Lithium-Ion Batteries and Centerfolds: The Final Chapter

by: John Petersen

I’m convinced that energy storage is going to be the next major investment trend and I have a very bullish outlook for the entire sector. My rationale is simple. As industrialized nations switch from fossil fuels to inherently variable alternative sources like wind and solar power, robust dispatchable energy storage will become essential to insure that electricity continues to flow at the flip of a switch. The only other options are more coal fired power plants or an unstable grid that suffers from increasingly severe disruptions when variable power supplies fail to mesh with variable power demands.

When I began studying the storage sector almost five years ago, I was amazed at the complexity and scope of the problem. While my simple mind was looking for a silver bullet solution, I quickly learned that there is no single technology that can solve all energy storage problems. Instead, there are a multitude of technologies that can each solve part of the problem. That’s why professionals believe a comprehensive solution will require a multi-pronged approach and something north of a trillion dollars in energy storage investment.

While I am not an engineer or a power professional, I have almost 30 years of experience in representing companies that raised money from investors and then either succeeded or failed based on their own merits. The following is a short list of experience based rules that I use as guideposts when considering a new client engagement, and I believe investors ought to at least consider before making an investment in the energy storage sector:

  • A rising tide lifts all boats but the greatest percentage gainers are boats with low profiles. In market terms, the best way to capitalize on a major long-term trend is to buy unloved stocks with low analytical ratios and avoid the current market darlings.
  •  In knowledge-intensive industries, significant performance gains and cost reductions arrive with each new generation of products. But Moore’s law does not apply to materials-based industries and without heavy R&D spending, modest performance gains and cost reductions are the best one can hope for.
  • A business plan that does not work without governmental incentives describes a business that does not make sense. With due respect for good intentions, Congress almost never gets it right when it comes to business and energy policy because there are too many conflicting special interests.
  • Reliable current access to cheap raw materials does not provide any protection from future price increases or raw material shortages, particularly when essential raw materials come from overseas.
  • A PhD working in a well-equipped laboratory can always generate test results that are vastly superior to the best results one can expect from a factory staffed by high school graduates; which is why R&D companies rarely survive the transition from research to manufacturing.
  • Scientists who invent technologies are almost always incapable of commercializing them because there is invariably something new to investigate, improve or refine.
  • Environmental protection is a fun topic for conversation and polite debate, but green products must be priced competitively or they will never take substantial market share from cheaper alternatives.
  • A well-run factory in North America or Europe will not be cost competitive with an identical factory in Asia that produces a similar product using similar manufacturing methods.
  • While past performance does not guarantee future success, age, experience, track record and personal commitment are unbelievably important.

Ten years of life in Europe has shown me that high gas prices force consumers to buy more efficient cars, live closer to work and rely more heavily on public transportation. But in the land of $8 gasoline, HEVs are a rarity and electric vehicles are never seen. Based on my personal experience, I believe the market for HEVs, PHEVs and BEVs will be very limited until these alternatives are cheaper to own and operate than a Mini Cooper or Smart. I also believe that anyone who honestly believes that the average consumer will voluntarily pay a large premium for less performance should have his medication levels checked.

I’m a believer in the Pickens Plan because it represents a workable short-term solution to the economic disruption caused by high oil prices and its principal proponent has the experience, persistence and financial clout necessary to make his dream a reality. I also like the idea that any large-scale Pickens Plan implementation will require cost-effective energy storage to ensure grid stability when the wind isn’t blowing in the Great Plains. While I think that compressed air energy storage [CAES] will likely do the bulk of the heavy lifting for Pickens Plan class mega-projects, batteries will also be essential for the fine work of load leveling, grid stabilization and instantaneous demand response.

For better or worse, the world changed while most of us were busy making other plans. When waste was cheaper than conservation, waste ruled. Now that waste is getting painfully expensive and global energy demand is growing far more rapidly than supplies, we have a serious problem with no easy solution. In my view, three things have to happen in the energy storage sector:

  • We must improve existing large format energy storage technologies;
  • We must scale-up existing small format energy storage technologies; and
  •  We must develop new large format energy storage technologies.

Each of these R&D efforts will have its own risks and rewards; but they will all be essential to ensure an energy future that isn’t significantly darker and less reliable than our energy present.

I’m a proponent of advanced lead-acid batteries because basic R&D on lead-acid technology was largely abandoned in the ‘70s and ‘80s when gas was $1 a gallon and cars, fork lifts, golf carts, industrial equipment and backup power systems were the only markets for large format batteries. So we had a 30-year gap where the world changed but lead-acid technology didn’t. In my experience, it is both easier and cheaper to improve established technology than it is to develop new technology. Over the last few years, lead-acid innovators like Axion Power (NASDAQ:AXPW) and Firefly Energy have taken a fresh look at lead-acid technology and achieved remarkable improvements in performance, durability and cost per kWh of energy storage. Other important advances have come from industry stalwarts like C&D Technologies (CHP), Enersys (NYSE:ENS) and Exide (XIDE). I sincerely hope that the improvements to date are mere harbingers of improvements yet to come. While I believe advanced lead-acid technology will only be part of the long-term energy storage solution, I’ve already made my bet that it will be an important part of the solution.

I remain an unrepentant skeptic when it comes to companies like Altair Nanotechnologies (NASDAQ:ALTI) and Ener1 (NASDAQ:HEV) that plan to make large format batteries for the automotive market using exotic chemistries. Here too, my rationale is simple. First, I don’t believe consumers will flock to HEVs, PHEVs or BEVs en masse unless purchase prices and operating costs are competitive with small cars like the Mini Cooper or the Smart. Second, I think using exotic raw materials for large format energy storage is incredibly wasteful; it’s like using titanium to build highway bridges. Third, I don’t believe the safety risks of large format Li-ion batteries will become clear for years. If HEVs, PHEVs and BEVs start blowing batteries and killing people, the costs to society and the storage industry will be enormous. Finally, even if you solve the other problems, Asian manufacturers will still be the lowest cost producers.

While I don’t know enough about the underlying technologies to make a recommendation, I’m intrigued by the results Beacon Power (BCON) is reporting from flywheels; ZBB Energy (ZBB) is reporting from zinc-bromine flow batteries; and Electro Energy (EEEI) is reporting from bi-polar NiMH batteries. From what I understand, each of these companies has the potential to play an important role in the energy storage industry at a competitive cost.

For the last hundred years, oil and gas were the prize because they provided reliable energy when and where it was needed. But peak oil is already upon us and the wind and solar alternatives are inherently variable. Since cost-effective energy storage is the only thing that can bring variable supply into balance with variable demand, I believe the energy storage sector holds the key to our energy future.

Disclosure: Author holds a long position in AXPW and is a former director of that company.