Energy/Battery price update

Last week we got an update from the US EIA on the growing differential between electricity prices throughout the day – the spread is now out to $45/mWh between prices at 1pm and prices at 8pm:

US day ahead energy prices

Source: EIA

Given this, it is worth a quick update of where prices stand in our journey to energy parity, particularly for batteries.

Keep in mind that the above chart is the “day-ahead” price. The actual energy price range is much larger and does provide much greater arbitrage opportunities for those that can store energy, this is more of an indicator of the on-going arbitrage opportunities.

Earlier this year we had a detailed look at the big picture numbers behind electricity prices and batteries in particular, concluding that (utility scale) batteries to shift the usage from 1pm to 8pm would be around $US220/mWh but that costs were falling at 20% per annum.

Tesla’s recent South Australian battery costs seem to be in that ballpark (I haven’t seen an official figure, maybe readers can point one out?), reports seem to suggest $US200-250.

Since then, Bloomberg has updated its battery numbers for 2016, showing that batteries continue to fall at 20% per annum:

Battery prices to 2016

Source: Bloomberg New Energy Finance

Net result?

At around $200-250/mWh batteries are a good alternative to peaking plants but they are a long way off influencing the $45/mWh typical spread between electricity prices throughout the day and prices at night.

Updating our investment summary from earlier in the year:

Investment Summary

At the moment, it looks like 7-10 years until we hit “energy parity” (see report from earlier this year for details) between solar+batteries and fossil fuels if current cost reductions are maintained. And don’t sleep on rooftop solar + batteries – they are a lot more expensive than coal, but retail power prices are a lot more expensive than wholesale. There is a decent chance that rooftop solar + battery users going off-grid start a “death spiral” for electricity transmission.

Battery costs are the major determinant at this point – if the rate of improvement slows then it may take 15-20 years. The base case is that battery improvement will be sustained, but it’s far from a given – this is the assumption to watch.

Power prices during the day are going to continue to fall over the next few years as we end up with a surplus of power from renewables. This will actually drive the pick up in batteries – the bigger the difference between the day price and the evening price the bigger the incentive for batteries.

The US is not the market to watch – energy costs are lower there than almost any other developed market. A better indicator of the future will be developments in Europe.

So, how does this affect investments:

  • Coal/Gas: Coal and gas will not cease to be used when we hit parity, it is just that the price will be limited to no more than solar+batteries, and that cost will fall year after year. Any investment in these companies should be done with falling commodity price expectations – i.e. value them in run-off. There may be short-term shortages/price spikes, but these are selling opportunities. Increases in electric car penetration may stall the downward trend for a few years.
  • Solar companies: Solar manufacturers are difficult – the technology is moving too fast to work out if there will be a “winner takes all”. Service providers to the solar industry are probably a better investment (if you can find one that’s not already very expensive) – we have added one of these recently to the portfolio. We have also been kicking the tyres of some of the semi-conductor stocks that manufacture “commodity-type” parts for solar companies – not a sexy area of the market (and thin margins) but at the right price some of these stocks are interesting.
  • Industrials: Companies that have high electricity bills during the daytime (or can shift costs to the daytime) will benefit. There are a number of European materials and refining companies that have struggled to compete with US companies because of the lower-cost US energy.
  • Oil: At the margin, less diesel will be used for power generation in remote areas. Expect this to continue. It is not a large part of the oil market, but it will mean oil demand will be weaker than they would have otherwise been.
  • Electricity Transmission: Will they get bailed out, will they be allowed to increase prices to offset falling customers, or will they take the pain of the “death spiral”? It is a country by country proposition – lots of risk in this trade.
  • Electricity Production: The toughest thing about an investment today for these companies is that your competitor who builds a solar array next year will have lower costs than you who built last year and so your competitor can handle lower electricity prices. Plus the regulatory risks from the “death spiral”. Another risky trade.

None of this relies on increased carbon taxes. But increased carbon taxes will accelerate the trends.

Damien Klassen is Chief Investment Officer at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Comments

  1. I think you are wrong about the death spiral and people going fully off grid.

    What will happen is more and more people will install localised production & storage (read: rooftop solar + battery) as the cost of production+storage per kWh is below buying it from the grid. They will install enough to cover their average daily usage, and the grid will be used as a backup device. For a long time, paying grid connection fees and the odd usage, and being paid for excess production (even at only 8c) will be beneficial. Remember you need to install about 3x capacity to go fully off grid and most of this is only used a handful of times a year. It’s the household version of building expensive peakers only used 5 days a year. For the longest time (longer than my investment horizon), people will remain on grid.

    And don’t forget with 95% of all cars switching to driverless electric over the next 13 years, electricity demand will rise.

    If I’m wrong, it will be because electric car is driverless car-as-a-service model (you don’t own one) and household energy consumption stabilises and solar+battery reduces to so cheap it’s worth buying 3x over capacity rather than paying grid connection fees.

    • St JacquesMEMBER

      Yep, a very likely scenario easypete. And a big, sustained move into EVs would save the electricity grid from the death spiral. The question is the likely time line.

    • Tassie TomMEMBER

      “Remember you need to install about 3x capacity to go fully off grid and most of this is only used a handful of times a year.”

      There is an alternative to this – install a small petrol/ diesel generator. 1500-2000VA should do it – it only has to recharge your battery when it becomes 3/4 empty – not power your whole house. It might cost $3000-4000, but it’s cheaper than $30,000 of extra batteries.

      Off-grid is close … for those lucky enough to have a roof … which is not shaded … and not heritage listed.

      • St JacquesMEMBER

        Interesting idea but it has me imagining generators firing up across the suburbs, might be pretty annoying.

      • Tassie TomMEMBER

        @ St Jaques – if there was a market for generators, and there were noise standards, I’m sure that manufacturers would meet the standards to meet the demand.

        Imagine if a million homes went off-grid over 10 years – that’s 100,000 generator sales per year in Australia. And it might be 2 or 3 million homes. I don’t know how many small generators were sold last year, but I’d have thought that 100,000 is orders of magnitude higher.

        You can hardly hear a new car idling. There’s no reason a generator can’t be as quiet.

      • Josh MoorreesMEMBER

        plus the active work on gas micro turbines which are much quieter again than petrol/diesel.

    • I think your timeline for vehicle replacement is too aggressive, but other than that sounds reasonable.

      • @easypete: And don’t forget with 95% of all cars switching to driverless electric over the next 13 years
        @drsmithy: I think your timeline for vehicle replacement is too aggressive, but other than that sounds reasonable.

        I don’t think it is. Batteries are still the biggest cost for electric cars. The engines and running costs are much cheaper than a petrol car. The numbers above say batteries are coming down at about 19% a year. So assume the cost of the electric car will come down at about 10% a year, at a current cost of $50k (Tesla model 3) then it will get to about $13k in 13 years – cheaper than the cost of a small car. The calculations are rough and ready – but you can see that sometime in the next 5-10 years the cost of an electric car will be cheaper to buy than the equivalent petrol one. And once that happens the floodgates will open.

      • drsmithyMEMBER

        I don’t think it is. Batteries are still the biggest cost for electric cars. The engines and running costs are much cheaper than a petrol car. The numbers above say batteries are coming down at about 19% a year. So assume the cost of the electric car will come down at about 10% a year, at a current cost of $50k (Tesla model 3) then it will get to about $13k in 13 years – cheaper than the cost of a small car. The calculations are rough and ready – but you can see that sometime in the next 5-10 years the cost of an electric car will be cheaper to buy than the equivalent petrol one. And once that happens the floodgates will open.

        I’d be cautious about assuming the price of a petrol car today is already lower bounded by the cost of manufacturing it.

        But I was simply thinking in more practical terms. The average vehicle age in Australia (and most of the western world) is ten years, which is going to be largely a factor of what people can (or choose to) afford. Most manufacturers today don’t even have an electric option at all, let alone one for all the major vehicle classes. So we are probably 3-5 years away (depending on where everyone is in their model cycles) from even having an electric _option_ for most vehicle purchases, let alone for electric to be the default.

        So in a 13-15 year timeframe, IMHO, we might just be seeing electric vehicles tip into a majority (~50%). But it’s going to be another 5-10 years past that before they’re “95% of all cars”.

        Or to put it another way, the average punter is going to own at least one more petrol car before he buys an electric one. Even then I wouldn’t be surprised to see petrol-electric hybrids holding back full electric for close to another decade on the timelines above.

        Driverless is less mature than electric (and has bigger regulatory/legal hurdles to clear), so it’ll probably be 5ish years further along again (as a general case, I expect it’s something that will phase in with increasing levels of capabilities over a decade or more – driverless in CBDs and especially on highways will arrive fairly quickly).

    • I think you are ignoring what happens when there is a large proportion of people who are connected to the grid consuming little or being net exporters. Currently electricity pricing is heavily skewed to usage despite the majority of the cost being fixed cost associated with the tranmission and distribution. Fixed charges are already increasing and would need to keep going significantly to offset this change.

      I would argue that a large move to grid connected solar and storage is actually one on the early stage of the sequence of events of the death spiral.

    • i actually dont buy this scenario. tesla has just announced almost all their superchargers will be solar and battery powered. this whole EVs will save the grid is flawed assumption. PV and soon PV and storage will be the the default gen of choice based solely on price

  2. Damien,

    “All the SI prefixes are commonly applied to the watt hour: a kilowatt hour is 1,000 W⋅h (symbols kW⋅h, kWh or kW h; a megawatt hour is 1 million W⋅h, (symbols MW⋅h, MWh or MW h); a milliwatt hour is 1/1000 W⋅h (symbols mW⋅h, mWh or mW h) and so on… (Wikipedia)

  3. $45/mWh between prices at 1pm and prices at 8pm

    $45 per milliwatt-hour. Wow, that’s expensive.