Greg Clarke’s Faraday Challenge announcement this week to fund £246m of battery innovation is a marked shift away from the Cameron-Osborne free market agenda. It indicates that the industrial strategy is more than just talk. This is an emerging market and the standards haven’t yet been established.
It is now clear that politics will play a bigger role in shaping Britain’s biggest markets; and make no mistake, we are talking about a vast market. This announcement, and the Government’s follow up actions, will ultimately affect all areas of investment from car manufacturing, to power generators, to software companies. Government has thrown its weight behind particular market forces. This will make some businesses and it could break others.
It presents a number of opportunities for investors with the potential growth in innovative start-ups like Enertechnos (soon to launch its ultra-efficient energy distribution cable) and Limejump (the big data energy aggregator). Meanwhile, it also presents significant threats to some incumbent energy suppliers with legacy systems, especially those that are in the process of installing new large scale power stations.
The announcement
Michael Faraday was one of Britain’s greatest scientists. He made a number of discoveries that advanced the field of electromagnetism with one of his most famous being capacitance. He was so instrumental that the unit of capacitance, the Farad, was named after him.
So, perhaps there was no more apt name for the Government’s new £246m energy storage challenge fund than the Faraday Challenge – launched by Business Secretary, Greg Clarke, in Birmingham yesterday as one of the six flagship areas of a £4.7bn R&D investment. It will begin with a competition led by the Engineering and Physical Sciences Research Council, to bring the “best minds and facilities together” to create a battery institute. If nothing else, the name shows the Government’s ambition behind the challenge, and it is ambition that is desperately required.
Why now?
The UK is well behind the likes of the US, China, Korea and Japan when it comes to battery development. Tesla led the charge (pun intended) in the US and an effective industrial strategy provided the same boost in Asia. More pressing is that the Government is also well behind UK market trends and is desperately playing catch-up. It is trying to reinforce the physical infrastructure and legislative environment while creating a more apt environment for investment into the sector.
There have been two key drivers for this:
Solar panels have proven more popular than expected. Government noticed this and slashed subsidies in 2015. This reduced the rate of take up but the reduction is only temporary. Prices are continuing to fall rapidly and we are now approaching escape velocity where they will make economic sense even without subsidies. At this point Government will have little control over their take up. Even at their current rate their effect is being felt.
Sunny days this year have already set new records for renewable energy and investors have seen lucrative returns from assets in the solar energy sector. The Government’s response to the unpredictable output of renewables is to pay traditional power producers to reduce their energy production or to consume the excess in the system to try to smooth unforeseen production peaks. I.e. wasting money to get people to waste energy. However, this is becoming more frequent and more expensive.
Besides the cost, there is the real risk of overloading the network and causing localised blackouts. Our electricity network was designed for electricity to flow one way in a very predictable manner, not for millions of small generators producing unpredictable amounts of energy. Reinforcing the network would be expensive and cause local issues when roads have to be dug up or new pylons installed. A headache that a minority Government trying to negotiate the UK’s way out of the EU does not need. Investors should be on the lookout for companies offering solutions to this issue, for example by improving the efficiency of existing infrastructure, as they’re likely to offer positive returns.
The emergence of electric vehicles (EVs) will increase the demand pressure on the grid, but could also be the solution. The EV market is now set for rapid growth as a fleet of new electric vehicles are due to hit British bitumen in the next couple of years. These challenge traditional vehicles on performance and, more importantly, price. While millions of new vehicles charging at the same time could certainly overload our network, Government is aware that each one also contains the potential solution: Millions of high-capacitance batteries that can be connected to the national grid to extract surplus energy and reduce the load when required.
For investors, this could present serious opportunities, especially as there continues to be a rise in usage of electric vehicles in the UK. Recent statistics from Go Ultra Pro show that 22,480 plug-in cars were registered in the first half of 2017, more than any other six month period prior.
So what does this mean?
The Faraday Challenge is just one measure in response to this, but it shows the willingness of Government to intervene to shape this market. This is important because the real impact will not be the funding but the regulatory response – and there are big regulatory questions to ask:
Who will pay for the upkeep of the national grid if more people become energy self-sufficient and no longer require it? What will happen to all the multibillion pound power stations that will only have to produce a fraction of what was expected? Will there be a free market approach to buying and selling electricity, allowing the creation of a new commodity trading platform? How will Government approach the necessary upgrades to the network?
I could go on but you get the point. The Faraday Challenge has begun to crystallise previously theoretical questions. How much Government intervenes in this space may well depend on the hue of the party in power when the decisions are made. However, it is now clear that a Conservative Government sees itself playing an interventionist role, which is likely to accelerate the uptake of green energy technologies and therefore presenting lucrative opportunities for the UK investment market. These issues are approaching at an accelerating rate. The politics of the next five years are likely to set in place an energy market regime that will amount to a bigger shake up than the 1990’s deregulation.