Energy Storage Opportunities vs. Irrational Expectations

by: John Petersen

Last week, Mark Solheim of Kiplinger’s Personal Finance Magazine,posted an article on Seeking Alpha that really helped clarify the economic issues I’ve been writing about for several weeks. His article, backed up by the analytical strengths of the Kiplinger organization, noted that most HEVs offer limited economic benefit to their owners. My reaction was the predictable question:

If HEVs offer marginal economics with NiMH batteries, how can they possibly pay with Li-ion batteries that cost significantly more per watt hour of energy storage?

The simple answer is “THEY CAN’T AND THEY WON’T.” Mr. Market has killed the electric car before and will continue do so each time it arises from the crypt in a form that can’t compete head to head with CNG and light hybrid diesel. “In America we get up in the morning, we go to work and we solve our problems” (From The Lost Constitution, by William Martin), but we don’t pay premiums for solutions that offer less than we think we need. To put it less delicately, the green in our personal philosophies always takes a back seat to the green in our wallets.

Notwithstanding my personal disdain for the overhyped near-term potential of electric vehicles, I believe the rapidly accelerating transition from fossil fuels to alternative energy is not merely a good thing but a necessary thing. Likewise, I believe the anticipated growth in the energy storage sector is not merely smart planning but an economic necessity. While forecasted growth rates across the entire alternative energy spectrum are immense, my sense is that the industry will grow far faster and far larger than any of us can even begin to imagine. As the magnitude of the problems become more obvious to investors who have not spent months in Asia and seen the day-to-day lives of the primary drivers of market change, the current narrow focus on glamour girl energy storage options will have to widen and investors who own work-horse technologies like advanced lead-acid batteries are likely to profit handsomely.

The simple fact is worldwide demand for all types of energy storage devices exceeds available supply by a wide margin. In the 1990s, Asian imports almost ruined the U.S. battery industry and drove many small manufacturers out of business. Their plants were then dismantled and either shipped overseas or scrapped. Recently, however, Asian imports have slowed to a trickle as demand in the manufacturers’ home countries has caught up with supply. So for the first time in years, the U.S. battery industry is building new manufacturing plants to meet current demand. When anticipated growth in domestic demand is factored into the equation, the outlook across the board is spectacular. On balance, I think we are entering an era when every manufacturer of energy storage devices will have more demand than it can possibly satisfy. That’s why I’m bullish on the entire sector, instead of a single technology group.

For two months now I’ve received scathing criticism from the faithful defenders of Li-ion and solid support from investors who want to understand the energy storage sector. In the process it’s become clear to me that my detractors are simply not hearing what I’m saying about the overall market because they are too wedded to the idea that their favorite technology will dominate a favorite market segment. Li-ion is a wonderful battery technology for applications where size and weight are mission-critical constraints. But the current hype over the potential for Li-ion batteries in transportation and utility applications is, to my way of thinking, irrational. Gold and silver are among the best electrical conductors in the world and would be more than adequate for use in many kitchen appliances. But they’re not used in kitchen appliances because they have more value in other uses.

I’m convinced the same will hold true for Li-ion technology. It will probably satisfy all technical requirements for transportation and utility applications, but it will prove to be far too expensive for the required work and have far more value in other applications. In my view of the global energy storage market, 100 power-assisted bicycles will always win the economic battle with a single PHEV; and a Li-ion manufacturer that makes batteries for bicycles will make far more money than a manufacturer that wants to power the utility grid. In the end I expect Li-ion to be a spectacular success, but not in markets where an exhaustive cost-benefit analysis is a critical part of any purchase decision.

The last month has been a tough one for the energy storage sector stocks I identified in mid-August. The group as a whole is off 16.2% and the outlook for today is not pretty. But once the current round of carnage has passed, I think there may be some real opportunities for astute buyers. I think the Li-ion group is generally overvalued because of all the hype surrounding electric vehicles.

Nevertheless China BAK (NASDAQ:CBAK) may have considerable short term potential. While I think the NiMH group is fairly valued, Hong Kong Highpower (NASDAQ:HPJ) is a new market entrant that has not yet achieved parity with its peer group. I continue to believe the lead-acid group is grossly undervalued because the market has not yet come to grips with the idea that as the energy storage market grows, lead-acid manufacturers will be the first beneficiaries of demand for cost-effective solutions that simply do not justify exotic battery chemistries. The latest price table is set forth below.

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