Energy Storage on the Smart Grid: 99.45% Cheap and 0.55% Cool

Infocast’s Storage Week was all I had hoped it would be, and more. While I thoroughly enjoyed serving on three discussion panels and was warmly received by roughly 250 attendee...[T]he most important value for me came from the opportunity to hear four days of high-level presentations by industry executives, national thought leaders and policymakers who repeatedly stressed that:

• From a utility perspective grid-based energy storage is the functional equivalent of an instantly dispatchable generating asset;
• The combination of wind assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
• The combination of solar assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
• When it comes to grid-connected energy storage, cost, reliability, maintenance and cycle life will be the primary decision drivers.

Consensus was that an optimal smart grid configuration will need storage capacity equal to at least 5% of peak system load and areas that rely heavily on intermittent renewables like wind and solar will need a higher capacity to maximize the value of those assets.

In the example of California, the required annual storage build was estimated at 500 MW per year for the next 10 years. Of this total, 50 MW would need to be fast storage in the form of flywheels and Li-ion batteries and the 450 MW balance would be 4 to 6 hour storage in the form of pumped hydro, compressed air, flow batteries and advanced lead acid batteries.

The following table assumes that fast storage for frequency regulation will have an average discharge duration of 15 minutes and load shifting storage will have an average discharge duration of five hours. It shows how the aggregate annual storage build for both California and the U.S. as a whole will break down in terms of both MW of dispatchable power and MWh of stored energy.

State of California	MW	Percent	MWh	Percent
Annual Fast Storage Build	50	10.00%	12.5	0.55%
Annual Load Shifting Build	450	90.00%	2,250	99.45%
Nationwide (8x California)
Annual Fast Storage Build	400	10%	100	0.55%
Annual Load Shifting Build	3,600	90%	18,000	99.45%

Using a quick and dirty pricing metric of $1 million per MW for fast storage devices including flywheels and Li-ion batteries the annual revenue potential of $400 million is impressive. Using an equally quick and dirty pricing metric of $500,000 per MWh for load shifting storage, the annual revenue potential of $9 billion is mind-boggling.

In the fast storage space, the leading contenders are Maxwell Technologies (MXWL), a leading manufacturer of supercapacitors; Active Power (ACPW), which builds low-speed flywheel systems for industrial power conditioning and UPS applications; Beacon Power (BCON), which builds high-speed flywheel systems for utility frequency regulation and recently snagged a DOE loan commitment for a 20 MW fast storage demonstration project; Altair Nanotechnologies (ALTI), which has built and deployed 2 MW of fast storage that is currently being tested by a major utility; and A123 Systems, which has also built and deployed several MW of fast storage for utility customers in the U.S. and overseas.

In the load shifting space, the leading contenders are Dresser Rand (DRC) which builds above ground compressed air systems, ZBB Energy (ZBB), which builds zinc-bromine flow batteries; lead-acid battery manufacturers like Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP); and innovators like Axion Power (AXPW.OB) which is in the early stages of demonstrating the capabilities of its lead-carbon storage technologies.

The broader market has not yet come to grips with the realities that:

• The combination of wind and storage yields better returns than wind as a stand-alone;
• The combination of solar and storage yields better returns than solar as a stand-alone; and
• While the fast storage developers have been grabbing all the headlines because of the push to develop PHEVs and EVs, the manufacturers of cost effective load shifting systems will lay claim to well over 90% of the anticipated revenue.

As investors in the $100+ billion wind and solar sectors come to understand the critical need for storage to maximize the economics of those intermittent renewables, interest in the $2 billion storage sector will surge. As storage sector investors come to understand the critical need for cost-effective load shifting storage, interest in established manufacturers of less glamorous technologies will also surge. It all goes back to my fundamental premise that for the next decade, cheap will beat cool.

I'm in transit from California to Europe and won't have access to electronic copies of the Storage Week presentation materials for a few days. So I apologize for the dearth of links to source materials. When those materials become available, I'll follow up with a more detailed series of articles that get into the grittier questions of which companies are best positioned to capitalize on explosive growth in both fast and load-shifting grid based energy storage.

For the first time in my career, I find myself on the leading edge of a trend that will be larger than most investors can begin to imagine. It's going to be a fun decade for investors who position their portfolios early because events like Storage Week and the anticipated IPO from A123 Systems are rapidly sending a clear signal to the broader market.

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 a small long position in Exide (XIDE), Active Power, Enersys and ZBB.

Comments

[ari5000]

If you're right about the macrotrend, some of these stocks have very big upside.... because most of the two year charts have been horrifying to long term investors.

Past is the past though. Very informative article. Batteries just don't have the same sexy street appeal as solar panels and wind farms. Might be slow to catch on with the herd.

2009 Jul 19 09:22 AM

[D. McHattie]

Another great article, John.

But I noticed that, though you mention ENS in the article, you did not disclose your position in the company as you usually do. Was that an oversight?

2009 Jul 19 09:31 AM

[John Petersen]

ari5000, I'd normally agree that it may take a while for the market to tune in but I see the upcoming A123 IPO as a watershed event. I think they're likely to get a big ATVM loan and a big ARRA battery grant. If that's the case, they'll need to raise something on the order of $600 million to pay their cost shares and provide working capital. Their last round of private financing was priced in the $9 range and they've got 70 million common equivalent shares outstanding. When I put it all through the sausage grinder, I see a post-money IPO valuation approaching $2 or perhaps $2.5 billion.

An IPO of that magnitude would be a sea change event. It would also generate a lot of sector interest among the bottom fishers who will start searching for other stocks in the same sector that might be undervalued. In other words, the IPO market is ultra-trendy and there is never just one. They come in series and each new offering builds on the excitement of the last one. So I think of A123 as being the equivalent of the first major solar or wind IPO - the beginning of a monster wave that's going to rock the entire marina.

D.McHattie, thanks for a great catch! I filed this article from the road and altenergystocks.com inserted the disclosure paragraph for me. I do in fact have a small position in Enersys (ENS) and also have small positions in Active Power (ACPW) and ZBB Energy (ZBB). I've sent a note to Seeking Alpha asking them to update the disclosure paragraph.

2009 Jul 19 09:59 AM

[engstudent]

Hi John, nice article. I was talking to one of the top US wind guys last week and he was dismissive of the economics of storage, so it's interesting to hear the other side.

I know from Ireland's perspective we plan to reach 40% wind by 2020 with no new storage. We plan to use wind in combination with fast response Open Cycle Gas Turbines (OCGTs) and interconnection to the UK.

I look forward to the details on the economics.

2009 Jul 19 10:02 AM

[John Petersen]

engstudent, the point that kept coming up during Storage Week was that storage is far faster and roughly half the all in cost of OCGTs. The point was made by both Ali Nouri of AEP and Imri Gyuk of Sandia. The synergies between storage and both wind and solar came from a presentation by Janice Lin of the California Energy Storage Alliance. The basic premise is that wind is most effective as a power source during the night and the peak in solar production is about 4 hours earlier than peak demand. So using storage to shift excess off-peak production to peak hours does wonderful things for both the cost effectiveness of intermittent renewables and the stability of the grid.

I'm supposed to be getting electronic copies of the Storage Week presentations within a few days and will try to make selected material available to readers if I can get the presenter's permissions.

2009 Jul 19 10:17 AM

[DRich]

Great article & Thank to you for all the links over the year. The Sandia test really gave the validation of this 5 yr. old obsession and got me thinking of investing in the full package. Being a believer that cheap wins with customers everytime. I thought that old-made-new again was the way, but couldn't justify my instincts. I was very interested to see results from emerging technology I could believe in.

Most of the discussion to date in your articles comment sections has been about PHEV, L-ion (neither of which peak my interest,though I'm invested) and major national grid applications (also invested in). The link is driving me crazy. Being a rural Texan (with all the stubborn, obnoxious independance that entails), I, my neighbors, and investing friends want to live off-the-grid as soon as possible. We still want the Grid as our UPS system, but ....

For major Utility installations the conversion of low voltage storage systems into the "smart" grid transmission seems to be covered by all the usual player suchas Eaton(ETN), International Business Machines(IBM), Emerson Electric(EMR), Siemens AG(SI), Johnson Controls(JCI), Honeywell(HON), and the like. All good companies and I would not hesitate to reccomend any of them, but they are too diversified and solutions too costly to have upside specific to this investing thesis. Most of the world doesn't have a mature or even an existing electrical grid. Our thesis is that the real upside to renewable energy is in these undeveloped places and the return of rural life that our kids and grandchildren will experience. I'm a believer that this urban sprall that is the USA will start to fade in the next fifty years and am looking out that far for investing beyond my lifetime. I know it's too soon to know but the local energy source is a today problem for us. That is why the link between our renewable sources and the house is a problem. Hell, our little co-op even tried to get A123 to install a household test at our expense just because their system uses Energy Conversion Devices(ENER) laminate, one my favorite companies, and we would be able to see what I don't fully understand in action. They thought us crazy and inefficiencies of cost were nutty even to me.

My question to you and this site would be: What might be an investable company that can invert low voltage storage into household existing energy?

Chinese & Indian companies can do this now, but I don't understand either countries bookkeeping/finacial structure well enough. The major industrials are too costly and nonspecific. I'm just driving myself nuts with the large number of smaller companies that are mostly private. Thought??????

2009 Jul 19 02:58 PM

[Mayascribe]

Have a safe trip home, John.

What do you know about NAATBatt? This emerging Kentucky-based alliance (National Alliance for Advanced Transportation Batteries) are aggressively postioning themselves for an inside track on getting some of Obama-bucks.

Seems there are quite a few companies around here in Philly that are competeing in this challenge to raise some government money: FYI-->> International Battery, Inc., C&D Technologies, Enersys, East Penn Manufacturing Co, Inc., and Lithium Technology. Also some biggies like FMC and Airgas.

Good article, again. It's fun to read about the future of the Grid.

But I think I need "patience" pills.

2009 Jul 19 03:15 PM

[John Petersen]

DRich, you're a bit out of my depth when you get into inverters and control electronics because that's a whole other animal. One of my personal favorites in the storage space is ZBB Energy and I suspect that you too may find it attractive because they're working on smaller storage batteries (50kWh to 500 kWh) that provide several hours of discharge at low voltages. Much of their attention is devoted to off-grid and end-of-grid applications for small towns that don't want to keep a generator running 24/7. Their financial position is both solid and liquid. Moreover, they've recently partnered with Eaton for distribution. The nicest thing is a market capitalization in the $11.5 million range despite the fact that the peer group average is more like $80 to $90 million.

The link to the Edgar website with all their recent reports is

www.sec.gov/cgi-bin/br...

The company's website is

www.zbbenergy.com/

2009 Jul 19 03:18 PM

[John Petersen]

Mayascribe, between expectations that the DOE will likely make its preliminary decisions on the ARRA battery grants this month and that A123 is angling for a mid-September IPO, I'm not sure how much patience will be required. I'm not entirely sure how NAATBatt will work in practice because I have a hard time envisioning its members joining hands and singing folks songs as they freely share IP and facilities, but building a shared battery plant that everybody has access to makes more sense in many respects than redundant facilities for single companies. Regardless of how it turns out though, I think the ARRA battery grants go to individual companies and NAATBat is a stand alone that will require separate legislation. The FOA for the ARRA grants simply doesn't fit for a NAATBat kind of organization.

2009 Jul 19 03:24 PM

[flywheel niche]

BCON flywheels are the most niche and have the most upside.

2009 Jul 19 06:18 PM

[Mayascribe]

Thanks!

To catch you up on a piece of news that seems to have escaped mainstream reporting is that beginning August 2nd, the Chinese citizens will no longer have to go through the Central Bank to make foriegn investments. This could be huge support for the dollar--something the Chinese so desperately need.

Considering China's zeal for rare metals, I'm thinking your pal Jack Lifton might be a little bifurcated about this news, as he might be a little happier when he reads or learns of this--for his Avalon shares-but he might also be concerned for the USA in that some private Chinese citizens might follow their government's lead and be after those mining companies that produce the rare metals, as well as American gold miners.

I have no idea how this will affect the battery biz for us shareholders, but if they throw a billion or two into battery stocks (along with the DOE monies), I'll take it.

2009 Jul 19 10:06 PM

[William Taylor]

I am with BCON too. I have seen their wheels work and it is really something. Their almost zero carbon footprint and 20 year life will be a big plus. Batteries are a toxic mess, dirty to make and dirty to get rid of with a limited working life.


On Jul 19 06:18 PM flywheel niche wrote:

> BCON flywheels are the most niche and have the most upside.

2009 Jul 19 10:46 PM

[John Petersen]

There are a lot of companies out there gunning for the fast response frequency regulation niche including Beacon, Active Power, Altair, A123 and others so while I like Beacon's high speed flywheel solution and enjoyed meeting Mr. Capp at Storage Week, it would be dangerous to assume that any company will be the only competitor in a particular niche.

2009 Jul 19 11:30 PM

[Doctor Strangelove]

From a Deutsche Bank research report: "SMA Solar Technology AG (SMA) is the world’s leading producer of photovoltaic (PV) inverters with technological leadership, a comprehensive product portfolio and a global footprint with local presence in key PV markets".

Market cap : 1.9 billion Euros (about 2.65 billion USD). It is listed in the German market. Ticker: Yahoo: S92.F, Bloomberg: S92 GY. I think the ADR trades on the pink sheets as SMTGF.PK


On Jul 19 02:58 PM DRich wrote:
> My question to you and this site would be: What might be an investable
> company that can invert low voltage storage into household existing
> energy?
>

2009 Jul 20 02:56 AM

[flywheel niche]

I disagree. Regarding flywheels only BCON can do it on a Mega -Watt level. DOE backing is big deal. Their are also many applications including Military. BCON is also working with the U.S Navy. However their is plenty of room for multiple
storage tech. Thanks for covering the storage sector in general.

On Jul 19 11:30 PM John Petersen wrote:

> There are a lot of companies out there gunning for the fast response
> frequency regulation niche including Beacon, Active Power, Altair,
> A123 and others so while I like Beacon's high speed flywheel solution
> and enjoyed meeting Mr. Capp at Storage Week, it would be dangerous
> to assume that any company will be the only competitor in a particular
> niche.

2009 Jul 20 08:24 AM

[John Petersen]

Flywheel, the grid cares about electrons and nothing but electrons. High speed flywheels are one way to fast response electrons and batteries are another. In general flywheels can deliver them a bit faster and batteries can deliver bigger volumes. It would be dangerous to assume than any company has anything approaching a monopoly position.

2009 Jul 20 09:03 AM

[ari5000]

taking a little profits on XIDE today -- will get back in.

I'lll watch ZBB, BCON -- but I agree -- none of these unprofitable co's have a lock. They ride and fall on risk appetite... much better to use some TA when trading those. XIDE is just a core holding until 2010

2009 Jul 20 10:43 AM

[John Petersen]

Nobody ever lost money by leaving something on the table for the next guy, but I am curious. What do you mean by TA?

2009 Jul 20 11:04 AM

[ari5000]

technical analysis --- The antithesis of what you (research and knowledge)

BCON bounced off the 200 day MA, but is trapped by the 50 day MA. If the IPO does spark interest again in these names, BCON might run to 1.10 where it failed before.

XIDE for example, runs into its 200 day MA at 4.29 and will probably fail as it's a bit extended.

But all Technical Analysis is 1-part observation, 1-part voodoo horseshit -- so I like to mix it with research, or rather scour the 'nets for thoughtful commentary. For some reason, people who trade the charts tend to dismiss FA and value investors scoff at the chartists... seems to be no one I've seen that integrates the two.

In general, the markets are very extended here - and since all markets tend to be 100% correlated these days... I'm expecting a 5% pullback and I can rebuy XIDE, for example, at 3.80.

Wall Street loves a good story though. When 'batteries' makes the front page of the WSJ or ABC report -- all these names go up 10% together, regardless of value.

But I could be wrong... it appears there is very little that can push the markets down these days.

2009 Jul 20 11:17 AM

[Mayascribe]

Well John, I have finally started accumulating shares of your favorite company!

Congratulations again of providing your groupies with a whole year (plus) of great articles!

2009 Jul 20 12:01 PM