ESS Tech Stock: Green Energy Needs Storage To Be More Viable (NYSE:GWH)

Jul 05, 2023

yangphoto/E+ via Getty Images

As the world shifts more radically to decarbonize on the back of COP26 there will be an increased need for utility-scale energy storage solutions to smooth out the intermittency of renewables. The need for green energy is clear for a world looking to prevent the forecasted impact of anthropogenic climate change. In this new world, storage solutions that allow for excess energy to be stored from both solar and wind will allow the grid to dispatch electricity during periods when the sun is not shining and when the wind is not blowing. Critically, this inherent intermittency of renewables forms a forever bottleneck that can only be solved by the type of storage solutions ESS Tech (NYSE:GWH) is building.

Energy, Climate & Sustainability Blog Post

The dichotomy between grid demand and solar supply highlights the importance of long-duration energy storage technology. Grid operators currently manage the intermittency of renewables by forecasting future load and including natural gas or coal electricity generators to handle the oscillations in energy output from solar and wind. As the portion of total US energy supply derived from renewable energy grows, it will become much harder for grid operators to foresee fluctuations in the total energy supply. Hence, if left unstabilized, intermittency could eventually pose a threat to the stability of the electricity grid.

Energy Information Association

Up until now, utility-scale renewable projects have been dependent on lithium-ion based battery storage like Tesla's (TSLA) megapack. While this will continue to play a significant role in stabilising the grid, iron flow batteries present a new paradigm.

ESS is developing long-duration iron flow batteries that use just water, salt, and iron for its chemistry.

A flow battery is an electrochemical cell where two chemical solutions are separated by a membrane. Ions are exchanged across this membrane producing chemical energy and electricity. ESS has stated that these can provide up to 12 hours of output with a lower levelized cost of storage (LCOS) than other competing technologies. Further, they've stated that their chemistry means their performance is better able to hold up under marginal weather conditions when compared to lithium-ion batteries.

Iron flow batteries are also able to work for long periods of time, measured in decades, without capacity fade. Management has stated that their customers can expect the battery delivered from day one to have retained its capacity in year 20. From an environmental perspective, iron flow batteries require materially less mined metals. The proliferation of mines for nickel, cobalt, and lithium is an often overlooked part of the green energy revolution as it drives deforestation and broader environmental degradation.

Battery storage is expected to be a $56 billion revenue opportunity by 2027 with the forward momentum already clear with 90% of new interconnection requests being renewables and/or storage since 2019. Further, at least $390 billion is expected to be invested globally in new renewable power generation capacity in 2022 with energy storage sure to form an important part of these zero-carbon power generation stacks. Hence, if ESS is able to commercialize its iron flow batteries, it faces years of strong growth as most grids have been built on the just-in-time principle. This renders them ill-suited for renewables without material investment in energy storage.

ESS Merger Investor Presentation

ESS is guiding for rapid uptake of its storage solutions in the years ahead. This is expected to reach $37 million by the end of fiscal 2022, rising to reach $300 million by the end of fiscal 2023. Overall, the company expects to realize a 248% compound annual growth rate from 2021 to 2027. A major deal was also recently reached to supply 2 GWh of storage to SB Energy, a subsidiary of Japanese conglomerate SoftBank Group (OTCPK:SFTBY). This will see SB Energy deploy iron flow battery systems from ESS to complement its solar power projects in Texas and California through 2026.

With the commons currently trading at just over $9 per share, the company sports a market capitalization of $1.31 billion. This places its price to forecasted sales for 2022 multiple at 35.4x, falling to 4x when revenue guidance for 2023 is used.

Battery storage is important to the green energy future now at the centre of policymaking from North America to Europe and Asia. The shift to green energy is accelerating and is required to mitigate the projected impact of human-driven changes on our climate. Hence, storage technologies like iron flow batteries will facilitate the entrenchment of renewable energy across large economies.

Against revenue guided for 2022, ESS is expensive on a price to sales multiple basis. However, if the company is able to meet its guidance for $300 million in revenue for 2023 then the current price likely presents an entry point for risk-taking investors.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.