As expected, A123 Systems filed a registration statement for a planned $175 million IPO last Friday. I believe the A123 IPO, together with recent industry reports by Merriman Curhan Ford and Lux Research, will begin to draw attention to the energy storage sector in a whole new way and mark the beginning of a major upward trend in a basic industry that's been undervalued for years. While it seems that nobody really wants to talk about batteries in a wired world, the fact is we couldn't be wired without them. And as we shift to alternative energy and electric vehicles in response to high oil prices, the demand for many energy storage technologies is likely to soar.
Today I'm going to venture a little out of my depth and try to provide a simple primer on energy storage for the electric utility grid. I'm not seeking perfection in this endeavor and will be happy with B- grades from the power professionals and engineers out there. My goal is to try and establish a baseline context for discussion and analysis, show why I believe some unloved companies are likely to be big winners.
My first graph comes from the Lawrence Berkley National Lab (http://currentenergy.lbl.gov/ca/index.php) website and shows statewide electricity use in California on July 31, 2007. I selected that date because the summer months have the biggest daily swings from base demand to peak demand and the graph is easy to work with.
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While the 24-hour curve looks pretty smooth, it would look more like an active stock trading chart if you could break it down into 5-second, 5-minute or even 1-hour intervals. Then if you wanted to complicate matters even further, you could divide California into 500 or 1,000 regional service areas and prepare a separate graph for each. It's a lead pipe cinch that while the individual service area graphs would all have the same general shape; the peaks and valleys in different service areas would never match. The challenge for electric utilities is to ensure that there is just a little more power available at all times in each regional service are than customers in that area use. When you think about complexity, you'll be amazed at the quality of utility service in the United States.
To satisfy variable demand, most electric utilities combine hydro, coal and nuclear plants that run 24/7 and carry the base load with gas turbine peaking plants that are brought on line sequentially when demand is rising and taken off line sequentially when demand is falling. Typically the lowest cost peaking plants will run for up to 18 hours per day on a year round basis and the highest cost peaking plants will only run for 4 to 6 hours per day on a seasonal basis. The end result is electric power that's always been there at the flip of a switch, whenever it's been needed.
Returning to the graph, imagine a hypothetical grid consisting of one base load plant that could generate 24 gW and fifteen gas peaking plants that could each generate 1.2 gW. By monitoring demand from minute to minute and using historical trends to predict anticipated changes a utility could do a pretty good job of bringing new peaking plants on line just before the additional power was needed. Supply would always be a bit higher than demand and there would always be some wasted generating capacity, but as long as fuel costs were low and reliability was the paramount issue, the trade off between wasted fuel and reliable power could be readily justified.
For the first time, we're facing a power future where wind and solar power facilities are likely to become major contributors on the supply side. For all their virtues, wind and solar power are dependent on variable local weather, which makes them inherently less reliable than gas turbines. As we make a large scale transition to wind and solar power and begin to replace gas turbines with more variable power sources, reliability will suffer unless we (a) keep the turbine infrastructure in place for periods of inclement weather; (b) overbuild wind and solar facilities to leave room for inclement weather, or (c) combine wind and solar with cost efficient energy storage. These options are not mutually exclusive and I foresee a future where traditional and emerging energy technologies operate side by side. But we can't shift 20% of our generating capacity to wind and solar and devote the natural gas to transportation unless we have reliable low-cost storage to ensure that bad weather won't upset the apple cart.
My second graph comes from a November 2004 study of energy storage prepared by Sandia National Laboratories. The chart focuses on the conventional utility grid (hydro, coal and nuclear baseload plants augmented by gas turbine peaking plants) and shows how total demand for energy storage systems would change in response to reductions in the installed cost of energy storage systems.
In 2004, Sandia forecast that the market for storage systems costing $1,000 or more per kW would be insignificant. But as costs declined from the $700 per kW level, the graph shows that demand would rise rapidly. In other words, as long as waste is cheaper than storage, waste rules. Now that high fuel prices are making waste painful; energy demand is growing more rapidly than supplies; and weather dependent power generation technologies are becoming an increasingly significant feature of the power generation landscape, I foresee a major opportunity for large scale grid based energy storage systems. While I'm not skilled enough to work out the math with any level of precision, I think an updated graph would probably use installed cost breakpoints that are 40% to 75% higher than the installed cost breakpoints Sandia used in 2004.
The interesting thing about graphs like these is they're intended for power professionals who are thinking about how to use storage in the electric grid. If you look at the graph from the perspective of a manufacturer of storage systems, it can be a useful predictive tool for evaluating the market opportunity. In 2004, Sandia forecast 10 gW of demand in California for storage that cost roughly $650 per kW. If we assume that demand hasn't changed and adjust the cost breakpoint for increased fuel costs, the nationwide demand for $1,000 per kW storage systems approaches 80 gW, or roughly $80 billion. When you start layering in additional storage that will be needed to compensate for inherent variability in solar and wind alternatives, the demand for $1,000 per kW storage systems skyrockets.
When electric utilities were looking for a $700 per kW solution and storage technologies were less developed, there was no market. As the breakeven cost of storage increases; storage technologies improve and the installed cost of storage systems decline, historical revenues in the $20 billion domestic energy storage industry are likely to increase at staggering rates and nimble manufacturers of low-cost storage systems are likely to profit handsomely.
Hours, minutes and seconds
One of the most important concepts in any discussion of utility grid energy storage is delivery duration. Some uses require delivery periods measured in hours, others require delivery periods measured in minutes and still others require delivery periods measured in seconds. Since the big challenge for utilities is to only provide slightly more power than customers demand at any particular moment in time, they have to focus on the peaks rather than the average. So the short duration storage technologies are frequently more important than long duration systems.
In general, technologies that can store huge amounts of energy are not particularly good at providing it quickly and technologies that can deliver energy quickly are not particularly good at providing huge amounts of energy. That's why forecasters generally agree that a comprehensive energy storage strategy will require a multi-pronged approach.
Hours: Pumped hydro and compressed air energy storage [CAES] are the technologies of choice for storing large amounts of energy that will be delivered over several hours. While most of the desirable pumped hydro locations have already been developed, there is still significant room for CAES development in depleted oil and gas reservoirs and aboveground facilities. While I haven't been able to identify any "pure play" companies in the CAES space, Dresser-Rand (NYSE:DRC) is a major supplier of industrial air compression equipment and is likely to be a significant beneficiary of future growth in CAES.
Other contenders in the Hours category include molten sodium sulfur batteries like the units American Electric Power (NYSE:AEP) has been testing in cooperation with NGK Insulators Ltd. [NGI.F] and zinc-bromine flow batteries like the ones ZBB Energy Systems (NYSEMKT:ZBB) has been testing in cooperation with a variety of development partners.
Minutes: The Minutes category is probably the most hotly contested. Altair Nanotechnologies (NASDAQ:ALTI) has recently demonstrated a 500 kWh battery system in cooperation with AES. But the Altair/AES demonstration project cost $1 million ($2,000 per kW) and required HVAC equipment of undisclosed size to keep the batteries from overheating. Likewise, Ener1 (NASDAQ:HEV) and A123 are doing some serious talking about opportunities in the Minutes category. If you take a pencil to A123's prospectus disclosures, their average production cost for Li-ion batteries is roughly $1,500 per kW. Since the bulk of the production costs for any battery are raw materials, I don't think the price of Li-ion batteries will fall dramatically. So unless the cost breakpoints for grid based storage soar, I don't see Li-ion as a cost effective competitor in an industry where accountants balance the cost of storage against the cost of waste.
An important non-battery contender in the Minutes category is Beacon Power (BCON), which is developing kinetic energy storage systems that it plans to use for utility applications. I haven't found any hard data on their expected cost per kW, but I'll keep looking because the underlying technology makes a lot of sense.
I believe the winner in the Minutes category is likely to be lead acid. The technology has been around for as long as any of us remember and the installed cost of lead-acid batteries is well within the range large storage projects require. If I'm correct in this assessment, the relatively low market valuation ratios for lead-acid manufacturers leave ample room for spectacular growth. As I noted last week, a rising tide lifts all boats but the biggest percentage gains come from boats with low profiles.
I know that lead acid chemistry has a reputation for short cycle life in deep discharge applications. But basic R&D on lead-acid technology was largely abandoned in the '70s and '80s and we had a 30-year gap where the world changed but lead-acid technology didn't. 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 and durability. Later this month Axion will ship 225 kW of batteries for a NYSERDA-funded peak shaving project at a cost of $1,000 per kW, which is arguably in the pricing sweet spot identified in the Sandia chart. Other important advances are likely from industry stalwarts like C&D Technologies (CHP), Enersys (NYSE:ENS) Exide (XIDE) and Johnson Controls (NYSE:JCI). While I believe advanced lead-acid technology will only be part of the energy storage solution, I've already made my bet that it will be an important part.
Seconds: The Seconds category will likely be dominated by large-scale supercapacitors and ultracapacitors. Maxwell Technologies (NASDAQ:MXWL) is making significant strides in the development of large-scale systems and intensively secretive EEEStor is making some pretty bold claims. I suppose time will tell.
The purpose of this entire exercise has been to identify a sector that has immense upside potential and reasonable risk levels. Personally I'm a bit of a geek and I love reading about the latest greatest inventions in energy storage. The ideas being floated to use solar energy for molten salt storage, use carbon nanotubes for batteries and capacitors and use the tides for power generation are all fascinating to me. I'm an incurable optimist and a firm believer that "In America we get up in the morning, we go to work and we solve our problems" (from The Lost Constitution by William Martin). So I'm convinced that the energy picture in 50 years will be almost unrecognizable. As a small company lawyer, I like to think of myself as a pragmatist. I've worked with clients that spent 15 years on R&D before they introduced their first products. As a result, I understand the difference between the bleeding edge of technology and the leading edge. The storage sector provides ample opportunity for both. But when it comes to investing my own money, I prefer technologies that can be implemented today rather than some day.
Over the next week or two I'd like to come up with a list of pure play energy storage companies that we can track over time to see how the various sub-sectors perform. I know of a dozen or so companies that fit the bill but believe the more the merrier. If you have any suggestions, please post a comment.
Disclosure: Author holds a long position in AXPW.OB and is a former director of that company.