Separating Sense From Nonsense in Energy Storage Investing
For the last few days the green transportation press has been beside itself with breaking news that the battery pack for the Nissan Leaf costs a staggeringly cheap $375 per kWh. They point to the Times of London as their source, but fail to note that the cost figure was buried in a throwaway sentence in the seventeenth paragraph of an April 4th story about a British executive who'd been transferred to Nissan's headquarters in Tokyo to run their green cars program.
This isn't proof folks, it's hearsay elevated to nonsense that belongs in the same class as the assertion that the $32,780 introductory price for the Nissan Leaf is a better indicator of cost than the Japanese price of ¥3.76 million, or $40,250.
To satisfy my own curiosity, I took a look at Nissan's summary financial statements and found that its normal gross margin is roughly 25% while its normal net income is closer to 5%. With a 20% spread between gross and net it's easy to see how Nissan could claim a small profit while actually taking a beating on each sale. All you have to do is ignore that pesky corporate overhead and everything is beautiful. Despite the halleluiah chorus from the green press, I tend to believe Josh Wolfe of Lux Research was closer to reality when he wrote "Unless Nissan and its battery partner NEC have unlocked the magic Li-ion formula that allows them to manufacture batteries at half the cost of their competitors, Nissan/NEC is almost certainly taking a loss on every Leaf it sells in the U.S., in order to encourage EV adoption and unseat Toyota/Panasonic as the greenest auto-making team."
For those who don't understand how markups work in a business setting, a simple example may be illustrative. If a battery manufacturer spends $375 per kWh to make it's product, it will typically need to sell that product to a customer for roughly $500 per kWh if it wants to pay corporate overhead and earn a profit. By the time a customer builds the battery into a car and then adds its own markup to pay corporate overhead, the battery cost to the end user works out to roughly $667 per kWh. So even if we assume the cost estimate in the Times article is accurate, the cost at the battery manufacturing level is nowhere near a reasonable proxy for the end-user price.
I understand why plug-in idealists want battery prices to collapse. They're all too familiar with the dismal economics that have doomed generation after generation of electric cars to the shredder, and they desperately want lithium-ion batteries to be the automotive equivalent of gene therapy that cures the congenital birth defects. Understanding the motives of idealists, however, does nothing to answer the bigger question – Why would anyone want to own stock in a company that freely admits, "There won't be a market for our product unless we improve performance while slashing our prices by 50% in the short-term and by two-thirds in the long-term." The plan may work for visionaries that want to change the world with battery-powered cars, but I can't see how investors will profit, or for that matter break even.
While the cost arguments of plug-in idealists are economic sophistry based on half-truths, the grander illusion lies in the common belief that lithium wonder-batteries will make all other batteries obsolete and store energy for everything from iPads to solar panels and windmills. It makes for a great story, but it won't happen in our lifetimes.
Most investors are familiar with the concept of disruptive technologies, a term coined by Clayton M. Christensen to describe simple, low-cost technologies that eventually displace established technologies as they mature. According to Dr. Christensen, disruptive technologies often lack refinement and have performance problems because they're new, appeal to an underserved market, and may not yet have a proven practical application; but their low cost creates new markets that induce technological and economic network effects, and provide an incentive to enhance them to match or even surpass the prevailing technology. The following graph illustrates the phenomenon.
Reduced to basics, the plug-in idealists want to take energy storage technologies that were developed for the most demanding uses and make them cheap enough for low quality uses that require huge amounts of storage. The concept flies in the face of time-proven realities that technological improvements invariably give rise to new applications the developers never contemplated and that modest users of high quality products are much fiercer price competitors than wasteful users. If we wanted to create a hierarchy of possible lithium-ion battery applications from the highest value per watt-hour to the lowest value per watt-hour, the list would look something like this:
|Cellphones and MP3 players||5 watt-hours|
|Portable Medical Devices||10 to 50 watt-hours|
|Laptop Computers||10 to 50 watt-hours|
|Electric bicycles and scooters||500 to 1,000 watt-hours|
|Hybrid electric vehicles||1,000 to 1,500 watt-hours|
|Uninterruptible power systems
||2,000 to 8,000 watt-hours
|Plug-in hybrid vehicles||10,000 to 16,000 watt-hours|
|Pure electric vehicles||24,000 to 50,000 watt-hours|
|Utility applications||500,000+ watt-hours|
I see a bright future for lithium-ion batteries in high value applications that only need a little battery capacity, but think it's foolish to suggest that lithium-ion batteries will become a dominant technology for plug-in vehicles and stationary applications that are incredibly price sensitive. In the world of economics each battery producer will do its level best to sell its products to the customers that offer the highest margins. In the real world, nothing but the dregs will be left for use in plug-in vehicles and utility applications.
In America Must Rebuild Its Domestic Battery Manufacturing Infrastructure, I explained why R&D spending in the lead-acid battery sector was curtailed in the mid-70s after maintenance free valve regulated batteries were perfected and brought to market. Then I explained that while lead-acid research was being curtailed, the emergence of portable electronics led to rapid and sustained growth of R&D spending on advanced batteries, composites and a host of new materials. The dynamic didn't change until the turn of the millennium when emerging large-scale energy storage needs gave researchers reason to go back and investigate the potential impact of new manufacturing methods and materials on old-line battery chemistries. Once the work got started, the result was almost magical.
To date, the most important development in the lead-acid world has been Axion Power International's (AXPW.OB) PbC battery, an asymmetric lead-carbon capacitor that was discussed at length in a recent report from the Naval Research Laboratory, which concluded the PbC and similar electrochemical capacitors have the inherent potential to:
- achieve much higher energy densities than supercapacitors, while maintaining a relatively fast charge-discharge response compared to conventional batteries;
- offer longer cycle life and lower maintenance;
- result in significant reductions in the weight and volume of power systems;
- facilitate the evolution and deployment of hybrid-electric military vehicles; and
- facilitate the development of regenerative power systems for cranes and other naval applications.
The PbC is basically a power technology that is best suited to repetitive charge discharge cycling like you find in automotive stop-start systems. Molten sodium batteries, in comparison, are basically energy technologies that are best suited to storing large amounts of energy. The key features that the PbC and molten sodium batteries have in common are that neither is a silver bullet, both are old-line chemistries that rely on cheap and plentiful raw materials, both can be easily recycled in existing facilities and both can be dramatically improved by using advanced manufacturing methods and materials that were developed in the last two decades for use in other products. Those common features leave both technologies in a position where they have substantial disruptive potential because there is ample room for improved performance and reduced cost without reinventing the wheel.
The following graph came from FZ Sonick's presentation at yesterday's session of the Electricity Storage Association's 20th Annual Meeting in Charlotte, North Carolina and shows where electrochemical capacitors and sodium batteries currently fall in a hierarchy of output energy densities. Both will improve with time and experience, but molten sodium could theoretically improve to a point where it eclipses metal-air for the energy density crown.
The next graph comes the ESA's website and shows where electrochemical capacitors and sodium batteries currently fall in a hierarchy of relative capital cost per cycle. Here too, both will improve with time and experience.
In a July 2008 report for its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program, Sandia National Laboratories predicted that the cost of asymmetric lead-carbon capacitors like the PbC would fall by at least 50% over the next decade and the cost of molten sodium batteries would fall by up to 80%. The price declines won't arise from fundamental changes in battery chemistry. Instead they'll arise from the normal learning curve gains that arise whenever a disruptive technology is introduced to the market and improved by profit-motivated manufacturers.
I have no doubt that lithium-ion chemistry will continue to advance and that lithium batteries will be the technology of choice for applications where size and weight are critical, and price is not a priority. But I can't buy the proposition that they'll defy economic gravity and supplant inherently cheaper technologies like the PbC, which is better suited to low value power applications, and molten sodium, which is better suited to low value energy applications.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.
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