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I was recently invited to prepare a memorandum on the battery industry for the electric mobility working group of the World Energy Council, a global thought leadership forum established in 1923 that includes 93 national committees representing over 3,000 member organizations including governments, businesses and research institutions. Since my memorandum integrated several themes from this blog and tied them all together, I've decided to publish a lightly edited version for readers. To set the stage for the substantive discussion that follows, I’ll start with an 1883 quote from Thomas Edison:

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 self-same thing. Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying.”

At the time, Edison was a customer who wanted to buy batteries to improve the reliability of the Pearl Street Station, the first coal-fired utility in North America. An essential truth even Edison failed to recognize is that battery developers don't lie, but potential customers consistently lie to themselves. They hear about gee-whiz inventions, overestimate the practical importance of the innovations and then make quantum leaps of imagination from the reasonable to the absurd. Therefore, the most important task for investors is to critically and objectively examine their own assumptions and avoid hopium induced hallucinations.

Cleantech, The Sixth Industrial Revolution

I believe we are in the early stages of a new industrial revolution, the Age of Cleantech. The cleantech revolution will be different from all prior industrial revolutions because the IT revolution forever changed a dynamic that has existed since the dawn of civilization. It gave the poor and the ignorant access to the global information network, proved that there was more to life than deprivation and sparked a burning desire for something better in billions of people who were once content with mere subsistence. Its long-term significance will be more profound than the discovery and settlement of North America.

The inescapable new megatrend is that six billion people have been awakened to opportunity and are striving to earn a small slice of the lifestyle that 600 million of us enjoy and typically take for granted. If the six billion are even marginally successful and attain a paltry 10% purchasing power parity, global demand for everything must double. Therefore, the most important challenge of our age will be finding new ways to satisfy insatiable demand for water, food, construction materials, energy and every commodity you can imagine.

The first and easiest step will be to eliminate waste in all its pernicious forms to make more room at the economic table. After that, the challenges become far more daunting.

The Everything Shortage

There is a widely held but grossly inaccurate belief that energy prices and CO2 emissions are the most pressing problems facing humanity. The reason is simple – in advanced economies everybody buys energy commodities in minimally processed form several times a month. Each of those purchases reinforces a belief that energy prices are an intolerable burden. While few of us purchase other minimally processed commodities beyond energy and food, the following graph compares the prices of non-ferrous industrial metals with the price of crude oil and highlights an inescapable and highly inconvenient truth that almost nobody understands ...

Metal prices are more volatile and increasing more rapidly than energy prices.

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To compound the problem, global production of energy resources is several orders of magnitude greater than global production of critical metals, as the following table based on data from the U.S. Geological Survey clearly shows.

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Metric tons per person vs. kilograms per person is an insurmountable disparity.

Most alternative energy and electric drive technologies can’t be implemented without large quantities of scarce metals. All of the metals in the table have critical competitive uses in other essential products and significantly increasing global production of any of them is problematic if not impossible. While improved recycling practices have the potential to help alleviate shortages of critical metals, a recent UN study of global recycling rates for 60 industrial and technology metals found that only 18 had end of life recycling rates over 50% while 34 had end of life recycling rates under 1%. The metals that are most important to alternative energy and electric drive are very difficult and expensive to recycle. So with the exception of lithium, which is a plentiful resource that only represents 5% or 6% of the metal content in Li-ion batteries, the world cannot produce enough technology metals to permit a widespread transition to alternative energy or electric drive.

Any alternative that can't be deployed at relevant scale isn’t an alternative at all. It’s merely an expensive distraction for the masses, a bit like the circus in ancient Rome.

The Diminishing Marginal Utility Of Batteries

Once you understand that metal supplies are far more constrained than energy supplies, every evaluation of electric drive becomes a simple exercise in optimizing the fuel savings from each unit of metal used. The five generic levels of electrification and the typical fuel savings at each level are summarized below.

Vehicle configuration Battery Savings
Stop-start systems use lead-acid batteries to eliminate idling while a vehicle is stopped but do not provide any electric boost. 1.0 kWh 10%
Mild hybrids like the Honda Insight use NiMH batteries to recapture braking energy and provide up to 20 or 30 horsepower of acceleration boost. 1.5 kWh 25%
Full hybrids like the Toyota (NYSE:TM) Prius use NiMH batteries to recapture braking energy, offer electric launch and provide up to 80 horsepower of acceleration boost. 1.5˚kWh 40%
Plug-in hybrids like the GM (NYSE:GM) Volt use Li-ion batteries to offer 40 miles of electric range before a range extender engine kicks in to power the electric drive. 16 kWh 75%
Battery electric vehicles like the Nissan (OTCPK:NSANF) Leaf use Li-ion batteries to offer up to 100 miles of electric range under optimal conditions. 24 kWh 100%

While NiMH has been the preferred battery chemistry for mild and full hybrids since they were introduced in the late 90s, it is a terribly resource constrained chemistry because the “M” most commonly used in NiMH batteries is the rare earth metal lanthanum. With per capita global lanthanum production running at a rate of 5 grams per year, significant expansion of NiMH battery production is effectively impossible, which is the main reason that Li-ion is gaining traction for use in electric vehicles. While not free from doubt, many industry observers believe NiMH and Li-ion will be the preferred batteries for full hybrids while mild hybrids will use NiMH, Li-ion and advanced lead-acid batteries.

There are important technical differences between the high-power batteries required for hybrid drive and the high-energy batteries required for electric drive. The differences, however, are relatively insignificant when it comes to raw materials requirements. Therefore, it’s not unreasonable to use battery capacity as a rough proxy for metal consumption in a fuel economy optimization analysis. The following comparisons assume that a new car with an internal combustion engine will use 400 gallons of fuel for 12,000 miles of annual driving. For the sake of simplicity, they assume a total of 96 kWh of batteries are available to reduce societal fuel consumption. The numbers are easily scalable.

  • 96 kWh of batteries would be enough for a fleet of 64 Prius-class hybrids that will each save 160 gallons of fuel per year and generate a societal fuel savings of 10,240 gallons per year;
  • 96 kWh of batteries would be enough for a fleet of six Volt-class plug-in hybrids that will each save 300 gallons of fuel per year and generate a societal fuel savings of 1,800 gallons per year; and
  • 96 kWh of batteries would be enough for a fleet of four Leaf class electric vehicles that will each save 400 gallons of fuel per year and generate a societal fuel savings of 1,600 gallons per year.

This example highlights the fundamental flaw in all vehicle electrification schemes. When batteries are used to recover and reuse braking energy that would otherwise be wasted, a single kWh of capacity can save up to 107 gallons of fuel per year. When batteries are used as fuel tank replacements, a single kWh of capacity can only save 19 gallons of fuel per year and most of the fuel savings at the vehicle level will be offset by increased fuel consumption in power plants.

Using batteries to enable energy efficiency technologies like recuperative braking is sensible conservation.

Using batteries as fuel tank replacements is a zero-sum game that consumes huge quantities of metals for the sole purpose of substituting electricity for oil. Since roughly 45% of domestic electric power is from coal fired plants and that percentage will decline very slowly, the only rational conclusion is that electric drive is unconscionable waste and pollution masquerading as conservation.

The Green Power Sophistry

EV advocates invariably paint an appealing picture of EVs being charged by wind or solar power and claim that the combination of the two is wondrous beyond reckoning. Beyond the impossibility of charging an EV from home solar panels and driving it to work at the same time, the reality is that the presumptive virtue of wind and solar power arises from generating green electrons, not using them. Once green electrons exist, it makes no difference whether they’re used to power an EV or a toaster oven. Since green electrons that are consumed in an EV can't be used to clean up a toaster oven, there can be no double counting of virtue. In fact, since wind and solar power impose their own burdens on materials supply chains there's a solid argument that the pretty picture is doubly wasteful.

The Fixed Cost Conundrum

In a conventional vehicle, the fixed vehicle cost is relatively low and the variable fuel cost per mile is relatively high. In electric drive the dynamic is reversed and the fixed vehicle cost is relatively high while the variable fuel cost per mile is relatively low. While few financial metrics are more shrouded in secrecy, intrigue and speculation than Li-ion battery manufacturing costs, A123 Systems (AONE) includes enough hard data in its quarterly and annual reports to the SEC to permit a reasonable estimate. The following graph compares A123’s reported quarterly revenue, its adjusted cost of goods sold (after backing out unabsorbed manufacturing costs) and the gross margin per kWh of batteries shipped.

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8.8.11 A123 Graph.png

A123’s direct battery production costs have averaged over $1,000 per kWh for the last two years. By the time A123 adds a reasonable profit margin for its effort and an automaker adds another layer of markup, the only possible outcome is an end-user cost of $1,500 per kWh or more.

Since most advocates insist that battery costs will decline rapidly, I’ll assume end-user battery pack costs of $1,000 and $500 per kWh to keep the peace. I'll also use several other charitable assumptions including stable electricity costs of $0.12 per kWh, no loss of battery capacity over time, no cycle-life limitations and a 15% second-life value. The following graph presents alternative gas price scenarios of $3, $6 and $9 per gallon, and then overlays depreciation and charging cost curves for an EV with a 25 kWh battery pack priced at $1,000 and $500 per kWh. The solid red and green lines show current gas and battery prices. The dashed lines show possible futures that are uncertain as to both timing and magnitude.

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6.19.10 Fuel Costs.png

The most striking feature of this graph is the shape of the curves. Where prevailing mythology holds that EVs will be wonderful for urbanites with short commutes that don't need much range flexibility, the curves show that high-mileage drivers who presumably need more flexibility will derive the most value. The reason is simple – spreading battery pack depreciation over 5,000 or even 10,000 miles a year results in a higher cost per mile than spreading that depreciation over 20,000 or 25,000 miles a year. Since the GM Volt has an effective electric range of 40 miles per charge and the Nissan Leaf has an effective range closer to 80 miles, it's clear that high mileage users will need to charge more than once a day to get the maximum benefit. Since nobody has claimed a useful life of more than about 100,000 miles for a battery pack, it seems likely that sustained and frequent recharging will impair the economics for high-mileage users who will need to replace their battery packs more frequently.

Moore’s Curse

The IT revolution set the stage for fatally flawed assumptions in cleantech because we all became accustomed to the phenomenon known as Moore’s Law, which describes exponential improvements in the speed and processing power of electronics. In the Moore’s Law world, electronic devices doubled their capacity every 18 to 24 months while requiring the same or smaller natural resource inputs. As a result, we’ve seen decades of falling prices for exponentially better products.

Unfortunately, Moore’s Law has no relevance to electric drive because the energy needed to move a given mass a given distance at a given speed is constrained by the laws of physics. Likewise, the number of electrons in a given mass of chemically active material is constrained by the laws of chemistry. These laws cannot be violated and in practice the theoretical limits can never be achieved. The best we can possibly hope for is highly efficient systems that take us most of the way there.

In the IT world of Moore’s Law the generational progression was 2, 4, 8, 16 etc.

In the cleantech world of Moore’s Curse the generational progression will be 50%, 75%, 87.5% etc.

The following graph is a bit dated, but it shows that current expectations respecting future advances in battery technology are completely out of touch with historical reality.

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8.19.11 Batteries.png

When Edison was complaining about batteries, specific energies of 25 wh/kg were common. A hundred and thirty years later specific energies of 150 wh/kg are pushing the envelope. A six-fold improvement over 130 years does not provide a rational basis for prevailing expectations.

Investment Conclusions

It's an Iron Law of Nature – things that can't happen won't happen. The world does not and cannot produce enough metals to permit the deployment of electric drive at a rate that approaches relevant scale. Chinese wind turbine producers are reeling from skyrocketing rare earth metal prices that are scuttling wind power deployment plans. Beijing is backing away from its aggressive vehicle electrification policies. If China can't make the numbers work in a command economy that produces over 95% of the world's rare earth metals, nobody can. The inescapable conclusion for investors is that resource dependent alternative energy and vehicle electrification schemes must fail.

Let's face it folks, it's time to kill the electric car, drive a stake through its heart and burn the corpse. Companies like Tesla Motors (NASDAQ:TSLA) are doomed because their vanity products can't possibly make a difference and have all the environmental and economic relevance of pet rocks. The only companies that stand a chance of long term survival are manufacturers of efficiency technologies that reduce aggregate resource consumption. If lithium-ion battery manufacturers like A123 Systems, Altair Nanotechnologies (NASDAQ:ALTI) and Valence Technologies (VLNC) can stop chasing rainbows and focus on sensible applications like electric two-wheeled vehicles that reduce natural resource waste, they may have long and prosperous futures. Manufacturers of fundamentally cheap energy efficiency technologies like Johnson Controls (NYSE:JCI) and Exide Technologies (XIDE) are certain to thrive in any event. The surprise winners in a resource constrained world will most likely be disruptive innovations like the PbC® battery from Axion Power International (OTCQB:AXPW) which uses a third less metal while promising a 10-fold improvement in battery cycle life to optimize the performance of efficiency technologies like stop-start systems, stationary applications and hybrid drive for everything from passenger cars to freight trains.

This article provides a summary overview of several topics I’ve examined in detail over the last three years. A complete archive of my work is available on Seeking Alpha. Most of the resource materials I’ve relied on are available through the numerous hyperlinks I’ve embedded in my articles.

Given the nature of the investing process I don't expect anyone to accept my logic without independently verifying the facts. I sincerely hope that this article will give at least a few investors reason to question their own assumptions in a hopium free environment. Most of us grew up in a rare period of privilege, prosperity and plenty that has seriously distorted our worldview. If we don't accept the reality that our supply chain assumptions are fatally flawed, we can’t possibly identify realistic solutions that can be implemented at relevant scale.

My perspective is very different from the views held by many alternative energy and vehicle electrification analysts. Some readers will no doubt find my thinking reactionary if not heretical. But even the Catholic Church requires a Devil's Advocate to argue against the canonization of proposed saints and gives that advocate fair and equal consideration before making a decision.

Disclosure:

Author is a former director of Axion Power International and holds a substantial long position in its common stock.

Source: It's Time To Kill The Electric Car, Drive A Stake Through Its Heart And Burn The Corpse