Benjamin Franklin once wrote, “A penny saved is two pence dear;” a self-evident truth that is half of the driving force behind cleantech, the sixth industrial revolution. The other half is our innate desire for reliability and stability, particularly when it comes to transportation and the power grid. Larger issues like energy independence, political policy, technology and global warming make for stimulating conversation, but when it comes to individual decisions, the things that really matter are saving money, getting to work on time and keeping the heat and lights on.
It’s impossible to pick up the Sunday edition of a major newspaper without seeing several reports on the latest cleantech projects and innovations because all cleantech sectors are progressing rapidly and the rate of change is likely to accelerate as the cleantech revolution becomes more pervasive. Notwithstanding their widely accepted economic and environmental advantages, cleantech solutions are inherently variable. Without energy storage to smooth out the peaks and valleys in wind and solar power, maximize the savings from hybrid electric vehicles (HEVs) and reduce the end-user cost of other cleantech solutions, the rate of change will slow and we’ll all be poorer for it. Since energy storage is the only way to make cleantech reliable and stable, and cost-effective energy storage can make cleantech investments more profitable, informed consensus holds that energy storage is an enabling technology for the cleantech revolution. As such, it is certain to be a major investment trend for decades to come. I think the first rising waters of this investment tsunami have already hit the beach.
It might strike some as a jaded view, but I’ve always suspected that scientists, politicians and reporters like talking about long-term technical solutions to pressing problems because they can’t be held accountable for the results. I was a year out of law school when the Carter administration included the first tax credits for ethanol production in the Crude Oil Windfall Profits Tax Act of 1980. Twenty-eight years and billions of dollars later, we discovered that using food to make motor fuel caused as many problems as it solved. The point is that major changes happen over the course of decades and things rarely work out the way the planners intended; but we muddle through anyway.
Today, scientists, politicians and reporters are spending so much time advocating various power train alternatives for cars and light trucks that one would think a golden age of transportation is just around the corner. The more contemplative types at the Department of Energy tell us a very different story. The following graph comes from the DOE’s 2009 Annual Energy Outlook and forecasts that power train alternatives for cars and light trucks will grow from about 1.5 million units in 2007 (10% of total sales) to about 12.5 million units in 2030 (63% of total sales).
One intriguing aspect of the DOE graph is the forecast that in 2030, HEVs like the Toyota (NYSE:TM) Prius will account for sales of about 4 million units per year; “mild hybrids” will account for sales of over 3 million units per year; and PHEVs and pure EVs, the current darlings of scientists, politicians and reporters, will only account for sales of about 500,000 units per year. I’m also surprised that the graph does not show a visible market share for compressed natural gas, a plentiful domestic resource that has many advantages over imported oil. The Pickens Plan may not ultimately succeed at the level advocated by Mr. Pickens, but ignoring the plan entirely strikes me as strange.
The data in the following table comes from a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. While the original Sandia table focused on the current and projected capital costs for energy storage technologies that can be used in solar power projects, the basic cost structure applies to the entire spectrum of energy storage applications from transportation to utility grid support. To enhance understanding, I’ve reordered the Sandia data to create a cost hierarchy. I’ve also added dark and light circles to indicate the likely and potential uses for the various technologies in five broad market sub-segments.
Last Monday I noted that in the emerging world of cleantech, 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. With storage systems of that size, even the lowly sealed lead-acid battery becomes a big-ticket item for most consumers. So while the geeks like me ask, “What is the best possible technology?” the consumers among us who worry about things like budgets and monthly car payments are more likely to ask, “What is the most affordable technology for the job?” Given the prevalence of mild hybrids and HEVs in the Sandia forecast, they apparently reached the same conclusion.
These are tough times in the equity markets. Most stocks have been savaged by the economic crisis and some of the biggest percentage declines were seen in companies that will be the first beneficiaries of the cleantech revolution. The following list of pure play energy storage companies has been arranged using the same cost hierarchy as the technology table. All table values other than closing prices and forward P/E ratios are expressed in thousands. Likely consumer behavior tells me the companies with the cheapest technologies have the greatest short- to medium-term growth potential and should have the highest relative market valuations, but the opposite is true in many cases.
While tables like this one can be daunting because they contain so much data, it’s easy to see that the six established companies that have earnings are currently trading at prices that are significantly lower than the Standard & Poors long-term average of 15 times earnings. The lead-acid group including Exide (XIDE), Enersys (NYSE:ENS) and C&D Technologies (CHP) are U.S. based manufacturers that derive the bulk of their revenues from the domestic market. The exotic chemistry group including Hong Kong Highpower (NASDAQ:HPJ), China BAK (NASDAQ:CBAK) and Advanced Battery Technologies (OTCPK:ABAT) are Chinese manufactures that derive the bulk of their revenues from sales in China. While all six are fine companies and attractively priced compared to historical norms, the Chinese firms are not likely to have a meaningful presence in North American for the foreseeable future.
Making sense of the data on the eight companies that do not have established earnings can be far more difficult. I believe the following quote from the SEGIS-ES report that was the source for my technology cost table can add context and help investors better understand the long-term goals and potential of the development stage companies.
Energy storage devices cover a variety of operating conditions, loosely classified as ‘energy applications’ and ‘power applications.’ Energy applications discharge the stored energy relatively slowly and over a long duration (i.e., tens of minutes to hours). Power applications discharge the stored energy quickly (i.e., seconds to minutes) at high rates. Devices designed for energy applications are typically batteries of various chemistries. Power devices include certain types of batteries, flywheels, and ECs [electrochemical capacitors]. A new type of hybrid device, the lead-carbon asymmetric capacitor [lead-carbon battery], is currently being developed and is showing promise as a device that might be able to serve both energy applications and power applications in one package.
Active Power (NASDAQ:ACPW) manufactures equipment based on steel flywheel and compressed air technologies for power applications. Its systems have traditionally been marketed as uninterruptible power supplies for commercial and industrial customers, but have significant potential to stabilize short-term variability in the power output of wind and solar power facilities. The company has a five-year history of rising revenues and should enjoy a strong competitive position as demand for low-cost short-term power stabilization systems increases. The potential global market for Active Power’s systems is measured in billions of dollars. It’s stock has taken a beating over the last year and is currently trading at about 9% of the 12-month high.
ZBB Energy (ZBB) manufactures a zinc-bromine flow battery for energy applications. The modular ZESS system can provide stable power for long periods of time (2 hours or more). The technology is well developed and the company is currently working on a number of demonstration projects in remote locations that are not served by a stable power grid. It is also working on projects to smooth the power output from wind installations in Ireland. While its revenue from demonstration projects has been limited, ZBB has recently joined forces with Eaton and the potential global market for the ZESS systems is measured in billions of dollars. It’s stock has taken a beating over the last year and is currently trading at about 1/3 of the 12-month high.
Axion Power (NASDAQ:AXPW) manufactures conventional lead-acid batteries and has commenced field demonstration projects for its proprietary PbC batteries, the asymmetric lead-carbon capacitors singled out in the Sandia report. Axion believes its PbC batteries will be ideal for a variety of power and energy applications that need storage, but do not justify the use of a more exotic and expensive technology. Axion is presently expanding its manufacturing capacity for PbC batteries and expects to begin selling up to 20,000 units per month by the third quarter of 2009. It is also ramping up manufacturing capacity for conventional flooded and sealed lead acid batteries. While Axion’s historical revenues have been limited, annualized sales in the range of $50 to $100 million appear likely by the end of 2009. Its stock has taken a beating over the last year and is currently trading at about 40% of the 12-month high.
Beacon Power (BCON) manufactures utility support systems based on a composite flywheel technology and has recently received regulatory approval for its plan to provide paid frequency regulation services. During the testing and demonstration phase, which will likely take a of couple years, I would expect Beacon to build and operate frequency regulation facilities for its own account. Upon completion of the testing and demonstration phase, I would expect Beacon to sell frequency regulation products to utility customers worldwide. The global potential for high power frequency regulation services and equipment is measured in billions of dollars. Beacon’s stock has taken a beating over the last year and is currently trading at about 1/4 of the 12-month high.
The remaining companies on the list are engaged in the development and commercialization of cutting-edge Li-ion and supercapacitor technologies that I have a hard time justifying in light of current economic conditions and my knowledge of the potential markets. These companies may ultimately prove to be diamonds in the rough, but they could just as easily prove to be lumps of coal.
There are immense differences between the technically plausible and the economically rational. The difficulty in distinguishing between the two is compounded by history, which shows that cutting-edge innovations are frequently uneconomic in the early stages but profitable over the long-term. I’m an optimist and convinced that we will find solutions for today’s problems that seem insurmountable. I’ve also had enough experience to know that the solutions will probably lead to a new set of problems. So what we really need to do is get up in the morning, go to work and solve the problems of today with the tools we have. If we do that consistently, tomorrow will take care of itself.
Disclosure: Author holds a large long position in Axion Power International, recently bought small long positions in Exide, Enersys, and Active Power and will likely make additional energy storage sector investments in the future.