Come gather round people wherever you roam
And admit that the waters around you have grown
And accept it that soon you’ll be drenched to the bone
If your time to you is worth saving
And you better start swimming or you’ll sink like a stone
For the times, they are a-changin’
The industrial revolution and the 250 years that followed were made possible by the discovery and application of large quantities of fossil fuels. But to quote Bob Dylan—who is cited throughout this blog post—“The Times They Are a-Changin’.”
My generation views Green as a movement. Millennials more meaningfully view it as an imperative.
“Alternative energy” will simply become energy. Royal Dutch Shell has predicted that oil demand will have peaked permanently within five years. Wind and Solar are growing more quickly than experts predicted, and that is a good thing because the demand for energy is rapidly increasing for products and services that were unknown only a few decades ago. What wondrous, high-tech innovation will be needed to meet this exploding demand for energy?
There are three primary drivers of the escalating demand for batteries: the Internet of Things (IoT), the concept of connecting a wide range of devices over the internet so they can talk to each other, apps, and us; Energy Storage Systems that store solar energy for when the sun isn’t shining and wind energy for when the wind isn’t blowing; and Electric Vehicles.
It is predicted that the use of batteries in electric vehicles alone will eventually demand 1,000 times more battery power than is used today.
Someday, chemistry will evolve, and innovation will create fuel cells that we cannot imagine today. However, for at least the next two decades, the heavy lifting of transforming the world economy to a greener state will rest on the back of batteries. Specifically, the new economy’s backbone will be the lithium ion battery.
At Cowen Group, we predict that today’s $5 billion battery market for electric vehicles will grow to more than $500 billion over the next two decades. Energy storage systems which currently use $1 billion worth of batteries a year will grow to $125 billion. Both of these markets will compound their growth at over 30 percent per year! Consumer devices, which today is the largest market for batteries at $15 billion, will continue to grow 10 percent per year.
The Internet of Things is the real wild card. It is predicted that in 20 years, IoT will represent more than 1 trillion—yes, with a “TR”—devices, and its use of batteries could eventually dwarf the other markets.
Electric vehicles are clearly the near-term driver of demand. We predict that the cost to manufacture an electric drivetrain will become cheaper to produce than an internal combustion drivetrain within eight years. This will be the point at which the switch to electric vehicles becomes rapid and inevitable. The auto manufacturers understand this and the announcements they have all made this past year regarding their moves toward electric vehicles is breathtaking.
The energy companies, meanwhile, are watching this, stunned, and have started to plan for the new economy.
Your sons and your daughters are beyond your command
Your old road is rapidly aging
Please get out of the new one if you can’t lend your hand
For the times, they are a changin’
Twenty years ago, even 10 years ago, the engineering students at America’s finest universities all wanted to be Steve Jobs, may he rest in peace. Today’s engineering students, entrepreneurs and most participants at the epicenter of America’s innovation who toil in the corridor from San Francisco to San Jose and Menlo Park all want to be Elon Musk. The genius and foresight and determination of the founder of Tesla, Solar City, and SpaceX should not be minimized, yet many in the economic establishment of the U.S. still view him as a quirky upstart.
His vision of a gigafactory to build batteries originally met with skepticism, but there are now 13 other gigafactories planned by other companies. Nine of those will be in China, which was able to leap frog a century of telecommunications infrastructure building done in other countries by going directly to wireless communication. Again, China is largely avoiding the ramp-up of transportation based on the internal combustion engine by planning a rapid cross-over to electric vehicles. Cars, trucks, buses, fork lifts, scooters—virtually everything that rolls will quickly convert to electric in China.
The loser now will be later to win
For the times, they are a-changin’
Batteries have not been in short supply over the past decade. In fact, making batteries has not been that profitable because supply has often exceeded demand. That is changing right in front of our eyes. There will be a massive increase in capacity to produce batteries better and cheaper.
There is, however, a catch. The battery chemistry of the lithium ion workhorse is largely dependent on very high quality lithium and cobalt for the cathode (nickel manganese and aluminum are also used in much smaller amounts) and graphite for the anode.
While there is plenty of graphite in the world, there is not plenty of high quality, battery-grade graphite. Much of the graphite has come from China and is produced in a manner that, to be polite, is not environmentally friendly. The production of cobalt has largely been supplied by artisanal miners as a byproduct of ore available from copper mining in the Congo. However, as has been the subject of explosive reporting by both the Washington Post and Amnesty International, this has come at the cost of the lives of countless children and contamination of the environment.
Lithium deposits are significant in several locations around the world, but the productive capacity to supply the amount of high quality lithium for the coming demand simply doesn’t exist. Nike learned that an American company with high standards cannot rely on suppliers who do not meet those standards globally. Companies like Tesla, Apple, Amazon, etc., will eventually demand that the inputs to the batteries they use come from suppliers who respect humanity and the environment. We can’t move to a greener world starting with filthy inputs.
The cost of the lithium, graphite, and cobalt in batteries in an electric vehicle is a small percentage of the total cost. But as the need to create a significantly cleaner supply grows, the prices of these commodities are sure to rise. Finding companies that can produce these supplies properly will be a great investment opportunity over the near to intermediate term.
The slow one now will later be fast
As the present now will later be past
The order is rapidly fading
And the first one now will later be last
For the times, they are a-changin’
Auto manufacturers that don’t continue to evolve their products quickly will be relegated from the status of corporate titans to corporate dinosaurs. Oil companies have to shift from simply producing hydrocarbons to diversified business plans.
Companies leading the charge in electric vehicles, the Internet of Things, and consumer electronics can be the next titans in the new economy. They will create jobs and grow rapidly if they execute their plans well. In 20 years, the Fortune 100 will likely have a completely new cast of characters. The investment ramifications are profound. Investment winners and losers are one apparent consequence of the coming new energy economy.
Author’s Note: Special thanks to Chris Krueger of the Cowen Washington Research Group, who came up with the style of embedding song lyrics in articles for the WRG Washington Weekly.