Electrification is a key theme to Energize’s investment thesis. We invest in software and business model innovation, many of which directly contribute solutions towards decarbonization by means of electrification. In this blog series, we’ll explore this critical transition and the technologies driving and enabling it.
In my past few “Electrifying Everything” posts, I’ve argued that solar and wind are poised to become the zero-carbon backbone for an electrified economy. Solar and wind are massive, cost-effective energy resources, but they have one major problem — sometimes the wind don’t blow and the sun won’t shine!
Storing power produced by the sun and wind is the skeleton key that unlocks our renewable electricity future. I believe lithium-ion (Li-ion) batteries have already won the race as the dominant energy storage technology of our era and will only pull further ahead in the next decade. Finally, dedicated battery software and solution-oriented providers will enable the Li-ion battery industry to take the next leap forward.
Let’s begin with the basics — what is energy storage? Donning my physics hat, energy storage is the ability to lock up the potential to do useful work later, contained within in a relatively stable physical structure. Today, most of our end-use energy is still stored in fossil fuels like coal and oil. But electricity is different. It must be consumed immediately, and it cannot be stored in a pile or in a tank. However, if we can cost-effectively store renewable electricity, then deep decarbonization of industry is possible.
Just how much storage is needed? Princeton’s Net Zero America study estimates that the U.S. will need 180 GW of six-hour batteries for a power grid dominated by renewable energy. That means we would need 70 times as many batteries that we have today, and that each battery would need to last at least twice as long as they can currently.
To address this deficit, there are a range of energy storage technologies commercially available today, from pumped hydroelectric to lead-acid batteries (like the ones that always died in your high school car). However, none can achieve the combination of cost efficiency, energy density, end-use flexibility and production volume of lithium-ion battery storage, which has captured more than 90 percent market share in the U.S., according to the Energy Information Agency (EIA). I believe lithium-ion batteries will be the de facto energy storage technology of the future.
As a flexible energy asset, lithium-ion storage can provide tremendous value across the entire power value chain. Consumers can leverage Li-ion storage as emergency back-up should power outages occur, such as the recent blackouts in Texas. Electric vehicle owners can cut costs by using batteries to charge their cars during periods of high electricity prices. Battery storage is already being deployed globally for these use cases and many others, and lithium-ion batteries have proven to work well enough across most applications. I recommend reading an excellent primer on how lithium-ion batteries work by David Roberts for more information on the technology itself.
Beyond flexibility, why are Li-ion batteries winning at scale? As the narrative often goes for the energy transition, it comes down to economics. Like solar PV, lithium-ion battery cell cost declined by roughly 90 percent over the past 10 years[1]. Lithium-ion battery technology is also seeing a massive scale-up in production — initially to produce batteries for iPhones, then for Teslas, and now to support our transition from a fossil economy to a battery-electric economy.
As the storage industry experiences catalytic growth, barriers to scale and growing pains have emerged. Battery energy density and duration needs to continue increasing. Battery supply chains, especially for mineral inputs like lithium, cobalt, and nickel, need become more diversified. And, perhaps most importantly, battery costs need to continue declining.
Hardware costs are already on the decline, thanks to an abundance of low-cost materials and advanced manufacturing techniques that reduce waste and improve quality. Increasingly, as Li-ion battery cells are commoditized, costs will be driven not by battery cell or equipment costs, but the infamous “soft costs” that still plague solar PV. Like solar, Li-ion battery system soft costs could account for 50 percent or more of total costs.
Innovative technologies that can help lower these soft costs and improve operational efficiency can unlock substantial market share. Globally, we estimate the battery market size across EVs, grid storage, and other use cases is $77 billion today, growing to $390 billion by 2025. As with solar, a battery industry at this scale can and will support standalone, venture-backable software businesses to further scale the battery ecosystem.
At Energize, our expertise lies at the intersection of the energy transition and digital solutions. We are bullish on three key areas where we believe software can play an outsized role in accelerating the lithium-ion battery industry forward:
In the past 30 years, the amount of energy a lithium-ion battery can store — or its energy density — has increased by three times. Steady energy density improvement coupled with a massive increase in battery cell production capacity have been the primary drivers of rapid declines in unit costs.
Increasingly, lithium-ion battery materials will evolve to become software-defined: The next generation of Li-ion batteries will require novel chemistries and manufacturing techniques to sustain improvement in energy density and costs. Historically, the battery material development and testing process required months, if not years. Software will compress battery material innovation cycles into weeks or days. Machine learning-based material science simulation software will enable battery producers to rapidly develop and test new Li-ion components. Chemical architectures will be built first in the cloud, before moving to physical lab bench testing. Iteratively simulating thousands or millions of battery material combinations will dramatically reduce research costs and development timelines.
Why does software have such an important role in the future of battery materials design? Here is one example: Today, a Li-ion battery installed in a Tesla Powerwall for home power back-up is roughly the same battery (chemically speaking) that goes into a Dyson vacuum or an electric Ford Mustang Mach-E. However, the power consumption requirements of each could not be more different. The Tesla Powerwall likely only discharges very infrequently during a power outage, where length of duration is most important. The Dyson vacuum needs only short bursts of energy to suck up dirt and debris effectively before recharging. The Ford Mustang Mach-E battery needs a bit of both — the ability to discharge slowly over long distances for highway driving, but also short bursts to accelerate from a stop light. In the future, software that can advance new battery materials will enable us to tune a Li-ion battery’s chemical make-up to the use case, optimizing performance and costs along the way.
A few innovative start-ups working on battery material software we are keeping our eye on:
After battery cells are manufactured, the deployment of field-ready batteries requires a complicated design and systems integration process. Batteries must be assembled into modules, wired together and paired with a battery management control system. An inverter and charge controller must be selected, then climate control and cooling equipment are added to the container that will eventually house the battery. Customers must be convinced, land procured, and utility interconnection secured. Finally, if any equipment or design specifications change, the entire system must be re-evaluated to ensure it will still work and produce revenue as expected. Complicated, costly, and mostly conducted manually with consultants and spreadsheets.
The entire design and validation process above is what drives the 30 to 50 percent in soft costs for battery storage installations. Developers often overdesign battery systems to provide a cushion for misjudgments or errors, resulting in even higher costs. I spoke with one developer who was adding between 11 and 22 percent in extra costs simply as a buffer against design errors.
Battery software is perfectly suited to streamline the iterative storage design and validation process. Stephan Rohr, CEO and founder of predictive battery analytics company TWAICE, sees three key value levers that can be addressed with battery analytics software. “First is having the right design system in place that can deliver the promised performance over the project lifetime. Second is optimizing the actual use and leveraging the full capacity of the storage. We see many developers design battery systems in which 10% of battery capacity is not used during actual operation, which can be corrected by analytics. Lastly, and most importantly, is forecasting the lifetime and total number of charge & discharge cycles a particular storage system can achieve.”
He added that using software like TWAICE to understand what impacts storage lifetime and actively manage storage assets can lead to 25 percent increase in overall battery lifetime.
In addition to TWAICE, a few other battery software companies targeting soft costs include:
Battery storage remains a young technology. Many batteries have been deployed within the past 10 years and have not yet operated through a full 20 to 25 year expected useful life. In addition, as storage developers deploy and operate batteries, we are learning quite a bit about how taxing real-life operations beyond the lab can be to the degradation and capacity of batteries. Many battery systems cycling aggressively with very fast discharge and charge cycles require replacement faster than expected, creating economic challenges due to replacement costs. Finally, many energy markets across the world are still figuring out how to best deploy and monetize storage for the power grid. Batteries in theory can act as a multitool for the power grid, but in many geographies, storage is still explicitly limited to singular use cases or locked out of wholesale revenue generation opportunities altogether.
Gian Paul Handal, commercial lead at Jupiter Power, shares a developer’s perspective on challenges the Li-ion battery market needs to address to scale. “When I started working with energy storage in 2014, the projects being deployed were expensive, unsustainable, and singular in application,” he said. “Today, lithium-ion batteries cost six times less than what they did then and are proven to provide a wide range of services with a single system. However, the reality is the markets are still evolving even as new projects go online. At Jupiter Power, we are well-positioned to capture the revenue opportunity arising in the battery market, but we need technology to help us optimize the use of lithium-ion batteries and provide flexibility for the future of energy storage.”
I am particularly interested in innovative start-ups that can enhance storage operations by:
Over the next decade, I believe the lithium-ion battery industry will further expand its overwhelming energy storage market share and launch next-generation iterations that catalyze renewable electrification — increasingly by leveraging software throughout the battery value chain. The compounding advantage of superior economics and production volume creates a positive feedback loop towards market dominance. While competing energy storage technologies will better serve niche, use case-specific applications or adapt to integrate with the core Li-ion battery technology platform, I predict the lithium-ion battery market will reach $700 billion by 2030[2]. Consequently, this growth supports a $30 to $50 billion opportunity for the battery software market — which is of particular interest to venture capital investors. Venture-scale battery software startups have already formed and will be crucial in driving growth and efficiency of the Li-ion market.
Batteries can address many of the energy storage needs of a renewable, electrified economy. However, batteries are not best suited to all power generation and storage use cases. The last key piece of the “electrify everything” energy production puzzle is low-carbon, flexible generation. In my next post, I will cover the leading options: Next generation geothermal, hydro and biomass. Stay tuned!
[1] Source: BNEF
[2] Source: Energize analysis
