How Investors Can Play The One Clear Winner From Texas’ Electric Grid Collapse: Battery Storage

The Electric Reliability Council of Texas did not live up to its name last week. And although daytime high temperatures in Houston have already returned to their regularly scheduled 70 degrees, the impact of the deep freeze lingers on in busted water pipes, empty store shelves and long lines at gas stations. Along with the plumbers working through their massive backlogs, there will be another big winner that emerges from the ice storm: batteries. 

As politicians wangle over how to reform ERCOT and the Texas power grid to withstand a future freeze, expect Texans to take matters into their own hands. There will plenty of new sales of more traditional natural gas-powered backup generators; leading manufacturer Generac reported a surge of new interest from homeowners last week. But expect bigger interest in systems that can work all year around, combining solar panels and battery storage. Houston-based Sunnova is offering home solar systems with battery storage at 0% finance rates and no downpayment. Competitor Sunpower offers home systems that include integration with an A.I.-informed smartphone app that enables a homeowner to sell excess solar power from their batteries back into the grid. “Storage is coming down in cost as fast as solar did,” says Sunpower CEO Tom Warner. “You can have a power plant at home where you have total control.” 

Every new rooftop solar system will take pressure off what is clearly a stressed out grid. “The current grid is incapable of handling an increasing number of climate-driven extreme weather events,” says Carl Fleming, partner in the energy finance practice of McDermott Will & Emery. Solar and wind “would be more effective at energizing the grid during such times with the addition of strategic battery storage to allow for immediate response time, or for ample energy storage of multiple durations.” 

Battery developer Fluence (a JV between Siemens and power giant AES) has installed some of the world’s biggest batteries and expects to build numerous 100 mw systems in the ERCOT regaion. Fluence Chief Operating Officer John Zahurancik says his standard systems can function happily down to -22 degrees. One of his favorite projects is a 100 megawatt battery facility in Long Beach, Calif. that boasts a four-hour duration and replaced an antiquated gas-fired plant. Customer Southern California Edison can charge the batteries with cheap solar power contracted at just 2 cents per mwh. Nationwide, we’ll need 1,000 times that, or 100 gw of storage to enable the renewables evolution, says Jason Burwen, of the U.S. Energy Storage Association. 

Indeed, the battery trend is bigger even than Texas. To invest in it, it’s best to apply a global perspective, says Lucas White, portfolio manager at GMO, who manages $1.1 billion in natural resources strategies and has generated 23% annualized returns the past five years. He sees better returns ahead for the companies that supply the raw materials that go into batteries rather than those that sell the finished product. 

Don’t get hung up on lithium, a main ingredient in lithium ion batteries, he says. “Lithium is abundant, while copper is a precious metal.” If you want to fight climate change, copper is the oil of the clean energy economy.” Solar and wind generators use roughly 10 times the copper of fossil fuel plants for comparable generation capacity, while electric vehicles need at least three times more copper than an internal combustion engine. White currently likes Grupo Mexico, a misunderstood conglomerate with a controlling stake in Southern Copper, which mines in Mexico and Peru. Sandfire Resources, an Australian gold and copper miner also looks attractive. “If you want to overhaul the electric grid, you need copper,” says White. “Copper is the oil of the clean energy economy.” 

Nickel is also becoming more precious. Tesla, at its recent battery day, outlined growth expectations that implied the company would need 80% of the world’s current nickel production in 10 years. “With many other electric vehicle companies coming, it will be a crowded market,” says Smith, who is a fan of Norilsk Nickel, the Russian behemoth that produces platinum, palladium, and other battery metals. 

On the smaller side, White likes Largo Resources, which operates Brazilian mines for vanadium — a key ingredient in revolutionary vanadium redox flow batteries. “Vanadium is likely to be a big part of the solution to utility scale energy storage where density is not as much a concern and they don’t care how much it weighs.” Largo trades on the Toronto exchange. 

For a hardware play White likes SolarEdge, which manufactures innovative power inverters needed to turn the direct current created by solar panels into alternating current, for use in buildings. 

To be sure, the flexibility of battery storage comes with a cost. According to Lazard, the average utility-scale battery will add roughly 10 cents per kwh to the electricity it handles, while a “behind-the-meter” residential system adds about 45 cents (all-in, including capital costs). Though costs are falling rapidly. 

And what of the big publicly traded Texas power generators? According to S&P Global analyst Aneesh Prabhu, Vistra Corp. emerged as the most reliable provider — only 1 gw of its 18 gw of Texas power plants reportedly went down during the freeze. NRG Energy, meanwhile is likely to see a $250 million reduction in 2021 operating earnings due to the loss of one of its nuclear reactors during the freeze. The situation was even worse at Exelon Generation, which had several of its Texas plants down for maintenance during the freeze, meaning it not only missed out on selling electricity at peak prices, but it also had to pay out the nose to keep customers supplied. S&P figures the ice storm could cost Exelon as much as $750 million. 

John Bartlett, portfolio manager at Reaves Asset Management, runs the closed-end Reaves Utility Income Fund and the utility-focused closed-end fund and the Virtus Reaves Utilities ETF. He doesn’t currently hold Vistra or NRG Energy, which have high debt loads, but believes they will both see significant growth in their respective retail electric providers, TXU Energy and Reliant Energy, which are likely to gobble up customers from small asset-lite electric providers that will be forced into bankruptcy by last week’s peak power prices ($9 per kilowatthour, versus a Texas average 8.6 cents per kwh last year!) they had to pay during the ice storm. 

Investors in utility-scale Texas generation assets will need to look for answers to important questions, says Bartlett. “What operational improvements might be made? What changes to market structure might all this beget? Importantly, what are people willing to pay for and what are they getting for their money?” As temperatures warm, repairs are made and memories fade, “it remains to be seen the degree to which Texans actually find the status quo untenable,” says Bartlett. Do Texans really want to shoulder the costs of winterizing wind turbine blades or power plant equipment for a once-in-a-generation deep freeze when that money could be better spent on microgrids and storage systems that will get far more long-term use in the heat of summer or the aftermath of hurricanes? “You would never build a utility for the day that the water pipes freeze in Houston,” says Bartlett. “You wouldn’t build a utility for a day when it got to zero in Dallas.”

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