AES - Fluence Energy: On The Right Track But Is The Market?

2023-05-09 10:54:35 ET

Summary

• Fluence listed on NASDAQ 1.5 years ago as a JV between Siemens and AES, but the teams brought together have much deeper energy storage experience.
• Fluence has clear goals for expanding its battery storage market, but this is much more than building and installing big batteries.
• It is possible that many in the market, including investors, may be missing how profound the other grid management aspects of Fluence’s business are.
• The company’s deep global knowledge helps Fluence to be strategic about the markets it seeks to play in.
• Fluence's share price has been volatile over the past 12 months, but there is a clear uptrend and the share price has doubled. Investors might think about a recent pullback in the past month (down 4.3%) as a possible entry point.

It is becoming clear that a key element of the transition from centralised, inflexible fossil fuel grids to those based on renewables is a capacity to manage intermittency. While pumped hydro is a useful way of doing this, increasingly battery technology is being used for stabilising renewable grids because it allows near instant power management, but also with up to six hours of battery capacity. This coupling between solar PV/wind and battery storage is showing staggering growth.

I've covered the birth of Fluence Energy (FLNC) elsewhere in September 2022 where I also reviewed its Q3 2022 reporting. There was change at senior management level and a strong commitment for the company to get its act together in growing the business profitably. Simple Investing reviewed Fluence's Q1 2023 performance in February 2023, indicating that management has been strong on execution as had been planned. Here I take a look at where the company is headed. I like what I see and think that the company might be of interest to investors looking to participate in the modernisation of power grids. After a small check in share price over the past month there are signs that the stock might be ready to move forward again. This is quite remarkable given the signs of headwinds in global markets. My take is that the urgency of decarbonizing power is beginning to be recognised in light of a number of very costly climate-related challenges that begin to impact food production globally.

Fluence has been raised to "buy" status by Goldman Sachs in March and Guggenheim in April. The company really is getting into its stride (up 110% year on year) and is worth investor attention, having been neglected by the market over most of the past month (down 15.9%), but it has experienced some recovery in recent trading sessions.

Fluence positions its products in terms of "transmissions assets" rather than just big batteries

Big battery producers are often pigeonholed as merely suppliers of battery storage products that get energised when there is too much renewable energy and get drained in periods when intermittent renewables under-deliver. This focuses on the supposed failure of renewables to be ideal power suppliers, even though power produced by renewables requires no further mining once the capture assets are installed.

Fluence, while not alone in this positioning ( think Tesla ( TSLA )), is explicitly positioning its latest product, called Gridstack, differently as a "transmission asset". Gridstack is currently being installed in a 150MW/300MWh big battery facility, the Hazelwood Battery, in Victoria Australia with a promise of 99% grid uptime. This is one of several Fluence SATAs (Storage-As-a-Transmission Asset) which are contracted or being delivered. The Gridstack represents Fluence's 6th generation technology stack. It is described as scalable (2 MW-500MW+), with 1-6 hour discharge duration and a safe "shock absorber". Gridstack uses software to provide grid stabilisation, including system inertia, power oscillation damping and renewable integration. The components of the Gridstack are: the 14.2 cubic meter Fluence Cube lithium battery, The Fluence OS operating system and the Fluence IQ which automates wholesale market participation to maximise asset value through forecasting, optimisation and bidding.

Fluence statistics are impressive for a young company: 6.2 GW of energy storage, 225+ energy storage projects in 44 markets and 18+ GW of optimised renewables and storage. These statistics represent assets deployed, contracted or under management. It is interesting that Fluence has invested heavily in building out its IT capacity in India to service its global markets.

How a renewables heavy grid operates

Big batteries are being built everywhere to stabilise grids that are increasingly converting to being powered by renewables. Australia is a leader in big battery adoption and RenewEconomy has a big battery storage map which shows 109 sites in Australia with projects bigger than 10MW or 10 MWh. The scale of the growth pipeline of projects is indicated by the following metrics: 15 operating, 12 under construction, 30 announced and 52 proposed.

Fluence provides an interesting up to date (April 2023) case study concerning management of a grid (Texas ERCOT) which has a high penetration of wind assets installed, and it comments on how its AI software with accurate forecasting helps. This is worth reading.

There is a lot to the Fluence story as it becomes one of the leaders in data prediction and management to ensure grid reliability (managed by big batteries). This new reality for augmenting renewable power is being ignored by some in the fossil fuel industry with leaders like Exxon Mobil ( XOM ) continuing to write it off without discussing the possibility (reality) of renewable-powered grids, in the hope that there will continue to be a market for gas peakers. Whereas in the past renewable projects could be built without clarity about how the power would be integrated into the grid, increasingly new renewable projects are being tied to replacing outdated fossil fuel power generation.

Fluence growth strategy

It has been suggested that Fluence is just looking to build its business through connections of its two large corporate parents Siemens ( OTCPK:SIEGY ) and AES Corporation ( AES ). While this is an obvious start-out position for a large battery company spun out of two huge parent companies, a bigger strategy is evident that is playing out in India. An interview by Sumit Jha (Mercom India) and Fluence CEO Julian Nebreda and SVP and President APAC Jan Teichmann gives an insight into Fluence thinking about India and more broadly its global ambitions. Julian Nebreda talked about Fluence's ambitions to manufacture batteries in India not only for the Indian market, but also for export elsewhere in Europe and Asia. Part of this strategy is to broaden Fluence's options away from too much dependence on China. Nebreda made clear that battery manufacture will take time to establish (maybe by 2025 or 2026), but Fluence is committed to rapidly implementing manufacturing in India with significant progress by the middle of this year and complete activities by end of 2024. Batteries represent ~50% of the cost of Fluence products, so manufacture of the rest of the Fluence product portfolio in India will assist Fluence in cost effective manufacture and also Indian employment.

A really interesting side of the Indian interest by Fluence, which dates back to formation of the company in 2018, is the fact that India is poorly served by access to gas-based power. This has been the "go-to" source for managing intermittency in the first instance in grids that have been fossil fuel-based. Batteries are an obvious solution for India which has aggressive renewable targets of 500 GW by 2030.

The exclusive partnership between Fluence and ReNew Energy Global ( RNW ) is an interesting one to watch, despite poor recent performance by RNW (down 24% year on year).

When discussing which battery technologies Fluence was considering, Teichmann made clear that lithium batteries have a big advantage currently due to the massive growth of the BEV (Battery Electric Vehicle) market which has brought the cost of manufacture down the cost curve. No other battery technology has yet been able to achieve this scaling advantage. The thing is that lithium batteries can offer up to six hours of storage and this is the sweet spot for grid stabilisation.

Having acknowledged the dominant role emerging for lithium-based battery technology, I think it is important to be aware of the likely emergence soon of complementing sodium battery technology. Even though sodium batteries are heavier than lithium batteries, the world's biggest battery manufacturer, CATL, suggests that there will be application for sodium batteries in 60% of global BEV (Battery Electric Vehicle) markets. Stationary batteries have less pressure on the weight of the battery than do vehicles. I doubt that there will be a problem for Fluence to incorporate cheaper sodium batteries in Fluence's battery offerings.

Having addressed Fluence's big interest in India as a choice in part to address overdependence on China, it is important not to neglect what is happening in the US. The Inflation Reduction Act is a powerful incentive for US manufacturing and Fluence is well advanced on building a US capacity for battery modules and battery management systems.

What the market thinks about Fluence

As often happens with emerging stocks in new markets, Fluence is not well covered by Seeking Alpha authors with just two articles in the past month (one buy, one hold), while 20 Wall Street analysts in the past 90 days are strongly positive (10 strong buy, three buy, six hold and one sell). As seems to be the pattern with Seeking Alpha's Quant Rating when addressing emerging companies that are yet to establish a profitable track record, Fluence has a hold rating. My take is that the Quant Rating is not strong for emerging companies as it tends to compare them with stocks in well-established industry positions. I think this is an oranges and apples comparison. To reinforce this view it is interesting that recently Goldman Sachs and Guggenheim have upgraded their positions to "buy".

Conclusion

The often overlooked issue about big batteries is that they are much more than unsophisticated storage devices for storing excess wind and solar power, to be released when needed. Management of intermittency is a key part of the renewables grid and this goes to spatial management of the grid (ie batteries in different geographies), frequency regulation, and high quality modelling to anticipate and manage power shortages and excesses. Fluence and Tesla are key companies to have realised this important role for big batteries and both companies have emerging businesses that are being seen as key to managing grids that are heading towards being 100% renewable. Some have argued that Fluence will be successful with customers in the world of Siemens and AES, but the company will not be successful in building a broader-based business. Everything I see about Fluence indicates a clear vision and strategy to be a major player in decarbonization of grids globally. I'm watching India as a market with clear goals about exit from fossil fuels and the strategy being followed by Fluence to engage closely with a high quality Indian development group ReNew Global ( RNW ). Currently this company is unloved, but the combination of Fluence and RNW reflects the strategic global plans. While many in the fossil fuel industry still cannot grasp how close grids based on very high penetration of renewables is, I think this is a fertile area for investment and Fluence is emerging as a key player.

I am not a financial advisor but I follow closely the huge changes as decarbonization of grids begins to happen everywhere. I hope that my perspective is of value to you and your financial advisor as you consider energy investment.

For further details see: