ENERGY WATCH #3 - October 23, 2018
he global EV-battery train keeps rolling on, with new investment and strategic announcements coming in every day.
For example, Dutch startup battery company Lithium Werks, founded by entrepreneur Kees Koolen, announced it has a signed a a 1.6 billion euro ($1.85 billion) deal to build a new storage battery plant in China.
Koolen told Reuters the agreement included project financing of 15-30 percent by Chinese or regional financing sources, 50 percent from development banks, and the remainder by Lithium Werks and its equity investors. The factory will be able to produce batteries with 500 GWh storage capacity per year by 2030.
The company’s focus is on lithium iron phosphate batteries which are the size of shipping containers. They are quick to charge and suitable for a variety of uses, including solar or wind farms, or in the shipping industry, writes Reuters.
Koolen “predicted the battery storage market would eventually be far larger than the market for electric cars.”
Another example: Tesla on 17 October clinched a deal for the acquisition of land in the Shanghai Lingang Equipment Industrial Zone to build its Gigafactory 3, reports Steve Hanley on Cleantechnica.
Tesla is pushing hard to get the Gigafactory 3 project moving forward, writes Hanley. “Thanks to the tit for tat trade war initiated by the current US president and his crack team of economic advisers, Tesla cars manufactured in America now must pay an import tariff of 40%, making it hard for them to compete against locally produced automobiles. Cars built in the new factory outside Shanghai will be exempt from that tariff.”
Hanley writes that China is about to launch a new policy that will stimulate EVs even more: “Tesla plans to be a major force in the Chinese new car market, especially as China institutes its latest EV policy starting January 1, 2019. After that date, every manufacturer building cars in the country will be required to produce a certain percentage of electric cars, known locally as new energy vehicles. Battery electric cars will get the most credits under the system. Plug-in hybrids will get a smaller credits.
Companies who wish to continue building cars with gasoline or diesel engines will be required to buy credits in order to do so. That will raise the selling price of those cars, making new energy vehicles more competitive in the marketplace.”
This kind of pro-active EV policy keeps many people in Germany awake at night. Signals from German automakers and policymakers on the EV revolution have been decidedly mixed.
Angela Merkel has indicated several times that she did not want to put too much pressure on the German car manufacturers and until recently resisted stronger EU CO2 emission reduction targets for the transport sector.
However, according to Zachary Shahan, editor of Cleantechnica, Merkel and her government have changed their minds. He notes that when it came to a vote in the European Council recently on a reduction target, “this was the first time when such a vote came up that Merkeldidn’t call the relevant EU policymakers in order to push for the weaker targets. In other words, through her silence on the matter, Merkel gave the policymakers nearly explicit permission to vote for the more aggressive targets.”
According to Shahan, “although this move (or lack of a move) by Merkel came as a surprise, it is not a huge surprise if you look back at a few statements from Merkel and her right-hand man, Peter Altmaier.
In April 2018, Altmaier, Germany’s Economy Minister, emphasized strongly that German auto manufacturers needed to invest into electric vehicle tech in the “two-digit billion amounts,” and noted that he wasn’t sure why there had been such a holdup on such serious investments. That “two-digit billion” figure didn’t even count batteries, which he said needed similar investments.”
In August 2017, notes Shahan, “Merkel stated that German automakers needed to “see the writings on the wall.” She added, “I cannot name a specific date now, but the approach [banning ICE vehicles] is right, because if we invest more in charging infrastructure and technology for e-cars fast, a general transition will structurally be possible. … Otherwise, foreign companies will come one day and show how it’s done, how e-cars are made. I would like to avoid that.” She also stated, in a speech in Dortmund, “Large sections of the auto industry have gambled away unbelievable amounts of trust. This is trust that only the auto industry can restore. And when I say ‘the industry’, that is the company leaders.”
With all this upbeat news, could there be a danger of overproduction of batteries? You would think not, but in a recent report, the Future of Battery Production for Electric Vehicles, Boston Consulting Group, notes that this indeed is very likely to happen.
Indeed, “a market model developed by BCG forecasts that global capacity for battery cell production will exceed market demand by approximately 40% in 2021 and exert tremendous pressure on cell prices”.
I should note, parenthetically, that I like the BCG’s free reports on energy much better than the ones put out by McKinsey. The latter are invariably behind the curve and offer few new insights to energy insides. BCG’s analyses are much more in-depth and often offer interesting insights into specific energy sectors.
This new report is no exception. Note that it is written from the perspective of battery producers, in alarming tones, warning of “overcapacity”. From the perspective of consumers, BCG’s findings are good news: they show that prices are likely to decline even more and more rapidly in the future.
How did BCG arrive at its conclusions?
There is certainly no question for BCG that EV sales will grow rapidly, as can be seen in this chart:
According to the report, the annual demand for battery capacity will increase from 70 gigawatt hours in 2017 to 800 to 900 gigawatt hours in 2030.
Nevertheless, the planned production increases of batteries will lead to overproduction, BCG finds: “In an effort to reduce cell production costs through economies of scale, leading battery producers have announced plans to add significantly more production capacity”, notes the report. “Such announcements have occurred frequently in the past year. For example, Chinese battery maker Contemporary Amperex Technology announced plans to build its first European EV battery factory in Germany, and US automaker Tesla has said it is considering opening a cell production factory in Germany. The largest cell production factories are planned for Asia, with Chinese manufacturers making the steepest increases in capacity.”
By 2021, about 40% of installed production capacity will be unused worldwide, BCG finds.
“Through 2021, the planned increases would more than double the installed global production capacity. Even though global demand for EV batteries is expected to rise significantly, it will not catch up to the planned production capacity in the near term. We forecast that by 2021, approximately 40% of installed production capacity will be unused worldwide. In China, this figure will exceed 60%.”
Moreover, BCG adds, “much of the newly installed capacity is intended to produce battery designs that will quickly become outdated.”
For battery prices, this is good news (from a consumer’s perspective). “In order to fully use their installed capacity, producers will need to slash battery prices”, notes BCG. “Indeed, we forecast that prices will decline by more than 50% during the next ten years. The solar panel industry provides a cautionary example: production overcapacity of 35% drove down solar-panel prices by more than 50% from 2006 through 2015.”
“The price decline will drive an equivalent reduction in the maximum manufacturing cost that allows for profitable battery production. By 2021, the cost per kWh will be $153, down from $195 per kWh in 2018. Previous forecasts had been much more favorable for producers. In 2010, the most optimistic cost forecast for profitable production as of 2021 was $270 per kWh. The 2018 figure is already 28% lower than the 2010 prediction.”
For battery manufacturers, there is only one thing to do, writes BCG: to start building “factories of the future”. The report describes in some detail what these will look like and how they will lead to further price reductions.
But that’s for producers to worry about. The rest of us may regard this report as another sign of the rolling battery/EV train.