I’m a lawyer and accountant who agreed to work as securities counsel for an R&D stage battery company named Axion Power International, Inc. (NASDAQ:AXPW) about five years ago. The engagement turned out to be more complex than expected and I ended up spending the next four years developing a profound understanding of the technical and competitive landscape in the energy storage sector, first as legal counsel, then as a board member and finally as board chairman. I resigned from Axion’s board in January 2007 and about a year ago I was able to upgrade Axion to a larger law firm and refocus my attention on other clients in the oil and gas, biodiesel, electrical generation and nuclear power industries. My only ongoing relationship is as a stockholder.
After a six-month cooling off period, I decided it might be worthwhile to share what I’d learned about energy storage in a series of Seeking Alpha articles. I'm not an engineer or electro-chemist, but I've spent enough time working in the energy field to understand the investment potential of energy storage without losing sight of the complex technical and economic risks. I’m not a disinterested observer by any stretch of the imagination. Instead I describe myself as an optimistic technology-loving geek with a deep streak of questioning skepticism that comes from 30 years of hands-on experience working as counsel for emerging energy and technology companies.
This is the 25th article in a series on the energy storage sector that I started in mid-July with an introductory piece titled Lithium-ion Batteries and Centerfolds. [For those who are not regular visitors to Seeking Alpha, the blue text in this sentence contains two hyperlinks. The first takes you to my chronological articles list and the second takes you to my first article. The hyperlink formatting that Seeking Alpha uses is easy on the eye but it can be confusing to readers who are expecting more obvious links.]
Since the holidays are upon us and nobody is really in the mood for a deathless analysis of some arcane sub-topic, I thought an effort to integrate and synthesize the themes I’ve explored during the last six months might be worthwhile. If you find yourself bored over the holidays and want to better understand the energy storage sector, you could read the entire series, paying special attention to the reader comments. There are some very smart people out there who don’t always agree with me, but invariably share views and opinions that can help you build perspective, which is the first step on the road to understanding.
Batteries have been around for hundreds of years and are a ubiquitous but largely invisible part of daily life. Despite the importance of batteries in all our lives, the markets are just now beginning to see energy storage emerge as a discrete industrial sector. Many would characterize the changes as a simple evolution of existing products. I believe the dynamic is more akin to a butterfly emerging from a cocoon, a creature that bears no resemblance to the lowly caterpillar and behaves far differently. In either event it’s a time of great opportunity and great risk as products that were once mere conveniences become critical enabling technologies for cleantech, the sixth industrial revolution.
The first critical point investors need to understand is that energy storage as an industrial sector is still in its infancy. Every adult knows that infants learn to crawl first, then they learn to stand, then they learn to walk and then they learn to run: and once they start running the game changes forever. Even so, there are a lot of people who expect a different progression in energy storage. It would be foolish for me to try to enter my grandson in the 2030 Boston Marathon. It is equally foolish to believe that any current technology will be a Holy Grail solution to our long-term energy storage needs. The best we can really hope for is baby steps that get longer and stronger over time.
Historically, North America and Europe had plenty of energy and while waste was cheaper than conservation, waste was king. In the late ‘90s the rules began to change rapidly as 6 billion people in less-developed countries began to diligently pursue a better quality of life and questions about global warming invaded the collective consciousness. Concurrently, there was an inflection point that marked the passing of peak cheap oil. Since then the cost of imported oil has evolved from a mere inconvenience into a crushing economic burden that can only get worse as the 6 billion who want a better life gain ground on the 500 million who already have one. Now that escalating prices are harshly punishing waste; energy demand is growing faster than global supplies; and weather dependent alternative energy technologies are becoming mainstream, cost-effective energy storage has become an economic necessity.
Traditionally there were two basic classes of rechargeable batteries. Cheap, simple and reliable lead acid batteries were manufactured in all developed countries and used to start cars, power motive devices and support industrial infrastructure. More exotic and expensive Ni-MH and Li-ion batteries were manufactured in Asia for use in toys, electronics and portable power tools. For many years, there was almost no competition between the two classes because lead-acid was too heavy and bulky for the markets dominated by Ni-MH and Li-ion and those chemistries were too expensive for the markets dominated by lead-acid. In 2004, Frost & Sullivan estimated annual global rechargeable battery sales at approximately $24.3 billion, including $17.5 billion in lead acid battery sales and $6.8 billion in Ni-MH and Li-ion battery sales.
Over the last few years, the battery industry has been rocked by changes that can only be described as seismic. The global consciousness has awakened to issues like peak cheap oil, increased competition for natural resources and global warming; and the masses have begun demanding new energy solutions including wind and solar power, hybrid and plug-in vehicles and grid-based utility support. As a result, an industry that was once geared for annual growth rates of 4% to 6% is now expected to blossom from $24 billion to over $100 billion in annual sales over the next ten years. The difficult part is that most of the expected growth will come from new energy storage applications that are very cost sensitive and are not well served by the dominant rechargeable battery technologies. It’s a real horse race out there, but the prize to the winners will be immense.
In the past, battery cost per kilowatt-hour (kWh) of capacity wasn’t usually an issue because most lead-acid batteries were used in 1 kWh increments and all Ni-MH and Li-ion batteries were used in 5 Wh increments. In the emerging world of cleantech, however, energy storage requirements start at 5 kWh for an HEV, ramp up to 25 kWh for a pure EV and exceed 250 kWh for a grid support installation. When the storage capacity gets that large, the capital costs reach stratospheric levels very quickly. Then the question becomes “Can this proposed storage system pay for itself in reduced energy costs?” If the economics don’t make sense, the storage system doesn’t make sense.
In a July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program, Sandia National Laboratories published a table that compares the current and projected capital costs for grid-based energy storage systems based on both existing and emerging technologies. While the report cautioned that life-cycle costs depend on a variety of factors and significant modeling work is required for an accurate cost benefit analysis, I think the following table provides a reasonable starting point for investors who want to understand the relative capital costs of the principal energy storage alternatives.
The mainstream press is awash in glowing reports about a new generation of electric vehicles (EVs) that promise freedom from the tyranny of rising gas prices while saving the planet from the catastrophic risks of global warming. Unfortunately, none of the reporters and precious few of the EV advocates seem willing to put pencil to paper and calculate whether the proposals make economic sense. I’ve done the work and the answers are not pretty.
The average American drives 40 miles a day, which works out to about 12,000 miles per year. Assuming an average fuel efficiency of 25 mpg, the average driver will use about 480 gallons of gas per year. A comparably sized plug-in electric vehicle would need about 10 kWh of battery storage to get a 40-mile range. The following table calculates the 10-year costs of a pure EV based on the principal battery chemistries that have been floated as transportation alternatives. The table assumes a 40-mile range and a 40-mile average daily use, straight-line depreciation of 10% per year, imputed interest of 6% per year on the unamortized battery cost and an average price of $0.06 per kWh for electricity to recharge the batteries. It then divides the calculated total cost of ownership by 4,800 to determine a breakeven gasoline price.
While valve regulated lead acid batteries do not have a 10-year useful life, I’ve included them in the table to help establish a universally understood baseline for end-user cost comparisons. I’ve also included lead-carbon devices, which are still too bulky for subcompact EVs. Once you eliminate these two technologies from the mix, it becomes clear that a pure EV using Ni-MH and Zebra batteries can’t break even until average gas price exceeds $2.59 per gallon and a pure EV using Li-ion batteries can’t break even until average gas price exceeds $4.07 per gallon.
While the price performance figures for a pure EV with a 40-mile range are disappointing, they deteriorate rapidly if you try to manufacture a pure EV with a 100-mile range. To illustrate the point, the next table goes through the same calculations using a 100-mile potential range and a 40-mile average daily use.
These two tables starkly illustrate the fundamental problems with the prevailing EV proposals:
- Pure EVs cannot pay for themselves unless you buy the cheapest batteries possible; and
- Pure EVs cannot pay for themselves unless you consistently use the maximum range.
I believe the cleantech revolution has already arrived and stabilized gas prices of $3 to $4 are the best we can hope for after the recession passes. While pure EVs fire the imagination, they’re only cost effective if you buy the minimum range you need and consistently use all of the range you buy. Given the American penchant for driving flexibility, the only solutions that are likely to succeed in the market are plug-in hybrid electric vehicles (PHEVs). But even they run into trouble if the battery range exceeds the average daily drive. More importantly, the net benefit to the end user is completely dependant on the capital cost of the batteries used in the PHEV. If gas costs average $4 per gallon, a PHEV that uses Zebra or Ni-MH batteries will yield a modest economic benefit over ten years. The same PHEV would be a break-even or losing proposition if it used Li-ion batteries.
I have consistently argued that America’s clean energy future will require the use of a wide variety of energy storage solutions and that lead-acid and advanced lead acid technologies would remain dominant for decades. The argument is not based on a belief that lead-acid and advanced lead acid batteries are technically superior or even technically equivalent. Instead, it is based on the undeniable fact that lead-acid and advanced lead acid batteries are good enough to do most of the necessary work and they are clear winners in any reasonable cost-benefit analysis.
I firmly believe that America needs to take a leading position in the cleantech revolution. I also agree with Andrew Grove’s suggestion that a reasonable baby step would be the conversion of 1 million pickups, SUVs and vans to PHEVs. That being said I think the proposals to do so using Li-ion technology are misguided because battery costs will make the conversions uneconomic for the end users. We have the ability to make pickup, SUV and van conversions paying propositions from the very start using cheap homegrown battery technology instead of expensive imports. Particularly in the midst of the worst recession since 1929, we cannot waste billions of dollars creating a monument to Asian battery hype. PHEVs have a bright future, but we need to choose whether that bright future will increase our national economic vitality or diminish it.
I believe the baby steps of the cleantech revolution must start with cheap, reliable and homegrown advanced lead acid battery technology. Something better, stronger and cheaper will undoubtedly emerge over the next 50 years. But until it does we need to go to work with the tools we have, solve our problems through old fashioned hard work and be ready to embrace new technologies when they prove to be something more than airbrushed centerfolds.
I first published the first version of the following table in a November article titled Alternative Energy Storage: Cheap Will Beat Cool. It compares the market valuations companies that manufacture their products in Asia and focus on Ni-MH and Li-ion chemistries, which I’ve classified as “Cool Imported Chemistry,” with the market valuations of companies that manufacture their products in the U.S. or globally and focus on more traditional chemistries, which I’ve classified as “Cheap Domestic Chemistry.”
A cursory review of the table shows that the Cool Imported Chemistry group carries a far richer market valuation than the Cheap Domestic Chemistry group. I can only attribute the difference to intense public relations campaigns that have created a general perception that companies focused on Ni-MH and Li-ion chemistries will derive a greater benefit from the cleantech revolution than companies focused on more traditional chemistries. In times of irrational exuberance and intense public relations, the markets can be voting machines. Over the long term, they are weighing machines. Accordingly, I believe the market valuations are distorted and as the cleantech revolution unfolds, the Cheap Domestic Chemistry group will outperform the Cool Imported Chemistry group by a very wide margin.
Disclosure: Author holds a large long position in Axion Power International, recently bought small long positions in Exide (XIDE) and Enersys (ENS) and may make additional storage sector investments in the future.