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Learning about ESG : Why batteries are key to the green transformation

22 Sep 2023

Travis Tucker

HSBC Asset Management, Research & Insights Senior Manager

Ed Conroy

HSBC Asset Management, Head of Active Equity Research

Key takeaways

  • Recent US and EU policy initiatives highlight the importance of battery technology, emphasising its strategic significance in a fragmented world.
  • Battery technology is crucial for widespread adoption of electric vehicles and renewable energy. Significant investment in recent years has driven declining battery costs, supporting adoption growth.
  • The green transformation offers diverse investment prospects. From battery advancement to clean energy, investors can contribute to and benefit from the green transition, driving positive environmental change.

Learning About ESG is an educational series that connects environmental, social and governance topics with investing.

Join us each issue to see how global developments can have implications for investors. The better we understand ESG, the bigger the role it can play in our everyday lives – and investment portfolios – contributing to a better world.

A proliferation of rooftop solar panels harnessing the sun’s energy, wind farms powering electricity grids, or electric vehicles transporting us to and from are all dependent on battery technology to efficiently store ever-growing amounts of power.

Recent policy initiatives from the US and EU underscore the importance of batteries. Both the US Inflation Reduction Act and EU Net Zero Industry Act include strong commitments to boost investment and self-sufficiency in battery technologies.

This comes amidst a more fragmented world, where competition has been overcoming global cooperation. Consequently, local battery capacity has emerged as an area of strategic importance as global powers prioritise resilient infrastructure and accessibility of key resources. The investment required is significant, with roughly USD165 billion of capital expenditure estimated to be needed in the EU and US to localise battery supply chains[@wood-mackenzie] - an area that China currently dominates, per the chart below.

Lithium batteries are typically associated with electric vehicles (EVs), with efforts to extend mileage per charge supporting mass adoption. Yet, their use extends across the spectrum of green infrastructure, also being vital to greater adoption of renewable energy. Since renewables generate power intermittently, more reliance on them requires greater ability to store the power generated.

The chart below shows the declining costs of green infrastructure as investment has picked up. Clearly, none has been as pronounced as the drop in EV battery costs. Driven by the surge in adoption, investment in EVs has grown at an average annual rate of over 50% since 2015. In conjunction, investment in battery storage technology has likewise grown by 50% per year over this time[@iea].

Source: HSBC Asset Management, International Energy Agency, May 2023. Figure for 2025 and 2030 is projected.
Source: HSBC Asset Management, International Energy Agency, May 2023.

What should investors expect in the years ahead?

While much of the investor attention on electric vehicles focuses on vehicle manufacturers, the underlying supply chain is where we expect significant change and opportunity to come.

${footnote}The attention on electric vehicles has been warranted, given a remarkable surge in demand that’s projected to increase by over one-third this year, following a record-breaking 2022[@international-energy-agency-july-2023]. With the growing scale and investment, EV battery costs have declined by over two-thirds in less than a decade. BloombergNEF’s Electric Vehicle Outlook predicts EVs will constitute nearly 60% of global passenger car sales by 2024. This will be facilitated by a projected fourfold increase in lithium-ion battery manufacturing capacity by 2030, led by China.

While China’s battery capacity expansion could lead to a global surplus over the next decade, ex-China battery supply should remain tight through the middle of this decade due to the combination of low existing capacities and fast demand growth. As EV demand picks up more broadly in the EU, US, India and other markets, China’s share in global EV battery demand is set to decline from roughly 60% currently to around 30% by 2030.

Given ambitious regulatory targets supporting electrification, Europe may become the new leader in EV penetration before the end of this decade. In the US, where penetration is currently lower, EV battery demand is expected to grow at a compound annual growth rate of 30%, gradually catching up with China by around 2030.

Projections suggest that the EU and US could achieve localised supply in battery cell manufacturing by 2027. ‘Home grown’ companies in the US should be particular beneficiaries from the changing regulation to support local manufacturing, while Korean battery makers should benefit from efforts aimed at reducing reliance on supply from China. 

Source: Precedence Research, December 2022.

What are key long-term implications?

Both the US and Europe have recognised the importance of recycling to alleviate battery materials shortages through their policy directives. Domestic recycling companies will play a pivotal role in localising the battery supply chain – helping the shift towards a more circular economy described in prior articles.

Achieving battery self-sufficiency poses specific challenges that need to be addressed, including:

  • Limited access to natural resources such as lithium reserves, which despite recent discoveries in the US, are for now highly concentrated in a few countries such as Australia, Chile and China.
  • Lengthy project lead times of up to seven years to localise various parts of the supply chain.
  • Higher costs associated with manufacturing outside of China.
  • Developing a local labour force with the requisite skills will take time.

Additionally, Chinese manufacturers have had the upper hand through access to royalty-free patents and more aggressive R&D spending. However, Korean and Japanese manufacturers are narrowing the gap in current technologies and are even well-ahead of the curve in some newer technologies.

To address the raw materials access issue, adopting alternative battery compositions becomes imperative, alongside the recycling opportunity. Sodium-ion battery technology has emerged as a commonly explored alternative to lithium-based batteries, offering a potential solution.

Today, sodium-ion batteries are more expensive than their lithium-ion counterparts due to low volumes and underdeveloped supply chains. However, future materials savings and energy density improvements offer a viable pathway for them to cost half of today’s lithium battery prices.

The other major advantages of sodium-ion are a more geographically diverse distribution of raw materials, better low-temperature performance and safety. BloombergNEF projects uptake of sodium-ion batteries to gain momentum from 2026, initially in the stationary energy storage market — supporting larger-scale renewable energy power storage.

Whether supporting EVs or clean energy, advancements in battery storage technology will serve as the backbone of the green transformation. Key shifts in this market will create less obvious, but interesting opportunities to invest in the transition.

Glossary

US Inflation Reduction Act: The act was passed in 2022, with investment in manufacturing, clean energy and significant reduction in carbon emissions as key priorities.

EU Net Zero Industry Act: Intended to accelerate Europe’s green transformation, with an overall goal to put Europe on a path to domestically manufacture at least 40% of its clean energy technology needs by 2030. 

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