NRGV - Flow Batteries: Progress At ESS Lockheed Martin And RedFlow

2023-06-20 13:55:11 ET

Summary

• Battery Energy Storage is in good shape with lithium batteries for short-term (0-4 hr) storage; flow batteries showing promise for 6-24 hr storage and scaling up.
• Lockheed Martin building a 10 MWh facility at military base in Colorado, while ESS struggles with shipping its iron-flow battery product currently.
• RedFlow (3 GWh long duration storage implemented) after success with 2 MWh facility now building a 20 MWh facility in California.
• China really scaling up with 400 MWh vanadium flow battery facility.
• Still early days for flow batteries but scale up is happening; California is investing in long duration storage and likely players in major scale are beginning to emerge. Time to pay attention.

With climate emergencies providing new urgency to decarbonize, there is increasing emphasis on limiting features of the renewable energy transition. This is not just about making electricity with solar PV and wind power, but also managing intermittency through storage. While the need for very short term energy management is now becoming solved with lithium battery technology, the need for longer term storage is clear. The current "sweet spot" is for 4-hour storage to manage daily surplus and deficiency of electricity, and there are a large number of lithium-based grid scale battery facilities being installed to manage this requirement. The next challenge is for longer storage in the range 6-24 hours. Currently, the momentum is with lithium-based batteries for the shorter grid scale energy storage and maintenance, but there is a lot happening that indicates that other technologies will have a role in longer term storage. One to watch is the emergence of sodium- rather than lithium-based batteries for stationary storage, but this technology will still be only for a few hours. The California Energy Commission ((CEC)) is proactive in investigating the energy storage space and especially beyond 6-hour storage. The California Commission sees massive energy storage growth in California from 0.25 GW in 2019, to 5 GW in 2023, 19.5GW in 2035 and 52 GW in 2045. One focus of the CEC is non-lithium advances in longer term storage. There are three funded projects currently involving a 60 MWh (by 2024) microgrid in San Diego involving a vanadium flow and zinc hybrid system, a RedFlow 20 MWh zinc bromine flow system in Northern California and a PG&E 5MW 100hr iron-air system from Form Energy . Note that a 1 MW Form iron-air battery system requires half an acre of land. Form Energy is an interesting private company which has raised a lot of money and has big end of town investors as significant customer partners.

Flow batteries have been in the mix for a long time, but they haven't achieved lift off because it is early in their technical development, especially scale up, and lithium battery technology has been on a steep cost reduction curve making it hard for flow batteries to compete. However this is beginning to change. Here I report on three MW-scale flow battery developments. These are Lockheed Martin's ( LMT ) GridStar Flow technology which, while still largely under wraps, will be commissioned in a defence project next year. The second company, ESS Tech ( GWH ), has an iron flow battery and it is in the throes of scaling up and having real customers, while the third company RedFlow (ASX:RFX), which uses zinc bromine flow technology, is also scaling up. Here I look at these three companies to get a sense of recent developments in flow battery technology. Being in public companies they have more exposure than big Chinese developments and a host of early stage flow companies, and so they are more approachable for investors than the host of emerging companies. The market for this 6-24 hour storage space is going to be huge, so it is worth investor attention even as other technologies like gravity storage (eg Energy Vault ( NRGV )) are seeking a piece of the pie.

ESS

ESS is NYSE listed and has been enthusiastically received by some Wall Street analysts, with seven reporting in the past 90 days, four of whom have a "strong buy" rating while the other three rate the stock as a hold. The company is poorly covered by Seeking Alpha authors (just one "hold") and it has a "hold" Quant rating. It has been all downhill since listing in 2021 and it is down 58% year on year, barely able to manage to keep the share price above $1 (trading currently at $1.39). In the Q1 2023 earnings call, CEO Eric Dresselhuys identifies four key issues that the company has to address in 2023. These are : i) scale up of manufacture (notably automation and injection molding); ii) improving supply chain quality and sorting out outsourcing; iii) optimising product designs (especially simplifying electrical and plumbing); iv) reducing time to commission solutions at customer sites. None of these four issues are trivial. They are the kinds of things that normally one would hope could be significantly under control before entering the glare of being a public company. The company does seem to be serious about addressing these issues. For example new COO Vince Canino comes with a background in scaling manufacture and delivering precision products. It is a bit scary that Vince relates the ESS flow battery product to a washing machine (but with more stringent reliability requirements)! The battery modules are injection molded with precision parts. As Vince indicates when the mold is sorted out, it is all good, but it sounds as if getting it right has not yet been solved. The precision needed sounds quite scary for a cheap part. The Q1 earnings transcript is worth reading to get a sense of the challenges and where the company is up to. Full marks for understanding the challenges, but I'm not sure how close the company is to resolving a lot of issues. The SVP of Engineering, Benjamin Heng, comes with a background in Tesla automation, so he is aware of the challenge of moving from a process to its automation. The numbers Heng presents in terms of increased efficiency are impressive (75% labor reduction, 60% improvement in cycle improvement and manufacturing footprint decreased by 75%). The goal is 2 GWh annual capacity. If this can be achieved quickly it will be interesting. Mark Bindon, VP Customer Success, has a background in delivering complex technology projects. It sounds as if Bindon had to start from scratch in delivering products to customers. It is a matter of sorting out how to do it and documenting. It sounds like things are improving with a 50% improvement in effort needed to deliver and commission a system to a new customer. Bindon expects substantial gains across multiple customer sites in the near future. Bindon makes the point that early customers have been very supportive and two gave supportive commentary on the earnings call.

In summary it sounds like the company has had a rude awakening to the reality of scaling up and delivering their products, which have had (and continue to have) the need for lots of innovation as products get into the hands of customers. The good thing is that a number of new senior executives with experience of this journey have been hired, but it all seems pretty fresh and building a cohesive team is going to take time.

The above gives a picture of the maturity of ESS technology. The hard thing is that there is a lot of development/optimization going on in a company with $119 million cash and a burn rate of a little more than $20 million quarterly. It has cash for the rest of 2023 and into 2024, but I suspect not far into 2024. So there will be a need for more cash soon. The company expects to be non-GAAP gross margin profitable in the next 12-18 months, but this probably needs everything to go well. The company has 0.8 GW of manufacturing capacity currently and needs $40 million CapEx for each 1 GW of additional manufacturing capacity (goal being 2 GWh capacity). Demand for product seems not to be a concern. It is about having cash and being able to manufacture product.

Note that the ESS batteries are not small , requiring a 40 foot container weighing 41.9 tons (when flow battery solution incorporated) to deliver 0.4 MWh capacity!! Specifications on the ESS Energy Warehouse are shown here .

Lockheed Martin

Lockheed Martin is building a 10 MWh (1 MW power for up to 10 hr) flow battery on a defence site at Fort Carlson, Colorado; commissioning of the battery is expected in 2024. The GridStar Flow Battery has been developed by Lockheed Martin, although details about this flow battery remain under wraps . The GridStar Flow battery is optimised for 6+ hours of operation. Its purpose is to provide a resilient battery with 100% (daily if needed) charge/discharge without problems and 20 year operational life. Lockheed Martin is coy about the technology. They describe it in the following way :

"The patented technology is based on the principles of coordination chemistry, offering a new electrochemistry consisting of engineered electrolytes made from earth-abundant materials. These properties enable GridStar Flow to counter anticipated and unforeseen grid disruptions by a robust and flexible long-duration, clean energy storage solution with a competitive total cost of ownership."

The only hint about the chemistry is that it is " mildly alkaline, aqueous electrolytes that are safe (nonflammable, noncorrosive, stable) ".

Lockheed Martin makes some big claims about their Gridstar Flow battery as follows :

• Renewable generation bulk shifting (large amounts of energy for many hours)
• Large-scale transmission & distribution deferral
• Peaking unit replacement (traditionally combustion turbines or internal combustion engines)
• Day-head, real-time and ancillary market optimization
• Multi-day and portfolio optimization
• Resiliency, particularly in microgrids, islands, and military installations

Note that they claim that their battery will replace fossil fuel-based peaking units and that it has a number of features of interest to defence installations. If the unit installed in Colorado lives up to the claims, one might expect that there could be adoption across the US military. More significantly for investors, Lockheed Martin is a huge company with massive capacity. It has the capacity to drive a major push into the 6-24 longer term battery market if the Gridstar lives up to the claims that Lockheed Martin is making. These claims include that the Gridstar has a competitive Cost-Of-Ownership.

The Gridstar Flow web link looks real and large scale. My caution is that the actual project in Colorado is for a pretty small capacity that would not deliver the claimed performance in the above summaries. The story about the Colorado facility makes clear that this is a pilot and the image is of a much smaller facility (1 MW/10 MWh).

Perhaps we'll know next year if the Gridstar is going to be to 6-24 hour storage what lithium ion batteries are providing for 0-4 hour storage. If this turns out to be the case, then Gridstar could become more than a frivolous part of Lockheed Martin's business.

RedFlow

Zinc-bromine flow battery company RedFlow (ASX:RFX) has just announced a 10-fold scale up in its flow battery products with a 20MWh long-duration storage system in a solar microgrid project funded by the California Energy Commission as part of the Paskenta Racheria Microgrid Project. The 20 MWh flow battery facility will involve 2,000 RedFlow ZBM3 batteries to become one of the largest global zinc-based flow battery projects. RedFlow has a 2MWh installation at Anaergia in California that has been successfully operated for more than 12 months and it has 3 GWh long duration storage implemented. The 20 MWh facility will be installed in late 2023 and early 2024. The system is expected to be commissioned in Q1 FY 2025.

RedFlow has released a June 2023 investor presentation which is a useful update on the status of their technology.

Australian company RedFlow is clearly undercapitalised, but it is beginning to rectify this and move beyond its early niche applications (such as powering remote mobile phone towers) which could themselves end up being non-trivial. The point about a zinc bromine battery is that it operates without the need for cooling and the components of the battery are cheap. There is less likelihood of theft of a RedFlow battery than of a lithium-ion based battery. This kind of application could have a significant market. The current focus of the business is to scale up production and take advantage of the successful California 2 MWh system. The question is whether RedFlow will succeed in its own right or whether a better capitalised company will get involved.

Other flow manufacturers scaling up

There are a lot of flow technologies that have been around for a long time.

Vanadium flow batteries have a long history based on early research in Sydney Australia with the first significant scale 200kW/800kWh system installed in Japan in the late 1980's. There are some problems with vanadium-based flow systems, especially concerning temperature control, but these have been addressed in various ways through varying the complexity of the electrolyte solutions. There are lots of vanadium-based flow battery companies and the biggest installation , the Dalian Flow Battery Energy Storage Peak-shaving Power Station involves a vanadium flow battery with a capacity of 100 MW/400 MWh which was opened in September 2022 in Dalian in North-East China. The plan is to double the capacity to 200 MW/800 MWh, but the timing of this is not clear. The goal of this grid-connected facility is to smooth power delivery from solar PV and wind power. Being Chinese, it is not easy to get details about this facility.

Invinity Energy Systems ( IESVF ) is another vanadium flow battery manufacturer which is headquartered in London UK and Vancouver Canada and listed in the UK (AIM:IES). It remains at the low end of scaled up flow systems, with a recently announced 1.2 MWh prototype to be deployed in British Columbia Canada. A second recent project involves a 2.1 MWh vanadium flow battery facility at San Juan County, Washington. Both of these battery facilities are expected to be commissioned in H1 2024. A larger 2 MW/8 MWh vanadium flow battery is expected to be established at Yadlamalka Energy in South Australia next year. Invinity has an annual manufacturing capacity of 200 MWh at a new facility in Vancouver Canada.

Other companies with vanadium flow batteries include Sumitomo Electric Industries ( SMTOY ), Stryten Energy with an installation at Snapping Shoals EMC near Atlanta metro, and Bryte Batteries, which is another vanadium flow battery company based in Norway.

Conclusion

Key players in the US energy world, such as Exxon Mobil ( XOM ) and Chevron ( CVX ) are still very much of the view that energy equates to fossil fuels and that renewables (solar PV and wind) have a marginal role, despite the fact a huge proportion of new power generation comes from renewables. The missing link is managing intermittency. Short term issues (from microseconds to 4 hours) are largely solved and are being implemented at scale globally. More innovations are coming, such as cheaper sodium- rather than lithium-based batteries. Pumped hydro is being expanded for seasonal grid management. However, the next frontier is 6-24 hour storage. Here I've shown that flow batteries are getting closer to being able to contribute to the resolution of this time window. The trick for investors is to find investable opportunities. In relation to flow batteries, this technology remains beyond most investors because the innovating companies are either not yet public or very risky due to uncertainty about which technology will win and also how undercapitalised companies can cope with cash needs without massive dilution for existing investors.

For now the things for investors interested in the energy shift to full electrification are most likely going to be comfortable watching from the sidelines, although ESS claims to be close to scaling up sales for its iron flow batteries. I think they have a high wire act and it might be worth waiting a little to see how they cope with the major challenges which they identify in their Q1 2023 reporting. The intriguing opportunity is Lockheed Martin's interest in defence funded opportunities. Lockheed Martin is such a huge defence contractor that a play in flow batteries seems almost frivolous. However the 6-24 hour storage space is going to be a massive opportunity. If the current Lockheed Martin flow battery excursion pans out, this could be the beginning of a massive opportunity and not just for defence options. I've also identified RedFlow (ASX:RFX) as of interest for investors with appetite for risk, especially with recent developments in California. My small stake in RedFlow keeps me paying attention to the storage space.

I am not a financial advisor but I follow closely the dramatic energy transition as the world begins to decarbonise power in favour of electrification of everything. I hope that my comments are of interest to you and your financial advisor as you review your energy investments.

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