ESOCF - Energy Vault And Long Term Energy Storage

2023-06-27 17:17:21 ET

Summary

• Grids based largely on renewables are coming and so is energy storage, which is currently dominated by lithium ion batteries which cope with storage up to 4 hours.
• Attention is focusing on longer duration (6-24 hour) energy storage and new ways of achieving this are becoming investible.
• Energy Vault has a simple gravity-based system being implemented in China and Texas but both facilities have less than 4 hour of storage (they are not long duration storage).
• Energy Vault’s business is broader involving substantial investment in lithium ion battery systems and proposed green hydrogen. All of Energy Vault’s revenue in Q1 2023 came from its lithium battery business.
• Investors might evaluate how competitive the Energy Vault business is in the lithium and hydrogen spaces when evaluating investment based on the emerging gravity business (which itself may not be long duration).

Having just published an article on flow batteries and companies opening up this technology to execute on Long Duration Energy Storage (well 6-24 hr), my thoughts went to other 6-24 hour storage technologies. Gravity energy storage is a much discussed means of extending the lithium battery boundary of ~4 hr for grid level power modulation. Energy Vault ( NRGV ) is seen as a leading company in this space with the current construction of a significant facility in Rudong China based on its EVx gravity storage technology, which has progressed significantly since the construction of its Swiss early version shown above. Here I review the Energy Vault business to get an insight into where gravity storage fits within the overall business. I was surprised to see that it has a substantial lithium battery business which includes lithium battery manufacture, energy management software and there is also an emerging green hydrogen storage project. As result I’m cautious about what an investment in Energy Vault buys at this stage.

Energy Vault’s business

In a recent interview, Energy Vault CEO Robert Piconi gave a summary of NRGV’s first year as a listed company, by starting with the beginning of construction of the Rudong large (long duration?) gravity feed EVx facility in China, along with lots of new business captured, progress with a software energy management system in the 0-4 hour (lithium battery) space and trebling of Energy Vault’s staff. Piconi also focused on building a large green hydrogen storage system. This surprised me because it showed that the business is not just a long duration gravity energy storage business, but that the core of the business was actually in (becoming very competitive) 0-4 hour lithium battery storage. It turns out that this includes battery manufacture and energy management of lithium batteries with solar PV and wind power generation. These areas have big players like Fluence ( FLNC ) and Tesla ( TSLA ) and it will be interesting to see how Energy Vault fares in competition in this space. There is no doubt that the 0-4 hour lithium space is undergoing massive growth, but I thought from what I’d seen of Energy Vault that it was focused on pioneering new territory in longer duration storage. It is beyond the scope of this article, but when considering investment in Energy Vault, there clearly needs to be consideration of the company beyond the gravity storage aspects of the business. I’m on the record elsewhere as being very sceptical of green hydrogen as a storage technology because I find it hard to see how the infrastructure will be built and also how a technology that discards a huge amount (70%) of the input solar and wind power in making, transporting and using the hydrogen will end up being competitive.

It is good marketing to distinguish your business from competitors, but it also helps to accurately describe your business. Energy Vault makes much of is long duration gravity energy storage and a significant gravity storage (EVx) facility is in construction in China. However, close inspection of the Q1 2023 Earnings Call transcript gave me a different impression of the company than the way the company (and just about everyone else) positions the company.

Energy Vault’s core business involves short term storage with lithium batteries

The focus on lithium batteries might change in the future but at the moment it is primarily a lithium battery business, and this transcends basically providing lithium batteries to include lithium battery manufacture as well as energy management of lithium batteries in a renewable energy generation environment. There is a substantial discussion about the lithium battery business in the Q1 2023 earnings call.

Energy Vault refers to its gravity storage business as long duration but this is not implemented

There is a widespread assumption that Energy Vault’s gravity business is for long duration (more than 6 hours) energy storage. The claim is that 72.5% of $1 billion of new project awards are for gravity EVx projects, but the details seem to indicate that Energy Vault’s business direction is 50/50 BESS (lithium 4 hour storage)/GESS (Gravity energy storage). I had assumed (and this is the way Energy Vault positions it) that the Gravity storage would be specifically directed towards longer duration storage, but the discussion of the Chinese project makes clear that it is a 25 MW/100 MWh 4 hour storage project, with all of the technology designed and built in China. This does not take the technology beyond what lithium batteries are delivering.

Perhaps this goes to the difficulty of making a long duration project cost-competitive in today’s market (see below)? There seems to be a lot of interest from potential global customers in the Rudong Chinese EVx facility that is under construction, presumably based on the possibility of long duration storage. It isn’t clear that the economics of the EVx gravity system operated with storage less than 4 hours will be competitive with lithium-based offerings.

There is a lot to like about the level of interest in the Chinese facility, with claims of strong interest from within China for multi-GW projects. The details of the Rudong Chinese gravity storage facility represent it as an Energy Vault project, but it seems to be entirely implemented with local Chinese technology. It looks like the Rudong deal is Energy Vault’s first licensing/royalty deal, although the details of this are unclear and how Energy Vault might leverage its EVx business off it are also unclear.

What about the first US EVx gravity storage facility at Snyder Texas in partnership with Enel Power ( OTCPK:ENLAY )?

The Snyder EVx facility is planned to be an even shorter duration Gravity storage system with just two hours storage at maximum discharge (18 MW/36GWh). This is not long duration storage.

Presumably there is the possibility of licensing the technology to other parties, but what (if any) the role of the Engineering, Procurement and Construction company China Tianying ((CNTY)) will have is not revealed. A licensing figure of 5% of gross revenue is mentioned and this was in the context of potential interest from Three Gorges Power, the largest pumped hydro asset manager and engineering company in the world. Time will tell how realistic this suggestion is.

The Q1 2023 Earnings call presentation had as a key takeaway that 72.5% of new project awards (overall amounting to 2.8GWh and ~$1 billion) were for Energy Vault’s EVx gravity storage system. I’m having trouble seeing how this can be given the company’s position discussed at the Q1 2023 earnings call. Energy Vault still doesn’t have an operating EVx system as far as I can make out and the ones being built are not long duration gravity energy storage systems. The earnings call suggested that Energy Vault is emerging as a business with 50% lithium battery projects and 50% long duration gravity storage.

What about other gravity storage businesses?

There are a number of different gravity energy storage companies, all of which have plans or projects but none of which seem to have a lot of momentum at this stage, although this may be about to change.

It is very early days in the gravity storage business and I’m not convinced that the best gravity solution is available yet. Australian startup Green Gravity has an interesting pitch . It plans to use old mine shafts (up to 500 meter depth) as its gravity location. The argument is that these facilities have deep excavations that mean a large vertical distance is already constructed, meaning small footprint and minimal construction cost. Old mines also often have grid access, providing the infrastructure to connect a gravity storage system with the grid. With these advantages Green Gravity argues that it avoids the substantial investment costs of building high structures to provide the energy capture and release. Of course the business model of Green Gravity relies on old mines, so this is a finite business model, but Green Gravity claims to have identified 175 mine shafts across 80 mines with a 3 GWh initial capacity requiring minimal adaptation for use in gravity power generation, with a further 3 GWh requiring only moderate modifications. Green Gravity CEO Mark Swinnerton claims up to 100,000 mines in Australia could be amenable to gravity power generation!

In contrast to Green Gravity which is just starting out, three companies have more than a decade of development, but little sign that they are gaining traction. These are Gravity Power which involves a closed battery using water in a shaft with a piston to either charge the system or release the stored energy, ARES ( Advanced Rail Energy Storage) which involves moving heavy blocks up or down a slope to capture and release energy, and Gravitricity , uses a vertical shaft to move heavy weights up and down.

Overall the gravity concept seems like a good idea, but I’m surprised to see so little progress made over the last decade.

Long duration energy storage

My comments above go to the technological problems that long duration (well 6-24 hour) storage companies address and whether gravity storage will end up being a part of the solution. I’m beginning to think that there is another issue for companies like Energy Vault that is more business model focused. The point is that for a business to be successful it needs to make money.

There are two issues about long duration storage worth examining in relation to the business model. The first relates to the need for a 6-24 hour class of storage, while the second relates to the reward structure.

Why is 6-24 hour storage the next horizon?

There seems to be some consensus that the window 0-4 hours is being served by lithium ion batteries, with frequency regulation essentially solved and grid scale balancing up to 4 hours being addressed with massive scale up of big lithium ion batteries. This will essentially solve maintaining the grid frequency and managing short term intermittency of the grid(s). Not solved is the need for available power beyond ~4 hours (eg overnight). Of course lithium ion batteries are not limited to 4 hours of power delivery (think about millions of BEVs (Battery Electric Vehicles) that operate quite happily with charging intervals well beyond 24 hours). The thing about lithium ion batteries is that they don’t do well if they are not subjected to frequent charge/recharge cycles. So I think long duration storage is about means to store power without significant loss for periods extending beyond 4 hours. Flow batteries can do this and even stay fully charged for months. Gravity storage offers the same storage stability.

The point is that for many purposes a predominantly renewable energy grid can operate effectively with just 4 hours of battery storage. There are many tools available to assist this, notably timeshifting (eg operate heating during periods of substantial power generation to provide an already suitable climate when the need arises) and demand management (paying users not to use power in times of high power demand).

6-24 hour storage as a means to enhance grid stability

I suspect the current focus on 6-24 hour storage is to widen the safety window allowing grid stability. It seems to me that this requirement is different to the 0-4 hour window in that it may be more akin to a power guarantee against the need for extra power. Currently this kind of power supply comes from gas peaking plants that are not operated for significant amounts of time. The gas peaker plants are reimbursed for the ability to deliver power, rather than the delivery of power.

The California Energy Commission addresses these issues in a recent business meeting where it addresses longer term power delivery. Research indicates the 10% of a notional 52 GW of California energy storage needed by 2045 will be dedicated to storage beyond 8 hours. This 5.2 GW of long duration energy storage is the target market (in California) for flow batteries and gravity storage that NRGV is developing. It is a big market. The presentation indicates that The California Energy Commission is researching how this longer term storage can be made financially viable and it notes specifically new proposed tariffs to ensure that this kind of power availability is financially viable. It also talks about metrics concerning performance, safety and cost improvements. It is clear that this longer term power will not be required all of the time, as under normal conditions the 1-4 hour storage buffer will be sufficient. The current research considers storage all the way to seasonal storage needs. I suspect that part of the solution will involve long distance (1000’s of kilometers) linkages using HVDC (High Voltage Direct Current) cabling. The point is that longer term storage may be needed for only 60-80 hours/year, so attention needs to be paid to “how much, where”, and the cost structure to have it available. The fossil fuel industry reverts to gas peakers, but already batteries (and possibly gravity storage) are becoming competitive with gas peakers.

What the market thinks

NRGV has just one (“strong buy”) rating by Seeking Alpha authors, so the stock is not well covered. Six Wall Street analysts have covered NRGV in the past 90 days and the sentiment is very positive (four “strong buys”, one “hold” and one “sell”). Seeking Alpha’s Quant rating is “sell”. The stock price chart is challenging, with a 77% fall over the past year. There is 12.3% of the stock shorted.

High level financials

I mostly leave financials to others, but I couldn’t help but notice the following regarding the cash position of the company : Q4 2022 $286.2 million, Q1 2023 $197.0 million; the net loss in Q1 2023 was reported as $31.1 million. A net loss of $31.1 million in Q1 2023 and decreased cash between Q4 2022 and Q1 2023 of $89.2 million ($286.2-$197 million) means $58.1 million was spent on something else. Could it be a capital investment in the Texan EVx facility that is being constructed and which Energy Vault will own? Seeking Alpha has the current cash position as $114.56 million, so another $83 million has gone somewhere since the end of Q1 if Seeking Alpha’s figures are accurate.

As regards to revenue, the company achieved revenue of $114 million in 2022. It is projecting $325-$425 million in revenue in 2023. In Q1 2023 it booked $11.4 million in revenue, all from Lithium battery storage projects (i.e. nothing from Gravity storage projects). I realise that the company achieved $100 million in revenue in Q4 2022, but is it realistic to expect 2023 revenue to be more than $300 million, and if so where will it come from? Note that in 2022 Energy Vault told shareholders that it expected to earn $680 million combined revenue for 2022 and 2023. On that claim one would expect $566 million in 2023. Big numbers in company presentations that don’t work out don’t help to give investors confidence.

Conclusion

The thing about going into the unknown is that the risks of failure are big. My initial thought about Energy Vault was that here is a company that maybe has broken through with simple long duration energy storage. After digging into the details and also through doing a quick look at what else is happening I’ve come back to earth. For me, while the area is interesting, it seems too soon to dive in. Energy Vault talks big about gravity storage, but the reality is that it is still a lithium battery company. Its proposed excursion into hydrogen storage is another reason for caution for me as I don’t “get” the hydrogen story. I know that Governments love the hydrogen story, but my take is that it is about the natural gas industry looking for a future rather than being a sensible idea. My take is that it won’t compete on cost. On gravity and Energy Vault, it makes sense that such a simple concept might end up successful, but it is too soon to know.

Notwithstanding the above, there is substantial funding available for long duration energy storage development, with $360 million of California state and DOE funds on the table now. The California Energy Commission is working on its first 100MW/ 800 MWh (8 hour) non lithium ion energy storage system now. My take is to pay attention but stay on the sidelines to see how NRGV shapes up. It has a big mountain to climb.

I am not a financial advisor but I follow closely the dramatic changes as the global energy system begins to become decarbonized. I hope that my comments on gravity energy storage and Energy Vault help you and your financial advisor as you explore how you might participate in the dramatic changes that are occurring now.

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