Alternative Energy Tax Credits for the Storage Sector

Last Friday's extension and expansion of tax credits for solar energy property will for the first time provide substantial tax incentives for the use of storage devices and power conditioning equipment in connection with residential photovoltaic solar systems. While these ancillary systems have always been included in the regulatory definition of qualified electric generation equipment, the old cap of $6,667 on eligible investments was typically exhausted by solar panel purchases, which left no real incentive for ancillary systems. With last Friday's elimination of the cap on qualified solar energy investments, the entire system, including solar panels, storage devices and power conditioning systems, will now be eligible for the 30% Federal tax credit. This is a major change.

I am loath to venture a guess as to the amount of additional revenue that manufacturers of energy storage products will book as a result of this simple change in the tax code. But I am more confident than ever that the first big beneficiaries of future decisions to include storage capacity in residential solar systems will be established lead-acid battery manufacturers like Exide Technologies (XIDE) and Enersys (ENS), emerging advanced lead-acid battery manufacturers like Axion Power International (AXPW.OB) and emerging flow battery manufacturers like ZBB Energy (ZBB).

It's hard to find anything positive to talk about when the Dow may stabilize under 10,000. But when the turbulence subsides and investors begin looking for investment sectors that are likely to outperform the market, the expansion of Federal tax credits to include the enabling storage technologies that make alternative energy work for regular guys should be important.

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

Comments

[nakedjaybird:]

Actually, I'm for subsidizing the best storage device out there: the GRASS TANK (be it from algea, switch grass, canola, or something new that can be grown on unused CRP dryland, which is already subsidized for doing NOTHING!).

2008 Oct 08 12:09 PM

[nakedjaybird:]

And I forgot to mention the working end of the GRASS TANK: a biofuel injected no-moving-parts-burner encapsulated with solid state direct conversion of waste heat to electricity with 80-90% capture of all energy burned vis-a-vis the 12-20% we capture today. And that electricity can be generated in stationary or mobile applications - in place of coal, nat gas, or even gasoline - now, where could that be?

2008 Oct 08 12:15 PM

[John Petersen:]

I have no idea where that could be sir but if they need a lawyer, be sure to give them my name!

2008 Oct 08 03:37 PM

[calvino:]

I have been following axpw for about twelve months. Interesting, interesting and very disruptive. I think there is high potential, especially since they already manufacture the specialized antique batteries in Pennsylvania. Or would Exide find it more profitable to keep cycling through conventional lead acid cells every four to five years rather while letting axpw suffocate through lack of capital and short selling?

2008 Oct 09 02:56 AM

[John Petersen:]

Axion had $12.5 million in cash at June 30th and was spending about $2.5 million per quarter. So it already has enough cash to run well into next year. It also has a fully operational plant that can generate $50 to $75 million in in annual revenue from standard lead-acid battery sales year. For several months they've been negotiating with major LAB producers to set up toll-manufacturing contracts that will use all or part of the excess capacity. Since every standard LAB plant in the country is currently running full tilt and the majors are adding capacity, I'm very optimistic about the prospects for a toll-manufacturing contract.

Axion is currently manufacturing electrode assemblies for roughly 10 PbC batteries per day using a very labor-intensive process. Now the issue is automating the process so that they can get to hundreds, then thousands and then tens of thousands of units per day. Automated equipment has been ordered that should take Axion into the 1,000 unit per day range at a modest cost. After that, more money will probably be needed if demand develops as anticipated. But even at a selling price of $200 to $300, a thousand units a day represents $50 to $75 million in additional potential sales.

On balance, I think waiting for Axion to run out of money would be a bad bet.

2008 Oct 09 06:47 AM

[nakedjaybird:]

Joh Peterson - I'll tell you where that is when their stocks are at highs - until then, you get no info, nor any pushes for lawyering.

2008 Oct 09 12:08 PM

[nakedjaybird:]

PS - how many foreign languages do you handle? You have not much time to learn more. Say two years max.

2008 Oct 09 12:10 PM

[nakedjaybird:]

PPS - and the only reason it will happen offshore first is because the US is too encumbered.

2008 Oct 09 12:12 PM

[Ricknplano:]

John,

Thank you for the additional info on Axion. I noticed at the Merriman Investors Conference they were using a significantly lower cost per KWH for PbC than on their website. That makes their technology seem much more competitive than the data on the website and helps me understand your optimism. I am also glad to learn their cash will carry them through mid-year. Thanks again for your insight. And though I am not expecting the new tax credits to have any measureable impact on overall demand, it helps a little and good news is hard to find in the stock market at the moment.

2008 Oct 09 03:06 PM

[John Petersen:]

Rick, I've not seen any hard cost per watt hour data for almost a year and think your data on that issue is probably more current than mine. It is certainly more current than the April 2007 data on Axion's website. I personally think that it's time for a website update but if it comes to a choice between improving aesthetics and improving technology, the technology improvements should win every time.

I started my career as a tax specialist and spent most of the early 80's working on tax sheltered investments. Before the rates fell during the Reagan administration and the AMT gutted the residue, even a 10% ITC was a huge driver of qualifying investments. The consensus is that tax rates are going up - way up. If they do a reasonably leveraged investment in solar may well generate tax benefits that exceed the out of pocket costs. If things work out the way it looks like they might, we may see a big resurgence in an investment class that's been dead for the last 25 years. All I know for sure at this point is that I'm dusting off my copy of the IRC and regulations.

2008 Oct 10 03:08 AM

[NOWHEREMAN:]

Its not short selling doing a number on AXPW, its one of the Beneficial 10% owners consistently selling shares at $1.10.

Its not unusual for the owner to buy shares even if the company is failing or to keep up a good front when its his idea at stake...Yang at Yahoo...

There will be no funding for this technology unless it can make inroads with the military. The idea and product may be great in the long run, but unless they get funding within the next 6 to 12 months, I doubt they will exist other than as a memory. AXPW drops below $1.00, as is likely, it will head down and then off the Bulletin Board and onto the Pinks.

2008 Oct 12 12:03 PM

[John Petersen:]

Paul, it's neither short selling nor insider sales. It's just more buyers than sellers and market makers trading for lunch money. I would encourage you to review Axion's most recent SEC filings to get a clearer view of its cash reserves and operational plans.

2008 Oct 12 01:02 PM

[Actualizer:]

John, do you think that the whole ITC would count for an energy storage system that is charged with both solar and utility power? The economics of these things make it such that the ROI increases with use, so it seems it would be good to charge it with base load at night, solar power in the morning, and then discharge all the energy during peak times in the afternoons and early evenings.

2008 Oct 20 09:48 AM

[User 283977:]

Just looked at AXPWs 10Q… Looks kind of scary....

2008 Dec 07 11:48 AM

[John Petersen:]

Bob, the 10-Q looks exactly like one would expect from a company that's leaving the R&D phase and entering commercialization. Subsequent to the date of the 10-Q, the company announced a $6 million purchase order for standard lead-acid products under a supply agreement that should generate a couple million a month in revenue by the middle of next year.

If the PbC batteries start rolling off the line on schedule next summer, the revenue could increase by another 100%.

The past has been bleak but the future's looking pretty solid.

2008 Dec 07 12:38 PM

[User 283977:]

Thank you for your reply John. I figured the government would finally come around to the position that they could not let GM and Ford go bankrupt. Made some money on that bet :)

I also expect that part of the conditions on any loan will be a stronger commitment towards the production of electric vehicles. So, I've been looking for battery technology stocks. The upside potential for AXPW seems plausible and substitutive while the downside risk is quite small given the stocks current price. I wish more of Seeking Alphas authors were as knowledgeable as you. Your on my Authors reading list. Thanks for the knowledge!

2008 Dec 07 02:14 PM