I was recently invited to prepare a memorandum on the battery industry
for the electric mobility working group of the World Energy Council
global thought leadership forum established in 1923 that includes 93 national
committees representing over 3,000 member organizations including
governments, businesses and research institutions. Since my memorandum
integrated several themes from this blog and tied them all together, I've
decided to publish a lightly edited version for readers. To
set the stage for the substantive discussion that follows, I’ll
start with an 1883 quote from Thomas Edison:
“The storage battery is one of
those peculiar things which appeals to the imagination, and no
more perfect thing could be desired by stock swindlers than that
very selfsame thing. Just as soon as a man gets working on the
secondary battery it brings out his latent capacity for lying.”
At the time, Edison was a customer who wanted to buy batteries to
improve the reliability of the Pearl Street Station, the first coal-fired utility
in North America. An essential truth even Edison failed to recognize
is that battery developers don't lie, but potential customers consistently
lie to themselves. They hear about gee-whiz inventions, overestimate
the practical importance of the innovations and then make quantum leaps of
imagination from the reasonable to the absurd. Therefore, the most important
task for investors is to critically and objectively examine their own
assumptions and avoid hopium induced hallucinations.
Cleantech, the Sixth Industrial
I believe we are in the early stages of a new industrial revolution,
the Age of Cleantech. The cleantech revolution will be
different from all prior industrial revolutions because the IT revolution
forever changed a dynamic that has existed
since the dawn of civilization. It gave the poor and the ignorant access to
the global information network, proved that there was more to life than
deprivation and sparked a burning desire for something better in
billions of people who were once content with mere subsistence. It's long-term
significance will be more profound than the discovery and settlement of North America.
The inescapable new megatrend is that six billion people have been
awakened to opportunity and are striving to earn a small slice of
the lifestyle that 600 million of us enjoy and typically take for
granted. If the six billion are even marginally successful and
attain a paltry 10% purchasing power parity, global demand for
everything must double. Therefore, the most important challenge of
our age will be finding new ways to satisfy insatiable demand for
water, food, construction materials, energy and every commodity you
The first and easiest step will be to eliminate waste in all its
pernicious forms to make more room at the economic table. After
that, the challenges become far more daunting.
The Everything Shortage
There is a widely held but grossly inaccurate belief that energy
prices and CO2
emissions are the most pressing
problems facing humanity. The reason is simple – in advanced economies everybody
buys energy commodities in minimally processed form several times a
month. Each of those purchases reinforces a belief that energy
prices are an intolerable burden. While few of us purchase other
minimally processed commodities beyond energy and food, the
following graph compares the prices of non-ferrous industrial metals
with the price of crude oil and highlights an inescapable and highly
inconvenient truth that almost nobody understands –
ARE MORE VOLATILE AND INCREASING MORE RAPIDLY THAN ENERGY PRICES.
To compound the problem, global production of energy resources is
several orders of magnitude greater than global production of critical
metals, as the following table based on data from the U.S. Geological
Survey clearly shows.
Metric tons per person vs. kilograms per person is an insurmountable
Most alternative energy and electric drive technologies can’t be
implemented without large quantities of scarce metals. All of the metals in the
table have critical competitive uses in other essential products
and significantly increasing global production of
any of them is problematic if not impossible. While improved
recycling practices have the potential to help alleviate shortages
of critical metals, a recent UN study of global recycling rates for
60 industrial and technology metals found that only 18 had end of
life recycling rates over 50% while 34 had end of life
recycling rates under 1%. The metals that are most important
to alternative energy and electric drive are very difficult and expensive
to recycle. So with the exception of lithium, which is a plentiful resource that
only represents 5% or 6% of the metal content in Li-ion batteries, the
world cannot produce enough technology metals to permit a widespread transition
to alternative energy or electric drive.
Any alternative that can't be deployed at relevant scale isn’t an
alternative at all. It’s merely an expensive distraction for the
masses, a bit like the circus in ancient Rome.
The Diminishing Marginal Utility of
Once you understand that metal supplies are far
more constrained than energy supplies, every evaluation of
electric drive becomes a simple exercise in optimizing the fuel
savings from each unit of metal used. The five generic levels of
electrification and the typical fuel savings at each level
are summarized below.
|Stop-start systems use lead-acid batteries to
eliminate idling while a vehicle is stopped but do not
provide any electric boost.
|Mild hybrids like the Honda Insight use NiMH batteries to
recapture braking energy and provide up to 20 or 30
horsepower of acceleration boost.
|Full hybrids like the Toyota Prius use NiMH batteries to
recapture braking energy, offer electric launch and provide
up to 80 horsepower of acceleration boost.
|Plug-in hybrids like the GM Volt use Li-ion batteries to
offer 40 miles of electric range before a range extender engine
kicks in to power the electric drive.
|Battery electric vehicles like the Nissan Leaf
use Li-ion batteries to offer up to 100 miles of electric
range under optimal conditions.
While NiMH has been the preferred battery chemistry for mild and
full hybrids since they were introduced in the late 90s, it is a
terribly resource constrained chemistry because the “M” most
commonly used in NiMH batteries is the rare earth metal lanthanum.
With per capita global lanthanum production running at a rate of 5
grams per year, significant expansion of NiMH battery production is
effectively impossible, which is the main reason that Li-ion is
gaining traction for use in electric vehicles. While not free from
doubt, many industry observers believe NiMH and Li-ion will be the preferred
batteries for full hybrids while mild hybrids will use NiMH, Li-ion and
advanced lead-acid batteries.
There are important technical differences between the high-power
batteries required for hybrid drive and the high-energy
batteries required for electric drive. The differences,
however, are relatively insignificant when it comes to raw materials
requirements. Therefore, it’s not unreasonable to use battery
capacity as a rough proxy for metal consumption in a fuel economy
optimization analysis. The following comparisons assume that a new
car with an internal combustion engine will use 400 gallons of fuel
for 12,000 miles of annual driving. For the sake of simplicity, they
assume a total of 96 kWh of batteries are available to reduce
societal fuel consumption. The numbers are easily scalable.
- 96 kWh of batteries would be enough for a fleet of 64
Prius-class hybrids that will each save 160 gallons of fuel per
year and generate a societal fuel savings of 10,240 gallons per
- 96 kWh of batteries would be enough for a fleet of six
Volt-class plug-in hybrids that will each save 300 gallons of
fuel per year and generate a societal fuel savings of 1,800
gallons per year; and
- 96 kWh of batteries would be enough for a fleet of four Leaf
class electric vehicles that will each save 400 gallons of fuel
per year and generate a societal fuel savings of 1,600 gallons
This example highlights the fundamental flaw in all vehicle
electrification schemes. When batteries are used to recover and
reuse braking energy that would otherwise be wasted, a single kWh of
capacity can save up to 107 gallons of fuel per year. When batteries
are used as fuel tank replacements, a single kWh of capacity can
only save 19 gallons of fuel per year and most of the fuel savings
at the vehicle level will be offset by increased fuel consumption in
Using batteries to enable energy efficiency technologies like
recuperative braking is sensible conservation.
Using batteries as fuel tank replacements is a zero-sum game that consumes
huge quantities of metals for the sole purpose of substituting electricity
for oil. Since roughly 45% of domestic electric power from coal fired plants and
that percentage will decline very slowly, the only rational conclusion is that
electric drive is unconscionable waste and pollution masquerading as conservation.
The Green Power Sophistry
EV advocates invariably paint an appealing picture of EVs being charged by wind
or solar power and claim that the combination of the
two is wondrous beyond reckoning. Beyond the impossibility of charging an EV
from home solar panels and driving it to work at the same time, the reality is
that the presumptive virtue of
wind and solar power arises from generating green electrons, not
using them. Once green electrons exist, it makes no difference
whether they’re used to power an EV or a toaster oven. Since green
electrons that are consumed in an EV can't be used to clean up a toaster oven,
there can be no double counting of virtue. In fact, since wind and solar power
impose their own burdens on materials supply chains there's a solid
argument that the pretty picture is doubly wasteful.
The Fixed Cost Conundrum
In a conventional vehicle, the fixed vehicle cost is relatively low
and the variable fuel cost per mile is relatively high. In electric
drive the dynamic is reversed and the fixed vehicle cost is
relatively high while the variable fuel cost per mile is relatively
low. While few financial metrics are more shrouded in secrecy,
intrigue and speculation than Li-ion battery manufacturing costs,
A123 Systems (AONE
includes enough hard data in its quarterly and annual reports to
the SEC to permit a reasonable estimate. The following graph
compares A123’s reported quarterly revenue, their adjusted cost of
goods sold (after backing out unabsorbed manufacturing costs) and
their gross margin per kWh of batteries shipped.
A123’s direct battery production costs have averaged over $1,000 per
kWh for the last two years. By the time A123 adds a reasonable
profit margin for its effort and an automaker adds another layer of
markup, the only possible outcome is an end-user cost of $1,500 per kWh or more.
Since most advocates insist that battery costs will decline rapidly, I’ll
assume end-user battery pack costs of $1,000 and $500 per kWh to
keep the peace. I'll also use several other charitable
assumptions including stable electricity costs of $0.12 per kWh, no
loss of battery capacity over time, no cycle-life limitations and a
15% second-life value. The following graph presents alternative gas
price scenarios of $3, $6 and $9 per gallon, and then overlays
depreciation and charging cost curves for an EV with a 25 kWh
battery pack priced at $1,000 and $500 per kWh. The solid red and
green lines show current gas and battery prices. The dashed lines
show possible futures that are uncertain as to both timing and
The most striking feature of this graph is the shape of the curves.
Where prevailing mythology holds that EVs will be wonderful for
urbanites with short commutes that don't need much range
flexibility, the curves show that high-mileage drivers who
presumably need more flexibility will derive the most value. The
reason is simple – spreading battery pack depreciation over 5,000 or
even 10,000 miles a year results in a higher cost per mile than
spreading that depreciation over 20,000 or 25,000 miles a year.
Since the GM Volt has an effective electric range of 40 miles per charge
and the Nissan Leaf has an effective range closer to 80 miles, it's clear
that high mileage users will need to charge more than once a day to get
the maximum benefit. Since nobody has claimed a useful life of more than
about 100,000 miles for a battery pack, it seems likely that sustained and
frequent recharging will impair the economics for high-mileage users who
will need to replace their battery packs more frequently.
The IT revolution set the stage for fatally flawed assumptions
in cleantech because we all got accustomed to the
phenomenon known as Moore’s Law, which describes exponential
improvements in the speed and processing power of electronics. In
the Moore’s Law world, electronic devices doubled
their capacity every 18 to 24 months while requiring the same or
smaller natural resource inputs. As a result, we’ve seen decades of
falling prices for exponentially better products.
Unfortunately, Moore’s Law has no relevance to electric
drive because the energy needed to move a given mass a
given distance at a given speed is constrained by the
laws of physics. Likewise, the number of electrons in a given mass of chemically active material is
constrained by the laws of chemistry. These laws cannot be violated
and in practice the theoretical limits can never be achieved. The
best we can possibly hope for is highly efficient systems that take us most
of the way there.
In the IT world of Moore’s Law the generational progression was 2, 4, 8, 16 etc.
In the cleantech world of Moore’s Curse the generational progression will be 50%, 75%, 87.5% etc.
The following graph is a bit dated, but it shows that current
expectations respecting future advances in battery technology are
completely out of touch with historical reality.
When Edison was bitching about batteries specific energies of 25 wh/kg were common. A hundred and thirty years later specific energies of 150 wh/kg are pushing the envelope. A six-fold improvement over 130 years does not provide a rational basis for prevailing expectations.
It's an Iron Law of Nature – things that can't happen won't
happen. The world does not and cannot produce enough metals to
permit the deployment of electric drive at a rate that approaches relevant scale. Chinese wind
turbine producers are reeling from skyrocketing rare earth metal
that are scuttling wind power deployment plans. Beijing
is backing away from its aggressive vehicle electrification policies
China can't make the numbers work in a command economy that produces
over 95% of the world's rare earth metals, nobody can. The
inescapable conclusion for investors is that resource dependent
alternative energy and vehicle electrification schemes must fail.
Let's face it folks, it's time to kill the electric car, drive a
stake through its heart and burn the corpse.
Companies like Tesla Motors (TSLA
are doomed because their vanity products can't possibly
make a difference and have all the environmental
and economic relevance of pet rocks
. The only companies that
stand a chance of long term survival are manufacturers of efficiency
technologies that reduce aggregate resource consumption. If
lithium-ion battery manufacturers like A123 Systems, Altair
and Valence Technologies (VLNC
can stop chasing rainbows and focus on sensible applications like electric
two-wheeled vehicles that reduce natural resource waste,
they may have long and prosperous futures. Manufacturers of
fundamentally cheap energy efficiency technologies like Johnson
and Exide Technologies (XIDE
are certain to thrive in any event. The surprise winners in a resource
constrained world will most likely be disruptive innovations like the PbC®
battery from Axion Power International (AXPW.OB
which uses a third less metal while promising a ten-fold
improvement in battery cycle life to optimize the performance of
efficiency technologies like stop-start systems, stationary applications
and hybrid drive for everything from passenger cars to freight trains.
This article provides a summary overview of several topics I’ve
examined in detail over the last three years. A complete
archive of my work
is available on Seeking Alpha. Most of the
resource materials I’ve relied on are available through the numerous
hyperlinks I’ve embedded in my articles.
Given the nature of the investing process I don't expect anyone to
accept my logic without independently verifying the facts. I
sincerely hope that this article will give at least a few investors
reason to question their own assumptions in a hopium free environment. Most of us grew up
in a rare period of privilege, prosperity and plenty that has seriously
distorted our worldview. If we don't accept the reality that our
supply chain assumptions are fatally flawed, we can’t possibly
identify realistic solutions that can be implemented at relevant
My perspective is very different from the views held by many
alternative energy and vehicle electrification analysts. Some
readers will no doubt find my thinking reactionary if not
heretical. But even the Catholic Church requires a Devil's Advocate
to argue against the canonization of proposed saints and
gives that advocate fair and equal consideration before
making a decision.
Author is a
former director of Axion Power International (AXPW.OB
and holds a substantial long position in its common stock.