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Last week I stumbled across a disturbing quote from Thomas Edison that was published in February 1883.

"The storage battery is, in my opinion, a catchpenny, a sensation, a mechanism for swindling the public by stock companies. The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. ... Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying. ... Scientifically, storage is all right, but, commercially, as absolute a failure as one can imagine."

When I overcame my nausea and began researching the business dynamics of the day, several parallels between 1883 and 2010 emerged with striking clarity, providing a useful object lesson for investors.

Edison invented the light bulb in 1879 and established the first investor-owned electric utility in 1882. The Pearl Street Station began operations in September of that year, and Edison's primary concern was improving service reliability for 85 lamps in lower Manhattan. Battery backup was the logical solution, but the technology of the day couldn't stand up to the demands of a power plant. Battery manufacturers promised more than they could deliver and the consequence was a phenomenon I'll refer to as the Edison Blowback, a disillusioned and angry high-profile customer who said some really nasty things to the press.

Edison's disgust with the battery industry ultimately led him to develop a nickel-iron battery in 1901. It became the battery of choice for vehicular transportation until the first generation of electric cars drowned in a sea of cheap and plentiful gasoline. While I've found nothing to suggest that Edison mourned the death of the electric car when internal combustion engines established their superior economics, flexibility and usefulness, he was reportedly upset that nickel-iron lost out to lead-acid as the chemistry of choice for starter applications. After a long and storied history, the last U.S. factory for nickel-iron batteries was closed in 1975.

Our power infrastructure and transportation system might have evolved differently if cost-effective storage had been available in Edison's day. But he couldn't solve the problem and we had to find a workaround. A hundred and thirty years later, cost-effective large scale energy storage remains a seductive but highly elusive goal.

Today, as we stand at the dawn of the Age of Cleantech, large-scale energy storage is once again seen as a key enabling technology for wind and solar power, the smart grid, efficient transportation and a myriad of other applications. Once again battery manufacturers are focusing on overcoming technical hurdles that have thwarted researchers for over a century. Once again imagination is running wild with visions of instantaneous technical progress and immense commercial potential. Once again, it seems that battery developers are ignoring the cost and complexity of developing large scale energy storage solutions and promising more than they can deliver.

I guess Mark Twain was right when he quipped that "history doesn't repeat itself, but it does rhyme."

Until the 1970s, there were two common types of batteries. Rechargeable lead-acid batteries did the grunt work of starting cars and providing backup power while dry cells were used for flashlights, toys and transistor radios. Valve regulated lead-acid [VRLA] batteries were invented in the mid-70s and quickly became the preferred technology. They worked so well that R&D spending on lead-acid batteries collapsed. At about the same time, new rechargeable battery chemistries including nickel cadmium, nickel metal hydride and lithium ion emerged on the scene. Since advanced batteries had immense potential in portable electronics, R&D spending on those chemistries soared, particularly in Asia where the electronic devices were made. The trend continued through the turn of the millenium because lead-acid batteries were good enough for the work they needed to do while advanced batteries for portable electronics were not.

Over the last decade, a new dynamic emerged as people started coming to grips with the amount of energy they waste. Today we're witnessing a seismic shift in the energy storage sector because none of the technologies we used the past is cheap enough, durable enough, big enough or robust enough to meet the demands of an energy efficient future. In response to this market dynamic, companies throughout the energy storage sector have:

  • Launched new R&D programs to improve lead-acid batteries;
  • Refocused R&D to develop bigger and cheaper lithium-ion batteries;
  • Increased R&D on novel battery chemistries and nano-materials; and
  • Devoted new R&D resources to physical storage systems like compressed air and flywheels.

The challenge is a classic conflict between technology and economics. Cheap chemistries like lead-acid are not durable enough to serve the storage needs of an energy efficient future and durable chemistries like lithium-ion are not cheap enough. We desperately need disruptive innovation to fill the gap and the billion-dollar question is which outcome is more likely:

  • That a cheap and simple chemistry like lead-acid can be made more durable, or
  • That an expensive and complex chemistry like lithium-ion can be made cheaper?

If history is a guide, the safer bet is that the cheaper technology will progress more rapidly. The following graph is based on the work of Clayton Christensen and shows how disruptive technologies emerge, evolve and mature.



Disruptive Technology.gif

When you consider the natural evolution of disruptive technologies, factor in a 25-year period from 1975 to 2000 when lead-acid R&D was suspended while lithium-ion R&D was charging forward at breakneck speed, and consider the vast differences in raw materials requirements and natural resource availability, the conclusion that lead-acid is better positioned to fill the gap is persuasive, if not compelling.

We live in an age of distorted expectations that have arisen from a universally recognized need for cost-effective large-scale energy storage. Lithium-ion battery technology will undoubtedly progress, but it will progress more slowly than people expect and as the inevitable delays, cost overruns and disappointments accumulate, another Edison Blowback is a virtual certainty. Lead-acid battery technology will also progress, but that progress will come as unexpected good news to a public that has low expectations for the technology. In time, incremental improvements in both technologies will cover the middle ground and relative valuations will equalize.

Great investors avoid the herd and focus on undervalued companies with a bright future. Herd followers that pay premium prices too early don't fare as well. As the cleantech revolution unfolds I believe every company that brings a cost-effective storage solution to market will thrive. The big upside surprises, however, will come from the lead-acid battery complex including Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB).

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

Source: Energy Storage and the Edison Blowback: A Lesson for Investors