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A hundred and thirty years ago Thomas Edison commissioned the Pearl Street Station in lower Manhattan. It was the world's first electric grid with 85 customers and 400 lamps. Unfortunately, Mr. Edison chose temperamental steam engines to power his dynamos so his grid was unstable. He hoped big batteries could fix his design mistake.

At the time, electrochemistry was cutting edge science. Battery technology had potential, but the available products were better suited to parlor tricks than power grids. The battery entrepreneurs of the day promised Mr. Edison more than they could deliver and he was furious. So he lashed out with the most memorable battery quote of all time.

"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."

While a cynic might observe that things haven't changed all that much, the quote speaks a 'Great Truth' that investors need to understand.

Batteries appeal to the imagination!

Everybody wants to believe in better batteries, so they do. Psychologists call it confirmation bias. Investors read press releases about 'game changing innovations' and their imaginations kick into overdrive. They never even pause to consider the difference between the technically possible and the economically desirable. Instead, they make a quantum leap from the possible to the absurd.

The phenomenon isn't limited to the battery industry. It arises whenever energy, imagination and politics cross paths. Government tries to force energy into an R&D model that was created for initiatives like the Manhattan Project and Space Program without understanding that those grand initiatives were demonstrations of engineering prowess and civilian applications for the technical advances that flowed from those initiatives were fortuitous accidents that had nothing to do with the original program goals.

The outcome is always the same - catastrophic malinvestment in poorly conceived schemes that soar to stratospheric valuations on hope and hype, and then crumble to obscurity as the economic realities become painfully obvious. A summary list of the serial energy policy failures during my adult life includes:

  • The Nixon and Ford Administrations' support for synthetic fuels from coal and oil shale;
  • The Carter Administration's support for synthetic fuels, nuclear fusion, ethanol and fuel efficiency;
  • The Clinton Administration's "Partnership for a New Generation of Vehicles" that failed miserably while private initiatives from Toyota and Honda were remarkably successful;
  • The Bush Administration's unflagging support for fuel cells, the hydrogen economy and corn ethanol; and
  • The Obama Administration's support for alternative energy and electric vehicles.

A Rogues Gallery of public companies that soared to incredible heights in times of technological frenzy and then crushed the hopes and portfolio values of unwary investors includes:

  • Hydrogen fuel cell companies like Ballard Power (NASDAQ:BLDP) and Plug Power (NASDAQ:PLUG) that sported triple digit stock prices at the turn of the millennium and trade for pennies today;
  • Ethanol companies like Pacific Ethanol (OTCPK:PIEX) that sported triple digit stock prices in the middle of the last decade and trade for pennies today; and
  • Battery companies like Ener1 (HEVVQ), Valence Technologies (OTCPK:VLNCQ) and most recently A123 Systems (AONE) that sought bankruptcy protection after losing the sky-high market premiums they sported as recently as 2010.

I don't understand how any rational investor can look at 50 years of serial energy policy disasters and honestly believe things will turn out differently for current market darlings like Tesla Motors (NASDAQ:TSLA) that talk about disruptive innovation when their only accomplishments are harnessing 6,000 hamsters to pull a coach and maintaining a share price that's about 1,500% of book value.

Since December of 2008 I've been reminding my readers that large-scale energy storage is still in its infancy. Every adult knows that infants learn to crawl first, then they learn to stand, then they learn to walk and then they learn to run: and once they start running the game changes forever. Even so, many investors expect a different progression in energy storage. It would be foolish for me to enter my grandson in the 2030 Boston Marathon. It is equally foolish to believe that any single technology will be a silver bullet solution to our long-term energy storage needs. The best we can really hope for is baby steps that get longer and stronger over time and silver buckshot that helps reduce aggregate waste of the world's natural resources.

I've long been a proponent of the fundamental proposition that when it comes to energy storage, cheap will always beat cool. The reason is simple. Cool and exotic energy storage systems are absolutely essential if your goal is to serve the 3% of consumers who will buy battery electric vehicles, plug-in hybrid electric vehicles and hybrid electric vehicles because they want to make a statement without really making a difference.

Vehicle

2011

Market

2012

Market

Class

Units

Share

Units

Share

Battery Electric Vehicles

7,287

0.08%

6,358

0.06%

Plug-in Hybrids

3,895

0.04%

24,082

0.22%

Hybrid Electric Vehicles

191,541

2.02%

322,516

2.97%

Internal Combustion

9,282,889

97.86%

10,510,120

96.75%

Cheap, reliable and admittedly boring energy storage systems are essential if your goal is to have a meaningful impact by serving the 97% of consumers who have to deal with petty issues like family budgets, down payments, monthly payments, reliability and flexibility.

The same is true for all other energy storage applications. A miniscule fraction of the market needs the extreme performance of exotic energy storage technologies while the needs of the masses are mundane.

I've consistently told readers that established manufacturers of mundane energy storage devices like Enersys (NYSE:ENS), Johnson Controls (NYSE:JCI) and Exide Technologies (XIDE), and developers of advanced mundane energy storage devices like Axion Power International (NASDAQ:AXPW) and Active Power (NASDAQ:ACPW) were safer and saner long-term investments than the sleek sexy and cool lithium-ion supermodels.

The companies I've recommended over the last four years haven't always had an easy road and several have been severely punished because the market does not understand the time required to bring a new energy storage product to market and prove performance to skeptical cost-conscious users. But they're all still standing. With the failure of A123 I'm four for four when it comes to predicting likely investment catastrophe in the over-hyped electric vehicle sector.

With 50 years of energy policy tragedies in my corner and a perfect track record at identifying companies that are at or near the peak of inflated expectations on the hype-cycle, I simply don't understand the fervently held conviction that "it's different this time."

Click to enlarge

Source: Energy, Imagination And Politics: A Toxic Cocktail For Your Portfolio

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