Energy Storage: Chrysler - A123 Alliance Likely to Spark Interest in Sector 120 comments
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On April 6th, Chrysler LLC announced the creation of a strategic alliance whereby A123 Systems, Inc. will become a primary battery supplier for Chrysler's planned line of plug-in electric vehicles. This is a huge step toward rebuilding America's domestic battery manufacturing infrastructure and both companies should be congratulated. The next steps I see in my murky crystal ball are finalization of A123's pending IPO coupled with an announcement that A123's $1.8 billion loan request under the DOE's Advanced Technology Vehicle Manufacturing Program has been approved. If the foundation has been properly laid, it will all come together very quickly.
I've been following A123 since it first filed its SEC registration statement. While the IPO was delayed by last fall's market implosion, its team stayed the course and announced plans to build a $2.3 billion battery manufacturing facility in early January. To help pay for the planned facility, A123 applied for a $1.8 billion loan under the DOE's Advanced Vehicle Technology Program.
In an earlier article that focused on the ATVM loan requests from A123, Ener1 (HEV), Tesla Motors and Integrity Automotive, I questioned how those requests could be approved without proof that the applicants would have willing buyers for their products. Monday's announcement provides a clearer picture of the negotiations that have been going on behind the scenes for months.
Thirty years ago, Michael Milken popularized the use of letters that said Drexel Burnham Lambert was "highly confident" financing could be arranged on specified terms if the underlying business transaction could be negotiated. These letters then formed the basis for negotiations between sellers, bankers and other necessary parties. My guess is that A123 and Chrysler have used the same mechanism quite effectively. If I'm right, the Chrysler release is just the first piece falling into place and the others will quickly follow.
From a securities regulatory perspective, A123 is almost done with its IPO filings. The registration statement went through three rounds of staff review and comment last year and was basically ready to go by late November. Updating the registration statement to include year-end financial information and disclose the terms of the agreement with Chrysler and the terms that have presumably been negotiated with the DOE should be fairly simple. So the only critical timing issues seem to be a final DOE decision, a registration statement amendment and a road show.
This is great news for the energy storage sector because like I said last August, there is nothing like a high-profile IPO road show to draw market attention to energy storage in a new way and mark the beginning of a major upward trend in a basic industry that's been undervalued for years. It should be a fun spring after a dismally hard winter.
In addition to the visibility boost I think the Chrysler – A123 alliance will bring to the storage sector, there may well be a second tier of good news for other manufacturers of energy storage devices. The ATVM program allocated $22.5 billion to major manufacturers and set aside another $2.5 billion for loans to "small automobile and component manufacturers" that have fewer than 500 employees.
While I originally questioned whether A123's loan request was part of the large manufacturer allocation or the small manufacturer set aside, it's now clear that A123 has been joined at the hip with Chrysler for months. Therefore, I think it's safe to assume that the $2.5 billion set-aside for small manufacturers will remain intact. While I remain skeptical about how the small company applicants will be able to meet the stringent business viability requirements I discussed in my earlier article on the ATVM loan program, it is entirely possible that similar behind the scenes negotiations are already in process on other ATVM loan requests.
While the Chrysler – A123 alliance will almost certainly spark a tidal wave of interest in the energy storage sector, I think it's important for investors to remember that the best opportunities are often found in the least glamorous stocks. The energy storage sector is a target rich environment that does not have a single ‘silver bullet’ technological solution. The root causes of the challenge include:
- Storage needs that range from watt hours to megawatt hours or even gigawatt hours;
- Discharge needs that range from seconds to hours or even days;
- Cycling rates that range from infrequent (e.g. back-up power) to intense (e.g. recuperative braking);
- Cycle depths that range from very shallow (e.g. engine starting) to very deep (e.g. fork lifts);
- Technological improvements that are usually incremental gains instead of disruptive advances;
- Products that require huge inputs of high value or exotic raw materials;
- The need to carefully analyze costs and benefits for each potential storage application; and
- The sheer immensity of the current and potential market for energy storage products.
The informed consensus is that annual revenues of companies in the energy storage sector will increase from $30 billion to $100 billion or more over the next several years. While I track a handful of pure-play public companies that are focused on billion-dollar market segments and likely to be strong competitors in those segments, none of their technologies has broad utility across the entire energy storage spectrum. So instead of a future where a couple of dominant competitors survive and the others fall by the wayside, it’s easy to envision a future where dozens of strong competitors will thrive by serving different billion-dollar market segments.
Over the last nine months I've written a total of 47 articles on the energy storage sector and the principal pure play companies that are active in the sector. The entire archive can be accessed from my Seeking Alpha author's page. While I have a strong personal preference for lead-acid technology, I also have a contingent of faithful readers who help round out the discussion so that a clear and informative picture emerges. You may find some of my analysis useful if you're looking at storage for the first time.
Disclosure: Author is a former director and executive officer of Axion Power International(AXPW.OB) and holds a substantial long position in its stock. He also holds small long positions in Active Power (ACPW), Exide Technologies (XIDE), Enersys (ENS) and ZBB Energy (ZBB).
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That would be sweet. Oh, and I’m in Grande Prairie for those mapping out the Canadian contingent here. Look in north west Alberta, you’ll find it!!
We looked closely at a range extender architecture for Model S. It ends up costing about the same in vehicle unit cost, a lot more in R&D and a lot more in servicing. Also, although performance is ok when both battery and engine are active at the same time, it turns really bad when the battery runs out and an undersized engine is carrying all the dead weight of the pack. Essentially, a REV is neither fish nor fowl and ends up being worse (in our opinion) than either a gasoline or pure electric vehicle.
An important consideration that people without a technical background don’t understand is that you can either have a high power or a high energy cell chemistry, but not both. Since the battery pack in a plug in hybrid like the Volt has to generate the same *power* as a much larger battery pack in a pure electric vehicle, it has to use a low energy cell chemistry.
That means a 40 mile REV pack is not 1/5 the size of a 200 mile pure EV pack, as simple proportionality would suggest. Another factor is that the REV pack is forced to do three to four times more cycles that a pure EV pack and is (obviously) hit with five times the current per cell during acceleration and regen braking, which forces the REV pack to be derated considerably.
The net result is that a 40 mile REV pack is roughly half the size of a 200 mile EV pack. On top of that, you have to add the engine, generator and all the interconnects between engine and battery. It ends up having about the same mass and worse packing efficiency than a pure EV, plus you still have to deal with all the environmental issues of a gasoline engine.
Popularity: 2%
From a technical standpoint, based on GM only using %50 of the battery capacity I have no reason not to believe what Elon is saying. BUT, if I have 40 miles EV from 1 mile on the odometer to 150,000 miles on the odometer I really don’t care how much extra weight i’m carrying around.
If you translate what he said from the article, it mostly boils down to this: Tesla doesn’t have the means to develop an entirely new battery chemistry, the R&D money to support an engine development and integration, or the means to do ICE servicing.
By contrast, GM is very familiar with ICE R&D and servicing though their dealerships. And the battery chemistry that was developed specifically for GM by A123 and LG is very different than the common Lithium Cobalt Oxide cells that Tesla uses.
As for the ICE having to haul around the weight of an empty battery, we have done the Pike’s Peak scenario here at GM-volt.com to death, and the fact is that there is no road in the U.S. that will allow the battery to get empty, so the battery and ICE are always producing electrical peak power together.
I love the TESLA but this guy is just blowing smoke when he says that the range extender ICE is not a good idea.
I would suggest that each tesla come with a tow bar on the front
First, their vehicles are only available in California. The support infrastructure for these cars is so complex that they won’t even sell it to you if there’s no dealer nearby.
It’s probably with good reason. If the car runs out of juice you’re stuck for a very long time. Because of the massive amount of battery power the car needs to operate, you’re likely waiting for eight to sixteen hours (or more) just to limp home. 110 charging on the Tesla is just not a feasible means of fast refueling. This same reason is exactly why the EV1 failed: people are not going to buy a car that has the potential to leave them stranded when the battery runs low.
And then of course is the hardware. When you buy a Tesla the electricians have to come out and install a sizable charging station in the garage - another barrier to entry. As mentioned above 110 charging is just not feasible.
I really do want Tesla to succeed. But they are making every one of the mistakes GM made with the EV1 and assuming the market will go along with it this time. They’re even down on Shai Agassi’s plan for a hot swappable battery infrastructure (something that would actually make the Tesla’s practical). They were so eager to criticize Agassi that their PR people logged into my low traffic blog to bash his plan. See that discussion here:
www.lonseidman.com/200.../
People simply won’t buy an electric car that can’t be quickly refueled. End of story. Anything else is going to be a toy for wealth
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What this means is that Tesla doesn’t have the financial resources available to develop an entirely new chemistry from scratch, so they were forced to choose between existing chemistries, and the commercially available high power chemistry didn’t work well for an range extended version for the Tesla Model S.
If I had the limitations of Tesla, I would come to the same conclusion. But to extrapolate that limited conclusion and say that range extended vehicles are not viable: That seem irresponsible to me.
In the short to medium term, batteries do not hold enough energy for a long day of driving. That’s true of Volt and of Tesla. So the question is how to address that. One approach is to have a specialty vehicle such as a Tesla for “regular” days and something else for “long” days. No doubt Tesla customers have multiple vehicles and use the Tesla as their short-range car.
Another approach is REV as in Volt. It does have considerably greater complexity, but it also offers longer range and immediate gas refills when needed, so for now it is much more versatile.
Right now I can have neither. If I could have both, it would be a hard choice, but I have enough range anxiety to favor Volt.
Here’s an analogy. Lotus manufactures the body and frame of the Tesla Roadster. Does that mean you can go to Lotus and buy Tesla parts? No. The designs of the Roadster are property of Tesla, regardless of who manufactures them.
Also, while its true that Tesla can buy other available chemistries, many of these are not economically viable for a company the size of Tesla. So this effectively limits their choice of chemistry those that are already mass produced. By contrast, a company the size of GM can pretty much guarantee hundreds of thousands of battery packs over a 5-year period, so battery makers will give GM much better pricing for custom chemistries.
In other words, Tesla has to choose an existing high volume chemistry, but for GM, any chemistry they chose will end up being high volume, and therefore competitively priced.
April 6th, 2009 at 7:09 am
From the article:
“The car exists only as a prototype but the company hopes to mass produce it if it can obtain a $350 million dollar government loan to build the assembly plant.”
Ha!! Elon Musk you’re an idiot!!
Only the Banks are getting Government (taxpayer) money right.
Theres no money for your silly pure battery electric vehicle.
If you’re looking for funding, why not ask Fisker?
The Volt pack is double the size of the 8kWh needed to maintain it’s end of life integrity. Far more full cycle charges and discharges are needed over the life of a 40 mile AER pack v. a 200 mile pack.
—”The car exists only as a prototype but the company hopes to mass produce it if it can obtain a $350 million dollar government loan to build the assembly plant.”
It would be similar to starting a Volt article like this:
—”Two years in, the car exists only as a mule, but the company hopes to produce a working prototype soon… and then mass produce it, if it can first obtain a $2 billion dollar government loan to fund the project, 4 billion in working capital for the next two months, and a further minimum of 22 billion dollars to be a viable concern going forward (assumed under the unlikely sales/SAAR scenario of 10.5 million autos).”
…doesn’t really sound that good
I know Tesla is using somewhat ‘inferior’ technology here and is a pretty simplistic company (and more than a little suspect financially), and are likely destined to be a mere footnote in history…but they still have the ’street cred’ of not only being first in this new wave of electric vehicles, but they are also currently in production….in the US no less.
I never really expected Tesla to amount to anything, other than a few cars for their extremely weathly ownership…so if anyone deserves a little benefit of the doubt, it’s them.
The guy basically said it how it is, the R&D on a E-Rev is expensive, he can’t afford it. Besides that, he builds/wants fast cars–that is the image, and on that metric he is right, the pure BEV is the way to go. The E-Rev hurts his business model- which is sports cars.
One could argue a pure BEV sports car, right now, offers equal to (if not better) performance for the buck as a ICE How many sub 4 second, 0-60 cars can you get for under 100K? (How many are over?) How many 7 seat, sport sedans are doing a mid 5 for $49K? (How many are over?) And as importantly, how many of those ICE sports vehicles are as hella cool? None. (ok, the McLaren F1 is cooler…but I digress
www.responsible-invest...
While I suspect Milunovich may be overshooting the mark a bit, I'll be delighted to take the 50x average between your under and his over.
online.wsj.com/article...
This placement does not surprise me a bit.
A123 wants to build a $2.3 billion plant and get 80% federal financing. The other 20% has to come from somewhere and it seems to me that a $500 million IPO might be a bit aggressive under current market conditions. So my best current speculation is that they'll divide their manufacturing plant ambitions into a couple of phases, get Federal financing for the first phase (perhaps with follow on assurances) and come out with an IPO in the $200 million range sometime this summer.
www.foxbusiness.com/st.../
www.gearlog.com/2009/0...
Now they have a street model in production and sales:
www.zeromotorcycles.co...
Yes, Mr. Petersen, this is relevant, as A123 sponsors the KillaCycle, so high performance electric motorycles are a no brainer product but seem to be off the radar of most investors.
hmmm, Which automakers also have good market share in motorcycles as test beds for new EV apps? Think ahead. It'll force the EV apps to be light and small, ideal for scaling up, just as high performance (but high price) trickles down to less demanding (and thus cheaper) apps, apparently Tesla's plan. Then again, the current world leader in drivetrain electric motors placed in sold street legal vehicles, Toyota, doesn't even make motorcycles, so my thinking might be completely wet.
I guess that's why the Chevy Volt and other EREVs make sense. The power pack is for local commutes and suburban/urban streets with stop signs, traffic lights and traffic. For higher speed longer distance interstate travel, the range extending on board engine creates charge through a generator for a charge sustaining mode which then runs the electric drive, essentially making it small train (which GM has storied expertise in, see en.wikipedia.org/wiki/...) on rubber wheels. No one denies that diesel electric drive freight trains, extremely heavy vehicles that can move at highway speeds, have been quite successful in long haul transportation since 1939.
The brilliance of EREV design is that it takes two major, extremely different driving patterns in the US (about 80% for mostly lower speed, short distance commutes and around town errands and about 20% for higher speed interstate longer distance travel (for truly long distance, why not fly, take the train, a bus, or rent a purpose built long distance vehicle, just as you would rent a moving van for moving) and uses the rechargable power pack for the first 80% and the remainder of the system for the other 20%. The downside is that is tries to make a single vehicle do extremely different type of driving, which invariably involves compromises and sacrifices.
If you want moderate distance performance in a luxury vehicle, get a Tesla Model S and rent something else for those once in great while mind numbing, boring, nothing to see, straight interstate, drives at 85 mph through nowhere, Texas if you refuse to fly or take a train or bus so you can read a book, play games, take a nap or maintain your investments while you are chauffered.
Given market saturation, it might might sense for vehicle makers to specialize their vehicles more for different types of use and for households to own more than one vehicle, of different types, and/or to rent purpose specialized vehicles more often.
Power cell manufactures can make and sell to both E2Ws and PHEVs. Why sell to more than the cream of the crop? Many chemistries, applications and companies means that building market share matters, especially if there are return to scale benefits or if the principals have egos. Your logical fallacy there is suppression of alternatives.