Are Energy Storage Investors Chasing Their Own Tails?

I didn't learn about normal bell shaped curves in kindergarten but I developed a pretty solid understanding of the concept by the second or third grade because at report-card time A's were worth a quarter, B's were worth a dime and C's had no value at all. By the time I reached college I was chasing the right hand tail of the bell curve on my own initiative. Law school and the competitive nature of my profession merely pushed my drive for the right hand tail up a notch.

Old habits die hard, so I still tend to chase that right hand tail of the bell curve in almost everything I do. The only real exception is investing where 30 years of experience has taught me that the most successful companies are the ones that sell products to the 95% of the population that don't command $200,000 salaries. There are companies like LVMH that have a great business catering to the elite, but they're not in the same league as Target (TGT) and Wal-Mart (WMT).

The energy storage sector is undergoing an amazing metamorphosis as the market comes to the realization that a boring old-line industrial sector holds the keys to cleantech, the sixth industrial revolution. Storage isn't a sexy alternative energy technology in its own right; instead it's an enabling technology that makes other technologies more reliable, efficient and profitable. This dynamic has encouraged a different class of investors to investigate energy storage for the first time. Unfortunately most of the attention goes to technologies on the right hand tail of the performance and cost curves. In my view, this is precisely the wrong place for investors that want to position their portfolios for the coming of cleantech.

I love quarterly reporting cycles because they provide a great opportunity for a reality check. This quarter, the reality check is even more important because General Electric (GE) just announced plans to enter the energy storage business in a big way and manufacture sodium nickel-chloride batteries for hybrid locomotives and grid-connected applications. Their plan to make batteries that integrate well with their railroad and wind turbine businesses makes great sense. Their choice of a technology that currently falls into the "cool" category but has the potential to become very cheap speaks volumes about what GE thinks a reasonable price point will be. If any company on the planet has a good feel for what everybody needs and is willing to pay for, it's GE.

I first wrote about this theme in "Energy Storage Stocks: Performance, Cost and Bell Shaped Curves" and expanded on the topic in "Alternative Energy, Regular Guy Stuff and Rainbow Stew" and "Alternative Energy Storage: Cheap Will Beat Cool." I then spent months delving into some of the more mind numbing aspects of energy storage technologies and the companies that are developing them. In the process, my core thesis that cheap will always beat cool has been diluted by gee-whiz performance claims of exotic technologies that are too expensive for 95% of potential buyers.

To help remind readers what matters in business, I've put together a simple graphic that overlays an average of the DOE's estimated current and 10-year projected cost of various energy storage technologies on a normal bell shaped curve. In this particular graphic, there is no direct correlation between the background curve and the price points in the foreground. The curve does, however, help put the projected cost differentials into the context of a normal market.



Investing would be easy if the market prices of stocks were based solely on financial statement metrics. In the real world, however, the baseline financial values are impacted by a wide variety of intangible factors that increase or decrease the value of a going concern. The factors that are typically identified as important include history and experience, existing customer and supplier relationships, human and intellectual property resources and the potential for exceptional growth and profitability.

The following table compares the market capitalizations of the companies I track with their tangible financial statement values. The purpose of this presentation is to highlight the implied market value of the non-financial assets the various companies hold and help investors decide whether they believe the intangible premiums are reasonable.

			Market	Tangible	Intangible
	Trading	Recent	Capitalization	Value	Premium
	Symbol	Price	(Millions)	(Millions)	(Millions)
Cool Emerging Group
Ener1	HEV	$6.12	$694.51	$25.16	$669.35
Valence Technology	VLNC	$2.06	$252.87	($63.08)	$315.95
Altair Nanotechnologies	ALTI	$1.26	$117.37	$37.14	$80.24
Beacon Power	BCON	$0.75	$85.93	$22.12	$63.82
Cool Sustainable Group
Maxwell Technologies	MXWL	$8.90	$200.44	$37.11	$163.33
Advanced Battery	ABAT	$3.47	$183.29	$76.12	$107.17
Ultralife Batteries	ULBI	$7.35	$124.65	$43.28	$81.37
China BAK Battery	CBAK	$2.06	$118.84	$166.91	($48.07)
Hong Kong Highpower	HPJ	$2.16	$29.36	$15.84	$13.52
Cheap Emerging Group
Axion Power International	AXPW.OB	$1.40	$49.77	$6.14	$43.63
ZBB Energy	ZBB	$1.10	$11.68	$7.08	$4.60
Cheap Sustainable Group
Enersys	ENS	$16.00	$767.61	$258.33	$509.28
Exide Technologies	XIDE	$5.45	$411.36	$285.73	$125.63
C&D Technologies	CHP	$1.80	$47.33	($37.04)	$84.37
Active Power	ACPW	$0.54	$32.65	$18.75	$13.89

The numerical average of the intangible premiums the market has attributed to the 15 companies I track is $148.5 million. While it's easy for me to justify substantial intangible premiums for companies like Enersys that have stable operating histories, global customer bases and product lines that are affordable for everybody, I have a much harder time justifying huge intangible value premiums for emerging companies that have neither stable histories nor established customers and plan to manufacture products that 95% of the population can't afford, particularly when the 5% who can afford their proposed products may not want them.

These are treacherous times in the energy storage sector. The new investors who are investigating energy storage for the first time are generally early adopters like me who instinctively focus on the right hand tail of the bell curve. We get so enamored with the technical performance claims that we tend to forget the realities of a free market where the vast bulk of potential customers don't have the economic power to choose a cool solution over a cheap solution.

Mark Twain quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he just made the cheapest cars. Microsoft (MSFT) didn’t make the best operating system; it just made the cheapest operating system. In times like these I believe energy storage investors will be well-advised to heed the philosophy of the great value investor 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.

Otherwise, they may find that they're chasing their tails. Investors that want to develop an in-depth understanding of the issues and opportunities in the energy storage sector may want to consider attending Infocast's Storage Week in mid-July. The speakers list includes more than 80 thought leaders in the battery industry, the government, the utility and automotive industries and the research and development sector. They've even invited me to participate in three panel discussions. Hopefully I'll return from San Diego with investable insights that I can share with readers in future articles.

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

Comments

[Road Runner]

So GE is making sodium nickel-chloride batteries and not sodium sulfer batteries as reported earlier?

2009 May 18 09:02 AM

[John Petersen]

Road Runner, on Saturday morning I found the following reference that clarified the battery chemistry GE will be producing:

www.comsol.com/shared/...

The sodium nickel-chloride (a/k/a Zebra battery) still requires very high temperatures of roughly 550 F., but it's a bit cooler than the NAS. The DOE's SEGIS-ES price range on Na/NiCl goes from a current price of $800/kWh to a future price of $150/kWh.

2009 May 18 09:10 AM

[Road Runner]

GE seems to make smart decisions as to what markets and products to pursue. This battery is just one example. They are heavy into new economy energy products like wind turbines, high-efficiency jet engines, etc. When the storm is over with the big finance side of their house, I believe their stock will do well with their vast portfolio of solid, new economy products. Looks like Jack Welch left the company with good decision makers. That is why I am an investor with them.

2009 May 18 09:13 AM

[Road Runner]

Thanks much John. You are a great source of information.

2009 May 18 09:14 AM

[Windsun33]

The big problem with any of the sodium-nickel batteries is that they are grossly inefficient compared to other common batteries. Fine for locomotives where you can carry 12 tons of them, not so hot for cars.

Various types of hydroxide + nickel batteries have been around for over 100 years, and their efficiency has never gotten much above 65%.

2009 May 18 09:16 AM

[John Petersen]

Road Runner, in spite of what the critics suggest from time to time I try to be accurate. Sometimes I slip like I did with the initial report of NaS chemistry, but this is far too important of a subject for me to let errors stand.

Windsun33, your point is well taken and extends far beyond NaNiCl because every battery has both strengths and weaknesses which is why I keep reminding readers that we are ultimately going to need all of them, plus a lot more that haven't been invented yet. One of the market's biggest misconceptions is that a single chemistry or family of chemistries will satisfy all of our future energy storage needs. The reality is that each market niche will be a battleground and the winners will be selected based on their performance and cost-effectiveness in a particular application.

2009 May 18 09:34 AM

[Don Harmon]

Well said John. I guess we need to start using this moniker for the GE batts: Na/NiCl2

Additives such as sulfur, iodide and
fluoride play a crucial role in the performance of
the system. The cost of nickel metal has
increased sharply in recent years, and this has
had a considerable impact on the economics of
the system. The cost of the metal, the potential of
the redox couple, the solubility of the metal
chloride and the formation of a passive layer that
could limit the utilization of the metal are some
of the initial factors to be considered when
designing the system.

In short, there are a lot of factors when talking about any battery chemistry and none of them are "slam-dunks". ALL of them are expensive in many ways that the average customer can't begin to comprehend.

That said - I agree we need them all and others that haven't even been invented yet is we intend as a planet to make the leap away from fossil fuels and into a new electric age.

Don Harmon

2009 May 18 11:28 AM

[Windsun33]

And the more you get into batteries - or any storage -, the trickier it gets. For example, some folks have predicted that if we actually go into widespread production of Li-ion batteries, that a Lithium shortage will come back to bite us. And for some renewable sources, it may end up that some type of thermal storage is the best way to go, such as liquid metal or underground super-pressure steam.


On May 18 09:34 AM John Petersen wrote:

> Windsun33, your point is well taken and extends far beyond NaNiCl
> because every battery has both strengths and weaknesses which is
> why I keep reminding readers that we are ultimately going to need
> all of them, plus a lot more that haven't been invented yet. One
> of the market's biggest misconceptions is that a single chemistry
> or family of chemistries will satisfy all of our future energy storage
> needs.

2009 May 18 11:30 AM

[searcher]

It's human nature to fixate on an aspect of the model of a problem. If you don't come to a personal understanding of a problem you cannot address it. Fortunately, a diversity of informed investigation is evident in all these approaches. The constraints of time and place affect all our personal motivations. Let a thousand ....

2009 May 18 12:17 PM

[John Petersen]

Don and Windsun, one of my pet hopes is that eventually we'll get smart enough to use the energy stored a few miles under our feet in preference to energy from a giant ball of hot gas that hangs out about 93 million miles out in space, but the learning curve will take a while. In the meantime, I'm firmly convinced that we need to wake up in the morning, go to work with the tools we have and solve our problems to the best of our ability. The best part of GE's decision was the quote from Immelt who apparently said:

"We never think small about anything we do, and we’re not thinking small about where this technology goes and the impact it can have."

It's one thing for a blogger like me to say that energy storage is going to be an investment tsunami. It's another altogether when the quote comes from the top of GE.

2009 May 18 12:24 PM

[tireman63]

John,
In your second paragraph above, you mentioned selling products to people making less than $200k/year. An old master or retailing said something like this a long time ago "We make our money not from the lady arriving in the chauffeur-driven limo, but from the shopgirl riding to work on the subway." The old gentleman was right.

2009 May 18 02:00 PM

[William Taylor]

Batteries may be developed that can serve almost any need but they all have a large carbon footprint, a feature that may drive their price higher. Shortage of materials may also drive prices up and manufacturing costs associated with materials contamination and remediation will also be a cost factor.

2009 May 18 02:28 PM

[Old Wizard]

Another good article, John. I caution you not to be too exuberent about GE's announcement. Immelt's stuardship at GE has not been exactly a rollicking success. The stock price, net profit, dividend, and product market share on engines, appliances, lamps and even generators to a lesser extent has decreased during his tenure while the risk in GE capital has increased leading to a downgrading of GE's corporate bonds. Deals like the one made with Warren Buffet weren't particularly advantageous for existing stock holders. The announcement, while making some sense from their new thrust into the green energy era, seems to be playing more to the politics of the country. GE management is on the Obama team and has gotten guarantees that it can go to the Fed loan guarantee window as a back up to shore up the cash requirements in GE Capital. Given the bet Immelt has made on windmill farms, electric grid management and medical record computerization, he must support the administration programs and 100m is good pr. The only problem is that demand at this point is pretty much Gov. fostered and may or may not be real, take longer to develop so that break even can be realized and not represent what the 200k or less user wants, needs or can afford. For example, what real evidence is on the table that leads us to believe that the railroads of the world want to buy and can afford hybrid electric train engines that makes the investment viable and at what point would their new batery venture coincide with a real windmill market. The Gov.'s goal is to provide 20% of todays generating capacity from wind and solar by 2030. Is the payoff from this investment going to break even in the next ten years? If I were running the ship I would be more inclined to build train engines that ran on natural gas, but my measure of performance would be nearer term and not driven by as many unpredictable dependencies such as politics, speed of windmill facility installation, development of high temperature reliable and safe batteries, and the time horizon of when effective electric grid management from wind generated electricity of any magnitude is brought on-line.

2009 May 18 02:54 PM

[John Petersen]

William, batteries have no greater or lesser carbon footprint than any other manufactured product and once they exist, they have no carbon footprint at all. Depending on the chemistry you're talking about, the recycling programs vary from extraordinary for lead-acid to almost non-existent for li-ion.

Old Wizard, analyzing GE is far beyond my meager powers of observations, but hybrid locomotives are an extraordinary application for recuperative braking to save energy that's currently going to waste. My excitement comes from the fact that an elephant hunter is now roaming a sector that has long been thought of as rabbit country. I can say batteries are going to be big business and the market says "OK, we'll watch and see." Immelt says the same thing and gets an entirely different level of attention.

2009 May 18 03:13 PM

[Futurist]

The "elephant in the room" is the U.S. dependence on foriegn oil. One year ago it was all anyone talked about and now people don't even notice the elephant. GE is simply looking down the road at products that improve their particular product line. Immelt understands that oil demand can not fall fast enough to beat the peak oil point. Therefore, if a business is to survive in the next twenty years it has to sell products that reduce oil consumption.
John is correct in looking at an industry (energy storage) for investment that is slated to grow. No new invention can come on fast enough to take away all of the new growth in this area.

At todays prices GE or any other large industrial can buy ALL of the companies John listed in this article for 4 billion dollars. That includes a 30% stock appreciation price. It won't take to much longer for the huge industrial companies to be major players in this new world.

2009 May 18 04:14 PM

[Don Harmon]

Futurist, let's hope the big players do come in for the sake of the small innovative companies who have really "pioneered" the new technologies and deserve some support from the likes of GE.

Don Harmon

2009 May 18 04:21 PM

[Wisdom vs. Information]

old wizard, wind farms are cranking out power at $0.07/kWh without subsidies, i consider that working, and distributed power works even better in china with its weak grid. i will believe that smart grid tech saves as much power as it costs when i see it, but i have not seen any researchers say it will NOT work; since we lose 50% of generated power in transportation, it makes sense. i do not buy that immelt is obama's tool, and i think it is good that he is smart enough to finance new pregrams with (IMO stupid) subsidies that ignorant voters want

2009 May 18 04:25 PM

[John Petersen]

Futurist, I'm a firm believer in peak cheap oil and think we are heading back into the $80 to $90 range far faster than most would think possible. Nevertheless, storage is not something that a big company can just decide to get into unless it wants to buy one of the existing players. GE spent several years and about $150 million before it decided to go forward with NaNiCl. There are a lot of strong patent positions out there that provide meaningful protection to their holders. Last week I estimated the current market valuation of the US battery industry at about $5 billion. But since most of the companies are trading at 50% to 80% off their 12 month highs, I doubt seriously that there are many battery stockholders that would be impressed unless a suitor was willing to pay a very large premium. That being said, I agree with Don that there is plenty of room in the storage sector for a number of very large and successful companies.

2009 May 18 05:09 PM

[Don Harmon]

If we look at the Automobile and the Airline industries what we find is eventual consolidation and eventually global consolidation which means the best of the small entreprenurial bunch will be rewarded (as they should be) with a partnership agreement with the large cap companies such as Ge and even Google if you can believe that? GE already has a stake in A123 and why do you think they do? Because Immelt and his crew recognize a nascent technology market when they see one and they are the best at seeing one. When GE makes a move the market sits up and takes notice.

The forerunners in this new market are ripe for being now included in the big cap portfolios of companies that they will support and ultimately deliver returns on for their stockholders.

Look for some major plays in the energy storage market in the near future! I sure am.

Don Harmon

2009 May 18 05:22 PM

[billp37]

A handful of US battery makers is scrambling for government support ahead of a deadline this week as the US struggles to win back lost ground from Asian competitors in one of the world’s next important technologies.

The race is also the first test of how the administration will use the near-$190bn in stimulus money earmarked this year to support “green” technologies, from alternative fuels to energy-efficient building materials.

Advanced batteries are seen as a strategic technology, given their importance to electric and hybrid vehicles, and their military applications.

www.ft.com/cms/s/0/ef8...

We are becoming more convinced that there is a BTU in problem with what goes into energy storage.


Gasoline, regular unleaded, (typical) gallon 114,100 BTU = 1.00 gallon (typical)

Q How much does a gallon of gasoline weigh?

A 2.69 to 2.91 kg (5.93 to 6.42 lbs), depending on temperature, type and blend

114,100/ 5.93 = 19,241.15 and 114,100/6.42 = 17,772.59 which means that gasoline contains about twice as
many BTUs per pound a coal.

2009 May 18 05:44 PM