Best Investments: Energy storage opportunities and intellectual short circuits

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Energy Storage – Opportunities and Intellectual Short Circuits | Alternative Energy Stocks

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Energy Storage – Opportunities and Intellectual Short Circuits John Petersen

After writing about investment opportunities in the energy storagesector fora couple of years, today marks an important transition because I'veaccepted Nadsaq's invitation to include my blog in the Community section of theirwebsite. I'm grateful for the chanceto reach a broader audience and hope that my weekly musings can helpnew readers separatehype from opportunity and avoid the intellectual short-circuits thatare all too common in the energy storage sector.

By way of introduction, I'm a working lawyer and accountant who hasspent30 years guiding emerging energy and technology development companiesthrough the corporate finance process. I earned my stripes in thebattery industry during a four-year stint as general counsel for Axion PowerInternational that included 20 months as its board chairman. I'm aninveterate earlyadopter of new technologies, but my investment perspective is temperedby the knowledge that even extraordinary companies can take decades toachieve their potential and the future beyond a five-year time horizonisinherently unknowable.

During the 20th Century rechargeable batteries became a ubiquitous andlargely invisible necessity of modern life. Lead-acid batteries startedcars, provided back-up power and ran forklifts, golf carts and the occasional electric car, while compactlithium-ion and NiMH batteries powered portable electronics. None ofthese batteries performed as well as we wanted them to, but the onlytime we gave them any thought was when they needed to be chargedor replaced. Maybe that's why the adjective most commonly used tomodify the noun battery is "damned." The bottom line is batteries areand have always been a grudge purchase; devices that satisfied basicneeds but fell short of expectations.

Over the last decade a curious dynamic has emerged in the energystorage sector as environmentalists, futurists and other dreamerslatched onto the seductive idea that batteries could do everything fromeliminating gas tanks to making wind and solar power stable. Theeco-evangelical fervor rapidly spread to the media and government, andwhat started out aswishful thinking quickly morphed into ill-conceived policy. Faced withunreasonable expectations, battery developers found themselvesbetween a rock and a hard place. They could either tell the governmentand the markets "your goals are unattainable" and reject pilesof money, or they could say "we may be able to attain those goals,"trusting that the money would flow, asking for forgiveness would beeasier than asking for permission and there might even be an unexpectedmiracle.

The problem with the plan is that today's emerging energystorage demands are orders of magnitude larger than theapplications the batteries were designed for. Theseemerging applications invariably demand extreme levels of battery reliabilityand performance, and are unbelievably costsensitive. In other words, the plan itself is a classic example of thetriumph of hope over experience.

Notwithstanding the flaws in the plan, the dynamic is now driving aglobal effort to improve all types of batteries. It's a long, difficultroad, however, because battery technology is fundamentally differentfrom information andcommunications technology, advances typically take seven to tenyears to move from the laboratory bench to the factory floor, and theMoore's law gains we saw in IT and communications arenot possible in electrochemistry. The innuendo inspired mottoof my high school class was "better living through chemistry," butworld-changing advances in electrochemistry have been few and farbetween.

If you spend any significant time reading media stories and analysts’reports on energy storage, you'll get the feeling that lithium-ionbatteries are an amazing new technology that's arrived just in time tosave us from the tyranny of imported oil. The reality is lithium-ionbatteries have been around for over 20 years, fine companies like Sony,Panasonic, Sanyo and NEC have already optimized their manufacturingprocesses, the chemistry accounts for over $7 billion in annual salesand the principal economies of scale have already been realized. Fromthis point forward, the gains will be incremental at best untilsomething truly different comes along.

Most investors have heard of disruptivetechnologies, a term coined by Clayton Christensen to describesimple, low-cost innovations that eventually displace establishedtechnologies. According to Dr. Christensen, disruptivetechnologies usually lack refinement and have performance problemsbecause they're new, appeal to a limited market, and may not even havea proven practical application; but their low cost creates new marketsthat induce technological and economic network effects and provide anincentive to enhance the disruptive technologies to equal or surpassestablishedtechnologies. The following graph illustrates the phenomenon.

11.5.10 Disruption.png

If you consider the graph for a minute, the problem with the disruptive technology myth becomes obvious. Lithium-ion batteries weredeveloped for the most demanding applications and are already at the top of the graph. Moving down-market tolow quality applications like electric cars and grid-based storage isthe industrial equivalent of a salmon swimming upstream to spawn. It's a constant battle with the law of economic gravity, predatory competitors and customers, and natural resource constraints. The lucky ones survive but many perish along the way.The key point to remember is that disruption flows from the bottom up, not from thetop down.

If we wanted to create a hierarchy of possible battery applicationsfrom the highest value per watt-hour to the lowest value per watt-hour,the list would look something like this:

11.5.10 Battery Hierarchy.png

(1) Current HEVs use NiMH batteries that are made from the rareearth metal Lanthanum. Since rare earth metal supplies are uncertain,lead-acid and lithium-ion battery developers are working to fill thevoid.
(2) In the US and Europe plug-in vehicles will typically use lithium-ion batteries because they're smaller and lighter. In Asia, more thrifty consumers are just as likely to prefer lead-acid. It is unclear whether either chemistry is truly suitable for the application.

I see a bright future for lithium-ion batteries in high valueapplications that only need a small amount of battery capacity, butthink it's foolish to suggest that exotic batteries will become a costeffective technology for electric vehicles or play a critical instationary applications where size and weight are meaningless butperformance and cost are critical.

I consistently write about a short list of 18 pure play energy storagecompanies. My favorites in the established and profitable manufacturersclass include Enersys (ENS),Exide Technologies (XIDE),Advanced Battery Technologies (ABAT) andChina Ritar Power (CRTP).In the emerging technology class my favorites are Active Power (ACPW)and Axion Power (AXPW.OB).Unlike many writers, I don't expect leading lithium-ion batterydevelopers like Valence Technology (VLNC),Ener1 (HEV)and A123 Systems (AONE) tothrive over the next couple of years.

In the weeks to come I'll drill down deeper into the myths andrealities of the battery industry and the relative competitivepositions of the manufacturers and developers I follow. Readers whowould like to read my prior articles can find a complete archive at SeekingAlpha. Since I'm bullish on the battery business but bearish onmany of today's market darlings, my articles tend to draw a lot ofreader comment. I'd encourage investors who want to understand theindustry to read my work, follow hyperlinks tosource documents and pay attention to the numerous comments fromothers who disagree with me. If you make the effort, you'll find adepth and breadth of thought and opinion that I could never present ifleft to my own devices.

Disclosure: Author is a formerdirector of Axion Power International (AXPW.OB)and holds a substantial long position in its common stock.
Posted by John Petersen on November 5, 2010 12:28 AM | Energy Storage – Opportunities and Intellectual Short Circuits

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Comments

Dear John,

I have been following your writing for the past few months and I am a big fan of yours.

I came across an interview (in French) of Ford's CEO in the November issue of Capital (www.capital.fr). I found what he had to say about EV pretty interesting. Here is a rough translation:

Capital: what is the status of your EV projects?

Alan Mulally: by the end of next year, we are going to launch an all electric version of our Transconnet utility vehicle. Next year we'll do the same with the Focus. These are very nice cars with a 100 - 130 km range, but let's be honest: how many customers are going to be interested? The mass dissemination of EV is not for tomorrow! There will need to be a real improvement in batteries, be able to charge them when it's hot, when it's cold, make them smaller - they still weight between 270 and 350 kg and cost more than 10,000 US$. This without even mentioning the infrastructure to be built for drivers to be able to recharge the same way they fill up their tanks today. No, for the time being, EV does not make economic sense.

Capital: What would be required to ensure its large scale deployment?

Alan Mulally: the private and public sectors will need to work together. We are working hard on the technology, but for the infrastructure, governments must be deeply involved. This means political choices about energy: how will this electricity be produced? In France, you have nuclear, but in the US we haven't answered that question.

Posted by: Thierry

| November 5, 2010 09:30 AM

Many thanks for a great find. Personally there is little in the world that I'd like to see more than a flexible cost effective plug-in. I just understand the difference between where the battery industry is and where it needs to be. I expect changes to come and am involved in a couple of projects that are heading in that direction, but it won't be a short road and my inner accountant never forgets that the risk adjusted discounted present value of a business that won't be profitable for five to ten years is very small in comparison to the market capitalizations of most industry participants.

Posted by: John Petersen

| November 5, 2010 09:41 AM

Thanks and congratulations on the NASDAQ recognition. You have earned it on your documentation and patience shown on SA.

I would like to ask why you didn't don't think that Bulk Energy Storage has any candidates. I've thought for sometime that NaS might be useful for this purpose since NGK Insulators, LTD. has been demonstrating utility scale for several years. Or are you talking about a fantasy, like EVs, to replace generation plants with batteries like radio repeaters? Maybe I'm not thinking in the right scale or application.

Posted by: DRich

| November 5, 2010 11:20 PM

In February I wrote about a report from Sandia that valued and sized 17 grid scale markets:

http://www.altenergystocks.com/archives/2010/02/gridbased_energy_storage_a_200_billion_opportunity.html

The second table showed the relative value of storage for each application. Once you get below T&D upgrade deferral, storage becomes a tough proposition for any battery. The problem is that bulk storage doesn't cycle frequently enough to be economically attractive. If you assume each cycle is worth $0.10 per kWh, then storage that generates dozens of dimes per day in revenue will always be worth more than storage that only generates one a day.

Right now all of the installations are focusing on power quality and regulation because those are the only uses that can justify the cost of NaS or Lithium.

Posted by: John Petersen

| November 6, 2010 02:40 AM

A bit OT re batteries, but, regarding bulk energy storage w rapid cycling, look at FERC chairman's recent comments at minute 23:30 re General Compression and its compressed air storage technology..http://c-spanvideo.org/x517p/
They claim 75% RT efficiency w multiday multi hundred megawatt storage capacity using compressed air stored in salt domes.

Posted by: GPMurdock

| November 7, 2010 11:06 PM

Unfortunately he didn't get into much detail on how the system will work. I have high hopes for compressed air but the more I learn about the thermal management issues the more I understand how difficult it is to do in practice. There are a lot of folks working on the problem and I wish them all the best of luck.

Posted by: John Petersen

| November 8, 2010 12:53 AM

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