Is Lithium-ion A Dead-End Electric Drive Technology?
Last week Energy Secretary Steven Chu addressed the United Nations Climate Change Conference in Cancun. After watching the video presentation several times I can't help but wonder whether the Secretary didn't politely caution his audience that lithium-ion batteries are a dead-end electric drive technology. I could be misinterpreting Secretary Chu's remarks, but if you own stock in a lithium-ion battery developer like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) or Altair Nanotechnologies (ALTID), or are considering any of these companies for your portfolio, the discussion that starts 25 minutes into the following video could be very important.
My impressions, observations and interpretations are summarized below.
Secretary Chu began his electric drive remarks with a politically correct but specious comparison of vehicle efficiencies that followed the EPA fuel efficiency party line I criticized in Alice in EVland, Part II. The numbers simply don't work unless you ignore efficiency losses and emissions on the utility side of the electric meter. Ignoring the political posturing, the most curious and troubling aspect of the Secretary's electric drive remarks was his description of what it would take for electric drive to be competitive with internal combustion:
"And what would it take to be competitive? It will take a battery, first that can last for 15 years of deep discharges. You need about five as a minimum, but really six- or seven-times higher storage capacity and you need to bring the price down by about a factor of three. And then all of a sudden you have a comparably performing car; let's say a mid-sized car which has a comparable acceleration and a comparable range."
Now, how soon will that be? Well, we don't know, but the Department of Energy is supporting a number of very innovative approaches to batteries and its not like its 10 years off in the future, in my opinion. It might be five years off in the future. It's soon. Meanwhile the batteries, the ones we have now, will drop by a factor of two within a couple of years and they're gonna get better. But if you get to this point, then it just becomes something that's automatic and I think the public will really go for that."
While Secretary Chu was explaining these bottom-line technical and economic requirements, the following summary text was superimposed on a background slide that compared the relative energy densities of common fuels.
"A rechargeable battery that can last for 5,000 deep discharges, 6-7 x higher storage capacity (3.6 Mj/kg = 1,000 Wh) at 3x lower price will be competitive with internal combustion engines (400 - 500 mile range)."
The unspoken yet undeniable truth in Secretary Chu's presentation is that it's impossible to achieve energy densities of 1,000 Wh/kg with lithium-ion batteries. The following graph comes from the Electricity Storage Association and shows the relative energy densities of various battery chemistries on a logarithmic scale. While the graph uses kilowatt-hours per ton and per cubic meter for its scale, the magic of the metric system means that the watt-hours per kilogram and per liter end up at the same root numbers, just three orders of magnitude smaller.
Lithium-ion battery developers have made great strides over the last few years when it comes to cycle-life and safety. In every case, however, the gains have come at the cost of reduced energy density. Today's lithium-ion batteries have energy densities of 95 to 190 wh/kg and it's reasonable to believe energy densities will continue to improve at rates of 4% to 5% per year. However the only battery chemistries that have a chance of achieving energy densities in the 1,000 wh/kg range are rechargeable metal-air and other technologies that IBM and others are working feverishly to develop.
What most investors don't understand is that emerging metal-air technologies have nothing in common with lithium-ion technology. The raw materials, fabrication methods, manufacturing facilities and fundamental chemistry are completely different. I can't predict whether or when the new technologies will be available, but Secretary Chu seems confident that the timeframe is more than five years and less than ten. Since he's forgotten more about battery technology than I'll ever learn, I tend to take his predictions seriously.
EVangelicals who believe electric drive ranks right up there with motherhood, apple pie, truth and justice have heralded Secretary Chu’s presentation as wonderful news. From an investor's perspective, I don't see how it can be viewed as anything less than a shot across the bow of the lithium-ion battery industry – a clear statement that electric drive requires better price and performance than lithium-ion batteries can deliver and an unmistakable implication that the DOE is now focused on more promising technologies.
Were I stockholder in a lithium-ion battery developer, Secretary Chu's presentation in Cancun would scare me senseless. He effectively said that developers of lithium-ion batteries can expect a couple years of intense cost pressure before their products become marginally non-competitive. If prices fall far enough and fast enough, those developers will enjoy a three- to eight-year window when they can build market share and perhaps earn a profit. By 2020, a new generation of even more advanced battery technologies will make the best lithium-ion batteries obsolete.
A recurring theme in this blog is that energy storage plays by a different set of rules. Information technology was great fun because creative types could write code one day and roll it into the global market the next. In the battery business, developers have to spend years refining their technologies, developing new production processes and building factories; which invariably means the next generation technology is nipping at their heels before they can hit the start button for a shiny new factory. Once a newer, better and cheaper technology starts grabbing headlines, obtaining expansion capital to build a second factory for yesterday's technology can be very difficult.
I was a Prodigy user in the early-90s and remember what happened when America Online launched a better platform. I also remember what happened when Yahoo! supplanted AOL and when Google supplanted Yahoo! Nobody knows what it will take to knock Google off its pedestal, but I have every confidence that some creative entrepreneur will find a way because that's the nature of the beast. Today's apex predators always become tomorrow's lunch.
During the fifth industrial revolution, investors made outsized returns by speculating in companies that would be market leaders when the future unfolded. In the sixth industrial revolution the outsized returns will come from investments in established market leaders that sell proven products into rapidly expanding markets while the future unfolds.
I like the lead-acid battery sector because a global manufacturing infrastructure already exists; top manufacturers like Johnson Controls (JCI), Exide (XIDE) and Enersys (ENS) generate billions in annual revenue and substantial profits by selling mundane products that serve the mundane needs of everyday people; and upstart innovators like Axion Power International (AXPW.OB) are developing important enhancements to proven technologies that can be integrated into existing factories without building new manufacturing infrastructure from the ground up.
There will always be a raging battle for the peak performance crown among battery technology superstars. Unless the overall rate of technological progress slows to a snail's pace like it did in the case of corn ethanol, today's best battery technologies will not have enough time to mature and build a global footprint before they're eclipsed by tomorrow's best battery technologies. Meanwhile the established industry leaders will continue manufacturing profitable products to meet rapidly growing global demand.
Call me a Luddite, but I don't want to own a technology that will be obsolete before it becomes profitable.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and owns a substantial long position in its common stock.