Huge Incentives for Energy Storage in Today's House Bill

In August of last year I published a primer on using batteries and other energy storage devices to help stabilize the electric grid and facilitate the integration of inherently variable renewable power resources. A week later I published a short list of pure play energy storage stocks that I expected to perform well as the energy storage sector matured and developed. In early November I started talking about rising tides in energy storage and by the end of the month I was arguing that energy storage was rapidly becoming an investment tsunami. Today, the House of Representatives is expected to pass H.R. 1, the American Recovery and Reinvestment Act of 2009, and forward the bill to the Senate. The detailed funding provisions in H.R. 1 prove that everything I’ve said about the importance of energy storage has been miles short of the mark.

I understand that H.R. 1 is in the earliest stages of the legislative process and substantial changes are likely. Nevertheless, if the provisions of the final bill bear even a remote resemblance to the current legislation, the impact on storage sector investors will be staggering. Highlighted Congressional descriptions of the four provisions that will directly impact companies in the storage sector follow:

Energy Efficiency and Renewable Energy

(1) $2,000,000,000 shall be for expenses necessary for energy efficiency and renewable energy research, development, demonstration and deployment activities, to accelerate the development of technologies, to include advanced batteries, of which not less than $800,000,000 is for biomass and $400,000,000 is for geothermal technologies.

(10) $1,000,000,000 shall be for expenses necessary for the manufacturing of advanced batteries authorized under section 136(b)(1)(B) of the Energy Independence and Security Act of 2007

Electricity Delivery and Energy Reliability


For an additional amount for 'Electricity Delivery and Energy Reliability,' $4,500,000,000: Provided, That funds shall be available for expenses necessary for electricity delivery and energy reliability activities to modernize the electric grid, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply, and for implementation of programs authorized under title XIII of the Energy Independence and Security Act of 2007 (42 U.S.C. 17381 et seq.):Provided further, That of such amounts, $100,000,000 shall be for worker training: Provided further, That the Secretary of Energy may use or transfer amounts provided under this heading to carry out new authority for transmission improvements, if such authority is enacted in any subsequent Act, consistent with existing fiscal management practices and procedures.

Advanced Battery Loan Guarantee Program


For the cost of guaranteed loans as authorized by section 135 of the Energy Independence and Security Act of 2007, $1,000,000,000, to remain available until expended: Provided, That of such amount, $10,000,000 shall be used for administrative expenses in carrying out the guaranteed loan program, and shall be in lieu of the amount set aside under section 1106 of this Act: Provided further, That the cost of such loans, including the cost of modifying such loans, shall be as defined in section 502 of the Congressional Budget Act of 1974.

Over the last few months we’ve all been horrified by the unfathomable cost of the financial industry bailout, and the law of large numbers has deadened our sensitivity to the relative size of incentives included in the House Bill. To provide a little color, the following table provides summary information on the pure play U.S. public companies that will be eligible to share in the likely subsidies including their total assets and total stockholders equity as reflected in their most recent SEC reports and their total market capitalization as of last Friday. (Click to enlarge.)

In addition to the pure play public companies identified in the table, there are a number of privately held battery research and development companies and a number of diversified industrial companies that are active in the energy storage space. Nevertheless, it seems clear to me that $1 billion in advanced battery grants and $1 billion in advanced battery loans, together with a potential share of $2 billion of renewable energy grants and $4.5 billion in grid development grants, should make a significant difference in the futures of a handful of companies that have a collective net worth of $1.5 billion and a collective market capitalization of $1.8 billion. As somebody who has been tracking the storage sector in considerable detail, I’m both floored and delighted by the amounts that Congress wants to spend for advanced battery research, development, manufacturing and deployment.

The pending subsidies represent an incredible opportunity for both the nation and the stakeholders in my list of pure-play storage companies and others that are active in the sector. Every company on my list can significantly accelerate their ongoing research, development, demonstration, manufacturing and deployment activities with a reasonable amount of Federal funding. I firmly believe that each of these companies has an important contribution to make and their respective technologies merit reasonable funding. My only cautionary notes are that:

• Politics and public relations have a nasty tendency to get in the way of good science and sound research, development, testing and commercialization decisions.
• Small companies are like children in developing countries that rarely starve but frequently die of dysentery.
• If you force feed an infant, one way or another you’re going to have a real mess on your hands and small companies are no different.

I believe the grants and loans included in the current House Bill can do an immense amount of good across broad sections of the energy storage landscape as long as the Department of Energy avoids the temptation to pick a presumptive winner before the research, development and testing race is run and the results are tabulated.

It looks like the storage sector is in for some very interesting times.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

Comments

[D. McHattie]

Thanks for the update, John. I was aware that the bill would contain significant benefits for 'alternative energy' companies but hadn't read anything that drilled down into the details as you have done.

I actually dipped my toe into axpw this morning, a company I would never have heard of if not for your writings. Don't worry, my position is small and I won't come looking for you if things turn sour!

D

2009 Jan 28 01:05 PM

[chaeflin]

ARTX might be another to include in your list

2009 Jan 28 01:12 PM

[John Petersen]

chaeflin, thanks for the heads up on ARTX. I think it may be a bit too diversified for my pure play group and Seeking Alpha does not want us to write about sub-$1 stocks, but I'll keep an eye on it.

2009 Jan 28 01:21 PM

[Lies and Damned Lies]

Wouldn't ZBB be a sub $1 stock now?

2009 Jan 28 01:35 PM

[John Petersen]

User, they have some flexibility for stocks that dip momentarily, but that's an editorial decision on their part. The decision to restrict my comment to pure play energy storage companies is mine.

2009 Jan 28 01:50 PM

[DiggerUK]

Hi John,
as there is someone on here writing as Battman, I shan't refer to you by that nickname again, apology(2) to Battman.

Your link in para 2, "Congressional descriptions" is coming up blank. Any reason.

I've added up the figures you give and find it comes to 9.8 trillion. Are there that amount of helicopters spare.

I know your bringing info about batteries to a wider audience than before, and I thank you for that. But it seems that the bubble in this sector is going to be bigger than even you speculated. Hence this article.

I still think RE's are goofy. New age batteries I can live with.

2009 Jan 28 01:59 PM

[John Petersen]

Digger, it appears that the link I used in the article doesn't endure because of the way the Thomas Locator is set up. To find the text I quoted please do the following:

1. Go to thomas.loc.gov/
2. Click on the center section link to HR 1
3. Click on the "Text of Legislation" link
4. Go To Title V -- Energy and Water and then find the subheading for Department of energy programs.

The only two parts that are reserved for batteries are the $1 billion in grants and $1 billion in loans. The competition within the grid stabilization and renewable energy categories will go far beyond batteries and it doesn't seem reasonable to believe that storage companies will get more than a small percentage of the other $6.5 billion.

But even $2 billion can have a monster impact in the storage sector. So I'm excited as long as it gets spread around.

2009 Jan 28 02:12 PM

[User 283977]

If even half of that seed money becomes available its going to cause a sea change in the Energy storage industry. It does indeed look like we are witnessing the beginning of a serious national energy policy. This is amazing. Thanks John!

2009 Jan 28 02:40 PM

[Conan the Barbarian]

Since I own both ALTI and ABAT( sub $1 for ABAT), I thank you for your continued inclusion of both in your list.

Good advertising, I have just added Zenn motors below $2 because of the USA Eestor battery patent.

I understand that a Green Car is having financial problems in your neck of the woods, no financing, yadda.

Know anything about it?

2009 Jan 28 04:05 PM

[John Petersen]

Bob, I'm optimistic that we may be on the verge of something very big and very important. There will be lots of hoops to jump through and lots of arguing about who deserves how much for what purpose, but it's certainly a good first step.

Paultaut, I did not include ABAT in the list because they are a Chinese manufacturer that just happens to have an SEC registration. These subsidies will not be available for anything that does not keep the cash and the jobs in the US. So I would be amazed if any of the Chinese companies qualify. For that matter, I'm not terribly confident about couple of other companies that do their manufacturing overseas, but that won't be clear until we have a law.

2009 Jan 28 04:40 PM

[Paul Davis]

In order "make a significant difference in the futures of a handful of companies," Congress has to divert capital away from the already successful areas of the energy sector--namely, traditional, non-renewable energy. If battery technology can only be accelerated by a massive violation of property rights, than let it be damned.

2009 Jan 28 05:14 PM

[Advill]

Problem with Valence is that it seems to have everything is needed to be a winner in this market, they have 400 patents that others competitors must buy, they have 19 years expertise, they have 3 plants in China, they have 100 MT of cathode production, they solved the energy charge problem last year, they have a pipeline of new products (Epoch II) to the market, the main shareholder is a Forbes 400 list member..they have everything right?.......except sales, why ? I HAVE NO IDEA,there has been a mess of firings and new buddies coming in and out, ther is ongoing concern of SEC, there is not a single quarter with profit, there is a 500 millon capital that is losted, there is the lowest value of the stock in the moment that Obama is going to launch the biggest green effort in U.S.History.... why Ford, GM, Daimler or anyother is ignoring them? at the same time there is a lot of hoopla...bla..bla about A123, perhaps you can have a brief comment on the matter. Regards.

2009 Jan 28 06:30 PM

[Conan the Barbarian]

Its all going to fly according to Green endeavors. Your product better be Green.

Take the Solar sector, how many solar companies are purely American with American production facilities. Are there any? I do not have a clue.

Will Solar projects stall because American Companies cannot provide the required panels? I do not think so.

The same thing will occur on the Battery side.

While Buying American sounds good, excluding foreign companies from the bidding process will not go over well internationally. Size will matter. Give a company like Altair a large contract, how many years would it take for them to expand their employee base. The same for all of the small vendors, they would all need cash before the fact to expand to the size needed by the time actual infrastructure building takes place.

The big boys will get the projects, the small vendors might get sub-contracts, if they are lucky. IMO

2009 Jan 28 06:47 PM

[D. McHattie]

Paultaut, while First Solar (FSLR) has production facilities in Germany and Malaysia, it also has production facilities in Ohio. Also, its headquarters are in Tempe Arizona. That probably makes it American 'enough'.

You don't have to exclude foreign companies, you just have to subsidize American firms. You can subsidize your own industry as much as you want as long as the subsidized product is only sold domestically.

2009 Jan 28 08:50 PM

[beegdawg007]

Bill,

Thanks for the articles and the updates. I really appreciate your informative posts. In regards to lithium Ion batteries vs lead acid, a thought came to me as I read your privious article. In that article you claim that Li batteries can be recharged up to 10,000 cycles. You feel that this is far more cycles than anyone will ever realistically need. You also state that their is a very real environmental hazzard inherent to Li batteries because they can not yet be recycled. I am not disagreeing with either of those positions. However, the following thoughts in regards to their use in automobiles came to me. 1. Lead Acid batteries are probably good for, at best, 5 years of daily use. And, they are considerably heavier than Li bts. If a car has a useful life of 18 years, it would require three sets of Lead Acid bats, but only one set of Li bats. In addition, after 15 years, if the car is useless, but the batteries are still good, one could either sell the useful batteries or buy a new car with out batteries and install the used batteries for energy. 2. Li batteries weigh much less per kwh, than do lead acid batteries. So, if the LI batteries have, as you suggest, a life of 30 to 90 years, from an environmental perspective, the amount of energy which is conserved as the result of not hauling around an extra 200lb to 300Lbs every day would really be quite enormous. And, yes, that is "non polluting" electricity but in reality on a world wide basis, according to the DOE, most of that electricity will still be comming from coal powered utility plants in 2030. Overall, it seems to me that both the energy saving and economics over the lifetime of the batteries is really greatly in favor of LI batteries. Also, if your estimate that these batteries should by useful for a minimum of 30 years, vs lead acid batteries which might last for five years, I wonder if the lead acid batteries are really more environmentally friendly when 6 sets of lead acid batteries will have to be made for every one set of li batteries. Just consdider the amount of coal which must be burned to make six sets vs one. I honestly suspect that the li batteries would be easier on the environment than would the six sets of lead acid.

Just my thoughts. Thanks for alerting me to this opportunity. I own a small position in CBAK.

2009 Jan 28 09:50 PM

[Coonja]

Picking up on paultaut's statement that "The big boys will get the projects, the small vendors might get sub-contracts, if they are lucky", I believe, considering how things work in Washington, those entities with the expertise getting money out of DC are at a distinct advantage, regardless of the merits of their product, unfortunately. They will get the lion's share of the pie and the cutting-edge, innovative ones will be absorbed or, as paultaut suggests, offered subcontracts, unless, of course, the innovators you have written about in your excellent series of pieces hire those who know, or learn quickly themselves, how to get money out of DC.

A sad, and wasteful, example of this was the Feds' handling of post-Katrina recovery along the Gulf Coast. The Shaw Groups of the world obtained the primary contracts, took the bulk of the money for "administering" the contracts, and what little remained went to subcontractors with the know how to deal with matters on the ground. More bang for the buck could have been gotten had the Feds cut out the middleman, but DC prefers the big contracts.

I sincerely hope I will be proven wrong regarding how things work on the issue at hand.

2009 Jan 28 11:49 PM

[John Petersen]

Paul, philosophically I agree with you, but the powers that be have decided that a stimulus bill is justified. As it turns out, a big chunk of that stimulus is going to a fairly concentrated industrial sector and could do some good things for stock prices in a very short span of time. That is Alpha.

Advill, Valence is a bit of a mystery to me. The bulk of their funding has come from Berg who seems to provide cash as needed but makes all his contributions as debt, which scares me to death. Their sales seem to be building slowly, but A123s marketing seems far better. I had to grin a few days back when Valence issued the "we're number 1" press release knowing that A123s cumulative sales would surpass their cumulative sales in the current quarter. Ultimately I think it all boils down to plant and manufacturing costs which are scary high across the Li-ion group.

Pautaut, the purpose of the subsidies is to help America's economy recover and build domestic infrastructure. I will guarantee that money from this bill will not be shipped overseas to support manufacturing and jobs in Asia. If you eliminate the companies like Ener1, Valence and A123 who do substantially all of their current manufacturing in Asia (I know that Ener1 has a plant in Indiana but it hasn't produced a product yet) the focus of who is in line to apply for the money gets even sharper.

McHattie, as I told Paultaut, I believe it's a virtual certainty that this round of money will be limited to work done in the U.S. and facilities built in the U.S. The goal here is to build domestic infrastructure and jobs, not provide for a greener environment. FSLR may get money to expand the plant in Ohio, but Congress is not going to subsidize manufacturing in Germany or Malaysia.

Beegdawg, I don't claim anything with respect to cycle life of Li-ion batteries. I repeat claims made by others and question whether those claims are based on cycle life testing or research estimates. I know they're not based on fleet scale road tests which concerns me greatly. I hear the sizzle but have never seen the steak. The current crop of lead carbon hybrids from CSIRO and Axion are expected to have cycle lives that are every bit as long as Li-ion and have much lower weight than their predecessors. Any economic calculation has to account for the time value of money and unless you are using long term rates of under 5%, the value of savings effectively disappears after 7 to 10 years. As a practical matter, I think everything we are working with today will be obsolete in far less than 20 years. One of my brothers is a computer tech who gets a kick out of using an old 40 MB hard drive for small document storage. But 20 years ago it was the highest and best in technology. With a 99% recycling rate for lead-acid batteries and no recycling statistics for Li-ion, I wouldn't make the argument that Li-ion is environmentally superior. I would also not plan on the subsidies doing anything for CBAK other than creating strong U.S. competition.

2009 Jan 29 12:19 AM

[John Petersen]

Coonja, last week I published an article with excerpts from the DOE rules for loans from the $25 billion auto industry bailout. The article is at:

seekingalpha.com/artic...

You can be certain that similar rules will apply under the new legislation and the probability that one or two major players will take the whole pie is very remote.

2009 Jan 29 12:23 AM

[Mayascribe]

Huge news, John! Thanks for ruining tomorrow morning for me. Now I have to be up at the crack of dawn figuring out what the heck to do!

Crazy bazaar it is that with this news of the house passing the bailout that the DOW futures are down 35.00, and the NASDAQ is up 45.50! Is the DOW republican, and the NASDAQ democratic?

2009 Jan 29 12:49 AM

[Mayascribe]

Ah! After "refreshing" my CNBC futures page, the DOW futures are up 229, yet the NASDAQ is only up 47.50!

For only the second time in my experimental day trading life, I'm going to throttle up and margin my account. Also, time to sell a little gold stock...Likely going to buy JP Morgan, Switch and Data Systems (SDXC), Quanta (PWR), and hope Exide finally goes wild.

Time to put the jibs up!

2009 Jan 29 01:08 AM