The Charge to Battery Storage

Electrification and a surge in demand for electricity will drive demand for battery energy storage.

The Climate Change Committee estimates that ‘electrification’ will contribute 60% of all UK emission reductions by 2040. Electrification, bringing the curtain down on the era of fossil fuels, is a must if we are to achieve emission reductions.

Whether it be clean energy, increased ownership of EVs, heat pumps, or the expected growth of AI and AI datacentres, there is expected to be a surge in global demand for electricity. The International Energy Agency (IEA) is forecasting demand for electricity from AI datacentres in the US to more than double over the next five years and will account for almost half of the growth in US electricity demand by 2030. Furthermore, the IEA estimates that data processing centers, mainly for use with AI, will consume more electricity in the US alone by 2030 than manufacturing steel, cement, chemicals, and all other energy-intensive goods combined!

Historically, fossil fuels have accounted for more than 60% of global energy production. As more countries shift to intermittent renewables for energy, such as wind and solar, this will in turn drive demand for large-scale energy storage provided by modern batteries.

Not surprisingly, China is likely to be the big winner here.

Chinese batteries are thought to account for 90% of energy storage systems and China’s market share in the US is estimated to be 80%, and in Europe, almost 75%! A research consultancy estimates that global battery storage capacity grew by over 50% last year and could double to 760 GWh in 2030.

China’s dominance of the global battery storage market is already ringing alarm bells in the West. In the US, Chinese battery systems have already been banned from military facilities. Trump has now imposed draconian tariffs on China to drive a trade deal, so will this create an opportunity for South Korean battery manufacturers? Some of these, such as LG and Samsung, are now building new lithium iron phosphate (LFP) battery production capacity but have yet to prove they can produce LFP batteries at scale and at a competitive cost. Meanwhile, Chinese companies are setting up new LFP battery production facilities in Southeast Asia, where eventual US tariffs are likely to be lower.

The US is unlikely to want to be in a position where it is reliant on China for grid-scale energy storage and one possibility is that it will ban Chinese batteries altogether on security grounds. Trump will no doubt be hoping his ‘best buddy,’ Elon Musk, continues to develop Tesla’s Powerwall and Megapack technology. In turn, if China is no longer able to sell storage batteries to the US, leading to overcapacity, then it could look to sell surplus battery stock into Europe, further supporting the shift to renewables. This assumes European governments do not perceive a security risk.

 

What have we been watching?

 

Trump 2.0 remains as unpredictable as ever, as reflected in his sudden and unexpected 100% tariff on films made in foreign countries. He also announced last night that he would sign an executive order that would reduce prescription drug prices in the US by 30% to 80% ‘almost immediately.’ To achieve that, Trump will institute a ‘most-favoured nation policy’ whereby ‘the US will pay the same price as the nation that pays the lowest price anywhere in the world.’

 

However, markets and particularly US equities, remained in a more optimistic mood as Trump announced his ‘first trade deal’ with a framework agreement between the US and UK, while over the weekend, US Treasury Secretary Scott Bessant suggested ‘substantial progress’ had been made in trade talks between the US and China. The US and China are to jointly provide details on the progress sometime today, but US media reports suggest that the reciprocal tariff on China could be lowered from 125% to 10% for a 90-day period while China would cut tariffs on US goods also to 10%.

While the US-China trade news is encouraging, we must remember that many other countries have still yet to reach a deal with Trump. The UK-US framework deal is interesting considering the UK is not running a big trade deficit with the US, nor was it facing much higher tariffs post Liberation Day anyway. As the first agreement with any country, it could preview what other trade deals will look like. Other countries may seek to replicate the UK’s exemption from sector tariffs and accept the 10% baseline reciprocal tariff in return for US concessions. It is interesting to note that US tariffs on China could be cut to 10% if media reports are correct. We have to wait and see what happens with the EU and other US allies such as Japan and South Korea, which saw larger reciprocal tariffs on Liberation Day but which seem to be making limited progress in trade negotiations.

On the geopolitical front, there was also some brighter news. Following the deadly military exchanges between India and Pakistan last week that almost pushed both countries to war, a ceasefire appears to be holding. In Ukraine, President Zelensky challenged Putin to meet him after Trump demanded immediate Ukraine-Russia talks. This follows European leaders’ calls for more sanctions if a 30-day ceasefire is not agreed upon. Putin doesn’t react well to ultimatums and has proposed direct talks with Ukraine in Istanbul on Thursday. Is Putin really interested in a peace deal, or is this another attempt to divide the US and Europe? Against this news, Israel’s security cabinet approved a plan to expand its military offensive against Hamas, which includes the ‘capture’ of Gaza. Israeli warplanes also carried out strikes on Houthi targets in Yemen in retaliation for the missile attack on Ben Gurion International Airport. There is also the matter of the suspected Iranian attack on the Israeli foreign office in the UK.             

 

In the UK, the Bank of England cut interest rates by 0.25% to 4.25%, as widely expected. More importantly, the UK and US announced a trade deal. This stuck to the 10% initial reciprocal tariff baseline but with carve-outs from even higher tariffs, such as automotive and steel, which would bring the effective tariff rate to slightly below 10%. While details are being ironed out, in return, the UK has agreed to fast-track American goods through customs, purchase $10bn of Boeing aircraft and lower barriers to American agricultural, chemical and energy exports. Compared to the trading relationship with the US prior to Liberation Day, the UK is worse off despite the deal. At least the UK has a framework deal and can now turn its attention towards a trade reset with the EU ahead of a summit on the 19th of May.  Sterling dropped back to $1.31 following the US-China trade developments and the likelihood of improving trade relations.

 

In Europe, Friedrich Merz was confirmed as the new German Chancellor by the Bundestag. However, he failed to obtain enough support on the first ballot, the first time this has happened since WWII, but was appointed on the second attempt! If the new German government now swiftly implements its urgently needed relief measures for the German economy, then the fact that it took two attempts to elect a new chancellor will quickly fade into the background. Nonetheless, a warning shot has possibly been fired!

 

In the US, the Federal Reserve (Fed) kept the Fed funds rate on hold for the third meeting in a row at 4.25%-4.5%, while sticking to a patient tone amid heightened uncertainty. Fed Chair Jerome Powell acknowledged the opposing pressures on its dual mandate stemming from larger-than-expected tariffs announced so far and offered little guidance on the policy path ahead. He also pushed back on the idea of pre-emptive interest rate cuts, a subject on which Trump has been very vocal!

 

In China, the People’s Bank of China (PBoC) announced a package of support measures, including a 0.1% policy rate cut, a 0.5% reserve requirement ratio cut and an extension of lending facilities for the services and consumer sectors. The moves signal a clear shift towards a looser monetary policy in response to the Trump tariff shock. Meanwhile, China’s factory-gate prices fell by 2.7% in April, the steepest drop in six months.     

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Brent oil slumped to a 4-year low at around $61 as OPEC+ agreed to increase oil production in June, but the price has rallied to over $65 on reports of the US/China trade negotiations.

Finally, as the war in Ukraine continues to rage and the 80th anniversary of VE Day passes. News that the EU is considering banning long-term contracts for the remaining imports of Russian gas by the end of 2027. In 2024, the EU purchased €23bn of Russian energy, which is greater than the military assistance it provided to Ukraine that year!

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