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Since July I’ve been writing a series of Seeking Alpha articles on the energy storage sector because I believe it is poorly understood but likely to be the next major investment trend. From August 15th through October 31st, the Dow fell by 19.9% but the energy storage stocks I’ve been following tanked by an average of 38.8%, which gives me a dismal track record as a short-term stock market prognosticator. The following table summarizes the gory details.

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Mercifully, I’m more concerned with long-term trends than short-term volatility and the fundamental market forces that I’ve been writing about for the last few months are developing faster and showing more strength than even I could have imagined.

I was excited when A123 Systems filed a registration statement for its long awaited IPO in August because I was convinced that an A123 IPO would draw market attention to the storage sector in a way that only a major IPO can. Frankly, I was surprised when A123 amended its registration statement on October 10th and amazed when it filed a second amendment on October 31st. Based on my experience after the ’87 crash, I would have expected the IPO to be delayed or even withdrawn until market conditions improve. But despite the worst market conditions in 20 years, A123 is effectively saying, “damn the torpedoes and full speed ahead, we have a business to build.” If things follow a typical track from here, we can look forward to the A123 Systems IPO sometime in November.

Another fine example of the fundamental strength of the energy storage sector is Warren Buffet’s recent investment of $230 million to buy 10% of BYD, a Chinese battery manufacturer that plans to build hybrid electric automobiles.

While lesser examples of the fundamental strength in the storage sector are too numerous to mention, the following quote from the closing paragraph of Jeremy Grantham’s October 24th newsletter “Silver Linings and Lessons Learned” may just say it all.

Let me suggest that the magic word this time is not “plastics” but “alternatives.” Massive spending on energy and, better yet, energy savings will create jobs, stimulate the economy, produce a good long-term economic return, reduce dependence on depleting Middle Eastern oil, curtail carbon dioxide emissions, and set, for once, a real example for other countries. From the simplest – better insulation and more efficient machines – through the new alternatives – solar, wind power, and second generation biomass – to the potentially massive investments in new nuclear plants and efficient energy transmission, this could be in total a long range bonanza for the U.S. in economic and broader respects.

I think this outlook is remarkable, particularly when it’s coming from a value investing legend that many have come to view as a perma-bear.

The message is clear: Our biggest challenge as a species is not reducing the amount of energy we use; it’s reducing the amount of energy we waste. Since cost-effective energy storage is one of the best ways to minimize waste, it is critical to our energy future and, by transitivity, essential to the future of civilization. Energy storage is not merely a desirable thing – it is an essential thing. The stock market hasn’t quite gotten the message yet, but it will! As the magnitude of the challenges and opportunities become more commonly understood, I believe a rapidly rising tide of market sentiment is certain to lift all of the pure play energy storage stocks I follow. It should be fun to watch.

The biggest challenge facing potential energy storage investors is that the sector is a target rich environment that does not have a single ‘silver bullet’ technological solution. The root causes of the challenge include:

  • Storage needs that range from watt hours to megawatt hours or even gigawatt hours;
  • Discharge needs that range from seconds to hours or even days;
  • Cycling rates that range from infrequent (e.g. back-up power) to intense (e.g. recuperative braking);
  • Cycle depths that range from very shallow (e.g. engine starting) to very deep (e.g. fork lifts);
  • Technological improvements that are usually incremental gains instead of disruptive advances;
  • Products that require huge inputs of high value or exotic raw materials;
  • The need to carefully analyze costs and benefits for each potential storage application; and
  • The sheer immensity of the current and potential market for energy storage products.

The informed consensus is that annual revenues of companies in the energy storage sector will increase from $30 billion to $100 billion or more over the next several years. While I can identify 14 pure play public companies that are focused on one or more billion-dollar market segments, and likely to be a strong competitor in those segments, none of their technologies has broad utility across the entire energy storage spectrum. So instead of a future where three or four dominant competitors survive and the others fall by the wayside, it’s easy to predict a future where dozens of strong competitors will thrive by serving different billion-dollar market segments.

That’s why I remain bullish about the growth prospects for almost every company in the energy storage sector. I may believe that Li-ion advocates who ignore cost benefit analysis, dismiss resource availability questions and assume disruptive future advances overstate the long-term potential of Li-ion technology, but it’s impossible to dismiss that potential.

Over the last couple months I’ve taken significant heat from commenters because I’m bullish on the entire energy storage sector but only own Axion Power International (NASDAQ:AXPW). While that situation is largely due my prior relationship with the company, I also believe that Axion occupies a unique position in the storage sector because its hybrid battery-supercapacitor PbC technology is truly a disruptive advance in lead-acid technology instead of a simple incremental gain. Axion’s PbC devices will offer the power, cycle-life and recharge rates of advanced battery chemistries at lead acid prices. Moreover, the success of its business will not depend on building an entirely new manufacturing infrastructure and then selling finished batteries in the industrial and consumer markets. For those reasons, I think Axion’s a game changer.

Unlike all other energy storage products, Axion’s PbC devices are based on a multi-patented carbon electrode assembly that can be used in existing lead acid battery plants without requiring substantial changes to equipment, components or manufacturing methods. While Axion plans to introduce the PbC technology by manufacturing its own batteries, the company’s medium-term strategy is to implement a platform technology business model where it will fabricate carbon electrode assemblies for sale to other battery manufacturers. I’m convinced that Axion’s ability to rollout a disruptive battery technology without first building a dedicated manufacturing infrastructure is unique and the closest anyone in the energy storage sector can come to an “Intel Inside” growth potential.

In addition to the pure play public companies that I follow, there are a large number of diversified domestic and foreign industrial companies that are very active in the energy storage field. There are also a large number of development stage companies that aren’t public yet but appear to have substantial potential. So I think the landscape is likely to change significantly over the next several years. But I remain convinced that energy storage will be the next major investment trend and far more pervasive than most of us can imagine.

Disclosure: Author holds a long position in Axion Power International (AXPW) and is a former director of that company.

Source: Rising Tides in Alternative Energy Storage