Last Thursday I briefly touched on several highpoints from a recent report by Merrill Lynch cleantech strategist Steven Milunovich, The Sixth Revolution: The Coming of Cleantech. In my closing, I suggested that if the report’s analysis is accurate and energy storage becomes a key enabling technology for the cleantech revolution, then it won’t be long before governments begin treating battery manufacturing companies as strategic national assets and adopting regulations, industrial policies and tariffs that are designed to favor their home country’s business interests. That observation started the mental snowball rolling downhill and I’ve spent several days pondering the question “Exactly where will all those batteries come from?” My preliminary analysis is more than a little disturbing.
Oil is a basic commodity that is consumer ready after minimal refining. The oil business can be quite profitable for resource owners, producers, refiners, distributors and employees who move petroleum products from the wellhead to the gas pump, but ancillary economic benefits to producing states are modest. Rechargeable batteries, on the other hand, are durable goods that are mainly used as components in other high-value manufactured products. This means that every battery produced creates a host of ancillary economic opportunities for the producing state.
America’s trading partners understand that exporting raw materials and components generates less economic benefit than exporting manufactured products. So while we have historically been at the front of the line when it came to buying oil from less developed countries, we will likely be pushed to the back of the line when it comes to buying batteries in bulk from countries that have or are building an industrial base. Let’s be realistic here, no self-respecting trading partner is going to sell components for products if it thinks it can sell finished products instead. Despite my unwavering support for the free flow of goods in the global market, I am not the least bit comfortable with the idea that America’s future should be subject to economic and industrial policy decisions made by foreign governments.
Most discussions of battery technology speak in terms of “battery packs” without ever describing what a battery pack is. In essence, a battery pack is nothing more than a number of individual cells that are put into a container and then hard-wired to provide the desired power characteristics. In the case of a lead-acid battery, the typical format is six cells in a rigid plastic box. In the case of NiMH and Li-ion batteries, the basic building block is the same cell you have in your mobile phone or camera. So if you want to power a laptop computer you’ll need battery pack with 12 to 16 cells; if you want to power an electric bicycle you’ll need a battery pack with 50 to 100 cells; if you want to power HEV you’ll need a battery pack with about 1,000 cells; and if you want to power an electric car you’ll need a battery pack with about 5,000 cells.
I’ve previously said that battery prices are almost meaningless in the context of a cell phone or laptop computer because battery cost is typically less than 5% of the retail purchase price. I’ve also said that battery prices will be a critical market driver in the case of an HEV that needs a $5,000 to $10,000 battery pack or an electric car that needs a $25,000 to $50,000 battery pack. While I’ve not delved into the intricate economics of a competitive market for batteries, it’s safe to say that a cell phone or laptop manufacturer will generally be less worried about battery prices than an electric bicycle manufacturer; who will generally be less worried about battery prices than an HEV manufacturer; who will generally be less worried about battery prices than an electric car manufacturer. In other words, the more you spend for the batteries that power your product, the more you worry about battery prices.
Readers who’ve been following my articles for any length of time know that I’m unrepentant critic of proposals to use NiMH and Li-ion batteries for the heavy work of powering vehicles and supporting the electric grid. I know that NiMH batteries are currently used in all of the available HEVs and I understand that Li-ion is the presumptive leader in the search for a new EV beauty queen. That knowledge, however, does not change the fact that using NiMH and Li-ion battery packs for transportation and grid support is like using 5,000 hamsters to pull a stagecoach. They may get the job done, but can we really afford to pay the price?
In my opinion, the insurmountable obstacles that will preclude the widespread use of Li-ion battery packs in electric vehicles and grid-support applications include:
- Product costs that are beyond the means of all but the most wealthy members of society;
- Cost benefit equations that only work for the mathematically challenged or emotionally committed;
- Capital intensive manufacturing infrastructure that simply doesn’t exist in the Americas;
- Intense competition for batteries that will be used in devices that have greater price flexibility;
- Reliance on manufacturers that are subject to foreign economic and industrial development policies;
- Reliance on rare and expensive raw materials that are imported from less-developed countries;
- Spotty product safety and performance histories that are improving but far from pristine;
- Product performance profiles that exceed reasonable application requirements several times over;
- Mature technology with little potential for new economies of scale or performance enhancements; and
- Unproven ability to recycle old batteries and use the recovered materials to make new batteries.
One of best parts of being an outspoken contrarian on a site like Seeking Alpha is that you get an extraordinary opportunity to hear why a host of readers believe you’re wrong. At last count, my 22 articles had drawn something on the order of 430 reader comments, so I like to think I have a pretty fair sense of the prevailing beliefs, prejudices, expectations and misconceptions. It’s interesting but not surprising to note that people who want to promote a particular opinion, philosophy, product or equity are usually responsible for the most egregious misrepresentations. I am not an unbiased observer when it comes to battery technology, but at least I’m honest about where my personal interests might conflict with or impair my objectivity.
Benjamin Disraeli reportedly said, “There are three kinds of lies: lies, damned lies and statistics.” In the battery industry, the most common statistical lies are based on the preposterous premise that the highest and best example of lead-acid battery technology can be found under the hood of your family car. It’s a garbage assumption that leads to garbage statistics, but it’s so insidiously reasonable sounding that people blithely accept the statistics without asking the critical question, “So how does your exotic battery chemistry compare with the best lead-acid technology?”
The following is a compendium of the cherished mythologies and incontrovertible realities that I’ve assembled from six months of reader comments.
Cherished Mythology: Lead-acid batteries are rust-belt technology.
Incontrovertible Reality: Lead-acid chemistry was ignored for almost four decades while fortunes were spent on NiMH and Li-ion research and development for portable electronics. Today, lead-acid researchers have access to materials and manufacturing methods that did not exist 40 years ago. When researchers began to evaluate the potential impact of new materials and manufacturing methods on lead-acid chemistry, the result was almost magical. The simple fact is that lead-acid batteries have advanced more in the last five years than NiMH and Li-ion batteries have since they were introduced.
Cherished Mythology: Lead-acid batteries are environmental hazards.
Incontrovertible Reality: With recycling rates approaching 99%, lead-acid batteries are the most highly recycled product on the planet and substantially all of the materials recovered through recycling can be used to make new batteries. Neither NiMH nor Li-ion chemistries can even come close to matching the natural resource efficiency and environmental safety of lead-acid batteries.
Cherished Mythology: Li-ion batteries are one-quarter of the weight of their lead-acid equivalents.
Incontrovertible Reality: The quest for safer Li-ion batteries slashed theoretical energy densities by 50% and significantly reduced the weight advantage. The recent introduction of Firefly Energy’s foam electrode technology has improved the energy density of advanced lead-acid batteries while reducing Li-ion’s weight advantage even further. Li-ion batteries still offer a modest weight advantage, but it’s ridiculous to agonize over weight in the context of a 3,000-pound car or a grid-connected power storage installation.
Cherished Mythology: NiMH and Li-ion batteries have more power than lead-acid batteries.
Incontrovertible Reality: The recent introductions of battery-supercapacitor hybrids like CSIRO’s Ultrabattery and Axion Power’s (NASDAQ:AXPW) PbC battery have improved the power profile of advanced lead-acid batteries to a level that’s competitive with NiMH and Li-ion batteries at a fraction of the cost.
Cherished Mythology: NiMH and Li-ion batteries have far longer cycle-lives than lead-acid batteries.
Incontrovertible Reality: The theoretical cycle-life of a battery is a gee-whiz number until it is compared with the needs of a specific product. If an EV will be recharged 350 times per year and the vehicle will have a 10-year useful life, anything over 3,500 cycles is waste. CSIRO’s ultrabattery technology reduces sulfation (the main cause of lead-acid battery failure) and Axion’s PbC technology eliminates the problem entirely. When development and testing of these recent innovations is fully documented, I expect the cycle-life differences between the major battery chemistries to be inconsequential.
Cherished Mythology: NiMH and Li-ion batteries will improve as the technology matures.
Incontrovertible Reality: NiMH and Li-ion batteries are already fully mature technologies. There have been big improvements in the safety of Li-ion batteries over the last 20 years, but those improvements have always come at the cost of reduced energy density. The only performance metric that keeps improving is cycle-life, which is already far too long for most real-world applications.
Cherished Mythology: NiMH and Li-ion batteries will get cheaper as demand increases.
Incontrovertible Reality: Roughly 75% of the cost of any battery is raw materials and NiMH and Li-ion batteries have been mainline industrial products for the last 20 years. Substantially all of the cost savings that can be realized have already been achieved. The only thing increased demand will do at this point is drive a relentless upward spiral in raw materials prices.
Cherished Mythology: Li-ion batteries are a silver bullet solution to energy storage problems.
Incontrovertible Reality: Li-ion batteries may well be the best storage solution for small format energy storage needs including cellular phones, power tools, portable computers, electric bicycles and hybrid scooters. Their cost effectiveness falls off dramatically when the battery pack is bigger than a breadbox. Even if Li-ion batteries could be cost effective in power-hungry applications like EVs and grid support applications, sound economics and rational industrial policies in producer states will invariably favor the production of 5,000 cell phones or 300 to 400 laptop computers over the production of a single EV.
Cherished Mythology: Plug-in electric vehicles provide a cost-effective path to a clean energy future.
Incontrovertible Reality: Plug-in electric vehicles may provide dramatic sound bites for politicians, car companies and environmentalists, but pure electric vehicles cannot be paying propositions until gas prices are far higher than they have ever been. Just this afternoon, I read that President Sarkozy is refusing to release a government-sponsored report that says EVs don’t make sense in France despite the fact that the bulk of French electric power comes from nuclear plants. The cheapest price I’ve seen reported for an EV battery is a $17,500 battery pack from Ener1 (NASDAQ:HEV) that will power the Th!nk City, a bare bones commuter car that would likely get 50 mpg with a gasoline engine or 60 to 75 mpg with a diesel. If you depreciate the battery pack over 10 years and include 5% imputed interest on the unamortized balance, you’ll need to realize $22,313 in fuel savings to recover your hard costs. At 15,000 miles a year and 50 mpg for a similar gasoline powered car, you can’t break even on the battery unless gas costs more than $7.44 per gallon.
The Milunovich report is an exceptional work and I can’t disagree with any of his conclusions. I do, however, think he overlooked one critical issue – the rapidly accelerating rate of change. Historically, technical revolutions evolved over decades. During my lifetime, each major round of changes has evolved more rapidly than the last and been more pervasive and far-reaching. I believe the cleantech revolution will evolve far faster than anyone can imagine and while the cleantech revolution may have started in the U.S. and Europe, it has already become an unstoppable global force. We may not be ready for the tsunami of change the cleantech revolution promises, but it’s already here and our only remaining choice is to adapt or be swept away. We need to get up tomorrow morning, go to work with the toolbox we own, solve our problems as best we can and be eager to adapt new tools when they arise.
The pure play public companies that have the potential to make a meaningful difference in America’s energy storage future include Enersys (NYSE:ENS), Exide Technologies (XIDE), C&D Technologies (CHP) Ultralife (NASDAQ:ULBI), Axion Power International (AXPW) and ZBB Energy (ZBB). The companies that have the potential to make a difference in Asia and Europe include Advanced Battery Technology (OTCPK:ABAT), China BAK Batteries (NASDAQ:CBAK), Hong Kong Highpower (NASDAQ:HPJ), Maxwell Technologies (NASDAQ:MXWL) and SAFT Batteries (OTC:SGPEF). The rest bear watching but are too immature or overvalued for me to seriously discuss them as potential investments.
Rational industrial policy dictates that our global trading partners will want to sell us finished goods instead of bulk components. Fundamental economics dictates that products like cell phones, laptops, power tools, electric bicycles and hybrid scooters will be more responsive to battery price changes than bulk products for EVs and grid support applications. In combination, these factors lead me to the inescapable conclusion that we cannot afford to use NiMH or Li-ion technology for EVs or grid support, and even if we could the battery producing countries cannot afford to reduce their production of other battery powered products to make room for our profligate demands.
America’s ability to profit from the cleantech revolution looks bleak unless it takes immediate and decisive steps to rebuild its domestic battery manufacturing infrastructure. Dithering, debating and daydreams are no longer options.
Disclosure: Author holds a large long position in Axion Power International, recently bought small long positions in Exide and Enersys and may make additional storage sector investments in the future.