New Solutions, New Challenges

Friday Reflection | December 4, 2020

New Solutions, New Challenges

Equity markets extended price gains this week. The news of a bipartisan stimulus proposal provided hope for a political compromise, while economic data offered a more tempered picture of recovery in the near term. Data this week showed that manufacturing activity declined in November, and the US economy only added 245,000 jobs in the month – by far the slowest month of job growth since the beginning of the recovery. The job recovery is hampered by lower than normal seasonal hiring as well as renewed business restrictions due to the pandemic resurgence and may constrain confidence and put stocks at risk for renewed downside volatility.

Longer-term, the outlook for asset prices is brighter. The housing market remains strong with low inventory and low-interest rates both supporting prices. New business formation in the US has continued to accelerate in recent months, and we’ve had several announcements of high-efficacy vaccine development success. In addition, concern about climate change and environmental sustainability is also driving a dramatic range of innovation; a broad swath of technology, industrial, and consumer product companies are likely to benefit. Today we discuss the rapid growth of the electric car market and the innovation in battery production that has made that possible.

We’ve discussed many areas of rapid change in our past articles, from telehealth and grocery delivery to the recent progress in Covid vaccine development. In the Bay Area, proximity to Silicon Valley’s tech innovation, combined with acute climate change awareness, has led many to enthusiastically embrace electric vehicles. This has been driven by significant advances in battery technology, declining costs as manufacturing expands, and tax credits for buyers. We expect this trend to continue due to the potential for additional government subsidies for green infrastructure, as well as advances in efficiency.

It is easy to see innovation in the field of battery technology that has made widespread adoption of electric vehicles possible. Beyond expanding global sales – which have tripled in the past four years,¹ – the leaps forward in efficiency are staggering. Mileage capacity has expanded from short local trips to much longer battery ranges that allow trips of hundreds of miles, and the holy grail of the ‘million-mile battery’ is viewed as within reach.² The stock prices of Tesla, Nio, Nikola, and even GM have reflected the potential commercial upside of this innovation.

While the positive impacts of electric cars on urban air pollution can be significant, the production of the lithium-ion batteries used to power these vehicles can be an energy-intensive process. Further, these batteries need to be replaced every 10 years in most cars and every 3-4 years in electric busses and trucks. That means the global stockpile of these batteries is projected to exceed 3.4 million by 2025, compared with about 55,000 in 2019.³ This is almost a 62-fold increase in 7 years. As we wrote last week, necessity is the mother of invention, and new businesses are stepping up to solve this problem (and make a profit).

Re-Use
Many electric vehicle batteries that are “spent” still have up to 70 percent of their original capacity. This opens the possibility of alternate uses, extending the use of the battery before being recycled. In Japan, Nissan repurposed vehicle batteries to power streetlights. Renault has batteries backing up elevators in Paris. And GM is backing up its data center in Michigan with used Chevy Volt batteries.  

Old batteries can also be useful for storing solar energy and backing up traditional electrical grids. In addition, private companies like the UK-based Powervault and Australia-based Aceleron have created technologies that can turn batteries into home electricity storage units, electric bike batteries, and other tools. Both established auto manufacturers and several renewable energy storage suppliers are among those trying to create a profitable aftermarket.

Re-Cycle
Continued innovation in lithium battery recycling is essential to address the challenges of scale in handling the significant industrial waste material in car batteries. Re-use is preferable to recycling, but the huge volume of materials now being produced will eventually require refurbishment, re-manufacture, dismantling, or final disposal. The associated challenges will mean substantial opportunities for innovation for battery technology and beyond. Uncontainable fires of stockpiled tires in the past – or current fires in metal recovery facilities such as the 2018 fire in a San Carlos – make clear the need for effective materials handling from manufacture through to recycling.⁴

In a way, the problem of battery recycling at scale doesn’t exist – yet. The tenfold increase in battery production in the last decade, however, means a corresponding increase coming in the years ahead as those batteries reach the end of their lifespan. Former Tesla executive JB Straubel⁵ launched a recycling startup in 2017 not far from Tesla’s Gigafactory in Nevada, Redwood Materials.  They use both pyrometallurgy (smelting) and hydrometallurgy (using acid solutions) to recover copper, nickel, cobalt, aluminum, and lithium. His goal is a circular supply chain that can make a material impact on sustainability.⁶ “We’re going to build a remanufacturing ecosystem for all those batteries. Material can get reused almost infinitely. There’s no inherent degradation to the metal atoms.” Both Amazon and Panasonic are current customers.

Another premier EV battery recycling company is Li-Cycle, a Canada-based company that uses advanced recycling technologies that can recover up to 100 percent of lithium from lithium-ion batteries. In the United States, California-based Retriev Technologies and Oregon-based OnTo Technology are also pioneering advanced battery recycling processes. A September 2020 report from the European Patent Office and International Energy Agency documented the rise of patent activity in batteries and electric storage technologies – including recyclability, and noted that the rise in innovation is driven by electric car battery technology.⁷

Innovation leads to economic growth, and that in turn provides an opportunity for investment.  Portfolio growth depends on the continuous renewal of those opportunities, which is why we are always interested in novel approaches to resolve current challenges. Many of our clients have expressed a preference to have their portfolios incorporate social and environmental screening in addition to financial considerations, and the companies innovating with battery technology are one example. This preference stems both from the desire to use their investments to support a more sustainable world as well as a conviction that this is the direction that our shared economy is moving. 

Companies that have diverse management teams, treat their employees well, and proactively address climate risks in their business have been rewarded by investors in recent years. North Berkeley portfolios that incorporate these strategies have also outperformed this year. Past performance is no guarantee of future results; yet, we expect innovative trends to continue, and to bring a real benefit for investors, for the environment, and for society as a whole.

¹Global electric car sales by key markets, 2010-2020. Last updated 2 Dec 2020 IEA.org

²What the million-mile battery means for electric cars. July 30, 2020 edition. Economist

³The Afterlife of Electric Vehicles: Battery Recycling and Repurposing. May 6, 2019. Institute for Energy Research

⁴Recycling lithium-ion batteries from electric vehicles.  November 30, 2019.  Nature

⁵Amazon invests in battery recycling firm started by former Tesla executive. September 17, 2020. CNBC

⁶The Race to Crack Battery Recycling – Before It’s Too Late.  November 30, 2020.  Wired

⁷A rapid rise in battery innovation is playing a key role in clean energy transitions.  September 22, 2020.  IEA.org