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Batteries Enabling the Next Jump Towards Sustainability

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Batteries Enabling the Next Jump Towards Sustainability JULY 2021 BATTERIES ENABLING THE NEXT JUMP TOWARDS SUSTAINABILITY Although base battery technology is over 200 years old, it was not until 30 years ago with the invention of the lithium ion (Li-ion) battery that the technology reached a tipping point to where today nearly all of us carry a Li-ion battery in our pockets. As we have come to grips with the crisis arising from our reliance on fossil fuels and global warming, battery investment and research increased substantially, especially over the past decade. Due to battery technology advancements and the increasing need to move away from fossil fuel dependence, we now find ourselves on the brink of yet another tipping point. Once we move beyond this point, we will be ushered into a new age of battery reliance which will enable us to leap to novel modes of energy storage and physical mobility that are truly more sustainable. Approximately 80% of Li-ion demand comes from, and will continue to come from, Electric Vehicles (EVs) as both regulatory incentives and market drivers will rapidly increase penetration of EVs from the 4% market share they held in 2020 to >20% of the market by 2030. As innovations reduce costs and improve battery performance, and as the demand for new mobility solutions grows, the EV Li-ion market is expected to grow from ~$25B in 2020 to ~$250B in 2030 (~26% CAGR). Since EV’s are the primary driver of the battery industry, this paper discusses the specific technological improvements that will be used in EV batteries over the next decade. We at Crescent Cove are excited about the investment opportunities that these developments in the EV and Li-ion market will offer, and we wanted to share with you an overview of the improvements that are coming and identify some of the companies that are developing these technologies. Photo of an EV Chassis Showing Battery Packs and Major Components (1) Sources: 1. https://www.telegraph.co.uk/cars/advice/everything-need-know-lithium-ion-batteries-car-makers-forgot/ THE INFORMATION HEREIN DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY INTERESTS IN SECURITIES. OFFERS ARE MADE ONLY BY THE OFFERING DOCUMENTS WHICH SHOULD BE READ IN THEIR ENTIRETY BATTERIES JULY 2021 EXECUTIVE SUMMARY 1. The battery market is on the verge of a major inflection point which will propel the market to grow 10x over the next decade to >$250B in 2030 2. The primary drivers of this inflection are: a. The rapid increase in demand for EV vehicles to reduce reliance on fossil fuels used in internal combustion engines (ICE) b. Technological advancements that are driving cost reductions for Li-ion batteries to parity with ICE by 2025 3. Breaking down the technological advancements shows a path and timeline which can structure an investment strategy in the sector. In our opinion, too much attention and valuation is being placed on the 3rd major advancement – the move to solid-state Li-ion batteries, which is not set to become viable for 10 years and carries the most technology risk. Advancements in 1) silicon anodes over the next 1 to 3 years and 2) advanced cathodes over the next 3 to 7 years provide attractive high growth opportunities for investment that have been overlooked. INDUSTRY OVERVIEW At its basic components, the electric battery is still based on technology that was invented in 1796 by Alessandro Volta. In his experiments, Volta created a battery by placing silver and zinc electrodes at two ends of containers that separated the electrodes by electrolyte fluids. The fluid facilitated an electric current that continuously flows from one electrode towards the other. Batteries still operate in much the same way – electrons flow from one electrode to the other through an electrolyte fluid. However, the basic battery is limited, as over time the electric source runs out leaving a cell that needs to be disposed of or replaced. In the early 1990s, the invention of rechargeable Li-ion batteries provided a breakthrough that removed the need for constant battery replacement. In Li-ion batteries, positively charged lithium ions move through the electrolyte liquid from one electrode, called the anode, to the other electrode, called the cathode. Upon charging, the negative and positive electrodes reverse and the positively charged ions flow from the cathode back to the anode. There is also a separator between the anode and the cathode that regulates the flow of ions between the anode and the cathode and prevents short circuiting. 2 BATTERIES JULY 2021 INDUSTRY OVERVIEW These batteries dramatically increased the number of recharging cycles available before the battery ceases to provide enough power over a reasonable amount of time and they quickly found their way into consumer products such as camcorders, smartphones and wearable devices and are ubiquitous today. Aside from electronic portable devices, the primary uses of batteries are for stationary applications, such as power grid backup, and for transportation applications, such as battery Electric Vehicles (EVs). In electricity grids, batteries provide a storage solution that can fill the intermittent gaps when wind or solar generation are not available. Demand for this type of storage is expected to increase steadily. However, EV demand is expected to grow exponentially over the next two decades, and due to the sheer number of units required EVs, will be the primary growth driver for battery demand. According to Cairn Energy Research Advisors, global Li-ion battery capacity will grow by 11x from 184 GWh in 2020 to >2 TWh by 2030, which represents a 27% CAGR over the next 10 years (see Exhibit 1 below). In terms of TAM, BofA Research calculates that the global EV battery market alone is expected to grow to $114B in 2025 (34% CAGR from 2020 to 2025) and to $247B in 2030. (2) This represents battery EVs growing from <4% of total vehicles in 2020 to 23% penetration in 2030. As you can see by the effect of the orange bar in Exhibit 1, it is the EV market that will dominate battery market growth over the next decade. Exhibit 1: Global Li-ion Battery Energy Capacity Forecast (3) Sources: 2. 2021 Storage Symposium Downstream Download: The Time Has Come, BofA Global Research, January 21, 2021 3. Global EV Battery Thematic Research (H/A): Who makes the EV battery in 2021: A year of very strong growth 3 for zero-emission, BofA Global Research, 01/18/21 BATTERIES JULY 2021 INDUSTRY OVERVIEW Battery costs will be the key for these market forecasts to come to fruition. As shown in Exhibit 2 below, Cairn Energy forecasts that the weighted average cost per kilowatt hour (kWh) will decline from $136/kWh in 2020 to $120/kWh in 2021 and will reach the $100/kWh barrier around 2025. Based on our conversations with industry sources, there is a high probability that the kWh will get to $85/kWh to $90/kWh. The $100/kWh for batteries is a major inflection point at which most experts think BEVs will become competitive with internal combustion engine (ICE) vehicles, reducing the needs for government subsidies and incentives to make up the difference. Exhibit 2: Li-ion EV Battery Cell Pricing Forecast (4) Exhibit 2 also shows that roughly 80% of the Li-ion battery cost is from the bill of materials, making these forecasts highly dependent on the underlying price of raw materials such as lithium, nickel, manganese, and cobalt. Longer term, price decreases will depend greatly on substituting new materials such as silicon into the battery design and reducing the amounts of expensive raw materials. The overall cost declines to date have been driven by improvements in supply chain efficiency, economies of scale in manufacturing costs, lower materials processing costs, and compressed margins across the entire supply chain. Currently, only a few companies build automotive scale Li-ion batteries and nearly 65% of Li-ion batteries are manufactured in China. (5) The main barrier to entry in Li- ion battery manufacturing is capital expenditures as facilities cost between $50- 100mm per GWh of annual production. Sources: 4. 2021 Storage Symposium Downstream Download: The Time Has Come, BofA Global Research, January 21, 2021 5. The Battery is Ready to Power the World, The Wall Street Journal, February 5, 2021 4 BATTERIES JULY 2021 INDUSTRY OVERVIEW It is estimated that $75B to $150B of investment will be required between 2020 to 2030 for expansion to 2,000 GWh of capacity, but this investment estimate may be conservative if some of the technology innovations described below are delayed. (6) Current production of EV batteries is dominated by CATL, LG, Panasonic, Samsung SDI, BYD, SK Innovations. See Exhibit 3 below for an illustration of the 6 largest providers and their current market share. Exhibit 3: Global Automotive Battery Share (%) (7) Several newcomers to the field such as Farasis and Northvolt are included in the “Others” section of Exhibit 3. Although these companies dominate the current Li-ion market, this paper focuses on smaller private pure play technology companies which inherently have higher growth potential that the established manufacturers. THE LITHIUM-ION BATTERY To understand the technological evolution that is to come it is important to comprehend how the components of a Li-ion battery work and are constructed. The basic parts of the Li-ion battery cell are: 1) Anode 2) Cathode 3) Electrolyte solution 4) Separator 5) Casing Exhibit 4 on the next page shows a basic diagram of the parts of a Li-ion battery. Sources: 6. The Future of Energy Storage, Sila Nanotechnologies, September 2, 2020 7.
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