Big Picture: The Rise of Lithium-ion Batteries

The lithium-ion (li-ion) battery is set to play an outsized role in our economic future. Their high-energy density, long recharging cycles, and lightweight structure make them well-suited to deliver electricity on the go.

As this future materializes, the economic importance of li-ion batteries will rise accordingly. It is therefore important that businesses, policymakers, and consumers know how li-ion batteries work, where they are made, and whether their supply chains run the risk of overconcentration or disruption.

We begin by tracing the current li-ion battery market and make a case for why the adoption of EVs will determine the battery market’s future.

Li-ion batteries have three primary demand drivers: consumer electronics, energy storage, and transportation. Consumer electronics were the initial driver of li-ion battery commercialization. Battery demand from continued adoption of smartphones, laptops, and other digital devices is projected to rise from 26 GWh in 2015 to 54 GWh in 2025. However, Bloomberg predicts that the dollar value of this energy market will fall over the same period.

As advances in li-ion battery technology continue to improve the efficiency of energy storage, the cost of storing renewable energy could decrease significantly, possibly to the point that renewables reach grid-parity with traditional energy sources. Since one of the main problems of renewable energy like solar is its intermittency, having reliable storage capacity would make renewable energy far more attractive to consumers and governments by mitigating supply disruptions. Bloomberg New Energy Finance (BNEF) predicts that energy storage demand for li-ion batteries will explode from 1 GWh in 2016 to 200 GWh in 2030.

But the key future determinant of demand for li-ion batteries will be electric vehicle (EV) penetration in the transport sector. Just as internal combustion engines (ICEs) made oil a crucial commodity, the continued electrification of transport will require enormous volumes of li-ion batteries and will turn them into a global necessity. Overall demand is set to skyrocket in 15 years, from 19 GWh in 2015 to 1,293 GWh in 2030. Goldman Sachs estimates that the market for batteries to power EVs will grow from under $10 billion today to $60 billion in 2030.

Increased production and demand for EVs will turn li-ion batteries into a commodity-like product over the coming decades. The International Energy Agency (IEA) estimates that, even without additional policy incentives or pro-EV measures, the global stock of light-duty EVs (including gas-electric hybrids) could increase from 3.1 million in 2017 to 125 million in 2030 (a figure that could climb to 228 million with a raft of IEA-recommended policies).

Wide-scale EV adoption depends largely on reducing the cost of li-ion batteries. That’s because batteries currently represent 42% of total EV costs and fully battery-powered EVs are not yet cost-competitive with gasoline-based ICEs. The performance of li-ion batteries is measured in dollars per kilowatt-hour ($/kWh). The industry consensus is that $100/kWh is roughly the threshold at which EVs become cost-competitive with ICEs. The BNEF price index for li-ion batteries has plunged from $1,000/kWh in 2010 to $209/kWh in 2017 and is forecast to break the $100/kWh barrier in the next decade, before falling to $73/kWh by 2030.

BNEF also predicts that, for mid-range EVs, the proportion of a vehicle’s pre-tax price attributable to li-ion batteries could fall from 42% today to as low as 18% in 2030, significantly increasing the affordability of EVs and thereby expanding demand.

If the consensus scenario plays out, li-ion batteries could, by the middle of this century, be as cheap and ubiquitous as the oil that powers cars today. The crucial difference between batteries and oil is, of course, that oil is a natural endowment whereas batteries are a manufactured good. This distinction means that the effective “commodification” of li-ion batteries will be dominated by countries that can manufacture them at the largest scale and the lowest cost.

Tesla, the darling of Silicon Valley, is but one player among many: China, Japan, and South Korea together already account for a significant majority of global li-ion battery production. Delving into the supply chains that drive this production is key to understanding the opportunities and risks for the li-ion battery industry at a time of unprecedented uncertainty about the future of economic globalization.