For the last few years, the mineral lithium has become synonymous with storing energy. Lithium's dominance in batteries has created what is called technology lock-in –- preventing other potential technologies from gaining traction. But lithium is not a perfect solution for all things energy storage. A number of start-ups promoting alternative solutions are drawing the market's attention, with one in particular receiving a big vote of confidence from a well-heeled investor.
Why grid energy storage is a big deal
Utilities are using more and more renewable energy sources, such as solar and wind, to generate electricity. US solar pioneer NextEra Energy (NYSE:NEE), for example, has seen its gross margins surge over the last 10 years by leveraging renewables, while US-based utility operator AES (NYSE:AES) has turned its business around by leaning more on renewables. However, solar and wind can't supply "baseload power," the always-there, minimum level of electricity needed to keep things running.
Enter grid energy storage: large battery systems that store electricity to use it at a later time, and which can supply baseload power. The pairing of renewables with grid energy storage holds the potential to make fuel costs, one of a utility's largest variable costs, drop to zero -- with a commensurate increase in a utility's gross margins and financial efficiency. And utilities, large and small, are paying attention.
The opportunity for grid energy storage is large. During its battery day event, Tesla's (NASDAQ:TSLA) CEO Elon Musk, for example, said that battery storage manufacturing would need to grow a minimum of 1,600 times from today's levels to fully decarbonize the world's electricity.
As a result, companies like Tesla and others have focused a lot of effort on ramping up their lithium battery production. Lithium, however, is only one type of battery chemistry with its own limitations. For example, it is normally thought of as a "short duration" battery, discharging in four hours or less. It needs to be kept within a certain temperature range, and it can catch fire when not operated properly.
The little Zinc battery company that could
Founded in 2008, EOS Energy Storage raised $160 million as it set out to produce a grid storage product using Zinc as the base chemistry. Zinc, they argue, is a longer-duration, safer, and cheaper alternative to lithium. It is also much more plentiful than lithium: around 24 times more so, according to the latest US Geological Survey estimates.
Through its 12-year life, EOS has scored a number of small but meaningful victories. Its systems were deployed in pilot projects by Duke Energy (NYSE:DUK) and UC San Diego in 2019, as well as in a larger project with Motor Oil Hellas, a Greek oil company, earlier this year. Its biggest milestone, however, is probably its recent announcement or a definitive agreement to merge with B. Riley Principal Merger Corp. II (NYSE:BMRG), a special purpose acquisition company, or SPAC.
The little SPAC that will
In late April of 2020, financial services specialist B. Riley Financial, Inc. (NASDAQ:RILY) announced the launch of the SPAC B. Riley Principal Acquisition Corp II, and its subsequent IPO, which priced at $175 million. The IPO was "small," about one-half the size of the average SPAC IPO so far for 2020. And in June of this year, barely two months later, the SPAC announced its intention to merge with EOS Energy. The transaction is expected to close in Q4 2020.
The merger assigns EOS an enterprise value -- the value of its stock plus or minus all debt and cash in its balance sheet -- of $500 million. The fresh infusion of cash from the merger will be used to ramp up the manufacturing and commercialization of EOS's Zinc-based Aurora system. The SPAC has also attracted fresh, high-caliber talent to the company's executive team, including CEO Joe Mastrangelo, who previously served as CEO of GE's (NYSE:GE) Power Conversion Unit.
Will a recharged EOS succeed?
B. Riley is an experienced financial operator. It has been in business for over 20 years, going public in 2015. And judging by the growth of its market capitalization, it has done a few things right in that time, outpacing the growth of the S&P 500 by more than 8 percentage points.
In terms of experience in renewable energy, B. Riley recently led electric bus company GreenPower Motors's (NASDAQ:GP) IPO. While that IPO hasn't exactly "taken off" yet like those of better-known EV companies, it demonstrates that B. Riley understands how to value clean energy opportunities, attract investors, and keep them interested.
In four short years, EOS projects its revenues will grow to $1 billion from today's base of merely $2.5 million. While this level of growth would qualify as head-spinning, EOS claims to have firm orders covering 56% of its sales targets through 2022. Also, because EOS is bringing to market a differentiated product, it may avoid direct competition from much larger rivals along and the resulting price erosion. And with its recent cash infusion, it is the only non-lithium storage player with substantial resources and an experienced team to make inroads in the space.
Given its aggressive growth targets and pioneering technology, investors interested in clean energy stocks should probably consider EOS as a high-risk, high-potential-reward opportunity, and invest prudently while diversifying their bets in the space.