operations, particularly lithium.
While there is no shortage of lithium in the Earth’s crust, he says, it will take investment and time to unlock it. “We think it takes upward of four years for a greenfield lithium project, either brine or hard rock, to produce a material acceptable to the cathode or battery maker’s specification.”
Alternatives to lithium may emerge but I wouldn’t hold your breath. No one I’ve talked to thinks any sensible competition is close. Solid state technology is the next frontier in battery technology but, as Smith says, it has been coming “next year” for the past five years.
So how should investors proceed with what I think is only the first stage of structural changes that will span decades? The listed grid-scale energy storage funds are all sensible, income focused, relatively boring ways of playing this space — compared with Tesla and Nio, that is. But both the grid storage and car manufacturers represent just one dimension of a fast-evolving ecosystem. A broader mix comes from including miners as well as materials processors and technology companies.
In this space there are two well-established UK-listed battery funds from LGIM and Wisdom Tree and both do their best to include a full range of businesses, though with very different core holdings. The inclusion in their portfolios of TDK (in the case of Wisdom Tree) and ABB and Lockheed Martin (for LGIM) does somewhat dilute the pure battery story.
A new entrant to the ETF market comes from VanEck, which has just launched a rare earth and strategic metals fund. The underlying index for this fund was up 82 per cent in 2021 has Australian (mostly mining) stocks at 43 per cent of the holdings and Chinese stocks at 22 per cent. The US is just 12 per cent.
Another product worth watching is from Global Palladium Fund, which has just launched — in Italy — the first physically backed ETC focused on the key metals used in electric vehicles such as copper, palladium, nickel, cobalt and platinum. I’d wager that a London listing is not far away.
The last option is to buy directly into individual stocks. A good place to start is to hunt through the top holdings in Smith’s Volta fund, which include Pilbara Minerals, an Australian lithium and tantalum miner; Wolfspeed Inc, a silicon-carbide semiconductor manufacturer which makes the crucial component of fast-charging technologies essential to consumer acceptance; and Core Lithium, an Australian miner of low-cost spodumene, a source of lithium.
Last but not least, Neo Performance Materials. This Canadian listed business runs a rare earth processing operation in Estonia, targeting the European market. According to Smith, Neo offers the potential for “transformational growth” and the stock is currently “underpriced”.
So perhaps the aggressive sell-off is a chance to think again about the energy transformation story and buy back into a revolution that isn’t going away. Next time I’ll look at another huge disruption coming our way — increased carbon prices.