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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Iron-Air Batteries Could Be The Breakthrough Energy Markets Are Waiting For

Last year, we made a financial projection for the price of electricity long term, with or without decarbonization (“Electricity decarbonization is not that expensive, so let’s get on with it”, Society of Utility and Regulatory Financial Analysts, April 2020). We concluded that decarbonized electricity would cost more primarily because battery storage costs so much. Mind you, we weren’t talking about a big price jump that anyone would notice in the typical family’s budget, for example, but nevertheless, a higher price for clean energy. A number of academic papers have concluded otherwise, but they depended on assumptions that might be optimistic. We wanted to stick with what we knew, and not assume that all would end well.

If the high cost of battery storage is one of the major impediments to some type of clean energy transition then what is required is a reduction in the cost of energy storage. And we were concerned about that prospect, because the drop in storage costs over the past two decades looked like this:

FIGURE 1: Index of cost of energy storage per KWH (2000=100)

That looks like the curve seems to be flattening out. We might need something new to change the picture, to bend the curve as some like to say. 

And then this news comes along. A group of venture capitalists and investors including Bill Gates, Temasek (Singapore’s state holding company), Macquarie (the Australian infrastructure investor) and steel group ArcelorMittal have joined MIT engineers to finance a company, Form Energy, that claims that its iron-air battery can deliver electricity for 100 hours at one-tenth the cost of lithium-ion batteries.

This new technology is said to feature easily sourced components, no Chinese rare earth materials, modular installations, and perhaps even the batteries may not burst into flame. Form Energy has already raised over a quarter billion dollars from investors and announced a deal to provide 150 hour energy storage to Great River Energy, a generation and transmission cooperative in Minnesota. This 150-hour battery contrasts with existing grid-scale lithium-ion batteries that provide energy typically in bursts of between two and four hours. A utility would be able to tolerate a whole lot of intermittent generation from wind and solar with that type of storage. Great River plans to completely phase out its coal-fired generation as a result.

We’re finance types and not engineers so we’re not writing today to attest to the veracity of the company’s claims. We know venture capitalists raising new funds tend to accentuate the positive to put it mildly. But this is a group that has to be taken seriously and if they continue to acquire significant utility clients they, and more importantly their technology, will get real traction.

We want to examine briefly what happens if their seemingly extravagant claims prove to be genuine. So we took another look at the price of electricity, assuming that the industry achieves a zero carbon goal by 2039. Our original study, presented at an industry conference in 2020, calculated that in 2019 dollars the price of electricity in the US would rise from an average of 10.7 cents per kilowatt hour in 2019 to 16.2 cents without major decarbonization efforts, a business as usual case by 2039. US electricity prices in our study rose to 22.7 cents per KwH with decarbonization in 2039. Next, let’s assume that Form Energy’s claim about the real cost of its battery storage is even close to accurate. If so, our back of the envelope calculation shows the price of decarbonized electricity in the US in 2039 falling into the 14-17 cent per KwH range. And that calculation may not reflect additional savings from reduced transmission expenditures. 

At this point it’s too early to get hung up on precision. This is the point: the degree and level of reduction in battery storage costs predicted by Form Energy’s new product is a game changer. It has the potential to completely change the discussion about decarbonization of electricity and the related role of storage. What is interesting to us, given the enormous capital intensity of the electric energy transition ahead, is that this new battery type could meaningfully reduce prospective capital spending needs.

In business type articles we tend to focus on winners vs losers. The clear loser here is natural gas as a boiler fuel for electric power generation. Coal also but coal is already uneconomic relative to gas, and becomes even more so if we assume carbon taxes are likely soon. The key for us is that natural gas has been the boiler fuel of choice for many utilities transitioning from coal-fired power generation. This fast transition to natural gas-fired baseload power generation, especially given the US utility industry’s checkered past with respect to climate change denialism, has long been a concern for us. Any degree of political blowback could result in potential stranded asset risk for utilities that leaned heavily into new gas-fired baseload power generation.

Given that each day brings another supposed climate-related disaster to the public’s attention, we don’t think it’s a stretch to anticipate a popular demand for a more rapid transition to cleaner forms of electricity production—especially those that would not meaningfully raise prices. Up until now, the US utility industry has transitioned to natural gas power generation in large central station plant formats for its scalability, reliability, and access to plentiful domestic fuel sources. But a relatively inexpensive 100 hour plus utility-scale storage battery is as disruptive a technological force for the electric utility industry as anything we have ever seen.

By Leonard Hyman and William Tilles for Oilprice.com

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