Alternative Energy Storage: Cheap Outperforms Cool

After devoting several months to articles on arcane technical and economic issues that normal investors should not have to endure, I declared a cease fire last week and advised readers that I was done with technology and planned to focus on more interesting topics like the future of the energy storage sector and making money from energy storage investments. I've spent enough time discussing trees. Now I want to evaluate the forest and show investors how to position their portfolios for the coming of cleantech, the sixth industrial revolution. I hope old friends and new readers alike will find the change refreshing. I know I will. I began blogging in July of last year and have concentrated on manufactured energy storage devices and the companies that make them. In a series of 55 articles to date, my fundamental premise has been that:

• Manufactured energy storage devices are just plain boring;
• Energy storage stocks have historically traded at "rust belt" valuations;
• As we enter the cleantech age, the market will discover that energy storage is a core enabling technology for many classes of alternative energy; and
• As the market adjusts to the new realities, valuations in the energy storage sector are likely to soar.

Since July, market interest has developed faster than I expected and it's beginning to look like my predictions of rising tides and investment tsunamis may have undershot the mark. Just on Friday, Energy & Capital ran a headline story that screamed "Advanced Energy Storage: It's Worth Billions." Others like it appear regularly. This is a great time for astute investors who are seeking alpha, but the window of opportunity is closing.

In November of last year, I published an article titled "Alternative Energy Storage: Cheap Will Beat Cool" that discussed the difference between cool innovations and successful products. That article was the first time I segregated companies into a "cool group" and a "cheap group." It concluded with the suggestion that investors who wanted to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.

I'm delighted to report that over the last five months, the market performance of the stocks I classified as cheap has absolutely crushed the market performance of the stocks I classified as cool.

The following table provides comparative price data for the short-list of battery companies I track and includes price data for two flywheel companies that I talk about frequently but omitted from my original table. It shows closing prices on November 14, 2008 and May 1, 2009, calculates the percentage of change over the last five months, and calculates current market capitalizations based on recent SEC reports.

		14-Nov	1-May	Percent	Market Cap
Cool Group	Symbol	Close	Close	Change	Millions
Ener1	HEV	$6.75	$5.61	-16.89%	$636.59
Valence Technology	VLNC	$1.88	$2.18	15.96%	$267.60
Maxwell Technologies	MXWL	$6.50	$10.22	57.23%	$235.91
Advanced Battery	ABAT	$2.13	$2.76	29.58%	$150.87
Ultralife Batteries	ULBI	$9.08	$7.39	-18.61%	$127.17
China BAK Battery	CBAK	$1.99	$2.05	3.02%	$118.24
Altair Nanotechnologies	ALTI	$0.87	$1.12	29.48%	$106.57
Beacon Power	BCON	$0.82	$0.85	3.05%	$95.13
Hong Kong Highpower	HPJ	$3.50	$2.00	-42.86%	$27.13
Cheap Group
Enersys	ENS	$6.86	$18.66	172.01%	$895.21
Exide Technologies	XIDE	$3.38	$5.70	68.64%	$430.22
C&D Technologies	CHP	$1.94	$2.10	8.25%	$55.12
Axion Power International	AXPW.OB	$1.30	$1.50	15.38%	$53.00
Active Power	ACPW	$0.40	$0.58	43.75%	$34.76
ZBB Energy	ZBB	$0.93	$1.22	31.18%	$12.82

Between the reference dates, a $1,000 index investment in each of the DJIA, the Nasdaq Index and the S&P 500 would have resulted in an average portfolio appreciation of 3.5%. In comparison, a $1,000 investment in each of the cool companies would have resulted in an average portfolio appreciation of 6.7%. The real shocker is that a $1,000 investment in each of the cheap companies would have resulted in an average portfolio appreciation of 56.5%. I'm reluctant to boldly predict future trends, but I have no reason to believe that the cheap companies won't outperform both the broader market and the cool companies for the foreseeable future because they started from very low valuation levels and have a lot of catching up to do.

Blogging about emotionally charged alternative energy and energy storage issues is always a challenge because the critics are smart, opinionated and outspoken. As a result the comments to my articles are often more interesting than the articles themselves. Since I've received more than my share of fair criticism and learned some things along the way, I've decided to restructure my presentation tables. I'm not going to change the core data or the companies I track, only the manner of presentation.

The biggest impetus for the change is that both of my original groups include two types of entities: established companies with sustainable business models and emerging companies that haven't reached a point where their business models are sustainable. The downside is that it gives me four analytical classes instead of two. The upside is that it will simplify analysis and make the results more useful to investors. My restructured group classification and presentation tables follow.

		14-Nov	1-May	Percent	Market Cap
Cool Emerging Group	Symbol	Close	Close	Change	Millions
Ener1	HEV	$6.75	$5.61	-16.89%	$636.59
Valence Technology	VLNC	$1.88	$2.18	15.96%	$267.60
Altair Nanotechnologies	ALTI	$0.87	$1.12	29.48%	$106.57
Beacon Power	BCON	$0.82	$0.85	3.05%	$95.13
Cool Sustainable Group
Maxwell Technologies	MXWL	$6.50	$10.22	57.23%	$235.91
Advanced Battery	ABAT	$2.13	$2.76	29.58%	$150.87
Ultralife Batteries	ULBI	$9.08	$7.39	-18.61%	$127.17
China BAK Battery	CBAK	$1.99	$2.05	3.02%	$118.24
Hong Kong Highpower	HPJ	$3.50	$2.00	-42.86%	$27.13
Cheap Emerging Group
Axion Power International	AXPW.OB	$1.30	$1.50	15.38%	$53.00
ZBB Energy	ZBB	$0.93	$1.22	31.18%	$12.82
Cheap Sustainable Group
Enersys	ENS	$6.86	$18.66	172.01%	$895.21
Exide Technologies	XIDE	$3.38	$5.70	68.64%	$430.22
C&D Technologies	CHP	$1.94	$2.10	8.25%	$55.12
Active Power	ACPW	$0.40	$0.58	43.75%	$34.76

If I had used this four class analytical grouping from the beginning, the average portfolio performance for a $1,000 investment in each company would have been as follows:

Cool Emerging Group	7.9%
Cool Sustainable Group	5.7%
Cheap Emerging Group	23.3%
Cheap Sustainable Group	73.2%

All experienced investors know that equity markets are driven by a combination of greed and fear, emotional reactions that are often at odds with fundamental economic realities. Over the past few years, both cool groups have been driven by headlines that highlight opportunities while both cheap groups have been driven by headlines that highlight problems. Since headlines invariably feed the greed and fear cycle, the cool groups were driven to relatively high valuation levels while the cheap groups were driven to relatively low valuation levels. If the last five months are an indication, the pendulum is starting to move back toward a more balanced position where cheap group valuations will eventually catch up with cool group valuations. As the following summary valuation metrics show, they still have a long way to go.

		Shares	Price/	Price/	Price/	Book Value
Cool Emerging Group	Symbol	(000s)	Earnings	Book	Sales	Per Share
Ener1	HEV	113,474		6.47	97.60	$0.91
Valence Technology	VLNC	122,754			9.39	-$0.51
Altair Nanotechnologies	ALTI	95,153		2.53	18.87	$0.46
Beacon Power	BCON	112,578		3.56	1367.00	$0.24
Group Average				4.19	373.22
Cool Sustainable Group
Maxwell Technologies	MXWL	23,083		3.58	2.81	$2.86
Advanced Battery	ABAT	54,662	8.85	1.97	3.33	$1.40
Ultralife	ULBI	17,208	9.43	1.40	0.48	$5.10
China BAK	CBAK	57,680		0.73	0.47	$2.92
Hong Kong Highpower	HPJ	13,563	13.16	1.87	0.41	$1.20
Group Average			10.48	1.91	1.50
Cheap Emerging Group
Axion Power International	AXPW.OB	35,333		6.69	60.25	$0.22
ZBB Energy	ZBB	10,512		1.37	10.33	$0.88
Group Average				4.03	35.29
Cheap Sustainable Group
Enersys	ENS	47,975	9.24	1.24	0.38	$13.79
Exide Technologies	XIDE	75,478	7.49	0.87	0.11	$6.21
C&D Technologies	CHP	26,247		1.53	0.16	$1.43
Active Power	ACPW	60,458		1.71	0.83	$0.35
Group Average			8.37	1.34	0.37

As the cleantech revolution unfolds, the market will learn that every energy storage decision boils down to a cost-benefit analysis. It will also learn that the bulk of the incremental sales revenue will be funneled to companies that serve the average needs of the average user, rather than the extreme needs of the rare "power user." While I believe fundamental market drivers will result in rapid and sustained growth across the entire spectrum of energy storage companies, I’m convinced the superstars will be the manufacturers of objectively cheap products that can serve the needs of average users at a reasonable price. Until cheap group valuations approach parity with cool group valuations, I continue to believe that investors who want to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.

Disclosure: Author is a former director and executive officer of Axion Power International and holds a large long position in its stock. He also holds small long positions in Exide, Enersys, Active Power and ZBB Energy.

Comments

[John Petersen:]

There has been a lot of talk about Warren Buffet's purchase of a 10% stake in BYD last September at a post-money valuation of $2.3 billion. Using the link provided in today's article about BYD, I pulled its annual report and was able to calculate the following valuation metrics for the Buffet purchase:

Price/Earnings – 12.3
Price/Book – 1.18
Price/Sales – 0.6

May 03 06:51 AM

[John Petersen:]

Correction: it was last Friday's article on BYD. The link is:

seekingalpha.com/artic...

May 03 07:29 AM

[Knowshitsur...:]

<<<"Disclosure: Author is a former director and executive officer of Axion Power International and holds a large long position in its stock. He also holds small long positions in Exide, Enersys, Active Power and ZBB Energy">>


Dear John, (pun entended) we had a few issues from the start.
Why I ignored all the above signs I'm not sure. Maybe I was just lonely or maybe it was those piercing blue eyes;could have been the hat. (It was probably the hat...your such a rebel).

It's hard for me to tell you this, but in the past few articles, I have been seriously thinking about ending my readership. I've decided that I've just been too dependent on your thinly veiled self promotion; of your so called cheap energy storage stocks.

It is a little sad for me knowing that I won't be able to rely on your biased information anymore, but I think I will be a better investor in the end. I'll always remember tripping on the tangerine seeds with you ( thanks for info on that one)

I'm returning your Darth Vader poster, but keeping your left ear.

Best to your frog Lenard, Loren

May 03 09:01 AM

[John Petersen:]

I'm sure we will all miss your cogent comment and analysis.

May 03 09:19 AM

[Brad Smith:]

John,
As one who attempts to identify relevant information at greenmarketintelligenc... I applaud your effort to inform readers about value propositions. After reading a few thousand articles and studies about alternative energy, clean tech, green tech, green jobs, green goods and services and related information pieces and research reports I learned that very few information producers drill down to discretely describe the monetization and value creation aspects that are vitally important to drive breakthroughs into the market place. I salute you for working on this aspect as you share information with your readers. It is obvious that you have developed a deep well of knowledge about alternative energy storage. I encourage you to apply this knowledge by focusing on articulating macro metrics that may be produced or impacted as alternative energy storage technologies are used in the market place. One of your recent articles cited a projection for electric powered vehicles. Refining this projection into metrics per million vehicles may help describe upside market value opportunity for the alternative energy storage category.
Elementary examples of metrics might include:
Metric for Carbon Credits created by 1 million electric vehicles
Metric for reductions in barrels of oil imported per 1 million vehicles
Metric for cost savings per 1-million electric power vehicle miles driven compared to gasoline power vehicle miles driven costs. From my perspective, articulating macro metrics that drive monetization and value creation is a missing but vital ingredient. My take away from reading Alternative Energy Storage: Cheap Outperforms Cool is that you have taken an important early step toward articulating how market turn over, monetization and value creation will evolve. Keep up the good work.
Regards, Brad Smith

May 03 10:25 AM

[Alphameister:]

I guess they are all "story stocks" in this new era, but some of the stories have more substantial backing than others. You've done a good job of making the distinctions and supporting them with sound analysis. Anyone who has acted on your advice has been very well rewarded. Readers might quibble about the description of Axion as "cheap" versus ABAT as "cool" given the statistics cited, and it seems to me you have identified ABAT as cheap in a prior post. It is also possible that one of the cool stocks might become a home run in a different time period, but that wouldn't alter the merits of your basic message that an investor is most reliably well served by seeking sustainable value within a growth industry.

May 03 10:47 AM

[Lies and Da...:]

Care to educate the rest of us on why you're ending your readership?
What are the signs that you ignored? Care to elaborate on why you believe that John's cheap energy stocks are, in fact, not cheap?
Why is the information biased?

John lists his sources, all of which are credible. Most of them being studies done by the DOE or some government sponsored research institute.
The tables and figures John publishes don't smell like they've been cooked either.

Yes John served on the board of Axion, and Axion might be a small enough company that promoting it constantly on Seeking Alpha might make a difference in its stock price.

But I believe that his experience with Axion gives him a profound insight into an industry that I would've otherwise dismissed. I've taken John's advice and have had returns in excess of 60% - and I am very grateful for his continued contribution to seeking alpha.

May 03 10:48 AM

[hillbillyharry:]

John:

In simplistic terms-cool and cheap-both are sub-sectors, and should be treated as such.

There are batteries for automobiles,and there are batteries for shipboard power, and heavy artillery pieces; varying temperatures like 30 below zero and automobiles requiring different types of batteries.

Choose your sub-sector and choose the appropriate battery manufacturer. Each category does not compete directly with the other-they are mutually exclisive to me.

Enjoy reading your analysis-but still yet, cool is cool and cheap is cheap.

Much abliged
Hillbillyharry

May 03 10:53 AM

[John Petersen:]

Brad, I'm flattered that you think me capable of such an analysis, but really think it's beyond me. More importantly, the more time I spend focusing on the trees the more important they become in the minds of users. It ends up distorting perceptions. We're at a crazy time in energy storage. The global battery market has historically been in the $30 billion a year range and the bulk of that went for starting, lighting and ignition. We're looking at growth over the next decade to $100 billion or more per year and most of that growth won't be in places that people think of right off the top of their heads. If I want to show investors where the profit potential lies, I need to stay at a higher analytical level and focus on companies and their potential rather than broader markets.

Alphameister, I've come to love ABAT over the last few months and if I could possibly find a way to draft a Li-ion producer for my cheap sustainable list ABAT would be the one. They're a great company and I plan on writing a separate piece on them as soon as the financial statements are filed for the Wuxi Angel acquisition. Their concentration on the E2W market in China is fabulous, their gross margins are great and management throws around G&A nickels like they're manhole covers. While I'm generally reserved about Chinese companies because I don't understand the business or cultural environment, I think ABAT is a winner and very attractively priced.

Lies, and damned lies, you had me going for a minute there because I thought you were talking to me instead of Dr. Know.

I've been having more fun blogging than I would have ever imagined and as long as I have readers like you who are interested in the subject matter I plan to keep it up.

May 03 11:05 AM

[GimliJan:]

John,
Please keep it up! I am a very new investor who is learning from articles by you, Cliff Watchel and some others on this site and the informed readers that comment, positively and negatively. Your new format is even easy for a "newbie" to understand. I don't have any positions in the energy storage sector yet, but I am watching several of the companies you have written about.
Keep up the good work!
Gimli

May 03 11:40 AM

[searcher:]

"I'm sure we will all miss your cogent comment and analysis." Sweet.

May 03 11:50 AM

[John Petersen:]

hillbillyharry, unfortunately cool and cheap are not really subsectors because most potential applications will have customers with a range of requirements. The market construct that I've been able to come up with so far is a standard bell shaped curve for each application class. In backup power, for instance, low demand users may only need your basic lead-acid battery, medium demand users may require a low-speed flywheel solution and high demand users may well require high-speed flywheels or even Li-ion batteries. I had lunch a couple months back with the president of Enersys Europe and he explained that customers frequently come to them believing that their needs are far greater than they actually are. So more often than not the customer who came looking for a Li-ion solution ends up buying a spiral wound thin pure plate lead or a more conventional system. Overall, I find it much easier to consider battery consumers as fitting the same general model as a class of high school students. There will be a few bright stars who really need the cool, there will be a group in the middle who really need the cheap, and there will be a group at the other end who can't afford either.

May 03 12:19 PM

[33Nick:]

Wait a second, I will miss your in-depth technical article. Maybe you can do both? ;)

May 03 03:19 PM

[John Petersen:]

33Nick, it's hard to keep a geek like me away from the technical side for too long. But I do think it's about time I lightened it up a bit and said something useful for a broader base of potential investors who are looking at storage for the first time.

May 03 03:44 PM

[Dirk McCoy:]

John, I'm glad to hear you'll still be around here to tip us off to the next great breakthrough (or scam). I absolutely agree that established (cheap) companies always have a leg up, because they have the customers. Should eestore technology or air storage technology actually live up to their lofty representations (and if they don't, you should file a class-action) then there's nothing that would keep one of your cheap companies from licensing the technology to move it to widespread adoption. I'll count on you for the smart view on that.

May 03 04:02 PM

[Mayascribe:]

Glad you are evolving, pal! You and your commentors have been a complete joy to read since last July. Yet, the ongoing frenzied debate, for this follower, grew tiresome in a kind of pleonastic way over the past couple of months.

This article lends proof to the pudding that your cheap vs. cool, or lith-ion vs. lead acid thesis has panned out magnificently (and I believe will continue to do so)!

The above charts are the easiest you've yet created for a lay follower to figure where to park their investment dollars for the long term in the Energy Storage Sector.

####

Thanks for the offer to read my "again-in-progress" manuscript, when done. Over the too many years I've been trying to get this book done, I've had at least a hundred people read parts or all of it, several whom are world renowed archeolgists who have thought enough of my work to stay with me when they were in town, or invite me into their homes for dinner and discussion, or, when researching in the field, invite me to sit down with them and enjoy a drink. It's humbling to have once been a cheesesteak flipper to now have as friends the top tops in their field from Harvard, Upenn, Yale, and many other elite institutions I can count as friends.

I park you in their company.

May 03 04:51 PM

[hall999999:]

Your thesis that cheap beats cool sounds reasonable to me but aside from the VHS-Beta analogy some of your evidence seems less than definitive. You reference your November article as proof that this thesis is correct. To begin with, it's funny that the AAPL vs. MSFT comparison begins in September 1989 since that is pretty much the last time that you could say an investment in Microsoft held until the present would have significantly outperformed an investment in Apple. Pick any point in time from October 1990 forward as your starting point and Apple does about the same or better than Microsoft. I bring this up to show that when you draw a conclusion you should use more than a single data point or else make it clear that the conclusion is very limited.
Furthermore, I think the point of that November article was that in the long run cheap beats cool. You can hardly look at the last six months and say, "see how right I was in November?". You were right that some of the lead acid companies were incredibly cheap so it was inevitible that at some point they would outperform the li-ion companies but six months can't be considered proof of a long term trend. Look back twelve months instead of six and you get a different picture of who outperformed who. And what will the next six months look like? Enersys had a 172% jump. Don't you think the stock might pull back from that and Enersys will underperform for the next six months?
I like the way you've broken the companies into four groups. It gives a more precise understanding of what we're looking at and helps alleviate the "why are you comparing ABAT to AXPW.OB" quibbles. Make sure you continue to keep the distinction clear between "cheap stock" and "cheap technology".
Finally, I'll be looking forward to your article on ABAT. Outside of the Yahoo message board it's hard to find analysis of the company that goes beyond, "They make li-ion batteries. You know, like CBAK."

May 03 05:00 PM

[John Petersen:]

Dirk, we need them all my friend. With the growth everybody is expecting for the storage market, the problem won't be too much competition. It will be not enough competitors.

Mayascribe, I love technology and I love watching companies and markets develop even more. Most every lesson I've learned has come the hard way, but I don't make the same mistakes twice and I can tell when companies are taking paths that are likely to cause them pain. The next few weeks should be fun as I talk about some of the mistakes I've seen in the past, particularly as they relate to small companies and big debt.

May 03 05:00 PM

[Mayascribe:]

Just had to end my previous comment with a pleonasm!

May 03 05:00 PM

[John Petersen:]

hall999999, the event that served as the inspiration for this article was a brokerage statement for my non-Axion holdings that has me up by about 235%. I wasn't brilliant but I was opportunistic and bought everything I own at or near the lows. I expect markets to pull back and advance because that's what markets do, but the overall valuation metrics on the cheap companies are still far more attractive than they are on the cool companies.

May 03 05:05 PM

[Mayascribe:]

Ahh! Looking forward to them! You know I enjoy that stuff, too.

With the S & P having 50 stocks that jumped 100 percent or more during the last month, the markets, which are testing their upside technical thresholds are, in one way ripe for a significant pullback.

And yet, billions of sideline money is pouring in every month from independent investors and most recently, mutual funds. The hedgy shorters and double and triple leveraged short ETF's are at a time where they have quite a battle to beat this market down to the March 6th lows.

That's why I feel safe that no matter what downturn we may soon experience, I feel confident that a long term position taken now (being five to ten years) will pay off huge down the road. Especially in your fav Energy Storage plays.

May 03 05:18 PM

[Mayascribe:]

Almost forgot, John. Check out Origin Oil's (OOIL) corporate website. I know it's not in the Energy Storage Sector, but when you see how quickly this company can turn pond scum, algea, into petroleum, well, you gotta see it, to believe it.

All I have to say is that Chevron is looking into this dramatic yet simplistic technology that, if cost effective, could have a dual impact on global warming and the oil industry itself. I promise the one minute video on Origin Oil's home page will leave your mouth slightly agape.

May 03 05:34 PM

[engstudent:]

Mayascribe, that was indeed a sweet video. You probably already know this, but for a recap of the numerous potential stumbling blocks, see this report from the March 2009 Algae Biofuels World Summit:

www.triplepundit.com/p...

What excites me is this new Wolfram Alpha search engine that you may have heard about:

www.guardian.co.uk/tec...

It's like google but it can actually interpret and compute questions you ask it. Maybe it can answer 'Which is the coolest, cheapest battery of them all?'

May 03 06:50 PM

[trevhug:]

John,

I admire your integrity and incisive mind. I need to bring the following dire situation to your attention if you do not know about it already. You are the ideal person to bring this situation to national attention because of your knowledge of the elements, your reputation, contacts and writing ability.
This is not about energy storage but concerning China's growing monopoly of rare earths. China already has control of 90-95% of the available world supply and is just about to buy a majority control of Lynas, an Australian mining company which was poised to go into the final stages of development early this year when bond holders backed out. Their mine in Australia has huge reserves of these essential elements. They have just accepted an offer of approximately $250m from China's state-run nonferrous mining company which will give China majority control of the mine's output. This deal can only be rejected by the share holders or the Australian Government.
Access to these minerals is an absolute necessity for our National Security and our commercial health because of their incorporation in many different processes and systems. Also many of the elements of the Green Revolution are dependent on them. Representatives of Lynas say the sale is not a threat, but they have a fiscal conflict of interest and the chief company spokesman who arranged the deal was an employee of the Chinese mining company....
I have been following Lynas for months because rare earths are as important as batteries for the future. I want to ensure that the threat of a monopoly is fully understood by the Western world. Maybe I am worrying unnecessarily but I have to be sure.
May I suggest you Google "Lynas" and "rare earths" to confirm the threat. The story is a long one and is described on-line by people who have more knowledge and writing ability than I have.
I am a retired MD with extensive education in chemistry and research. This is the first time I have written in this area. I have no history of paranoia and a small position in Lynas which is a miniscule percentage of my portfolio. Thank you for your attention.

May 03 08:29 PM

[Mayascribe:]

engstudent: Thanks for the links. Walfram Alpha search engine is a marvel!

As for the algea link (thanks again), I'm wondering if that conference was privy to OriginOil's latest technological leap, as the announcement of the separation process occured a month after the conference was held. Feasability or cost competitiveness of algae has been the issue for years, but this new technique, or process, is something I want to keep my eye on, especially as the CEO stated he expects production for industrial usages to commence in two years.

Another "cool" technology like Ener1? Or, hopefully another clean technology that can join the club of realistic business concepts that can eventually rid the world of gross over dependence on oil.

May 03 08:59 PM

[Beacon of Hope:]

I really dont think your giving Beacon Power enough credit. They have a proven energy storage. They have partnered with AEP, National Grid. They signed contracts with the US Navy, US Air Force. They are supported by Duval Patrick and are destine for stimulus money. I feel it is an "Obama Proof" company. The produce 0 carbon emissions. Their product has a 20 year life span with minimal man power. They are very efficient. They will soon be a big part in the NYISO. Their name has also been brought up in Californis and Ohio. National grid is talking about these smart cities wich would most likley include Beacon. I hear there name mentioned along with GE and Google. I just think they have a ton of potential and you are always down on them. Plus the Vice President outlined plans to distribute grants for smart grid technology development ($3.3 billion) and for smart grid storage. I just dont get why your so down on this comapny.

Hit Peace... Watch for good news to come from Beacon.

P.S. Large batteries will cost a ton to recucle.

May 03 10:14 PM

[John Petersen:]

Mayascribe, last year's sell off was indiscriminate and the good got hammered along with the bad. Now it seems the market is trying to identify the leaders for the next decade and selectively buying into core industries that will lead the way. It's nice to be in front of the wave instead of trying to catch it.

Algae based biodiesel is intriguing because a lot of people think they can get the algae production price low enough to make sense. It has a better chance of long term success than turning food to fuel as we do now. More importantly it won't be subject to uncorrelated commodity prices on both feedstock and finished product. Origin's market price is about 100x book which is a little steep, but they seem to be prudent in their spending. It's a rank speculation but I've seen worse.

trevhug, another Seeking Alpha contributor named Jack Lifton writes regularly on rare earth and strategic metals and I rely heavily on Jack when it comes to these issues. Jack's instablog is usually fascinating and the latest post is on your topic. See:

seekingalpha.com/autho...

China has been aggressively buying resources wherever it can find them because it knows its next economic development steps will be resource constrained. I think people are wrong to believe that China will always be a big exporter of cheap goods. In fact, one of my biggest recurring themes is that 6 billion people know how good 500 million of us live and they all want to earn a place at the table. In the end, I think the only solution will be minimizing waste in all its forms and using all resources for their highest and best purposes. The competitive landscape for the next 50 years will be way different from the last 50, but at least pressure from offshore will make us reexamine the wisdom of shutting down domestic mines in favor of imports.

Beacon of Hope, I'm not down on Beacon - I worry about Beacon. They have a promising technology that appears to have ample room for cost reductions. The frequency regulation market has great potential and the more Beacon can drive down the price of their system, the greater the market acceptance will be. On the other hand, they spend a lot of money on a recurring basis and are working feverishly to finalize terms for an $80 million DOE loan.

I've seen several small public company clients crushed by debt financing and even friendly DOE debt is still debt. I've also spent a lot of time negotiating equity offerings with investment bankers whose only concern is protecting new investors. In many cases, the right answer for the client was one that did not please current stockholders. In my view Beacon's financing challenges may be higher than its technical hurdles. That's a good recipe for short-term pain even if the long-term potential is bright.

May 04 12:59 AM

[Don Harmon:]

Just a video (newscast) thought some of you might be interested in taking a look: www.eenews.net:80/tv/v...

Don Harmon

May 04 12:54 PM

[lemoneater:]

Thank you for your very informative article about energy storage stocks. I appreciated your "cool" vs "cheap" designation. Can "cool" ever be "safe?" (I'm mean a stock which isn't overloaded by dept and a stock which even pays a dividend?) At the moment I'm invested in JCI partly because of their lithium batteries=energy storage, but I know that JCI has other divisions which are currently suffering from lower demand for automotive parts.

May 04 12:56 PM

[henarl:]

Of course one hopes that cool will eventually become cheap. That is how technology evolves and gives us most of the things we now enjoy. Until it does tho, I would agree that cheap is the better short to medium term investment.

May 04 01:28 PM

[John Petersen:]

don, thanks for the link to an interview between a correspondent of Environment & Energy Publishing and the president of the Electric Drive Transportation Association, who is presumably employed to make the most forceful case possible for EV and PHEV initiatives. He did a wonderful job of laying out all the justifications for EVs but basically admitted that the economics don't work without piling on some very fuzzy environmental costs and benefits. A more cogent discussion of the real dollars and cents issues can be found here:

www.dailytech.com/The+...

lemoneater, a number of companies in the "Cool Sustainable Group" have solid financial statements and are either profitable or incurring losses as a matter of choice because they want to rapidly advance their technologies. I wouldn't expect anybody that I follow to pay out dividends for the foreseeable future because I think they are all going to be on very steep growth curves that will require every penny that they can pull together. JCI's a great company that has good storage products but an overall business that's to complex to compare to the pure play battery companies. Enersys and Exide are also both very active in developing advanced lead-acid batteries that are a huge improvement over the starter battery in your car. Enersys is also active in the Li-ion space.

May 04 01:32 PM

[Don Harmon:]

John, Your ref. article on the Volt rehashes the same old tired "scarcity of resources" argument which has been debunked fairly well by now. Ultimately your premise here is simply that "Cheap will beat Cool". If Steve Jobs subscribed to this theory - he would not have invented the I-Pod. What you are blind to in all these essays, is there are those unique people in this world who will find a way to make "Cool" also "Cheap" (Like Apple does).

You like to use math and market cap charts to prove your thesis, but conveniently miss the fact that somewhere out there is a young genius who will turn your tidy little world completely upside down one of these days. That kid might even be related to you and only be in high school right - now but he's out there, believe me, and when he comes on the scene, look out!

Even John knows this is true. And, while I do agreee with his short-sighted investment advice if you want to be conservative, nobody strikes it rich playing the favorites and ignoring the long shots, as we can attest to by the running of the 135th Kentucky Derby this weekend....lol!.

Don Harmon

May 04 01:59 PM

[John Petersen:]

Don, the article made scarcity arguments that even I've said I'll not be making in the future, but it's primary thrust was that PHEVs are marginal economic propositions until oil reaches $280 per barrel.

I think it is more than a bit ironic and actually quite apt that you've chosen Apple as your paradigm for Li-ion. I've been a Mac user since 1988 and never cared that their products were appallingly expensive because I believed the performance was worth the price. A whopping 95% of all computer users disagreed with me and went for the cheaper option. Things got a bit dicey in the early 90s when Apple could only command a 5% market share because of pricing, but I stuck with them through thick and thin because I'm that kind of guy when I find a product I like - damn the cost full speed ahead. Over the last couple years Apple has finally gotten its act together and started producing products that normal people can afford.

If I'm an investor trying to figure out where to put my money today, I'll take the cheap alternative until somebody on the cool side proves they can be cost competitive.

I keep waiting for the genius, but have no reason to believe he will be developing a Li-ion chemistry instead of something truly advanced using carbon nanotubes or graphene.

On the topic of the Derby, if we assume that all the companies are shooting for the same goal, let's call it a $2 billion market capitalization, then Ener1 is a 3 to 1 favorite, Valence is in the middle of the pack 10 to 1 and Axion is the 50 to one longshot.

May 04 02:21 PM

[Don Harmon:]

John, you amuse me and perplex me as well. If Valence is a 10 to 1 horse, and is clearly in your Cool category, how could Axion be a 50 to 1 horse and be in your Cheap category? Being conservative, and a fan of carbon technology, why do you handicap your own horse Axion @ 50 to 1 odds on beating Valence @ 10 to 1?

Are you admitting the Valence (Cool Emerging Group) is truly a favorite then in this race while Axion (Cheap Emerging Group) is a long shot?

Don Harmon

May 04 02:38 PM

[John Petersen:]

No Don, I'm saying that starting from a $700 million market cap, the payoff is 3 to 1 if Ener1 grows to a point where it merits a $2 billion market cap. Similarly I'm saying that starting from a $260 million market cap, the payoff is 8 to 1 if Valence grows to a point where it merits a $2 billion market cap. Using the same math and starting from a $50 market cap, Axion is a 40 to 1 payoff if it grows to a point where it merits a $2 billion market cap. (my original numbers in the earlier post were off a bit.)

Based on what I know about their business fundamentals, I think Axion will get there long before Ener1 or Valence, but then again I have a dog in the fight and am not entirely unbiased.

But people who are looking for large multiple payoffs never get them by betting on companies that are objectively overvalued. They get them by betting on companies that are objectively undervalued.

May 04 03:24 PM

[Don Harmon:]

Companies that are objectively undervalued are so for a reason. They have had their best days in the sun and their technology hasn't changed in decades. So the political imperative to shift to newer technologies is ultimately going to trump these old line companies. Why do you think virtually ALL of them are now trying to jump into the Lithium-ion market space?

Just look at the list of companies who have joined NatBATT - now numbering (51) who have never before been interested in this market but now see the "light" shining brightly in the DOE Grant money.

Don Harmon

May 04 03:31 PM

[John Petersen:]

The alternative explanation is hype!

We both know where I come down on the issue.

It's like the wall street journal said last December, Li-ion developers may well secure a place in a new electric-car industry. But at current prices, investors are being asked not just to dream, but to take success for granted.

May 04 03:34 PM

[Don Harmon:]

Today's hype is tomorrow's hyperspace!

We both indeed know where we come down on the issue.

You read the Wall Street Journal and I read Wired Magazine - personally I believe you are right about investors. They are not going to be the drivers of this new Li-ion technology. The government is going to drive this train on this trip.

Don Harmon

May 04 03:46 PM

[John Petersen:]

Don, I think we'll just have to agree that reasonable men can reach different conclusions based on the same facts.

May 04 04:37 PM

[Don Harmon:]

John, love you and respect your position! Yes, there is a lot of food on the table right now. They are plowing tomato crops into the ground in Florida because the farmers can't even break even selling them on the market! Interesting times we live in.

Best,

Don Harmon

May 04 04:40 PM

[billp37:]

PNM has not responded so far.

home.comcast.net/~bpayne37/pnmelectric...

May 04 08:06 PM

[John Petersen:]

Don, I respect your hopes that LiFePO4 batteries will eventually become competitive on the basis of pure economics but think it would be fairer if you disclosed your interests in LiFeBatt in a little more detail so that readers could wrap a little context around our discussions. In earlier comment streams I've conceded that Li-ion will almost certainly be the technology of choice for power users at the right-hand tail of the bell shaped curve that view performance as their primary metric and are unconcerned with costs. Likewise you've conceded that the hoped for price declines are likely to be gradual rather than precipitous. I enjoy the back and forth, but want new readers to at least understand the context.

May 05 11:09 AM

[marketquant:]

> Li-ion price declines

The *prior* Alti CEO said that their pricing was going to decline from $2 to $1 to $0.50 per Wh over a couple of years -- that was over a year ago. In the most recently conf call the *current* CEO stated that their price had indeed been "value engineered" and had fallen by half its prior level, and would fall by half again within 18 to 24 months. Neither have given specific reasons.

If Alti can do this I don't see any reason that other companies wouldn't be able to achieve similar results.

May 05 12:15 PM

[John Petersen:]

marketquant, I listened to the same conference call you did. The current CEO said the price had been cut in half from $2 to $1. This is a statement of fact.

He also said they expected to further reduce the price to fall by half again within 18 to 24 months. This is a forward looking statement.

There is a great deal of difference between talking about what you have done and talking about what you hope to do, particularly when you don't give any details about how you plan to accomplish your goals. The battery business is based on chemistry and raw materials costs. Moore's law does not apply. Until somebody can show me how ALTI or any other Li-ion battery developer will be able to slash the price it pays for raw materials, I'm not impressed by vague promises.

I am too old to believe in the commodity price fairy.

May 05 01:29 PM

[marketquant:]

> talking about what you hope to do

I thought that when Gotcher departed Alti that the half-price target might get delayed or withdrawn, but they followed thru with it, so that gives them some credibility on being able to project the price curve -- perhaps more than you!

> price it pays for raw materials

Years ago Alti said that they can literally start with incredibly cheap raw materials (their researchers are former BHP Billiton materials PhDs) and turn these into materials worth more than 30 times as much. It doesn't appear that raw materials are the price limiting factor that you claim it is.

The current Alti CEO is a former Duracell guy who was in charge of their largest plant in North America and Director of Product Development -- so how on earth could such a person not know what he is talking about?

> vague promises

The promise seems fairly specific to me -- half price in 18 to 24 months.

May 05 04:19 PM

[John Petersen:]

marketquant, I respect your right to be satisfied with the pricing risks for the reasons you offered. Please allow me the same right to raise and question the pricing risk for the equally rational reasons I've offered. You and I are debating business risks and we have different takes on the same issue. Neither of us is objectively right. But anyone who reads our back and forth will be better informed.

May 05 04:37 PM

[Beacon of Hope:]

John I just don't understand you. Beacon Power has a ton of potential. You know this is an $.80 stock. There is nobody out there that has any type of clean energy storage. The energy storage business could be worth billions. No matter if the grid uses solar, hydrogen, nuclear, batteries, wind, water, ect. They all will need some type of storage. Beacons technology with flywheels is by far the best. It is the fastest, cleanest and has a 20 year life expectancy with minimal man power. Obama will fund them not only to create jobs but because he knows its the right decision. Not only will they will soon get a huge some of money with the department of energy loan, but they qualify for many grants. Duval Patrick will also give them stimulus money. I would like to know your thoughts on their connecting to the NYISO and the Midwest ISO and in California. Also I would like to hear your opinion about the partnerships the signed with AEP and National grid. Both looking to use this type of energy storage. National grid is looking to build smart cities. I dont know if you have heard of them. Beacon will be a part of that. I think they are looking to build their first one in Worcester, MA. Finally Beacon is spending money to build plants and Flywheels in the end will make money. They have yet to make a dollar. This could easily turn into a large cap company that pays dividends. You make it out to be a junk stock. I dont know if you have ever hear the saying you have to spend money to make money. The sky is the limit for Beacon Power. Last but not least I was taught in grade school that history repeats it self.

May 23, 2005 BCON $.86 - Aug 22, 2005 BCON $4.13

All I ask John is that you give me something to work with here. You have no facts on Beacon Power. You ignore all the signs that this company is going to be BIG.

All you readers can listen to Jon here, or you can go to face book and search Beacon Power and get the real facts on this company.

At least have the decency to answer me and give me some more reasons behind you article besides they spend lots of money. Dont be a coward. Have the gall to admit that Beacon shouldnt be at $.80 .

May 06 12:24 AM

[Beacon of Hope:]

Beacon power up 22% last week and 100% in the last month. Oh yeah Beacon Power is so cool.

May 06 12:39 AM

[Don Harmon:]

For the readers that John refers to - I am the founder and CEO of LiFeBATT, Inc. in case you wish to know. The website link clearly shows a tie to LiFeBATT, which I presumed people would connect the dots. If I mislead anyone I do apologize - as you can tell I also have a horse in this race and like the recent owner of "Mine That Bird" we are a darkhorse @ the moment, but watch out all you "lithium princes" we are right on your tail!

Don Harmon




On May 05 11:09 AM John Petersen wrote:

> Don, I respect your hopes that LiFePO4 batteries will eventually
> become competitive on the basis of pure economics but think it would
> be fairer if you disclosed your interests in LiFeBatt in a little
> more detail so that readers could wrap a little context around our
> discussions. In earlier comment streams I've conceded that Li-ion
> will almost certainly be the technology of choice for power users
> at the right-hand tail of the bell shaped curve that view performance
> as their primary metric and are unconcerned with costs. Likewise
> you've conceded that the hoped for price declines are likely to be
> gradual rather than precipitous. I enjoy the back and forth, but
> want new readers to at least understand the context.

May 06 01:28 AM

[marketquant:]

Beacon of Hope,
BCON's current price on flywheels is $10,000/kWh (they stated this in March at a Calif Energy Comm meeting) with a goal of $5,000/kWh in 2010. ALTI has already sold two similar frequency regulation devices to a large utility for $2,000/kWh (which have 1/3 the expected life), but afterwards ALTI cut their price in half. Doing the math says that ALTIs device will be 40% cheaper even if BCON hits their price target in 2010.

May 06 07:00 AM

[John Petersen:]

marketquant, your last post is a good example of an inappropriate either - or mentality that seems to pervade most discussions of storage options. In frequency regulation applications where 0 to 10 second bursts of MW level power are crucial, supercapacitors from Maxwell lead the pack. As you get into the 10 second to 120 second range, the high-speed flywheels from Beacon probably lead the pack. In the 2 to 5 minute range, a high output Li-ion solution like ALTI's may work well. When you get into the 5 to 15 minute range, it will be hard to beat the price-performance profile of lead-carbon.

The point of all this is that we need every energy storage technology that's out there and a bunch more that haven't been invented yet. It will then be up to end-users to configure a system that best fits their particular needs for a particular installation.

Every survivor will have more business than it can possibly say grace over, but the idea that one or even a handful of technologies will dominate the storage market is sophistry.

May 06 09:32 AM

[marketquant:]

> system that best fits their particular needs

The *particular* need of grid FR devices appears (according to EPRI, ISO, and KEMA reports) to be a power to energy ratio of 4:1. This ratio is derived from actual ISO data from CAISO, NYISO, and PJM. Further, a near ideal "fast regulation" control signal is around 45 seconds -- anything faster than that is beyond the capabilities of the control signal (i.e. chasing noise, and perhaps counterproductive). A response time of, say, 4 seconds, is more than enough to correctly respond. Most of the sample data that I've seen shows control signals in the same direction roughly 2 to 5 times in sequence -- i.e. 90 seconds to 225 seconds. This *particular* application matches flywheels and Li-ion very well -- so the next question is cost, which I've already covered.

May 06 10:15 AM

[John Petersen:]

marketquant, your numbers appear to be significantly different from the pricing that Sandia published in a July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. I don't know what the right answer is, but if I was an investor in either company I would want to find out. The Sandia report can be found at

www.sandia.gov/ess/Pub...

May 06 10:59 AM

[marketquant:]

I've seen estimates (from EPRI) that show *projected* flywheel costs at around $1500/kWh for a 10MW commercial system (with $/kW power costs still high though) -- but no one has actually built one yet. I didn't think you were a fan of projected price reductions. :-)

Beacon has itself literally proposed a 20MW (5MWh) $50m plant in Stephentown, NY -- that's $10,000/kWh. Their cost goal is $25m by 2010. Their SEC filing says $60m for the first one.

(see page 7)
www.case.edu/energy/pd...

(see page 15)
www.scribd.com/doc/809...

(see page 6)
www.nyiso.com/public/w...

Lastly, re the SEGIS document, I have found that industry sources (EPRI, ISOs, KEMA) generally are better sources for cost data than government sources. The SEGIS doc footnotes say that they emailed some people to get their numbers. Anyhow, that SEGIS doc is a proposal to study the technology -- not the results from such a study.

May 06 01:19 PM

[John Petersen:]

marketquant, I'm no fan of anticipated major cost reductions for chemistry and raw materials. I'm a bit more flexible when it comes to cost reductions for physics because I've seen so many during my life. In any event, I think that trying to draw cost comparisons between two different but equally non-commercial technologies is a bit speculative to leave unchallenged.

May 06 01:28 PM

[marketquant:]

> two different but equally non-commercial technologies

Alti has *sold* two grid storage systems. One of them is performing commercial FR in the PJM for AES. The other is in MISO being offered to help MISO modify the control system for their new commercial FR market.

BCON has demonstrated its tech, but not gone commercial yet.

I don't think that the projected cost reductions for BCON are "physics" (or materials), but simply volume production -- they said so in their SEC filing.

May 06 02:05 PM

[John Petersen:]

Selling two devices for validation testing by a potential customer is not commercial production, particularly when the sales were made a year ago, the data gathering is ongoing and there have been no follow on orders.

I can also buy volume production as a contributor to substantial cost reductions as long as material costs don't represent 75% to 80% of product costs.

May 06 04:12 PM

[Speedspirit:]

John,

What is a ETF for this sector

May 06 04:23 PM

[marketquant:]

> validation testing by a potential customer
> follow on orders

I'll give you some ground there I suppose -- it has been almost a year. (But not too much ground of course!) The presentations to the FERC by AES about those devices (including the A123 models) has been impressive. They would lose a *lot* of credibility with the FERC and the ISOs for pressing for tariff modifications if they weren't a committed "potential customer" -- Hemphill of AES is on the Alti BOD after all.

So, it's probably not a question of will they order more, but how many? A measly amount? A blowout? At least Alti does not have an exclusive relationship and could sell to others potentially.

May 06 05:35 PM

[John Petersen:]

Speedspirit, my colleague Tom Konrad writes frequently about alternative energy ETFs. His author page is:

seekingalpha.com/autho...

marketquant, I like what Altair, A123 and Axion doing in the utility sector. From everything I've seen or read it's an immense market and battery systems that are carefully matched to load conditions can provide tremendous benefits in ways that most people can't imagine. My fourth Seeking Alpha article was "Grid-based Energy Storage: Birth of a Giant." It has a wonderful, albeit dated chart from Sandia that identifies the 2004 price break-points for various classes of storage and estimates the relative size of the markets at those break points. The numbers are mind boggling.

seekingalpha.com/artic...

Wired has just published a review of a year long study in Seattle about the performance of their fleet of Prius plug in retrofits that only averaged 51 MPG. The title of the article is "Plug-In Hybrids: More Hype Than Hope?"

www.wired.com/cars/coo.../

May 07 12:36 AM

[frflyer:]

The hype or hope article about PHEVS that you cited, also included the following.

"EV advocates are quick to note the Prius wasn't designed to be a plug-in hybrid, and in fact makes a lousy one. The biggest problem is the electric motor is too small, so the car relies more heavily on the gasoline engine. Cars designed from the ground up to be plug-in hybrids, like the plug-in Prius that Toyota is working on or the Saturn Vue plug-in – will almost certainly offer far better fuel efficiency."

On reading the article, I was a little confused about how they were measuring the mpg of the converted Priuses in the study. The claims often heard for PHEVs don't say you will get 100 mpg on a trip. They say that with enough electric only range for people to commute back and forth to work, they will end up doing 60% of their driving on battery power, with a resulting overall annual mpg of 100.
And one has to consider that the 30 miles, or whatever is the electric only range, is fueled by about $1 worth of electricity.

I also noted the anecdotal story in the last paragraph about the man who got 75mpg with his Hymotion conversion kit. And this on what is not the ideal test car, assuming the quoted paragraph above is correct.

Who was driving the cars? Was it typical commuting and less often longer distance trips? No. Since these were city fleet vehicles, they wouldn't be very good examples of the averege driver's experience.
That makes it a flawed study to my mind.

May 07 04:06 AM

[marketquant:]

Idaho National Labs has some data on plug-in testing (Urban and Hi-way standard driving schedules). In "charge depleting mode" these Prius conversions get very high 100+ mpg -- examples: A123 urban first 22 miles is about 150 mpg (page 9), A123 hi-way first 31 miles is about 100 mpg (page 10), Valence urban first 30 miles is about 135 mpg (page 11), Valence hi-way first 41 miles is about 100 mpg (page 12).

So if you stop after these "commutes" and re-charge for *hours* you'll get great mileage! It appears important to stay in "charge depleting" or "CD" mode to get the great mpgs. Alti's battery recharges in less than 10 minutes, so this might be of some value to certain potential customers who won't wait for *hours* to recharge (shameless plug).

May 07 07:37 AM

[marketquant:]

link
avt.inel.gov/pdf/phev/...

May 07 07:38 AM

[John Petersen:]

frflyr, I'll not argue that the Seattle experience is anything more than anecdotal. I will suggest, however, that the optimal results obtained through accelerated testing using professional drivers is nowhere near as useful as real time data generated by normal human beings under a wide variety of climate and topography is essential before we really know what the reasonably expected benefits will be. We humans are often careless and frequently stupid. We get instruction manuals and don't read them and if the instructions strike us as too restrictive we ignore them. But you can't promise Joe Lunchbucket 100 mpg and think he'll be happy when you tell him it's his darned fool fault that he only got 50 mpg.

marketquant, many thanks for the link to the slide presentation. I checked the INEL site earlier today and couldn't find it on my own. Thank God for readers who find this stuff as fascinating as I do. Most all of the latest generation batteries have ultra-fast charge rates and I think both A123 and Valence are claiming comparable prowess in that metric. I still have reservations about the feasibility of corner charging stations that use ultra-high power electric systems to move 25 kWh in the space of 10 minutes. One thing is certain, you'll never see me anywhere near their Self-Serve.

By the way, it's hard to call a plug shameless when your favorite is 1/3 the effective cost of Valence and 1/6 the effective cost of Ener1.

May 07 10:45 AM

[billymadisun:]

what group would mPhase/xdsl.ob be lumped into?

May 10 12:26 PM

[John Petersen:]

Ultra-low priced stocks that I can't comment on.

May 10 11:51 PM