Why NEC’s storage exit shouldn’t worry investors

BY RICHARD HEAP:

It’s been a good year for the energy storage sector despite everything.

The global financial and oil crises have shown there are opportunities for investors in storage to profit from volatile energy prices.

More governments are using the crisis to step up their green infrastructure investment plans where storage will play a part.

And barely a week goes by without a large storage order or tender in which storage players can bid. This week’s request for 1GW of renewable energy projects by AES in Google, which names storage as a favoured technology alongside wind and solar, is the latest in a long line of tenders that indicate strong demand for storage. That should all bode well.

Yet these strong growth indicators haven’t been enough to save NEC Energy Solutions, which is part of the Japanese technology giant NEC.

Two weeks ago, Bloomberg reported NEC is set to wind down the subsidiary by 2030. This is despite the fact that it has around 1GW of storage projects in operation and is one of the world’s largest energy storage operators.

The company said it would not take on new projects but was committed to those it has in development. It said it would carry on maintenance for those it has built until March 2030. And NEC said it made the decision because Covid-19 meant it hadn’t been able to find a buyer for the subsidiary.

So what should investors make of this?

We could understand if the fate of NEC Energy Solutions has made investors question their own plans for the sector. It does show some of the financial challenges for the storage sector in the coming years. But we also see unique issues for incumbent NEC that won’t apply to other companies.

Investor influx 

In the last five years we have seen more utilities building a position in storage.

Some have done it by acquisition: EDF, Engie, Shell, Total and Wärtsilä come to mind. Others such as NextEra are bolting on storage to their already massive renewables portfolios. Yet others have paired up with major industrial players, such as AES Corporation and Siemens in Fluence.

This is an indication of the financial challenges that will face incumbents such as NEC. Cash-rich utilities and manufacturers are ploughing money into storage, while leveraging expertise in the renewables that storage will support. This will make it tougher for established storage specialists like NEC to compete.

But these market dynamics only worsen NEC’s existing problems.

NEC Energy Solutions formed in 2014 when its parent bought A123 Energy Solutions. Its goal was to build a leadership position in grid-scale batteries, and it did. But it was also unprofitable every year – and we all know how that goes. Takashi Niino, chief executive of NEC Corporation, said as much in a call with analysts on 12th May: the subsidiary was unprofitable despite growing sales.

Then there’s a reputational hurdle. NEC has a reputation for quality products that are more expensive than its rivals’. That narrows the types of deals that the company will win, especially in cost-focused tenders.

Finally, its strategy has shifted in recent years, away from selling its lithium-ion phosphate systems and towards selling those of Asian firms, such as LG Chem and Samsung. That has pushed it increasingly into a role of integrator, and thus marginalises it when compared to rivals that invest in their own technology.

We can contrast this to Fluence, which this month unveiled a six generation of its storage system and a roster of major customers for 800MW / 2,300MWh of deals. Enel, LS Power, sPower and Siemens were the big-hitting buyers.

And yet we don’t think the fate of NEC should worry investors much. They already know that competition will be fierce, but it’s a battle many are already fighting in wind and solar. These are cash-rich players in it for the long haul.

We also haven’t written off NEC Energy Solutions. NEC hasn’t totally ruled out a sale. There will be players interested in the expertise it has to offer.

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