Utility and Misc

The APS Battery Explosion Should Worry PNW, AES Investors

AES and PNW investors should be paying close attention to the risks associated with their investments. Arizona Public Service (PNW subsidiary) is working to determine what caused an explosion at their McMicken Energy Storage facility, a grid-scale battery facility. The explosion injured 4 fire fighters and sent 3 of them to a burn center. If the explosion is tied to the battery, it could have broad consequences for both PNW and AES shareholders.

These batteries were originally installed in 2017 to support Phoenix’s growing West Valley region, which has a very high penetration of rooftop solar, making the batteries a strong complement to growth in the region. As more solar is installed and makes up a greater percentage of power generation, the steeper the “duck curve” becomes. The duck curve is the phenomenon which occurs when power prices during the middle of the day drop as solar panels generate energy, and rise in the evening and early morning when the sun sets.

Duck Curve, Source: CAISO
Source: CAISO

In order to combat this, energy storage is required so that batteries can store energy during the day when prices are low (and even negative), and discharge energy when solar generation is lower.

Trouble for batteries could mean trouble for grid reliability. The explosion should be worrisome for PNW as they continue to install batteries, as APS announced plans to build 850 megawatts of battery storage by 2025 which would be necessary if solar continues to grow as a percentage of total generation.

If the fire was found to be caused by the batteries, it could cause trouble for APS as they’ve previously had problems with grid storage systems, such as a fire at a different facility in 2012. Many believe this could be a systemic issue due to Arizona’s desert climate. Increasing penetration of renewables requires battery storage or at least significant gas peaker capacity to be successful. Gas peakers are fast start natural gas plants which operate only when power prices reach a certain threshold. Because they are more variable in their operation, they are often more profitable then baseload generation such as nuclear and coal, which requires constant operation. As state legislators mandate higher renewable energy usage, battery storage technology becomes much more important relative to natural gas peakers.

Although battery fires have always been a concern for the storage industry, most of the issues have been been limited to South Korea.

Consequences for AES Investors

While this fire certainly raises concerns for APS (NYSE: PNW) shareholders over the next few years, the greater risk appears to be with the battery provider, AES Corp (NYSE: AES) who have pinned their growth on developments in the storage market. After merging with Siemen’s storage unit last year, AES has been signing multiple deals to provide battery storage.

Although the secular growth story looks promising as utilities and market operators in the U.S. are now trying to integrate large amounts of storage capacity, this growth could be at risk if AES batteries are found liable for the APS explosion.

AES has vastly outperformed the broader utility sector over the past year as the hype surrounding battery storage has gained steam.

AES 1 Year Performance vs. XLU

With investor expectations already elevated based on this perceived growth in battery storage, this incident could prove to be costly. While the secular growth story is compelling, there are other competitors in this market who will be able to take market share from AES should their battery be found responsible for the explosion.

AES investors should be wary of buying the stock at current levels, especially as new risks in their battery storage business emerge. Now may be a good time to take some risk off the table and consider the fact that the stock may be priced for perfection.

Source: Seeking Alpha

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