Innovation in the ‘Traditional’ Sectors — Part 2

I recently wrote about the need for innovation in ‘traditional sector’ companies and used cathode materials in lithium-ion (li-ion) batteries as an example for showcase the challenge and also the opportunity. That post led to several subsequent discussions including understanding risk, planning for innovation and growth. One theme that also came up regularly is having end-to-end visibility, in an industry, which I’d argue is still nascent with vested interests of incumbents and new players.

In this post, I go to the other extreme and from one commodity (minerals) to another (kWh), with energy needed to charge Electric Vehicles (EVs). Spoiler alert, the same theme as upstream is also evident here and is ripe for innovation, both from technology and business model standpoint.

It’s projected that by 2030 the global passenger EV fleet will be 145 million. This fleet of vehicles will need 640 TWh of energy to keep these vehicles moving. To put this in perspective, this is approximately 15% of the total generation capacity in the US, a ~$20T economy. To support this energy need, will require investment in generation capacity, transmission, and charging infrastructure.

The energy utilities in the US have invested ~$2.5 billion in transportation electrification and are projected to invest another $13 billion over the next five years. Think of the corresponding analogue of the upstream investment in li-ion cell capacity, of which ~70% is in China. In addition to investment, the congestion cost is estimated to have increased from $3.8 billion in 2016 to $5 billion in 2018. To make matters worse, some of the largest utilities in the US have junk rating.

It’s also an open question as to how will the business model of charging infrastructure evolve. One obvious proposal is energy utilities to build this infrastructure, but there is a push back due to monopolistic dynamics and also rate increase, as seen in the recent SCE investment. The other option is, with the shift from oil to electrons also presents ripe opportunities for the Oil & Gas (O&G) companies to grow beyond their core business. It’s no surprise that BP, Shell, and Total have been on a buying spree recently and making investments.

Beyond these two sectors, there are potential opportunities for companies in related sectors. While a typical car is used for ~5% of the time and uses ~10% of the vehicle’s battery capacity is used for daily driving. This fleet of 145 million EVs are distributed energy resources that at a 50 kWh battery can provide energy to ~0.25 million US households for a month! Assuming conservatively that 30% of the battery capacity is made available it will provide 2.1 TWh of energy available for grid services. With the EV industry moving towards a million mile EV battery, the use cases beyond driving will become more attractive. That’s why the FERC order 8222 to allow distributed energy resources in the wholesale market is so important.

We’re seeing signs of these new trends, where Tibber is aggregating EVs to firm up the grid, Sunrun is aggregating stationary energy resources for grid services, or Nuvve’s Vehicle-to-Grid (V2G) pilot with SDG&E. Some of the recent EV model releases also are presumably V2G ready from day 1. Several other companies in the traditional sectors — e.g. power electronics, materials, automotive, will likely have promising innovation and growth opportunities. Like in the upstream case, leveraging the rapid innovations across hardware and software technologies will help the companies to lay the foundation for growth as they expand beyond their core businesses.