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[ Final] FINA3324 Investment Individual Assignment Investment Analysis (University of Western Australia) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university [ Final] FINA3324 Investment Individual Assignment Investment Analysis (University of Western Australia) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

FINA 3324 Investment Analysis: INVESTING IN BATTERY STORAGE FINA3324 INVESTMENT ANALYSIS CHRISTINE HENG (22906068) Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

Table of Contents a. Analyse whether battery storage technology will advance sufficiently over the next five years to substantially reduce demand for traditional carbon-emitting energy sources. .................................... 2 Battery/Energy Storage .................................................................................................................... 2 Electric vehicles + Sustainable Energy ............................................................................................ 2 Rising demand for Lithium .............................................................................................................. 3 Government Initiatives ..................................................................................................................... 4 Conclusion ......................................................................................................................................... 5 b. You are required to identify explain and justify an investment strategy to exploit trends in the battery storage market over the next 12 months. You should be specific with respect to instrument(s) you would invest in. Importantly, your answer should not be one sided. Your investment strategy should be discussed among other potential investments and the risks faced by these strategies. ........ 6 Growth in the market ....................................................................................................................... 6 Opportunities in the market ............................................................................................................. 6 Challenges in the market .................................................................................................................. 7 Real Options vs Financial Options ................................................................................................... 8 Growth options .................................................................................................................................. 8 Pick and Shovel strategy ................................................................................................................... 9 Summary ........................................................................................................................................... 9 References: ...................................................................................................................................... 10 Appendix: ........................................................................................................................................ 12 Page 1 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

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a. Analyse whether battery storage technology will advance sufficiently over the next five years to substantially reduce demand for traditional carbon-emitting energy sources. Battery/Energy Storage What is a battery storage? It is the use of battery to store unused or excess energy for future usage. Quoted from (Australian Renewable Energy Agency, 2021), “batteries are an energy storage technology that uses chemicals to absorb and release energy on demand”. According to (Baker, 2021) the importance of battery is to facilitate the storage of energy produced by wind farms and solar panels, and to reduce the reliance on fossil fuels. Wind farms can only supply energy on windy days, hence the energy produced has to be stored for calm days when the wind farms are not producing energy. Likewise for solar panels, which relies on sunlight, it is only functional in the day and not at night. A guest lecture Kerr (2021) on 26 March mentioned that many homes in Western Australia have installed solar panels on their rooftops, however, in the day, people are either in school or at work, and these energy are not fully consumed, hence storing the energy for later at night can help to supply electricity for your air conditioners and lights. In appendix 1.1 by (Kerr, 2021) he explains the function of the battery storage and appendix 1.2 shows the various types of storage technologies. (Stevens, 2019) said that “Solar and wind are playing a greater role in power generation, but without effective energy storage techniques, natural gas and coal are needed for times when the sun isn’t shining, or the wind isn’t howling. And so large-scale storage is instrumental if society is to shift away from a world dependent on fossil-fuel.” Electric vehicles + Sustainable Energy In the past, we used to rely heavily on fossil fuels to get fuel for our vehicles but now, we have the emergence of electric vehicles (EV) hitting the road. According to (U.S. Department of Energy, n.d.) these EVs can reduce emissions and are cost saving, and, solar and wind are renewable energy that help to recharge your EVs. BlueSG, an electric car rental company which provides car sharing services in Singapore. These cars do not require gas and it is 100% electric. There are various charging points at different locations for the vehicles to be parked and charged at, which is convenient and easy Page 2 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

to use. The rental rate is charged according to the duration that it is on rental per usage, and a monthly membership fee. To fully utilise their charging points, BlueSG allows other EV owners to charge their cars at the selected charging points as long as they are using the same type of inlet. The fees include an annual membership fee and rates based on how long you charge per usage. (BlueSG | 24/7 Carsharing Solution in Singapore, n.d.) Tesla Inc is one up and coming company that is reputable for its EV and their sustainable energy ecosystem. Tesla is able to not only able to design and manufacture, but also install and lease solar energy generation and energy storage products. (Reuters Editorial, n.d.). According to (Tesla, n.d.), Tesla’s battery cell for their EVs and energy products are done inhouse to reduce the cost and meet bulk orders. Tesla is also a very prominent player in this industry as their mission is to reduce global warming, and they have key leadership roles in modelling how to manage security risks with software cars effectively. (Shipley, 2020) (Ohnsman, 2021) suggests that Redwood Materials, a start-up by the co-founder of Tesla, is working on a partnership with ERI, a processor of electronic waste. The goal of the alliance is to recycle battery materials. During the making of EVs, there were concerns on whether the need for these materials, such as cobalt, lithium, nickel, and copper, were sufficient and should they have any environmental impact. However, with this recycling start-up in place, it sets to recycle any of ‘waste’ that can be recovered and reused again. Currently, both companies are looking into the concerns on how solar panel can be recycled and reused. Rising demand for Lithium With a surplus on the demand for lithium, prices are increasing as well. The sales of lithium were remarkably strong in China and Europe as compared to other countries. The spark for lithium was due to the increase in EV sales, in addition to the subsidies that various countries have in place, encouraging more sales. As (Barrera, 2021) speculates, lithium producers will have to increase their production to meet demands. Due to the increasing production of EVs, the need for lithium increases. Quoted by (Runkevicius, 2020), “By 2030, EVs will need 2,700 GWh worth of lithium-ion batteries a year. For perspective, that’s equivalent to 225 billion iPhone 11 batteries—and 13X more battery power than we use today.” On top of that, (Runkevicius, 2020) shared that lithium Page 3 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

may not be a rare, there is supply but time is needed to extract this large-scale operation, which may not be enough to supply the upcoming demand for EVs. Referring to appendix 1.3, (Runkevicius, 2020) draws out the increasing demand which shoots above the possibly of lithium to be produced. Government Initiatives As (Kerr, 2021) mentioned, Western Australia (WA)’s federal have a renewable energy target and subsidies. He explains how wind farms are getting paid for leaving the equipment switched on and despite losing money in the energy wholesale market, the subsidies received results in the wind farms having a positive sum in total. On low demand days for electricity, the cold generator is subsidised by the state government to make up for their economic losses. Singapore’s green plan is to install solar panels on the roofs of housing blocks and to increase efficiency by multiplying the deployment of solar energy in the following years. In addition, the green initiative includes changes to use smart LED lights and solar energy in housing areas. (SG GREENPLAN, n.d.) To boost the adaptation of EVs in Singapore, according to (Mohan, 2021), Finance Minister Heng Swee Keat announced that to encourage the early adoption of EVs, initiatives such as rebates on the taxes paid for registering the vehicles and lowering the cost for the vehicles. The Finance Minister quoted that “technology is changing the future of transport.” (SG GREENPLAN, n.d.) suggests the plans for easier access to charging stations in housing areas and public carparks. As the governments seek to phase out traditional fuel-based cars to replace them with renewable alternatives. In an article by (Reuters,2020) on fossil fuel-based vehicle bans across the world, shared the different countries’ plans to implement changes such as bans on petrol and diesel vehicles, to push “green revolution” to reduce pollution. This is to promote consumers to change over to EVs as part of their “green initiative”. As cited in (Reuters,2020), countries such as United States, Canada and China are implementing the bans in 2035 and countries such as India are drawing plans towards the same goals. Page 4 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

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Conclusion In United Kingdom (UK), wind and solar engery are expected to multiply by 2030, large- scale storage would be needed to help balance the peaks and troughs however it comes with a price, which companies are not willing to fork out. New energy storage technologies are needed to accumulate these large capacity of energy from wind and solar powers. If there is not enough storage space, these energy will go to waste, causing a loss. And these storage are able to reduce the costs by up to $40Billion euros by 2050. Luckily for subsidies, it encourages companies to build and operate sufficient energy and rebates are given out to consumers such as lowering their bills. With these renewable energy having a lower cost than the fossil fuels and governmetns showing their early support for these new storage technologies, it hopes to boom the industry. (Radcliffe, 2021) The purpose of having battery storage, shown in appendix 1.4, which Kerr (2021) added that power supply is the few industries that consumers have control and as more people in WA have their own power supply, the other energy generated have to be stored elsewhere, this is where leasing battery storage to generator and retailers come into place, this is networking investment. Due to an increasing awareness of global warming, which raises concerns about not only waste but also carbon emission, consumers are most likely to engage themselves with battery storage technology to protect the environment. Given the various opportunities from the different government to implement subsidies and rebates for their people and energy companies. The government plays a part in making it simpler and easier to access which encourages not only businesses but also consumers to react. As mentioned by (Kerr,2021), many people in WA are installing solar panels on their rooftops, soon there will more demand for battery storage as there will be a need to store these energy for future usage. Hence, the battery storage technology will advance sufficiently over the next five years to substantially reduce demand for traditional carbon-emitting energy sources. Page 5 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

b. You are required to identify explain and justify an investment strategy to exploit trends in the battery storage market over the next 12 months. You should be specific with respect to instrument(s) you would invest in. Importantly, your answer should not be one sided. Your investment strategy should be discussed among other potential investments and the risks faced by these strategies. Growth in the market The reason why energy storage is growing is due to the fall in cost. According to (Hervery- Bathurst, 2019), the cost of battery pack has declined from more than $1,000/kWh in 2010 to less than $200/kWh in 2019, (refer to appendix 2.1). Most of the sales of energy storage comes from EVs which uses a similar lithium-ion technology. Although there is a growth in the market, but as the EV industry expands, the cost for energy storage are expected to decrease (refer to appendix 2.2). Opportunities in the market There are eight factors that (Deloitte, 2018)’s report deemed for as an opportunity. They are cost, grid modernization, global movement toward renewables, participative in wholesale electrical markets, financial incentives, phase-outs of FITS or net metering, desire for self- sufficiency and national policy. The three main factors I would like to highlight are the low cost in the market, the global movements and policies for renewable energy, and the desire for self-sufficiency, how they significantly play a part in boosting the battery storage market. Cost : Although there is an increase in performance, the cost to manufacture battery decreases as part of plan for more usage in the future. Refer to appendix 2.3, for the price in lithium-ion battery that decreased from 2010-2017, by 80%. Despite the steep expansion on EVs, requiring bulk orders of batteries, the battery storage systems have to cost-competitive to attract early adopters to stimulate demand. Global movement and policies for renewables : There is massive support from the government such as policies, subsidies, and rebates. As mentioned in part (a), the various supports from the government makes it easier for Page 6 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

consumers to join the change. This plays a part for pushing clean energy to come into place, lowering the demand for traditional carbon-emitting energy sources. Desire for self-sufficiency (Deloitte, 2018) saw an increase in demand for Australian homes which quadruple in 2017 as compared to 2016 as they saw the battery storage as an adequate power supply as compared to their “unreliable” regional electric grids. Despite the cost ranging between AU$8,000 to AU$10,000, the need for these installations were most likely due to the pride of early adaptors and being self-sufficient. Challenges in the market With given opportunities, there will be restraining forces that prevent you from developing. There were four main barriers that (Deloitte, 2018) identified. They are, misconception of high prices, lack of standardization, outdated regulatory policy, and insufficient knowledge on energy storage. Misconceptions of high price Although the cost is kept low to bring in early adaptors, but battery storage is affiliated with technology and technology is not always economical. Due to this judgement on the cost of battery, it hinders consumers from considering batteries as their solution. However, in actual fact, the cost has been declining (refer to appendix 2.3). Lack of standardization In the early stages, there might still be changes in the technical areas. The differences make it complex which would involve costs and the value chain, and end up disrupting the future deployment of standardization. Outdated regulatory policy In Deloitte (2021)’s research, they concluded that regulatory policies were not updated in line with the energy storage technology. Without the updated public policies in place, it discourages the deployment of energy storage. Page 7 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

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Insufficient knowledge on energy storage Not many are familiar with energy storage, its applications, functions, and solutions. Deloitte (2021) agrees that the stakeholders in the industry are not able to define energy storage. If there is no clarity on what it is and how it should be fully utilised, it will defeat the purpose of this. Real Options vs Financial Options A real option would be a manager’s right but not an obligation to invest in a given project and they are multi-staged projects, with decisions to proceed or drop a project depending on the best information the managers have at that time. Whereas a financial option, is a derivative, where buyers have the right but not the obligation to buy or sell an underlying asset at a specified price at some point in the future. A financial option would be better in this case as you are able to exercise whether or not to buy or sell depending if you are on a call or put option, respectively, based on what is the best outcome for you. Supposedly you are in a call option and the spot price is higher than your strike price, you can exercise by the option otherwise if the strike price is higher than the spot, you will be making a greater loss and you do not have to exercise the option. The only loss you will make in the call option is the premium which you have to pay for this “contract” to exist. If you are in a put option, you should exercise the option when the strike price is higher than the spot price. It is important to know the intrinsic value of the option as it represents the current value of the option. When the price is right, where will be an intrinsic value, otherwise when the options are out of money or at the money, there is no intrinsic value. No intrinsic value because the option is not exercised and hence a loss. Growth options Growth options are developed through investments which provides a competitive advantage for companies in earning profits in the future. According to (Silva Rosa, 2021), when high economic growth is expected, investors value companies developing growth options. Given that there is a lot of potential for this industry to bloom, and given the policies and initiatives set in place from the government to highly promote this new change, which will result in high Page 8 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

growth. Growth options may be a difficult tool to estimate the cash flows, but the value of it depends on the market share and higher returns can be gained by investing in the growing economy but not all companies will benefit equally. For the economic growth to happen, it requires constant responsive changes to stimulate the spending. However, an economic growth does not equate to an increase in profits. In this case, the policies placed by governments are fiscal policies rather than monetary policy. According to (SEGAL, 2021), both types of policies are to influence a nation’s economic activity, but fiscal policy is for taxing and spending actions, whereas monetary is concern with interest rates and supply of money. Pick and Shovel strategy This investment strategy is to invest in the underlying technology needed to produce a good or service instead of in the final output. The investor might buy stocks in a supplier, rather than the company that produces the finished goods. This can reduce risk but if the industry struggles, the supplier will too. (Chen, 2020) Investing in battery storage or its components would be a great choice as battery storage is a tool for many other products. Battery storages are mainly supplying to EVs, to be installed in either homes or public areas alongside with solar panels and wind energy. Summary As we understand that industry for battery storage will increase overtime, however we are not able to predict what the prices will be. Given the many opportunities in the market, given the low cost, government policies and initiatives and the desire for self-sufficiency. However, there are a stumbling blocks such as the misconceptions of high price, lack of standardisation, outdated regulatory policy and insufficient knowledge on energy storage. (Deloitte, 2018) Hence, we could exercise in an option we have the right but not the obligation to exercise. It helps to minimise risk as there is a maximum amount of loss, depending on which situation you put yourself in. Another strategy would be the pick-and-shovel strategy which has its risk of failing when the industry fails. Page 9 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

References: Australian Renewable Energy Agency. (23 April 2021) Renewable Energy. https://arena.gov.au/renewable-energy/battery-storage/ Baker, D. R. (2021, January 16). Why batteries are the key to Biden’s green dreams. Bloomberg . https://www.bloomberg.com/news/articles/2021-01-16/why-batteries-are-the- key-to-biden-s-green-dreams-quicktake Kerr, P. (2021, March 26). Battery Storage and some roles in the power system [Slides]. Westernpower. https://echo360.org.au/lesson/G_03b41450-ad70-4be6-a22f- 17aaf9dcc6a8_566757db-4b3c-4180-a04a-04738cb596f2_2021-03-26T16:58:00.000_2021- 03-26T18:52:00.000/classroom Stevens, P. (2019, December 30). The battery decade: How energy storage could revolutionize industries in the next 10 years . CNBC. https://www.cnbc.com/2019/12/30/battery-developments-in-the-last-decade-created-a- seismic-shift-that-will-play-out-in-the-next-10-years.html U.S. Department of Energy. (n.d.) Electric Vehicle Benefits. Office of Energy Efficiency & Renewable Energy. Retrieved from https://www.energy.gov/eere/electricvehicles/electric- vehicle-benefits BlueSG | 24/7 carsharing solution in Singapore. (n.d.). BlueSG. https://www.bluesg.com.sg/ Reuters Editorial. (n.d.). TSLA.O - Tesla Inc Profile | Reuters . Reuters. https://www.reuters.com/companies/TSLA.O Tesla. (n.d.). About Tesla . Tesla. https://www.tesla.com/en_SG/about Shipley, L. (2020, February 28). How Tesla Sets Itself Apart . Harvard Business Review. https://hbr.org/2020/02/how-tesla-sets-itself-apart Ohnsman, A. (2021, May 25). Tesla Cofounder’s Battery Recycling Startup Ties Up With Top U.S. E-Waste Processor . Forbes. https://www.forbes.com/sites/alanohnsman/2021/03/25/tesla-cofounders-battery-recycling- startup-ties-up-with-top-us-e-waste-processor/?sh=62c09cd4595e Page 10 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

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Barrera, P. (2021, April 22). Lithium Market Update: Q1 2021 in Review . Investing News Network. https://investingnews.com/daily/resource-investing/battery-metals- investing/lithium-investing/lithium-market-update/ Runkevicius, D. (2020, December 7). As Tesla Booms, Lithium Is Running Out . Forbes. https://www.forbes.com/sites/danrunkevicius/2020/12/07/as-tesla-booms-lithium-is-running- out/?sh=29bf7d1b1a44 Mohan, M. (2021, February 16). Budget 2021: More incentives to encourage early adoption of electric vehicles. CNA. https://www.channelnewsasia.com/news/singapore/budget-2021- singapore-electric-vehicles-adoption-incentives-14208764 SG GREENPLAN. (n.d.). Energy Reset . Greenplan.Gov.SG. https://www.greenplan.gov.sg/key-focus-areas/energy-reset/ Reuters (2020, November 18). Fossil fuel-based vehicle bans across the world. Reuters. https://www.reuters.com/article/climate-change-britain-factbox-idINKBN27Y19F Radcliffe, J. (2021, March 19). Energy storage technology is accelerating – but grids aren’t ready for the transition . The Conversation. https://theconversation.com/energy-storage- technology-is-accelerating-but-grids-arent-ready-for-the-transition-156707 Hervery-Bathurst, I. (2019, November 20). Eight things investors need to know about energy storage . Schroders. https://www.schroders.com/en/insights/economics/eight-things-investors- need-to-know-about-energy-storage/ Deloitte. (2018). Supercharged: Challenges and Opportunities in global battery storage markets . Deloitte Center for Energy Solutions. https://www2.deloitte.com/content/dam/Deloitte/bg/Documents/energy-resources/gx-er- challenges-opportunities-global-battery-storage-markets.pdf Silva Rosa, R. (2021, March 22). Wk5 Macro Analysis Summary Notes [Slides]. Blackboard Learn. https://lms.uwa.edu.au/webapps/blackboard/execute/displayLearningUnit? course_id=_56923_1&content_id=_2237209_1&framesetWrapped=true SEGAL, T. R. O. Y. (2021, April 28). Monetary Policy vs. Fiscal Policy: What’s the Difference? Investopedia. https://www.investopedia.com/ask/answers/100314/whats- difference-between-monetary-policy-and-fiscal-policy.asp Page 11 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

Chen, J. (2020, April 7). Pick-And-Shovel Play . Investopedia. https://www.investopedia.com/terms/p/pick-and-shovel-play.asp#:%7E:text=Key %20Takeaways,that%20produces%20the%20finished%20good . Appendix: Appendix 1.1 by (Kerr, 2021) Appendix 1.2 by (Kerr, 2021) Appendix 1.3 by (Runkevicius, 2020) Appendix 1.4 by (Kerr, 2021) Page 12 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

Appendix 2.1 by (Hervery-Bathurst, 2019) Appendix 2.2 by (Hervery-Bathurst, 2019) Appendix 2.3 by (Deloitte, 2018) Page 13 of 14 Downloaded by Ztera Zt (fvwyicjuberxnlelid@bbitf.com) lOMoARcPSD|22216293

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