On EESAT and Energy Storage Opportunities on the Smart Grid

Last week I appeared as a luncheon speaker at EESAT 2009, a biennial international technical conference sponsored by the DOE, Sandia National Laboratories and the Electricity Storage Association that focuses on storage technologies for utility applications. The conference included dozens of high-level technical presentations from storage technology developers and was far and away the best-organized event I've ever attended. The only notable absence was a large contingent of buyers, which left some participants wondering whether they were preaching to the choir. Nevertheless, I was encouraged by rapid growth in the number and size of utility-scale demonstration projects and the growing body of proof that storage will be a critical enabling technology for the smart grid. I left Seattle more convinced than ever that the opportunities in grid-based energy storage are huge, but that successful investing will require study, patience, diligence and a firm grasp of economics.

The theme of my presentation was that some developers of energy storage devices are destined to follow in the footsteps of Arkwright, Fulton, Vanderbilt, Carnegie, Rockefeller, Ford, Moore, Gates, and Brin, and become the next generation of industrial legends for one simple reason: we're entering an era where 500 million people in North America and Western Europe can no longer lay claim to the lion's share of global resources because the other 6 billion inhabitants of our planet know for the first time that there's more to life than mere subsistence. While each of them may only want a small piece of the pie, the law of large numbers will give rise to explosive increases in global demand for everything and the only way to avoid armed conflict or catastrophic environmental damage is to minimize waste in all its forms, beginning with energy.

On the cautionary side I returned often to the unpleasant reality that most grid-connected storage applications won't pay under current economic conditions because the spread between the cost of storage and the value of storage remains narrow. That cost-benefit equation is changing rapidly as energy costs rise and renewables are added, but as long as waste is cheaper than storage, waste will prevail. The following graph comes from a November 2004 presentation (.pdf) by John Broyes of Sandia National Laboratories that provided an overview of the DOE's Energy Storage Systems Program. The chart focused on the California utility market and showed the clear inverse relationship between the installed cost of energy storage systems and total demand for those systems. It merits more than a passing glance from investors who want to know where the business is (see p. 11 of the presentation for an expanded version).



While the graph contains a wealth of information on the wide variety of potential uses for storage in the utility market, the most important lesson for energy storage investors is price sensitivity. When total installed costs for energy storage systems are $1,000 per kW or higher, demand for storage is almost insignificant. As installed costs fall into the $600 per kW range, the number of cost-effective utility applications soars. I've been told that an updated version of the graph is in the works and will be released shortly. You can bet that I'll be among the first to write about it.

There were several EESAT presentations that focused on important but expensive frequency regulation technologies that are priced beyond the high-range of the graph. Over the last year, demonstration systems from Beacon Power (BCON), Altair Nanotechnologies (ALTI) and A123 Systems (AONE) have shown a remarkable ability to respond to regulation signals in microseconds and provide up and down regulation at speeds that traditional systems can't even begin to match. Based on estimates from the PJM Interconnection, one of the independent system operators that manage the U.S. grid, national demand for frequency regulation installations is on the order of 6,000 MW and could be much higher if flywheel and battery systems prove capable of handling longer duration load ramping intervals. The ongoing tests are not conclusive because the new systems have not been in service long enough to establish their useful lives, but the preliminary results are promising.

There were also several EESAT presentations that dealt with more mundane energy storage applications that were priced in the mid-range of the graph. Those projects ranged from the use of flow batteries at cellular telephone installations in Africa to a recently completed 12-year demonstration where Exide Technologies (XIDE) used lead-acid batteries to effectively eliminate the need for diesel fueled backup power on a remote island where the primary power source was renewable. Yet another presentation showed how computer analysis of satellite maps was being used to identify new locations in Ireland for pumped hydro, a technology that generally falls in the low-range of the graph but is commonly believed to have limited potential because most of the desirable locations are already developed.

Overall, the most important takeaways from EESAT were that from a utility perspective:

• Storage is the economic equivalent of a dispatchable generating asset;
• Installed cost and reliability will be the primary drivers of decisions to implement storage solutions;
• Maintenance and cycle life will be secondary decision drivers;
• An optimal smart grid configuration will need storage equal to at least 5% of peak system load; and
• As renewables become prevalent, storage will become increasingly critical to grid stability.

In Energy Storage on the Smart Grid Will Be 99.45% Cheap and 0.55% Cool, I explained that the required annual storage build in the State of California was estimated at 500 MW per year for the next decade. 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. When the California numbers are scaled up to a national level, they translate to billions in new annual demand for as far as the eye can see. When you add in billions in new demand for transportation, it's clear that the sector isn't even close to ready for the near-term demands. To compound the problem, essential raw material supply chains aren't ready either.

In preparation for my EESAT presentation, I spent a good deal of time analyzing how the energy storage industry of today is different from the industry that existed a few years ago. My most important conclusion was that energy storage devices are rapidly evolving from minor components in high-value durable goods to stand-alone end user products. As a result, the cost of energy storage is rocketing from less than 5% of product cost in the case of portable electronics to more than 50% of product cost in the case of an EV like the Tesla roadster. When you get into the utility arena, the storage devices are the products and represent 100% of the product costs. Since consumers generally have higher payback expectations and shorter investment horizons than utilities, I believe consumer price sensitivity will be very high notwithstanding the current flood of optimistic stories, speeches and reports from the mainstream media, politicians and environmental activists.

While some of the stock market valuations in the energy storage sector reflect the emerging reality that energy storage is and will remain a highly price sensitive product, others do not. As a result, we have a weird market dynamic where Enersys (ENS), the world's largest manufacturer, marketer and distributor of industrial batteries, trades at a 50% discount to a newcomer like A123 Systems (AONE); and Exide Technologies (XIDE), the world's second largest manufacturer of OEM automotive batteries, trades at a 28% discount to a newcomer like Ener1 (HEV). While the valuation disparities might be justified if either of the newcomers had a technology that would displace the established leaders or significantly erode their revenues or margins, that outcome can't be expected in the foreseeable future because the newcomers are focused on far more expensive products for markets that don't even exist yet.

Over the last fifteen months I've written 92 blog entries that focus exclusively on the energy storage sector; the established and emerging energy storage technologies; and the principal competitors in the industry. My recurring simple hypothesis has been that cheap energy storage will beat cool energy storage in the market and that companies that manufacture objectively cheap products will experience far more rapid and sustained stock price growth than companies that are developing objectively expensive products. Over that time, my personal trading account that includes Active Power (ACPW), Enersys (ENS), Exide Technologies (XIDE), ZBB Energy (ZBB) and Great Western Minerals Group (GWMGF.PK) has gained over 300%. Nevertheless, I think I've finally reached a point where I've said most things that can be said. Accordingly I plan to slack off a bit and write in response to current events instead of trying to maintain a regular schedule.

Over the next decade, I believe that every energy storage company that brings a product to market will have more business than it can handle. Nevertheless, I believe that companies that have attained lofty market valuations based on ambitious plans to develop exotic products are likely to trade flat or decline in price while the companies that have less ambitious goals and less expensive products have substantial upside potential.

My favorite short-term holding is ZBB Energy (ZBB) because its ZESS 50 and ZESS 500 flow battery systems are market ready and carry an attractive mid-range price while its market capitalization of $15.3 million is but a small fraction of the peer group average. My favorite mid- to long-term holding is Axion Power International (AXPW.OB) because its first generation PbC batteries are in production and have been delivered to select end users for testing, the PbC battery promises a cheap solution for a wide variety of mundane energy storage applications and Axion's market capitalization of roughly $80 million is well below the peer group average.

The only thing that will prove me right or wrong is time.

DISCLOSURE: Author is a former director of Axion Power International and has a substantial long position in its stock. He also has small long positions in Active Power, Enersys, Exide Technologies, ZBB Energy and Great Western Minerals Group.

Comments

[PhreddyPhert]

VERY interesting... your articles seem extremely well researched, wide ranging and future focussed. As you say: "The only thing that will prove me right or wrong is time."

2009 Oct 16 06:30 AM

[jerrydd]

Your line that 'what was missing was buyers' is telling. Facts are we already have enough grid to handle the load. How many blackouts have you heard about this summer?

Nor is there much of a market until energy prices go back up for a while which will take a few yrs in the electric market as there are so many sources of electricity and far more ways to stop wasting it, lowering demand. Facts are even before the recession we used less electric that before that.

RE is not a grid problem except for distant wind, solar farms. Spread out home size units average out so no storage is needed.

Nor are EV's going to be in any real number for 4-5 yrs. Only Nissan has plans for large scale production soon. The others will do very small numbers for as long as they can get away with it. Car companies do not like EV's. PHEV's as they last too long and need few parts, service.

Advanced lead better be only 50% more expensive than regular lead or it won't be viable. Utility size lead only costs about $60/kwhr. Home size only $100/kwhr. So unless carbon/lead or others can beat that and I don't think they can, they are not going to make it.

2009 Oct 16 08:46 AM

[Franklin76]

In the analysis for $/kW in the chart how is that calculated for batteries and how do you account for cycle life etc. Is this $/kW over a specific service life?

For instance, industrial lead-acid batteries run ~$100/kWh for a 35Wh/kg VRLA and have PD of ~150 W/kg. So the cost is only $23/kW but it's good for only 300 cycles.

The A123 M1 cell runs ~$1200/kWh, has 105 Wh/kg and 3000 W/kg or is $42/kW but lasts 1000 cycles.

Thanks,
Franklin76

2009 Oct 16 09:12 AM

[Dave Marsh]

One of your previous articles had a graph showing projected storage demand by type, and it showed the greatest future growth in flow batteries and ultra capacitors. Investors seem to have bought into the ultracap idea in a big way, as evidenced by Maxwell's meteoric rise, especially in the last two months. So I took the flow battery route and bought ZBB, thinking their day would surely come. Well it hasn't, yet, and it barely trades at all some days. Any thoughts on why ZBB, and for that AXPW, just aren't attracting much volume at all, though AXPW is "sort-of" on the radar now, post-XIDE deal?

2009 Oct 16 09:19 AM

[John Petersen]

PhreddyPhert, one of my biggest reasons for slowing down a bit is a desire to remain fresh and not re-till the same fields. If you ever find yourself with questions on the energy storage sector, you'll probably find an answer and a third-party link in one of my archived articles. They're all available by clicking the link under my picture at the top of the page.

Jerrydd, there are lots of folks at the DOE and Sandia who would disagree with your assessments of need and future growth rates. Utilities live in a world of complex Federal regulation and a plethora of local utility commissions. Storage does not fit conveniently into any of the regulatory cubbyholes that have been created over the years. While it's true that the utilities have usually done a pretty good job of keeping the lights on, the grid is currently operating on a razor's edge during peak demand periods and when bad things happen, they're very bad. Without rapid deployment of grid based storage, satellite pictures like these will become far more common.

www.noaanews.noaa.gov/...

There are apparently discussions in several quarters over the need for "storage portfolio standards" like many States have already adopted for renewables.

2009 Oct 16 09:27 AM

[John Petersen]

Franklin, the underlying Broyes presentation does not get into the detail of how the costs of various systems will be calculated, but you can rest assured that the cost-benefit analysis will look at a period of years and make appropriate adjustments for energy and power curves and also replacement cycles. The Exide project I referred to used the same lead-acid batteries for 12 years and saved $8 million in fuel costs for a $2 million installation. So I wouldn't get too attached to absolute cycle-life numbers like 300, 1,000 or even 20,000. It all depends on design parameters that are far too detailed for a blog like mine.

Dave, ZBB was one of those companies that started losing ground right after its IPO and has pretty-much fallen off the radar screens. It's IPO came out at $6 in mid-2007. It's been hanging around at about 20% of the IPO price for the last year in spite of some very positive business developments. The last company I saw in that position was ACPW which I bought at $0.26 on Christmas Eve and which closed at $1.24 yesterday. ZBB's day is coming, but I'd be reluctant to say what the triggering event will be or how long it will take. One of the biggest challenges for any small company is developing name recognition. You'd be amazed at the number of people who attended EESAT and thanked me for taking the time to raise public awareness of the sector in general. Until very recently, storage has been thought of as a boring rust belt sector and nobody paid any attention. That dynamic is changing rapidly.

2009 Oct 16 09:45 AM

[captainccs]

If you wait for a brown-out to start doing something about it, you'll have guaranteed blackouts before you solve the problem.


On Oct 16 08:46 AM jerrydd wrote:

>
> Your line that 'what was missing was buyers' is telling. Facts are
> we already have enough grid to handle the load. How many blackouts
> have you heard about this summer?
>

2009 Oct 16 09:50 AM

[captainccs]

How soon will ZBB run out of cash? Reminds me of the dot-com no-revenues-but-great-... bargains. ;)

I just don't see investing in any energy related company that is not currently making a profit. I'll leave that to the VCs.

2009 Oct 16 09:58 AM

[John Petersen]

captainccs, ZBB had $3 million in cash at year end (6/30) and has raised $2 million more since then. While it's still losing money, it's operating expenses are very small and its marketing partner Eaton is monstrous large. When I was a much younger lawyer, a wise old mentor once quipped that "Small companies are like small children in third-world countries. They rarely die of starvation but frequently die of dysentery." Twenty-five years later, I understand the wisdom well.

2009 Oct 16 10:09 AM

[andrewjmcd]

Any news from CHP/firefly technology?
When is the trials expected to be completed?

Thanks,
Andrew

2009 Oct 16 10:15 AM

[William Taylor]

As you know, John, I am a fan of BCON but I am getting a bit hesitant as I don't see much progress. I am wondering if they have a chance in this game based on their low carbon footprint and the fact that they seeming require virtually no maintenance as opposed to battery systems which degrade, need replacement and maintenance.

I think that grid operators are conservative buyers, particularly of any new technology like flywheels, and that the path to acceptance will be difficult for BCON but I am hoping that the fact that they are probably the "greenest" technology will overrule cost difficulties.
As you sure that, factoring in maintenance and replacement costs for batteries, that flywheels are not in the financial ballpark? Thanks for your work, it helps push away some of the fog of uncertainly for many of us.

2009 Oct 16 10:38 AM

[Ed C.]

John, as always, you have written an excellent, well-researched article. Regarding the 2004 Sandia chart - how does storage duration factor into the graph? If an energy storage system were designed for 1 kW for 1 hour vs. 1 kW for 8 hours, the price would vary dramatically, and I'm not sure how to read the chart to account for that? Thanks.

2009 Oct 16 11:07 AM

[John Petersen]

Andrewjmcd, I've not seen anything new from Firefly and the deal is too small to meet a materiality standard for C&D, so they really don't have anything to talk about. But like I said, there should be a large market for any improved devices that come out over the next decade and Firefly's technology certainly fits that mold.

William, I was rough on Beacon early on because its market cap in the summer of 2008 seemed a bit on the high side. I would not dismiss the potential of flywheels because even 6,000 MW of regulation translates into a very respectable market if regulation services are worth $250,000 to $500,000 per MW/year.

There are a number of good things that play in Beacon's favor over the long term. First, while the frequency regulation market is not as big as some of the others, proving the usefulness of flywheel systems in load ramping could be far more significant. Second, it's easier to get big improvements in systems like flywheels that rely on the laws of physics instead of the laws of chemistry. Finally, their strategy seems to be build a few installations, prove their financial merit and then open the technology to utilities that want to buy their own systems instead of merely paying for services.

I continue to believe the only way to play the sector is through diversification. As humans we're always looking for the single silver bullet and that just won't exist in storage. We need them all and a bunch of stuff that hasn't been invented yet.

2009 Oct 16 11:29 AM

[John Petersen]

Ed, the chart talks about installed cost per MWh. So if you had a $4 million per MW NAS battery with a 7 hour discharge cycle like the ones from NGK Insulators, the cost per MWh would work out to roughly $600 per KWh. Likewise, if you had a $500,000 per MW lithium-ion battery with a 15 minute discharge cycle, the cost per MWh would be closer to $2,000.

2009 Oct 16 11:35 AM

[jerrydd]

On Oct 16 09:27 AM John Petersen wrote:

> Jerrydd, there are lots of folks at the DOE and Sandia who would
> disagree with your assessments of need and future growth rates.

The difference is I live in the real world and they don't. Fossil Energy is about to skyrocket which will make it more profitable to conserve, more eff or switch to another fuel or RE. Basically fossil fuels are going up and RE equipment is going down. And our national security, economy needs it to happen.

DOE is for unsurprisingly nukes as their budget 70%? subsidizes nukes.

If Sandia was for RE they would design, test a 3kw solar CSP unit that only cost $3-4k. It's only a 5hp solar engine, 3kw alternator and a 200sq' trough collector and would supply all the power, heat many eff homes would need, even get a check back from the utility. This one unit of which we need 50 million could be 10-20% of our energy problem solution and create many jobs, building, installing, maintaining them. So even at $8k almost all your energy needs for under $8k for 50 yrs is a deal. Payback in 2-5yrs.
Here is a start up to do that, waste heat engines and biomass. Can be fueled by most anything
cyclonepower.com

Wind generators now cost $2k/kw with inverter. Google Axial Flux wind generator

So no the grid will not be larger as plenty of people soon will be making their own because it is cheaper and never going up in price. We will need less grid but smarter. Now add eff buildings, eff retrofits and demand drops. And this will happen because it's cheaper than paying for energy. It's $.25/kwhr standard rate in some markets. There home storage would be very profitable.

Utilities
> live in a world of complex Federal regulation and a plethora of local
> utility commissions. Storage does not fit conveniently into any of
> the regulatory cubbyholes that have been created over the years.

I agree. I think the first market will be home units, storing the household's daily supply needed at night cheaply to power it during the day/peak/expensive hours. This can be done in most any home, business and cut your bill by 50% in many areas.


> While it's true that the utilities have usually done a pretty good
> job of keeping the lights on, the grid is currently operating on
> a razor's edge during peak demand periods and when bad things happen,
> they're very bad. Without rapid deployment of grid based storage,
> satellite pictures like these will become far more common.
>
> www.noaanews.noaa.gov/...

This hasn't been much of a problem for yrs after that last large blackout many yrs ago, the FERC bit down hard on the utilities to keep enough peak power on hand.
Especially now with all the NG plants which can be throttled and smaller, works as well as storage.

>
> There are apparently discussions in several quarters over the need
> for "storage portfolio standards" like many States have already adopted
> for renewables.

I'd bet among those making storage equipment especially!!

Don't get me wrong, I think storage, EV's and RE are going to be big but not yet. I've been around this since 70 and seen al this before. It will take 4-5 yrs to get it going enough that it makes a difference so those should pick their energy stock very carefully as too many won't make it.

The reason EV's won't be a problem is many of them will be the grid storage system in 10 yrs. They will charge off peak and put power back into the grid as needed during the day since each already has a 50-200kw inverter easily matched to the grid.

As far as real investment, people might want to build their up their own RE generation for investment income. Used wind generators from upgraded wind farms can be very inexpensive to reinstall, make money from for 15-30 yrs. And very profitable if near a good market. Not profitable like near hydro, etc so check your rates first and RE laws.

2009 Oct 16 11:42 AM

[Mayascribe]

John: Great summation of your trip along with investing angles, combined with a new slant. As you know, I have shares in Exide, Axion, and Active Power. Although I sold off much of the Active Power after the recent huge surge, and will reaquire after the stock settles.

My e-gamer plan right now is all about oil and junior miners, and a few H1N1 stocks, with a small smattering of other stocks.

I'll keep track of the batt sector by maintaining ownership of the above batt stocks, and your terrific columns. Currently, unless some accelerating event occurs, I believe the short term dough needs to be planted in the other above sectors. Long term, though, the energy storage sector will go from rust belt thinking to glitz and glam thinking.

Again, good article. Glad for your safe return!

2009 Oct 16 12:48 PM

[John Petersen]

Mayascribe, take a closer look at ZBB because I think it's my next four bagger (already there with ENS, XIDE and ACPW). Maybe Jack will get something fun posted over the next couple days.

2009 Oct 16 12:59 PM

[Dave Marsh]

Well John, right after your response to me about ZBB and your mention of it being your near-term choice in the sector, it shot up 10% on >100K volume. Coincidence, or correlated, it's nice to see.
Also, you may have noticed the go-ahead for BCON's 20MW frequency reg. project in NY was announced this morning.

2009 Oct 16 01:23 PM

[John Petersen]

Dave, I've been writing for 15 months and have never seen any evidence that my opinion (good or bad) can move a market. That's why I created my own little trading account last December so that I'd have something concrete to point to. About the only thing I know that my work does for certain is raise the profile of a group of 15 small companies that I follow, and that's a benefit for the entire sector.

I'm delighted to see the barriers falling for Beacon. It's working on an important technology that needs to be built, thoroughly tested and documented, just like a half-dozen other companies I could name off the top of my head. This sector, but my mother always told me that the shorter trees either had to grow or die, but as long as you were diversified enough to take a couple deaths the odds were pretty good that you'd get some real growers.

2009 Oct 16 01:49 PM

[Mayascribe]

Will do, John. Is there any reason you think the stock's going to bust out soon?

2009 Oct 16 02:18 PM