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EPA and NHTSA Predict 42% Market Penetration for Start-Stop Systems by 2016

John Petersen

On April 1st the National Highway Traffic Safety Administration [NHTSA] and the Environmental Protection Agency [EPA] announced a joint final rule establishing fuel economy standards for all light duty vehicles sold in the United States. In my last article, I focused on the overall fuel efficiency improvements the new CAFE regulations will require. After spending a couple days reading and digesting the Final Rule Release, which runs to 1,469 pages, I've concluded that my initial optimism over the future of start-stop technology was understated.

The Final Rule Release begins with several hundred pages of introductory materials that describe the key efficiency technologies automakers are expected to implement between now and September 2015. It describes start-stop as:
  • 12-volt micro-hybrid (MHEV) – also known as idle-stop or start-stop and commonly implemented as a 12-volt belt-driven integrated starter-generator, this is the most basic hybrid system that facilitates idle-stop capability. Along with other enablers, this system replaces a common alternator with a belt-driven enhanced power starter-alternator, and a revised accessory drive system.
After a lengthy discussion of how each of the principal efficiency technologies will contribute to the overall goal and explaining the freedom the individual automakers will have to pick and choose solutions, the Final Rule Release includes the following table, on page 484, that identifies the automakers and estimates the percentages of their 2016 model year fleets that will incorporate each technology.

CAFE Technologies.png

In the supplemental tables to its "Annual Energy Outlook 2010," the Energy Information Administration forecast new light duty vehicle sales of 16.5 million units in 2016, which implies nationwide sales of 7 million vehicles with start-stop systems if the NHTSA and EPA estimate is accurate.

I've previously explained why start-stop technology is hard on starter batteries. It basically boils down to the fact that the battery will need to start the engine several times during a typical commute instead of starting it once. While the automakers can get better start-stop performance by using ultra-premium lead-acid batteries, even premium batteries have problems with a chemical process known as sulfation which is the primary reason lead-acid batteries fail.

I've also explained how a new generation of lead-carbon battery technologies including the Ultrabattery from Australia's Commonwealth Scientific and Industrial Research Organisation [CSIRO] and the PbC® battery from Axion Power International (AXPW.OB) are a game changer for energy storage because they reduce or eliminate sulfation while significantly increasing both acceptable charging rates and available power. The end result is a battery that's price competitive with premium lead-acid batteries and performance competitive with lithium-ion batteries, as shown in the following graph from Sandia National Laboratories.

Sandia PSOC.png

For eighteen months I've been predicting with increasing confidence that the cleantech revolution would start with baby steps, rather than giant leaps, and that advanced lead-acid and lead-carbon batteries would play a crucial role in the widespread implementation of micro, mild and strong hybrid electric vehicle [HEV] technologies. My confidence ramped up a notch or two last August when President Obama announced $2 billion in ARRA battery manufacturing grants that included:
  • $34.3 million to Exide Technologies (XIDE) with Axion Power International for the "production of advanced lead-acid batteries, using lead-carbon electrodes for micro and mild hybrid applications;" and
  • $32.5 million to East Penn Manufacturing for the "production of the UltraBattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications."
My confidence continued to rise as reports from the Energy Information Administration, Frost & Sullivan, Roland Berger Strategy Consultants and most recently Lux Research concluded that start-stop technology would become a standard option for new vehicles sold in both Europe and the U.S. over the next few years. Now that the NHTSA and EPA have weighed in with their estimate that 42% of the 2016 model year new car fleet will be equipped with start-stop, my confidence level couldn't be higher.

Since I started blogging I've argued that media and political hype about plug-in vehicles has created an odd dynamic where market expectations for the potential long-term beneficiaries of the cleantech revolution are highly inflated while market expectations for the likely near-term beneficiaries are unreasonably low. There is simply no other way to explain the fact that Exide trades at 17% of historical sales while A123 Systems (AONE) trades at 3x forecasted 2012 sales, or that Axion trades at less than 4x its tangible book value of $26 million while Ener1 (HEV) trades at closer to 10x its tangible book value of $57 million.

For the reasons I've discussed at length in a series of articles about the fundamentally flawed idea that we can use batteries to replace fuel tanks, I believe there are significant risks that the lithium centerfolds will fail to meet the market's high expectations and their stock prices will suffer. Conversely, I see a very high probability that Exide, Axion and others will outperform the market's modest expectations and their stock prices will respond accordingly.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock.



was posted on AltEnergyStocks.com.


       

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Comments

From your disclosure, it looks like you sold your position in XIDE. Any comments on this?

The small positions I had were in a "play account" that I created for the purpose of testing my theories. When a short-term cash need arose that didn't justify the sale of other assets, I closed the play account.

John, you seem really bullish on Axion and I'm wondering what you view as the critical milestone they need to reach in order to really take off. It looks like they lost a lot of money last year made major changes to the management team. They have fresh capital but do they have a working product? And if the product works, what else is missing from the equation?

You need to remember that Axion is my old home team and I have a lot riding on its future. With that being writ large, I couldn't be happier with the way things are progressing.

Most of Axion's losses over the last few years have been non-cash charges arising from warrants, accrued preferred stock dividends and the like. Their cash used in operations was only $6.6 million last year, down from $8.9 million in the prior year. Since inception, total cash used in operations has been $30.5 million, including $18.4 million in R&D. Basically, the boys throw nickels around like manhole covers.

Except for the CFO, the management changes have all been additions and upgrades that tell me the board expects a lot more activity in the near future. Likewise, the fact that they raised $26 million in December is very telling because survival could have been insured for a couple years with half that amount. Knowing the board the way I do they wouldn't have raised that much cash without a clear short-term plan for major capital plant expansion. The financing also cleaned up the capital structure so that all the preferred stock positions were flushed, which will make Q-1, 2010 the first time ever when it's all common stock with no weirdness.

The science at Axion has been clear from day one. The issue has been getting the negative electrode assemblies into a format that can be used as a plug-and-play component in any existing lead-acid plant. The ultimate goal is to get the technology to a point where Axion can make complete batteries in its own plant and sell electrode assemblies to Exide and others who will then build co-branded batteries in their plants.

Axion's first automated electrode fabrication line was put in service last year and they've spent several months doing shakedown testing, finding glitches and figuring out how to improve throughput and automate quality control. It's hard-core industrial engineering of finding the cheapest way to make a consistent product. They're currently planning a second generation fabrication line that should be operational by the end of this year. Once they have a fabrication line that works the way they want it to, cloning the line several times to ramp up capacity should be pretty simple.

In several conference calls and presentations, the CEO has explained that commercial prototype PbC devices have been in the hands of European OEMs since last May and the testing is going well enough that the OEMs are talking about larger scale road testing. I think the fact that the devices have not been rejected by potential customers who are working under tremendous time pressures is encouraging.

I've been in Axion for a long-time and like my risk profile better today than I ever have before. When you realize that the market price today is within spitting distance of my $1.07 average cost per share, it's pretty easy to be bullish.

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