Alternative Energy, Regular Guy Stuff and Rainbow Stew

I had a bit of an epiphany over the weekend because of two unrelated events. First my younger brother announced that he was installing 5.2 kW of solar panels on his house in Arizona. After that a potential client from Dallas described his new line of low-cost high-performance insulation products as "regular guy stuff." In combination, these events clarified and crystallized my thoughts on a fundamental theme that investors may want to use as a touchstone when analyzing alternative energy investments: the difference between regular guy stuff that can solve energy storage problems today and science fair projects that may be economic someday.

For several weeks I've been trying to think of a way to work an excerpt from Merle Haggard's 1981 classic Rainbow Stew into a Seeking Alpha article. The song is all about a regular guy's somewhat jaded view of science fair projects, government promises and the human condition in general. But it speaks the truth in a way that only country music can:

"There's a big, brown cloud in the city and the countryside's a sin;

the price of life is too high to give up its gotta come down again;

when the world wide war is over and done and the dream of peace comes true;

we'll all be drinkin' that free bubble-up and eatin' that rainbow stew.

When they find out how to burn water and the gasoline car is gone;

when an airplane flies without any fuel and the sunlight heats our home;

one of these days when the air clears up and the sun comes shinin' through,

we'll all be drinkin' that free bubble-up and eatin' that rainbow stew."

In the 27 years since Rainbow Stew was released, we've seen immense progress on air pollution; wind energy has become cost competitive; and if my younger brother is a reliable indicator, solar panels have become regular guy stuff. Today the imagination of the rainbow stew crowd is focused on greenhouse gasses, battery powered electric vehicles and the holy grail of hydrogen fuel cells. While there is universal hope that the daunting technological barriers will be attacked and leveled, there is no consensus on which class of technology will win the prize; how long the development path will be; or when the science fair projects will be cheap enough to qualify as regular guy stuff. Until then, regular guys will do what they have always done, start the journey with a single step and build on that progress by putting one foot in front of the other.

Rechargeable batteries are a ubiquitous but largely invisible part of modern life. For the last 100 years they have been the epitome of boring regular guy stuff; growth in the storage sector has been slow; and the companies that make rechargeable batteries have carried rust belt valuations. But nothing stays the same forever and in the rapidly evolving world of alternative energy, rechargeable batteries have become a critical enabling technology to keep the power flowing when the sun doesn't shine and the wind doesn't blow. If my brother can't use all the power produced by his solar panels, his choices will be to (a) waste the excess capacity, (b) sell the excess to his local utility, or (c) store the excess for use after dark. The only thing I know for sure at this point is that he will make his choice based on a careful analysis of the costs and benefits of each option, as will every other regular guy who faces the same decision. My brother's decision, and the individual decisions of millions of other regular guys will be the ultimate drivers of growth in the energy storage sector. To paraphrase Ben Franklin, we have entered an era where a kilowatt saved is two kilowatts dear. Energy storage has already made the transition from a philosophical ideal to an economic necessity for regular guys.

In a May 2008 report on the energy storage sector, Merriman Curhan Ford (MERR) estimated the global market for rechargeable batteries at $20 billion annually with roughly 70% of global sales coming from lead-acid batteries and the remaining 30% coming from other chemistries. The report then stated that catalysts are already in place that could drive demand to $100 billion or more over the next several years. While some of the market catalysts identified by MCF will depend on the development of exotic batteries for electric vehicles, the bulk of the forecast growth will come from regular guy applications that can be adequately served by lead-acid technology; boring stuff like a storage system for my brother's 5.2 kW of solar panels.

Lead-acid is the cheapest rechargeable battery technology in existence and has been the king of energy storage for over 100 years. Lead-acid batteries have a remarkable safety record and with recycling rates approaching 99% environmental issues are almost non-existent. While low energy densities and short cycle lives have historically limited the economic benefit of using lead-acid batteries for large-scale storage, several recent technical developments promise big improvements in performance at a very modest cost. Because of their size and weight, lead-acid batteries are not likely to be the first choice for electric vehicles. But when you put it all together, rumors of the king's illness or impending death have been greatly exaggerated.

Over the last several years, the rainbow stew crowd has aggressively promoted lithium ion as the battery technology of the future for almost every conceivable application. They point to the size, weight and energy density advantages of Li-ion batteries and dismiss critical issues like cost, raw materials availability and a deplorable safety record. They also ignore the fact that every major improvement in Li-ion safety has come at the cost of reduced battery performance. Portable electronic devices have improved remarkably over the last decade, but the bulk of the gains have come from improved device designs, not improved Li-ion batteries. My willingness to speak the truth may be unpopular, but the fact is Li-ion is a mature technology that is simply too expensive for the large-scale energy storage jobs the rainbow stew crowd wants it to do.

I believe the biggest challenge facing energy storage investors is separating rainbow stew hype from economic reality. There is universal agreement that electric vehicles would be good for a host of environmental and economic reasons. The problem is that lead-acid batteries are too heavy for the job and Li-ion batteries are too expensive for the job; which leaves us with a gaping chasm between what idealists want and what battery technology can deliver. The rainbow stew approach is to hope that the newest wrinkle in an aging face will slash the cost of Li-ion batteries and make EVs more than an outrageously expensive status symbol. The regular guy approach is the Pickens Plan: start the journey with a reasonable first step and build on that progress by putting one foot in front of the other. I remain hopeful that we will one day solve the EV battery dilemma, but I see nothing on the horizon that tells me a solution is even close.

If you look at the universe of energy storage companies I've been tracking since mid August, the established manufacturers with the lowest market valuation ratios are Exide (XIDE) and Enersys (ENS), lead-acid leaders that have fallen dramatically in price over the last couple of months but are certain to be the first big winners when regular guys buy energy storage solutions. The same pattern holds in the transition manufacturers class where Axion Power International (AXPW.OB) carries a low market valuation despite the fact that its PbC technology will bring advanced battery cycle-lives and recharge rates to the lead-acid world. In the mid-range you find solid companies like Advanced Battery Technology (ABAT), China BAK (CBAK) and Hong Kong Highpower (HPJ) that manufacture advanced batteries for portable devices. At the nosebleed extreme of the valuation spectrum, you find companies like Altair Nanotechnologies (ALTI) and Ener1 (HEV) that have not yet manufactured or sold commercial products and are betting their future that a substantial segment of the new car market will pay an immense premium for sub-par performance. I think betting against regular guys in favor of rainbow stew is a sucker's game.

As the energy storage sector grows from $20 billion to $100 billion in annual revenue, there's no question that rainbow stew solutions will grab the bulk of the headlines. But unless and until the fundamental economics of battery manufacturing change, the lead-acid manufacturers who produce cost-effective energy storage solutions for regular guys will make the bulk of the money. As an investor, I believe cash flow trumps rainbow stew every time.

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

Comments

[NOWHEREMAN:]

John, its really unfortunate that you have chosen to limit the Technology now driving Altair to the Car Battery arena and not to the brighter and much larger potential it has in the Energy Storage arena.

Financing is the key. Without the type of grants that Altair keeps getting, the small companies in your universe will disappear within 12 months. Cash flow is great but with No commodity related push to pour money into these technologies, both revenue and cash flow will disappear.

Just like Coal will always be "dirty", Lead and "lead poisoning" go hand in Hand. Perception and the length of the Recession will determine whether any of the current Tech. improvements survive.

2008 Oct 02 10:27 AM

[John Petersen:]

Paul, I agree that Altair's technology has some important uses in energy storage. But those uses will be limited to situations that can take advantage of the tremendous cycling capacity of Li-ion; meaning applications that will cycle several times per day 365 days a year. For regular guys who want a diurnal storage solution that will cycle once a day, Li-ion will never be cost effective. It will make even less sense in standby power applications that cycle 50 to 100 times per year. I keep saying I love Li-ion in appropriate applications. But it is unreasonable to argue that Li-ion will be the best solution for most large-scale storage applications because those applications do not generally require 5,000 to 20,000 lifetime cycles.

2008 Oct 02 01:53 PM

[Peter Troast:]

John--the "regular guy" vs science fair analogy is exactly right for the alternative energy space. But I think some of the regular guy stuff may be even more regular than you think. There is lots of appeal in the cutting edge new technologies....until you do the math and find out home based solar PV (without incentives) has a 20+ year payback. Meanwhile, most of the houses across the country leak air like sieves and some of the solutions to those basic building envelope upgrades produce return almost immediately. Storage is a great category. Cutting edge home building materials will be interesting. Measurement and demand response. The ESCO's as people begin to realize that the most effective investments to cut energy costs and reduce CO2 are the regular guy basics.

2008 Oct 02 02:24 PM

[donpat:]

John - I know you know Howard K. Schmidt (I think he is an Axion director, in fact) - do you think his rectenna, self assembled solar device will be the saviour of our energy bacon?

Let him convert the energy - and then get Axion to store it!

Best regards,

Don/donpat

Ref:
donpatent.blogspot.com...

I'm impressed, obviously. You?

2008 Oct 02 03:42 PM

[John Petersen:]

Don, I've known Howard since I did an IPO for his company in '92. I recruited him to serve as an Axion director when he was the Executive Director of Dr. Smally's carbon nanotech laboratory at Rice University. Howard is brilliant and one of my favorite people in the world. I don't know anything about his latest patents, but I'm sure I'll learn more if and when he wants me to learn more.

2008 Oct 02 04:45 PM

[William Taylor:]

I am still hoping the world will have some positive results from Eestor. Think there is much of a chance, John?

2008 Oct 03 11:38 AM

[Paul Killinger:]

John,

You've become my favorite SA author. You do the best job of interpreting the prospective Rainbows for us Regular Guys. And that extends to your writing style, as well.

Would you please tell me more about the commercial energy storage prospects for BCON's flywheel technology. It appears tailor made for wind energy. Is lead-acid storage a viable competitor? Are there others? Does their technology work in the real world?

(Please excuse me if you've covered this previously. If so, would you be so kind can you direct me to such posts. Thank you.)

2008 Oct 03 01:50 PM

[John Petersen:]

William, I can't get enough information about what eestor is doing to form a reasonable opinion. The energy densities they talk about seem to exceed the maximum published physical properties of the material, which leaves me a bit skeptical. They also seem to require incredibly pure materials, which is always an expensive process. Between the two, my gut sense is that if it works it will be tremendously expensive, which will put it in the same class as Li-ion for most bulk storage uses.

2008 Oct 03 03:31 PM

[John Petersen:]

Paul, Beacon says that the principal target market for its flywheels is frequency regulation (i.e. making sure that the power flowing to users comes in at 60 cycles and 110 volts). Frequency regulation is a billion dollar segment that is critical right and will become increasingly important as inherently unstable sources like wind and solar are added to the grid. While the flywheels are great for frequency regulation because the application requires short bursts of high power, they can't provide power for more than a few minutes. So they won't work in applications that need power for more than 10 minutes or so.

The two principal contenders for the frequency regulation market will be flywheels or Li-ion batteries and I don't have a good enough sense of what the Beacon flywheels will cost to venture a guess as to which alternative will be more cost efficient. But I continue to believe that devices are easier to improve than chemistry, which favors flywheels over the long term as long as they start out on parity with Li-ion.

2008 Oct 03 03:45 PM

[Paul Killinger:]

Thanks, John. One more "novice" question.

How exactly will power get from wind farms to actually being usable on the electric grid? I know about the use of eminent domain to attach one to the other, if you will. But as you point out, one is variable, and the other requires a steady supply.

I've seen Mr. Pickens say the problems with this technology are being resolved, and will be ready by the time the wind farms are up and running. So how would this work?

As a layman, I suppose I envision fields of huge lead acid batteries somewhere that can store the power created by the wind turbines, and send it to the power grid as required. Is this remotely the reality?

What companies are involved in trying to resolve this dilemma? Isn't this the arena in which Beacon's flywheels are partially the solution?

Thank you for your time and interest!

2008 Oct 03 04:28 PM

[John Petersen:]

Paul, my "Grid-based Energy Storage; Birth of a Giant" article has a chart that shows system demand in California over a typical 24-hour period. It also explains how power systems are base loaded with coal or nuclear, and then peaking facilities are put on-line or taken off line to make up the difference between base load and current demand. It's complex stuff but when you realize that the national grid runs as fewer than 10 regional grids, the aggregate demand in a region at a particular time is immense. So you can add all the output of a field of windmills pretty much whenever you need them. When demand falls, you take the windmills offline so that they aren't producing electricity that isn't being used.

The biggest issue with wind and solar is that output changes when the wind speed increases or decreases and the same happens every time a cloud covers the sun. So the solar and wind are inherently more variable than a gas turbine. Experience in Spain and Germany is that you can tie in renewables directly into the grid without major instability problems until you get to about 20% of capacity. That being said, frequency regulation gets important way below the 20% level, and that's where Beacon comes in. It's not so much storing large amounts of power at 6 a.m. for delivery at 1.p.m. as storing small amounts of power at 12:45 p.m. for use a few minutes later when the wind drops off. The goal of frequency regulation is to smooth out a curve that would have a lot of peaks and valleys if you didn't have the flywheels or Li-ion batteries on standby.

When you talk about storing hours worth of power for delivery hours after it is generated, the task will fall to pumped hydro, compressed air storage and perhaps flow batteries. Everything else is too expensive.

The Storage Potential chart in the same article shows graphically what the value of various storage applications was in 2004. The price break points have gone up since then, but the market segments remain the same.

2008 Oct 03 04:52 PM

[Paul Killinger:]

That's fascinating, John. Thank you!

2008 Oct 03 05:21 PM

[Paul Killinger:]

John,

I don't run out of sophomoric questions easily (ha, ha!).

So if li-ion batteries can provide backup power for something as daunting as the electric grid, why aren't they well suited for PEV's?
(I say that as an advocate of 60 year old NGV's, and I believe in their current state of technology EV's are stupid.)

I've read about where lithium is mined (Chile and China) and that it's a relatively rare element. It would also seem to be an ideal candidate to become the basis for a new OPEC (OLEC?).

But I suspect there is more to it than that, isn't there?

2008 Oct 03 05:42 PM

[tireman63:]

Mr. P>

Have you discussed the Firefly graphite carbon-foam battery in any previous columns? I am really fascinated by it's potential, and Caterpillar Tractor and a bunch of venture capitalists think so, too.

2008 Oct 03 07:56 PM

[John Petersen:]

Paul, my issue with Li-ion has never been "will the technology work in EVs?" The issue is price. A Li-ion battery that can deliver watt hour of useful energy ranges from $.50 for the cheap explosive kind to $1.50 for the kind that don't have big safety issues. To get any kind of range in an EV, you need 30 or 40 thousand watt hours of stored energy. So even the most optimistic price estimates I've seen takes you to about $17,500 for the batteries in a small bare bones EV. Joe 6 pack will never be able to pay that price and Joe Mercedes wants his luxury. So the only real buyer is Joe Celebrity who can and will spend $50,000 for a spartan but green status symbol.

I am concerned about the availability of lithium. Reserves in the Andes are limited. The deposits in Mongolia do not have the same chemical makeup and will require substantial processing to work in batteries, which means higher cost. After Mongolia, finding commercial lithium reserves gets really tough.

The South American countries are still content to export raw materials. China, on the other hand, wants to export finished products. So even if the Mongolian reserves turn out to be huge, I think the Chinese will turn the material into batteries before export, which doesn't help non-Chinese manufacturers a bit.

2008 Oct 04 01:56 AM

[John Petersen:]

Tireman, I'm intrigued by Firefly but since we can't invest in the company yet there doesn't seem to be a lot of sense in talking too much about what they're doing.

2008 Oct 04 01:58 AM

[NOWHEREMAN:]

Lithium, Chile, SQM pure play miner. If you believe in its future, SQM is a future winner. It has retraced with the entire Alt. Energy complex.

I do not own it, am following it on a Technical basis for a few people who believe in lithium technology based products.

I don't believe there is enough of this element to serve all of the needs that people envision to use it for. To me, all products involving the use of exotic elements will be limited in scale because of the limited amount of exotics available. Nano tech would expand the Scale but, otherwise...

Now, does anyone know if lithium can be recycled?

2008 Oct 04 03:05 AM

[NOWHEREMAN:]

Too bad about AXPW, I see that a 10%+ beneficial owner has been dumping shares at $1.10. Not too much at a crack but consistently. Probably wants to maintain some stability, as they dump more.

I used to/ still do even though the shares are worthless, a company that could use a home's copper wires to provide broadband connections at 100megs. You buy a box and voila, you are up and running. It was installed in some Canadian Hotels and even in the Middle East...HomePlug, The tech still exists but no one was interested in funding it.

IMHO, AXPW will suffer a similar fate, as did Broadband over powerlines and wireless power transmission.

2008 Oct 12 11:49 AM

[John Petersen:]

The situation with the Shareholders Trust is way too complex to get into, but the reported sales involved restricted stock with a new holding period. So there was no market impact. If things work according to plan, the vast bulk of the shares in the trust will eventually be distributed to several hundred small individual holders.

A handful of directors and other insiders have something north of $30 million of their personal cash invested in Axion. Clearly somebody is gaming the stock right now. But I'll give long odds that the gamer has not done his homework.

2008 Oct 13 11:47 AM