For several months I’ve been writing about manufactured energy storage devices and the companies that develop and manufacture them. My basic theme has been that these devices are fundamental enabling technologies for cleantech, the sixth industrial revolution. I’ve repeatedly said that profound economic changes were rapidly evolving and that energy storage would be a major investment theme for decades to come, but even my unbridled optimism could not keep pace with the realities. While most investors have been focusing on obvious problems like bad mortgages, tight credit and recessions, immense changes in the energy sector have gone almost unnoticed. As a result, most investors do not understand that the energy storage sector of today does not even bear a passing resemblance to the one I started writing about last summer.
The economic stimulus bill signed into law last Tuesday includes $2 billion in “facility funding awards” for manufacturers of advanced battery systems and vehicle batteries that are produced in the United States. In the context of an $800 million economic stimulus package, $2 billion is little more than a rounding error. In the context of an industry that would report approximately $1 billion of domestic property plant and equipment on a hypothetical consolidated balance sheet, the amount of the facility funding awards is mind-boggling.
In addition to the facility funding awards, the economic stimulus bill provides an indeterminate amount of grants for energy storage research, development, demonstration and deployment (“RDD&D”) as part of a $4.5 billion pool set aside for electricity delivery and energy reliability. Once again the RDD&D number is easily overlooked in the mega-bill, but it eclipses cumulative VC investments in the energy storage sector by a wide margin.
Finally, I’ve previously reported that the bill includes $300 million for Federal purchases of fuel-efficient vehicles and a substantial expansion of the tax credit regime for electric vehicles, but until I saw a chart in the Wall Street Journal that attached a $2 billion budget cost to the tax credits, I didn’t fully understand what was happening on the demand side of the equation.
When you add up $2 billion in facilities grants, a likely $1 to $1.5 billion in RDD&D funding and an additional $3 to $5 billion in tax credit subsidized consumer demand, it’s easy to see the truth in the late Senator Everett Dirksen’s legendary quip “a billion here, a billion there, and pretty soon you’re talking real money.”
When the Wall Street Journal recently asked Energy Secretary Chu about time frames, the Secretary said, “To really stimulate the economy and help the U.S. recover from this dire situation we’re in, my feeling is, a substantial fraction, a majority of it … you’re starting to cut checks within half a year to a year.” Later in the same interview, Secretary Chu observed, “The synopsis of the loans I’ve seen in innovative green energy they’re in the hundred-million dollar range.” When discussing the methodology he wanted to use in evaluating funding applications and allocating funds, Secretary Chu said “There’s always a risk. . . . The protection is to get really good people to ask the right questions, to do a real evaluation. There are two ways of doing this: You can ask the right questions, and you can get people who are good at this sort of economic project management, who are experienced in "how do you smell something that doesn’t look like it’s going to fly?" or the financial business plan or basis of the company.”
Everything I’ve read so far tells me Secretary Chu is a pragmatist who understands that modest projects do more to create jobs than mega-projects; every project entails unavoidable technical, business and market risks; there is no single technology that can provide a cost-effective solution for all essential energy storage needs; and none of the principal players in the energy storage sector has the depth of management, technical and manufacturing expertise to successfully implement a mega-project. While I have no doubt that some battery companies will make the same kind of piggish requests we saw in connection with the auto industry bailout, I believe the only sensible approach open to the DOE is diversification across a broad range of companies and technologies, which tells me that a large number of $100 to $200 million grants are far more likely than two or three mega-project grants.
I’ve been following a group of pure-play public energy storage companies since last August. While companies like Advanced Battery Technologies (ABAT), China BAK Battery (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ) may derive some collateral benefit from increased sales of tax credit eligible products, they are essentially Chinese companies that are not likely to be effective competitors for facility funding awards and RDD&D grants. If you eliminate the Chinese companies from my tracking list, the number of U.S. based companies that have a reasonable chance of effectively competing for a portion of the billions in grant funding gets very short.
The following table identifies twelve pure-play U.S. based public companies that I view as credible competitors in the DOE grant process. The table includes a summary product description, a classification of their current product commercialization status, their 12-month high stock price, last Friday’s closing stock price and their estimated current market capitalization. Every one of these companies is developing or manufacturing energy storage devices that will be essential to our clean energy future and each of them should be able to make a compelling case for a reasonable amount of manufacturing or RDD&D funding (click on the table for a PDF version).
When you consider that the $1.9 billion combined market capitalization of these twelve companies is only a fraction of the available Federal grant funding, it isn’t hard to understand why I see significant potential for impressive short-term gains as the potential federal grants are reduced to approved funding applications over the next year.
I would not presume to pick the winners of the upcoming grant application process or even begin to guess the amounts that the various companies are likely to request or receive. I will, however, suggest that as a group, this short list of pure play energy storage companies stand to receive cash infusions that could easily represent 50% to 300% of their current market capitalizations and propel their business fundamentals to an entirely different level. I think a balanced portfolio of these twelve companies should be an easy double for investors over the next year regardless of what happens in the broader market.
Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).
John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.