Tom Konrad, CFA
Axion Power International, Inc. (OTC:AXPW) has been developing its patented PbC lead-carbon battery technology, and in 2013 those efforts seem on the verge of paying off. Unfortunately, Axion’s financing situation makes me unwilling to recommend its stock as an investment in the near term, but I do consider it one to watch. This article will take a look at Axion’s technology and near term potential markets. A follow-up article (published here) will discuss the company’s financing situation, and the things which will need to change before I consider the stock an attractive investment.
Axion’s PbC batteries are conventional Lead-Acid (PbA) batteries with the lead sponge negative electrodes replaced by a sandwich of a copper current collector protected by corrosion barriers which are in turn surrounded by carbon electrodes. Not only does this reduce the lead used in the batteries, but, compared to PbA batteries, results in a much more durable battery capable of a much faster recharge rate.
While they cannot compete with Lithium-Ion batteries on energy density, PbC batteries require less complicated battery management, have better low temperature performance, are more cost effective to recycle, and have a much better safety record. They deliver all these advantages at significantly lower cost.
According to Jay Bowman, the Chief Technology Officer at Axion customer ePower Engine Systems, it was as if Axion’s batteries had been specifically designed for ePower’s application. ePower has developed a series hybrid drive system similar to that used in railway locomotives intended for retrofit into heavy-duty class 8 trucks. Retrofit is a practical application for heavy-duty trucks because a heavy-duty truck’s engine is rebuilt several times during the life of the chassis. Hence, ePower has the opportunity to achieve significant penetration into the heavy-duty truck fleet without having to manufacture complete trucks. The cost effectiveness of ePower’s hybrid retrofit is also enhanced because much of its cost is offset against the cost of conventional engine replacement.
After two years of testing various types of batteries (both PbA and Lithium-Ion,) Bowman concluded that only Axion’s PbC batteries had the durability and recharging capacity required for a series hybrid drive in heavy duty diesel trucks.
Earlier this month, ePower ordered $234,000 worth of PbC batteries for retrofit into ten trucks. It will be placing these truck with different trucking fleets to allow the operators to gain experience with the system and allay any concerns about durability. Multiple operators have informed Bowman that, if the trucks perform as he expects, they will quickly begin placing orders in quantity. The economics and fuel savings of ePower’s system are so significant that fleet operators will be compelled to use the system to compete, assuming durability concerns can be adequately addressed.
|The second generation NS 999 electric switcher locomotive uses Axion Batteries. Photo by Missy Schmidt.|
Norfolk Southern Corporation (NYSE:NSC) released its 2013 corporate sustainability report on July 16th. The report devoted most of a page (30 of 130) to the NS 999 all-electric switching locomotive, which uses Axion PbC batteries. The NS 999 was the first of four “Alternative Power” projects mentioned, and was given considerably more space than the other three. In contrast, Norfolk Southern’s 2012 report only mentioned the NS 999 prototype once, in its environmental timeline, where the prototype was mistakenly said to have been unveiled in 2010, rather than 2009. The timeline was corrected in the 2013 sustainability report.
NSC’s second generation NS 999 is equipped with Axion PbC batteries, which the sustainability report describes as “more technologically advanced” than the lead-acid batteries the previous NS 999 had used, and with which NSC had encountered “technical challenges” during trial field operations.
Axion completed delivery of the 1,080 batteries for the second generation NS 999 in January, generating $475,000 in revenue in the fourth quarter of 2012.
It seems reasonable to believe that the greatly increased prominence of the NS 999 in Norfolk Southern’s sustainability report reflects increased confidence on the part of NSC’s management that its previous “technical difficulties” may have been overcome.
While Norfolk Southern and especially ePower could potentially produce orders which lead to explosive sales growth in coming years, Axion’s initiatives in stationary markets are most likely to lead to significant revenue and cash flow this year.
Axion’s PowerCube is an array of PbC batteries with associated control electronics mounted in a standard cargo container. These can be quickly deployed to remote locations, and are being marketed to commercial, military, and utility operations especially on offshore islands. Axion has responded to a large number of RFPs in these markets which could lead to orders and this year. Since payment is typically up-front, any such orders would greatly help Axion’s financing situation.
Offshore islands and other remote locations, and military operations have very expensive electricity, since the marginal source of power is almost uniformly diesel generators. That increases the value of grid stability and power-shifting services from stationary storage. The fact that these applications are stationary makes PbC’s disadvantage compared to Lithium-Ion (higher weight and volume) much less significant. Axion has preferred vendor status for a number of offshore island projects, and expects commercial sales to commence this year or in early 2014.
The scale of grid tied applications is also an advantage for PbC, since price becomes more significant at scale, and PbC batteries work well in long strings (high voltage installations.) Operation in long strings is much more problematic with Lithium-ion (and other battery chemistries) because variability between batteries requires either complex battery management or significantly reduced performance and leads to early battery failures. This sort of variability is why we are told to keep sets of rechargeable batteries together, and not mix batteries of different types, ages, or even manufacturers [PDF].
I, and most of my readers, were introduced to Axion Power by Joh
n Petersen, Esq., an attorney and former board chair and general counsel for Axion. From 2007 to 2012, John wrote prolifically about energy storage and the electrification of transportation for Seeking Alpha and my own website, AltEnergyStocks.com. While he did write about the NS 999, ePower’s hybrid truck application, a more typical example of his articles was spent critiquing the economics of plug-in vehicles (with special attention to Tesla Motors (NASD:TSLA),) and talking up the economics of PbC batteries for Stop-Start hybrid vehicles. Given all this background, I will not go into detail on the economics of Stop-Start technology, but simply refer you to Petersen’s article archive on Seeking Alpha.
In terms of Axion’s progress on stop-start, I spoke with Axion’s CEO Thomas Granville on Thursday. BMW has completed third party testing on its prototypes, but does not want to adopt the technology if Axion is its sole supplier. With an introduction from BMW, Axion is working with at least one major battery manufacturer to allow it to be a second manufacturer for BMW.
Like BMW, many potential customers will be unwilling to design PbC batteries into their own products until they can be certain there will be a supplier even if Axion Power, a microcap company with financing difficulties, goes bankrupt. If Axion successfully negotiates a deal with a major battery manufacturer, it will open a lot of doors, and not just to inclusion in BMW’s Stop-Start vehicles.
I’m extremely optimistic about Axion Power’s business prospects over the next twelve months. I anticipate a breakthrough in at least one of the four business areas I outlined. Unfortunately, Axion was forced to raise money to fund its continuing operations in a $10 million offering of non-conventional convertible notes. The conversion price of these notes is tied to Axion’s market price is based on the recent market price, and so a falling share price for the stock leads to greater dilution of shareholders and further stock price declines.
Even with Axion’s bright business prospects, the continuing issuance of new shares to repay these notes, and Axion’s likely need to raise additional capital next year make careful timing of any stock purchases essential. I discuss my ideas on the most advantageous timing in a follow-up article. But, if I owned the stock today, I would be a seller at the current price of $0.17.
Disclosure: no position in any of the stocks mentioned.
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