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In the last couple of months, electric cars from Tesla Motors (NASDAQ:TSLA) have had three collision-related battery fires that were widely covered by the media. Last week, the NHTSA decided to conduct a formal investigation of these incidents. While Tesla's CEO Elon Musk immediately went on the offensive arguing that Tesla's BEVs have a lower fire risk than gasoline powered cars, the question an increasing number of investors are asking is "Why has Tesla had three battery fires in a fleet of 17,000 BEVs while Nissan hasn't had any fires in its fleet of over 90,000 BEVs?" The answer is simple. Tesla's battery decisions significantly increased battery risks for both the customer and the company.

My primary resource for the discussion in this article is a 2012 study published by the National Renewable Energy Laboratory titled "Vehicle Battery Safety Roadmap Guidance." Since the roadmap provides far more scientific detail than most investors need or want, I'll focus on the general themes that impact investment risk and leave the electrochemical and engineering minutiae for professionals.

The generic term "lithium-ion battery" includes at least a half-dozen varieties that range from relatively safe iron phosphate formulations to relatively unstable cobalt oxide formulations. I use the word relatively because no lithium-ion battery is 100% safe. All lithium-ion batteries will burn if the cell is punctured. In general, fires resulting from a punctured cell are the least violent. Lithium-ion batteries can also ignite spontaneously if debris left over from the manufacturing process pierces a 15- to 25-micron separator and creates an internal short circuit. In those cases, which are referred to as "field failure events," the internal short circuit ignites materials inside the cell and causes internal temperatures to spike to a few hundred degrees centigrade in seconds. At that point, the cell ruptures feeding additional oxygen to the fire. In rare unexplained cases, internal temperatures to spike to a couple thousand degrees centigrade in seconds, which suggests that thermite reactions might be taking place.

The failure mechanisms in lithium-ion batteries are not well understood because it's darned near impossible to extinguish a lithium-ion battery fire. In the event of a fire, the best first responders can do is try to cool the surrounding pack to keep the fire from spreading. What we do know is that punctured cells react less violently than cells that have a field-failure event and that field failure events are less violent than other failures that some experts attribute to thermite reactions.

Since the thermal energy released by a burning lithium-ion battery is up to three times greater than the electrical energy the battery could release in a normal discharge cycle, cell punctures and field failure events can be a very big deal as increased temperatures in one cell propagate to adjacent cells causing them to go into thermal runaway. The phenomenon is like lighting one side of a matchbook on fire. Once the first one goes, the others are sure to follow. One recent Tesla fire in Yucatan Mexico was captured in a YouTube video that shows how the process of lithium-ion battery fratricide unfolds in a large battery pack. The video begins with what appears to be a modest fire in a couple of punctured battery modules. As the temperature builds, other modules reach the thermal runaway point and explode. During the grand finale, several modules join the party and explode at the same time. If the incident didn't involve a $100,000 car and a real life accident, it would be a great special effect for Hollywood.

Tesla's first risky battery choice was picking cells with high energy density and a less desirable safety profile than the low energy density cells chosen by all of the other automakers.

Its second risky battery choice was ignoring the laws of large numbers.

Field-failure events are very rare and while I haven't been able to find detailed statistics for the 18650 cells Tesla buys from Panasonic, the NREL report noted:

"Field failures arising from manufacturing defects that cause internal short circuits have very low probabilities of occurrence (estimates for 18650-size cells that fail catastrophically are 1 in 10 million cells to 1 in 40 million cells). While this may be reassuring for manufacturers of portable electronics, EV and HEV battery packs may have thousands of cells and up to 1,000 times more stored energy, making even this small failure rate unacceptable."

The battery pack in a Tesla Model S uses about 7,000 high-energy 18650 cells that are more prone to field-failure events than safer lithium-ion chemistries. Since each cell in the battery pack represents an independent field failure risk, the risk of a catastrophic field failure event at the battery pack level is:

  • One in 1,429 if you assume a 1 in 10 million risk at the cell level;
  • One in 2,857 if you assume a 1 in 20 million risk at the cell level; and
  • One in 5,714 if you assume a 1 in 40 million risk at the cell level.

Some of the more troubling aspects of the NREL report included observations that:

"When discussing battery safety, it is important to understand that batteries contain both an oxidizer (cathode) and fuel (anode as well as electrolyte) in a sealed container. Combining fuel and oxidizer is rarely done due to the potential of explosion (other examples include high explosives and rocket propellant), which is why the state of charge (SOC) is a very important variable. Lower SOCs reduce the potential of the cathode oxidizing and the anode reducing. Under normal operation, the fuel and oxidizer convert the stored energy electrochemically (i.e., chemical to electrical energy conversion with minimal heat and negligible gas production). However, if electrode materials are allowed to react chemically in an electrochemical cell, the fuel and oxidizer convert the chemical energy directly into heat and gas. Once started, this chemical reaction will likely proceed to completion because of the intimate contact of fuel and oxidizer, becoming a thermal runaway. Once thermal runaway has begun, the ability to quench or stop it is nil."

"Although much study has gone into understanding and modeling the lifetime of cells with aging, little work has been done on the effects of aging on thermal stability and abuse tolerance."

"USABC goals, in line with the DOE research program for HEVs, are a calendar life of 15 years for HEVs and 10 years for EVs. A cycle lifetime of up to 1,000 cycles at 80% depth of discharge is also required. Little or no safety testing has been performed on cells approaching these lifetime limits. There are valid concerns about the stability of the active materials, separators, and possible reactions involving new degradation or contamination products."

"(H)igher energy cells have a stronger response to abuse events and usually have poorer safety performance."

Batteries in an electric car are maintained at a high state of charge to maximize driving range. Unfortunately, that practice also maximizes the potential for a field failure event. Since Tesla wanted its cars to have the longest possible driving range with the lowest possible battery weight, it chose a relatively unstable high-energy battery chemistry while its competitors who make electric cars with shorter ranges chose safer and more stable chemistries. Since Tesla wanted to keep its battery costs low and take advantage of a global capacity glut for 18650 cells, it decided to use 7,000 small format cells in its battery pack while more experienced automakers paid premium prices for large format automotive grade cells that reduce the impact of the law of large numbers.

All of Tesla's public talking points on the three fires focus on the collision-related nature of the battery pack failures. The statistics in the NREL report indicate that a catastrophic pack failure rate of 1 in 6,000 would be just about right if Tesla was using a safer low-energy chemistry like lithium iron phosphate.

If the NHTSA concludes that the fires were attributable to Tesla's risky choices of high energy density batteries in 7,000 cell packs instead of road debris, the impact on Tesla will be life threatening. The current market price of Tesla's common stock does not, in my opinion, reflect this real and substantial short-term survival risk.

Source: Understanding Tesla's Life Threatening Battery Decisions

Additional disclosure: I am a former director of Axion Power International and hold a substantial long position in its common stock. I currently serve as executive vice president of ePower Engine Systems, a privately held company that's developing an engine-dominant series hybrid drivetrain for heavy trucking.