I hate being wrong, but Mother always taught us, "if you have to eat crow don't nibble."
In February 2010, I wrote an article - titled "Why I Don't Expect A Lithium-Ion Battery Glut" - that's shaping up as one of the worst predictions in the history of my blog. This week, Lux Research published a report titled "Using Partnerships to Stay Afloat in the Electric Vehicle Storm" that has me convinced that the capacity glut in lithium-ion batteries will be massive for at least a decade.
I humbly and sincerely apologize to any readers who bought shares in lithium-ion battery developers based on my starry-eyed optimism for the EV battery market.
The basic premise of my February 2010 article was that while plug-in electric vehicles would almost certainly die a slow and agonizing death from the congenital birth defects that have doomed every generation of EVs to the scrap heap of history, booming sales of electric two-wheeled vehicles, or E2Ws, and Prius-class hybrid electric vehicles, or HEVs, would be enough to absorb the slack. With eighteen months of history to look back on, it's just not working out the way I thought it would.
As I expected, plug-in vehicles are drawing breathless reviews from the press and EVangelicals, and indifference or outright scorn from the car buying public. Automakers are toying with plug-in vehicle concepts that may go into production over the next few years if the plans aren't scrapped due to customer apathy, but they're all rushing to make new fuel efficiency technologies like stop-start idle elimination standard equipment. With the exception of Advanced Battery Technologies (OTCPK:ABAT) which makes both ebikes and the batteries that power them, E2W manufacturers are letting their customers decide and the overwhelming majority of E2W buyers are voting with their wallets and deciding that cheap and reliable lead acid batteries are better suited to their needs despite a little extra weight.
Can you believe it? Cheap is beating cool. Who could have predicted such an outcome in the depths of the worst financial crisis since the 1930s?
In all seriousness, Lux forecasts a catastrophic supply and demand imbalance in the lithium-ion battery sector over the next decade. On the supply side it predicts that global manufacturing capacity will ramp to about 21,000 MWh by next year (875,000 Leaf-class BEVs) and climb to almost 30,000 MWh (1.25 million Leaf-class BEVs) by 2015. On the demand side, Lux's optimistic case based on $200 oil predicts annual battery sales of about 6,000 MWh in 2015 (250,000 Leaf-class BEVs) ramping to 22,500 MWh (937,500 Leaf-class BEVs) by 2020. Under their more conservative $140 oil price scenario, demand won't hit 6,000 MWh until 2020. The low oil price scenario is aggressively ugly. Is it any wonder that France has recently withdrawn €100 million of subsidized loans for a planned Renault battery plant?
The Lux forecast is bad news for diversified first tier manufacturers like LG Chem, GS Yuasa, SB LiMotive, AESC, and Sanyo; terrible news for financially sound second tier manufacturers like Toshiba, Hitachi, and JCI-Saft; and an "existential threat" for emerging third tier battery developers like A123 Systems (AONE), Ener1 (NASDAQ:HEV), Valence Technologies (VLNC) and Dow Kokam that were counting on transportation markets that are unlikely to develop.
Now you know why so many lithium-ion battery developers are suddenly talking trash about using their batteries for grid-scale storage. In the near future, that myth will be buried along-side its brother the electric car because the world's utilities can't possibly soak up 20,000 to 25,000 MWh per year of excess lithium-ion battery manufacturing capacity.
Last February, the Department of Energy released a comprehensive study on the economic potential of grid-based storage titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide." It was commissioned by the Energy Storage Systems Program and written by Jim Eyer and Garth Corey. Based on the conclusions of that study, which I discussed in "Grid-Based Energy Storage; A $200 Billion Opportunity," I cobbled together a table that identifies the principal grid-based energy storage applications, quantifies the potential national demand and quantifies the 10-year economic value for a kilowatt-hour of grid-based storage dedicated to an application. The table is mine, but the baseline numbers are Sandia's.
The color coding in the table represents my attempt to segregate system value per kWh into cool technologies like flywheels, supercapacitors and lithium ion batteries, which are highlighted in blue, and cheap technologies like flow batteries, lead-acid batteries, compressed air and pumped hydro, which are highlighted in yellow. If you total up the potential demand for all of the blue highlighted applications and throw in the orange for good measure, you get to a likely US demand of 11,500 MWh spread over a period of several years. It won't make a dent in 20,000 to 25,000 MWh per year of excess lithium-ion battery manufacturing capacity.
Like bloggers, outfits like Lux want every dark cloud to have a silver lining and their new report is no exception. In addition to forecasting doom, gloom and bust for the lithium-ion battery space, it focuses on the expected development of a $300 million annual market for supercapacitors in the transportation markets. In that market, Lux identified Maxwell Technologies (NASDAQ:MXWL) as the dominant competitor and took pains to observe that "For the numerous supercapacitor technology developers to gain market share in transportation, they will need to validate products with a clear edge over Maxwell's incumbent technology, and not rely on growing demand to create ripe opportunities for new entrants."
While I'm a fan of Maxwell's products and business potential, I'd be remiss if I didn't point out that its stock trades at 4.3 times book value and 3.3 times trailing twelve-month sales of $131 million. Even if you assume that Maxwell will walk away with the lion's share of the $300 million transportation supercapacitor market that Lux is forecasting for 2016, its upside potential will be limited as it negotiates the transition out of the valley of death and begins trading on the basis of sales, growth and profitability.
Disclosure: Author is a former director of Axion Power International (NASDAQ:AXPW) and holds a substantial long position in its common stock.