Re-Purposed Electric Car Batteries and Its Effects on Electric Car Adoption/Driverless Car Adoption

Last night I attended the Churchill Club event in Melbourne on the future of batteries. There was a great panel presenting and the discussions covered a range of battery technologies, including Ecoult which is commercialising the CSIRO ultracapacitor technology for lead acid batteries.

In particular I was interested in the presentation by Relectrify CEO and Co-Founder Valentin Muenzel who talked about Relectrify’s mission to use electric car batteries that were no longer useful in energy storage applications. This was interesting because as part of my research for a book that Chris Rice and I are writing on the future of driverless cars I had been looking at the adoption rates of electric cars as part of the rise of driverless cars. In that research I had come across an assessment by Ark Investments that had calculated the net present value of an electric car battery in a specific energy storage scenario as shown in the following table:

Ark Invest battery depreciation table

source: https://ark-invest.com/research/ev-batteries-value – accessed June 20th 2017

The basic principle is that while a battery in an electric car might have its performance degrade to a point where it is no longer useful for driving, that battery will still have significant storage capacity (think about your phone battery after 18 months – it still works but its capacity is reduced).  If you can buy that battery cheaply and adapt it to storage use then you have a cost effective solution.

Of course the Net Present Value calculation in the table is for a specified energy reserve use which has a higher price, and nobody buys an asset for its Net Present Value otherwise all you do is get your money back over time. In discussions with Valentin he told me that without giving away commercial secrets the model for them is about 50% of the value of a new battery. This is important because the cost of new car batteries is falling. An analysis of battery prices by Bloomberg New Energy Finance in January showed the pace of that change:

battery prices falling fast from Bloomberg

source: https://www.bloomberg.com/news/articles/2017-01-30/tesla-s-battery-revolution-just-reached-critical-mass  

Now this is the price of the battery itself which is not the same as an installed battery system but the progress has been amazing, and mirrors what we have seen in solar energy. No great basic technology breakthrough, but significant technology improvements driven by the cost learning curve. In a separate report Mckinsey has stated that electric vehicle batteries fell to $227/kWh in 2016 with Tesla claiming to be below $190 per kWh (Electric vehicle battery cost dropped 80% in 6 years down to $227/kWh – Tesla claims to be below $190/kWh) Rumours have also circulated that Tesla has got the battery costs down to $125 per kWh (Tesla is now claiming 35% battery cost reduction at ‘Gigafactory 1’ – hinting at breakthrough cost below $125/kWh) although the truth of that remains to be seen. There is no doubt about the rapid pace of changes occurring, just the quantum of that change.

Valentin and I also discussed the model for autonomous vehicles given that a fleet model or a car sharing model means that cars would travel far more kilometres in a year. For an electric car this means that the battery will reach its degradation limit more quickly as the battery would be charged and discharged more often. Interestingly for Valentin this meant that the battery would be worth more for repurposing, because outside of the energy capacity the battery still retained, its relative newness means the technology is likely to be more advanced, and safety and physical deterioration characteristics would be much better.

Given that storage is likely to become far more important in the future given changes in the energy generation mixes around the world it puts a slightly different complexion on the costs of electric cars. It is our view that the end game for driverless cars is mass fleets supplied as a service with hardly anybody owning a car. If electric car batteries only last 3 years in shared driverless vehicle but have significant re-sale value it lowers the lifetime cost of a kilometre travelled and therefore accelerates us to the point where the cost of running an electric car is lower than running a fossil fuel car. Lifetime cost factors less into individual car ownership decisions but if you own 50,000 cars in a mass fleet in a highly competitive market it becomes it becomes a much more important factor. This changes adoption rates and also the balance between fossil fuel and electric cars.

The effects of this will be lumpy as Valentin advised that different batteries have different degrees of difficulty for repurposing as stationary storage. This is related to the original design decisions made for the battery technology which were originally made with the purpose of electric cars in mind, not stationary storage. For example apparently Tesla has stated that their car batteries will not be repurposed and that is due to the design constraints in their battery technology.

A note of caution:

In a discussion with John Wood (CEO of Ecoult) he quite rightly warned me to be careful of the public statements of battery manufacturers and suppliers on their lifetime use. Given that we are talking about changes in technology and lifetimes of 10-15 years which are therefore untested in the real world, those are wise words.

 

Image credit: The featured image is from http://www.relectrify.com/

The Smart Business Model Play in Solar Energy Solutions

In conjunction with the announcement by Tesla on April 30th that they are supplying home battery storage systems (Tesla launches a stationary battery aimed at companies with variable electricity rates and homes with solar panels.) Solar City in the USA has announced that

Using Tesla’s suite of batteries for homes and businesses, SolarCity’s fully-installed battery and solar system costs are one-third of what they were a year ago

Just think about that for a moment. A model which has dropped in price by 67% in 12 months. That is disruption on a major scale.

The solar panel business and the battery storage business is likely to be a continually brutal Darwinian space and require huge capital to supply the necessary scale because of the structure of the technology and the cost reductions that are occurring.

This raises the question of what is the smart play in this space and I think it is in staying away from the panel and battery technology space and playing in business model innovation at the layer above that.

There has been considerable comment on what is happening in the cost curve reductions in solar panels and battery storage including:

Why Moore’s Law Doesn’t Apply to Clean Technologies

and a counterpoint from one of my favourite analysts/writers Ramez Naam:

Is Moore’s Law Really a Fair Comparison for Solar?

who embedded the following graphic from Nature Climate Change

Nature-Climate-Change-Batteries-Cheaper-than-2020-Projections-800x488

looking at the falling prices in battery storage.

I think both articles make excellent points but the main issue is the cause of price change over time which has been 60% annually for transistors and 14% annually for solar (over 37 years) according to Naam. Analysis of the two articles indicates that the change in transistors has been far more driven by technological innovation while the pace in solar has been more by the classic cost learning curve and move to scale.

Which brings us to the smart play. My view on the key drivers when thinking about business strategy:

  1. Just as many solar manufacturers have bitten the dust over the last decade the same will apply to battery manufacturers and start up battery companies in the next decade, as well as being a continuing issue in the panel industry.
  2. One of the main problems with Lithium Ion batteries is the charge and discharge cycle lifetime. From a cost per kWh storage point of view the shorter the life cycle then the higher the cost as the initial capital costs have to be depreciated over less energy usage. Therefore alternative battery storage options have to be a key competitor in the space. There is lots of investment going on in technology development. So to win you either have to have the capital backing that companies like Tesla boast or pick the right technology and take the development risk.
  3. Particularly at a household level the costs are related as much to installation and deployment model as to cost of the technology (just as transistors are only a fraction of smartphone or tablet costs).
  4. At the household level adoption issues beyond costs will also be critical.

So while there will be clearly winners in the panel and battery space the risks and capital required are enormous. There are better opportunities in deploying innovative business models in the space including:

  • Models for landlords that get around the issues of the landlords bearing the capital costs and tenants gaining the cost reduction on their power bills. This includes leasing and income sharing models driven by algorithms.
  • Efficient and low cost installation models that drive down the costs of installation and maintenance.
  • Financing models that allow installation for people that otherwise could not afford installation.
  • Community models that integrate use of the grid into distributed generation, storage and consumption models that reduce costs to consumers while improving the income for local generators and renewable energy systems

There are parallels for this in other sectors. The sports clothing company Under Armour is pursuing a strategy for fitness apps to complement its sports clothing sales. That strategy is hardware technology agnostic in that it integrates with a range of technologies that users are adopting. This means they do not tie themselves to any particular hardware solution and avoid riding on top of a technology that fails.

That is the smart play here

Paul Higgins

 Full disclosure: I have recently worked for the sugar milling industry here in Australia on energy transition scenarios. I may in the future have a financial interest in community models.