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Understanding the Development Path for Li-ion Battery Technologies

Last Tuesday a reader who works as a consultant in the energy storage and hybrid electric vehicles industries and sent me an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2009, a high-level policy analysis that discusses the merits, risks and expected costs of an aggressive eight-year initiative to foster the development and facilitate the commercialization of Li-ion batteries. The draft roadmap was written during the last days of the Bush administration, has since been partially implemented in the American Reinvestment and Recovery Act of 2009 and has never been officially released by the DOE. It does not necessarily reflect the latest policy views of the Obama administration. While I don't generally feel comfortable writing about documents that have not been publicly released, I've discussed most of the basic issues and challenges in other articles and believe the conceptual framework, industry assessment, development goals and timelines discussed in the draft roadmap can help energy storage investors make better decisions. So I've decided to take a deep breath, begin with a couple of important quotes, summarize the broad investment themes that can be extracted from the draft roadmap and try to tie it all back to a likely future for the energy storage sector. This is complex stuff so I encourage readers to offer comments and ask questions.

The introductory paragraph of the draft roadmap says:

"Advanced batteries will play a significant role in the energy and economic security of the United States; therefore, ensuring a domestic supply of this technology is critical. Advanced batteries are essential for the development of electric drive, high-efficiency, light-duty, and heavy-duty vehicles. They are also seen as a critical enabling technology for the large scale deployment of renewable energy sources such as wind and solar. In addition, other applications, such as those in the defense and intelligence industries, would benefit from the use of advanced batteries. Current batteries for these applications are beginning to approach performance targets, but their price, size, and abuse tolerance do not yet meet market standards. In addition, nearly all high-volume advanced battery manufacturers are located in Asia. In contrast, the United States has limited manufacturing capability and a small number of trained battery engineers, scientists, and line workers. To be a global leader in the production and sale of advanced batteries, the U.S. must rapidly develop improved technology and establish a U.S.-based battery manufacturing capability."

While the frank message of the introductory paragraph is stunning, the follow-up discussion of the principal barriers to the development and commercialization of Li-ion batteries is an even bigger eye opener.

"PHEV Battery Barriers: PHEV batteries face many of the same challenges associated with HEV batteries (uncertain calendar life, cost, abuse tolerance) plus additional challenges with energy density and specific energy. There is also concern that the deep cycling required of a PHEV battery all-electric range operation will be more difficult than the shallow HEV cycling. The Vehicle Technologies Program Office does not believe that NiMH systems will be able to meet the weight and volume targets of a PHEV battery with greater than a 10- or 20-mile range. ... Although Li-ion batteries can provide the energy and power for a 10-mile system, 20- to 40-mile goals are very difficult even for them. The major challenges to developing and commercializing batteries for PHEVs are as follows:
  • Cost – The current cost of Li-based batteries is approximately a factor of three to five times too high on a kWh basis. The main cost drivers are the high cost of raw materials and materials processing, the cost of cell and module packaging, and manufacturing costs.
  • Performance – Much higher energy densities are needed (for the 40-mile or greater system) to both meet the volume and weight targets and to reduce the number of cells needed for an entire battery, thus reducing the system’s cost. In addition, durability and reliability of current batteries needs to be assessed and possibly improved for use in passenger vehicles.
  • Abuse Tolerance – Many Li batteries are not intrinsically tolerant to abusive conditions such as short circuits (including internal short circuits), overcharge, over discharge, crush, or exposure to fire and other high-temperature environments. The use of Li chemistries in these larger (energy) batteries increases the urgency with which these issues must be addressed.
  • Life – Hybrid systems with conventional engines have a life target of 10 to 15 years, and battery life goals have been set to meet these targets. The goals of 300,000 HEV cycles and 5,000 deep discharge cycles are either unproven or are anticipated to be difficult. Specifically, the impact of combined EV/HEV cycling on battery life is unknown, and extended time at high state of charge (SOC) is predicted to limit battery life.
EV Battery Barriers: For EV batteries, the challenges are similar to those for PHEVs (weight, volume, calendar life, cost, and abuse tolerance), but the challenges are more difficult. Batteries can be developed to meet these targets, but they will be a generation beyond the current state of the art. In general, the research to meet the challenges associated with EV batteries will build on work done on PHEV batteries, just as research for PHEVs will build on the battery technology used in HEVs.

Renewable Energy Storage Barriers: DOE is also considering the role of electrochemical energy storage systems for optimizing the use of renewable energy sources to reduce U.S. dependence on foreign oil. Affordable energy storage could enable increased market penetration for many renewable energy sources such as solar and wind. The targets of this application are different than those for transportation, and alternative electrochemical energy storage technologies need to be considered. In this application, energy density is less important than for PHEV and EV applications. Of paramount importance are (a) low cost, (b) long cycle and calendar life, (c) high system reliability, (d) low maintenance, (e) low self-discharge rates, and (f) high system efficiency."

I've read the draft roadmap several times and think the DOE's development plan for Li-ion batteries has a reasonable chance of success from a governmental policy perspective. Nevertheless, I believe the plan will expose energy storage investors to a high level of business, competitive and technical risk that will take the better part of a decade to resolve. The simple summary for those who do not have the time to study the draft roadmap in detail is:
  • Battery manufacturing is a national security issue and America cannot rely on imports for this fundamental need;
  • Catching up with Asia is not enough and America must become the global leader in energy storage technology;
  • The best available Li-ion battery chemistries are not robust or stable enough to power America's energy future;
  • The best available battery manufacturing technologies are too expensive for a mass-market product;
  • Current material supply chains are not reliable enough to protect America's national security interests;
  • Li-ion batteries cannot become commercially viable without a massive government funded effort to advance the state of the art in battery manufacturing and Li-ion chemistry through two generations over the next decade;
  • The activity we've seen over the last few years is merely a prelude to the main event; and
  • Substantially all of the recently announced plans to build limited numbers of PHEVs and EVs for sale into "entry markets" like state fleets, city busses, utility fleets, USPS vehicles, private delivery fleets and the military are essential steps in the R&D process that allow manufacturers to validate the technical potential of their products before commercial roll-out; and
  • Mass market commercialization of Li-ion batteries cannot occur unless and until all essential R&D work is successfully completed.
While I'm reluctant to compare the development plan for Li-ion batteries with the Manhattan Project, which cost $24 billion (in CPI adjusted dollars) and employed 130,000 scientists, engineers and technicians, the combined governmental and private sector investments could easily be in the same price range by the time the dust settles.

We are entering the age of cleantech, the sixth industrial revolution. We are also witnessing the birth of massive new consumer markets in South America, India and Asia that will put unimaginable strain on global supplies of water, food, energy and every commodity you can name. In combination, these mega-trends guarantee 10 to 20 years of gut wrenching change and economic dislocation. I have enough oil and gas experience to know that the oil industry will not be able to increase production to levels that satisfy the future demand projected by McKinsey and other macro-economic analysts. I have enough experience in energy storage to believe that by 2020 Li-ion battery manufacturing technology and chemistry will probably advance to a point where PHEVs and EVs are cost effective. But given my age, experience and financial responsibilities, I'm unwilling to put my portfolio at risk by trying to pick the winners of a business marathon that will take a decade or more to run and be subject to the unpredictable and highly variable winds of political and economic change.

I recently reviewed a slideshow presentation from a September 2008 clean air conference that described the auto industry as a serial victim of  technology du jour syndrome and offered the following table to prove the point.

25 years ago
15 years ago
Electric vehicles
10 years ago
HEVs and Electric vehicles
5 years ago
Hydrogen Fuel Cells
2 years ago
PHEVs and Electric vehicles
What’s next?

It's enough to make you go Hmmm.

Every analytical report I've seen concludes that global demand for energy storage devices will grow at extraordinary rates for several decades. Over the next few years, the substantial bulk of the revenue growth will go to existing producers of lead-acid batteries that can deliver proven products from existing factories. As cost-effective Li-ion battery manufacturing technologies and chemistries are developed, tested, validated and commercialized, they will rapidly become the preferred choice for extreme performance applications like PHEVs and EVs. As these technologies mature, Li-ion batteries may even make inroads into less demanding applications that have traditionally been the province of lead-acid batteries. Over the longer term a new equilibrium will develop where lead-acid batteries are used for certain applications and Li-ion batteries are used for others. Unless the market forecasts I've seen are seriously misguided, manufacturers of all classes of energy storage devices will have a hard time keeping up with expected demand.

We don't live in a black or white world and it is patently absurd to think that the future of energy storage will be black or white. The reality is far more likely to be a richly mottled canvas dominated by various shades of green. The simple fact is that we need every energy storage technology that's ever been invented, and more. I believe Li-ion batteries, lead-acid batteries, lead-carbon batteries, flow batteries, pumped hydro, compressed air, thermal solar and flywheels will all make important contributions to the energy storage solution. So I believe a balanced portfolio of energy storage stocks is the only sensible approach for investors who don’t have the time, inclination or ability to do their own detailed research. Articles like this one can provide food for thought, but they should not be relied on as investment advice because every author (including me) has his own agenda, preferences, predilections and prejudices.

As an investor, my goal is to buy low and sell high. Based on five years of work in the energy storage sector, I’m convinced that near-term growth in the Li-ion group will be slower than most people expect while near-term growth in the lead-acid group will be faster than most people expect. If my basic thesis about future rates of technological development and revenue growth is correct, the companies in the lead-acid group are likely to perform far better over the next few years than the companies in the Li-ion group.

Readers that want to develop a deeper understanding of the issues and opportunities in the energy storage sector may want to join me in San Diego for Infocast's Storage Week on the 13th through 16th of July. The speaker's list includes more than 80 thought leaders from the battery industry, the government, the utility and automotive industries and the research and development sector. I'll be participating in three panel discussions and hope to return home with new investable insights that I can share with readers in future articles.

DISCLOSURE: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds 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-carbon battery research and development.

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