Last month the DOE released the 2009 Annual Progress Report for its Energy Storage Research and Development Vehicle Technologies Program. Like the 2008 Annual Progress Report I discussed in a February 2009 article titled DOE Reports That Lithium-ion Batteries Are Not Ready For Prime Time, this new report is a relatively upbeat assessment of lithium-ion battery research and development that once again provides a stark reality check for investors in energy storage stocks. In Section III of the Report, which focuses primarily on meat and potatoes issues like R&D objectives, technical barriers, technical targets and recent accomplishments; the DOE summarized the objectives and technical barriers as follows:
- By 2010, develop an electric drive train energy storage device with a 15-year life at 300 Wh with a discharge power of 25 kW for 18 seconds and a cost of $20/kw.
- By 2014, develop a PHEV battery that enables a 40 mile all-electric range and costs $3,400.
- Cost – The current cost of Li-based batteries (the most promising chemistry) is approximately a factor of three-five too high on a kWh basis for PHEVs and approximately a factor of two too high on a kW basis for HEVs. The main cost drivers being addressed are the high costs of raw materials and materials processing, cell and module packaging, and manufacturing.
- Performance – The performance advancements required include the need for much higher energy densities to meet the volume and weight requirements, especially for the 40 mile PHEV system, and to reduce the number of cells in the battery (thus reducing system cost).
- Abuse Tolerance – Many Li batteries are not intrinsically tolerant to abusive conditions such as a short circuit (including an internal short circuit), overcharge, over-discharge, crush, or exposure to fire and / or other high temperature environments. The use of Li chemistry in the larger [PHEV] batteries increases the urgency to address these issues.
- Life – The ability to attain a 15-year life with 300,000 HEV cycles or 5,000 EV cycles is unproven and is anticipated to be difficult.
The recent accomplishments section includes about 85 pages of discussion on 25 pending research, development, analysis and testing projects that are nowhere near complete. It's clear from the Report that the DOE is coordinating a massively complex and expensive drive to improve lithium-ion batteries to a point where they will be cost-effective in transportation applications. It's equally clear that the effort has a long way to go before we're able to accurately assess the likelihood that all or any of the pending R&D projects will result in innovations that can survive the transition from the laboratory bench to the factory floor. The R&D is critically important, but favorable results are not guaranteed, costs are likely to exceed budgets by a wide margin and timing is anybody's guess. The only certainties are it won't be soon and it won't be cheap.
When I started writing this blog, my central thesis was that energy storage is the beating heart of cleantech and is destined to become a major investment theme that will endure for decades. Storage is an essential, enabling technology for wind and solar power, an efficient smart grid and emerging transportation applications. It's also a difficult industry that's constrained by laws of chemistry, requires massive volumes of commodity raw materials and can only be described as capital intensive heavy manufacturing. That means we can reasonably expect steady incremental progress over a the long-term.
However, the game changing 'Moore's Law' type advances we've come to expect from information and communications technology are simply not going to happen in energy storage. To borrow a concept from John Mauldin, my favorite Seeking Alpha contributor, energy storage is a 'muddle through' industry that will progress in baby steps that take years, instead of quantum leaps that happen overnight.
When you cut through the happy talk and issue advocacy, energy storage is all about minimizing waste and making inherently variable energy sources more reliable. If waste is cheaper than storage, waste will be the rational choice for over 95% of the population who believe the green in their wallet is more important than the green in their cocktail party conversation. Given the nature of the industry, the law of economic gravity will prevail and the cheapest solution that can do the work will earn the lion's share of the market. The future of energy storage is bright, but it's going to be a long hard slog through the swamp and I can comfortably guarantee that we'll never see teenagers on Sunset Boulevard popping the hood to show off and compare their battery packs.
One of the most difficult parts of blogging on the energy storage sector is explaining that when it comes to investing, entry price and timing are the only things that matter. My favorite example is one everybody knows. I've been a Macintosh user since 1988 and had countless arguments over the years about the technical superiority and ease of use of the Mac OS. The contrary argument, of course, was that products from Apple (NASDAQ:AAPL) were too expensive compared to budget priced products that used Microsoft's (NASDAQ:MSFT) operating system. Over the last few years Apple products have surged to the forefront as they pared prices to more competitive levels and continued their tradition of technical excellence. The following chart from Yahoo! Finance shows the 25 year comparative stock market performance of the two companies.
Click to enlarge
As a computer user, I've always insisted on owning Apple. As an investor, the better path would have been to own Microsoft for the first 19 years and then shift to Apple for the last six.
In the long-term, I expect every company that brings a cost-effective energy storage product to market to have more business than it can handle. For the next five to ten years, I expect the biggest gains to accrue in companies like Enersys (NYSE:ENS), Exide Technologies (XIDE), C&D Technologies (CHP), ZBB Energy (ZBB), and Axion Power (NASDAQ:AXPW), that make objectively cheap products today to satisfy immediate needs.
When, and if, advanced battery developers like A123 Systems (AONE), Ener1 (NASDAQ:HEV), Altair Nanotechnologies (NASDAQ:ALTI) and Valence Technologies (VLNC) succeed in their individual and collective efforts to make objectively expensive products affordable, portfolio adjustments to reflect the new realities will be essential. But if Apple vs. Microsoft teaches anything, it's that cheap beats cool until cool becomes cheap. Promises don't matter. Price tags do.
Last year I said that I'm a simple-minded creature and believe that little things like costs and benefits matter. When the brand new annual progress report from the DOE concludes that:
- Lithium-ion batteries will not be cost-effective in HEVs unless somebody finds a way to slash costs by 50%; and
- Lithium-ion batteries will not be cost-effective in PHEVs unless somebody finds a way to slash costs by 67% to 80%;
I believe them. When I combine the DOE's conclusions with a recent opinion from the National Research Council that the DOE's price objectives "beyond 2012 are extremely aggressive and are unlikely to be reached by the target date or even for a significant time beyond" cruel reality seems obvious: lithium-ion batteries are still not ready for prime time and the plug-in vehicle frenzy is leading investors and the public down a garden path that can only end in disaster like most technology du jour schemes that are conceived in the halls of government and then sold to the public as the next big thing, including:
|25 years ago||Methanol|
|15 years ago||Electric Vehicles|
|10 years ago||HEVs and Electric Vehicles|
|5 years ago||Hydrogen Fuel Cells|
|3 years ago||Ethanol and Biofuels|
|Today||PHEVs and Electric Vehicles|
|2012||Here Be Dragons|
Will Rogers said , "There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves." Albert Einstein reportedly defined insanity as doing the same thing over and over again and expecting different results. When will investors learn that technical hype originating from government with a chorus of support from heavily subsidized companies rarely works out well?
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and owns a substantial long position in its stock. He also owns small long positions in Exide Technologies (XIDE), C&D Technologies (CHP) and ZBB Energy (ZBB).