For the last few weeks, I’ve been writing a weekly article on energy storage, a long-neglected industrial sector that most consider boring but I believe will be the next major investment trend. While I’m bullish over the prospects for almost all of the storage companies I know about, I will always pick the “best affordable technology” over the “best available technology” because that’s exactly what consumers will do when they make buying decisions.
My fundamental premise is that every energy storage decision will ultimately boil down to a cost-benefit analysis where (a) the cost of the original energy inputs plus (b) the fully loaded cost of storing the energy must be less than (c) the value of the energy delivered to an application. As long as the basic equation balances, energy storage is a rational decision that’s required the laws of economics. But if the equation doesn’t balance we leave the day-to-day world of paychecks, budgets and monthly bills and enter a fantasy world where performance trumps cost.
The leading battery technologies in increasing order of cost and performance are lead-acid batteries, advanced lead-acid batteries, nickel metal hydride batteries, lithium ion batteries and supercapacitors. Flywheels, pumped hydro, compressed air and other mechanical storage technologies will also be important. Each of these technologies has a critical role to play as the energy storage market grows from $20 billion to $100 billion per year. But as investors, we need to remember that the energy storage markets, like most other human endeavors, can be graphically described by a normal bell-shaped curve.
There will be substantial markets for extreme performance technologies like NiMH, Li-ion and supercapacitors, just as there are substantial markets for luxury cars. But the bulk of the volume under any normal bell shaped curve is never at the extremes. It’s in the middle! I see no reason to believe that different rules will apply in the developing energy storage markets. The companies at the performance extremes may get an undue share of the press and glory, but the companies that offer a cost-effective alternative to the average consumer will almost certainly book the lion’s share of the future revenues and profits.
The current sex, blood and glamor in the battery industry are focused on emerging companies that concentrate on extreme performance technologies like NiMH, Li-ion and supercapacitors. In the process, established companies that manufacture lower performance mass market products, the markets with the greatest potential for long-term growth, are treated more like redheaded stepchildren. I have to believe that market perceptions are very seriously distorted when an emerging Li-ion manufacturer like Ener1 (HEV) carries a market capitalization of $720 million while a well-established multi-billion dollar lead-acid manufacturer like Exide Technologies (XIDE) carries a market capitalization of $774 million. Likewise I have to wonder why research stage companies like Beacon Power (BCON) and Altair Nanotechnologies (ALTI) carry market capitalizations that are two or three times the market capitalization of a transition manufacturer like Axion Power (OTC:AXPW) that is getting ready to introduce a cost-effective storage solution for the mass market. While I hate to sound like a luddite, the only real opportunity I’ve been able to identify in the extreme performance battery sub-sector is Hong Kong Highpower Technology (HPJ), an established NiMH manufacturer that has $73 million of annual sales and a lead-acid class market capitalization of $55 million.
Over the next few months, I expect the distorted market perceptions to reach an extreme level as A123 Systems completes a high-profile IPO and finally draws substantial market attention to the energy storage sector. As PHEVs and HEVs are introduced to the market, on-road performance fails to live up to the forward-looking hype and the basic cost-benefit issues become crystal clear, I expect the pendulum of market perception to begin moving back toward the center as it always does. Over the medium- to long-term, I expect the relative market valuations of the lead-acid and advanced lead-acid manufacturers to increase significantly while the relative market valuations at the extreme performance end of the spectrum fall from their current lofty heights.
While I believe fundamental market drivers will result in sustained growth across the entire energy storage sector, I’m convinced the real stars will be the manufacturers of mass-market products that can do the required work at a reasonable cost.
For traders, speculators and other adrenaline junkies, exotic battery technologies will probably be the most attractive sector for the next year or so.
For long term investors who want to buy cheaply and hold for substantial long-term gains, I think established lead-acid manufacturers like Exide, Enersys (ENS) and C&D Technologies (CHP); emerging advanced lead-acid manufacturers like Axion; and new market entrants like Hong Kong Highpower are the only sensible choices.
Disclosure: Author holds a long position in AXPW and is a former director of that company.