Cost Effective Energy Storage: The Orphan Stepchild of Alternative Energy 28 comments
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In connection with this week’s launch of their new “What Matters” website McKinsey & Company published a pair of essays that should be of particular interest to alternative energy investors. The first essay, “Electron-Democracy,” describes the coming smart grid as a system that will be built outward from a core of centralized power plants, but increasingly be supported and stabilized by incremental energy flows between small producers and consumers that can respond nimbly to market demand with lower capital costs and more robust protection against disruption. Putting the pieces together, the authors suggest that:
“. . . the distributed grid might look like this: intermittent wind and solar power generation would be complemented by load-supplementing fuel cell plants, in much the same way that peak power and base load power plants interact today. Electric vehicles [EVs], plug-in hybrid electric vehicles [PHEVs], and batteries would serve as grid energy storage when excess energy is being produced.”
This outlook, which is rapidly building consensus, is a fundamental force that will drive investments in alternative energy for decades to come. In fact, it’s the raison d’être for wide swaths of the alternative energy industry.
The second essay, “Time to fix the wiring,” is a far more important contribution from Dr. Steven Chu, the new Secretary of Energy. This essay is remarkable because it presents a frank, readable and easily understood summary of the economic and technological factors that will drive the smart grid’s development. It is also an extraordinary public vision statement from Secretary Chu that neither equivocates nor obfuscates. It may be attributable to age or a misspent youth, but I can’t remember the last time a Cabinet Member spoke his mind and explained his vision with a comparable level of unambiguous clarity.
In framing the issue, Secretary Chu wrote:
It’s important to understand where we are now. Existing energy technologies won’t provide the scale or cost efficiency required to meet the world’s energy and climate challenges. Corn ethanol is not a sustainable or scalable solution. Solar energy generated from existing technologies remains much more expensive than energy from fossil fuels. While wind energy is becoming economically competitive and could account for 10 to 15 percent of the electricity generated in the United States by the year 2030 (up from less than 1 percent now, according to the US Energy Information Administration), it is an intermittent energy source. Better long-distance electricity transmission systems and cost-effective energy storage methods are needed before we can rely on such a source to supply roughly 25 percent or more of base-load electricity generation (the minimum amount of electrical power that must be made available). Geothermal energy, however, can be produced on demand. A recent Massachusetts Institute of Technology (MIT) report suggests that with the right R&D investments, it could supply 10 percent of US power needs by 2050 (up from about 0.5 percent now).
Since I’ve taken more than my share of criticism over the last eight months for insisting that energy storage must be cost-effective, I was delighted to see Secretary Chu take a position that it’s all about price vs. performance.
Last November I wrote “Alternative Energy Storage: Cheap Will Beat Cool,” a Seeking Alpha article that basically said economic decisions by users of energy storage systems would ultimately favor cost-effective technology over best available technology. I then demonstrated that within the energy storage sector, the companies that made “cool” energy storage devices carried disproportionately high market valuations compared to companies that made “cheap” energy storage devices. In light of Secretary Chu’s use of the term “cost-effective” to modify “energy storage” I think it will be worthwhile to revisit those issues in greater depth.
This morning I downloaded summary information on the Ardour Global Alternative Energy Index [^AGIGL] and eliminated any companies that were not based in the U.S. I then went to Yahoo! Finance and downloaded market capitalization, price to sales and price to book value data for all of the U.S. based companies. After eliminating six energy storage stocks, the 45 remaining U.S.-based alternative energy companies had a combined book value of $15.5 billion, combined sales of $16.2 billion and a combined market capitalization of $27.2 billion, which works out to an average of 1.75 times book value and 1.68 times sales.
As long-term readers know, I track a small group of pure-play U.S. based energy storage companies and take a very egalitarian approach. My only qualifying question is “does the company manufacture rechargeable batteries or other devices that store electricity for future use?” Collectively, the twelve U.S. based energy storage companies that I track have $1.5 billion in equity and $6.7 billion in sales, but carry a combined market capitalization of $1.7 billion, which works out to an average of 1.13 times book value and 0.25 times sales. So from a sector perspective, my energy storage group trades at a hefty discount to the industry averages implied by the Ardour Index.
Any time a sector like energy storage trades at a steep discount to a broader average like the Ardour Index, I start thinking about bargain hunting opportunities because experience has taught me that market valuation metrics within an industry will tend to coalesce over time. The following tables segregate the energy storage companies I track into two basic classes, “cool technologies” and “cheap technologies.” For purposes of distinguishing between the two classes, I arbitrarily picked a product price point of $500 per kWh of energy storage capacity.
Click to enlarge
Collectively, the six cool technology companies have $217 million in book value and $372 million in sales, but they carry a combined market capitalization of $861 million, which works out to an average of 4.0 times book value and 2.3 times sales. These numbers are much higher than average price to book value and price to sales ratios for alternative energy stocks included in the broader Ardour Index. Accordingly, it seems reasonable to suggest that the cool technology stocks are overvalued when compared to the rest of the alternative energy universe.
In comparison, the six cheap technology companies have $1.2 billion in book value and $6.3 billion in sales, but they only carry a combined market capitalization of $804 million, which works out to an average of 0.6 times book value and 0.1 times sales. These numbers are much lower than average price to book value and price to sales ratios for alternative energy stocks included in the broader Ardour Index. Therefore it seems reasonable to suggest that the cheap technology stocks are undervalued when compared to the rest of the alternative energy universe.
It strikes me as illogical that companies that focus on time-proven energy storage technologies trade at a significant discount to the Ardour Index averages while companies that focus on less reliable and more expensive technologies trade at a significant premium. It gets even odder when you consider that the bulk of the $2 billion in battery manufacturing subsidies in The American Recovery and Reinvestment Act of 2009 are supposed to be used for cost-effective technologies. This is more than a simple index problem. In fact, it appears to be a fundamental disconnect between sector valuations. Alternative energy and emerging storage technologies may be well respected, but nobody gives a second thought to the core group of cost-effective enabling technologies that will ultimately make alternative energy economically viable.
I can’t justify the phenomenon, but it’s clear that cost-effective energy storage has become the orphan stepchild of the alternative energy industry. When faced with a market disconnect of this magnitude, I think alternative energy investors would be wise to remember the words of Benjamin Graham who said, “In the short run, the market acts like a voting machine, but in the long run it acts like a weighing machine.”
Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).
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Have you heard anything about the high conductive power lines? Ever since IMGC was bought out I have not heard much about it. But that would go along with energy storage.
Coby, I think the back and forth with commenters like you is the best part of this whole exercise. Unchallenged views and opinions are always far more dangerous than those that have been subjected to a high level of scrutiny.
AUTHOR'S GLOAT: I just noted a report from Greentech Media on a Japanese Li-ion trade group study that pegged the current price of Li-ion battery packs at $2,000 per kWh and expressed confidence that they'd be able to cut the price in half next year. As you might expect, I'm eagerly waiting for an explanation of how they think that is going to happen.
"The key for distributed energy is not because it's cheaper. The key is national security--we don't have a huge storage (device) that can be blown up," Nourai said.
"Aggregated, hundreds of these units controlled (by AEP)...effectively do the same as one big storage unit," he said. "It's closer to the load, and it has the potential to (create) competition on price."
news.cnet.com/greentec...;snav
I like FCEL for this reason. Their utility scale fuel cells can use methane or NG and can work in conjunction with NG fired plants.
They are also CHP (combined heat and power)
"Better long-distance electricity transmission systems and cost-effective energy storage methods are needed before we can rely on such a source to supply roughly 25 percent or more of base-load electricity generation (the minimum amount of electrical power that must be made available)."
Does this mean 25% of power needs to be base load at minimum? It's more like 70% now isn't it? - 50% from coal and 20% from nuclear
As far as rights of way and siting issues for new transmission lines, there is an alternative idea in the proposal for large scale CSP that was featured in Scientific American last year. They had the idea of using existing rights of way and even siting new HVDC lines along highway and railway rights of way, eliminating the problems mentioned. I wonder if anyone is seriously considering this and what the pros and cons are.
Seems like it would have less impact on land for one thing. It wouldn't be possible to do this everywhere, like in the desert where there may be no existing roads or rights of way near potential new CSP plants, but could still account for much of the miles of transmission lines from these sources to the end user in less remote areas.
Lead acid battery companies like Exide would only need a turnaround in the auto sector to lift their stocks from their current low valuations. New applications like grid and EVs would be like icing on the cake for them.
Exide's OEM automotive battery sales represent about 20% of revenue. Enersys and C&D have no substantial exposure to the automotive sector. The rest comes from industrial applications in motive and standby power. People who have been selling any of these companies based on fears of what's going on in Detroit have not done a deep analysis.
Sodium Sulfur has to be kept in the range 300 to 350 °C (~570 to 660 °F)
Development in Japan [wikipedia] --
NaS Battery was one of the four battery types selected as candidates for intensive research by MITI as part of the "Moonlight Project" in 1980. This [10 year] project sought to develop a durable utility power storage device...
The other three types of batteries were: improved lead-acid, Redox flow (Vanadium type), and Zinc Bromide batteries.
TEPCO(Tokyo Electric Power Co.)/NGK(NGK Insulators Ltd.) consortium declared their interest in researching the NaS battery in 1983, and have become the primary drivers behind the development of this type ever since. TEPCO chose the NAS battery because all its component elements (Sodium, Sulphur, Ceramics) can be abundantly found in Japan. First large-scale prototype field testing took place at TEPCO's Tsunashima substation between 1993 and 1996, using 3 x 2MW, 6.6kV battery banks. Based on the findings from this trial, improved battery modules were developed and were made commercially available in 2000.
The performance of the commercial NAS battery bank is as follows:
1. Capacity : 25 - 250 kW per bank
2. Efficiency of 87%
3. Lifetime of 2,500 cycles (at 100% DOD - depth of discharge), or 4,500 cycles (at 80% DOD)
en.wikipedia.org/wiki/...
"Can't even get my gas furnace to light without electricity."
That problem can be solved by using what I believe are thermocouple? bimetalic strips or peizo electric starters. I remember that my father installed this on our gas fired furnace in Massachusetts years ago. Got sick of losing heat when the inevitable power loss from downed power lines happens in winter.
GE looks very cheap now, too. Picked up some GE bonds @ 8.2% yield today, while additionally buying some common shares on my crazy e-trading account. According to my broker, who was in Washington, D.C., Sunday, talking to a Scranton PA congressman, along with brokers from four orther major houses, about the need for M2M to be "loosened," and bringing back the uptick rule.
My broker thought he would only get about a half hour of time, but ended up speaking with the Scranton congressman for two and a half hours! On a Sunday! The Scranton congressman sits on the House Financial Subcommittee, and has Barney Frank's ear. And...looked what happened today! Great potential news for GE and the financial sector.
If you're into a short term trade, my broker expects GE to be a, "Low teen stock," within a couple of weeks, or sooner.
Also, more attached to your article here, I remember watching T-Boone Pickens a couple weeks ago, hinting that there will be an additional stimulus toward the Grid, coming mid April or early May.
As you can imagine, I spent the last two days getting out of gold mining stocks and into the financials. Furious, intense stuff. I need a nap!
(If you want, for kicks, you can link to my "Mayascribe" comments and read what I wrote about my broker's DC trip before all this news today unfurled, and the
prediction I made about how this week was going to unfold. Not that I really care, but I should have recieved way more thumbs up!)
An article: clrlight.org/hvdc.htm
This time won't be exceptions. I t will drop like a rock again
as soon as it reach a certain level. Just watch.
Americans have no far sight. Only when oil goes up like carzy
and gasoline at $4.00 a gallon, then people will talk about alternative
energy. But it's all forgotten after a few short months.
This is sad reality. We must admit it.
PeteK, my murky crystal ball is still looking for a stabilized oil price of $70 to $80 by the end of the year and at those prices, AE will look pretty attractive. I'm not convinced that the lithium story will ever work in real life, but I suppose time will tell.