Future Shock: Will Better Batteries Dim Electric Utilities' Prospects?

Technologies Converge to Disrupt Power Industry

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Posted: Wednesday, November 8, 2017 12:41 pm | Updated: 7:15 pm, Wed Nov 8, 2017.

Imagine a fantasy world where solar roofs or panels efficiently and cheaply generate electricity to be stored for weeks in a customer's diminutive and low-cost battery.

Such a world would have little need for a centralized, fully integrated (generation, transmission, and distribution) electric utility, relying instead on self-sustaining battery-combined "distributed generation" systems.

This scenario could emerge as companies and governments continue to invest billions in battery technology and as several technologies converge to advance research and development efforts. In S&P Global Ratings' view, this combined effect could pose an increasing risk to the U.S. regulated utility industry beginning in the next decade and beyond.

Technological advances have undone many established industries, often at a pace much faster than expected. Fewer than 10 years ago we all read the morning newspaper, listened to our favorite music on a CD, occasionally used a public pay phone, and rented our favorite movie on a VHS tape from a video store. Technology has changed many industries, and often when change starts the pace of transformation only quickens. This only adds to the uncertainty and difficulties of trying to precisely predict when a technological breakthrough will transform an entire industry.

Our long-term view incorporates our assumptions that a breakthrough in battery technology remains years away, possibly more than the next decade. Furthermore, even after a technological breakthrough, battery adoption may be somewhat slower compared to other technological breakthroughs. This resistance reflects society's dependence on quality and reliable electricity and our expectation that individuals -- risk averse to power outages caused by technical failures -- would be less likely to adopt early and completely. Also, it is possible that utilities may modify their business model, forestalling such competition. On these premises, we believe the risk to the utility industry is more than 10 years away.

Battery Technology Will Improve

While today we remain far and possibly decades away from a battery technological breakthrough that stores energy for weeks at a time, the odds of a future major battery improvement are ever increasing. This reflects the rising research and development costs that companies and government entities are investing in addition to the diverse projects they're undertaking to advance batteries and energy storage.

A few of the diverse projects and investments include:

Tesla Inc. increased its research and development (R&D) costs by more than 40 percent annually since 2010. The company's approximate $5 billion investment in its lithium-ion battery Gigafactory, which is currently under construction, has the potential to further reduce the cost of this battery type through advancements and improved efficiencies in both battery production and capability. Additionally, the company is building the largest battery project to date with capacity of about 100 MW.

• Industry leaders, including Panasonic Corp. (Japan), Johnson Controls Inc. (U.S.), and LG Chem Ltd. (South Korea) collectively continue to invest billions in the battery industry.

Saft Groupe S.A., a French pure-play manufacturer of batteries, increased its R&D by about 16 percent annually from 2011-2015.

Coslight Technology International Group Ltd., a pure-play battery manufacturer in China, has increased its R&D costs by 67 percent annually since 2012.

• The U.S. Department of Energy continues to invest about $80 million annually in energy storage technology, including batteries.

While the lithium-ion battery, which essentially moves lithium-cobalt oxide between the positive and negative electrodes as the means of generating electricity, is the predominant battery type used today, researchers are developing many other technologies that could ultimately be cheaper and more effective than the lithium-ion battery. The end result may provide customers with an affordable, efficient, and portable way to store energy for weeks.

New battery technologies could come in the form of:

• Advanced hydrogen-bromine flow batteries. These batteries rely on chemical reactants to store energy in external tanks, permitting larger amounts to be stored at a lower cost than lithium-ion batteries.

• Lithium-air batteries. These batteries draw in oxygen from the outside air to create a chemical reaction with the battery's lithium during the discharging cycle, releasing the oxygen during the charging cycle.

• Molten metal batteries. These are liquid batteries that heat metal to about 900 degrees and can store energy at a low cost.

• Saltwater batteries. These are nontoxic batteries that use a concentrated saline solution as its electrolyte.

• Sodium-ion batteries. These batteries could perform at the same standards as today's lithium-ion batteries but at a significantly lower cost.

• Zinc-air batteries. These batteries are currently limited to delivering low levels of power over long periods of time. However, by integrating new chemistry, they have the potential to deliver high levels of power.

Industries Are Converging

We expect that industries will converge around battery technology. One such convergence is evident in electric car company Tesla's acquisition of rooftop solar company SolarCity Corp. in 2016. Electric cars run on batteries, and solar-generated electricity is most effective when its excess generation energy is stored and used at a later time when solar cannot generate electricity. While solar generation is a green renewable energy, harnessing the power of the sun, it has an inherent weakness in that it is intermittent power, only fully effective during sunlight hours on non-cloudy days. To offset this deficiency, excess solar generation must be stored in batteries to be used later. This is exactly Tesla's strategy of joining the solar panel or solar roof with a battery to maximize its efficiency and usage. The union of these two seemingly disparate companies — and other such mergers in the future — will likely result in all-out efforts to optimize battery technology.

A second convergence around battery technology is U.K. vacuum cleaner manufacturer Dyson Ltd.'s announcement that it will invest about $1.4 billion on battery development. This again demonstrates that different industries are converging and investing around a possible battery technological breakthrough.

Who Will Be The Utility Survivors And Thrivers?

Even if there is a technological breakthrough in batteries, resulting in reduced prospects for regulated utilities, we don't expect all utilities will necessarily face the same risks.

First, utilities will have time to adapt to this new reality, and we expect that the better management teams will reduce risk by gradually decreasing the size of their generation portfolio, investing in battery solutions, or other advanced technologies, reducing their operations and maintenance costs. This will drive down their cost to deliver electricity, marketing the utility as an affordable and reliable competitor to the new distributed generation system.

Secondly, we think transmission and distribution (T&D)-only utilities will be less affected. Even with a battery technological breakthrough, most customers would prefer to pay a competitively priced monthly fee to have the utility as a backup in the event of a very cloudy month or a mishap with the battery. Our lives today are so dependent on electricity that few would be willing to risk the potential consequences of living, even for a short while, without electricity.

Generally risk-averse U.S. households conservatively maintaining a competitively priced backup for their power would be similar to the story of the significantly less critical landline phone. Despite wireless phones being extremely popular for nearly two decades, nearly 50% of U.S. households have retained their landline phone.

Utilities most vulnerable to a battery technological breakthrough would be fully integrated utilities located in areas with above-average sun strength, serving customers with above-average incomes. These utilities would initially be most susceptible to declines in electricity sales given the desire of customers in sunny areas to take advantage of this improved power source and their ability to afford the steep upfront costs of installing an enhanced distributed generation system.

Based on the states identified, there are 14 U.S. utilities that we think could face increased risk if there was a battery technological breakthrough (see table). Although this list includes all three of California's large electric utilities, these utilities have been proactive in managing their generation supply commitments, moving their utilities closer to a T&D-only model.

While we think a disruptive technological breakthrough that will threaten the electric industry's business model is more than a decade away, the risk of this occurring over the long term is real. We'll continue to evaluate this risk and how other changes will affect the electric utility industry. Certainly, the electric utility industry has provided low-cost, reliable electricity for more than 100 years, a service that has underpinned U.S. economic growth during this time. However, it is hard to imagine that by 2037 the electric utility industry will still deliver power in the same way it does today.

Primary Credit Analyst:

Gabe Grosberg, New York (1) 212-438-6043; gabe.grosberg@spglobal.com

Secondary Contacts:

Ni Ai, New York 212-438-7278; ni.ai@spglobal.com

Sloan Millman, New York (212) 438-2146; sloan.millman@spglobal.com

William Hernandez, New York 212-438-9132; william.hernandez@spglobal.com

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