Seeking Alpha
Long-term horizon, nano-cap, micro-cap, alternative energy
Profile| Send Message|
( followers)

Last Tuesday a reader sent me a copy of "Ending the ICE Age," a new industry overview from Bank of America Merrill Lynch analyst Steven Milunovich on the future of plug-in vehicles, which the newly organized Electrification Coalition has christened grid enabled vehicles, or GEVs. After spending several hours studying the report I concluded that Mr. Milunovich has found the true religion of the new millennium while I'm still an unwashed pagan, or worse yet a heretic.

The grim reality is that when you look at American energy policy as a faith-based initiative, a new religion with its own rigid doctrine, dogma and ritual, it begins to make sense. It explains why our Secretary of Energy feels comfortable with a public comment that he's agnostic about natural gas. It also explains why the coastal waters of California and Florida together with huge swaths of Alaska have been forever consecrated as holy ground. It even explains why climatologists, eco-clerics and the fanatic faithful feel justified suppressing facts and ostracizing skeptics that call their world-view into question.

It's a 21st century version of the Spanish Inquisition and I have a front row seat. What fun!

The Milunovich report is the third bullish analysis of GEVs that I've reviewed since the beginning of October. The other two came from Credit Suisse and HSBC. All three reports wax poetic on the fuel savings and CO2 reduction potential of GEVs, all three assume that battery pack costs will fall from current levels of roughly $1,200 per kWh to something on the order of $500 per kWh over the next five to ten years, and all three warn that the GEV industry will not bear fruit unless lithium-ion battery developers can deliver on their promises to make cheap, powerful, durable and safe products. The fundamental problem with all three reports is they don't ask whether the premise of GEVs is reality, or blue smoke and mirrors. The only way to answer that question is with a spreadsheet that presents a side-by-side comparison of the alternatives. I'll try to keep it simple.

Reality vs. Blue Smoke and Mirrors

The best information I've been able to lay my hands on indicates that the capital cost of a new lithium ion battery plant is on the order of $1,000 per kWh of annual capacity. The following table provides a simplified analysis of the economic impact of a hypothetical $500 million plant. It provides a baseline column for conventional internal combustion vehicles, together with additional columns that allocate 100% of plant capacity to battery packs for Leaf class BEVs, Volt class PHEVs and Prius class HEVs. To minimize controversy, I've assumed that the batteries will cost $500 per kWh; every vehicle will travel 12,000 miles per year; every GEV will get 4 miles of electric-only range for each kWh of charge; and all GEVs will use electricity from utilities that emit the national average of 585 grams of C02 per kWh.

Economic Impact of $500 Million Lithium Ion Battery Plant
Production Capacity 500,000 kWh Per Year
ICE BEV PHEV HEV
Battery Pack Requirement 24 kWh 16 kWh 1.3 kWh
Vehicles enabled per year 20,833 31,250 384,615
Vehicle cost without batteries $20,000 $19,500 $21,600 $21,800
Battery Cost at $500 per kWh $12,000 $8,000 $650
Total vehicle sales price $20,000 $31,500 $29,600 $22,450
Annual Gasoline Use (gallons) 400 0 0 240
Annual Electricity Use (kWh)

3,000

3,000


Annual CO2 Emissions (metric tons) 3.7 1.8 1.8 2.2
Annual economic impact
Battery sales (000s) $250,000 $250,000 $250,000
Non-battery vehicle sales (000s) $406,250 $675,000 $8,384,615
Tax credits to purchasers -$156,250 -$234,375
Net economic impact $500,000 $690,625 $8,634,615
Annual Gasoline Savings (000s) 8,333 12,500 61,538
Annual CO2 Reduction (metric tons) 40,425 60,638 568,062

While the HEV values in the table are very attractive in the context of a gasoline fueled car, they get downright gorgeous if you take the analysis a step further and factor in the potential use of CNG as a substitute fuel in conventional HEVs.

Think about it – a CNG fueled HEV uses no imported oil and its carbon footprint is lower than a BEV that uses electricity from an average utility. The only significant drawback is an underdeveloped retail CNG distribution system but that impediment is relatively easy to solve since America's natural gas distribution backbone is pervasive, robust and far more modern than the electric grid.

When you calculate gasoline savings and C02 emission reductions per dollar of capital investment, no technology fares better than advanced lead-carbon batteries for start-stop micro-hybrids. To put things in perspective, a $500 million investment in plant and equipment for micro-hybrid batteries would permit the production of 7.5 million vehicles per year, generate roughly $1.9 billion in battery sales, slash gasoline consumption by 180 million gallons and reduce C02 emission by 1.7 million metric tons. In other words it is very likely that the $68 million in ARRA battery manufacturing grants that went to lead-carbon battery manufacturers will generate greater gasoline savings and C02 emission reductions than the $1.2 billion in ARRA grants that went to lithium-ion battery companies. This is not a question of faith. The numbers cannot lie and the magnitude of the differences is too big to ignore. If you really want to make a difference, you take the baby steps and harvest the low-hanging fruit first.

Nobody with a spreadsheet and a rudimentary understanding of mathematics can honestly argue that subsidizing batteries for GEVs will hold a votive candle to using the same funds to subsidize batteries for Prius class HEVs. Adding the cost of GEV charging stations to the abysmal economics results in a picture that nobody but the blindly faithful could love. I have no doubt that a variety of GEVs will be introduced over the next couple of years because that's what the new religion demands. For obvious reasons, I expect the phenomenon to be a flash in the pan.

The Hype Cycle

While I was doing my background research for this article, I came across a wonderfully informative graph titled "Hype Cycle of Emerging Technology" that TIAX LLC adapted from a Gartner Group concept and presented at the Plug-in 2008 conference. The graph is particularly useful for investors because in addition to showing how public perceptions of technologies develop over time, it shows how early stage markets for equity securities develop.

While TIAX suggested that PHEVs were approaching their peak visibility level in May 2008, I don't think we'll reach the peak until 2012 at the earliest. By 2015, when significant numbers of GEVs have been sold to consumers who discover to their chagrin that their oh so sexy GEV is little more than a 20 foot power cord connected to an expensive, temperamental and inflexible automotive supermodel that doesn't like heat, cold or hills, and has a nasty habit of taking several hours to recharge and refresh just when you need it most, we should be well into the trough of disillusionment.

I can almost hear the phone conversations now, "I understand that Johnny Jr. needs to see a doctor for that projectile vomiting thing but I just plugged my GEV into the charging station and I won't be able to get to the school for another four hours. Could you do your best to keep him comfortable, give him a book or maybe an aspirin and tell him that daddy will be there soon?"

I'm a big fan of hard-core economics. I have no fundamental problem with Government subsidies to manufacturers that support critical infrastructure and have a reasonable chance of accomplishing their stated goals. It's an entirely different matter when taxpayer money is used to subsidize luxury consumption. New factories make the economy richer if the fundamental business premise is sound. Eco-bling subsidies to the new faithful have no justification in sound public policy. We deserve better.

The supermodels of the energy storage sector including A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) are well up the hype cycle curve and approaching the Peak of Inflated Expectations. In contrast the stalwarts of the battery business including Exide Technologies (XIDE) and Johnson Controls (JCI), together with new technology entrants like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) that are developing disruptive enhancements to established battery technologies, are just approaching their technology trigger point. As stop-start and mild hybrid technologies become standard equipment on internal combustion engines over the next few years, I believe these overlooked low-priced companies with sustainable business models that work in the real world of pagans and heretics will sparkle.

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 a small long position in Exide Technologies.



Source: Lithium Ion Batteries and GEVs: False Gods for the New Millennium