The energy industry is going green, driving the need for energy storage stocks. With an aim to go net-zero carbon by 2050, governments worldwide are promoting renewable energy like wind and solar. But the problem with these energy sources is they are dependent on climate. The sun won’t always shine, and the wind won’t always blow.
That could cause a supply shortage as it did in 2020 when North Sea wind turbines froze, reducing wind energy capacity. This transition to clean energy has necessitated operational and market reforms that give equal value to electricity system flexibility and adequate availability. This has called for increased investment in energy storage.
Energy Storage Growth Potential
Within energy storage, battery storage is the most talked-about solution. The International Energy Agency (IEA) data showed that battery storage capacity additions increased 50% year-on-year (YoY) to 5 GW in 2020 as investment increased ~40% to $5.5 billion. The agency expects the total installed capacity to expand 35-fold to 585 GW between 2020 and 2030. This means over 120 GW of battery storage capacity additions, representing average annual growth of 38%.
Supporting the IEA estimates are BloombergNEF estimates of 34 GW of global annual energy storage capacity installations by 2030, up from about 4 GW in 2020. Even Elon Musk thinks that Tesla Energy ($616 million in quarterly revenue) could become as big as Tesla Automotive ($15.5 billion in quarterly revenue).
Energy storage has a huge potential as the energy industry shifts to renewables and the automotive industry to electric vehicles (EVs). Evercore analyst James West describes energy storage as the ‘third pillar of future power grids. He stated that lithium-ion batteries and li-ion dominate the utility-scale storage. However, battery storage faces several challenges, including the procurement of core minerals like nickel.
Three Energy Storage Stocks to Buy in 2022
Most renewable energy producers invest in energy storage projects. Then there are a few pure-play battery makers, as battery storage is the most prominent storage solution. Below are three stocks that can give you exposure to the rapid deployment of energy storage projects.
Tesla is one of the biggest battery manufacturers in the world. Although Tesla is an EV company that derives 82% of its revenue from automobiles, it derives 3% of revenue from solar and energy storage. Tesla manufactures a utility-grade lithium-ion battery Megapack and has a dedicated factory for it. It has other energy storage products, but Megapack is popular and seeing strong demand.
The semiconductor supply shortage and rising raw material prices are impacting Tesla’s ability to fulfil orders. Despite these headwinds, energy storage deployments increased 90% YoY to 846 MWh in the first quarter. The demand is substantially above capacity, and Tesla is ramping production at the Megapack factory to meet the growing demand. Elon Musk believes Tesla Energy could one day become as big as Tesla Automotive.
You can hop on to this long-term secular growth by buying Tesla shares today. But remember, the short term will be volatile. Plus, Tesla is oversensitive to Musk’s Twitter comments and his Dogecoin and SpaceX venture. Here’s a hint of its volatility. Tesla stock surged 50% over Musk’s acquisition of Twitter and then fell 33% as Musk is considering dropping the deal. Despite these ups and downs, it is a stock to buy and hold for the long term as it comes with a package deal of clean energy, EV, crypto, and space travel.
My second pick after Tesla is the world’s largest renewable energy producer NextEra Energy. As I said before, storage is a generation asset, and NextEra and its subsidiaries generate wind and solar power plants. They are a leader in battery storage. The company signed contracts for 2.099 MW of energy storage capacity for 2023-2024. It plans to add ~3,200 MW of new battery storage capacity by 2031.
While NextEra Energy earns a significant portion of its revenue from solar and wind projects, energy storage is a supporting infrastructure to make its operations flexible and reliable even in extreme weather conditions. As the company builds more wind and solar projects, it will need more energy storage capacity.
NextEra stock will benefit from the growing government support for renewable energy infrastructure. The stock is down 21% year to date amid short-term headwinds but has the potential to grow several folds in the long term. It could also pay dividends like other energy stocks once it achieves a capacity.
Fluence Energy (FLNC)
Fluence is a pure-play energy storage solutions provider with a market cap of $383 million. Its offerings include Fluence Cube used to build battery systems. It is seeing a huge demand for this, booking 582 MW of orders in the second quarter alone. Its service offering is Fluence OS which offers delivery, operations and financing structuring services, such as energy-storage-as-a-service (ESaaS). Its last offering is Fluence IQ bidding technology for energy storage systems. It completed a pilot program to deploy an emissions-free battery backup solution for Google’s Belgium data center.
As I mentioned before, energy storage deployments are growing rapidly. Fluence is among the beneficiaries. Its revenue surged 249% in the second quarter ended March 31. Its order backlog increased to $2.2 billion (from $1.9 billion in the previous quarter). The company is not yet profitable but is growing rapidly. It could become profitable as it deploys more storage units.
The COVID lockdown in China and the supply chain disruption from the Russia-Ukraine war have delayed project completion, shifting Fluence’s revenue recognition to future quarters. The stock market also reacted to these headwinds, sending Fluence stock down 75%. But its long-term growth is intact and is visible in its $2.2 billion order backlog. It is a good stock to buy the dip and hold for the long term.
Energy Storage Stocks: Final Takeaway
The 2030 decade is crucial for energy storage stocks as deployment picks in full swing. The current market downturn and supply chain headwinds have pulled down these stocks. But they are witnessing exponential demand. Once the supply chain issue is resolved, you could see a high double-digit or triple-digit surge in the above three stocks. Consider the risks and have a long term time horizon to benefit from the rapid growth in energy storage stocks.