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Lithium Ion Batteries And GEVs Are Faith-based Cures for Oil Addiction

John Petersen

Last Tuesday a reader sent me a copy of "Ending the ICE Age," a new industry overview from Bank of America Merrill Lynch analyst Steven Milunovich on the future of plug-in vehicles, which the newly organized Electrification Coalition has christened grid enabled vehicles, or GEVs. After spending several hours studying the report I concluded that Mr. Milunovich has found the true religion of the new millennium while I'm still an unwashed pagan, or worse yet a heretic.

The grim reality is that when you look at American energy policy as a faith-based initiative, a new religion with its own rigid doctrine, dogma and ritual, it begins to make sense. It explains why our Secretary of Energy feels comfortable with a public comment that he's agnostic about natural gas. It also explains why the coastal waters of California and Florida together with huge swaths of Alaska have been forever consecrated as holy ground. It even explains why climatologists, eco-clerics and fanatic faithful feel justified suppressing facts and ostracizing skeptics that call their world-view into question.

It's a 21st century version of the Spanish Inquisition and I have a front row seat. What fun!

The Milunovich report is the third bullish analysis of GEVs that I've reviewed since the beginning of October. The other two came from Credit Suisse and HSBC. All three reports wax poetic on the fuel savings and CO2 reduction potential of GEVs, all three assume that battery pack costs will fall from current levels of roughly $1,200 per kWh to something on the order of $500 per kWh over the next five to ten years, and all three warn that the GEV industry will not bear fruit unless lithium-ion battery developers can deliver on their promises to make cheap, powerful, durable and safe products. The fundamental problem with all three reports is they don't ask whether the premise of GEVs is reality, or blue smoke and mirrors. The only way to answer that question is with a spreadsheet that presents a side-by-side comparison of the alternatives. I'll try to keep it simple.

Reality vs. Blue Smoke and Mirrors

The best information I've been able to lay my hands on indicates that the capital cost of a new lithium ion battery plant is on the order of $1,000 per kWh of annual capacity. The following table provides a simplified analysis of the economic impact of a hypothetical $500 million plant. It provides a baseline column for conventional internal combustion vehicles, together with additional columns that allocate 100% of plant capacity to battery packs for Leaf class BEVs, Volt class PHEVs and Prius class HEVs. To minimize controversy, I've assumed that the batteries will cost $500 per kWh; every vehicle will travel 12,000 miles per year; every GEV will get 4 miles of electric-only range for each kWh of charge; and all GEVs will use electricity from utilities that emit the national average of 585 grams of C02 per kWh.

Economic Impact of $500 Million Lithium Ion Battery Plant
Production Capacity 500,000 kWh Per Year









ICE
BEV
PHEV
HEV
Battery Pack Requirement

  24 kWh
16 kWh   1.3 kWh
Vehicles enabled per year

20,833
31,250
384,615








Vehicle cost without batteries $20,000
$19,500
$21,600
$21,800
Battery Cost at $500 per kWh

$12,000
$8,000
$650
Total vehicle sales price $20,000
$31,500
$29,600
$22,450








Annual Gasoline Use (gallons) 400
0
0
240
Annual Electricity Use (kWh)

3,000

3,000


Annual CO2 Emissions (metric tons) 3.7
1.8
1.8
2.2








Annual economic impact






Battery sales (000s)

$250,000
$250,000
$250,000
Non-battery vehicle sales (000s)

$406,250
$675,000
$8,384,615
Tax credits to purchasers

-$156,250
-$234,375

Net economic impact

$500,000
$690,625
$8,634,615








Annual Gasoline Savings (000s)

8,333
12,500
61,538
Annual CO2 Reduction (metric tons)

40,425
60,638
568,062

While the HEV values in the table are very attractive in the context of a gasoline fueled car, they get downright gorgeous if you take the analysis a step further and factor in the potential use of CNG as a substitute fuel in conventional HEVs. Think about it – a CNG fueled HEV uses no imported oil and its carbon footprint is lower than a BEV that uses electricity from an average utility. The only significant drawback is an underdeveloped retail CNG distribution system but that impediment is relatively easy to solve since America's natural gas distribution backbone is pervasive, robust and far more modern than the electric grid.

When you calculate gasoline savings and C02 emission reductions per dollar of capital investment, no technology fares better than advanced lead-carbon batteries for start-stop micro-hybrids. To put things in perspective, a $500 million investment in plant and equipment for micro-hybrid battteries would permit the production of 7.5 million vehicles per year, generate roughly $1.9 billion in battery sales, slash gasoline consumption by 180 million gallons and reduce C02 emission by 1.7 million metric tons. In other words it is very likely that the $68 million in ARRA battery manufacturing grants that went to lead-carbon battery manufacturers will generate greater gasoline savings and C02 emission reductions than the $1.2 billion in ARRA grants that went to lithium-ion battery companies. This is not a question of faith. The numbers cannot lie and the magnitude of the differences is too big to ignore. If you really want to make a difference, you take the baby steps and harvest the low-hanging fruit first.

Nobody with a spreadsheet and a rudimentary understanding of mathematics can honestly argue that subsidizing batteries for GEVs will hold a votive candle to using the same funds to subsidize batteries for Prius class HEVs. Adding the cost of GEV charging stations to the abysmal economics results in a picture that nobody but the blindly faithful could love. I have no doubt that a variety of GEVs will be introduced over the next couple of years because that's what the new religion demands. For obvious reasons, I expect the phenomenon to be a flash in the pan.

The Hype Cycle

While I was doing my background research for this article, I came across a wonderfully informative graph titled "Hype Cycle of Emerging Technology" that TIAX LLC adapted from a Gartner Group concept and presented at the Plug-in 2008 conference. The graph is particularly useful for investors because in addition to showing how public perceptions of technologies develop over time, it shows how early stage markets for equity securities develop.



While TIAX suggested that PHEVs were approaching their peak visibility level in May 2008, I don't think we'll reach the peak until 2012 at the earliest. By 2015, when significant numbers of GEVs have been sold to consumers who discover to their chagrin that their oh so sexy GEV is little more than a 20 foot power cord connected to an expensive, temperamental and inflexible automotive supermodel that doesn't like heat, cold or hills, and has a nasty habit of taking several hours to recharge and refresh just when you need it most, we should be well into the trough of disillusionment.

I can almost hear the phone conversations now, "I understand that Johnny Jr. needs to see a doctor for that projectile vomiting thing but I just plugged my GEV into the charging station and I won't be able to get to the school for another four hours. Could you do your best to keep him comfortable, give him a book or maybe an aspirin and tell him that daddy will be there soon?"

I'm a big fan of hard-core economics. I have no fundamental problem with Government subsidies to manufacturers that support critical infrastructure and have a reasonable chance of accomplishing their stated goals. It's an entirely different matter when taxpayer money is used to subsidize luxury consumption. New factories make the economy richer if the fundamental business premise is sound. Eco-bling subsidies to the new faithful have no justification in sound public policy. We deserve better.

The supermodels of the energy storage sector including A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) are well up the hype cycle curve and approaching the Peak of Inflated Expectations. In contrast the stalwarts of the battery business including Exide Technologies (XIDE) and Johnson Controls (JCI), together with new technology entrants like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) that are developing disruptive enhancements to established battery technologies, are just approaching their technology trigger point. As stop-start and mild hybrid technologies become standard equipment on internal combustion engines over the next few years, I believe these overlooked low-priced companies with sustainable business models that work in the real world of pagans and heretics will sparkle.

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 a small long position in Exide Technologies (XIDE).



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Comments

John,
I see two flaws in your anti-PHEV argument, although I agree with the general gist.

The first flaw is that your numbers are for average users. No user is average, and some are extreme enough that their usage would justify PHEV technology. Consider a PHEV taxi doing runs from an airport: it returns regularly to the airport and waits for its next passenger, during which time it could be recharging. Such a PHEV with a relatively small battery pack might easily be economic because it would have the equivalent of multiple charge cycles a day. If my guess is true, then focused subsidies for such heavy use vehicles might be justified.

The other quibble I have is that you don't look at what I would term a "mild PHEV." Suppose we take a Prius style HEV with a 1.3kW battery pack, and give it a plug and an only slightly larger 2kW battery pack.

A normal Prius usually maintains its battery around 40-60%, or at 0.4kW, so this mild PHEV could be charged about 1.6 kW every night or 6.4 miles of electric range, for the cost of only 0.7kW of batteries, or about $350, using your numbers.

If the vehicle is driven at least 6.4 miles 250 days a year, that's an annual gas savings of about 26.7 ($107) gallons, and electric usage of 400 kWh ($40), for a annual savings of $67, or a payback of 5 years. While this is not nearly as good as the incremental advantage of converting an ICE to a hybrid, it's well worth doing.

Finally, your point about the sick kid and the GEV that needs to charge is beside the point of PHEVs. You can always unplug it and drive it like a hybrid.

Tom, there will undoubtedly be users like the taxi you mentioned that can make more effective use of a PHEV than others. But when we start looking at a national policy we have to deal with broad averages and subsidizing GEVs is a sub-optimal policy by an order of magnitude. It all goes back to the idea that subsidies should be based on contribution to the cause rather than proactive technology choices.

When your constraint is battery plant capacity then anything over an HEV battery has to be viewed as taking another vehicle off the road and I have a hard time imagining where the savings on a low capacity plug-in would exceed the savings that would have been realized from three HEVs (assuming a 4 kWh capacity for the plug-in).

I agree the child example would not be as likely in a PHEV, but I'm not optimistic enough to forecast a hassle free ownership experience.

You wrote:
I have a hard time imagining where the savings on a low capacity plug-in would exceed the savings that would have been realized from three HEVs (assuming a 4 kWh capacity for the plug-in).

Here's the situation: low use hybrids. I have a Prius that sits in the garage 5 days a week. The batteries in my Prius would be saving a lot more fuel if they were added capacity on a PHEV that is driven every day.

If you really want an incentive that uses batteries most effectively, it has to distinguish between usage patterns. How can you do that? By charging vehicle registration fees based on vehicle miles traveled (VMT), rather than a flat fee per year. If you then charge a lower (or even free or negative) per mile fee for GEVs, presto!, the highest mileage users such as taxis have the most incentive to drive a GEV.

VMT fees have the added advantage that they create an incentive to reduce driving, an excellent way to reduce fuel use and GHG.

That suggestion seems a good deal more rational than the current scheme.

I think you underestimate the gasoline usage of the ICE-powered vehicle. You are assuming 30mpg on average. I suspect with the current fleet on the road 30mpg isn't even the average for highway driving. Most driving is probably done in suboptimal conditions (lower speed, stop-n-go traffic, low tire pressure, etc). I'd guess more like 20-22mpg average which would increase the CO2 output in the ICE column significantly.

Skip, the 30 mpg number was what Milunovich used for a new ICE and if we want to be even handed the only fair way to assess the impacts of new GEVs and HEVs is to compare them with new ICE. Ultimately it doesn't change the fact that GEVs are a suboptimal use of batteries until all cars are at the HEV level.

Tom & John -- Fleets -- metro busses, USPS, UPS, FEDEX, etc. -- have seemed for some time the only seriously feasible market in the near term for electrification. And I have no problem with the govt. subsidizing fleet demonstrations projects. Fleet owners have staffs to oversee the new equipment and charging operations in their central garages; in contrast, individual GEV owners would learn of problems only when a battery explodes or melts down in the garage or when Johnny dies at school -- one single incident would destroy the V2G industry in a moment. Fleet-to-grid (F2G) alone would probably give the utilities enough storage to keep them happy, and maybe fleet owners really could make at least a little real money from "renting" their batteries to utilities when plugged in; it's clear that individual car owners never would (that's a topic for the future). Sure, why not add lght-duty fleets like taxis to the list of fleets; they have central garages, too. Besides, maybe Better Place will set up charging stations at airports where taxi drivers could schmooze with celebrities dropping off their $200,000 Tesla roadsters for airport valet parking. But one of these days we really ought to get serious about achieving goals, instead of seeming to. Great summary article, John!

John, even fleet vehicles have the same problem with suboptimal use of battery power. The fundamental difference between an HEV and a GEV is that the HEV only uses the battery to recover energy that would have been wasted in braking. The GEV in comparison uses a battery to carry the entire load of acceleration, cruising and waste elimination. It's a highly efficient process in an HEV and a highly inefficient process in a GEV. I visited Maxwell a couple weeks ago and they pointed out that busses create 80% of their pollutants during acceleration and that's the stage where the real savings can happen. The rest is fluff.

The calculation identifying the most efficient ways to allocate batteries is interesting, but misses the sociological reality that there is a vast diversity in people's interest and commitment to environmental responsibility. There are people who will pay the premium to have a lower emitting car, and we need to use that capital to spur battery development as well as push everyone to get into a much more efficient vehicle. Ultimately PHEVs are a better solution...lower emissions, lower operating costs, less dependence on foreign oil. Seems to me their plug-in range should slowly be increased as battery costs come down.

Until batteries are unlimited, each GEV effectively forces a dozen other car purchasers who cannot afford the big premium to burn more gasoline, emit more pollutants and adding insult to injury, subsidize the GEV. It's unethical in a polite conversation.

John -- I hadn't explicitly heard the idea that Maxwell told you about acceleration. But it makes me realize now that, based on something I read, I've just begun assuming advanced capacitors of some sort will be part of the electrical "kit" inside at least heavier-duty vehicles such as buses and trucks, paired with their batteries to handle high-power (high-emitting) moments like acceleration. Maybe I got that in something I read about Maxwell. I don't know much about how it would work.

Maxwell makes a great case for using supercapacitors in heavy transportation and there are people who want to try a supercapacitor only bus that will recharge at every stop to pick up enough energy for the next half mile. It's all fascinating and the ultimate question will boil down to which technology offers the lowest total cost of ownership. As I keep saying, there is far more need for cost effective storage solutions than there are solutions. That makes it easy to believe that everybody who brings a technology to market will have more business than they can handle.

"Until batteries are unlimited, each GEV effectively forces a dozen other car purchasers who cannot afford the big premium to burn more gasoline..."

This is muddled economics. Nothing is ever unlimited. Everything comes with a supply and demand curve. Your argument depends on an unjustified assumption that the supply of batteries is very inelastic...so that a battery used in a PHEV precludes building several HEVs. In reality, demand for PHEVs will increase the price of batteries just a bit and spur building of battery factories and better batteries, maybe ultimately lowering the HEV battery price.

Ultimately you are right that rational planning would get everyone out of their SUVs and into HEVs first, but I can't control what other people do. Your analysis is far from convincing me that I should choose a HEV like the Prius over a PHEV if one were available. To do that you have to do a full economic analysis showing how inelastic the supply of batteries is and then determine how many other people actually would have chosen HEVs if I had chosen a HEV instead of a PHEV. My intuition says you are flat wrong...that this analysis would show that production of the Chevy Volt for example will have a small, and eventually even a negative effect on battery prices for the Prius.

John, I just read through your series on Battery Investing for Beginners and understand more now about where you are coming from. Thanks for the great information! You have a strong argument that the EV hype is promising more than current technology can deliver, and the path to significantly cheaper battery technology is unclear, so investing in the cool Li-ion companies is a bit risky. However, I disagree with your claims that PHEVs do not decrease dependence on foreign oil or CO2 emission. Your numbers clearly show that they do decrease both of these. Your point is that there are more cost-effective ways for society to decrease oil dependence and CO2 emissions. Here I agree. But as an individual environmentalist, I don't have much control over what society does, and so it may still make sense to invest a few thousand dollars in adding 20 miles plug-in range to a hybrid vehicle. Even without government subsidies, you pretty much break even due to lower operating costs at current gas prices compared with a non-plug-in hybrid. (4 extra kWhrs of battery storage at $1000/kWhr is $4000 plus $2250 for electricity (6000 electric miles per year for 10 years on electric at 4 miles per kWhr and $0.15 per kWhr), which is within the measurement uncertainty of 240 gallons a year at $3 per gallon over 10 years = $7200). And eventually we need something better than HEVs because there is not enough fossil fuel to have 7 billion people driving even 50 miles per gallon cars for very long.

I don't disagree that supplies are elastic, but they're far less elastic than most people believe and the capital costs of building new plants are immense, as is the expected cost of charging infrastructure.

When it comes to government policy, however, we're dealing with an entirely different kettle of fish and subsidizing GEVs which are inherently inefficient users of batteries while not subsidizing HEVs, which are tremendously efficient users of batteries and far more affordable is an unconscionable elevation of symbolism over substance.

I agree wholeheartedly that you should be able to buy whatever works best for you. When you ask me to pay for your choice, we have a problem.

This article should be exorcised. How's that for a bad religious analogy? In other words, you a bigoted asshole. Shut up.

Vitriol does not change facts. When they change so will my opinion.

Wake up. I'm not talking about your "facts". I'm criticizing your ridiculous choice of words and analogies, which betray your religious intolerance and historical ignorance. Your lack of intellect on this point reduces the quality of your facts and analysis to the level of a tarot card reader. Grow up and stop trying to be so cool by impressing people with your failed political correctness.

You have obviously confused me with someone who gives a damn what religion people practice. You couldn't be farther from the truth. But regardless of what you believe or don't believe, don't ask me to pay for it. According to Dan Brown's latest novel, the ABCs of religion are assure, believe and convert. I don't buy the assurances. I don't buy the belief system and I sure as hell don't want to be converted. Please feel free to put me on your list of banned writers.

Heretic Diviner:

While we welcome debate here at AltEnergyStocks.com, we have very little tolerance for what is known in web parlance as "trolls" - individuals who, under the cover of anonymity, use overly aggressive and insulting language toward authors or other commenters.

If what John Petersen or any other author writes is offensive to you to the point where you feel it should not be published here, please contact us and we will investigate.

If you want to respond to John or anyone else directly, even better, provided you are willing and able to do it within the confines of civility.

However, if you are not able to elevate your comments beyond mindless insults that can't possibly form the basis of an intelligent discussion, then your comments are not welcome here.

All future comments like the 2 above will be banned.

Charles Morand
Editor
AltEnergyStocks.com

John, your model looks like it might be apt for cars that will be driven where the grid is much more brown than green for all or most of their road life, but that would mean betting against the greening of those grids sooner rather than later. Where your model starts to break down for me is where grids already are very green, like here in Manitoba (mostly hydroelectric with a growing share of wind). Ditto for places like Ontario, BC and California where the grids are getting very green. I have a few other concerns with your model:

You've kept the cost of carbon externalized, thereby underestimating the value added of the lowest emission vehicles. For many climate scientists and people like myself, the price of carbon at a time when we appear to be flirting with climate catastrophe tipping points is almost incalculable. I would price it, as some economists do, in the hundreds of dollars per tonne range, potentially escalating to $1000 or more during the lifetime of any car manufactured in the next few years. This consideration alone makes the GEV a compellingly better social value (for me and others) than the HEV, assuming a relatively green grid. And if we reframe "subsidies" as well-deserved rewards for emissions avoidance, it potentially makes the BEV/GEV a better dollar and cents value too.

You also haven't priced in the value added of grid energy storage and reverse metering (I can't remember the exact terminology, but you know what I mean) in the more battery-rich vehicles. The grids will get a lot smarter within the lifetime of any cars we manufacture today, making the virtual GEV fleet a valuable adjunct for utilities.

As another person pointed out, the lower cost of fueling the battery-rich vehicles has also been left out. And if what I've read and heard about the very low maintenance cost of ICE-free vehicles is true, that's another significant dent in the lifetime cost of the GEVs.

I appreciate the blog. Thanks.

Syd, for the last 30 years my life experience has been that simple projects take twice as long and cost twice as much, and the multiplier increases with project complexity. Ultimately I believe this should be a consumer's choice where each of us has the freedom to choose the solution that makes the best sense for our situation. The averages in North America are horrible. Using taxpayer money to subsidize solutions that will not, on average, accomplish the intended goal is ethically wrong.

John. Please don't confuse my novels with real life. I am a fiction writer. The novels are exactly that, fiction. You would do well to enjoy them as literature, not as rules to live by.

"The best information I've been able to lay my hands on indicates that the capital cost of a new lithium ion battery plant is on the order of $1,000 per kWh of annual capacity."

That's just preposterous. If this is true, then what you are saying it is it $1 per Wh of annual capacity. I costs $1 dollar to make 1 Watt hour per year. Something is completely wrong with this analysis and cost basis.

Tammy, I agree that the numbers are preposterous, but they're not wrong. If you go back into the archives of the lithium ion battery producers and run the numbers they're talking roughly a million dollars for each megawatt hour of new manufacturing capacity. While the costs are depreciated and the plants have been around for a while, A123 has 170 mWh per year of manufacturing capacity in China and their PP&E is about $53 million. In connection with the ARRA battery grants which were supposed to average about $150 million each, the stated requirement was:

For each award made in this area, recipients are expected to build, or increase production capacity of, manufacturing plant(s) in the United States that can produce, or be expanded within the constructed factory’s footprint to produce, 20,000 to 100,000 PHEV batteries and/or their cells per year or equivalent volumes of other EDV, or microhybrid (stop/start assist) batteries. For purposes of production volume estimation each PHEV battery must be capable of delivering at least 5kWh of available energy (production of 100,000 to 500,000 kWhs).

$150 million in 50% grants for annual production of 100 to 500 million watt hours is fairly clear in my calculator.

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