A (3:07)

Yeah, so there's a dozen different ways to measure the cost of a stationary storage system. Usually we go with dollar per kilowatt hour as a good metric. And for building something within the United States right now, due to tariffs and duties, you can be looking at anything from 50 to 60% more expensive than it would be in other countries. And to an extent, the pain of the United States has been the gain for many other regions with imports from China for stationary storage systems to the EU or even emerging markets Accelera, as those are relatively low barrier, low tariff environments. China sees them as areas of potential strategic growth opportunities, particularly the eu, which has really surged in battery deployments as a result. If you're building a system, building it in Europe right now is going to be significantly less expensive than building it in the United States. That means that there's going to potentially be more batteries installed there and potentially a bit of a gap on batteries coming into the U.S. do you have.

B (4:06)

Any or the CEA have any kind of estimate? I know it's not going to be precise, but in terms of the rate of adoption for energy storage having been slowed down because of the prices being higher here or maybe comparing it with other regions of the world to say, hey, look, obviously there's different policy drivers and maybe we want this for other reasons, but if we didn't have the anti dumping tariffs and other tariffs, we would have X number of megawatt hours. And now we have X minus Y because of all these things. And if you look at wherever France or somewhere in Germany, whatever it is, they're growing at X percent per year and we're growing at X minus because of this. Is there a way that you guys try to come up with some kind of measurement to understand the impact so that we can understand what the trade off is, to see if our policies on a cost benefit basis can make sense?

A (5:04)

The impact right now is still nebulous and one of the reasons for that is that the trade policy right now is still very much in flux. I think we just saw as we were recording this today, news that the tariffs being expanded on China that were announced may be delayed a further 90 days. This would be another delay on top of the previous delays. As a result, it's been very hard for buyers in the United States to make a purchase decision in terms of whether to move forward with a project on a timeline. And even before HR1 came in where there wasn't as much certainty on what ITC eligibility would be, now there's a lot more certainty on that. But that certainty comes with an additional layer of uncertainty. So there's also a counterfactor here which is that this has not snuck up on the market. We've been banging this drum at CEA for a year now that there's a potential downside on policy uncertainty certainty. This year, developers, system integrators, purchasers, they accelerated imports over the past 12 months and as a result we have a pretty significant amount of backlog supply in the United States. One of the biggest questions that we've gotten over the past year, specifically I'd say the end of 2024 was what is the predominant rate for warehousing, energy storage systems or long term storage in the United States? Because buyers were looking at getting these systems in under the tariff wire. As a result, part of that 2025 demand is going to be filled by systems that were brought in, you know, just before these tariffs were announced, or even tariffs that were coming in. Even just sort of getting them on the boats the day before the tariffs are announced is enough to make it happen. But there, there will be impacts on this simply because there is a gap that no other supply is really ready to fill. If let's say that all projects were economically not viable under tariff, under the tariffs from China, which is probably not the case, I mean, there probably are many projects that are economically feasible. Even if you increase the capex of the system back to 2023 levels, the market was perfectly healthy when batteries cost this much back then as well. At the same time, if let's say you didn't buy from China due to FEOC constraints, foreign entity of concern restraints, or the tariffs that are in play, you're looking at a gap in the domestic market of about 40% more or less for the next couple of years in terms of the amount of lithium ion battery containers that are going to be built here in the US versus the demand that's going to be needed to meet all of the projects that are coming online. So that is potentially your, your floor on the market right now in terms of what the tariffs could impact. That in reality, it's probably going to be more muted than that, maybe on the order of 10 or 20% as you have capacity that is being filled by these backlogs or secured from other resources. And there's always the opportunity that more domestic capacity comes online. We've seen a lot of announcements that have followed the money from the EV market where many Korean vendors are repurposing or converting some of their EV battery facilities in the US towards stationary storage, simply because it has a better demand pathway without the EV tax credits that were eliminated under HR1. So I hate to say it's a situation of massive flux, but that's really the truth that we're living in. It's unclear just how much of a hit to overall demand this will be until we know just how many batteries were shipped into the United States early and just how many projects can move forward even under a heavier tariff burden.

B (8:40)

In your couple of responses that you've had so far, you've mentioned China a number of times, which is not surprising. We're talking about energy storage. You've talked about U.S. production. What about production from other countries like Korea you mentioned that might face either a lower tariff or not have the same fiat restrictions? Aren't there ways potentially for those markets like we have seen in solar to become kind of a middle ground into if U.S. production ever matures, to be able to satisfy the U.S. fine. And if it doesn't, you know that maybe there'll be other jurisdictions that the U.S. government or trade policy favors over China, but maybe aren't the same as building in the US but then it won't have the same effect as, you know, it won't be an all or nothing kind of situation.

A (9:28)

Absolutely. Yep. So domestic content would be the first line of defense for that, building batteries here in the United States. That's a lot of what the Inflation Reduction act was, was trying to focus on. At the same time, we are importing systems in from other regions. The problem is that China has had a pretty strong, not quite monopoly. But the majority of batteries that were brought into the US have come from China for the past couple of years. Now that could shift. I would point to June as a particular month where import data indicates that imports from China for battery storage systems were at a monthly low down at around 8,000 metric tons, as opposed to 56,000 back in January. And South Korean imports were at 6,000, so almost at the equivalent level of China. And that means that even as South Korean vendors look to repurpose production here in the US Importing from South Korea is increasingly and cyclically. You know, South Korea is where we got most of the batteries for, you know, 2016 through 2016. 2019 or so or earlier. And that is now a renewed option for many developers here in the United States. Changing tariff levels might make that more feasible as we had the proposed 25% tariff levels for South Korea down at, I believe, the 15% level now much lower than what you'd be getting out of China. So it's creating this interesting price parity, almost a sort of coincidental parity between these various regions where lower costs out of China are counteracted by higher tariff levels and higher prices out of South Korea are counteracted by lower tariff levels. And so you have this interesting balance that's emerging. There are other markets that can upset that balance. Making batteries in the EU is increasingly an option, but we've seen a lot of scalebacks in that market as Chinese batteries are simply too inexpensive for vendors there to compete. And even if there is manufacturing there, that market's likely to take most of that manufacturing. Southeast Asia is an area where we're seeing a lot of interest from developers starting a lot of manufacturers looking to build out some early production in that market that's still a couple years down the line. So we're not going to see suddenly six months from now this sort of movement through, through Southeast Asia that we saw, for instance, solar panels and other technologies over the past couple of years. So right now it really is sort of China, South Korea and maybe domestic manufacturing. In the next two years, Southeast Asia could start developing as an interesting market. But as you mentioned, foreign entity of concern that is a key prov. Energy storage was a bit lucky and was spared the same fate that solar and wind fell as part of HR1 where there was a big pushback there. Energy storage will be able to take advantage of the investment tax credit across the original period that was established in the Inflation Reduction Act. However, now they're a foreign entity of concern provisions where access to that is going to depend on not interacting in certain ways. Purchasing from ownership from intellectual property from these foreign entities of concern, still working to see just what the impacts of that are going to be. But specific provisions such as material assistance provisions for foreign entity of concern mean that even the IP of the of Chinese LFP technology may follow these the manufacturing country by country and make it difficult to get the inflation to get the investment tax credit. So as a result you have, maybe you're trading off by not getting as many tariffs, but then you're also trying to juggle making sure that you remain eligible for the investment tax credit. The itc, as you get pushed from both ends, it becomes Increasingly hard from a purchasing perspective to really make a fully educated decision and one that's de risked.

B (13:08)

How much, to the extent that you guys are looking at this and are able to measure it, how much of the tariffs and other costs of moving supply chain are being absorbed by the companies themselves? Because one thing that's been surprising to me is if you look from just a pure economic model, you think in a competitive market everyone's already priced basically to the bone. And then so if you impose a tariff, you would think the tariff's just going to add onto the price. And that was kind of the way people had talked about it before all the tariff craziness started a few months ago for Liberation Day. But that really hasn't, as far as I can tell, been the real impact. Like the tariffs are not being passed through at 100% to developers. Do you guys have any insights into how that cost is really being borne by the different actors? And when we say, oh, there's a 15% tariff, well, maybe that only results in a 3% increase in price and it's negligible. Or maybe it results in a 12% increase in price and then maybe the PPA you bid is not economic anymore. How do people think about this?

A (14:16)

Yep, absolutely. And there really isn't even that much anecdotal evidence yet about just how much of the tariffs are being passed through. Partially because a lot of entities are waiting to ink these final purchasing decisions until they have more certainty on what the tariffs are going to look like, on what they are going to look like. Now it may be another 90 days until we get that certainty, which means probably another 90 days before the first real results start trickling in that tell us just how much of this additional cost is going to be passed through. There is reason for optimism though in that we really haven't found the bottom of the storage industry in terms of pricing yet. Partially that's been due to commodity prices. Lithium has been that rock bottom pricing, although we're seeing that recover a little bit. But also there's been incredible appetite from manufacturers to put margin pressure on themselves and their competitors by offering bottom of the barrel pricing. And for many entities, a lot of more vertically integrated ones that have ownership and stakes all the way through extraction, down through system integration and selling entire energy storage systems. When you're that vertically integrated, you can take a margin hit and spread it across your, your total business a bit more smoothly. You know, you get a bit, it's a bit of a depth versus width situation for some of that Margin compression. So some manufacturers may be in a better position to offer lower pricing than they otherwise would be. At the same time, you know, this had already been happening where there was a lot of pressure on margins just at the pricing level that we'd seen where we were seeing DC blocks out of China in 2024 that were in the 90 to $100 range, that fell into the 80 to $90 range and then even lower anecdotally pricing in the EU in the $60 per kilowatt hour range, which would have been unheard of two years ago. So given that that pricing level, it's hard to see just how much more manufacturers can absorb the tariff hit. So if I had to guess, when we see this finally played out, I think that a significant portion of those tariffs will by necessity be passed through to buyers in the United be absorbed. And a lot of it will depend on the scale of the purchase that a buyer is willing to make and the structure of that purchase as well. There's going to be a lot of nuance and negotiation for most, for a lot of these large scale supply procurements and that's going to change the terms and change the overall price structure pretty significantly.

B (16:45)

The other thing that your analysis there to me begs the question of what about the financial stability of the suppliers themselves?

A (16:54)

Right.

B (16:54)

I mean, we saw years ago in the module supply, some of the largest module suppliers running into financial trouble. If there's the. Assuming the market, which I think it was, was already very competitive. If you have these new pricing pressures and if your analysis is correct, that some of them are going to be able to absorb more of the increased costs of doing business than others? Or do you see a heightened scrutiny from purchasers looking at the creditworthiness of the supplier? And do you think people should be concerned that there's going to be some type of shakeout here in the next year in the market once people understand where the tariffs, the impact that the tariffs are going to have.

A (17:38)

Great question. So far, no, I haven't heard much worrying about credit worthiness of suppliers in this case. I think the more likely option is going to be consolidation where some of these smaller entities that have trouble reacting to the margin pressure that's being put on them from some of the bigger players may move towards selling or spinning off, et cetera, et cetera, their various battery system, the portions of their business focus on batteries. But in terms of credit worthiness, I don't think that we're at that point yet where we've seen anything in the financials themselves that would, that would make people more nervous about that. I think that there is some good trust in the market. There's a lot of vendors that are very trusted from that perspective. And that list is getting longer rather than shorter as smaller vendors continue to draw up scale and build their financials as well. So potentially consolidation, but not seeing a lot of anxiety in terms of credit worthiness from the buyers yet. That could change.

B (18:39)

All right, so let me, as we're getting towards the end of the recording here, switch to forward looking. What do you see in terms of pricing and technology movement over the next, let's say two years? I mean, going beyond that probably pretty tough to predict, but we have people on the podcast pretty regularly talking about new technologies that are going to be long duration, they're going to be less expensive, but so far for the last few years, we don't really see it yet, but it may be that it's coming. Where do you see pricing headed, let's say excluding lithium prices because that's, who knows where commodity prices are going to be. But just based on technological improvements, energy density, better ways to manufacture whatever, or shifts to maybe slightly cheaper technology that's better for stationary energy storage.

A (19:37)

Yeah. So starting with lithium ion batteries, improvements in terms of cell chemistry, energy density, density in terms of number of racks fit into a container, maybe moving towards AC coupled systems versus DC coupled for total project system cost the next five years you could be looking at 10%, maybe 15% as you get further economies of scale, total price declines and that could be, that's going to be completely mitigated by tariffs. And so adding tariffs on, for a, for a system free sort of benchmark 5 megawatt hour system pricing will actually increase over the next five years due to tariffs and potentially lithium prices and other commodity prices increasing over time. Now lithium ion continues to drop in terms of overall pricing and that has made it very hard for alternative technologies to compete. Many of these technologies suffer from the five years out problem where the technology has been five years away for the past 15 years, unfortunately. And it becomes increasingly difficult to do that when you don't have a market at scale to ride the coattails of in the way that lithium ion did in the form of electric vehicles. EVs make up proportionately a much larger share of lithium ion demand compared to stationary storage. So stationary storage has benefited from that learning curve and the scale that the EV industry has driven. Now that shifted as the technology has bifurcated a bit and now we're seeing more bespoke solutions for stationary storage. But the broader learning curve of lithium ion has made a huge impact in how lithium iron phosphate battery costs have come down as well for a large scale long duration storage system. If you're talking about compressed air, compressed CO2, modular pumped hydro iron air flow batteries, sodium ion, few of those, with the exception of sodium ion, really can benefit from the learning curves of other technologies. And a lot of the sort of economic case for those comes in two flavors. The first one is the need for alternative chemistries is going to depend primarily on how long the duration of the application is. So looking at an 8 hour or 24 hour or even 150 hour system, lithium ion is not well built to compete at those durations compared to other technologies. Unfortunately, there just isn't much of a need for those durations yet. That need is emerging over the next 10 years, 20 years. As we get closer and closer to 100% renewable penetration in many markets, the need for longer duration storage is going to be there. But at the same time, cost declines are not on the same order that they have been for lithium ion systems. So we're at an interesting position where when California is modeling their eight hour energy storage needs over the next 20 years, they're modeling lithium ion chemistries as the least cost solution. So for alternative chemistry it's going to be or even just alternative technologies for mechanical systems or thermal systems, it's going to be a question of demonstrating the need for a solution and then demonstrating a cost outside of the laboratory setting. Some companies are closer to that where they're building out commercialization. They have pilot programs going on with utilities, those leaders in the space. You know, if they emerge and they're competing at these longer durations, that may mean a smaller slice of the pie for lithium ion to play with. As we get closer and closer to full renewable penetration in many of these markets in Europe or in the United States, where state by state targets are increasingly more aggressive in terms of the amount of renewables on the grid, it will really need to come from both directions before we really see any kind of long duration energy storage technology compete at scale with lithium ion.

B (23:21)

All right, last question for you. Three years from now, what? Or maybe three, maybe too soon? You tell me. Maybe I got to make it five to make it more interesting. But you tell me what's the right year, but what percent of the demand for energy storage in the US will be satisfied through domestic production?

A (23:41)

I love the question. And three years from now, I think we're going to be above 50%, I think it's probably going to be closer to 75 or 80%. And that is primarily, unfortunately due to tax credits being reduced for EVs. EV demand in the United States and potentially to an extent globally has been below analysts expectations. With tax credits going away in September, demand is going to be affected and as a result, there's going to be a lot of capacity for lithium ion manufacturing that is feeding demand that's now eroded. And stationary storage represents a much better bet in these cases. Its demand is steady. There's going to be a lot more overall electricity demand on the grid, but additionally bigger price spikes and more grid instability, which energy storage loves, a problem that energy storage loves solving. As a result, we anticipate demand for storage to be relatively steady. So we're going to see a lot of that be repurposed. Now the question is how quickly that can happen. So far some of these announcements indicate that it's not a question of 2035 or even 2030, but in the next one, two or three years that a lot of this capacity can be repurposed. It's an expensive proposition converting an NMC chemistry factory to LFP. If you have the IP, the technology is still probably a 15, 20, 25% of your total capex to reconvert it, but it's certainly not like building an entire new factory. And so as a result, we could see 10 gigawatt hours here and there across the United States and it wouldn't need to be that many to meet domestic demand. Domestic demand is probably going to be up at around 100 gigawatt hours, potentially a bit more over the next five years annually. So you only need maybe three or four factories further to announced they're converting to LFP technology where you could start thinking about meeting all of your demand from domestic manufacturing, which is pretty remarkable. Not quite the story we thought we'd be telling, you know, two or even one year one year ago where we had sort of a carrot and stick approach for building out domestic manufacturing in the United States. Now it's more of a case of EV suffering and energy storage picking up that slack. But still good news for the energy storage industry, just not quite the way that the industry I think would want it to have happened.

B (25:58)

All right, with that, Dan, I'll thank you for recording with us today. Thanks for your time.

A (26:02)

Thanks so much for having me.

B (26:07)

You can find us online at www.projectfinance.law or send us an email at currentsordonrosefullbright.com Please rate review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers.

A (26:23)

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