Why Energize Capital is betting lithium-ion remains the future of batteries

Advanced battery chemistries have been getting a lot of attention. In recent months, the Department of Energy designated $3 billion for the advanced battery supply chain, iron-air battery maker Form Energy closed a $405 million Series F, and zinc battery maker Eos nabbed another $315 million to get manufacturing off the ground.

That same time frame, however, brought the closures of battery companies like Cuberg and Ambri. Those shuttered startups pursued new chemistries, but ultimately came up against the reality that lithium-ion batteries maintain a monopoly on both electric vehicle and grid-scale applications, thanks in part to what the IEA said is “one of the fastest cost declines of any energy technology ever.”

Lithium-ion’s dominance is central to the investment thesis at Energize Capital, a climate software firm with around $1.2 billion under management. Partner Tyler Lancaster said the firm expects the battery market to evolve “very similarly” to solar photovoltaics. 

”Crystalline silicon built up enough of a lead, and then learning curve dynamics took over,” he explained. “We massively scaled up the manufacturing capacity, primarily in China, and that just completely crushed the unit costs.” Around that time, he added, firms were springing up with new business models to finance the equipment, like Sunrun and Sunnova.

“We think batteries are going through a very similar cycle,” Lancaster told Latitude Media. “And while there might be some innovations around the edges…most of it will be centered around the lithium-ion foundational platform, and we are quite skeptical that many of these newer-fangled chemistries will be able to compete in the long run, even as you get to longer durations or higher energy density applications.”

While other chemistries boast longer durations, he thinks cost reductions for lithium-ion will make diurnal storage possible for the technology.

“I don’t know if we can forecast the different ways that very, very cheap batteries might be used ten years from now if those trends keep happening,” Lancaster said. For instance, he anticipates that developers may overbuild projects with “super cheap” lithium ion batteries, where only a portion of the batteries on site are discharged at a time, to replicate a 12- or even 20-hour duration.

That said, Lancaster acknowledges that “very, very long-duration storage” like seasonal storage will require different technologies — though that may mean non-battery options like advanced geothermal or hydropower.

The main place where there’s room to innovate, Lancaster said, is in software. The recent slew of closures, he added, are a sign that the battery industry has entered what Energize calls the “software-enabled scale phase.” 

Energize essentially splits the battery market’s growth into three phases: The “hardware cost-down phase,” the “business model innovation phase,” and finally the “software-enabled scale phase.”

Five years ago, Lancaster said, the battery market was “firmly” at the end of the hardware cost-down phase and emerging into the business model innovation phase. Now, he added, a lot of the friction in the market is centered around soft costs — site acquisition and permitting, financing, customer acquisition, and engineering and design — which are starting to mirror the solar market.

One of Energize's investments in the space is German battery analytics platform Twaice, which sells software to lithium-ion battery manufacturers and developers deploying those batteries. Twaice found success both with automakers beginning to develop EVs and with grid-scale storage developers.

Twaice Co-CEO Stephan Rohr said that as the company expands, electric utilities are becoming another key target customer group, particularly in the United States. The company’s analytics and simulation software, Rohr explained, can help developers predict aging and performance behavior of battery cells in order to make design decisions. It can also help operators monitor and optimize fleet health, safety, and performance. And for many developers, that independent performance assessment is key — Twaice isn’t affiliated with a particular manufacturer.

During the commissioning phase of a project, for example, Twaice’s software analyzes data from individual battery cells, identifying sub-optimal modules or components. “If you don’t do that, you may get into the first one or two years of operation and notice underperforming revenue,” Rohr said.

Twaice sometimes encounters erroneous state-of-charge estimations. In some cases, battery management systems aren’t correctly detecting thousands of cells in a storage system, and are therefore underreporting charge estimates. Incorrect charge data can lead to systems not being charged fully, and general inefficiency. One customer, Rohr said, reported discharging to 0%, but still managing to pull an additional 10 megawatt-hours. For many storage projects, particularly in markets like ERCOT, he added, most of the revenue is earned in the few days per year when the grid needs extra capacity and balancing, and on those occasions accuracy is essential.

That said, software is not necessarily a guarantee of scraping value from the battery market. 

For instance, many of the companies that Twaice hopes to sell to already have their own internal data and software teams — and may ultimately prefer to build rather than to buy the software they need. And there’s also the nascency of the company’s target markets. OEM’s are still ramping up EV production, and constantly changing timelines for manufacturing and sales could ultimately hurt Twaice’s own sales pipeline, said Lancaster. The same is true for grid-scale storage, where deployment timelines aren’t always set in stone.

Meanwhile, in contrast with Energize, Twaice isn’t working with lithium-ion to the exclusion of other batteries. While the chemistry is its focus, it is also building software for sodium-ion batteries; Rohr said the company is optimistic about their potential, given that they can largely be manufactured on lithium-ion production lines. Sodium-ion is also further along than other new chemistries, he added. 

Lancaster, at Energize, said the firm remains open to the possibility that its investment in Twaice could ultimately play out beyond lithium-ion — after all, that company’s value really hinges on how many cells are at play, and less on what kind of cells they are. Energize has definitely gotten some pushback on their market prediction, particularly around whether there are gaps lithium-ion can’t fill, he added.

But to date, Lancaster still hasn’t seen evidence that anything other than lithium-ion will take Twaice to eventual profitability. And the recent string of advanced battery chemistry failures boosts the Energize thesis.

“We’re venture capital investors so we hate to see startups and founders fail in their endeavors; we hate to gravedance,” he said. “On the one hand, we’re starting to see proof that the thesis we’ve had around the market is bearing itself out. On the other hand, it isn’t necessarily a good thing for the entire ecosystem.”