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Batteries/ESS(Overweight/Maintain) September 2, 2020 Batteries/ESS (Overweight/Maintain) Key to the green energy revolution Mirae Asset Daewoo Co., Ltd. Yeon-ju Park [email protected] Chuljoong Kim [email protected] Youngbae Kwon, CFA [email protected] Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. September 2, 2020 Batteries/ESS CONTENTS I. Investment summary 3 ESS are key to the green energy revolution 3 II. US: Past the inflection point 4 1. ESS adoption in California 4 2. Increase in utility-scale energy storage projects 6 3. Grid parity and ESS demand growth 7 4. Economic feasibility 9 5. Strong demand prospects in the US 11 III. ESS are key to the green energy revolution 12 1. Global ESS market to grow seven-fold through 2025 12 2. Falling battery costs to accelerate ESS market growth from 2023 13 Ⅳ. Investment strategy 14 Top-tier battery makers to benefit: Higher valuations for ESS businesses 14 Key recommendations 16 LG Chem 17 Samsung SDI 25 CATL 29 Mirae Asset Daewoo Research 2 September 2, 2020 Batteries/ESS I. Investment summary ESS are key to the green energy revolution; battery market is undervalued despite high margins and strong growth potential Late last year, the California Public Utilities Commission called on power providers to secure 3.3GW in new clean energy resources by 2023. In response, two major utility companies— Southern California Edison (SCE) and Pacific Gas and Electric Company (PG&E)—plan to install energy storage systems (ESS) with a combined battery storage capacity of 1.2GW and maximum dischargeable capacity of 4.8GWh. The capacity is expected to be in service by August 2021. These projects are huge in scale, far exceeding the US’s total ESS deployment in 2019 (523MW/1.1GWh). There are numerous advantages to ESS. Such systems are eco-friendly, have short installation periods, and help to enhance power grid/power supply stability in regions with a high share of renewable resources in the power generation mix (such as California). Most of all, ESS power generation costs have declined over the past two years to the point where ESS are competitive enough to replace gas peaking power plants, which are high-cost, low-efficiency facilities that run only when there is high demand for electricity. Consensus estimates for the US ESS market are being revised up, despite COVID-19. Market researcher Wood Mackenzie projects US ESS demand to increase sharply from 523MW in 2019 to 1.5GW in 2020, 3.6GW in 2021, and 7GW in 2025. And actual ESS demand may grow more rapidly than expected. We estimate solar-plus-storage projects alone will reach 7.5GW in 2025, and ESS solutions stand a strong chance of replacing peaking power plants. Of note, the massive power shortage that hit California in August is likely to accelerate the ESS market’s expansion. We expect the global ESS market to expand more than seven-fold to 90GWh in 2025 (from 12GWh in 2020). As the US market illustrates, an increasing share of renewable sources in the power generation mix should spur higher ESS demand to ensure the stability of the electricity grid and power supply. In addition, we foresee ESS battery prices declining further around 2023 (aided by technological innovation), which should cause ESS demand growth to accelerate. Like the electric vehicle (EV) battery market, the fast-growing ESS battery market is likely to be led by top-tier companies. Accordingly, we revise up the value of battery companies’ ESS businesses and maintain LG Chem, Samsung SDI, and CATL as our top picks. We forecast global demand for ESS-use lithium-ion batteries to expand seven-fold to 90GWh in 2025 (from 12GWh in 2020). Given that ESS demand in the US is set to expand rapidly over the next two to three years, battery sales to the US may exceed market expectations. We expect the ESS-use battery market to be highly concentrated, similar to the EV battery market. In addition, margins are likely to be high relative to EV battery margins. Given the conservative nature of the power generation market, we expect batteries with proven track records to be favored over low-priced batteries. In addition, we do not anticipate high price- cutting pressure, as ESS batteries account for just a fraction of total power system costs (whereas EV batteries account for 30-40% of EV costs). In the medium/long term, winners in the EV battery market are well positioned to extend their leadership to the ESS battery market. We maintain our positive view on global top-tier battery companies, despite recent share rallies. The EV battery market is likely to outperform expectations in terms of growth and margins. Although there are concerns ahead of Tesla’s (TSLA US/CP: US$475.05) Battery Day, we note that Tesla’s innovations have always been a boon to EV battery companies in the past. Moreover, the expansion of the global ESS market should bolster battery companies’ top and bottom lines. We lift our target price on LG Chem by 35% to W1,050,000 and maintain our target prices of W690,000 for Samsung SDI and CNY270 for CATL. Mirae Asset Daewoo Research 3 September 2, 2020 Batteries/ESS II. US: Past the inflection point 1. ESS adoption in California In the US, SCE and PG&E are taking the lead in ESS adoption. SCE is planning to install 770MW/3GWh of battery energy storage by Aug. 2021, while PG&E is set to add 423MW/1.7GWh. Taken together, these capacity plans (1.2GW/4.8GWh) are far higher than the US’s total ESS deployment in 2019 (523MW/1.1GWh; Wood Mackenzie estimates). Moreover, SCE and PG&E are planning to install total storage capacity of 1.2GW and 717MW, respectively, by 2023. SCE estimates that California will need 10GW of storage by 2030 and 30GW by 2045. Table 1. California power companies’ ESS projects Company Power capacity Energy capacity Duration Project name Developer Launch (offtaker) (MW) (MWh) (hours) SCE Blythe 2 NextEra Energy Aug. 2021 115 460 4.0 Blythe 3 NextEra Energy Aug. 2021 115 460 4.0 McCoy NextEra Energy Aug. 2021 230 920 4.0 Garland Southern Power Aug. 2021 88 352 4.0 Tranquility Southern Power Aug. 2021 72 288 4.0 Sanborn Terra-Gen Power Aug. 2021 50 200 4.0 Gateway 1-2 LS Power Aug. 2021 100 400 4.0 Total 770 3,080 PG&E Moss 100 Dynegy Marketing and Trade Aug. 2021 100 400 4.0 Blythe Energy Storage 110 NextEra Energy Aug. 2021 63 252 4.0 Diablo Energy Storage Diablo Energy Storage Aug. 2021 50 200 4.0 Diablo Energy Storage Diablo Energy Storage Aug. 2021 50 200 4.0 Diablo Energy Storage Diablo Energy Storage Aug. 2021 50 200 4.0 Gateway Energy Storage LS Power Aug. 2021 50 200 4.0 Coso Battery Storage Coso Battery Storage Aug. 2021 60 240 4.0 Total 423 1,692 Notes: Power capacity is a battery’s maximum output; energy capacity is the amount of energy stored in a battery; duration is the ratio of energy capacity to power capacity. Source: Press materials, Mirae Asset Daewoo Research Figure 1. SCE to add 770MW/3GWh of ESS capacity by Aug. Figure 2. SCE estimates that California will need 10GW of ESS 2021 capacity by 2030 Source: SCE, Mirae Asset Daewoo Research Source: SCE, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 4 September 2, 2020 Batteries/ESS In Nov. 2019, the California Public Utilities Commission called on power providers to secure 3.3GW in new clean energy resources by 2023 (50% by Aug. 2021), in anticipation of a major shortfall in grid capacity due to the planned closures of gas-fired power plants and the growing mix of renewables. In response, several power suppliers, including SCE, have undertaken massive-scale ESS projects. ESS facilities boast numerous advantages; for example, they are more eco-friendly than gas-fired power plants and cheaper than peaking power plants. They also have relatively short installation periods. ESS facilities also help address the “duck curve” problem—the timing mismatch between peak demand and generation—that poses challenges (e.g., grid pressure and reduced electricity quality) for renewable energy sources. In the state of California, solar/wind power accounts for 20% of total energy production. Table 2. ESS project size by company (by 2023) Company Power capacity (MW) Energy capacity (MWh) Notes SCE 1,185 4,740 770MW/3GWh by Aug. 2021 PG&E 717 2,868 423MW/1.7GWh by Aug. 2021 San Diego Gas and Electric 293 1,172 California Community Choice Association 800 3,200 Heavy PV/ESS reliance Total 2,995 11,980 Source: CPUC, Mirae Asset Daewoo Research Figure 3. Energy mix of solar and wind power in California Figure 4. “Duck curve” problem exacerbates grid instability (% ) 14 Solar PV Wind 12 10 8 6 4 2 2014 2015 2016 2017 2018 2019 Source: California Energy Commission, Mirae Asset Daewoo Research Source: CAISO, press materials, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 5 September 2, 2020 Batteries/ESS 2. Increase in utility-scale energy storage projects Utility-scale energy storage projects are gaining significant momentum in the Western part of the US (beyond California). According to a recent study by the Lawrence Berkeley National Laboratory (published in Jul. 2020), 28% (102GW) of solar PV capacity within interconnection queues were solar-plus- storage hybrids at end-2019.
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