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Epic Changes Are Coming in the Electric Power, Transportation and Energy Storage Sectors

John Petersen

Epic is the only word I can use to describe an evolving tragedy that killed tens of thousands of people, inflicted hundreds of billions in property damage, destroyed 3.5% of Japan's base-load power generating capacity in a heartbeat and will cause recurring aftershocks in the global electric power, transportation and energy storage sectors for decades. While I'd love to believe the worst is behind us, I fear the times of trouble have just begun.

Since it's clear that Japan will have to turn inward and serve the urgent needs of its own population first, the following direct and immediate impacts seem all but certain:
  • Lost electric power from Japan's ruined nuclear plants must be replaced with oil, natural gas and coal because alternative energy technologies like wind and solar can't possibly take up the slack;
  • Cleanup and reconstruction must increase total Japanese demand for liquid motor fuels;
  • Japanese demand for industrial metals and construction materials must skyrocket; and
  • Crushing limitations on Japan's base-load power generating capacity must:
    • complicate supply chains for equipment, components and materials from Japan;
    • increase the cost of Japanese exports;
    • increase demand for all types of electric efficiency technologies;
    • increase demand for HEVs and other fuel efficiency technologies;
    • increase demand for grid-based energy storage systems; and
    • force utilities to shed non-essential loads and abandon their support for plug-in vehicles.
Some years from now, I expect to see rows of headstones in the EV graveyard that read "Lost to the Tsunami."

While I'm still trying to puzzle my way through the primary, secondary and tertiary impacts, it's a virtual certainty that nuclear power will be immensely unpopular even if things go spectacularly well in Japan. Switzerland has suspended pending applications for two planned nuclear plants and anti-nuclear activists are on the offensive in France. Germany just declared a moratorium on nuclear power and ordered the "temporary" cessation of operations at seven reactors that were built before 1980. Other jurisdictions, including earthquake prone California, can expect immense public pressure to follow suit. In time things will stabilize at a new normal, but that new normal will be very different from the normal that existed two weeks ago.

Some readers will be offended by my offhand dismissal of wind and solar as viable solutions. Others will be enraged by the suggestion that utilities will abandon their support for distributed and inherently unpredictable power demand from plug-in vehicles. All I can say is that reality is inconvenient that way. Japan just lost 7.6 gigawatts of base-load capacity. The German moratorium slashed their base-load capacity by 8.3 gigawatts. As the nuclear dominoes continue to fall, the strain on power grids everywhere will get far worse than any of us can begin to imagine. The last thing the world needs in times of plummeting base-load capacity is rapid expansion of demand. We simply can't have it both ways.

Nuclear power plants typically operate at 90% of nameplate capacity while wind and solar operate at something closer to 25% of nameplate.  The nuclear reactors that have recently gone off-line in Japan and Germany accounted for roughly 125 TWh of electricity production last year. In comparison, global electricity production from wind and solar power in 2009 was 269 TWh and 21 TWh, respectively. In other words, we just lost base-load power that represents 43% of the world's renewable electricity output. The gap cannot possibly be filled by new wind and solar power facilities.

There is no question that Japan will be forced to use conventional fossil fuels to replace its destroyed nuclear plants and unless its residents choose to endure extreme hardship for the sake of principle, Germany will be forced to do the same. Comparable power shortages will arise in every industrialized country that decides the risks of vintage nuclear plants outweigh their benefits. When you start stripping base-load power out of the grid, plug-in vehicles become wildly extravagant. My cynical side is tickled that Armageddon Entrepreneurs will finally be forced to choose between stoking fears over (A) imported oil and turmoil in the middle east; (B) global warming; and (C) nuclear power plants. My practical side foresees an immensely difficult time when reality finally sinks in and people are forced to come to grips with their own wasteful behavior. The panacea possibilities were washed away in the tsunami. Now we have to get serious about conservation and abandon the childish notion that we can waste one class of natural resource in the name of conserving another.

Over the last few months the mainstream media has been abuzz with stories about high-profile demonstration projects that will use battery-based systems to help stabilize the grid and smooth power output from wind and solar installations. As usual, the mainstream is getting it wrong and creating expectations the energy storage industry can't possibly meet.

A classic example of overblown media hype is Southern California Edison's plans to spend $55 million to demonstrate a battery-based solution from A123 Systems (AONE) that will provide 32 MW of power and 8 MWh of energy to smooth power output from the Tehachapi wind complex. The following graph from the California ISO highlights the variability issue that's the bane of alternative energy facilities everywhere.
3.16.11 Wind.png
While the new energy storage system will probably do a fine job of smoothing minute-to-minute variability, it will be absolutely worthless in the context of Tehachapi's average daily power production swing of over 200 MW. Tehachapi needs several gigawatt hours of storage, not a few megawatt hours.

I'm convinced that grid-based energy storage is an immense opportunity, but it won't be in the form of the headline grabbing projects the media is fixated on today. Two weeks ago the Pacific Northwest National Laboratory published a review of "Electrochemical Energy Storage for Green Grid" that describes the need for grid-based storage, identifies the leading storage technologies and explains the baseline economic requirements. Copies of the PNNL review are available from the American Chemical Society for $35. If you own stock in a battery company or are thinking about investing in one, it's the best $35 you'll ever spend.

In their discussion of storage economics, the authors said:

"Cost is probably the most important and fundamental issue of EES for a broad market penetration. Among the most important factors are capital cost and life-cycle cost. The capital cost is typically expressed in terms of the unit cost of power ($/kW) for power applications (e.g., frequency regulation) or the unit cost of energy capacity ($/kWh) for energy applications (e.g., load leveling). The life-cycle cost is the unit cost of energy or power per cycle over the lifetime of the unit.

...  In the authors' opinion, the cost of electricity storage probably needs to be comparable to the cost of generating electricity, such as from natural gas turbines at a cost as low as 8-10 ¢/kWh per cycle. Thus, to be competitive, the capital cost of storage technologies for energy applications should be comparable or lower than $250/kWh, assuming a life cycle of 15 years or 3900 cycles (5 cycles per week), an 80% round trip efficiency, and “zero” maintenance. A capital cost of $1,250/kW or less is desired if the technology can last 5 h at name-tag power. ..."

A123's demonstration project at Tehachapi will cost $1,720 per kW and $6,880 per kWh for a 15 minute solution. It's a highly profitable project for A123, but light-years from cost-effective. The same is true of another high profile project where Ener1 (HEV) will sell power quality systems with a combined capacity of 3 MW and 5 MWh to the Russian Federal Grid for $40 million, or $13,300 per kW and $8,000 per kWh. These projects are great headline events, but they'll never be the basis for a sustainable business.

In February and March of last year I wrote a series of articles that focused on grid-based storage. The first summarized a study titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide" that was commissioned by the DOE's Energy Storage Systems Program and conducted by Jim Eyer and Garth Corey. For that article, I calculated an average economic benefit for each of the 17 grid-scale storage applications discussed in the report and then used those averages to calculate the potential demand in MWh, the potential economic benefit per kWh and the potential revenue opportunity for storage system manufacturers. The following table summarizes my results.



The color coding is simply my attempt to separate high-value applications that need objectively cool technologies like flywheels, supercapacitors and lithium ion batteries from low-value applications that need objectively cheap solutions like flow batteries, lead-acid batteries, compressed air and pumped hydro. The bottom line is that revenue opportunities in grid-based storage will be 90% cheap, 8% cool and 2% in-between. Any way you cut it, the lion's share of the revenue opportunity will flow to companies that manufacture objectively cheap storage solutions. There will be niche markets in the $1 billion to $6 billion range for cool technologies like flywheels, supercapacitors and lithium ion batteries, but those niche markets will pale in comparison to the opportunities for cheap energy storage.

Until last week, I believed global demand for grid-based storage would ramp slowly over the course of a decade. Today it's beginning to look like grid-scale storage will rapidly eclipse all other potential markets. The universe of companies that can effectively respond to urgent global needs for large-scale storage is very small. It includes General Electric (GE), Enersys (ENS), Exide Technologies (XIDE), and C&D Technologies (CHHPD.PK)  in the established manufacturer ranks, and Axion Power International (AXPW.OB) and ZBB Energy (ZBB) in the emerging technology ranks. Companies like A123, Ener1, Active Power (ACPW), Beacon Power (BCON) and Altair Nanotechnologies (ALTI) will undoubtedly have exciting revenue opportunities, but the cost of their products will exclude them from the competitive mainstream.

In November of 2008 I wrote, "what I initially described as a rising tide is now looking more like an investment tsunami as a handful of micro-cap and small-cap companies gear up to compete for $50 to $70 billion of rapidly developing annual demand for large format energy storage systems." While it took a real tsunami to bring things to a head, I'm more convinced than ever that every company that brings a cost-effective energy storage product to market over the next few years will have more demand than it can possibly handle. EVs may be dead men walking but grid-scale storage looks like the opportunity of a lifetime.

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



was posted on AltEnergyStocks.com.


       

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Comments

John,
I think you underestimate the capacity for transmission to smooth renewable output, and for smart grid technologies to match demand to load. In conformist Japan, I'm particularly bullish on demand response.

I agree on storage, though, but you left off my favorite storage pick for the Japanese crisis: NGK Insulators 5333.JP/NGKIF.PK. Sodium-Sulfur batteries are cheap, well suited to grid based storage, and they're Japanese.

See: http://blogs.forbes.com/tomkonrad/2011/03/18/green-stock-picks-for-a-post-fukushima-world/

I understand that transmission can help with renewables, but I also understand that transmission takes forever to permit and build because of the immense numbers of people who have to reach an agreement. I've also heard that the grid in Japan is far less interconnected regionally than people tend to assume. These things may be solutions but they're not necessarily short-term solutions. In the meantime a friend who lived in Japan until about a month ago is telling me that demand response in Tokyo today is rolling blackouts of three hours per day.

NGK's sodium sulfur batteries are good, but they're not exactly cheap and they're not particularly responsive for things like up and down regulation. That being said, it's a virtual certainty that NGK, along with everyone else, will have more business than they can say grace over.

Wonderful overview, John. If transmission smoothes variable power, it's because frequency regulation (FR) is provided by grid (transmission) operators. Right? And it's the FR, not simply transmission, that provides stability. So, I think you again tend to discount and undervalue Beacon Power, clearly the low-cost provider of FR services, considering both capital and life-cycle costs.

It looks like the norther grid (especially north of Sendai) in Japan is minimal: see map:
http://www.geni.org/globalenergy/library/national_energy_grid/japan/japanesenationalelectricitygrid.shtml

But Japan is an island... the way to quickly interconnect it much more effectively is to run HVDC under water. Makes the whole permitting process much easier... you only need to permit the interconnections. It's also a good way to bridge the 50Hz/60Hz boundary you see south of Tokyo. HVDC is good business for Siemens and ABB. Not sure if there are any Japanese suppliers.

John, I'm not sure that FR will be as critical over the long term as it is today because a 100 MW of slow storage can easily provide 10 MW of frequency regulation services. Until we get to a point where there are lots of 100 MW bulk storage facilities, however, the 10 MW FR facilities will be critical. I recently changed my views about Beacon because I think it's at the bottom of the valley of death and getting ready to start the journey out of the valley. I won't give it credit for having a silver bullet solution, but certainly think it's part of the silver buckshot we need so desperately.

Tom, I suspect the opportunities in Japan will be far more numerous and diverse than we can imagine. I'll also bet that their domestic providers get much better terms than foreigners. Keiretsu is a time honored tradition in Japan and I don't expect that to change any time soon.

Totally with you on the Japanese companies getting first dibs on the business. That's why I picked NGK. (Agreed NaS is not cheap in terms of kWh compared to PbA, although I think it has a longer cycle life, which might make it more economical in the long run... PbC could be another matter, however.) But NaS is much cheaper than Li-ion on a per kWh basis, and just like you said in your comment to John, I don't think the big problem is FR, I think it's bulk storage.

John,
Although I haven't commented in a while due to a major project, it is good to see that you are still "fighting the good fight". I offer a few comments.

1. Geothermal will likely see aggressive adoption in Japan. Obviously it is not a "silver bullet". It won't be a quick solution to electricity shortfalls. Nor does it seem likely to replace all nuclear generation in Japan. And, certainly it is much less applicable in Germany, etc. But I would not be surprised that geothermal related companies become good investments.

2. I recognize that you specialize in commenting on energy storage, particularly electric energy storage. But, as the saying goes, "there is more than one way to skin a cat". In this case, I would suggest that there is already a method of storing "electric energy" that already meets your $250/kWh target, is field proven and widely, although not universally, applicable. I am thinking of thermal storage.

Already in wide (but nowhere near as wide as it could or should be) use, thermal storage is typically used to time shift energy use for air conditioning. In a properly designed system, the cooling system operates at night, using electricity at a discounted rate, to freeze or chill a storage medium such as water. During the day, air conditioning is provided for the associated building by transferring the thermal energy from the storage medium. Without getting into geeky details, not only does this shift the electric load, in many cases it even consumes less electricity overall. This system has historically been used in large buildings such as offices, schools, hospitals, etc. A new product downsizes the technology so that it is applicable to a much wider range of buildings, although probably not for most individual residences.

While the preceding does not truly provide the ability to inject electricity back to the grid, a technology in development may do so. In this system, both heat and cold are "simultaneously" stored in separate containers at fairly high thermal differential, on the order of 500C. That differential is later used to generate electricity when needed. Present system efficiency estimates are greater than 70%. If this works, it too has the potential to provide cost competitive electricity storage.

By the way, a paper recently published on research into vanadium redox flow batteries indicates that performance can be increased by ~70% by the simple addition of HCL to the solution. If this is commercially viable, that could place such a flow battery in the range of $300/kWh.

Also, again regarding the need to replace generation capacity, I would not be surprised to see more active adoption of distributed generation based on fuel cells. I would also expect such systems to be combined heat and power co-generators. While these systems are still expensive, progress is very encouraging. Given the already high, and sure to be increasing price of electricity (and energy generally)in Japan, systems such as those from Fuel Cell Energy are probably borderline competitive now.

A very large capacity low cost storage technology now close to commercial deployment is compressed air storage in salt caverns. Largely still in stealth mode, General Compression has built POC proving 75% + RT efficiency. Investors include Duke Power and USRG.

http://cleantechnica.com/2011/03/06/another-arpa-e-winner-general-compressions-renewable-energy-storage-ramps-up-in-30-seconds/

Congratulations to you Tom on your new blog at Forbes. Thanks for your thoughts on NGK.
Anyone here own GRID or think its a good buy now? I know in the past it was deemed a solid investment in terms of the portfolio. It looks like NGK is a major holding of the ETF.
-D Lane

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