Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

What Utilities Need to Know about Energy Storage Cost Drivers

November 27, 2017 at 4:31 PM / by PowerAdvocate

More likely than not, your utility is already or soon will be procuring battery energy storage as part of its grid modernization strategy. In fact, according to BCC Research, the global market for grid-scale battery storage technologies is projected to reach nearly $4.0 billion in 2025, up from $716 million in 2015.  Battery costs have fallen dramatically over the past decade. However, events in the Democratic Republic of the Congo are putting the brakes on further cost reductions. Here’s a look at what’s happening and how you can approach your battery procurement planning in light of these events.

Battery & Utility-scale Grid Storage Cost Trends

 (Indexed, Jan 2010 = 100)

Figure 1 colbalt blog post.jpg

Source: PowerAdvocate

It’s in the Chemistry

Modern battery chemistry utilizes many minerals, including copper, nickel, graphite, manganese, lithium, and cobalt.  While many analysts have cited lithium as a critical and undersupplied mineral which may slow battery deflation, cobalt’s scarcity is much more severe. With the exceptions of minor operations in Morocco, most cobalt (98%) is mined as a byproduct of copper or nickel production. This limits the extent to which capital expenditure intended to boost cobalt extraction reacts to changes in cobalt prices.   Moreover, the Democratic Republic of the Congo dominates world cobalt production, accounting for roughly half of global production and reserves . 

 

The Global Cobalt Supply

figure 2 global colbat supply.jpg

Source: United States Geological Survey

An Unstable Mix

Cobalt reserves are concentrated in South Central Congo and while the Congo is seldom stable, over the past year political turmoil has re-instigated a civil war. This civil strife has already reportedly disrupted supplies to Asian consumers of cobalt. 

Even if Congolese cobalt supplies are not disrupted, they may not be usable for American companies.  Dodd-Frank financial reform regulations require that U.S.-listed companies ensure they do not source ‘conflict minerals.’ As the Congo’s civil war escalates, certifying cobalt supplies as non- ‘conflict minerals’ will likely prove to be very difficult.  

Catalyst of Shortage

Limited investment and supply disruptions in the Congo, combined with surging battery demand, are likely to ultimately lead to a worsening global cobalt shortage. Demand for cobalt has skyrocketed over the past year – and it’s expected to continue to do so for the foreseeable future. 

Batteries drive about one-half of global cobalt demand, including those used in electric vehicles, mobile phones, digital cameras, and cordless power tools. Other on-going market trends will continue to compound cobalt cost pressures:

  • The global market for electric vehicles is expected to more than double in size between 2016 and 2020.
  • Both the Chinese and U.S. governments are currently stockpiling cobalt. China's State Reserves Bureau bought 5,000 tonnes of cobalt last year and is expected to buy more this year. The U.S. Defense Logistics Agency has been stockpiling lithium-cobalt-oxide and lithium-nickel-cobalt-aluminum-oxide since 2014. Speculators purchased large stockpiles of the mineral in late 2016, helping to skyrocket prices.

The result to date? Since June 2016 cobalt prices have increased by almost 200 percent.

High Grade Cobalt Prices

(Indexed, Jan 2013 = 100)

figure 3.jpg

Source: American Metals Market

Preparing the Solution

How should utilities plan battery procurement considering the challenges associated with cobalt sourcing? 

  • Supplier negotiations. When negotiating with battery suppliers emphasize that cobalt only represents a minority of the costs of a battery and that most other battery costs have fallen recently. To assist with building this case, leverage should-cost analysis tools, which will provide transparency into the different cost indices that drive battery prices. For further details, check out our E-Brief: Navigate Cost Complexity with Should-Cost Analysis. Note that cobalt demand is surging largely due to advances in battery technology which should translate into lower battery costs.
  • Product exploration. Explore less cobalt intensive battery chemistries with your suppliers which may be suitable to your purposes.
  • Compliance check. Check with your legal department and with your suppliers to ensure that your supply chain is in compliance with conflict mineral laws.

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