■Future Outlook of RS Technologies＜3445＞

3. New Entry into the Vanadium Redox Flow Battery Electrolyte Market

(1) What is VRFB

The company established LE Systems, which handles the development, manufacturing, and sales of electrolytes for VRFB in October 2023, as a 100% subsidiary (business succession from the former LE Systems in December of the same year). VRFB, a type of rechargeable battery that has been researched and developed since the 1970s as a national project for energy savings, is widely known for its high safety due to being non-flammable, long-lasting performance without degradation, and the ability for unlimited charge and discharge. Unlike other batteries that undergo charge and discharge through electrode chemical changes, VRFB achieves charge and discharge through electrolyte chemical changes. By increasing the amount of electrolyte, it is easy to expand the storage capacity, making it ideal for stationary large-scale storage applications such as photovoltaic and wind power generation. In Japan, only Sumitomo Electric Industries＜5802＞ operates as a VRFB manufacturer.

While the initial cost is high, in applications designed for long-term operation, it demonstrates cost advantages. In comparison with lithium-ion batteries (iron phosphate-based), the company has calculated that after 10 years of use, the costs are almost the same, and after 20 years the costs are about 30% lower.

(2) Market Outlook

With the increase in the supply of daytime clean energy from large-scale solar power generation plants, there is a growing need both domestically and internationally for large-scale storage batteries to store generated power for nighttime use. According to the "IEA World Energy Outlook 2022" issued by the International Energy Agency (IEA) as presented in the materials provided by the company, the global storage capacity of stationary storage batteries is expected to increase significantly, with a most conservative estimate (based on declarations from various countries) indicating a growth from 27GWh in 2021 to 270GWh in 2030 (10 times) and 1,296GWh in 2050 (48 times). A certain proportion of this growth is expected to be attributed to VRFB systems. The newly established storage capacity of VRFB is projected to grow rapidly from approximately 1.5GWh in 2022 to around 20GWh in 2028, with the electrolyte volume increasing dramatically from about 0.09 million cubic meters to around 1.2 million cubic meters (approximately less than 5 billion dollars) and expanding by 13 times. It is anticipated that 50% of this expansion will be led by the Asian region, particularly China. China has already started to introduce VRFB systems with power companies, setting the stage for market development. In anticipation of future market growth, more companies are entering the VRFB market. The company aims to achieve the top share of the VRFB electrolyte market by 2028 by utilizing the network it has built with local governments and local companies in China.

It is predicted that the newly established storage capacity of VRFB will grow rapidly from approximately 1.5GWh in 2022 to around 20GWh in 2028, while the electrolyte volume is estimated to increase from about 0.09 million cubic meters to around 1.2 million cubic meters (equivalent to around less than 5 billion dollars), expanding by 13 times. It is expected that 50% of this market will be dominated by the Asian region, led by China. With VRFB systems being introduced by power companies in China, the market is gaining momentum, and more companies are entering the VRFB market in anticipation of its expansion. Leveraging the network established with local governments and local companies in China, the company has set a target to achieve the top share of the VRFB electrolyte market by 2028.

Forecast from Guidehouse Insights, an environmental energy sector research company in the USA.

(3) Strengths of the LE System

Currently, many Chinese manufacturers are electrolyte manufacturers, but the LE System lists three strengths: stable procurement capabilities of raw materials, cost competitiveness of electrolyte production process, and comprehensive technical capabilities that enable collaboration with numerous battery manufacturers. The strategy is to expand sales to VRFB manufacturers domestically and internationally leveraging these strengths.

a) Stable procurement capabilities of raw materials

The main producing countries of vanadium are South Africa, China, Russia, and the USA, which together account for over 90%. While over 80% is used for steelmaking additives (improving strength and heat resistance), it is also widely used in the chemical and electronics industries. Vanadium pentoxide is commonly used for VRFB electrolytes, but controlling procurement costs is very challenging due to market volatility. The LE System sources intermediate product (AMV) as raw material, facilitating procurement through relative negotiations. Additionally, the LE System possesses various technologies to recover vanadium from waste (residue) emitted by thermal power plants and plant facilities, potentially establishing a system for stable procurement through partnerships with major oil companies, steel manufacturers, and leading mining companies in South Africa domestically and internationally.

b) Cost competitiveness

The common manufacturing process for electrolytes involves procuring vanadium pentoxide, converting it through dissolution, filtration, and electrolytic reduction processes into vanadium trioxide, used as an electrolyte. In contrast, the company has established a technology to directly manufacture electrolytes from intermediate product AMV, which purifies vanadium pentoxide. AMV can be sourced more affordably via relative price negotiations compared to vanadium pentoxide, reducing electricity costs by over 50% due to a quicker dissolution time (1/5 of the duration) and employing a reduction device with a high liquid contact area to potentially reduce electrolyte manufacturing costs by around 50% compared to competitors. As the proportion of electrolyte in VRFB costs is about 35%, the benefits to VRFB manufacturers are significant. Furthermore, the company's research indicates that the lower impurity composition in their electrolytes compared to other products is a strength, as lower impurities are seen as more suitable for long-term operation. Additionally, they have developed lead-free and antimony-free technologies to comply with environmental regulations.

c) Comprehensive technical capabilities

LE System has been involved in research and development related to VRFB in Japan for over 30 years. It has a team of technical advisors who have built a network with domestic and overseas cell manufacturers, and possesses unique VRFB design technology that allows for cell development independently. Its strength lies in being able to propose the optimal VRFB system. In terms of patent strategy, it holds multiple patents related to vanadium recovery technology, electrolyte manufacturing processes, VRFB system design, etc. (10 or more owned patents).

(4) Current Status and Future Outlook of LE System

LE System currently operates a research and development base at its Tsukuba office and completed the Namie Plant (Fukushima Prefecture) as a mass production factory in September 2021. The Namie Plant has an annual production capacity of approximately 5,000 cubic meters, with no sales performance until 2022. However, starting in 2023, it has received inquiries from multiple Asian manufacturers, and has begun mass production by receiving a large order for North American power plants through overseas cell manufacturers. Although shipping preparations have already begun, sales recognition will occur upon completion of acceptance inspection. Several inquiries ranging from tens of millions to hundreds of millions of yen have also been received.

As sales targets, it aims for 1 billion yen in the fiscal year ending December 2024, 3 billion yen in the fiscal year ending December 2025, and 24 billion yen in the fiscal year ending December 2026, with an operating profit margin of 20% expected in the fiscal year ending December 2026. While there is a possibility of not achieving the sales target for the fiscal year ending December 2024 due to the timing of acceptance inspection for North American projects (hundreds of millions of yen), the increasing inquiries suggest a high potential for accelerated sales growth in the future. Since the sales capacity of the Namie Plant is expected to be around 3 billion yen per year, investments in increasing production capacity will be necessary to achieve the sales target for the fiscal year ending December 2026. There is a high likelihood of establishing a new base in China, the largest consumer market. If expanding, it is expected to be a factory with a capacity of 0.05 million cubic meters per year. The company aims to establish a production system with an annual capacity of 0.15 million cubic meters in the future. Based on the current selling price of the electrolyte, this translates to approximately 90 billion yen, and even considering the trend towards lower prices due to mass production, there is ample potential for this to be a business on the scale of tens of billions of yen.

(Written by FISCO guest analyst, Jo Sato)