If you had have asked the average investor over a decade ago what they made of clean, renewable energy, I'm fairly sure they would have thought it largely irrelevant - something for the hippies, greens and ESG investors only. Flash forward just 10 years and on the London stock market we've seen an enormous explosion of interest in income producing green energy assets, with countless billions of pounds raised from private investors to invest in solar and wind energy funds. Renewable energy has gone mainstream.
We're now poised at the next stage of a profound energy infrastructure change and the coming new age is perhaps best explained by a recent encounter I had with a successful serial entrepreneur and investor.
He'd made plenty of money in the past from property and media. By the end of the last decade he was starting to invest in everything from wind turbines to anaerobic digestion plants for farmers (a huge and vibrant niche in the UK). His latest big idea was batteries, hundreds and hundreds of them in fields dotted around the UK . More specifically he and his colleagues were buying in a convoy of container sized boxes that would be plonked down next to a host of renewable energy sites around the UK. The aim? The same as Elon Musk's big bet on a farm of units in the South Australia field - that next generation battery units situated next to renewable energy installations can be used to even out the power flows based on weather conditions.
Throughout the world there's a slow war going on between traditional grid operators and next generation renewables operators. The legacy grid networks are fighting back against the intermittency of renewable energy - helping to push up their huge historic and regulated costs - while the young Turks of the new electric revolution dump flotillas of batteries in the countryside to soak up the excess power, and then sell the watts back into the system at times of peak demand.
For many observers this is the real story behind the new electric revolution - the new power grid of the future backed up batteries. In many respects this - and the need for better mobile power storage solutions for mobile devices - is a much bigger story than the much-hyped electric car story.
A recent McKinseys report observed that "storage prices are dropping much faster than anyone expected, due to the growing market for consumer electronics and demand for electric vehicles (EVs). Major players in Asia, Europe, and the United States are all scaling up lithium-ion manufacturing to serve EV and other power applications. No surprise, then, that battery-pack costs are down to less than $230 per kilowatt-hour in 2016, compared with almost $1,000 per kilowatt-hour in 2010. "
The first chart below - from that McKinsey's report - carefully outlines a sensible time frame on the economic value being created by various battery storage solutions. Notice how frequency regulation as well as smoothing along with commercial demand charge reduction is already regarded as high value - as is the need for power reliability back up and local capacity planning. In simple terms, this is the new battery revolution - storing spare power off grid and then selling it back in at times of peak demand.
Unlike much of the hype around electric cars, this storage revolution already makes economic sense. According to McKinsey's "storage is already economical for many commercial customers to reduce their peak consumption levels. At today's lower prices, storage is starting to play a broader role in energy markets, moving from niche uses such as grid balancing to broader ones such as replacing conventional power generators for reliability, providing power-quality services, and supporting renewables integration". The second chart below from McKinsey's puts this cost dynamic into a graphical perspective - sticking huge battery units next to power generators makes economic sense now!
Given this huge potential market, how can investors play this mega global theme of distributed power technologies and batteries? Unfortunately, most investors will probably find themselves dragged inexorably back to one hugely hyped name - Tesla, manufacturers of the eponymous electric cars and also prime movers in the distributed battery solutions industry. Its huge GigaFactory in the Nevada desert is only now starting to churn out increasingly cheap lithium battery units to power not only their cars but a host of other applications including home storage units. Tesla is also currently the global number three seller of electric cars, with a 9 per cent market share‚Äî helped by surging revenues in China now past $1bn and counting. But investor sentiment about Tesla is largely motivated not by boring old batteries but by sexy cars - and on this score its hard to see why it's a great investment bet. Arguably boring old GM might be a better bet: in the US, its Chevy Volt model is the top selling electric car and the Chevy Bolt is not far behind. And don't forget BMW, the biggest seller globally.
What alternatives are there for investors? For most the safe route in to the battery space is via the battery suppliers themselves, with names such as Tesla and Panasonic cropping up incessantly. Another increasingly obvious way to play the theme is to buy into business mining the raw materials that go into those lithium-ion batteries, with one obvious commodity category: lithium. Any stock with the element in its core business plan has been shooting up in value, prompted by concerns of shortages. But my sense is that we'll actually see an oversupply of the metal within a few years, as producers around the world gear up.
Other minerals and metals used in batteries might be a more interesting bet: these include lesser-known raw materials such as cobalt (probably the smartest bet at the moment), manganese, nickel and even copper. According to BHP Billiton, if the electric vehicle market rises as it predicts to 140m cars by 2035, it will account for about one-third of total copper demand. It is also reasonable to expect demand to increase rapidly for other relevant metals such as dysprosium and terbium.
Realistically most investors will be forced into buying individual stocks to play any of these themes such as battery manufacturers (tesla and Panasonic) or miners (Rio). To my knowledge there aren't currently any actively managed funds focusing only on battery technologies although some investment trusts listed on the London stock exchange such as City Natural Resources are increasingly weighting their portfolio towards big bets on the metals miners behind the battery revolution. It's also worth noting that more than a few investment trust providers on the London market are currently investigating setting up renewable energy battery investment trusts, in order to provide a steady income for investors through storing spare power and then selling back into the grid at periods of peak demand.
Over in the ETF space there is one obvious way to play the battery theme - the Global X Lithium & Battery Tech ETF (LIT) listed on the NYSE Arca exchange which "invests in the full lithium cycle, from mining and refining the metal, through battery production". According to its US issuer, this ETF "seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Lithium Index". The index itself tracks the performance of the largest and most liquid listed companies active in exploration and/or mining of Lithium or the production of Lithium batteries - Solactive is a big independent index developer based out of Germany, and is used by many of the smaller ETF issuers. You can find out more about this US ETF via its website at https://www.globalxfunds.com/funds/lit/
What's amazing is that this very specialist, niche fund has attracted over $1 billion in assets under management - which isn't bad for a fund that is relatively expensive with aTER of 0.75%. According to the funds latest fact sheet (end of October) the fund mainly invests in mining stocks, comprising 62% of the value of the fund, while consumer stocks account for 13% and IT businesses 12%.
In geographical terms the fund is 37% invested in US equities followed by Chile, at 18% - the South American country controls most of the easily mined reserves of lithium globally. In terms of individual stocks, the biggest holding in the fund at the moment is a US listed outfit called FMC Corporation at 23% of the fund - FMC stands for the Farm Machinery Corporation, betraying the businesses' background in agricultural technology. Its FMC Lithium business unit by contrast is focused on improving lithium use, mainly through new extraction and processing methods. FMC as a stock currently trades at a mighty 38 times earnings.
Other big holdings within the fund include Chilean miner Sociedad Quimica y Minera at 18%, Samsung with 18%, Tesla at 5%, Albermarle 4.9%, Chinese electric car manufacturer BYD at 4.25% and Panasonic with just 4.12%. According to Global X since the funds inception its annualised volatility is a whopping 20% versus 12% for the wider market - its beta is 1.2, implying this is a classic momentum play on tech and commodity stocks. The sharpe ratio (a measure of risk adjusted returns) is relatively lowly 0.21 since inception - this despite year to date fund returns of 64% and a 12 month return of 69%. In sum, this new, fast expanding ETF is a risky way to play the lithium and battery space. But as its stands, unless you're willing to buy individual stocks, LIT is the only obvious choice to play the battery theme.