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Alternative Energy Storage: An Investment Tsunami

Change often comes as a surprise because it develops while we’re focused on other issues and by the time we notice the change, it’s already history. In a recent presentation attended by Eric Wesoff of Greentech Media, clean-tech venture capitalist Vinod Khosla reportedly said, “500 million people on earth enjoy a lifestyle that 9 billion people will want in 2050.” Actually, it would be more accurate to say that 6.2 billion people already know how the other 500 million live and every single one of them wants his piece of the dream. The trick will be finding a way to raise the standard of living in developing economies without crushing the standard of living in developed economies. For that to happen without catastrophic conflict and horrific environmental consequences, the world must find relevant scale solutions for persistent shortages of water, food, energy and virtually every commodity you can imagine.

I’m an incurable optimist who believes that “In America we get up in the morning, we go to work and we solve our problems” (from The Lost Constitution by William Martin). But we can’t solve persistent shortages of water, food, energy and commodities without first minimizing waste. We also can’t wait for miraculous new technologies to painlessly solve urgent problems. We have to go to work today with the toolbox we own and be ready to replace our tools with better ones when they become available.

When I started this series of essays, I was confident that energy storage would become a major investment trend over the next several years because cost-efficient storage can substantially reduce waste while enhancing the reliability of many alternative energy technologies. Since then, the fundamental market drivers have developed far faster than I imagined and what I initially described as a rising tide is now looking more like an investment tsunami as a handful of micro-cap and small-cap companies gear up to compete for $50 to $70 billion of rapidly developing annual demand for large format energy storage systems. Important developments over the last few weeks that hint at the magnitude of the coming tidal wave of change include:

October 27th

C&D Technologies (CHP) entered into a manufacturing partnership with Firefly Energy for the commercialization of a microcell foam electrode developed by Firefly that can almost double the run time and cycle life of lead acid batteries used in long-haul trucks and off-highway equipment.

October 27th

Ener1 (NASDAQ:HEV) bought an 83% interest in Enertech International, a Korean manufacturer of lithium-polymer batteries that it had previously used to fabricate prototype battery packs for plug-in electric vehicles that Norway’s Th!nk plans to introduce next year.

November 6th

Exide Technologies (XIDE) bought Mountain Power, a Canadian developer of large capacity lithium-ion batteries for the communication, utility, medical, military and industrial markets.

November 12th

Axion Power International (NASDAQ:AXPW) showed its shareholders a modular system that will use its PbC batteries (an advanced lead-carbon battery/supercapacitor hybrid) to provide on-demand power for a substation support and upgrade deferral project funded by NYSERDA.

November 19th

Beacon Power Corporation (BCON) received provisional regulatory approval from ISO New England for the commercial use of a modular system that uses an array of high-speed flywheels to provide on-demand power for frequency regulation.

November 19th

A123 Systems delivered a modular system that will use lithium-phosphate batteries to provide on-demand power for frequency regulation projects managed by AES Corporation (NYSE:AES).

November 21st

Altair Nanotechnologies (NASDAQ:ALTI) received regulatory approval from the PMJ Regional Transmission Organization for a modular system that uses lithium-titanate batteries to provide on-demand power for frequency regulation projects managed by AES.

November 25th

A123 Systems filed a third amendment to the registration statement for its planned IPO, which tells me that the offering will probably go forward in December despite the most uncertain market conditions in decades.

November 25th

France’s Saft Batteries (OTC:SGPEF) and global infrastructure giant ABB (NYSE:ABB) announced the joint development of a modular system that uses lithium-ion batteries to provide on-demand power for frequency regulation and other utility applications.

The trend toward reduced waste through energy storage is not going to develop over a period of years like I predicted – the tsunami has already hit the beach and washed away my fantasies of fame and glory as a prophet of the new energy age. But after three months of extreme market turbulence, there is still a good opportunity for astute investors to position their portfolios for an unprecedented growth surge in an established industrial sector that has historically carried rust belt valuations but will very likely graduate to something approaching clean-tech valuations.

Unlike most clean-tech writers, I have nothing complimentary to say about the economic potential of plug-in electric vehicles, at least as currently proposed. Installing a 5-pound battery pack on a 35-pound bicycle to reduce strain on the rider makes sense. So does installing a 20-pound battery pack on a 175-pound motor scooter to boost city-driving mileage into the 180-MPG range. But using 1,000-pound battery pack to power a 3,500-pound family car at highway speeds is the epitome of arrogant extravagance. I have little doubt that a small market will develop among technical dilettantes like me that have nothing better to do than spend $40,000 to $150,000 for a souped-up golf cart. But there isn’t a snowball’s chance in hell that plug-in electric vehicles will ever be cheap, reliable or safe enough for regular guys. EVs provide easy sound bites for the politicians who supported the egalitarian ideal of home ownership for all through the magic of sub-prime mortgages, but the mirage fades immediately when the auto industry’s proposed plug-in electric vehicles are subjected to even a cursory cost-benefit analysis.

Notwithstanding my criticism of lithium-ion technology for plug-in electric vehicles, I’m delighted to see a broad-based drive to introduce lithium-ion technology in the utility sector because utilities have a unique ability to take full advantage of the long cycle lives, fast recharge rates and high overall efficiency of the technology. I’m even happier to see the key players in the bulk storage sector take a modular approach to their products which will make it easier for utilities to mix and match storage products to fit the needs of a particular installation. While single technology installations are possible, my understanding of basic utility needs leads me to believe that multiple layers of energy storage using a variety of different technologies will ultimately be the norm.

Last week’s edition of Forbes included a good introductory article on grid storage entitled "Hold that Electron", which explained some of the storage options available to utilities, but didn’t address how those technologies can work together to satisfy day-to-day operating requirements. The following table is my effort to add a little more detail and give readers a better idea of how utility scale storage system will likely be configured.

Capital Cost
Storage Category
$/Watt
$/kWh
Key Applications
Discharge Interval

Flywheel systems

$2.50
$10,000

System stability & power quality

0 to 30 seconds

Lithium-ion batteries

$4.25
$1,750

Power quality & regulation

0 seconds to 15 minutes

Advanced lead-acid batteries

$2.20
$540

Regulation and spinning reserves

0 seconds to 1 hour

Sodium sulfur and flow batteries

$3.00
$500

Spinning & replacement reserves

0 seconds to 4 hours

Compressed air & pumped hydro

$1.25
$10

Replacement reserves

10 minutes to 8 hours

Because of the incredible transformation that is currently sweeping through the storage sector I remain very bullish on the short to medium term prospects for most companies in the sector. While Altair is overvalued compared to its peers, the only stock that really worries me is Ener1 because its business model depends on the success of plug-in electric vehicles, its market capitalization is exorbitant when compared with every other company in the storage sector and it does not compare favorably with A123 Systems using established valuation metrics. So I have to reach the same conclusion as Lux Research in its recent report on Energy Storage for Electric Vehicles:

Investors should be wary of EV-related business plan claims. Particularly when it comes to pure EVs, every expectation ever set by a start-up company has slipped – and the audacious goals of Project Better Place look effectively unachievable in anything like the time frame it has proposed. Many of these businesses offer real opportunity for long-term enterprise value creation, but to make sound judgments, investors from venture capitalists to project financiers should take every timeline they see in the EV field and stretch it out by a factor of 2x to 3x.

Disclosure: Author holds a large long position in Axion Power International (AXPW), has recently bought small long positions in Exide (XIDE) and Enersys (NYSE:ENS) and may make additional storage sector investments in the future.