AI boom powers rivals to Tesla’s battery storage business

Hello from New York. Europe today is coming to grips with the significant wins by far-right parties in the EU elections. As our colleagues reported on Sunday, “kiss goodbye to the European Green Deal”. While the significance of these elections is still being understood, they could deal a major blow to renewable energy and sustainable investing on the continent that is the world’s leader in both.

For today, I have an article about one aspect of renewable energy that does not get much visibility: storage. And while we might associate batteries with electric vehicles, batteries are crucial to increasing electricity demand as well.

Thank you for reading. — Patrick Temple-West

Battery storage companies are booming, but can they catch Tesla?

When most people think of Tesla they picture its electric cars (or maybe a Cybertruck. I saw my first in New York last week). And when most people think of Tesla’s competitors, Ford, General Motors and other auto manufacturers come to mind.

But not Julian Nebreda, chief executive of Fluence Energy, a Virginia-based, publicly traded energy storage provider. “Tesla is probably our biggest competitor,” Nebreda told me. It is all due to Tesla’s significant — and perhaps under-appreciated — battery storage division.

Tesla launched a battery storage business in 2015. In April this year, Tesla reported record energy storage revenues of $1.6bn for the first quarter. “Energy generation and storage remains our highest margin business,” the company said in an earnings report.

Fluence went public in 2021 and was started by AES, a Virginia utility, and German energy company Siemens. AES started work on lithium-ion energy storage in 2007, and now Fluence is one of Wall Street’s favourite companies as it hopes to benefit from booming electricity demand underpinned by artificial intelligence.

“Data centre demand is not new. What is new is the urgency,” Nebreda said. “That is where we are going to play in terms of speed and getting permits, in terms of efficiency, we are the technology that is the fastest.”

While batteries are not as visually appealing as wind turbines or solar panels, they can play a crucial role in maintaining stable supply in electricity grids that are set to rely increasingly on intermittent renewable sources.

Growth in batteries dominated almost all other clean energy technologies in 2023, the International Energy Agency said in an April report. Last year, battery deployment in the energy sector increased by more than 130 per cent year over year. And while many people might associate batteries with electric cars, the energy sector accounts for more than 90 per cent of overall battery demand.

The AI revolution has undeniably captivated investors around the world. Chipmaker Nvidia’s market capitalisation briefly hit $3tn last week, worth the entire French Cac 40 stocks index plus most of Germany’s Dax. Investors have been eyeing under-appreciated, “picks and shovels” companies to bet on the AI boom. Storage companies such as Fluence are rising as one such business.

“We believe [Fluence] should appeal to a wide swath of investors,” those both in traditional energy and environmental, social and governance (ESG), JPMorgan said in a May 9 research report.

Surging investor interest in energy storage has opened doors to different technologies. Lithium batteries such as the ones Tesla makes are not the only way to bottle up electricity. Form Energy, a Massachusetts-based storage business, sells iron-air battery technology. Form argues its batteries can last much longer than lithium and are cheaper.

In December, Form won a $30mn grant from California for a project that will discharge power into the state’s grid for 100 hours. The award is part of a California Energy Commission programme dedicated specifically to investing in long-duration energy storage. And in Minnesota, Xcel Energy, a utility, is partnering with Form to deploy two iron-air battery systems at retired coal plants.

“Our 100-hour, iron-air battery is designed to deliver the demand dexterity needed to allow large industrial loads to be connected quickly,” Mateo Jaramillo, Form Energy’s chief executive, told me. I spoke to Jaramillo on a video call and it was my first interview with a chief executive who was wearing a yellow safety vest. He was calling me from Form’s West Virginia facility that is under construction.

According to Jaramillo, technologies already exist today that can be deployed quickly and at scale to meet rising electricity demand. For example, the excitement and investor dollars in small nuclear reactors might be overly optimistic, he said. These small modular reactors “while promising as a new grid resource, still have uncertain timelines and cost profiles”, he said.

One of the challenges for companies in the renewable energy ecosystem is trade restrictions.

“Geopolitics is a headwind,” Nebreda said, since some Fluence parts are coming from China. “We work with a global supply chain and that is important to deliver products at good prices,” he said. “A world in which you cannot send things around effectively is a worry.”

Another hurdle is cheap electricity. In some parts of the US, energy capacity costs “have just fallen through the floor,” PJ Deschenes, a managing director in Nomura’s “greentech” division, told me. For some investors, there was not enough pricing power to motivate new battery investments on their own, “and that is a problem”, he said.

“You will ultimately need a more clear payment for capacity in the system,” Deschenes said.

If electricity grids are hit by extreme weather or crack because of a crisis, surging prices could force the need for more batteries, he said. “It is one thing if you are paying 20 cents a kilowatt hour. It is another if you have to pay $5.”

The biggest challenge for storage companies might be keeping up with Tesla. Nebreda acknowledged that Tesla also did residential battery storage, and “clearly their cost of capital is much better than ours”.

As critical as batteries were for renewable energy storage, “the challenge is how new entrants compete with incumbents such as Tesla”, as well as BYD, China’s rival electric-vehicle manufacturer, said Arash Nazhad, a managing director at Moelis who co-leads the company’s cleantech group.

Elon Musk’s company is clearly a juggernaut. But the evolution of competing energy storage companies will have ramifications for the global clean energy transition in ways that do not involve electric vehicles. (Patrick Temple-West)

Smart read

I recommend Rachel Millard’s interview with Keith Anderson, chief executive of Scottish Power, who said UK ministers needed to “tackle head-on” the practical and bureaucratic problems holding back the UK’s green transition.