John Petersen

A couple days ago Lux Research published a new report titled “Every Last Drop: Micro‐ And Mild Hybrids Drive a Huge Market for Fuel‐Efficient Vehicles” that focuses on rapidly growing markets for micro-hybrid vehicles and their battery systems.

During 2011, automakers sold an estimated 5,000,000 micro-hybrids worldwide, mainly in Europe. By 2017, Lux forecasts global micro-hybrid sales of 39,000,000 cars a year and a $6.3 billion annual market for their battery systems, which represents an across the board average of $161 per vehicle compared to an auto industry average of less than $60 per vehicle in 2009. While most US investors aren't even aware that micro-hybrid technology exists, it's already crossed the chasm and become a mainstream automotive technology.

To put the micro-hybrid phenomenon into perspective, most auto industry observers believe combined global sales of HEVs, PHEVs and EVs will be lucky to reach the 2,000,000-vehicle a year mark by 2017. Electric drive technologies may become mainstream architectures for 2025 and beyond, but for the next six years there's no doubt that cheap and easily implemented micro-hybrid technologies for mass-market vehicles will be at the epicenter of battery industry growth and profitability.

The term micro-hybrid is used to describe idle elimination systems that reduce fuel consumption by turning the engine off when it's not being used to power the wheels. They typically replace both the starter motor and the alternator with a belt-driven starter-generator, or BSG, upgrade to a better battery and add required control electronics. No other changes are necessary. While a BSG will offer a couple horsepower of cranking and generate a couple kilowatts of electricity, BSG's are not robust enough to drive a vehicle's wheels. Nevertheless, they're simple to combine with existing engine architecture and very cheap to implement. Because of their mechanical simplicity, micro-hybrids only cost $400 to $1,000 more than a conventional vehicle, but promise fuel savings of 5 to 15 percent. Micro-hybrids are a baby step, but 39,000,000 baby steps a year can cover a lot of ground and save about 15 millions of barrels of oil per year.

In their latest report, Lux divides micro-hybrids into three distinct classes that require different types of batteries.

Light Micro-Hybrids are typically sub-compact and compact cars that offer limited stop-start functionality and don't have regenerative braking. The current batteries of choice for light micro-hybrids are enhanced flooded lead acid batteries. The global market for light micro-hybrids is expected to grow to 8.5 million vehicles per year by 2017.

Medium Micro-Hybrids range from sub-compact through full-size cars that offer greater stop-start functionality and may offer limited regenerative braking. The current batteries of choice for medium micro-hybrids are enhanced flooded lead acid batteries and advanced AGM batteries. The global market for medium micro-hybrids is expected to grow to 22.2 million vehicles per year by 2017.

Heavy Micro-Hybrids are typically mid-size and full-size cars that offer the highest level of stop-start functionality, take full advantage of regenerative braking and implement other fuel economy innovations. Because of their extreme power demands, heavy micro-hybrids need better performance than the best AGM batteries can offer. The global market for heavy micro-hybrids is expected to grow to 8 million vehicles per year by 2017.

The following graph from the latest Lux report shows how the market is expected to evolve over the next six years.



On a regional basis, Lux is forecasting that:

• The European micro-hybrid market will grow from over 4 million units in 2011 to 12.6 million units by 2017.
• The North American micro-hybrid market will grow from a standstill in 2011 to over 8 million units by 2017.
• The Japanese micro-hybrid market will grow from about 400,000 units in 2011 to over 6 million units by 2017.
• The Chinese micro-hybrid market will grow from under 300,000 units in 2011 to 8.9 million units by 2017.

Last November I used the following table to highlight the differences between the daily battery load in a normal car and the daily battery load in a micro-hybrid for a typical city driving commute with 15 engine-off opportunities per leg.

Power Event	Conventional	Stop-Start
Initial engine start	500 Amp Seconds	500 Amp Seconds
Engine-off accessory loads		45,000 Amp Seconds
Engine restart loads		4,500 Amp Seconds
One-way battery load	500 Amp Seconds	50,000 Amp Seconds
Round-trip battery load	1,000 Amp Seconds	100,000 Amp Seconds

We're all familiar with the flooded lead-acid batteries that have been standard automotive equipment for decades and I don't think anybody would suggest that they can do 100 times the work without quickly failing. The automakers know that better batteries are needed, but they all want to get by with the cheapest better battery they can find because every dollar of cost matters in mass-market products.

Some automakers are using enhanced flooded batteries for their light and medium micro-hybrids solely because of cost considerations. They reason that enhanced flooded batteries offer twice the lifetime energy throughput of their simpler siblings and twice the throughput is always a good thing. The problem, of course, is that the numbers don't balance if you double the throughput of the battery and expect it to do 100 times the work.

A similar, albeit less dramatic, dynamic exists for the automakers who are upgrading medium micro-hybrids to AGM batteries that cost twice as much as their more primitive cousins but offer ten times the lifetime energy throughput. After all, improving performance by an order of magnitude is huge – until you understand that they're increasing the required work by two orders of magnitude. The bottom line is that AGM batteries will be the best available technology for micro-hybrids until a significantly better solution emerges, proves its merit and becomes available at relevant scale. Once a better solution is widely available, the market must gravitate to better performance unless the incremental cost exceeds the value of the incremental fuel savings.

I follow two companies that will be the first big beneficiaries of the rapid global adoption of micro-hybrid technologies. Johnson Controls (JCI) and Exide Technologies (XIDE) both manufacture enhanced flooded batteries for micro-hybrids and are rapidly expanding their AGM battery manufacturing capacity in North America and Europe. They will clearly be preferred suppliers for light and medium micro-hybrids from American and European automakers for the foreseeable future. While enhanced flooded batteries won't have a huge impact on either revenues or profits, their rapidly expanding AGM battery sales will double their per vehicle revenue and triple their per vehicle margins. It truly is a manufacturer's dream scenario. As micro-hybrid production numbers ramp rapidly over the next few years I expect both companies to outperform the market's expectations by a wide margin.

From my perspective the most interesting segment is heavy micro-hybrids that demand more performance than AGM batteries can hope to deliver. These next generation systems will push the frontiers of micro-hybrid technology by maximizing regenerative braking and adding other nuanced features like passive boost, which disables the BSG during acceleration, opportunity charging, which increases power to the BSG when the vehicle is decelerating, and engine-off sailing, which turns the engine off while the vehicle is rolling to a stop. The heavy micro-hybrid market is the prime target for two advanced technology systems that are working their way through the development and commercialization process, and stand a good chance of becoming industry leaders over the next few years.

In the fall of 2010, Maxwell Technologies (MXWL) and Continental AG introduced a dual device system that matches a supercapacitor module from Maxwell with an AGM battery and control electronics from Continental. The first design win for the Maxwell-Continental system is diesel powered micro-hybrids from Peugeot-Citroën. A comparable system will be used by Mazda in it's iELOOP heavy micro-hybrid. Other automakers will almost certainly follow their lead in adopting dual device systems for heavy micro-hybrids.

A second advanced energy storage system for heavy micro-hybrids is the PbC battery from Axion Power International (AXPW.OB). The PbC is an integrated battery-supercapacitor hybrid that combines lead-based positive electrodes from a battery with carbon based negative electrodes from a supercapacitor in a single cell. While the PbC is not yet available as a commercial product for heavy micro-hybrids, it is two and a half years into evaluation by BMW and other leading automakers, and offers a performance profile that simply can't be matched by anything short of a lithium-ion battery pack. If Axion can clear the last testing and manufacturing hurdles, the PbC has the potential to be a game changer in the heavy micro-hybrid space because it offers 5X the capacitance of dual device systems and 5X to 20X times the dynamic charge acceptance after a few months in service.

Last week I spent some time with a former Enersys engineer who noted that there are only two components in a car that automakers refuse to put their brand on. The first is the tires and the second is the battery. If a consumer has problems with either of those components, the automakers say, "Take it up with the manufacturer" who frequently says, "You abused our product by pushing it beyond design limits."

While the traditional blame game has a long and storied history, it can't continue indefinitely because micro-hybrids are being sold by the automakers as fuel efficiency and emissions control systems. Over the short term, the automakers will continue to play the game of using cheap batteries that can't stand up to the duty cycle. Over the longer term, applicable regulations will change to require that the OEM battery installed in a micro-hybrid be designed to satisfy the requirements of the vehicle's electric load profile.

For investors who want to benefit from the micro-hybrid vehicle trend but don’t have the time or inclination to study the various energy storage technologies in depth, a balanced portfolio weighted in favor of the large established battery manufacturers makes the most sense. While I have a personal favorite, I expect all four companies to outperform over the next three to five years.

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

Posted by John Petersen at 04:58 PM | Permalink | Comments (0)

John Petersen

During the fourteen years that I've lived in Switzerland, the Germans have been the world's staunchest supporters of green power and alternative energy. Their aggressive development of wind power was breathtaking, as was their warm embrace of photovoltaic power. Over the last few weeks, however, there has been an ominous change in the mainstream German media's tone as the political class finally comes to grips with the unpleasant reality that rooftop solar panels are worthless on short, grey winter days and "For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity." Three recent and highly negative articles from Der Spiegel Online include:

• Solar Subsidy Sinkhole; Re-evaluating Germany's Blind Faith in the Sun;
• Solar Subsidy 'Insanity' Will Cost Consumers; and
• Solar Energy Row is an 'Undignified Spectacle'

As recently as last year, articles like these would have been unthinkable. Today they're viewed as reasonable discussions of critical issues as the laws of thermodynamics and economic gravity assert their absolute primacy.

The Germans have been trailblazers in all things green since the emergence of the Green Party in the 1980s. In fact, it's hard to name an alternative energy technology that Germany hasn't welcomed with open arms. When it comes to green power and alternative energy, the Germans have been on the far left of the technology adoption curve for a very long time.



If the tone of the recent Der Spiegel articles is a reasonable indicator of public sentiment, the innovators are getting ready to throw in the towel on green panacea solutions and get down to the serious work of conserving energy instead. They're weighing the costs and benefits, and reaching an entirely predictable conclusion that it's impossible to depend on variable and inherently unreliable power sources as the backbone of an industrial economy. As Germany goes, so goes the world.

If the world's standard-bearer for green power and alternative energy abandons the quest and chooses a more sensible path of conservation and energy efficiency, the backlash against the solar power industry will be immense and risks to the wind power industry will skyrocket. After all, it's hard to argue the merits of "One for the Price of Two" power solutions; which is exactly what you get when wind and solar power have to be fully backed up by conventional power plants. If the solar and wind power dominoes fall, they'll almost certainly take out the emerging electric vehicle industry that demands huge amounts of money and natural resources to simply substitute one fuel source for another.

Currently all eyes are on Germany as the epicenter of European efforts to restore fiscal balance in an age of profligate and unsustainable government spending. The apparent German surrender on green power and alternative energy may just be an unfortunate victim of that broader effort. Until the dark clouds dissipate and we have a clearer view of the landscape, I'd minimize my exposure to solar, wind and electric drive and focus instead on less costly energy efficiency technologies that work with the laws of thermodynamics and economic gravity instead of fighting them.

Disclosure: None

Posted by John Petersen at 08:41 AM | Permalink | Comments (5)

John Petersen

John Lennon once quipped, "Life is what happens to you while you're busy making other plans." A classic example of the phenomenon is the quiet emergence of stop-start idle elimination as standard equipment on new vehicles while politicians, pundits, the media and mechanical monkeys beat the drum and played the kazoo for the amazing EV sideshow.

Stop-start is more than a vague promise of hope and change. It's a reality that's sweeping through the auto industry today and will conserve more gasoline in 2013 than all of the worlds HEVs and plug-in vehicles combined. It's proof positive that a huge number of baby steps cover more ground than a couple of giant leaps.

Stop-start is one of the most sensible ideas you can imagine. Turn off the engine while a car is stopped at a light and then restart the engine when the light changes. In heavy traffic, this simple economy feature can improve gas mileage by 5% to 15% while eliminating emissions from idling vehicles. It's a win for the driver, a win for the environment and a win for the people on the sidewalk who don't have to choke on exhaust fumes. There are no losers and no hidden costs.

While early versions of stop-start technology date back to the '70s, the first modern stop-start systems were introduced by Peugeot-Citroën in 2006 and BMW in 2008. What began as a modest baby step with little or no fanfare is taking the auto industry by storm. In its 2011 Power Solutions Analyst Day presentation, Johnson Controls (JCI) used the following graph to show how automakers plan to implement stop-start as standard equipment over the next five years. The subtext of their presentation was "we sure didn't see this one coming."



Regardless of how you judge the merit of an automotive efficiency technology, a production ramp from zero vehicles in 2005 to planned production of 15 to 22 million vehicles a year by 2015 is extraordinary. While most investors don't even know that stop-start exists, the technology has already crossed the chasm and is certain to have a significant impact on the future earnings of a handful of public companies that are currently trading at huge discounts from their 52 week highs.



Stop-start is a classic disruptive technology; a simple baby step that opens the door to improvements in fuel economy that nobody even considered a few years ago. The only fly in the ointment is the reality that yesterday's automotive batteries are simply not durable or robust enough for the immense electrical loads stop-start systems require them to carry.

The battery problem is easy to understand. In a conventional car the battery starts the engine when you leave for work and it has to recover enough charge during your commute to restart the engine when you head home at night. With a stop-start system, the battery has to start the engine when you leave for work, carry the accessory loads during engine-off intervals, restart the engine on demand, and recover its state of charge as quickly as possible in preparation for the next engine off opportunity. The pattern repeats on the trip home. The following table highlights the differences in battery duty cycles for a 15-mile commute with an average of one engine-off event per mile.

	Conventional	Stop-Start
Initial engine start	500 Amp Seconds	500 Amp Seconds
Engine-off accessory loads		45,000 Amp Seconds
Engine restart loads		4,500 Amp Seconds
One-way battery load	500 Amp Seconds	50,000 Amp Seconds
Round-trip battery load	1,000 Amp Seconds	100,000 Amp Seconds

Think about the table for a minute. An optimized stop-start system requires 100 times the work from its battery; two full orders of magnitude. This is not a simple problem with an easy fix.

Recent studies from BMW and Ford show that flooded lead-acid batteries start to degrade in a matter of weeks and more expensive AGM batteries start to degrade within a couple months, but the batteries don't simply die. Instead, their charge recovery time increases from 30 seconds with a new battery to four minutes or more after a few thousand miles. Since stop-start systems disable themselves until the battery regains an appropriate state of charge, longer charge recovery times make the mechanical systems less efficient and eat into potential fuel savings. In many cases, stop-start systems lose most of their functionality within six months. It's sure to become a huge problem when pollution control inspectors start testing for stop-start functionality. Finding a solution now is a major challenge for both automakers and the battery industry.

In an effort to compensate for the shortcomings of conventional lead-acid batteries, automakers are upgrading from flooded batteries to AGM batteries, or to dual battery systems that use flooded batteries for starter loads and AGM batteries for accessory loads. The first big beneficiaries of these battery upgrades will be Johnson Controls and Exide Technologies (XIDE). Both companies are building new AGM battery manufacturing capacity at a blistering pace and it's easy to see why. Historically the automakers spent about $60 per car on a flooded starter battery. AGM batteries in comparison cost about $120 and dual battery systems cost about $180. Anytime a manufacturer can double or triple its per vehicle revenue and widen its margins by selling premium products wonderful things happen to the income statement. So far the income statement impact has been small because production volumes have been small. Over the next couple years the impact will become dramatic and it's already baked in.

While AGM batteries and dual battery upgrades are the best the automakers can do with current technology, they're a still a compromise and there's a growing recognition that the automakers need a more durable solution for the basic stop-start systems they're selling today and a more powerful solution for the advanced stop start systems they want to sell tomorrow. That dynamic has created a compelling business opportunity for two technology developers whose products can integrate easily with existing battery manufacturing infrastructure and are better suited to the demands of stop-start systems.

The first advanced energy storage system for stop-start was introduced last year by Maxwell Technologies (MXWL) and Continental AG. It combines a supercapacitor module from Maxwell with an AGM battery from Continental to provide the extra cranking power required by stop-start diesels from Peugeot-Citroën. The dual device architecture complements current automotive battery technologies instead of competing with them. Shifting the starter loads to the supercapacitor slows the rate of battery degradation and extends AGM battery life by up to 30%. It's not a perfect solution because it can't address the accessory loads that are over 90% of the problem, but it's clearly a step in the right direction with a product that's available today in relevant scale.

A second advanced energy storage system for stop-start is the PbC® battery from Axion Power International (AXPW.OB). The PbC is an asymmetric lead-carbon capacitor that replaces the lead-based negative electrodes in a conventional AGM battery with carbon electrode assemblies. The end result is a hybrid device that offers extraordinary charge recovery times while eliminating negative electrode sulfation, the principal failure mechanism of conventional lead acid batteries. Like the Maxwell supercapacitor module, the PbC complements current battery technologies instead of competing with them because the PbC electrode assemblies have been designed to work as plug-and-play replacements in any AGM battery plant. The PbC hasn't scored a design win yet, but extensive data generated in over two years of bench and vehicle testing by first tier automakers shows that the PbC is a very promising solution for basic and advanced stop-start systems.

A dark horse energy storage system for stop-start vehicles was introduced this year by A123 Systems (AONE). This one kilowatt-hour lithium-ion battery pack offers the cold cranking power of a quality lead-acid battery, the exceptional charge acceptance of lithium-ion and a weight reduction of about 20 pounds. While A123 has not released pricing information on its Nanophosphate® Engine Start Battery, its average unburdened cost of goods sold for the quarter ended September 30th was $1,015 per kWh. Even with significant future economies of scale, I believe it will be difficult for lithium-ion batteries to compete effectively in the low-end stop-start market because automakers must carefully weigh the trade-off between battery cost and fuel savings. As you move to the high-end market with very heavy accessory loads, the A123 solution could be compelling.

Stop-start creates an unusual business dynamic in the battery industry because the additional revenue from doubling or tripling the battery capacity of every new car leaves plenty of room for the old line competitors and the new technology entrants to thrive. The following table provides summary market capitalization and stock price data on the five companies that are likely to compete in the stop-start market.



There isn't a stock in the table that I wouldn't feel good about buying at current prices.

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

Posted by John Petersen at 03:40 AM | Permalink | Comments (0)

John Petersen

On September 26, 2011, Bernstein Research and Ricardo plc published a 450 page analytical report titled, "Global Autos: Don't Believe the Hype – Analyzing the Costs & Potential of Fuel-Efficient Technology," which combines best in class securities research from Bernstein with the deep automotive expertise of Ricardo, a global leader in engineering, product innovation and strategic consulting. The result is the most comprehensive, detailed and eminently reasonable forecast of short-, medium- and long-term trends in advanced automotive powertrain technology that I've had the pleasure to read.

It's devoid of axe grinding or cheer-leading and simply describes how the auto industry is likely to evolve over the next couple decades. The key takeaway is two themes I regularly stress – Cheap Beats Cool and Baby Steps Rule.

Since the "Black Book" is far too detailed and comprehensive to adequately explore in a blog like mine, I think the best approach will be to summarize the key conclusions and explain how the expected evolution of powertrain technology will impact the companies I write about.

Overview. Bernstein and Ricardo are bullish on gasoline and advanced diesel technology, but cautious on the near term or medium term prospects for electric vehicles. They believe advanced automotive technologies must be affordable before logical consumers will buy new-generation vehicles in significant quantities. They have concluded that improvements to conventional engines will be key over the next 10 to 15 years and HEVs will become viable on a large scale by 2020. They believe near-term mass market adoption of electric vehicles is unlikely given the tough financial comparison with ever improving combustion engine vehicles. While premium-priced plug-ins may become viable earlier, by definition they will be niche products.

Conventional engines can meet 2020 regulatory targets at low cost. While widespread adoption of several emerging technologies including downsized engines, turbocharging, advanced fuel injection, stop-start idle elimination, advanced transmissions and other technologies that reduce rolling losses will be needed to meet regulatory targets, a shift to more expensive hybrid and electric drive technologies is unnecessary and unlikely. Except for Nissan-Renault, automakers' electric drive ambitions point to high-profile concept cars coupled with vaguely modest production plans.

Current HEVs and Plug-in Vehicles have much higher TCOs than conventional powertrains. Bernstein and Ricardo estimate the total cost of ownership, or TCO, of a conventional C-segment car at €21,300 ($28,400) over a typical four-year ownership period for the first purchaser. Without exception electric powertrains fail to offer any cost savings with HEVs costing approximately €1,650 ($2,200) more over four years, PHEVs costing approximately €4,500 ($6,000) more over four years and EVs costing approximately €10,800 ($14,400) more over four years.

Aggressive downsizing and modest electrification will be needed after 2020. To move from niche to volume production, PHEVs and EVs require a breakthrough in battery performance (energy and power density) and cost to overcome range anxiety and TCO concerns. While aggressive downsizing and modest electrification will be required from 2020 on, Bernstein and Ricardo believe the auto industry can meet regulatory targets with a 10% market share for HEVs, a 4.5% market share for PHEVs with small battery packs and a 4% market share for full BEVs. They estimate that the current cost differential between manufacturing a conventional car and manufacturing the same car with an electric powertrain is on the order of €16,000 ($21,500) before incentives.

At current vehicle costs and tax rates, oil would need to cost $300/bbl in Europe, $500/bbl in China and $800/bbl in the US before plug-ins would break even with conventional vehicles. Bernstein and Ricardo believe market forces alone are unlikely to provide enough incentive for a demand pull in electrified powertrains. While electric vehicles are likely to benefit from sizable cost reduction opportunities, combustion engines will require more expensive technology upgrades. The combination of the two will lower the break-even point for fossil fuels by ±20% over the next five years and another 35-40% by 2020. By 2025, Ricardo and Bernstein expect EVs to be competitive with conventional vehicles.

Battery cost reductions will be a key driver of future vehicle electrification. Bernstein and Ricardo estimate that currrent battery pack costs range from €4,500 ($6,000) for PHEVs to €13,500 ($18,000) for full electric vehicles, or $750-$800 per kWh of pack capacity. Battery costs will need to halve if EVs are to break even with internal combustion. Historical trends indicate that battery costs will decline by roughly 5% per year, which should bring costs down into the $310-$350 per kWh range by 2025. Until then, governments will need to bridge the gap with subsidies of several thousand dollars per vehicle for electric powertrains to be competitive.

Hybrids, PHEVs and EVs require significant amounts of additional raw materials. Conventional cars are material intensive but batteries and traction motors for HEVs, PHEVs and EVs will require significant additional amounts of raw materials that are far less plentiful and recyclable than the principal metals used in conventional cars.

While lithium supplies are adequate, competing demands for rare earth metals and copper will be challenging. Global lithium supplies are adequate for the foreseeable future, but rare earth metal production is dominated by Chinese producers and prices have skyrocketed. As new mines become productive and recycling technologies are developed, the constraints will become less burdensome, but costs will remain significant. The biggest metal constraint will likely be copper because a conventional car needs 24 kg of copper while an HEV needs 34 kg, a PHEV needs 54 kg and an EV needs 94 kg. As a result the value of the copper in an EV will probably exceed the total value of the steel and aluminum combined.

Stop-start systems offer some of the best value for money CO2 reduction potential. Bernstein and Ricardo expect that virtually every conventional internal combustion powertrain in the mature markets will feature either simple or advanced stop-start systems by 2020.

Almost all widely hyped improvements to powertrain are based on old concepts. The fundamental chemistry and physics of powertrains have not changed significantly over the past 100 years, but design and combustion efficiency gains have provided continuous advances in power density while noise, emission and fuel consumption levels have decreased. The next 15 years will be characterized by an evolution of existing technologies and the co-existence of various powertrain options, rather than the emergence of a disruptive dominant new technology such as electric or fuel cell vehicles. Over the next 15 to 20 years electrification is expected to become commonplace, but Bernstein and Ricardo expect that three out of four vehicles will still have an on-board internal combustion engine.

While I am a frequent and relentless critic of lithium-ion and electric vehicle investments because I believe the investing public has unrealistic expectations about the amount of time that will elapse between introduction and commercial success Bernstein and Ricardo didn't reach any conclusions that I'd disagree with. They expect battery development timelines to be lengthy and improvements to be limited to ±5% per year. They expect manufacturers of electric vehicles and components to lose money for several more years as they try to overcome immense TCO disadvantages and establish a toehold in the mass market. These conclusions are entirely consistent with the industry's experience with HEVs which took almost a decade to achieve a 3% market penetration in the US. The process will be evolutionary rather than revolutionary and investors who pay premium prices for the stock of companies that won't hit their stride for another decade will suffer.

In the energy storage sector, the first big beneficiaries of powertrain improvements will be Johnson Controls (JCI) and Exide Technologies (XIDE) who make starter batteries. Since stop-start technology puts tremendous strain on the battery from starting the engine several times during a commute and carrying accessory loads during engine off intervals, the auto industry is rapidly increasing the per vehicle amount they spend on batteries. Historically a new car used a simple flooded lead acid battery that cost the automakers about $60. Because of the heavier battery demands of stop-start, automakers are rapidly shifting to AGM batteries that cost about $120 and dual battery systems that cost $120 to $180. On a per vehicle basis, JCI expects cars equipped with stop-start systems to generate twice the revenue and three times the profit margin.

While current battery technology may be good enough for basic stop-start systems, it is clearly inadequate for the advanced stop-start systems automakers want to implement to minimize emissions and maximize fuel economy. Those advanced systems will need far more robust energy storage devices like the battery-supercapacitor combination that Maxwell Technologies (MXWL) has introduced on diesel powered cars from Peugeot and the revolutionary PbC battery from Axion Power International (AXPW.OB) which is in advanced stages of vehicle testing by BMW and other automakers.

I continue to believe lithium-ion cell manufacturers including A123 Systems (AONE), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) will be poor investments over the next seven to ten years because these companies are under immense pressure to reduce costs in an industry where materials represent 60% of pack level costs and heavily automated manufacturing methods keep labor and overhead in the 22% range combined. While there are some potential economies of scale to be realized in battery management systems and perhaps a more efficient use of raw materials, the gains are expected to be slow and painful during a period when profit margins are compressed to help heavily electrified vehicles overcome crushing TCO handicaps.

While I'm cautiously negative about battery manufacturers, I don't see any possibility that niche manufacturers like Tesla Motors (TSLA) can possibly live up to outlandishly inflated expectations and maintain clearly unreasonable stock market valuations by manufacturing niche products that can only appeal to a minute fraction of the car buying public. It took three years before Tesla sold its 2,000th Roadster. While there are a respectable number of reservations for the Model S that will debut next year, there is no reason beyond unbridled optimism to believe demand for a $60,000 electric passenger car is a well-spring rather than a puddle. Even NPR, a bastion of conservative thinking, has taken to pessimistic reporting on the near-term potential of the electric vehicle sector now that unlimited government spending on ideology seems to be going the way of the dodo bird. There will be some demand and Tesla may survive as a going concern, but I can't imagine how it will retain a market capitalization that's an eye-watering 11.2 times book value and 16.4 times sales. The law of economic gravity simply cannot be denied and it will not be mocked.

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

Posted by John Petersen at 12:29 PM | Permalink | Comments (0)

John Petersen

Last November I broke with tradition for the first time in over 30 years and suggested a paired trade that bought Exide Technologies (XIDE) and shorted Tesla Motors (TSLA). Over the following three months, investors who made the trade and bought four Exide shares while shorting one Tesla share pocketed the following gains.

	16-Nov-2010	16-Feb 2011	Net
	Entry	Exit	Gain
Buy Four Exide	-$29.76	$49.68	$19.92
Short One Tesla	$30.80	-$24.73	$6.07
Pair Trade Total	$1.04	$24.95	$25.99

While the paired trade hit its peak value in mid-February of this year, it didn't turn south until early June.



Since June, Exide has fallen to unsustainably low levels and Tesla has climbed to unsustainably high levels, which means it's once again time to recommend a paired trade that buys Exide while shorting Tesla. At yesterday's close the ratio works out to an 11.5 share Exide buy for each shorted share of Tesla. The results this time around should be even better than last year because the valuation disparities summarized in the following table are so immense.

	Exide	Tesla
Price Per Share	$2.87	$33.22
Market Capitalization	$244.2	$3,464.2
Working Capital	$512.1	$257.9
Book Value	$415.8	$294.1
TTM Sales	$3,092.9	$201.1
TTM Earnings	$8.8	-$224.3

A couple days ago I suggested that Exide's Recent Price Collapse Was Unjustified and explained how forced liquidations by a large Exide shareholder have crushed its stock price on two occasions during the last two years. Today I'll summarize a few of the headwinds that Tesla must face and overcome if it hopes to avoid a major price decline.

Battery Safety Questions. Over the last week there have been numerous news stories about an NHTSA inquiry into the safety of automotive lithium-ion battery packs after a GM Volt that had been used for crash testing spontaneously caught fire at an NHTSA facility. While the stories remain optimistic about the outcome, they overlook the inconvenient truth that safety testing of lithium-ion battery packs is not comparable to the procedures automakers used for other batteries.

In the late 90s Ford built a test fleet of electric delivery vans called the EcoStar that used sodium sulfur batteries. As part of their normal testing, Ford took a "Vlad the Impaler" approach to safety and used a hydraulic ram to drive a ten-inch long four-vaned arrowhead wedge into a fully charged 35 kWh battery pack. The sodium sulfur battery passed the test. As far as I know, safety testing for lithium-ion batteries is limited to driving an eight penny nail into a single cell. I have not been able to find any published reports of destructive pack level testing to determine how the failure of one cell might cascade through a battery pack that contains up to 6,800 cells.

To put the safety question into sharper perspective, Japan's NGK Insulators suspended its sodium sulfur battery production and asked its customers to stop using its products until an investigation uncovered the cause of an unexplained battery fire. Before the incident NGK had a flawless 10-year safety record, but it still asked its customers to suspend operations on an installed base of 305 Megawatts of power and over a gigawatt hour of energy storage at 174 locations worldwide because of a single incident where nobody was hurt.

If the NHTSA reaches an entirely reasonable conclusion that pack-level testing of lithium-ion batteries has been given short shrift in the headlong rush to bring electric vehicles to market, the delays and risks of thorough pack level testing and the associated news coverage could be catastrophic for specialty EV manufacturers.

Charging Infrastructure Issues. For several years China has been perceived as a global leader in vehicle electrification. Over the last several months, public statements from Chinese leaders have grown increasingly wishy-washy, suggesting that fuel efficiency and HEV technologies would be easier and less expensive to implement at relevant scale. Just this week Forbes reported that China’s power-grid giants – China Southern Grid and State Grid – may throw another monkey wrench into the works by insisting on battery exchange schemes instead of distributed charging infrastructure. While actions in Mainland China will probably not have much direct impact on Tesla, the risk of similar restrictive decisions by utilities in more important markets cannot be dismissed out of hand.

Resale Value Questions. One of the biggest unanswered questions in the electric vehicle space is resale value. Advocates assure us that EVs will retain their value better than conventional cars despite the fact that the battery packs that represent up to half of the vehicle cost are consumable and wear out over time. Yesterday's Wall Street Journal reported that vehicle leasing firms in Israel were having second thoughts about Project Better Place because of uncertainty over residual value. While leasing and residual value issues may not be critical to buyers of the Tesla Roaster, they're likely to be important to buyers of the upcoming Model S which is targeted to an upscale consumer market where vehicle leasing is commonplace.

The Valley of Death. There are no greater, crueler or more universal truths in the stock market than the hype cycle and the valley of death. While there are exceedingly rare exceptions like Google, substantially all new companies and new industries go through a cycle of inflated expectations followed by profound disillusionment. Substantially all cases where companies have avoided the hype cycle have involved a high level of business maturity and close to flawless execution. The following graph from the Gartner Group illustrates the typical stages.



Tesla's execution to date has been pretty good and as far as I can tell it hasn't encountered any significant delays or setbacks. Unfortunately its stock is priced to perfection and anything less than flawless execution going forward can be a catalyst that pushes the stock off the peak of inflated expectations and into the trough of disillusionment. Given the substantial external risks I've discussed above and the inherent risks discussed in Tesla's SEC filings, I think the downside risk in Tesla's stock outweighs the upside potential by an order of magnitude.

Disclosure: None.

Posted by John Petersen at 10:09 AM | Permalink | Comments (2)

John Petersen

Since June of 2009 I've been a voice in the wilderness proclaiming that stop-start idle elimination will become a dominant automotive fuel efficiency technology by mid-decade and represent a tremendous business opportunity for established lead-acid battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE) and emerging energy storage technology developers like Maxwell Technologies (MXWL), Axion Power International (AXPW.OB) and A123 Systems (AONE). In the process I've suffered more than a little abuse, scorn, derision and ridicule from EVangelicals who think it makes sense to propel up to 5,300 pounds of metal at highway speeds with quarter-ton battery packs. With each passing day, however, it becomes increasingly clear that my cautious assessment of electric drive and my optimistic outlook for cheap and simple fuel efficiency is spot-on accurate because, in the words of Vinod Khosla, "Economics matter and nothing that defies the law of economic gravity can scale."

The most recent confirmation that stop-start will leave all other vehicle electrification technologies in the dust over the next decade comes from a Pike Research report titled "Stop-Start Vehicles, Micro Hybrid Technologies, Batteries and Ultracapacitors; Market Analysis and Forecasts," which reports that while stop-start technology is not well known or understood in North America, stop-start vehicles, or SSVs, are already outselling hybrids by a factor of 3.5 to 1 and the stop-start advantage is expected to widen to 16 to 1 over the next few years because of low cost and easy integration.



In its discussion of the business opportunity Pike said, "Global revenue from the sales of stop-start batteries will grow from $827 million in 2011 to $8.9 billion in 2020, at a compound annual growth rate of 30%." The Pike report mirrors similar conclusions from Lux Research in their October 2010, report "Micro-hybrids: On the Road to Hybrid Vehicle Dominance." Both reports are a good deal more conservative than EPA forecasts that stop-start will be implemented in 42% of US light duty vehicles by 2016. In a weirdly ironic Halloween twist, Wunderlich Securities analyst Theodore O’Neill blamed the rapid adoption of stop-start for limiting demand for lithium-ion batteries and plug-in vehicles. “Where it went off the rails," said O'Neill, "is all the major car companies figured out in 2009 that they could use a different technology to meet the emissions standards in the U.S. and in Europe ... That technology is start-stop."

I've always argued lead-acid batteries would remain competitive for decades as the battery of choice for cars with internal combustion engines, but I never expected to read that stop-start technology and lead-acid batteries were crushing vehicle electrification. Score one for the home team!

Even though stop-start has had a hard time catching the mainstream media's attention, it's the most sensible and cost-effective fuel efficiency and pollution reduction technology imaginable. It automatically turns off the engine when your car isn't moving and instantly restarts the engine when you take your foot off the brake. The biggest problem with stop-start is that it's a battery killer because instead of starting the engine once when you begin a trip, it has to start the engine several times during the trip, carry accessory loads during engine off intervals and recover its charge very quickly to prepare for the next engine off opportunity.

The conventional flooded lead-acid batteries that we've all come to know and hate are simply not robust enough for stop-start. So the auto industry needs a better energy storage solution to accomplish the worthy goal of eliminating wasted fuel and useless pollution from idling vehicles.

The auto industry's widespread and rapid adoption of stop-start has come as a big surprise to most battery manufacturers and industry analysts. Historically almost all cars used flooded lead-acid batteries for starting, lighting and ignition. While AGM batteries have existed since the 70s, global production capacity was limited to a few million batteries a year and most AGM batteries were used in aviation, marine and other high-end applications where their sealed design avoided problems with electrolyte leakage, gas generation and maintenance. Simply put, the world's battery manufacturers were not ready for a surge in AGM battery demand from the auto industry which needs about 55 million batteries a year.

Since the world's battery manufacturers didn't have enough factory capacity to make AGM batteries for the auto industry, their first response was to introduce enhanced flooded batteries that don't perform as well as AGM, but can be made in existing plants. Their next response was to go on a huge capital-spending spree to build new AGM battery manufacturing facilities. Between 2002 and 2009, JCI averaged about a million AGM batteries per year. By 2015 it plans to make about 18 million AGM batteries a year. Exide is also expanding its AGM capacity from 500,000 batteries a year in 2010 to 5.5 million batteries a year by 2015. Other battery manufacturers are quickly following suit.

When Citroën and BMW introduced the first stop-start systems in 2006 and 2008, the technology was viewed as a modest advance with an uncertain future. The initial reviews were less than flattering because the systems performed fabulously in new cars but suffered sharp performance declines as the batteries aged. That gave rise to a concerted industry-wide effort to learn why lead-acid batteries failed in stop-start vehicles and find solutions to the problem.

At the 2010 European Lead Battery Conference, BMW and Ford explained the problem of dynamic charge acceptance to the world's lead-acid battery manufacturers and used the following graphs to show how AGM batteries used in stop-start systems begin to lose their dynamic charge acceptance almost immediately and become effectively worthless after a few months. They also explained that unlike traditional vehicle designs, engine starting was only a minor issue in stop-start because over 90% of the energy used during an engine off interval was attributable to accessories, rather than the starter.



While the graphs provide a lot of data the most important line has a burgundy highlight and shows how charge recovery time increases from 30 seconds with a new battery to several minutes with a battery that's been used for a few months. Since stop-start systems disable themselves until the battery has recovered, a battery that can recover in 30 seconds will invariably save more fuel than a battery that needs several minutes to recover.

Today the auto industry and the battery industry find themselves at an impasse over battery performance in stop-start. The automakers have made it clear that traditional AGM technology is not good enough for today's stop-start systems and can't possibly support future stop-start systems that will offer better fuel economy and put even greater strain on their batteries. The battery industry has responded by producing enhanced AGM batteries that are an improvement over traditional AGM technology, but remain inadequate for the demands of future stop-start systems. To solve the problems and accomplish their fuel economy and emissions reduction goals, most automakers are actively evaluating other technology alternatives.

Continental AG and Maxwell Technologies developed the first new approach to energy storage for stop-start. Their system combines a supercapacitor module with an AGM battery to ensure that stop-start diesels from Peugeot Citroën have enough cranking power to reliably restart the engine. In their second quarter conference call, Maxwell's CEO noted that the system would also increase AGM battery life by roughly 30%. While the Continental-Maxwell system can't do much to overcome the dynamic charge acceptance limitations of AGM batteries, Pike believes supercapacitors will be used to complement batteries in stop-start systems for diesel engines.

Axion Power International is presently completing the development of a second novel approach to energy storage for stop-start and preparing to launch their first product. Axion's PbC battery is a hybrid device that replaces the lead-based negative electrodes in an AGM battery with carbon electrode assemblies that eliminate sulfation, the chemical process that causes conventional AGM batteries to lose their charge dynamic acceptance capacity over time. Since the PbC is a third-generation lead-acid device, it can be assembled on any conventional AGM battery line. In over two years of exhaustive testing by BMW and others the PbC has demonstrated remarkably stable dynamic charge acceptance through several years of simulated use in a stop-start vehicle. While the PbC is not currently available for use in stop-start vehicles, the Pike report suggests that the PbC will be available for use in 2013 model year vehicles.

A123 Systems has recently announced the launch of a lithium-ion battery for stop-start vehicles. Their engine start battery combines sixteen of their 20 Amp hour cells with associated control electronics to deliver a kilowatt-hour of energy and the cold cranking amperage necessary for an automotive starter battery. Because of the high cost of lithium-ion batteries, Pike believes their market penetration will be "very limited" and restricted to expensive performance vehicles.

Stop-start presents a rare dynamic for the lead-acid battery industry because the new technology solutions from Maxwell and Axion will complement rather than compete with existing battery products. Supercapacitors from Maxwell will function as add-on component that improves the efficiency of today's AGM batteries. Similarly, carbon electrode assemblies from Axion have been designed for easy integration into existing AGM plants as a plug-and-play component that can make today's AGM batteries better. Both technologies can help established battery manufacturers better serve their customers needs without eating into their revenue from product sales. For both companies, the ability to leverage existing manufacturing facilities, distribution networks and customer relationships should facilitate a much faster ramp rate than one could expect from a new product that needs to overcome entrenched competitors, build manufacturing, distribution and customer service capabilities and divert staff from other lucrative markets.

JCI and Exide will be the first big beneficiaries of the global shift to stop start. Both companies are trading well off their historic highs and have attractive upside potential. As products from Maxwell and Axion prove their merit in stop-start vehicles and increase production capacity, their shares should perform well. Since Axion has a market capitalization of $40 million while Maxwell is valued $550 million, Axion has greater upside potential for risk tolerant investors.

Currently, the media hype is all about lithium-ion batteries and plug-in electric drive, but auto industry's production plans are all about stop-start and other fuel efficiency technologies. Given a choice between chasing sunshine, lollipops and rainbows or investing in an established automotive trend, I'll take the established trend any day.

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

Posted by John Petersen at 02:54 AM | Permalink | Comments (5)

John Petersen

In their 1969 bestseller "The Peter Principle" Laurence Peter and Raymond Hull quoted a Latin-American student named Caesare Innocente who lamented, "Professor Peter, I'm afraid that what I want to know is not answered by all my studying. I don't know whether the world is run by smart men who are, how you Americans say, putting us on, or by imbeciles who really mean it." After watching the events of the last few weeks, I think most of my regular readers would agree that the imbeciles are clearly steering the ship.

Last March I went to the Geneva Motor Show on press day, which gave me a chance to see the cars up close and personal without fighting the crowds. While I'm generally skeptical when it comes to electric drive, I left Geneva convinced that the Fisker Karma was the most beautiful passenger car I'd ever seen. I even promised my inner geek that I'd secretly take one for a test-drive once production started. The last remaining hurdle was cleared in mid-October when the EPA issued its official fuel economy rating of 52 MPGe for the electric range of 32 miles and 20 MPG for gas powered trips using the 2.0 liter onboard generator.

I was crestfallen. How could something so gorgeous and green get such a horrible fuel economy rating?

The answer, it seems, is that when you put the Karma on a scale it weighs a few hundred pounds more than a Hummer H3 and a few hundred pounds less than a Cadillac Escalade. That's right folks: it's a 5,300 pound behemoth that was engineered in California with $169 million of ATVM loan guarantees from the Department of Energy. While most of the long-term economic benefits from manufacturing these shocking green monstrosities will be outsourced to Finland, at least the batteries will be made in the US by A123 Systems (AONE) which made a $23 million venture capital investment in Fisker to establish a strategic relationship and ensure the battery supply contract.

When journalists and political pundits questioned the reasonableness of the Fisker loan guarantee, the DOE explained:

"Fisker’s loan has two parts. In the first part, Fisker used $169 million to support the engineers who developed the tools, equipment and manufacturing processes for Fisker’s first vehicle, the Fisker Karma. That work was done Fisker’s U.S. facilities, including its headquarters in Irvine, California, which has 700 employees and plans to continue hiring. While the vehicles themselves are being assembled in Fisker’s existing overseas facility, the Department’s funding was only used for the U.S. operations. The money could not be, and was not, spent on overseas operations. The Karma also relies on an extensive network of hundreds of suppliers in more than a dozen U.S. states."

The sophistry of using taxpayer money to finance special project jobs in California while creating long-term manufacturing jobs in Finland is self-evident. The more troublesome questions in my mind are:

1. How many $100,000 Karmas will Fisker need to sell to earn enough profit to repay $169 million in DOE loans?
2. How many battery packs will A123 need to sell to Fisker if it wants to recover its $23 million investment?
3. Is either outcome even remotely possible given the lackluster sales and margins that Tesla Motors (TSLA) has realized from its equally sexy and expensive Roadster?

This was clearly a series of deals negotiated by imbeciles who really mean it. The most outrageous part of the DOE's defense was the penultimate paragraph which says:

"Remember that plasma TVs, cell phones, personal computers and many other common products were once fabulously expensive luxury items, but quickly became a staple for middle class Americans. These price declines wouldn’t have been possible without the first, commercial scale marketing as premium products."

BALDERDASH! I expect that kind of bafflegab from EVangelicals but not from government officials.

There is no possibility that electric vehicles will ever deliver the kinds of cost reductions we witnessed during the information and communications technology revolution because the fundamental science is totally different. There is no Moore's law for the physics of moving a 2.65-ton vehicle down the road. There is no Moore's law for electrochemistry. There is no fairy godmother to increase global production of non-ferrous metals or control commodity prices. But instead of rationally discussing science, supply chains and energy economics, we have the DOE deflecting reasonable questions with the time-honored wisdom that "facts don't matter because the essence of political debate is the plausible boldly asserted."

A little over three years ago I started cautioning readers that Ener1 (HEVV.PK) was a disaster in the making. My cautions got more strident when Ener1 made a substantial venture capital investment in Th!nk Motors to strengthen their strategic relationship and retain a battery supply contract that was jeopardized by Th!nk's insolvency. While some readers took my words of caution to heart, many did not. This week they learned that analyzing battery and electric vehicle companies through rose colored glasses is a great way to end up with a stock that's listed on the Pink Sheets. While I generally like to be right, I hate being this right.

I wonder how the DOE feels about that $118.5 million ARRA Battery Manufacturing Grant they gave Ener1 in August of 2009.

My graph for this week is courtesy of Lux Research and appeared in their recent report "Using Partnerships to Stay Afloat in the Electric Vehicle Storm." The graph is particularly instructive because it overlays their forecasts for the electric vehicle and lithium-ion battery markets in a single graph.



The yellow lines represent total demand for lithium-ion batteries in automotive applications through 2020 using three different oil price scenarios. The blue shaded area represents the total planned production capacity of the global lithium-ion battery industry for the same period. The inescapable conclusions are that (1) without $200 oil, growth in electric vehicle sales will be tepid at best and certainly not robust enough to justify nosebleed market capitalizations for companies like Tesla, and (2) the glut of lithium-ion battery manufacturing capacity will be a crushing burden for all but the most efficient and financially sound battery manufacturers.

While Pike Research recently reported that demonstration projects have deployed 538 MW of lithium-ion based storage on the grid, all of the facilities I've read about report power based on a 15 minute discharge. That means the demonstration projects have used about 135 MWh of batteries to date, or less than 1% of the expected annual capacity glut. While grid-based storage may have significant long-term potential, it's not a big enough short-term opportunity to make a difference.

The takeaway for investors who are willing to remove their rose colored glasses is that the industry leaders in the electric vehicle and lithium-ion battery sectors are run by imbeciles who really mean it and their companies are doomed to underperform the market for years. Molly Ringwald was Pretty in Pink, but it's an ugly color for stock listings.

Disclosure: None.

Posted by John Petersen at 12:48 PM | Permalink | Comments (4)

by Clean Energy Intel


Nissan Leaf (Left) & Landglider at the 2009 Tokyo Motor Show. Image source: Wikipedia / Tennen-Gas

Nissan and its sister company Renault have clearly made a commitment to 'advanced-drive' autos.

The facts speak for themselves:

•     Nissan put the Leaf on the streets in December of 2010 - the first mass-produced, battery electric vehicle. Sales reached 15,000 units worldwide by September of this year.
•     Nissan-Renault CEO Carlos Ghosn has said he expects sales of BEVs to make up 10% of the sales of new light-duty vehicles by 2020.
•     The combined companies are investing $5bn in electric drive vehicle development.
•     The two companies have said they will produce 8 different EVs by 2015.

Two new developments at Nissan illustrate the fact that the company is keeping its options open in terms of  which new alternative fuel technologies will in the end be the winners.

Firstly, Nissan has developed a new hybrid powertrain which, when released in 2013, will combine an electric motor with the new XTRONIC continuously variable transmission (CVT). The CVT itself is capable of improving fuel economy by as much as 10 percent because of 'modified parts, a smaller fuel pump and use of lower-viscosity oil, all of which cut friction by as much as 40 percent..... The system, paired with a 2.5-liter turborcharged engine, provides the power of a 3.5 liter engine but with much better city and highway fuel economy' according to a report by AutoObserver.

Nissan has of course been producing hybrids for some time - in the US with the Altima Hybrid, for example, and the Infiniti M35, which was released this July. Neither model has seen much success - mainly since the hybrid field is heavily dominated by the Prius.

Perhaps of more interest then, is Nissan's suggestion that the company has also built a fuel-cell stack for hydrogen fuel-cell electric vehicles (FCEVs) that provides more than double the power density of the fuel stack the company developed in 2005 at about one-sixth the cost. This from AutoObserver's report:

Nissan achieved this by changing the fuel cell stack's structure to cut its size in half while reducing the use of platinum and the total number of parts by 75 percent, the company said. The automaker said it also made cost- and size-cutting improvements to the fuel-cell stack's separator flow path, which separates hydrogen, air and cooling water with stamped thin metal plate.

The news that significant progress has been made in getting the amount of platinum used in fuel cells down is good news since the platinum content of the cells has been a major factor in keeping the fuel cell less than economical.

Perhaps hydrogen fuel-cell electric vehicles will make a renewed impact once again. The key is the ability of the various automakers currently on route to put FCEVs on the market by 2015 to get costs down. From this perspective, Nissan's news certainly raises an eyebrow.

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

Posted by cleanenergyintel at 04:16 PM | Permalink | Comments (0)

John Petersen

I've been writing about micro-hybrid vehicles and stop-start idle elimination since May 2009. It's a cheap and simple fuel efficiency innovation that turns the engine off while a car is stopped at a light and automatically restarts the engine when you take your foot off the brake. It's not gee-whiz sexy, but it can boost fuel economy by 5% to 15% in city driving and dramatically improve urban air quality by reducing idling. What could be more sensible?

When I first wrote about stop-start in "Why Advanced Lead-acid Batteries Will Dominate the HEV Markets," the only market forecast I could find came from Frost & Sullivan, which predicted that global micro-hybrid sales would ramp from 800,000 units in 2008 to about 10 million units in 2015, a superb growth rate by almost anyone's standard.



By April 2010, expectations about the ramp rate for stop-start technology had increased significantly and the final rule release for new CAFE standards predicted that stop-start would be used in 42% of new US passenger cars by 2016. In its recent Power Solutions Analyst Day presentation, Johnson Controls (JCI) summarized automakers current plans and forecast a global penetration rate of 25 million stop-start vehicles per year by 2016, over 2-1/2 times the rate forecast by Frost & Sullivan in 2009.



By 2020, JCI expects global stop-start vehicle sales on the order of 50 million vehicles per year.

Regardless of what you believe automakers and consumers should do when it comes to fuel efficiency, it's clear that the automakers are implementing stop-start at a fevered pace and the technology will become standard equipment over the next five years. In response to surging demand from automakers, JCI is ramping its manufacturing capacity for absorbed glass mat, or AGM batteries, from four million units this year to an estimated 18 million units by 2015. Other manufacturers like Exide Technologies (XIDE) are following suit and it won't be long before cars equipped with stop-start systems are saving more fuel per year than all HEVs, PHEVs and BEVs combined.

Baby steps and low hanging fruit are important!

Despite their fuel economy advantages, stop-start systems are very hard on the batteries that need to restart an engine ten or even twenty times in a typical commute and carry accessory loads during engine-off intervals. In the real world, stop-start systems work great when the batteries are new but quickly lose their functionality as the batteries age. The following graph from the Department of Energy's Idaho National Laboratory illustrates the problem with shocking clarity.



With brand new batteries the test vehicles had great fuel economy. As the batteries deteriorated over a few months of use, the bulk of the fuel economy benefits vanished.  At last September's European Lead Battery Conference, BMW and Ford explained the problem in a joint presentation that focused on dynamic charge acceptance, the ability of a starter battery to recover the energy used during an engine-off cycle and get ready for the next engine-off cycle. The key take-away from the BMW-Ford presentation was that today's leading battery technologies, including flooded and AGM batteries, are not well-suited to the extreme power and charge acceptance demands of stop-start systems.

For stop-start to reach its full potential, the auto industry desperately needs a better energy storage solution.

Maxwell Technologies (MXWL) and Continental AG developed the world’s first enhanced energy storage system for stop-start vehicles with diesel engines manufactured by Peugeot-Citroën. The system uses a supercapacitor module from Maxwell and an AGM battery from Continental to ensure that there will be enough power to restart the engine at the end of a stop-start cycle. While the Maxwell-Continental system is a significant advance over AGM batteries, it does not address the core issue identified by BMW and Ford, which is the ability of the battery to recover the energy used by a vehicle's accessories during an engine-off interval. It does a great job of carrying a 300 amp-second starter load, but does very little to help the battery recover from a 3,000 amp-second accessory load.

A123 Systems (AONE) developed a second enhanced energy storage system for stop-start based on its lithium iron phosphate technology. The one kilowatt-hour battery pack offers the cold cranking amps of a high quality lead-acid battery, the high charge acceptance of lithium-ion batteries and a weight reduction of about 20 pounds.

Axion Power International (AXPW.OB) is currently completing the development of a third enhanced energy storage system for stop-start vehicles based on its PbC technology, a lead-carbon hybrid that does not suffer from negative plate sulfation, the primary failure mechanism for both flooded and AGM batteries in stop-start applications. At last September's European Lead Battery Conference, BMW and Axion presented test data confirming that the PbC retained its dynamic charge acceptance through the equivalent of four years of use in stop-start simulation. In a recently published white paper, Axion released more detailed information on the performance of a dual-battery PbC system.

Currently, the market for stop-start energy storage systems is wide open and there is very little clarity about the types of systems automakers will ultimately choose for their vehicles. The following table summarizes the alternative approaches automakers are actively testing and evaluating, and provides a rough estimate of the cost of each energy storage alternative.

Enhanced flooded batteries (single battery system)	JCI Exide	$75
Enhanced flooded batteries (dual battery system)	JCI Exide	$150
AGM batteries (single battery system)	JCI Exide	$150
Dual battery - flooded starter battery with AGM accessory battery	JCI Exide	$225
Dual device - supercapacitor starter with AGM accessory battery	Maxwell Continental	$250
Dual device - flooded starter battery with PbC accessory battery	Axion Power	$325
Lithium-ion battery	A123 Systems	$750

The emergence of stop-start as standard equipment presents a tremendous opportunity and a tremendous challenge for energy storage developers and manufacturers. Automakers are accustomed to paying $75 for a starter battery and there is intense pushback against dual battery systems and AGM batteries that will double the cost. Despite the automakers' resistance to cost increases, many have accepted the reality that they'll have to upgrade to single battery AGM systems or even dual battery systems that use an AGM battery for accessories and a flooded battery for the starter. To date only one automaker has made the decision to upgrade to a dual device supercapacitor and AGM battery system, however A123 systems has said that an undisclosed automaker has signed a production contract for its lithium-ion starter battery. The Axion system is currently being tested by BMW and several other automakers, but has not yet captured a design win.

I see the market for stop-start batteries as a knockdown drag-out brawl for the next couple of years. Consumers will not be happy with stop-start systems that offer great performance for a month or two and then deteriorate. While the automakers will resist upgrading to premium energy storage systems, customer demands coupled with constantly increasing regulatory pressure to improve fuel economy will force them to implement more sophisticated and expensive systems from Maxwell, A123 and Axion.

In the third quarter Maxwell gained 13% while the broader markets lost 13%. At yesterday's close, Maxwell had a market capitalization of $495 million and was trading at 4.7x book value and 3.5x trailing twelve month sales. Those metrics strike me as expensive compared to A123 Systems, which has a market capitalization of $381 million and trades at a discount to book value and 3.6x sales. Since it's still in the last stages of product development, Axion carries a very modest market capitalization of $42 million, or about 1.5x book value (after adjusting for bargain asset purchases) and trades at 4x to 5x anticipated 2011 sales.

While established lead-acid battery manufacturers like JCI and Exide will be the first beneficiaries of the stop-start market as their revenue per vehicle doubles and their margins triple, the energy storage system that offers the best combination of price and performance will ultimately win the lion's share of the market. While it’s impossible to pick a winner at this point, second, third or even fourth place in a $7 to $10 billion dollar market niche with no solidly entrenched competitors could be a company maker for any of the emerging technology developers.

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

Posted by John Petersen at 09:57 AM | Permalink | Comments (4)

John Petersen

Tom Lehrer is frequently credited with a quip that perfectly summarizes my feeling about the financial markets in the third quarter, "Apart from that Mrs. Lincoln, how did you enjoy the play?" During the quarter we were given box seats to classic political opera in two acts. Act One was set in Washington DC while Act Two moved to Europe so we could hear the same tortured songs of woe in a different language. We all know the opera has to end with the immensely popular "Kick the Can Chorus," but we suspended disbelief, bought into the fear and held a massive liquidation sale. As a curtain call it looks like we've let our elected demagogues scare us into a new recession. Do you ever wonder if the system might work better if ballots included "None of the above" as an alternative and required the offices to remain vacant if nobody won a majority?

For the third quarter the Dow, S&P 500 and Nasdaq indexes were down an average of 13.1% and it was even uglier in energy storage where the best names in the business were beaten down by 35% to 50%. The following table summarizes the price performance of my tracking list for the year and the quarter ended September 30, 2011.



It was a bloody time that's creating a great buying opportunity. While it's still a little early to buy the biggest companies in the sector, it's a wonderful time to do some homework, map out a strategy and prepare for the inevitable bottom.

For reasons I can't explain, several energy storage companies move in the same direction as the S&P 500, but react more violently to changing market sentiments. To illustrate the phenomena I've created a graph that compares percentage price movements for Johnson Controls (JCI), Enersys (ENS), Exide Technologies (XIDE) and Active Power (ACPW) against the S&P 500 using 10-day volume weighted moving averages instead of daily prices.



While the pattern is less obvious over longer periods, the following graph that tracks the percentage price movements since April 1, 2009 shows that the pattern holds in both up and down markets, which suggests that buying storage at the next bottom should have a significantly greater upside potential than buying the broader market at the bottom.



The next bottom may well be the buying opportunity of a lifetime as energy storage emerges as an investment mega-trend and the market realizes that cool has no place in an industrial sector where cost matters and the law of economic gravity reigns supreme. Core positions in Johnson Controls, Enersys and Exide Technologies are a must have for all serious storage investors. Depending on your risk appetite, more speculative companies like Active Power, Axion Power (AXPW.OB), Maxwell Technologies (MXWL) ZBB Energy (ZBB) and perhaps Beacon Power (BCON) also merit serious consideration.

For the last three years I've cautioned investors that the media circus around plug-in vehicles and exotic batteries was a transitory phenomenon driven by ill-conceived ideology instead of common sense. The upcoming recession will force the government and the markets to recognize that plug-in vehicles are unconscionable waste masquerading as conservation and a luxury no nation can afford, much less subsidize at relevant scale.

My last chart for the day compares the market capitalizations of my tracking list companies on September 30, 2009 and September 30, 2011. While Axion Power and Exide are far stronger today than they were in the fall of 2009, most of the companies that lost a lot of market value have also lost a lot of ground.



The simple but undeniable reality is everybody wants better batteries but nobody wants to pay a premium price for them. The green in an ordinary consumer's wallet will always take priority over the green in his cocktail conversation. Manufacturers of objectively cheap products that can do the required work are certain to thrive over the next five years. Developers of exotic batteries for plug-in vehicles and other uneconomic applications are likely to follow the same tragic path as Ener1 (HEV).

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

Posted by John Petersen at 10:04 AM | Permalink | Comments (4)

by Clean Energy Intel

Companies with significant exposure to the market for natural gas transportation have obviously received a lot of attention recently following the announcement last week of a co-marketing agreement for LNG transportation between oil major Shell (RDS-A) and Westport (WPRT), a provider of natural gas engine technology.

This makes the release of Pike's new annual global sales forecasts for natural gas vehicles particularly timely and worth a look.

According to Pike Research, there are currently 12.6 million natrual gas vehicles (NGVs) in the world. These are mainly located in Latin America, the Middle East and Africa. Meanwhile, annual sales of NGVs reached about 1.9 million globally in 2010.

Pike's research suggests that sales will now grow significantly going forward, reaching 3.2 million by 2016 - a jump of 68%. Most importantly, Pike believes that the key driving force will be fleet owners looking to cut down on their petroleum bills. As a percentage of total global sales, commercial NGVs are expected to rise from 59% today to 65% by 2016.

For the US, Pike sees sales growing even faster. From a fairly low base of 8,400 in 2012, sales are expected to quadruple to 33,000 vehicles by 2016. Moreover, some 90% of the NGVs sold in the US in 2016 are expected to be for commercial use. Clearly, this would be a significant market for a company like Westport.

The market for NGVs in the US is currently limited, particularly in terms of personal transportation, by the large costs associated with building natural gas stations. The following numbers from AutoObserver highlight the issue:

"As of Sept. 1, there were 901 CNG stations and 45 liquefied natural gas (LNG) stations in the U.S., compared to about 2,600 propane stations, more than 2,400 E85 stations and almost 3,200 publicly accessible electric-vehicle charging stations, according to the U.S. Energy Department's Alternative Fuels and Advanced Vehicles Data Center (AFDC). There are about 125,000 conventional gas stations in the U.S".

However, the task of providing an LNG station network for commercial trucking fleets is not quite so onerous since it can be effectively focused on the main trucking corridors. This provides Pike with more optimism on their commercial NGV forecasts for the US.

All of this is certainly supportive for Westport of course. And this is particularly true in the light of the company's recent agreement with Shell. You can read a fuller discussion and assessment of the implications of this agreement here, with a further update here.

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

Posted by cleanenergyintel at 11:25 PM | Permalink | Comments (0)

by Clean Energy Intel

Following the deal between Westport Innovations (WPRT), provider of natural gas engine technology, and Shell (RDS-A) on a co-marketing agreement for natural gas solutions for the trucking industry in North America, Westport CEO David Demers gave an interview on CNBC's Mad Money.

You can read more about the original co-marketing deal here. The bottom line is that this commitment from a major oil company will no doubt spur the use of natural gas in the transportation sector. However, it may well represent simply too much competition for the smaller Clean Energy Fuels (CLNE). Again, see more detail here.

Following the announcement, Westport CEO Demers' interview on CNBC only served to underline each of these two main conclusions, as the quotes below make clear. You can view the full interview, including all quotes given below, here.

What is most striking in terms of Demers' comments, is his repeated suggestion that customers have been waiting for the entry of an oil major to assure them that long-term availability of natural gas fueling would be there:

"The question we get from everybody, whether they're in trucking or rail or mining, is well is this sustainable. Can we really see the fuel that we need, in the scale that we need, in the price we need for decades into the future to justify a move of this whole economy into a new fuel".

The implication that the good work previously being done by Clean Energy Fuels alone had not been enough is fairly clear:

"And I think that people have been waiting for a move from one of the majors and this move from Shell is clearly the starting gun for a whole new energy era".

Demers put forward a good case that Shell has the presence to make the shift towards natural gas in the trucking sector start to happen:

e experience, the technical expertise, its going to give people a lot of comfort that this is not a big scary, risky move to go into this new fuel".

Shell is of course starting out by offering natural gas from 2012 in selected Shell Flying J truck stops in Alberta Canada. Initially the LNG will be supplied by third parties. However, by 2013 Shell expects to be producing LNG at the company's Jumping Pond gas processing facility. Moreover, the agreement with Westport is for North America as a whole and if Shell's move in Alberta is successful they will no doubt roll out LNG availability in trucking corridors across the States.

Thi "Shell has clearly got a lot of ability to help make this transition easy for fleets. They have the billing systems, the credit card, the networks, ths will also spur the natural gas transportation market as a whole. However, this level of competition will no doubt limit the growth of a much smaller company such as Clean Energy Fuels, which simply does not have the capital to compete in terms of infrastructure roll-out.

As I argued in my previous article on the issue, T. Boone Pickens and Clean Energy Fuels have done an excellent job in putting the case for natural gas trucking before the market. However, in the end Shell may well just represent too much competition for a relatively small pioneering outfit.

On the other hand, the news is unequivocally good for Westport. At present, I have no positions in my clean energy portfolio due to a negative view of the risk in the overall stock market (more detail here). However, from a long-term perspective Westport looks set to grow its business very strongly. Further weakness in the overall market in the period ahead may very well provide a good entry point in this stock.

Disclosure: I have no positions in the stocks discussed.
About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund..

Posted by cleanenergyintel at 08:58 PM | Permalink | Comments (0)

by Clean Energy Intel

Westport Innovations (WPRT), provider of natural gas engine technology, received a major boost following the announcement of a co-marketing program with Royal Dutch Shell (RDS-A). Understandably, Westport itself rose 19.4% on the day. Perhaps less understandable was the 13.2% rise seen by Clean Energy Fuels (CLNE).

The agreement between Westport and Shell launches a co-marketing program in North America aimed at providing an integrated commercial solution for customers in the natural gas vehicle field. You can read a full description of the program in the press statement from Westport here. In essence, the agreement aims "at providing customers a better economic case when purchasing and operating liquefied natural gas–powered vehicles (LNGVs) by consolidating key value chain components such as fuel supply, customer support and comprehensive maintenance into a single, user-friendly package".

Key quotes from the press statement from each of the two companies point to the intended strength of the agreement:

Firstly, David Demers, CEO of Westport Innovations said: “As a result of this initiative, we believe the use of natural gas as a fuel for transportation will accelerate. The North American launch is an important first step with Shell and we look forward to the continued proliferation of our advanced technology products and integration services.”

“We at Shell believe that natural gas, because of its abundance and strong environmental profile, is a destination solution in the transportation fuels space. This alliance with Westport will allow us to bring these benefits to market in a way that I believe can potentially transform fuel consumption in the heavy-duty vehicle segment for years to come,” said José-Alberto Lima, Shell Vice President for LNG & Gas Monetization.

The fact that an oil company is putting its muscle behind natural gas as a fuel for the trucking sector is unequivocally good for the future of natural gas transportation. It is also clearly very bullish for Westport, particularly since the agreement is intended to apply 'initially in North America', implying that if successful it could be rolled out elsewhere. The Shell deal also follows on Westport's success in securing an agreement with GM over the development of natural gas engines. 

However, the 13.2% rise in Clean Energy Fuels is more questionable. The company's strategy was largely based on rolling out a natural gas refueling infrastructure before the mainstream oil companies moved into the market, hopefully aided by the passage of the Natural Gas Act. Unfortunately, voting on the Natural Gas Act was postponed last year and it has yet to pass. And now Clean Energy Fuels faces serious competition. 

Since Westport provides natural gas engines, it makes little difference to the company's strategy who provides the natural gas fueling infrastructure. All that it important is that trucking companies will be assured that the infrastructure will be there. If, however, Shell is going to roll out such an infrastructure across the main trucking corridors, there is less of a clear roll for the much smaller Clean Energy Fuels.

One final point is worth noting. CLNE's backer T. Boone Pickens and the company's CEO Andrew Littlefair have both disposed of a reasonable amount of stock in the company recently. Most significantly, in the three days between August 30th and September 1st Mr Pickens sold 1,319,488 shares for a total value of $17,632,200. 

T. Boone Pickens and Clean Energy Fuels have done an excellent job in putting the case for natural gas trucking before the market. However, in the end Shell may well just represent too much competition for a relatively small pioneering outfit.  

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service produced by a retired hedge fund strategist who also manages his own money inside a Clean Energy investment fund.

Posted by cleanenergyintel at 08:46 PM | Permalink | Comments (0)

John Petersen

In the most under-reported cleantech story of the year, researchers from the National Renewable Energy Laboratory have used an impressive array of computational and modeling tools to prove that the Law of Diminishing Marginal Utility, which holds that the first unit of consumption of a good or service yields more utility than the second and subsequent units, doesn't have a loophole for plug-in vehicles. The penultimate slide from an NREL presentation at Plug-in 2011 says it all – and proves beyond doubt that cars with plugs are less effective at saving fuel and reducing emissions than conventional hybrids and other simple fuel efficiency technologies.



At the individual vehicle level, the diminishing marginal utility of batteries is self-evident the moment you understand that the first 1.5 kWh of batteries in a Prius-class HEV slash fuel consumption by 33% but it takes a whopping 22.5 kWh of additional batteries to eliminate the other 67% with a Leaf-class BEV. The reality just gets uglier when the analysis moves to a societal level where cars with big batteries can only sabotage national efforts to reduce dependence on imported oil and cut CO2 emissions. They're the poster child for conspicuous consumption and the elevation of style over substance. Even researchers from the NREL who wanted to reach a contrary conclusion couldn't make a rational resource sustainability argument. The best they could manage without sacrificing intellectual integrity on the altar of eco-orthodoxy was to conclude that lithium supplies won't be constrained for a couple decades, which somehow makes the diminishing marginal utility of batteries more palatable. Lithium may not be an issue for a couple decades, but it's far from a permanent solution. While the NREL didn't mention them, other non-ferrous industrial metals pose more immediate concerns, particularly when you understand that metal prices are more volatile and increasing more rapidly than oil prices.



I didn't reprint the NREL graphic because it's news. Regular readers of this blog already know the facts. I reprinted the graphic because it's in a form that even a Congressman or Senator can grasp, particularly a Congressman or Senator who's under the gun to slash wasteful spending and try to get the economy back on a sustainable track. No matter how you define the disease, plug-in vehicles are not a cure, or for that matter a band-aid. There are solutions that can make a substantial difference in national fuel consumption and CO2 emissions, but they're boring efficiency technologies including Prius-class HEVs, mild hybrids like GM's eAssist and even stop-start systems that simply turn the engine off while you're waiting for a stop light. Taxpayer subsidized toys for eco-royalty are not going to work because even if prices fall, fawning acolytes of electric drive can never overcome the diminishing marginal utility of big batteries.

I've been a careful observer of Federal energy policy and panacea energy solutions since my graduation from law school in 1979. Over the years I've watched policy lurch from one game changer to the next and recoiled in horror at the devastation changing policies and priorities have repeatedly wrought on investors who were foolish enough to buy the latest dream. At this year's EIA Energy Conference John German, a Senior Fellow and Program Director for the International Council on Clean Transportation closed his presentation with the following slide.


While ancient stock market lore is easily forgotten, it's important to remember that fuel cell companies like Ballard Power (BLDP) and Plug Power (PLUG) and ethanol companies like Pacific Ethanol (PEIX) lost more than 99% of their once lofty market values when ambitious technology du jour dreams collided with economic reality. Without a clear exemption from the law of diminishing marginal returns Tesla Motors (TSLA), A123 Systems (AONE), Valence Technologies (VLNC) and other companies that want to replace fuel tanks with big batteries can't possibly avoid the same fate. The surprise winners over the next few years will be stodgy old-line battery companies like Johnson Controls (JCI) and Exide Technologies (XIDE) and emerging technology developers like Axion Power International (AXPW.OB) that understand the green in a customer's wallet is more important than the green in his cocktail party conversation.

Mark Twain said, "history does not repeat itself but it rhymes." William Martin wrote, "In America, we wake up in the morning, we go to work and we solve our problems." We use the tools that are readily available to us and we remain willing to adopt newer and better tools when they prove their merit in a free market and become commercially available at reasonable prices. The time for dreaming is over. We need to wake up, down a pot of coffee, go to work and solve our problems with sensible, affordable and sustainable solutions like compressed natural gas, stop-start idle elimination and a host of conventional fuel efficiency technologies.

Sometimes I wonder whether the world is being run by smart and cynical ideologues who are putting us on, or by economic imbeciles who believe their own hype.

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

Posted by John Petersen at 03:37 AM | Permalink | Comments (2)

John Petersen

After eight years of rarely speaking above a whisper, Axion Power International (AXPW.OB) has found its voice, taken the scientific wraps off its PbC® battery technology and shown potential customers, competitors and investors that it's carrying a big stick and is poised to dominate energy storage for stop-start idle elimination – a cheap and sensible fuel efficiency and emissions reduction technology that's expected to grow at spectacular rates for the rest of the decade as shown in the following forecast of battery demand in vehicles equipped with stop-start systems.



In a new white paper on dynamic charge acceptance that's available in the Investor section of its website, Axion has thrown down the technology gauntlet and shown why flooded and valve regulated lead-acid batteries from Johnson Controls (JCI), Exide Technologies (XIDE) and others aren't good enough for today's stop-start systems and won't be good enough for even more demanding second generation systems. In the process it's also shown why a dual device system from Maxwell Technologies (MXWL) and Continental AG (CTTAY.PK) that combines a supercapacitor module with a valve regulated AGM battery can't be an optimal solution either.

The basic problem is that stop-start systems require their batteries to operate at a partial state of charge and conventional lead-acid batteries rapidly deteriorate if they're not kept fully charged. There's a fundamental mismatch between the needs of the application and the capabilities of the battery. With flooded lead-acid batteries the deterioration is obvious within weeks. With valve regulated AGM batteries it takes a few months. As the battery deteriorates, the mechanical systems just stop working. Stop-start systems that lose their functionality over a few weeks or a few months because of feeble batteries aren't efficiency technologies at all - they're greenwash. Automakers desperately need a better solution, but it has to be easy to manufacture, easy to scale and cheap enough for a price sensitive mass market.

In simple terms, the PbC is a battery-capacitor hybrid that loves operating at a partial state of charge and doesn't deteriorate rapidly with age. While the basic chemistry is pure lead acid, Axion replaces the lead-based negative electrodes found in conventional batteries with carbon electrode assemblies that eliminate battery deterioration and pave the way for second-generation systems that will offer even better performance. Since the white paper does a fine job of explaining the science, I'll focus on the business dynamics that favor rapid launch and widespread implementation of the PbC technology.

The PbC offers 10x the dynamic charge acceptance and 20x the cycle-life of conventional lead acid batteries for one reason – it's a third-generation device that takes valve regulated AGM battery technology to a whole new level. While the science underlying the PbC technology was patented in 2002, the challenge was developing production methods and equipment that could leverage existing manufacturing and distribution infrastructure instead of replacing it. Axion spent eight years developing PbC electrode assemblies that can be used as plug-and-play replacements for the lead-based electrodes used by battery manufacturers worldwide. The last step is earning OEM certification for its automated electrode manufacturing processes. Once the OEM's have certified Axion's electrode manufacturing processes, it will be easy for an AGM battery manufacturer to substitute PbC electrode assemblies for their conventional lead electrodes and offer a better battery to customers without having to requalify their factories or their products.

Unlike other battery manufacturers that want to build new factories and develop new customers, or wrestle business away from entrenched competitors, Axion plans to pursue a platform technology strategy where it will focus on manufacturing a high value component for sale to existing manufacturers that want to offer a better product to current customers. Axion's strategy was lifted from the Intel playbook. They don't care who manufactures the battery for a particular customer as long as it uses Axion's electrodes. With a strong intellectual property estate that will keep new entrants away from its sandbox, Axion is well positioned to forge a variety of cooperative relationships with battery manufacturers worldwide.

The only battery technology on the market that can offer comparable performance in stop-start applications is lithium-ion. While lithium-ion developers like A123 Systems (AONE) are actively developing products for the stop-start market, their batteries are more expensive than the PbC and harder to scale because they can't leverage existing infrastructure. They also suffer from significant cold weather performance issues and have limited potential for future cost reductions while the PbC is at the upper left-hand corner of the learning curve. There's a reason that first tier battery buyers like BMW and Norfolk Southern publicly aligned themselves with the PbC technology before there was a PbC product.

In his seminal book The Innovator's Dilemma, Dr. Clayton Christensen uses the term disruptive technologies to describe low-cost innovations that satisfy new customer needs, improve over time and eventually displace established technologies. The following graph illustrates the phenomenon.



If you believe Dr. Christensen's theory it's impossible to believe that lithium-ion batteries that were developed for the most demanding uses will be the ultimate winner in energy storage for stop-start idle elimination. Technologies simply do not transition downstream from high quality uses to low quality uses. Disruptive technologies always start at the bottom and work their way to the top. Given a choice between embracing the PbC technology and working with Axion or losing critical market share to more expensive lithium-ion products, the lead-acid battery industry will do the only sensible thing.

At yesterday's close Axion had a $48 million market capitalization and a serially patented technology that holds the price and performance keys to a multi-billion dollar market. The math seems obvious to me. In less than two weeks Axion will present at the Rodman & Renshaw conference in New York. It's stock had a strong run in February and March of this year after similar presentations at lower tier cleantech conferences sponsored by Piper Jaffray, Jefferies and Kaufman Bros. While the first run was crushed by selling pressure from a couple of large stockholders, cumulative trading data leads me to believe that the willing sellers are effectively out of stock and can't cause a comparable reversal of the next run.

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

Posted by John Petersen at 06:51 AM | Permalink | Comments (4)

John Petersen

Last week I stumbled across a link that led to a 2010 report from the National Research Council titled "Hidden Costs of Energy, Unpriced Consequences of Energy Production and Use." This free 506-page book takes a life-cycle approach – from fuel extraction to energy production, distribution, and use to disposal of waste products – and attempts to quantify the health, climate and other unpriced damages that arise from the use of various energy sources for electricity, transportation and heat. After studying the NRC's discussion of the unpriced health effects, other nonclimate damages and greenhouse gas emissions of various transportation alternatives, and thinking about what the numbers really mean, I've come to the conclusion that the electric vehicle advocates are playing liars poker with their cost and benefit numbers – emphasizing a couple areas where electric drive is superior and de-emphasizing or completely ignoring a far larger number of areas where electric drive is clearly inferior. The result, of course, is unfounded and wildly optimistic claims of superiority based on four sevens in a ten digit serial number that don't mean a thing if your goal is to evaluate the entire serial number.

The first graph from the introduction summarizes the unpriced health and other nonclimate damages arising from the use of thirteen different vehicle fueling technologies over the entire cycle life of an automobile and quantifies the unpriced mine to junkyard cost per vehicle mile traveled, including well or mine to wheels costs of manufacturing the vehicle and fueling it over its operational life.



The thing I found most surprising was the relative consistency of the numbers across all thirteen classes, both for today and for the future, and the fact that many advanced drive train technologies score lower than their conventional cousins because the unpriced costs of manufacturing the vehicle or processing the fuel exceed the claimed operating benefits. When you look at the realities from a cradle to grave perspective there are no clearly superior choices and the values are all clustered within ±15% of a $1.25 average. While I derive some personal satisfaction from the idea that the low cost winners are a Prius-class HEV or an internal combustion engine with a CNG fuel system, and that electric drive is just a smidgen cleaner than a diesel engine burning fuel produced from Fischer Tropsch coal liquifaction, the reality is that none of the advanced technologies are inherently better. They're just more expensive.

The game is simply not worth the candle. It’s certainly not worth the enormous expenditures of public funds that governments worldwide don't have. There’s nothing electric drive can accomplish that CNG and fuel efficiency can’t accomplish cleaner, faster and cheaper.

The second graph from the introduction summarizes the unpriced greenhouse gas damages arising from the use of the thirteen different vehicle fueling technologies over the cycle life of an automobile. While the range of variation around a current average of about 450 grams of CO2 per vehicle mile traveled is a little wider at ±25%, once again it's just not worth getting worked up over inconsequential differences that entail substantial incremental costs.



One of the most intriguing take aways from these two graphs is the inescapable conclusion that the differences today are modest and as technologies mature and improve the differences will become less important, not more. By 2030, plug-ins will have no advantage over internal combustion when it comes to greenhouse gasses and be significantly worse than internal combustion when it comes to health and other nonclimate costs.

Over the years I've suffered endless abuse from commenters who decry my appalling lack of vision when it comes to lithium-ion superstars like Ener1 (HEV), A123 Systems (AONE), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) that are certain to drive battery performance to new highs while driving manufacturing costs to new lows and enabling a paradigm shift to electric cars from Tesla Motors (TSLA), Nissan (NSANY.PK), General Motors (GM) and a veritable host of newcomers that are positioning for future IPOs and certain to change the world. While the following graph is a little dated, it shows why the electric pipe dream can’t happen unless some genius in a garage comes up with an entirely new way to store electricity.



Liars poker can be a fun way to fritter away the hours in Wall Street watering holes like Fraunces Tavern, but it creates enormous risk for investors who hear about four sevens but never hear about the other six characters in the serial number. I've seen this melodrama before. For the period from 2000 through 2003 fuel cell developers like Ballard Power (BLPD) and FuelCell Energy (FCEL) carried nosebleed market capitalizations based solely on dreams. From 2005 through 2007, it was the age of corn ethanol kings like Pacific Ethanol (PEIX). Lithium-ion battery developers have already taken it on the chin and there's no question in my mind that Tesla will be the next domino to fall. Its demise is every bit as predictable and certain as Ener1's was.

It's frequently said that those who do not learn from history are condemned to repeat it. There isn't much I can add.

Disclosure: None.
Posted by John Petersen at 04:49 PM | Permalink | Comments (12)

John Petersen

Last Friday President Obama and executives from thirteen leading automakers gathered in Washington DC to announce an historic agreement to increase fleet-wide fuel economy standards for new cars and light trucks from 27.5 mpg for the 2011 model year to 54.5 mpg for the 2025 model year. While politicians frequently spin superlatives to describe mediocre results, I believe the President's claim that the accord "represents the single most important step we've ever taken as a nation to reduce our dependence on foreign oil" is a refreshing example of political understatement. After three decades of demagoguery, debate, dithering and delay, meaningful policy change has finally arrived, and not a moment too soon.

The economic impact will be immense – a staggering $1.7 trillion in fuel cost savings that will flow directly to consumers. As those savings begin to work their way through the economy and kick-start secondary fiscal multiplier effects, the boost to GDP will be closer to $7 trillion. I believe Friday's agreement will ultimately be seen as the biggest economic stimulus event in human history.

The following graph from a new White House report titled, "Driving Efficiency: Cutting Costs for Families at the Pump and Slashing Dependence on Oil" says it all.



The most surprising aspect of this agreement isn't the aggressive goals; it's the fact that the auto industry has helped forge the goals and plans to achieve them by implementing "affordable technologies that are on the road today." The new goals are not based on the electric dreams of a Tesla Motors (TSLA). They're based on the automaker's hard-nosed evaluation of the cumulative gains that can realistically be achieved with existing ICE technologies like engine downsizing, stop-start idle elimination, turbocharging, optimized cooling, low friction, direct fuel injection and variable valve timing.

Individually the fuel economy gains from advanced ICE technologies will only be baby steps toward energy independence. Collectively they'll give American consumers passenger cars with lower well-to-wheels CO2 emissions than a 2012 Nissan (NSANY.PK) Leaf plugged into the typical wall socket. They'll change the world without a budget busting paradigm shift.

In early July The Boston Consulting Group released a new report titled "Powering Autos to 2020; The Era of the Electric Car?" that evaluated the combined potential of baby-step fuel efficiency technologies and considered their likely impact on wildly expensive and impractical proposals to convert the world's transportation infrastructure from liquid fuels to electricity. In the report BCG concluded that:

• Conventional technologies have significant emissions-reduction potential, but OEMs will need to pull multiple levers simultaneously to meet emissions targets.
• Advanced ICE technologies can reduce gasoline consumption by 40% at a cost to the consumer of $50 to $60 per percentage point of reduction – roughly half what BCG predicted three years ago.
• Advanced ICE technologies are likely to become standard equipment worldwide during the next decade.
  
• Electric cars will face stiff competition from ICE and will not be the preferred option for most consumers.
• Battery costs will probably fall to about $9,600 per vehicle, but become increasingly uneconomic as the potential fuel savings per kWh of battery capacity plummets.
• In addition to dismal economics, plug-ins will face substantial go-to-market challenges including battery durability concerns and the absence of adequate charging infrastructure.

In my view the BCG report is a must read for investors who want to profit from this fuel efficiency mega-trend and avoid heavy losses in vehicle electrification schemes that will become increasingly uneconomic over time. The fundamental flaw is simple. Today an EV with a fully charged 24 kWh battery pack can save a consumer the equivalent of 3 gallons of gas. By 2025, the savings will be closer to 1.5 gallons of gas. Even with falling battery prices the value proposition can only get more challenging with each passing year.

For the last couple years I've been cautioning investors that gee-whiz vehicle electrification technologies are transitory, a flash in the pan, and the biggest business opportunities in energy storage involve cheap, simple and effective baby-step technologies like stop-start idle elimination that will slash fuel consumption by 5% to 15% for a few hundred dollars. The BCG report and the newly announced fuel economy goals are yet another proof of that principle.

The future is all about getting more from less and has absolutely nothing to do with increasing consumption of one class of scarce natural resources in the name of conserving another.

While I can't identify the component manufacturers that will thrive from the widespread implementation of advanced ICE technologies like turbocharging, direct fuel injection and variable valve timing, picking the winners in energy storage is easy. Johnson Controls (JCI) and Exide Technologies (XIDE) will be the first beneficiaries as automakers upgrade their electrical systems to withstand the strains of stop-start idle elimination. As stop-start systems become standard equipment worldwide and the inherent limits of current AGM battery technology become obvious, more powerful energy storage solutions from emerging technology developers like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) will ascend to prominence if not dominance.

The new fuel efficiency standards are not an omen of doom for lithium-ion battery solutions from A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) which will no doubt gain a toehold among the 6% to 13% of consumers who say they'd purchase an environment-friendly car even if they had to pay a premium over the life of the vehicle. I'm just not certain how significant that toehold will be in light of the incontrovertible reality that less than 2% of consumers actually buy environment-friendly cars.

On balance I believe that survey-based uptake forecasts will be just another example of a painful lesson I learned in the biodiesel business – that individual buying decisions speak louder than surveys and the green in a consumer's wallet always takes priority over the green in his cocktail party conversation.

For several years the mainstream media, financial press and sell-side analysts have been publishing irrationally optimistic stories and reports about the end of the ICE age and the dawn of a golden electric era. On Friday the Obama Administration and the automakers put the world on notice that IC Empire is striking back and plans to bury the now generation of electric wannabes like it has all of their predecessors.

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

Posted by John Petersen at 05:31 AM | Permalink | Comments (5)

John Petersen

Today is the third anniversary of my blog on investing in energy storage. While the last three years have been profoundly troubled by a market crash, a slow recovery and more ups and downs than a roller coaster, energy storage has been surging to prominence as investors realize that batteries, products we all love to hate, are a critical enabling technology for wind and solar power, efficient transportation, the smart grid and hundreds of other applications that make life more pleasant. With each passing day it's increasingly clear that energy storage is an investment mega-trend that will endure for decades. Most of the smart money is still on the sidelines looking in, which explains the popularity of my blog. As the smart money transitions from analyzing opportunities to making investments, the sector should encounter rising tides that lift all boats.

Thomas Edison was the first to identify the biggest risk of energy storage investing a century ago when he complained:

“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.”

The problem isn't really the batteries, which haven't improved all that much over the last century. Instead, the problem lies in the fertile imaginations of investors, ideologues and demagogues who read about scientific discoveries in research laboratories, overestimate the value of those discoveries and then make a wildly optimistic leap from the reasonable to the absurd.

The two most common forms of batteries are carry-over relics of the 19th century. Lead-acid batteries have been around for 150 years and spiral wound batteries have been popular for almost as long. While battery chemistry has changed over the years and manufacturing methods have been modernized, the energy storage capacity of today's best batteries is only four or five times greater than the energy storage capacity of the batteries Edison complained about. Regardless of what you read in the paper or hear on the news, making a better battery is very hard work and the vast majority of exciting new discoveries never make it from the laboratory bench to the factory floor because they're just too expensive.

It's fun to daydream about the technical possibilities of portable power, but the market will only pay for cheap, reliable and safe portable power. The chasm between technical possibility and economic viability is both wide and deep.

Today's most common myth in energy storage is that exponential performance gains will be accompanied by rapidly falling prices. The current issue of Science includes an article titled "Getting There" that offers a classic example of how the mythology grows and spreads. The article's centerpiece is the following graph that compares the theoretical potential of battery materials and the best results obtained in working cells.



A quick read through the article and a glance at the graph would be enough to convince any reasonably imaginative person that a golden age of battery powered everything is just around the corner. The undeniable facts the article and the gee-whiz graph don't explain with any force are:

• All lithium-ion batteries in commercial production are in the first category;
• The performance differences between today's lithium-ion chemistries are minor;
• Current technologies offer little room for improvement because the theoretical limits are absolute;
• The first category are the only batteries we know how to manufacture in bulk;
• All advanced battery technologies will require the development of completely new manufacturing methods and equipment;
• All advanced technologies will require the construction of different infrastructure from the ground up;
  
• All advanced technologies are five to ten years from production if everything goes right; and
• The companies that own the best current technologies do not own their advanced counterparts.
  

In other words each step forward will make all the science and all the manufacturing infrastructure required for the prior generation of lithium-ion batteries obsolete. It's the epitome of creative destruction where the future poses an existential threat to the past, but the future can't leverage, build upon or even use the massive infrastructure investments of the past. Progress in IT was immense and rapid because every step along the path built upon and leveraged the past. Progress in energy storage is agonizingly slow because innovation that builds upon and leverages the past is rare.

In my first Seeking Alpha article, I wrote that the market prices for Ener1 (HEV) and Altair Nanotechnologies (ALTI) resulted in "nosebleed market capitalizations based on little more than dreams." In September 2008, I added Valence Technologies (VLNC) to my list of dangerously overvalued lithium-ion battery developers because like Jacques Cousteau it was under water to the tune of $68.4 million at mid-year. In October 2009, I added BYD Co. Ltd. (BYDDF.PK) to my list and wrote that it was "a classic example of why it's never a good idea to make investment decisions based on simple questions like "What did Warren do?" In November 2009, I added A123 Systems (AONE) to the list observing that it was "well up the hype cycle curve and approaching the Peak of Inflated Expectations." Last November, I added the magical gravity defying Tesla Motors (TSLA) to my list and suggested a paired trade that would short Tesla and buy Exide Technologies (XIDE). In every case the reader outrage over my criticisms was palpable. You'd have thought I was torturing kittens. Subsequent price performance tells a very different story. The following table summarizes the market price of each of these companies when I first openly criticized them, their closing price last Friday, and the percentage decline in the interim.

Company	Symbol	Initial Price	Friday's Price	Change
Ener1	HEV	$5.91	$0.79	-87.6%
Altair Nanotechnologies	ALTI	$7.92	$0.96	-87.9%
Valence Technologies	VLNC	$3.59	$1.03	-71.3%
BYD Co. Ltd.	BYDDF.PK	$11.12	$2.86	-74.3%
A123 Systems	AONE	$15.88	$5.68	-64.2%
Tesla Motors	TSLA	$30.80	$27.58	-10.5%

My record at picking winners isn't perfect, but I'm batting a thousand when it comes to identifying over-hyped stocks near the peak of inflated expectations.

Since I first criticized them, A123 and BYD have fallen to levels where they're beginning to look attractive for long-term investors who believe in the future of electric transportation and are not concerned about a looming glut of lithium-ion battery manufacturing capacity that will increase losses and force marginal manufacturers out of business without reducing material, manufacturing or finished battery costs. In spite of the happy talk from Silicon Valley and buy-side cheerleaders, Tesla hasn't even started to bleed. Ener1, Altair and Valence may survive, but only if they can negotiate massive capital infusions on terms acceptable to new money.

I've been bullish about the lead-acid battery sector for years because the major battery manufacturers including Johnson Controls (JCI), Exide and Enersys (ENS) have global manufacturing footprints, established product lines, strong customer relationships, billion dollar revenue streams and rust-belt market capitalizations. My favorite in the group is Exide because it trades at a significant discount to its peers and is well-positioned to out-perform market expectations on a go-forward basis.

In light of recent forecasts that stop-start idle elimination will be deployed in almost a hundred million cars over the next five years, I think JCI and Exide are facing a dream scenario where unit volumes remain stable but per unit revenues double and margins ramp sharply as customers gravitate to their premium AGM products.

My old company Axion Power (AXPW.OB) has not been a stellar stock market performer over the last couple years, but the delays have arisen from the stringent manufacturing and quality control requirements of it's principal potential customers. Since I can't remember another instance where huge companies like BMW and Norfolk Southern have publicly aligned themselves with a nano-cap technology developer that hasn't even launched its first product, I can live with delays that disappoint the market but please them.

The last three years have been a lot of fun and intelligent comments from knowledgeable readers have provided a balance and breadth that I could never have achieved on my own. New readers in particular may find it helpful to peruse my article archive, but be sure to spend enough time reading the comments to understand where the views of others differ from mine. I always try to explain the factual basis for my opinions and provide links to relevant source documents, but in the end I'm only human and I can only speak from the shoes I stand in. I want to thank everyone for their respective contributions, even those who haven't learned how to disagree without being disagreeable.

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

Posted by John Petersen at 12:27 PM | Permalink | Comments (2)

John Petersen

Last week Societe Generale published a thematic research report titled "A new world order, when demand overtakes supply" which examines the macro-economic and demographic trends that will transform the global economy over the next 20 years. It mirrored the theme of Jeremy Grantham's April 2011 quarterly letter titled "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever" and did a great job of summarizing an issue I touched on in "How PHEVs and EVs Will Sabotage America's Drive For Energy Independence."

In the words of Societe Generale:

"So, while up until now less than one billion people have accounted for three-quarters of global consumption, over the course of the next two decades, the new Chinese, Indian, Indonesian, Latin American and African middle classes will bring an additional two billion consumers with similar needs and aspirations as today's North American, European and Japanese consumers." (Page 12)

"Beyond growth in demand for finished products, the most spectacular effect likely to be brought about by the stronger development of the emerging economies will be the enormous rise in demand for raw materials." (Page 14)

"A structural increase in raw materials prices is in fact an inevitable consequence of chronic resource insufficiencies, whether we're talking about industrial, energy or agricultural resources." (Page 19)

The following table from Mr. Grantham's quarterly letter summarizes China's current consumption of key energy, industrial and agricultural commodities as a percentage of total global consumption and drives the point home with the subtle clarity of a sledge-hammer.



If we've seen this kind of demand dislocation as a result of a few decades of growth in China, what's going to happen when the surging middle class populations of India, Indonesia, Latin America and Africa decide to show up for the dinner party? The answer, of course, is that we'll be thoroughly screwed unless we stop wasting time, money and materials on pipe dreams, toys and panacea solutions, and focus instead on finding relevant scale solutions to persistent global shortages of water, energy, food and every commodity you can imagine. We all face a clear, present and persistent danger that can’t even be addressed until we accept the entire ugly reality with all its vulgar implications!

One of the most disturbing conclusions in the Societe Generale report is that while per capita energy demand in advanced economies will remain stable at 5,463 kg of oil equivalent, or maybe even decline to 5,000 kg per person by 2030, global average demand will increase from current levels of 1,818 kg per person to 3,312 kg per person in the low case and 4,228 kg per person in the high case. All of the increased demand will come from emerging and developing economies.

Our fundamental problem is that per capita global production of energy resources is 100 to 200 times greater than per capita global production of the technology metals that underlie all alternative energy schemes. To make things worse, all of those metal resources have critical competing uses that cannot be set aside or ignored in the name of advocacy. At a recent grid-based energy storage conference in Brussels I used the following table to emphasize the point. The orange highlight quantifies available energy resources while the green highlight quantifies technology metal resources.



The mathematically challenged optimists in our midst earnestly believe we can solve our energy problems with cool toys like wind turbines, solar panels, electric cars and other materials intensive energy schemes that fire the imagination but can never be sustainable. These aren’t solutions! They’re the energy and transportation equivalent of graphic novels and just a half-step removed from warp drive. In the final analysis, the dreamers who want to waste metals and other natural resources in the name of conserving coal, oil and natural gas are not saviors. They're unwitting saboteurs who can only make the problems worse!

Whether we like it or not, the only technology that has a prayer of generating enough new energy to satisfy even a small fraction of anticipated global demand is nuclear, a point that was forcibly driven home by Bill Gates in a recent interview at the WIRED Business Conference 2011. The naive idea that we can cut hydrocarbon consumption for the laudable goal of saving the planet is sophistry. Given a choice between freezing in the dark and burning hydrocarbons human beings will always choose the later because immediate personal need will always trump long term societal goals, especially fuzzy green goals.

I'm an unrelenting critic of obscene raw materials users like Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) that want to build a future out of making toys for our emerging eco-royalty because I've read about the French Revolution and remember how 'Madame Le Guillotine' put a uniquely sharp edge on popular discontent over conspicuous consumption. These business models are doomed to fail because they're diametrically opposed the needs of society.

The only alternative energy investments that stand a chance of survival, much less profitability, are basic efficiency technologies that slash waste and deliver real savings for every ounce of natural resource inputs. Nuclear power, idle elimination, fuel efficiency, demand response, building efficiency, ebikes, recycling and a host of other technologies that do more with less are the only possible future. Wind turbines, solar panels, electric cars and all of the other feel-good graphic novel schemes are merely pleasant distractions, a bit like Nero's fiddle.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock because Axion's disruptive third generation lead-acid-carbon battery technology uses 30% less lead to deliver impressive gains in power, cycle-life, charge acceptance and overall real world utility.

Posted by John Petersen at 04:20 AM | Permalink | Comments (8)

John Petersen

The second quarter was a turbulent period for investors in the energy storage and vehicle electrification sectors. Johnson Controls (JCI), C&D Technologies (CHHP.PK) and the enchanted, mystical, gravity defying Tesla Motors (TSLA) were up a little. Everybody else was down as fear, loathing and uncertainty ran rampant and the congenital birth defects of EVs and batteries to power them proved to be insurmountable obstacles for all but St. Elon of Palo Alto, the patron saint of expensive toys.

While the second quarter wasn't pleasant for most of the companies I track, I draw some comfort from the timeless words of Barron Rothschild who advised 18th Century investors to "buy when there's blood in the streets, even if the blood is your own" and Warren Buffett who advised 21st Century investors to "be fearful when others are greedy and greedy when others are fearful." The following table tracks price performance in the energy storage and vehicle electrification sectors for the second quarter of 2011 and the twelve months ended June 30, 2011.



There were any number of events that troubled the market deeply during the second quarter including news that:

• Th!nk Motors was heading into bankruptcy for the third and final time, which was disastrous news for its principal stockholder Ener1 (HEV);
• Altair Nanotechnologies (ALTI) was having problems closing a strategic investment from Hong Kong;
  
• Valence Technology (VLNC) was going to lose its sole supplier status at Smith Electric Vehicles;
• The unburdened cost of goods sold at A123 Systems (AONE) kept climbing instead of plummeting;
• Exide Technologies (XIDE) had decided to recognize $35 million of refinancing and restructuring costs in the fiscal year ended March 31st instead of carrying some of those costs into the current year;
  
• China Ritar Power (CRTP.PK) had decided to terminate its SEC registration while other China-based companies with US listings wallowed in a fog of suspicion spawned by aggressive short sellers; and
• Giggles over the prospect of using $1,000 per kWh batteries to store 10¢ per kWh electricity for the grid began to be heard from the utility sector.

My candidate for the most surprising event of the quarter happened a few days ago at JCI's 2011 Power Solutions Analyst Meeting. While JCI was the biggest recipient of Federal lithium-ion battery manufacturing support in the summer of 2009 when it shared a $299.2 million grant with Saft, JCI recently filed suit to dissolve that joint venture because Saft wants to stay focused on electric vehicles while JCI wants to look elsewhere for greener pastures. JCI is quick to observe that all automakers are developing a range of alternative energy powertrains, but it used the following graph to emphasize its view that the overwhelming majority of alternative powertrain vehicles produced over the next five years will use simple, cost effective and fuel efficient stop-start idle elimination systems.



It doesn't take much graph reading skill to see that cars with plugs wont even be speed bumps compared to the huge global market for stop-start systems.

As I review the stock price performance table I see a lot of risks and precious few opportunities. For reasons discussed in other articles I believe Ener1 is nowhere near done bleeding and Valence's market capitalization is unsustainable. While I'm not a fan of the lithium-ion battery producers, A123 is starting to look interesting because financing transactions that were fundamentally positive beat its market price into the ground.

Active Power (ACPW) has backed up a little and is now a mere 238% gainer since I recommended it at $0.72, but its management is executing well and there seems to be a lot more room to the upside.

In the lead-acid group most analysts are looking for a 25% upside in JCI, but I think the real sleeper stock is Exide. They bit a bullet and took about $35 million of one time charges in the last quarter of the fiscal year just ended, but that merely cleared the decks for future profitability. More importantly, they provided revenue and operating earnings guidance for the first time since emerging from bankruptcy. If their guidance is even close to accurate, it will come as a huge surprise to market watchers who got used to nothing but pain as Exide completed a multi-year restructuring. I won't be surprised by a double or even a triple over the next year.

I'm more confident than ever in Axion Power International (AXPW.OB) because the quirky market dynamics that forced the price down while the company was announcing world-class relationships with giants like Norfolk Southern and BMW seem to be coming to an end. The expected announcement of an important DOE grant for an Axion led team that includes a major US automaker, a research university and a national laboratory may be a tipping point. The DOE had planned to make the announcement last week and is apparently running late. Depending on which rumor you choose to believe, the news should be forthcoming sometime in the next two to four weeks.

For the last three years I've been cautioning readers that the market was acting like a voting machine in response to hype and that once reality set in, the lead-acid sector would represent unparalleled opportunity for long-term growth. The group has done well so far, but the real fun is just getting ready to start. Investors are finally realizing that the alternative energy revolution will take decades to unfold and the early winners will offer cheap solutions that conserve energy instead of cool solutions that waste huge volumes of non-ferrous industrial metals in the name of conserving a little oil.

In early March I created two hypothetical portfolios and funded each of them with $25,000 imaginary dollars. My long fuel efficiency portfolio that includes JCI, ENS, MXWL, XIDE and AXPW is down 10% at $22,502. In comparison, my short vehicle electrification portfolio that sold ALTI, AONE, HEV, TSLA and VLNC is up 35% at $33,906. My plan is to let both hypothetical portfolios run till September 6th and then prepare a six-month report.

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

Posted by John Petersen at 09:15 AM | Permalink | Comments (2)

John Petersen

On June 27th Johnson Controls (JCI) hosted their 2011 Power Solutions Analyst Day and unveiled their expectations for the future of stop-start idle elimination systems. After noting that all automakers are developing a range of powertrains, JCI used this graph to emphasize their view that the overwhelming bulk of alternative powertrain vehicles over the next five years will have simple, cost effective and fuel efficient stop-start systems.



You don't see much about stop-start systems in the mainstream media because politicians and reporters are too enchanted with plug-in vehicles and other exotica to deal with mundane issues like purchase prices and payback periods, but JCI has made it crystal clear that its meat and potatos business over the next five years will be cheap, not cool.

JCI's estimates for market growth over the next ten years were equally impressive, particularly when you realize that the advanced energy storage systems required for stop-start generate twice the per unit revenue and three times the per unit margins of flooded lead-acid batteries. It's a manufacturer's dream come true, stable unit volumes with rapidly increasing revenues and margins.

In their presentation JCI explained that the three key attributes of energy storage systems for stop-start are:

• Cycling – reliable system charge/recharge cycles over time;
• Useable energy – range of stored energy that can be used to optimize the system; and
• Charge acceptance – rate of recharge to maximize opportunity capture.

It ties perfectly to a joint presentation from BMW and Ford at last fall's European Lead Battery Conference where the two automakers explained why the stop-start duty cycle is so hard on conventional batteries. In a normal vehicle, you start the engine at the beginning of the trip and turn it off at the end. In a car equipped with stop-start, the engine turns itself off automatically every time the car is stopped and restarts automatically when the driver takes his foot off the brake. While the difference between one start per trip and one start per mile is enormous, a more critical problem arises from the fact that stop-start systems require the battery to carry all accessory loads during frequent engine off intervals.

In the segment of the BMW-Ford presentation that quantified a typical stop-start duty cycle, the accessory load was 50 amps for 60 seconds, or about 3,000 amp seconds while the starter load was 300 amps for one second. In other words, the accessories accounted for a whopping 91% of total load. Their graph of AGM battery performance over time shows that charge acceptance (the downward curving blue line) plummets as the battery ages while the time required to recover from an engine off event (the upward curving red line) soars from 30 seconds to three minutes or more.


Since all systems are designed to disable the stop-start functionality until the battery has recovered an acceptable state of charge, system efficiency falls off rapidly as the battery ages. The automakers want and need something better than AGM batteries, the principal solution that old line auto battery manufacturers like JCI want to provide.

The first advanced technology introduced for stop-start systems was developed by Continental AG in cooperation with Maxwell Technologies (MXWL) for use in diesel stop-start systems from Peugeot. In this dual device configuration an AGM battery carries the accessory load and a supercapacitor module carries most of the starter load. It insures a reliable engine restart, but can't do much about the bigger problem of accessory loads. Contiental and Maxwell expect that their system will be installed in up to a million Peugeot vehicles in the next three years. If the system works well for Peugeot and stop-start vehicle sales ramp as rapidly as JCI expects them to, implementation rates will probably be higher.

A second advanced technology solution for stop-start systems is a third generation lead-acid-carbon hybrid that's being developed by Axion Power International (AXPW.OB), which hopes to begin a commercial roll-out of its PbC battery later this year. In a joint presentation by BMW and Axion at last fall's ELBC, the performance differences were obvious. The graph that tracked PbC's performance over time using the BMW-Ford test protocol showed that charge acceptance (the flat blue line) stayed stable at 100 amps, or twice the charge acceptance of a new AGM battery, while recovery times (the flat black line) remained stable at 30 seconds.



The BMW-Ford graph shows that AGM batteries fade very rapidly over the first 5,000 miles of use in a stop-start equipped vehicle. The BMW-Axion graph shows that the PbC offers optimal performance through 40,000 miles. In a recent presentation at the 2011 Advanced Automotive Battery Conference in Mainz, Germany, Axion unveiled an updated graph of follow-on testing through 80,000 cycles, or approximately eight years of use, with only modest degradation.



I've been bullish about the future of stop-start idle elimination technology for a couple years. If the JCI forecasts are even close to accurate, I've been seriously understating the potential. Since JCI is the largest lead-acid battery manufacturer in the world and has a 36% share of the global automotive OEM and battery replacement markets, it will undoubtedly be the biggest beneficiary of the rapid worldwide implementation of stop-start idle elimination systems. The second biggest beneficiary will probably be Exide Technologies (XIDE), which is emerging from several years of tough restructuring and trades at a significant discount to JCI on a forward looking earnings basis. Emerging technology developers like Maxwell and Axion also have significant opportunities to grab a sizeable share of what's shaping up as $6 to $12 billion market niche. Their respective market capitalizations are summarized below:

Johnson Controls	JCI	$26.8 billion
Exide Technologies	XIDE	$569 million
Maxwell Technologies	MXWL	$442 million
Axion Power	AXPW.OB	$54 million

As former Axion director, I'm all too aware that it's a very little fish in a very big pond. I also understand why the PbC's extreme cycling performance and charge acceptance can be crucial to the future development of stop-start, a world-class fuel efficiency technology that's already being produced at scale and will become dominant in this decade. It's easy to dismiss my ramblings because I have a large stake in Axion. It's harder to dismiss BMW, a first tier automaker that joined Axion as a co-presenter at last year's ELBC. It will be darned near impossible to dismiss a big three US automaker that's apparently signed on as an Axion subcontractor in a pending DOE grant application.

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

Posted by John Petersen at 10:12 AM | Permalink | Comments (0)

John Petersen

In 2009, the world produced some 13.2 billion metric tons of hydrocarbons, or about 4,200 pounds for every man, woman and child on the planet. Burning those hydrocarbons poured roughly 31.3 billion metric tons of CO2 into our atmosphere. The basic premise of alternative energy is that widespread deployments of wind turbines, solar panels and electric vehicles will slash hydrocarbon consumption, reduce CO2 emissions and give us a cleaner, greener and healthier planet. That premise, however, is fatally flawed because our planet cannot produce enough non-ferrous industrial metals to make a meaningful difference and the prices of those metals are even more volatile than the prices of the hydrocarbons that alternative energy hopes to supplant.

The ugly but undeniable reality is that aggregate global production of non-ferrous industrial metals including aluminum, chromium, copper, zinc, manganese, nickel, lead and a host of lesser metals is about 35 pounds for every man, woman and child on the planet. All of those metals are already being used to provide the basic necessities and minor luxuries of modern life. There are no significant unused supplies of industrial metals that can be used for large-scale energy substitution. Even if there were, the following graph that compares the Dow Jones UBS Industrial Metals Index (^DJUBSIN) with the Amex Oil Index (^XOI) shows that industrial metal prices are more volatile and climbing faster than hydrocarbon prices, which means that most alternative energy schemes are like jumping out of the frying pan and into the fire.



For all their alleged virtues and perceived benefits, most alternative energy technologies are prodigious consumers of industrial metals. The suggestion that humanity can find enough slop in 35 pounds of per capita industrial metals production to make a meaningful dent in 4,200 pounds of per capita hydrocarbon production is absurd beyond reckoning. It just can't happen at a relevant scale.

I'm a relentless critic of vehicle electrification schemes like Tesla Motors (TSLA) because they're the most egregious offenders and doomed to fail when EV hype goes careening off the industrial metals cliff at 120 mph. Let's get real here. Tesla carries a market capitalization of $2.8 billion and has a net worth of less than $400 million, so its stock price is 86% air – a bubble in search of a pin. Tesla plans to become a global leader in the development of new electric drive technologies that will use immense amounts of industrial metals to conserve irrelevant amounts of hydrocarbons. Even if Tesla achieves its lofty technological goals it must fail as a business. Investors who chase the EV dream without considering the natural resource realities are doomed to suffer immense losses. Tesla can't possibly succeed. Its fair market value is zero. The stock is a perfect short.

I won't even get into the sophistry of wind turbines and solar panels.

Next on my list of investment catastrophes in the making are the lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) that plan to use prodigious quantities of industrial metals as fuel tank substitutes, or worse yet for grid-connected systems that will smooth the power output from inherently variable wind and solar power facilities that also use prodigious quantities of industrial metals as hydrocarbon substitutes. Talk about compounding the foolishness.

I can only identify one emerging battery technology that has a significant potential to reduce hydrocarbon consumption and industrial metal consumption at the same time while offering better performance. That technology is the PbC® Battery from Axion Power International (AXPW.OB), a third generation lead-acid-carbon battery that uses 30% less industrial metals to deliver all of the performance and five to ten times the cycle life. There may be other examples, but I'll have to rely on my readers to identify them.

Humanity cannot reduce its consumption of hydrocarbons by increasing its consumption of industrial metals. The only way to reduce hydrocarbon consumption is to use less and waste less.  There are a world of sensible and economic fuel efficiency technologies that can help us achieve the frequently conflicting long-term goals of reduced hydrocarbon consumption and increased industrial metals sustainability. They include but are not limited to:

• Better buiding design and insulation;
• Smarter power management systems;
  
• Telecommuting;
• Denser cities with shorter commutes;
• Smart transportation management to reduce congestion;
• Buses and carpooling;
• Bicycles and ebikes;
• Shifting freight to rail from trucks;
• Smaller vehicles that use lightweight composites to replace industrial metals;
  
• Deploying solar and wind with battery backup for remote power and in developing countries;
  
• Shipping efficiency technologies, such as better hull coatings, slow steaming, etc.; and
• Recycling, recycling and recycling
  

My colleague Tom Konrad wrote a 28 part series on "The Best Peak Oil Investments." While I'm skeptical about the future of biofuels after suffering major losses in the biodiesel business, Tom's work provides an exhaustive overview of the energy efficiency space and a wide variety of investment ideas that have the potential to make a real difference. Since we can't simply take a couple of giant leaps into the future, we'll just have to get out of our current mess the same way we got into it – one step at a time.

We live in a cruel world. There is no fairy godmother that can miraculously accommodate the substitution of scarce industrial metals for hydrocarbons that are a hundred times more plentiful. We can and we must do better, but we can't solve humanity's problems until we accept the harsh realities of global resource constraints without the filters of political ideology and wishful thinking.

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

Posted by John Petersen at 09:28 AM | Permalink | Comments (26)

John Petersen

Last Wednesday Maxwell Technologies (MXWL) announced the launch of a new ultracapacitor product that insures reliable engine starting for commercial trucks and other heavy vehicles. According to the Energy Information Administration, the existing US fleet includes 4.2 million heavy-duty diesel trucks. All of these vehicles are subject to strict anti-idling laws and regulations that strain their battery systems and increase the risk that the engine won't be able to start when it needs to. While a dead battery is a pain for the average consumer, it can cause a world of problems for a commercial truck that has to stay on schedule and can't afford the lost time or the out-of-pocket costs associated with a roadside service call.



The Maxwell solution is simple, but effective. They've packed twelve of their 3,000 Farad BoostCap ultracapacitors into a standard Group 31 battery case along with the necessary control electronics. Since heavy trucks frequently use four or more lead-acid batteries to power starting, lighting and accessories, the ultracapacitor pack is swapped for one of conventional batteries, wired directly to the starter and then connected to the rest of the electrical system. The installation is simple and can be done in less than an hour. Once the ultracapacitor pack is installed, it will assure trouble-free starting for the life of the truck even if the batteries get severely depleted. With an expected retail price of $1,299, the product should pay for itself in a couple of years by reducing the frequency of battery replacements, avoiding service calls that can cost up to $600 each and reducing downtime costs including late deliveries and spoilage of perishable products.

While Maxwell has not released specifics on its expected revenue per ultracapacitor pack, I'd have to guess that something on the order of half the retail price should flow back to Maxwell. With a national fleet of 4.2 million trucks and a revenue potential of $650 per vehicle, the addressable market works out to $2.7 billion. It's a niche market, but a very attractive opportunity in a transportation sector that truly needs a better energy storage solution for starter systems.

Maxwell was kind enough to share their preliminary marketing presentation with me and it clearly lays out the advantages. The ultracapacitor pack draws its energy from the other lead-acid batteries with a trickle charge that takes about 15 minutes and draws about 36 watt-hours of energy from batteries that have a combined capacity of roughly 3,000 watt-hours. When it's fully charged the ultracapacitor pack can deliver up to 1,900 amps of starting current and support up to three cold cranking events per charge. Since the system is ultracapacitor based, temperatures as low as -40° F will not impact performance.

While the product is an important milestone for Maxwell, it's also a great object lesson in how economies of scale work. The ultracapacitors Maxwell will use in the system are part of its K2 series. These are the same basic devices that Maxwell uses for its hybrid bus and wind turbine products. Each of the 12 ultracapacitors is roughly the size of a soda can, which makes integration into a compact starter pack relatively straightforward. The biggest reason Maxwell could afford to develop this product for the trucking industry is that it's already making millions of the basic ultracapacitor every year and the new starter solution is simply another use for a proven product that's already being manufactured at scale. As a result Maxwell was able to develop the product in-house and plans to take it directly to end-user and OEM markets without bringing in another manufacturer as a partner. It should enjoy a significant first mover advantage, retain a higher degree of control over its own destiny and enjoy higher long-term margins than it would if the product had been developed in cooperation with somebody else.

Last fall Maxwell's stock price ran from $12 to $17 in response to an automotive design win that will involve the installation of $50 BoostCap modules in up to a million new passenger cars over the next three years. When I compare the relative value of the two products and the fundamental end-user benefits of the two solutions, I have to believe the starter solution for heavy trucks will be an order of magnitude more important to Maxwell's top and bottom lines over the next few years.

This is a very important product announcement that the market seems to have missed.

Disclosure: None.

Posted by John Petersen at 03:54 PM | Permalink | Comments (0)

John Petersen

I'm a cynic and a heretic when it comes to plug-in vehicle schemes because most defy the laws of economic gravity and violate a cardinal rule that Ford engineers developed for the EcoStar light delivery vehicle program in the early '90s:

– The unloaded weight of a plug-in vehicle should never exceed 70% of its loaded weight.

Investors who pay attention to this simple rule can easily distinguish between pipe-dream vehicle electrification schemes that are nothing more than feel-good eco-bling and realistic vehicle electrification projects that make economic sense.

For the last few weeks I've been studying a technology partnership between Norfolk Southern (NSC) and Axion Power International (AXPW.OB) that is developing cost effective battery and hybrid electric drive retrofit systems for railroad locomotives. After extensive research I've decided that battery and hybrid electric locomotives are applications that even a heretic can love because:

• Vehicle weight to cargo weight ratios range from good to extraordinary;
• Expected payback periods are in the three to four year range;
• Electric retrofits can avoid emissions abatement costs mandated by EPA regulations; and
• Axion's PbC technology appears likely to overcome the battery problems that plagued earlier efforts.

Like e-bikes, stop-start idle elimination and hybrid electric vehicles, battery and hybrid electric locomotives are clean fuel efficiency technologies that just make sense.

The Green Goat

The first hybrid electric switching locomotive was introduced in 2004 by Railpower Technology and called the "Green Goat." It replaced the 1,750 hp diesel engine in a General Motors EMD GP9 locomotive with a 290 hp diesel generator and 60,000 pounds of lead-acid batteries that offered a combined power output of 2,000 horsepower. The Green Goat's core strengths were a $750,000 price tag that compared favorably with the $1.5 million price of a new switching unit and a battery dominant hybrid electric drive promised fuel savings of 40% to 60%. Subsequently, Railpower launched a smaller version called the "Green Kid" that offered a combined power output of 1,000 horsepower.



In a year long field trial by IDC Distribution Services, the operator of an inter-modal port facility in British Columbia, the Green Kid logged 3.6 million feet of switching operations over 2,347 hours, saved 10,450 gallons of diesel fuel, and reduced CO2, CH4 and N2O emissions by 53% compared to a conventional switching locomotive.

Initially, the Green Goat was well received and railroads including BNSF, Union Pacific (UNP) and Canadian Pacific (CP) ordered a combined total of 175 units. Despite the initial marketing successes, the Green Goat had significant battery problems and only 55 units were delivered before Canadian Pacific returned four units and canceled the balance of a 35-unit order citing unsatisfactory performance. The company went bankrupt in 2009 and emerged as a subsidiary of the RJ Coleman Co. that no longer builds the Green Goat.

The NS 999

In 2009, Norfolk Southern unveiled an experimental electric switching locomotive that it built in cooperation with the Department of Energy, the Federal Railroad Administration and Penn State University with the aid of a $1.3 million Federal grant. Unlike the Green Goat, the NS 999 draws all its power from an array of 1,080 lead-acid batteries that provide a power output of 1,500 horsepower. The project's goal was to demonstrate the feasibility of a plug-in battery powered locomotive that would eliminate direct rail yard emissions and save up to 50,000 gallons of diesel fuel per year.



During initial trials with 80% of its batteries connected, the NS 999 "operated a full switcher shift, at one point pulling 2,200 tons of rail cars on an uphill track – without using a sanding system, which helps locomotives gain traction. After the shift, the four-axle locomotive had enough juice in its 12-volt batteries to run two more eight-hour shifts." Like the Green Goat, however, the NS 999 ran into battery performance issues that had Norfolk Southern evaluating lithium-ion batteries, nickel-based batteries and advanced lead-acid batteries in a matter of weeks. In June of 2010 Norfolk made its battery technology selection and recruited Axion Power to develop a new battery management system and integrate its disruptive PbC battery technology into the NS 999. The project is scheduled for completion later this year.

In addition to the NS 999 project, Norfolk Southern is working with Axion to develop a retrofit hybrid drive system for multi-purpose locomotives that will use 1,600 to 1,700 PbC batteries to improve fuel economy in long distance freight transportation. A prototype is expected by next spring.

The Battery Problem

The fundamental battery problem encountered by both the Green Goat and the NS 999 is a chemical process known as negative electrode sulfation. During discharge, a lead-acid battery's electrodes are partially dissolved and lead sulfate is created. During charging, the bulk of the lead sulfate gets dissociated and redeposited on the electrodes. In practice complete dissociation of lead sulfate never happens. Instead, a portion of the lead sulfate is deposited on the negative electrode in the form of hard crystals. As the number of cycles increases so does the level of crystallization. When the crystal build up is extreme, the battery fails. The following electron micrographs show how sulfation increases over time in a shallow-cycle partial state of charge environment.



The PbC Solution

Axion's patented PbC battery is a hybrid device that uses conventional lead plates for the positive electrodes and carbon electrode assemblies for the negative electrodes. The PbC is technically classified as an asymmetric ultracapacitor. Due to its unique architecture, the PbC does not experience negative electrode sulfation. It also offers significantly higher charge and discharge currents than a conventional lead-acid battery. In a shallow cycling environment like the Green Goat, prototype PbC batteries have demonstrated the ability to withstand tens of thousands of cycles without degradation. In a deep cycling environment like the NS 999, prototype PbC batteries have demonstrated the ability to withstand up to 2,000 cycles at a 100% depth of discharge without battery damage.

After several years of working with alpha and beta prototypes of its PbC electrodes and electrode fabrication processes, Axion is just now completing the installation, optimization and certification of its first commercial electrode fabrication line. While it has not launched a commercial product yet, that launch is expected later this year.

The Business Opportunity

North America's Class I Railroads operate a combined fleet of approximately 1,500 switcher units that each burn about 50,000 gallons of diesel fuel per year. The average switching locomotive is 30 to 40 years old and was manufactured during an era when emissions control regulations were far less stringent than they are today. As a result of new EPA regulations and a variety of state air quality initiatives, the railroads are under intense pressure to reduce N2O and particulate emissions in their switching yards, which are often located in heavily populated urban areas.

Based on a recent report to the California Air Resources Board, it appears that the cost of bringing an old locomotive up to current standards is roughly equivalent to the cost of converting an old locomotive from diesel-electric to battery powered electric. While an emissions abatement upgrade will improve fuel economy through the application of newer technology, a battery retrofit can eliminate all direct emissions and fuel consumption. Based on a current off-road diesel price of $3 per gallon and an estimated fuel consumption of 50,000 gallons per year, a battery retrofit should offer a payback period in the three to four year range. In comparison, the payback period for an emissions abatement upgrade will be closer to ten years. The long-term revenue potential of retrofitting a portion of the switcher fleet to run on batteries isn't a company maker, but it's a darned good start.

The Voting Machine

Over the last year Axion's stock price has stagnated in the $0.50 to $0.75 range as shares that were sold in December 2009 moved from relatively weak hands to stronger hands. While I've responded to countless comments and questions from readers, many have missed the crucial fact that Axion is focused on completing the development of its technology, rather than marketing a fully developed product. It's never had a marketing team and except for the odd technical presentation at industry events, its selling efforts have been non-existent.

Despite a lack of marketing for a development-stage product that wasn't ready for commercial use, Norfolk Southern found the path to New Castle because it was looking for a cost-effective solution to a critical performance problem that could not be solved with conventional lead-acid batteries. Based on its own technical evaluation of the prototype PbC batteries Axion was able to make in 2009, Norfolk Southern hired Axion to design and build a new battery management system that would facilitate the integration of PbC batteries into the NS 999. After about eighteen months of working with the technology, the refurbishing project for the NS 999 continues apace. If there was any substantial reason to believe the PbC would not stand up to the rigors of the NS 999, Norfolk Southern would have terminated its relationship with Axion long ago. The same can be said for BMW which also found the path to New Castle because it was looking for a cost-effective solution to a crucial performance problem that could not be solved with conventional lead-acid batteries.

In its last quarterly report, Axion disclosed that it had received notification from the Department of Energy that a grant application under the Vehicles Technology Program had passed the first round of criteria testing and advanced to the final round of review. In its last conference call, management told participants that the grant application identified Axion as the prime contractor, and included a top-three US automaker, a research university and a national laboratory as subcontractors. While details of the application will remain confidential until a funding decision is made, it appears that this time around a first tier US automaker has found the path to New Castle because it was looking for a cost-effective solution to a critical performance problem that could not be solved with conventional lead-acid or lithium-ion batteries.

Given the mainstream media's infatuation with lithium-ion batteries, the voting machine that is the market does not want to believe the PbC will be a disruptive energy storage technology. When I consider the growing parade of world-class companies that found the path to New Castle before Axion even had a product to sell, I have to believe there is more substance to the PbC than even I understand.

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

Posted by John Petersen at 11:44 PM | Permalink | Comments (2)

John Petersen

On March 30th, Lux Research released an update on the vehicle electrification market titled "Small Batteries, Big Sales: The Unlikely Winners in the Electric Vehicle Market" that predicts:

• E-bikes and micro-hybrids carry minimal storage, but compensate with high volume. E-bikes show strong unit sales, as they sustain a 157 GWh storage market totaling $24.3 billion in revenues in 2016. Micro-hybrids benefit from increasingly stringent emissions limits, supporting 41 GWh and $3.1 billion in storage sales.
• Hybrid electric vehicles (HEVs) like Toyota's Prius grow steadily while PHEVs and EVs are at the mercy of external factors. Both PHEVs and EV sales are sensitive to oil prices, but catalyze growth for Li-ion batteries, along with HEVs powering a $2.3 billion market in our base case scenario.
  
• Advanced lead-acid batteries will dominate the storage market now and in the future, resulting in a 165 GWh and $16.1 billion market in 2016.  Lithium-ion follows, showing strong growth from 4.1 GWh and $2.7 billion in 2011 to 32.2 GWh and $11 billion in 2016.
  

Since the report echoes several themes I frequently discuss in this blog, it seems like an opportune time to back away from the minutiae and revisit the broad opportunities for growth in the vehicle electrification sector.

The basic drivers of all vehicle electrification initiatives are the desire to break the economic stranglehold of increasingly expensive petroleum, reduce CO2 emissions and improve air quality in big cities. The major countervailing force is the economic reality that consumers will not sacrifice the flexibility and reliability of internal combustion engines for a more expensive alternative that doesn't offer a compelling value proposition. Governments and EVangelicals are pushing hard for flashy EV solutions with miserable economics, but Lux believes cheap will beat cool over the next five years.

Electric Two-wheeled Vehicles

In Lux's view, the runaway winner over the next five years will be e-bikes – the most energy efficient transportation in the world. It expects battery sales for e-bikes to double from $12 billion in 2011 to $24.3 billion in 2016. While roughly 85% of today's e-bikes use lead-acid batteries because they cost less, Lux expects lithium-ion batteries to garner an 18% market share in China by 2016, which implies a global market share of closer to 30%. As an avid cyclist who understands the impact of extra weight on a bicycle, I think Lux's market penetration forecast for lithium-ion is low. Lead-acid may retain its dominance in China, the world's biggest e-bike market, but I'm convinced that lithium-ion will be the battery of choice in North America and Europe where e-bikes are rapidly gaining ground.

Lux expects a limited market for e-bikes outside of China, but I think it's a market that could surprise people who haven't really considered the mobility needs and transportation budgets of young adults and cost-conscious commuters. E-bikes are not an all weather solution, but on a pleasant day a $1,000 e-bike is far more attractive than alternatives that cost thirty to fifty times more and can't come close in the fun per mile category.

I've been following Advanced Battery Technologies (ABAT) for a couple years and have been impressed by its cost control and business strategy. It began as a low cost manufacturer of commodity lithium-ion batteries and then expanded into e-bike manufacturing. It's growth rates and profit margins are impressive enough that I've often said ABAT is too cheap to be cool. ABAT's stock price recently tumbled by over 40% when Variant View Research, an acknowledged short seller, published three "hatchet-job" articles that were highly critical of its operations, financial reports and corporate governance. Since I don't want to jump into the middle of a dogfight, I'll simply note that ABAT is the only publicly held pure play in the e-bike space and seems to have a bright future as a vertically integrated manufacturer of e-bikes, the most popular electric vehicles in the world.

Micro-hybrids

The second biggest market over the next five years will be micro-hybrids, conventional internal combustion vehicles that simply turn the engine off when the car is stopped and restart the engine when the driver takes his foot off the brake. In an earlier report titled "Micro-hybrids: On the Road to Hybrid Vehicle Dominance," Lux forecast that the micro-hybrid market would grow from three million units this year to 34 million units a year by mid-decade. The primary drivers of growth will be strict new European CO2 emissions rules and ambitious new CAFE standards that will be phased in over the next few years. According to Lux "micro-hybrids sit in an enviable position as a cost effective approach to improve fuel efficiency, since their start-stop and regenerative braking capabilities can be implemented in the OEMs' current stable of vehicles, without the more drastic redesigns needed to create a full EV, PHEV, or HEV." Overall, Lux believes the market for advanced batteries in micro-hybrid vehicles will grow from $495 million this year to $3.1 billion by 2016.

Competition in the micro-hybrid battery space is intense and diversified. Johnson Controls (JCI) and Exide Technologies (XIDE) are both offering a variety of advanced lead-acid batteries for micro-hybrids that range from enhanced flooded batteries to valve regulated absorbed glass mat batteries. With their global manufacturing footprints, established OEM relationships and proven manufacturing competence both companies should benefit from impressive growth in OEM battery sales over the next five years.

While advanced lead-acid batteries currently dominate the micro-hybrid battery market, there is a growing body of proof that advanced lead-acid batteries are ill suited to the demands of micro-hybrids. In a 2007 Journal of Power Sources article, a team of battery researchers from Ford described the problem as follows:

"Charge acceptance, particularly at low temperatures, is a battery requirement that determines the charge balance of the power supply system. The more the battery has to contribute to supplying electrical loads, the more essential it becomes that it can be recharged quickly. ... [A]dvanced HEV applications will require good charge acceptance in a dynamic discharge/charge micro-cycling operation. We call this feature dynamic charge acceptance (DCA). In the particular case of lead/acid batteries, DCA capability is extremely sensitive to the short-term previous charge/discharge exposure of the battery."

At last September's European Lead Battery Conference in Istanbul (the ELBC) Ford and BMW jointly proposed a new battery testing protocol for micro-hybrids. Under the protocol a 60-second engine off cycle will require 39,600 watt-seconds of energy. Of that total, 36,000 watt-seconds will be used to support accessory loads during engine off interval and the remaining 3,600 watt-seconds will be used to re-start the engine. Until the 39,600 watt-second discharge is recovered, the stop-start system will be disabled. Since a disabled stop-start system can't save fuel by turning off the engine at a stoplight, dynamic charge acceptance is rapidly emerging as one of the important battery performance requirements for micro-hybrids, if not the most important one.

The big drawback of using enhanced flooded batteries and AGM batteries in micro-hybrids is that their dynamic charge acceptance degrades over time. While a new battery needs about 30 seconds to recover from an engine-off event, it can take three minutes or more when a battery's been in service for a year. Since city driving typically offers one or two engine-off opportunities per mile, pushing the battery recovery time from 30 seconds to three minutes or more has a very negative impact on fuel economy.

The following graphs come from the BMW-Ford presentation at the ELBC and show how the dynamic charge acceptance of an AGM battery degrades over time. The graph on the left shows what happens if the generator is disabled for seven seconds after restart to maximize the engine power available for acceleration. The graph on the right shows what happens if the generator kicks in immediately. The downward curving blue lines show the amount of current the battery can accept as the number of stop-start cycles increases. The upward curving black scatters with red overlays show the time required for the battery to regain an acceptable state of charge. The simple summary is that both batteries performed poorly and lost most of their dynamic charge acceptance capacity in a matter of months.



While advanced lead-acid batteries are currently the best available choice for micro-hybrids, their market dominance is vulnerable because dynamic charge acceptance is so critical. As the market matures, I believe automakers will choose batteries for micro-hybrids on the basis of detailed cost benefit analysis that includes lifecycle fuel economy. When all costs are accounted for, I believe emerging energy storage technologies will gain the upper hand.

Three advanced battery developers have disclosed alternative approaches to the micro-hybrid market.

The first design win from Peugeot-Citroën went to a three-component system from Continental AG and Maxwell Technologies (MXWL) that combines an AGM battery and control electronics from Continental with a small supercapacitor module from Maxwell. In this system, the AGM battery carries the 36,000 watt-second accessory load and the supercapacitor picks up the 3,600 watt-second starter load. While this three-component approach will reduce battery strain by shifting the starter load to the supercapacitor, it can't eliminate the gradual loss of dynamic charge acceptance in the AGM battery that does the yeoman's share of the work.

A second design win from an undisclosed OEM has reportedly gone to A123 Systems (AONE), which has been testing a lithium-ion micro-hybrid battery solution for the last few years. Given the charge acceptance characteristics of A123's lithium-ion chemistry, I believe its stop-start solution will perform well and avoid the dynamic charge acceptance issues that plague advanced lead-acid batteries. The big questions will be cost and cold weather performance. Until A123 releases more details on its micro-hybrid solution, it will be hard to assess its competitive position.

The third contender for a share of the micro-hybrid market is Axion Power International (AXPW.OB), which is working with several automakers and has progressed far enough in its relationship with BMW that the two companies made a joint technical presentation at last year's ELBC. While it's not unusual for an automaker to enter into a development contract or supplier relationship with a micro-cap, I'm not aware of another case where an automaker shared the podium with a battery developer at an industry conference. A more surprising development was a brief conference call reference to a grant application under the DOE's Vehicle Technologies Program that Axion filed as a co-applicant with a major automaker. To the best of my knowledge, this is the first time an automaker has joined in a DOE grant application with a component developer. While the details remain sketchy, the DOE plans to make its award decisions by late June and fund in the third quarter.

Axion is not currently producing PbC batteries for commercial sale to customers. It has recently installed a second-generation automated production line for its patented carbon electrode assemblies and is engaged in manufacturing process, quality control and product performance validation activities with potential customers. Until that work is completed, a design win or production contract will remain out of reach.

EVs, PHEVs and HEVs

While Lux forecasts that EVs, PHEVs, and HEVs will command a solid chunk of storage revenue because of their high per vehicle battery costs, Lux doesn't "expect EVs or PHEVs to take the world by storm, and sees steady but not explosive growth from HEVs." Lux said that consumer acceptance of the GM Volt and Nissan Leaf is "anything but a certainty" and noted that early results indicate only 40% of the non-binding pre-orders for the Nissan Leaf are turning into purchases. It cited high battery costs as a major obstacle to making electric vehicles cost effective. Overall Lux believes that light and heavy PHEVs will depend on high oil prices and "EVs will disappoint in all scenarios." As a product class, Lux predicts that battery sales for EVs, PHEVs, and HEVs will grow from $710 million this year to $2.1 billion in 2016. Since there are so many competitors in the EV, PHEV and HEV markets, it's hard to pick likely winners and I'd rather watch from the sidelines.

Heavy Vehicles

The last class of vehicles considered by Lux was delivery trucks, city buses and railroad locomotives. It forecast that sales in the heavy vehicle segment would grow from $110 million in 2010 to $642 million in 2016. A number of energy storage technology developers are active in the heavy vehicle segment including:

• Maxwell, A123, Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC), which are actively marketing energy storage systems for hybrid and electric buses and delivery trucks; and
• General Electric (GE) and Axion Power, which are developing battery systems for hybrid locomotives and retrofit solutions for the existing locomotive fleet.

While there are too many competitors to pick likely winners in the highway vehicle markets, I'll continue watching the railroad market with interest because the existing locomotive fleet includes 24,000 units nationwide and implementing hybrid drive in a train is relatively simple because of the ability to mix and match conventional diesel locomotives and retrofitted electric locomotives to meet the power and recuperative braking needs of a specific load and route.

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

Posted by John Petersen at 08:17 PM | Permalink | Comments (2)

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.

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.

Posted by John Petersen at 03:07 AM | Permalink | Comments (10)

John Petersen

On March 4, 2011 the Pacific Northwest National Laboratory published a comprehensive review of "Electrochemical Energy Storage Technologies for Green Grid" that is a must-read for serious investors who want to understand the technical and economic intricacies of the energy storage sector. It explains why storage is a key enabling technology for wind and solar power, the smart grid, efficient transportation and a legion of high-technology manufacturing and service enterprises that can't survive without reliable power. It also explains why energy storage is an investment mega-trend that will endure for decades. While I normally try to provide links to materials that are available for free, this particular review is only available from the American Chemical Society website and their charge for non-members is $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.

Conceptually, a battery is nothing more than a bottle that stores electricity. The term "energy" describes the total amount of electricity you can put into the bottle. The term "power" describes how quickly you can empty or fill the bottle. The basic problem with energy storage is that batteries are thousands of times more expensive than the electricity they store. You may be able to buy a kilowatt-hour (kWh) of electricity for a dime, but a battery to store that much electricity will set you back $150 to $1,000. Once you include battery depreciation in the equation, the cost of electricity from a battery is always higher than the cost of electricity from a wall-socket. If you only need to store a few watt-hours of energy for a cell phone or laptop computer, convenience will usually outweigh battery cost. If you need five, ten or twenty thousand watt-hours of battery capacity so that you can use electricity from solar panels at night or drive a plug-in vehicle 40 to 80 miles, battery cost quickly becomes a major issue, if not an insurmountable obstacle.

In its report, the PNNL explains that capital cost and life-cycle cost are the most important and fundamental issues in the energy storage sector. Capital costs are usually expressed in terms of dollars per kilowatt ($/kW) for power applications and dollars per kilowatt-hour ($/kWh) for energy applications. Cycle-life cost is calculated by dividing the sum of the capital cost and expected maintenance costs by the number of cycles a battery can deliver over its useful life. In general, the authors of the PNNL report believe the following attributes are essential for grid storage applications:

• Capital cost of $250 per kWh or less;
• Long calendar life (e.g. > 15 years);
• Long cycle-life (e.g. > 4,000 deep cycles);
• High safety standards; and
• Low maintenance costs.

It's a tall order and most energy storage technologies fall short of the mark. The following graph from the PNNL report shows the estimated capital cost per cycle of various storage technologies before project financing costs, operation and maintenance costs, and replacement costs.



After studying the PNNL report in detail, I believe flow battery and lead-carbon battery technologies have the best shot at meeting these high standards in the short term. Others will no doubt disagree. The only way for a serious investor to make an informed decision is to download the report, study the PNNL observations and draw his own conclusions.

There is one publicly-held pure-play energy storage company in the flow battery space. ZBB Energy (ZBB) is the owner of a zinc-bromine technology that was invented by Exxon, developed by Johnson Controls and ultimately sold to ZBB. Over the last few years, ZBB has developed a modular system architecture for its technology and successfully completed a three-year validation test by Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO). ZBB has also devoted considerable resources to an open-platform power management system that facilitates the integration of diverse power sources and diverse energy storage device types to meet the needs of a particular customer. ZBB has been a poor market performer since its IPO in 2007 and currently trades at one-fifth of the IPO price. Its market capitalization of $33 million is the lowest of the 18 pure-play energy storage companies I follow. ZBB hasn't had a particularly strong balance sheet for several years and it will need to raise additional capital. Given the proven status of its technology and its low market capitalization, I believe ZBB has limited downside risk and attractive upside potential.

The section of the PNNL report that I found most illuminating was their discussion of lead-acid batteries in general and lead-carbon batteries in particular. While I've been writing about lead-carbon battery technologies for a couple of years, the PNNL review is the first major report from a national laboratory that does not require A to B to C analysis to integrate information from several sources. The following schematic from Furukawa Battery shows the three primary lead-acid battery electrode configurations that are presently being developed.



In its discussion of conventional lead-acid batteries the PNNL report noted that lead-acid has historically suffered from limited cycle life (e.g. 1,000 cycles), limited depth of discharge (e.g. less than 30%), low round-trip energy efficiency (e.g. 50% to 75%) and low charge acceptance capacity (e.g. 7% of the one hour discharge rate). In combination, these technical factors have made large-scale applications problematic from an economic perspective.

The first innovation PNNL discussed in the field of advanced lead-acid batteries involves the use of carbon additives to improve cyclability while inhibiting the formation of hard lead sulfate crystals on the negative electrodes. In the graphic, a carbon additive design will replicate the conventional lead-acid battery configuration shown on the upper left. Johnson Controls (JCI) and Exide Technologies (XIDE) are both actively developing carbon enhanced lead-acid batteries in both flooded and absorbed glass mat, or AGM, form factors. Both companies claim performance improvements of 100% or more, which can reduce the capital cost per cycle by 50% or more.

The second innovation PNNL discussed is an asymmetric lead-carbon capacitor that uses a carbon electrode assembly to replace conventional lead-based negative electrodes. In the graphic, an asymmetric lead-carbon capacitor is shown on the upper right. The key advantages noted by PNNL include a higher operating voltage for the cell as a whole, greater utilization of negative electrode capacitance, the elimination of negative electrode sulfation and reduced swings in acid concentration. The asymmetric lead-carbon capacitor was patented in 2001 and is owned by Axion Power International (AXPW.OB) which has trademarked the name PbC® and filed a suite of protective patents around the core technology. In exhaustive performance tests over the last three years, Axion has demonstated that the PbC battery:

• Offers a depth of discharge of up to 70%, as compared to 30% for conventional lead-acid;
• Offers stable round-trip energy efficiency of 85%, as compared to 50% to 75% for conventional lead-acid;
• Offers cycle life improvements of 400% or more;  and
• Offers dynamic charge acceptance rates that are a 10x improvement over conventional lead-acid.

In combination, these unique features of the PbC battery can reduce capital cost per cycle by an order of magnitude and make the PbC the most cost-effective electrochemical storage system in the industry. Axion's PbC battery is almost ready for commercial roll-out. The company has taken delivery of its second generation electrode fabrication line and expects to commission the line by the end of this month. Once the line is commissioned, potential customers who have been testing first generation products for over a year will need to conduct extensive process and equipment validation evaluations before placing orders. Barring unforeseen difficulties, that process should be completed this year. Axion has enough capital to finance its activities over the next year, but will need additional capital to build new electrode production capacity if demand for its product develops. Given the unique attributes of the PbC technology and Axion's relatively low market capitalization of $70 million, I believe Axion has limited downside risk and attractive upside potential.

The last innovation PNNL discussed in the field of advanced lead-acid batteries was the Ultrabattery, a half-measure developed by CSIRO that represents an improvement over conventional lead-acid batteries but does not offer all the performance advantages of the PbC. In the graphic, Ultrabattery is shown on the bottom. The PNNL report was the first detailed discussion I've seen of the Ultrabattery technology and it highlights a couple of issues that strike me as potentially problematic. During a discharge cycle the Ultrabattery does not begin to access the capacitance of its carbon electrode until the lead electrode has been depleted. Likewise during a charge cycle, the carbon electrode charges first which results in significant hydrogen production at the lead electrode.

Several lithium ion battery companies including A123 Systems (AONE), Ener1 (HEV) and Altair Nanotechnologies (ALTI) have sold high profile demonstrations of their technologies in grid- connected applications. After reading the PNNL report I'm more convinced than ever that these demonstrations will not turn into sustainable businesses until those manufacturers are able to overcome a variety of hurdles relating to system cost, safety, durability and cycle life. They may be successful, but when I compare their market capitalizations with the market capitalizations of ZBB and Axion, I have to believe that the greater upside potential lies in the companies with the lower current market capitalizations.

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

Posted by John Petersen at 11:09 AM | Permalink | Comments (0)

John Petersen

In 1789 Benjamin Franklin wrote "in this world nothing is certain but death and taxes." Today he probably would have written "in this world nothing is certain but death, taxes and rising oil prices." There's no escaping the misery, but astute investors who take the time to understand the fundamental trends can profit as the misery unfolds. For the short term, I'm convinced the biggest opportunities will be in fuel efficiency technologies for cars and light trucks.

After 20 years of complacent stagnation, the US started to get serious about light-duty vehicle fuel efficiency in 2005 and has made solid progress with improvements in the 14% to 18% range. The rate of change will ramp rapidly over the next five years as aggressive new CAFE standards that were adopted in April 2010 take effect. The following graph provides an at a glance summary of new light-duty vehicle fuel efficiency over the last 30 years and new fuel efficiency standards for the next five years.



In their 2010 adopting release for the new CAFE rules, the NHTSA and EPA identified three fuel efficiency technologies that would play crucial roles in automakers' efforts to meet the new standards (page 484):

Efficiency Technology	Fuel Savings	Penetration
Gasoline direct fuel injection	4%	60%
Dual clutch transmissions	7%	55%
Stop-start idle elimination	8%	42%

The usual diversified group of first tier manufacturers of automobiles and component systems will control two of the three technologies. Only one, stop-start idle elimination, offers a pure-play opportunity with a certain outcome.

Stop-start is the most sensible fuel efficiency technology you can imagine – turn off the engine while the car is stopped in traffic. While the concept is simple, implementation is a beast because drivers typically want their sound systems, climate control, lights and other accessories to keep working when the engine is off. Therefore, the key enabling technology for start-stop systems is a better starter battery.

Traditionally, a battery had to start a car once during a normal trip. With a stop-start system, however, the battery has to start the engine an average of once per mile and carry critical accessory loads while the engine is off. For a one-minute engine-off cycle, the accessories will demand ten times as much energy as the starter. For a 15-mile commute with one engine-off cycle per mile, the battery will have to deliver 165 times the energy that it would in a car without stop-start. The battery load is immense, but an optimized stop-start system can slash fuel consumption in city driving by up to 15% and do it for an incremental capital investment in the $400 to $800 range.

The normal flooded lead-acid batteries we've used for decades simply can't stand up to the demands of stop-start systems. That reality has forced automakers to rely on cut-out systems that disable the stop-start function when the battery's state of charge falls below a minimum level, and won't re-enable the stop-start function until the battery recovers an acceptable state of charge. The result is stop-start systems that don't function anywhere near peak efficiency. To minimize problems, automakers are currently using dual battery systems and upgrading to absorbed glass mat, or AGM, batteries.

In recognition of the shortcomings of flooded batteries, the leading battery manufacturers are building new AGM battery production capacity at a blistering pace. In 2007, Johnson Controls (JCI), the world's biggest battery manufacturer, had global production capacity for 400,000 AGM batteries per year. Their announced expansion projects will boost that capacity to 11.2 million AGM batteries per year by 2014 and further expansions in the US are being discussed. Exide Technologies (XIDE) is also on an expansion spree that will boost its AGM battery capacity from 500,000 units in 2009 to 3.5 million units in 2013. On a worldwide basis, Lux Research forecasts that AGM battery demand will soar by 800% over the next five years, from three million units in 2010 to 27 million units in 2015. As they substitute higher margin AGM batteries for lower margin flooded batteries, the revenues and margins of leading battery manufacturers including JCI, Exide and to a lesser extent Enersys (ENS) will soar. Their stock prices will follow suit.

While AGM batteries are currently the best available technology for stop-start systems, they are far from ideal because their ability to recover an optimal state of charge deteriorates rapidly as the battery ages. Using simulation protocols from BMW and Ford, researchers have learned that the time required for an AGM battery to recover from an engine-off event increases from 50 to 60 seconds with a new battery to 4 or 5 minutes with a battery that's been in service for six months. The bottom line is automakers need a better solution than AGM batteries. Until a better solution comes along, however, the AGM battery will reign supreme as the battery of choice for the stop-start market.

The two principal contenders for "better solution" honors are:

• A multi-component system from Continental AG and Maxwell Technologies (MXWL) that combines an AGM battery, a small supercapacitor module and associated control electronics in a system that eliminates the voltage drops and black screens that commonly occur when the starter engages at the end of an engine-off cycle; and
• The third generation lead-carbon battery from Axion Power International (AXPW.OB) that replaces the lead-based negative electrode in a conventional AGM battery with a carbon electrode assembly that boosts cycle life by 400% and provides consistent charge recovery times of about 35 seconds through four years of simulated use.

The Maxwell - Continental system is available now and was recently selected by PSA Peugeot Citroën for use in Citroën C4 and C5 diesels featuring PSA's e-HDi second generation micro hybrid system. With an estimated three-year value in the $50 million range, this design win should provide a significant boost for Maxwell's top-line revenue. Despite its advantages, however, the Maxwell - Continental system is not an ideal solution because the supercapacitor can slow but it can't stop the deterioration of the AGM battery it's paired with. So over time, vehicles equipped with the Maxwell-Continental system will suffer the same kind of performance degradation that all other stop-start systems exhibit.

The most promising solution to the challenges of stop-start, the PbC® battery from Axion, is in the final development stages and won't be ready for a large-scale commercial rollout until 2012. Axion is currently installing a second-generation fabrication line for their serially patented carbon electrode assemblies and potential customers should begin validation testing on the new fabrication processes and equipment soon. Once its potential customers validate the fabrication process, the last major step will be to build additional electrode fabrication capacity so that Axion can manufacture PbC batteries on its own AGM battery line and sell electrode assemblies to other AGM manufacturers. Since the PbC electrodes are designed to work as plug-and-play replacements for traditional lead-based electrodes, Axion should be uniquely positioned to leverage existing AGM battery manufacturing capacity while giving other battery manufacturers the opportunity to sell a premium product to their existing customers.

While the PbC battery is still a development stage technology and Axion is just barely out of the nano-cap range with a $60 million market capitalization, its roster of disclosed industry relationships is extraordinary. Axion has longstanding relationships with both East Penn Manufacturing and Exide, the second and third largest AGM battery manufacturers in North America; it has a service contract to develop a battery management system for Norfolk Southern (NS) which wants to retrofit a portion of its 3,500 unit locomotive fleet with hybrid drive; and the PbC battery has demonstrated exceptional performance during 18 months of testing by BMW, the industry leader in stop-start with over a million EfficientDynamics vehicles on the road today. In over 30 years as a small company securities lawyer, I've never seen another company that was able to generate a comparable level of interest and involvement from the giants in its industry.

The energy storage sector offers a wide range of fuel efficiency pure plays. The following table provides summary data on key financial (in millions) and market metrics that I consider important. While JCI is not technically an energy storage pure play because of its diversified operations in auto parts and building efficiency, I've included it in this list because 14.6% of its revenues and 52.5% its earnings are derived from battery manufacturing operations.



While I closely follow the energy storage and vehicle electrification sectors and am convinced that every manufacturer who can bring a cost-effective product to market will have more demand than it can handle, these five companies have the clearest paths to market beating growth over the next five years and are my favorites for that reason. JCI, Enersys, Exide and Maxwell have been stellar performers since December 31, 2008 with market crushing gains of 126% to 264%. Axion has been the laggard of the group, losing 39% of its market value it raised new capital in a brutal market and worked to complete the development of its promising PbC technology and start climbing out of the valley of death. For the next few years, I expect the entire group to outperform the market by a wide margin because the die is already cast.

Fuel efficiency has been a hot topic in the automotive world for the last five years and new regulations in the US and EU will provide a massive impetus for immediate change. Increasing political turmoil in oil producing regions can only add to the sense of urgency. There is a wide variety of potential long-term solutions, but short-term solutions to immediate problems are very limited. For the next five years, stop-start will be at or near the top of the list.

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

Posted by John Petersen at 05:43 AM | Permalink | Comments (2)

John Petersen

Thanks to a recent comment from JLBR, I've found a new hero in Dr. Peter Z. Grossman, an economics professor from Butler University who cogently argues that government attempts to force alternative energy technologies into an R&D model that was created for the Manhattan Project and refined for the Space Program will always result in commercial disaster because "the goal of the Apollo Program was the demonstration of engineering prowess while any alternative energy technology must succeed in the marketplace." In a recent article titled "The Apollo Fallacy and its Effect on U.S. Energy Policy" Dr. Grossman summarized the problem as follows:

"The Apollo fallacy has been detrimental to the development of effective energy policies in the US [and] instead of asking what kinds of programs might be useful, the government holds out the promise of a technological panacea to be delivered simply by an act of Congress. The prospect of an energy panacea actually has some political benefits. It allows politicians to claim that they can provide simultaneously the two outcomes most Americans seek from energy policy: low energy prices and energy independence. In fact, with conventional resources these goals are mutually exclusive. To get low prices, the government should provide incentives to drill for oil and gas not just in the US but also in places where they might be exploited more cheaply – of course making the nation more dependent on outside sources. To lessen dependence (true energy autarky is not a feasible goal) on foreign resources, the only method government can use with conventional resources is to raise prices through taxes. But a new technology presumably can to both at once: provide cheap, US-made energy. Unfortunately, the history of energy programs argues that the pursuit of a technological-commercial panacea will fail."

In a 2008 white paper titled "The History of U.S. Alternative Energy Development Programs: A Study of Government Failure," Dr. Grossman started with the Eisenhower Administration's wildly optimistic plans to commercialize nuclear fission reactors for civilian electricity and offered a brief history of serial energy policy failures including:

• The Nixon and Ford Administrations' support for synthetic fuels from coal and oil shale;
• The Carter Administration's support for synthetic fuels, nuclear fusion and ethanol; and
• The Clinton Administration's "Partnership for a New Generation of Vehicles" that failed miserably while privately funded initiatives from Toyota and Honda were remarkably successful.

My additions to Dr. Grossman's list would include Bush the Younger's support for fuel cells, the hydrogen economy and corn ethanol, and the Obama Administration's support for vehicle electrification and alternative energy in general.

These ambitious energy policies all shared three fatal flaws:

• An inability to distinguish between the technologically possible and the economically desirable;
• A belief that intervention can force innovation and overcome technical challenges on time and within budget; and
• A failure to recognize that generous subsidies invariably lead to increased demand for more generous subsidies.
  

The end result has always been grandiose, unrealistic and extravagant mandates that resulted in catastrophic losses for naive and credulous investors who bought the hopium.

For over sixty years, the government has consistently and predictably failed to understand that industrial revolutions arise from technologies that are perfected by entrepreneurs and prove their value in a free market. The government can accelerate advances in basic science and engineering when cost is not an object, but it can't make technologies cost-effective or ignore the realities of a resource-constrained world. The following cartoon from Jan Darasz appears in the most recent issue of Batteries International Magazine and may overstate the problem a bit, but only a tiny bit.



During the "Sputnik moment" discourse in his recent State of the Union Address, President Obama promised to spend billions of taxpayer dollars to put a million plug-in vehicles on the road by 2015. Back in the business world, Johnson Controls (JCI) and Exide Technologies (XIDE) are spending their own money, together with a $34 million ARRA battery manufacturing grant, to build factories that will make AGM batteries for 14.7 million micro-hybrids a year by 2014. The President's plan will save up to 400 million gallons of gas per year by 2015. The 56 million micro-hybrids that will be built during the same time frame using AGM batteries from JCI and Exide will save 1.6 billion gallons of gas per year. Last time I checked, spending millions to save billions of gallons of gasoline was more sensible than the inverse.

I've frequently argued "Alternative Energy Storage Needs to Take Baby Steps Before it Can Run." A favorite quote from William Martin's novel "The Lost Constitution" says it all – "In America we get up in the morning, we go to work and we solve our problems." Unfortunately government programs never use the tools that are readily available to do the work. Instead they impede sensible actions like using compressed natural gas instead of gasoline and let urgent problems fester while new, exotic and politically popular technologies are invented and refined, but never commercialized. A cynic might suggest that it's a great way for a politician to kick the can down the road while deferring blowback from policy failures and unintended consequences until his successor takes the oath of office.

We have 60 years of experience that proves well intentioned but ill-conceived government alternative energy technology initiatives aren't doing the job. Investing $46 of capital to save a gallon of gasoline with a plug-in vehicle is foolish when you can save that same gallon of gasoline with a $24 capital investment in an HEV. Taxing Peter to underwrite the cost of Paul's new car will impoverish the masses instead of empowering them. Using imported metals to make non-recyclable batteries for the purpose of conserving more plentiful petroleum has all the intellectual integrity and economic appeal of using cocaine as a weight loss supplement.

There are solid growth opportunities in the domestic energy storage sector. JCI and Enersys (ENS) both trade at about eighteen times earnings while Exide trades at about twelve times earnings. In the more speculative small company space, Axion Power International (AXPW.OB), ZBB Energy (ZBB) and Beacon Power (BCON) all present intriguing value propositions as they emerge from the trough of disillusionment and begin to build industry relationships and revenue by proving the value of their products one baby step at a time.

I'm convinced that every manufacturer of energy storage devices that brings a cost-effective product to market will have more business than it can handle as dwindling global energy supplies make storage more cost-effective than waste. That conviction, however, does not extend to market darlings like Tesla Motors (TSLA), A123 Systems (AONE) and Ener1 (HEV) who owe their high profiles and huge swaths of their balance sheets to government largess and glittering promises of an all-electric future once they prove that their wonder products work in the hands of normal consumers and learn how to manufacture better than Toyota Motors (TM), Sony (SNE), Panasonic (PC) and a host of lesser industrial luminaries that have proven their capabilities with decades of successful execution.

Over the last several months I've become convinced that a transition from gasoline to compressed natural gas may be one of the great opportunities of our age. Natural gas is abundant and clean, and an easy domestic substitute for imported oil. While I don't know as much as I'd like to about fiscal multipliers, I have to believe a massive shift from imported oil to domestic natural gas would reduce energy costs to consumers, slash CO2 emissions, generate trillions in additional GDP and go a long way toward ameliorating the looming deficit spending crisis many observers predict.

Just yesterday, the 2011 Honda Civic GX, a conventional vehicle with a CNG fuel system, tied with the all-electric Nissan Leaf for top honors in the American Council for an Energy-Efficient Economy's list of the Greenest Vehicles of 2011, a position it's held for eight years in a row. The Toyota Prius came in fourth, well ahead of the GM Volt, which came in seventh. I can only imagine what the ACEEE ratings would look like if Honda added a hybrid drive to the Civic GX or Toyota added a CNG fuel system to the Prius.

Mark Twain observed that "history doesn't repeat itself but it does rhyme." When it comes to specious and ill-conceived alternative energy technology initiatives that originate on the banks of the Potomac and rapidly mutate into bad investments, I can't help but wonder whether we're just hearing another chorus from the same old song – 99 Bottles of Energy on the Wall.

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

Posted by John Petersen at 10:36 AM | Permalink | Comments (4)

Eamon Keane

Following the worst traffic jam in history this past August, Beijing has introduced significant curbs on cars. New car registrations will be slashed 70% to 240,000. Non-registered cars must have a permit and cannot travel at peak hours (7-9am and 5-8pm).

With 4.7m cars and a population of 22m, Beijing only has approximately 200 cars per 1,000 people. This is just half the level of cars in Mexico city with which Beijing is tied in IBM's "Commuter Pain Index". If you think LA is bad, Beijing is 4 times worse:



When rumours of the restrictions on car sales surfaced a couple of months back, new car purchases spiked dramatically and fights broke out as punters vied for cars. For the 120m Chinese households mainly clustered in coastal cities earning over $5,000 (the level at which car ownership becomes affordable), having a car, aside from the personal freedom it affords, is a sign that you've made it. Banned from owning a car up until the 1980s, Chinese citizens now want some of that private car goodness. Sales increased 46% in 2009 and a further 35% this year, to reach 18m.

Many other cities such as Guangzhou, Shanghai and Shenzhen are snarled up also. Chronic traffic and smog are just two reasons why China must not follow the car centric American/OECD culture. The Chinese road network is almost saturated with cars. One strategy is to frantically expand it and hope for the best. Yet here is a timely opportunity to redefine mobility for the globe's most populous country. The assumption in all energy forecasts is that Chinese car ownership continues to rise quickly:



The growth in Chinese passenger car sales is the single largest growth factor for global oil demand over the next 20 years. The IEA states "Holding all other factors equal, a 1% per year faster rate of growth in car ownership in China alone would result in around 95 million more cars on the road in 2035 and 0.8 mb/d of additional oil demand".

There are some grounds for optimism. Several Chinese websites offer dynamic ridesharing and several cities have bus rapid tranist (BRT), a cheaper alternative to rail. The remarkable rise of electric 2 wheelers (E2W) in China, which occurred nowhere else, shows that things can be different. Chinese sales have soared from a few hundred in 1994 to around 22 million this year and may rise to 32 million by 2014. With around 120 million E2Ws in China, the Chinese are largely comfortable with electric drive. E2Ws took off in China for a couple of crucial reasons: (1) many cities curtailed gas mopeds due to air pollution, (2) E2Ws have a low total cost of ownership, (3) no licence was required and use of the cycle lane was permitted. E2Ws are subject to the 20/40 rule: max speed 20km/h, max weight 40kg. They're still faster than Beijing traffic.

Innovative and cheap EVs, with a modular market structure similar to E2Ws are being built by Kandi (KNDI). They are a great way to cut pollution and all the better if they are used for ridesharing in cities. They also help the Chinese government meet its lofty goal of 1 million EVs by 2015.

With sufficiently strong direction from government further supporting car alternatives (while suppressing cars), a rising oil price, and a terrible driving experience, the Chinese may yet avert their covetous gaze from OECD style private car ownership. They may even teach the West a thing or two - E2Ws are beginning to take off in Europe with sales this year of around 1 million.

Disclosure: No Positions

Posted by Eamon Keane at 10:19 PM | Permalink | Comments (5)

John Petersen

October has been a fun month for me as JD Power and Associates rained on the electric vehicle parade with a new report "Green Drive 2020; More Hope than Reality?" that forecast a 1.8% global market penetration rate for cars with plugs in 2020; Maxwell Technologies (MXWL) announced a design win in the automotive stop-start market; Pike Research issued a new report on power systems for hybrid locomotives; Nanomarkets LLC reported that lead-carbon batteries will be a leading contender in the $1 billion wind-power storage market; Lux Research began advertising an upcoming webinar to introduce their new report on stop-start micro-hybrid systems that will be used in 34 million cars per year by mid-decade; and Johnson Controls (JCI) didn't even mention lithium in its fourth quarter earnings call. After a couple years of feeling like I was wandering alone in the wilderness, I'm glad for the company.

The JD Power report was based on detailed surveys of consumer attitudes in the US, Europe, Japan and China and concluded that there were seven major hurdles to market acceptance of electric vehicles:

• Range anxiety;
• Support infrastructure deficiencies;
• Power and performance deficiencies;
• Fuel economy concerns;
• Limited battery life and replacement cost concerns;
• Overall cost of ownership concerns; and
• Charging requirements that will keep EVs out of service for several hours a day.

While the list is fairly comprehensive, it overlooks two overriding economic realities that strike me as even more important.

First, we're mired in the depths of the worst recession since the 1930s. While the economy is slowly recovering, consumers in all income brackets are getting more conservative in their spending and increasing their savings at rates not seen in decades. HEVs were introduced in 1999 and took ten years to achieve a 2% market penetration in a strong economy. That makes it very hard to swallow the suggestion that plug-in vehicles, which promise less simplicity, reliability and performance at a higher cost, will achieve comparable results in a weak economy.

Second, life is unpredictable, people are frequently careless and in a problem situation where a driver can blame himself or blame his car, it's a safe bet that the car will be portrayed as the villain. It won't matter how good the new generation of EVs are in reality. They will still suffer immense reputation damage as tales of users who forgot to recharge their batteries, who couldn't use their car in an emergency and who pressed their luck "just this once" begin to proliferate and compound. The inevitable horror stories can't be avoided and they can't help but dampen or even kill consumer demand.

I expect electric cars to be the great technological failure of the decade and am the first to admit that my views are extreme, but my reasons for those views are well documented in my other articles including "Alice in EVland; Six Impossible Things." The only thing that will prove me right or wrong is time.

Notwithstanding a cynical view of electric cars that need huge amounts of battery capacity and use it inefficiently, I believe there are tremendous opportunities in heavy applications like buses, commercial fleets and locomotives that are prodigious users of energy and represent cost-effective markets for conservation technologies. There are also tremendous opportunities for cost-effective storage to maximize the stability and usefulness of wind and solar power. Last but not least, the humble baby steps applications like stop-start idle elimination will surprise everyone with their growth and vitality.

Once you get beyond delusional visions of electric cars, nobody cares what kind of battery a device uses. There's a reason that 85% of the electric bikes in Asia use lead-acid batteries - they're good enough for the job and they're far cheaper than the alternatives. In all real battery markets, engineers and cost accountants are responsible for choosing the best energy storage device for a particular application. In applications where size and weight are mission critical constraints, the designers will choose lithium-ion batteries. In applications where size and weight don't matter, other technologies will frequently be a better choice. No matter how hard people beat the table, energy storage will never be cool; batteries will always be a grudge purchase; and we'll all keep using the adjective damned to modify the noun battery.

For a little over two years my consistent message has been that developers of gee-whiz battery technologies for electric vehicles are dangerously overpriced while established manufacturers of cheap and reliable batteries for the masses trade at bargain basement levels. That dynamic has not changed yet, but the mainstream is finally beginning to consider the vast gulf between technically feasible and economically sensible. As the EV rose wilts and more mundane applications like buses, commercial vehicles, hybrid locomotives, renewable power integration and stop-start idle elimination generate profits rather than losses, market expectations and capitalizations will adjust to business realities. Wayne Gretzky was great because he tried to play where the puck was going to be. Prudent investors will do the same thing.

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

Posted by John Petersen at 03:31 PM | Permalink | Comments (8)

John Petersen

Last week I spent three days at the 11th European Lead Battery Conference in Istanbul where I learned that I've been far too conservative in earlier articles that discuss the likely impact of stop-start idle elimination systems on the battery sector. To put things in perspective, the 10th ELBC in 2008 had 500 participants and two papers on stop-start systems. The 11th ELBC in Istanbul had 700 participants and 15 papers on stop-start, including three from major automakers. The stop-start papers took a full day of the 2-1/2 day conference program.

The high-level overview is that almost every major automaker is aggressively implementing stop-start idle elimination systems across their main product lines. Most forecasts expect penetration rates of 20 million cars per year within five years and emerging consensus is that stop-start will be standard equipment on all internal combustion engines by 2020, if not sooner.

The logic is inescapable; turning the engine off when a vehicle is stopped reduces fuel consumption and toxic emissions without impacting performance. The estimated fuel savings range from 5% in government mandated tests and 10% under real world city-highway driving to almost 20% in congested city traffic. No matter which figure you choose, it's a very worthwhile target if implementation is widespread enough and cheap enough.

In his opening remarks, Ray Kubis, the president of Enersys' European unit, explained that current stop-start systems typically use two batteries instead of one, and use higher quality batteries. This increases the battery content of new vehicles to two or three times historic norms. While a couple hundred dollars of additional battery value has a minor impact on the price of a car, it's a huge opportunity for publicly traded lead-acid battery companies like Exide Technologies (XIDE) Johnson Controls (JCI) and Enersys (ENS) that can expect their OEM sales and margins to skyrocket over the next decade followed by sustained increases in replacement battery sales as the stop-start fleet ages. It's an even bigger opportunity for developers of other advanced energy storage technologies that are better suited to the harsh demands of stop-start vehicles.

In the first automaker's presentation, Andreas Stoermer of the BMW Group (BAMXY.PK) described a joint research effort between BMW, Ford Powertrain Research (F) and Moll Batterien that evaluated the technical requirements of stop-start systems and developed a universal testing protocol to accurately assess the impact of battery aging under real world stop-start operating conditions.

While theory of stop-start is both simple and rational, significant complexities arise from the need for a battery that can support accessory loads during engine-off periods, reliably restart the engine on demand and recharge as rapidly as possible to prepare for the next engine-off opportunity. To date, the European experience with stop-start systems has been less than stellar because the systems work great with new batteries, but rapidly lose functionality as the batteries age. In practice the frequency of engine-off events plunges during the first few months of driving. Based on this experience, automakers are rapidly coming to the realization that conventional lead-acid batteries are not robust enough to handle the demands of stop-start. They need something better.

The primary advantage of the BMW-Ford test protocol is that it's technology agnostic and can be used with any battery chemistry and any combination of energy storage devices. The protocol is designed to focus on dynamic charge acceptance, or the amount of time required for a battery system to recover from the last engine-off event. The specific steps in the test protocol include:

• A 60 second discharge at 50 Amps to simulate accessory loads during engine-off periods;
• A one second discharge at 300 Amps to simulate the engine restart load;
  
• A seven second rest period to avoid recharging the battery while the vehicle is accelerating; and
• Measurement of the time needed to bring the system back to an 80% state of charge in preparation for the next engine-off opportunity.

The most fascinating part of the protocol is that the engine restart load is only 9% of the total energy associated with an engine-off event and the yeoman's work is carrying the accessory load without interruption.

While BMW-Ford test protocol seems simple, it's brutally punishing for battery systems because it focuses on maximizing the number of engine-off events in order to maximize fuel savings. There's no escaping the fact that turning the engine off eight to ten times during a commute saves more fuel than turning it off two or three times.

BMW is apparently working with appropriate agencies to have the BMW-Ford test protocol adopted as the EU's official standard for measuring the CO2 emissions reductions of stop-start vehicles. It is clearly more accurate than current EU standards that require a 20 minute test of a new vehicle with a fully charged battery. It also offers a more accurate long-term prediction of the fuel economy end-users will experience their daily driving.

In the second automaker's presentation, Dr. Ed Buiel of Axion Power International (AXPW.OB) summarized the results of a recently completed joint testing effort by Axion and BMW that used the BMW-Ford protocol to evaluate the long-term cycling performance of four types of lead-acid batteries including:

• A high quality valve regulated absorbed glass mat lead-acid battery;
• A high quality AGM battery with high surface area carbon additives;
• A high quality AGM battery with conductive carbon additives; and
• Axion's lead-carbon PbC battery.

The performance graphs for the first three types of batteries were nothing short of tragic because their dynamic charge acceptance plummeted within weeks after the batteries were put in service. The only battery to survive a five-year simulation with no appreciable performance degradation was Axion's PbC.

A couple weeks ago I published a set of battery performance graphs that Axion presented at the 2009 Asian Battery Conference in Macau. At ELBC I learned that those graphs were interim results from the Axion-BMW testing program that was using the BMW-Ford test protocol. I haven't received my electronic copy of the ELBC proceedings yet, but think two key graphs from Axion's 2009 presentation in Macau bear repeating.

The following graph shows the rapid deterioration of a high quality AGM battery as the number of engine-off events increases. The blue line shows the maximum charging current the battery was able to accept as it aged. The black line shows the amount of time the battery needed to recover in preparation for the next engine-off event. The only visual differences between this graph and the full testing cycle graph presented at the ELBC are an increase in the number of cycles completed and a gradual flattening of the dynamic charge acceptance curves.



The next graph shows that Axion's PbC battery does not suffer any negative effects from sustained rapid cycling, is able to accept much higher charging currents and has a predictably short recovery time. In an application like stop-start where maximizing the number of engine-off events will maximize system efficiency, the differences are critically important. Once again, the only visual difference between this graph and the full testing cycle graph presented at the ELBC is an increase in the number of cycles completed.



I was happy when I found Axion’s 2009 presentation on the Internet. I was even more pleased to learn that the 2009 graphs were interim results from a long-term testing relationship with BMW that was using a test protocol developed by BMW and Ford. I was delighted to see final graphs at the ELBC that tracked the performance of the PbC through a full five-year cycle life instead of the shorter test period presented in Macau. When I get my electronic copy of the ELBC proceedings, I'll prepare an update to this article with graphs for the four battery types.

In the third automaker's presentation, representatives from Renault explained the validation and test procedures that battery manufacturers would have to complete before their products could be considered for use in Renault vehicles. The first stage for all batteries is six months of validation testing followed by at least a year of rigorous performance testing. In their discussion of stop-start systems, Renault made it very clear that flooded lead-acid batteries would not work. While the Renault presentation held out some hope for AGM batteries, the results of the Axion-BMW tests make it pretty clear that AGM will not be an attractive long-term solution.

Based on everything I learned at ELBC, it's clear that widespread commercialization of stop-start systems will require advanced energy storage products that are far more robust than conventional AGM batteries and can stand up to rapid shallow cycling. There is little question that Axion's PbC is the current lead-dog in the race because it's already completed over a year of testing with BMW and is the only device that has demonstrated the ability to survive the BMW-Ford test protocol. It still faces a variety of industrial engineering and scale up challenges, but at least for now the PbC appears to be the best emerging technology option.

Other possible contenders for a big share of the stop-start market include the Ultrabattery developed by CSIRO, NiMH batteries, lithium-ion batteries and multiple-device systems like the battery-supercapacitor product that's being developed by Maxwell Technologies (MXWL) and Continental AG. The big challenge for NiMH and lithium-ion battery systems will be establishing comparable shallow cycling capacity with no performance deterioration at a competitive system cost. The big challenge for multiple-device systems will be overcoming rapid deterioration of the AGM battery that will carry the engine-off accessory load and ultimately be a gating limitation on system recovery time. I wish them all the best of luck because a vibrant market requires several credible competitors and it would be difficult for a small company like Axion to scale up production rapidly enough to satisfy the expected demand from automakers worldwide.

The next year to eighteen months will be very interesting times in the stop-start market. I expect 2011 to be an active year of testing and large-scale fleet demonstrations for competing energy storage products. By this time next year I expect automakers to announce their final design specifications for commercial rollout of stop-start systems beginning with their 2013 model year vehicles. Ultimately I think stop-start vehicles will be introduced with a variety of storage systems that will then have to prove their merit over time. After seven years of hard work, it's wonderful to know that Axion will be running in the derby and can claim to be a pre-race favorite because of the work it's already completed with BMW.

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

Posted by John Petersen at 05:29 AM | Permalink | Comments (9)

John Petersen

Many of my regular readers know I'm a working securities lawyer, a humble scrivener who writes reams of deathless prose that private companies use to raise money from investors, and public companies file with the SEC in the form of registration and proxy statements, and annual, quarterly and current reports. I've spent a couple years as an oil company executive and a few more as board chairman of an advanced lead-acid battery technology developer. The balance of my 30-year career has been devoted to natural resource and technology-based businesses that needed somebody elses' money to pursue their plans and had to pass through a gatekeeper like me to get it.

It's a fascinating job because I need to develop an encyclopedic understanding of a client's business, operations, technology and industry before I can begin to offer sound advice on important business, financial and tactical decisions. In The Devil's Advocate, Al Paccino described a law degree as "the ultimate backstage pass." The movie line may be a slight exaggeration, but like most of my brethren I've learned that ambitions, optimism and bold plans are universal, failure is more common than success, and mediocrity is more common than excellence.

Along the way I've developed a kind of sixth sense for business models that will or will not work. While I haven't seen every fatal error a businessman can make, I can spot most of the common ones in my sleep. While part of me hates to tell an bright-eyed entrepreneur that his business model can't fly, I'd rather ride my bicycle for free than get paid for working on a deal that violates my "life is too short" rule.

I started blogging a couple years ago because of a love hate relationship with my own profession; one that always informs but often fails to communicate because full and fair disclosure of all material facts in compliance with the rules can never do a good job of explaining a business strategy and integrating the facts in a way that maximizes comprehension. My goal was to share my knowledge of the energy storage sector and help contemplative investors understand where the sector is going as cleantech, the sixth industrial revolution, unfolds.

Over the last year I've gotten bogged down in a series of absurd arguments with philosophically committed EVangelists who obviously slept through Economics 101, another violation of my life is too short rule. Since one of my favorite financial writers, John Mauldin, has recently had a lot of fun with the following quote from Lewis Carrol's Through the Looking Glass,

Alice laughed. "There's no use trying," she said, "one can't believe impossible things."

"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."

I'm going to borrow John's theme and identify six impossible things about electric vehicles that most investors choose to ignore or simply don't understand.

Impossible Thing #1 – Zero Emissions

The gold standard of vehicle electrification is the Prius from Toyota Motors (TM). With an admirable ten-year history of user satisfaction, a base price of $21,000 and a design that maximizes fuel efficiency by using a 1.3 kWh NiMH battery for hybrid drive functions, the Prius delivers a combined city/highway fuel economy rating of 48 mpg, which is twice the 2011 model year combined fleet CAFE standard of 24.1 mpg.

According to Toyota, the 2011 Prius has tailpipe emissions of 143 grams of CO2 per mile, which is 3 grams per mile LESS than an electric car plugged into the average US utility. While a simple comparison based on average emissions shows that the Prius has a slight edge over every EV, the reality is even bleaker because EVs with theoretically be charged at night and most off-peak power comes from coal fired generators, while about half of daytime power comes from natural gas. I've never seen a study that analyzes the CO2 emissions differential between peak and off-peak power, but I'll give long odds that an EV charged with off-peak power is considerably dirtier than a Prius.

Impossible Thing #2 – Consistent Marginal Returns

Like all things in life, electric vehicles are subject to the law of diminishing marginal returns, which states that the first unit of a variable input yields the greatest benefit and each additional unit yields a progressively smaller incremental benefit. Frankly, I can't imagine a better proof of that economic law than a quick comparison of four vehicle electrification options.

• The Toyota Prius uses 1.3 kWh of batteries to slash fuel consumption by 50%;
• The GM Volt uses another 14.7 kWh of batteries to save the next 30%;
• The Nissan Leaf uses another 8 kWh to save the last 20%; and
  
• The Tesla Roadster uses another 29 kWh to satisfy the range requirements of people who have a commute of more than 30 miles, the maximum that Nissan recommends for potential Leaf purchasers.
  

There may be a "PHEV-light" alternative like Toyota's planned Plug-in Prius that gets to a more optimal point on the marginal utility curve, but the big battery behemoths have all the long-term potential of the Edsel unless someone can find a way to repeal the law of diminishing marginal returns.

Impossible Thing #3 – Available Raw Materials

Like all things in life, electric vehicles are subject to raw material constraints. Each year our planet produces a few kilograms of aluminum and copper and a few grams of rare metals per person. It is impossible for more than a handful of politically favored elites to use hundreds of kilograms of highly refined and processed metals to reduce their personal consumption of oil, which is produced at a rate of 616 kilograms per person.

Impossible Thing #4 – Assured Battery Safety

The green press is full of happy stories about the improving safety of lithium-ion batteries. At the same time, Federal regulators are focused on a recent 747 crash in Dubai that was caused by spontaneous ignition of lithium-ion batteries during shipment. While EVangelists think mommies and daddies across the land should place their child safety seats securely on top of the battery pack, the Federal government is preparing to impose sweeping restrictions on the transportation of those same batteries on US cargo planes.

Impossible Thing #5 – Assured Recycling

EVangelists invariably assume away battery recycling issues with blithe assurances that somebody will solve the problem before used battery packs become a disposal problem. However, nobody has been able to demonstrate a cost-effective lithium-ion battery recycling process. The primary recoverable materials are steel, aluminum, copper and some rare metals. While these materials were highly refined when they went into the batteries, they lose the original processing value in recycling and the recovered metals aren't worth much more than any other scrap metal. Since there is no recycling technology, a discussion of the problem promptly degenerates into "second life" mythology, where electric utilities will become dumping grounds for used battery packs that have outlived their usefulness in transportation.

Impossible Thing #6 – Economic Payback

Even EVangelists acknowledge that the incremental investment in an electric vehicle will not be recovered over the life of the vehicle unless oil prices soar to levels that would crush the global economy. Most investors are concerned with return on investment. A business model that can't offer a return of investment is worrisome.

Any one of these six impossible things should be enough to give a contemplative investor pause. In combination they spell disaster for investors in electric car manufacturers like Tesla (TSLA), Fisker Motors and Th!nk, and nothing but trouble for battery manufacturers like A123 Systems (AONE) and Ener1 (HEV) that are devoting immense resources to the electric car dream. There are a wide variety of rapidly evolving and lucrative markets for lithium-ion batteries, but companies that chase this White Rabbit down the hole may be unable to find their way out.

Most of us know that money managers, analysts and investors tend to follow the herd, but few of us ever really come to grips the unappetizing corollaries that:

• Unless you're the leader the view never changes; and
• If you follow a big enough herd, you'll spend a lot of time wallowing in manure.

Disclosure: I'm a former director of Axion Power International (AXPW.OB) and have a substantial long position in its stock. I don't believe that Axion's advanced lead-carbon PbC® battery will be a contender in the plug-in vehicle space because it's a power battery rather than an energy battery. Accordingly, the success or failure of electric cars will be irrelevant to my finances. With any luck, this will be the last time I focus on electric cars because there are important business opportunities to discuss and I'm not willing to waste any more time debating make believe with the folks who slept through Economics 101.

Posted by John Petersen at 12:38 AM | Permalink | Comments (6)

John Petersen

An English proverb teaches us to hope for the best but plan for the worst. With the imminent introduction of a variety of plug-in vehicles that will begin hitting showroom floors in the next few months, the phobia du jour is range anxiety, an entirely rational terror that an EV will get you to your destination in eco-chic style but only get you home with the help of a tow-truck. Sadly, most people who extol the virtues of electric drive are incurable optimists that have little or no regard for the risks inherent in complex systems and the widely variable needs of individuals. The quick and dirty overview is that every plug-in owner will have to cope with range degradation before the new car smell fades and his problems will only get worse as time passes.

Nissan Motors (NSANY.PK) will soon start delivering its battery powered Leaf, the world’s first production EV. The Leaf will get its power from a 24 kWh lithium-ion battery pack and Nissan's advertising campaign focuses on a showroom floor range of 100 miles. While they include the usual throw-away warnings that "Range will vary with driving habits, conditions, weather and battery age," they haven't been entirely forthcoming with the inconvenient truth that battery packs start to degrade with the first charging cycle and the process never stops.

The following graph comes from a recent National Renewable Energy Laboratory study that examined the long-term effect of local weather conditions on power degradation in lithium-ion battery packs. This particular graph has an upward slope because it's showing the percentage of power loss over 15 years. To show expected vehicle performance, the curve would need to be inverted. While the study's authors warned that their results were optimistic because they didn't include battery degradation from the heat buildup that happens whenever a car is parked in the sun, most potential buyers will find the optimistic numbers shocking enough.



In Minneapolis, an EV-100 will be an EV-90 after one year and an EV-80 after five. In Phoenix it will be an EV-80 after one year and an EV-60 after five. These are not minor differences to people that need dependable transportation to and from work, particularly if they plan for the worst when they make a buying decision.

Other major range penalties that potential buyers must consider include:

• Cold weather penalties of 10% to 20%.  While heat increases the rate of battery degradation, the widely reported experience of Mini-e drivers has shown that cold weather is a killer. If you live someplace where your dog's water bowl occasionally freezes over, you need to plan on an occasional 10% range reduction, but if your dog's water bowl frequently freezes solid it's better to plan on a 20% reduction.
• Hilly terrain penalties of 5% to 10%. Hilly terrain is one of those things that most drivers don't consider because logic dictates that the energy used to climb a hill will be recovered on the downhill. In reality the energy used in climbing is far greater than the energy recovered coasting downhill. While this reality isn’t important to drivers, cyclists quickly learn that 500 feet of elevation gain increases the energy expended on a 60-mile ride by about 5%. While cars have better aerodynamics than bicycles, hills are never free and the downhill wheee! is never fair payback for the uphill grind.
• Stop and go traffic penalties of 30% to 50%. Of all the factors that impact EV range, stop and go traffic is the biggest offender. According to Nissan, the Leaf's range will fall by 40% in 15 mph stop-and-go-traffic at low temperatures and by 50% in 6 mph stop-and-go-traffic at moderate temperatures.

When you put it all together, a three-year old EV-100 will probably act like an EV-50 on a frosty winter's day in Minneapolis. While a foolish consistency may be the hobgoblin of small minds, I think consumers will tend to be very cautious when it comes to choosing between dependable transportation and an eco-chic image.

The simple solution, of course, will be bigger, better and cheaper battery packs. According to popular media and specious political promises, that wondrous day is just around the corner. While I suppose anything is possible, I find it hard to ignore 30 years of hands-on experience with R&D companies and H.L. Mencken's warning that "A newspaper is a device for making the ignorant more ignorant and the crazy crazier."

In August Greentech Media reported that battery prices were plummeting, Project Better Place would pay $400 per kWh for lithium-ion battery packs with a 2012 delivery date and IBM has plans to demonstrate a prototype lithium-air battery pack within two years. The ecstasy was palpable, but wholly irrational.

Better Place has based its business model on leasing batteries as a service instead of selling them as a product and even a modest level of success will give it buying power comparable to a first tier automaker. Better Place is planning on massive government support and at least in the U.S., the subsidies could exceed its capital costs for a time. Under those circumstances Better Place doesn't need to sweat minor details like battery quality, service life and pack degradation because it can simply discard problem packs that were bought with somebody else's money and continue to collect rental charges with little or no capital investment. It should be a hell of a party until the governments get a clue and take away the punchbowl. The hangover, however, may be painful.

As we leave our pleasant dreams of a Better Place and awaken in the real world, the dynamic changes rapidly. Consumers need warranties to protect their investment and companies that write warranties need to cover their costs. While Tesla Motors (TSLA) has been able to get away with three-year battery pack warranties for its roadster, real automakers will have to provide eight to ten year warranties and eventually earn a normal profit on vehicle sales. So even if they start with a battery pack that costs $400 per kWh at the battery factory, the fully loaded cost to consumers with an eight to ten year warranty and a normal markup will be closer to the $750 per kWh Nissan has ascribed to the battery pack in the Leaf.

In a May 2009 report for the DOE, TIAX LLC pegged the current cost of commodity grade 18650 lithium-ion cells at $200 to $250 per kWh, which resulted in pack costs of $400 to $700 per kWh. Despite the happy talk about economies of scale, large format batteries are a good deal more complex than a giant economy-sized box of laundry detergent. While the cost of large-format automotive grade cells may eventually approach the cost of small-format commodity cells, they're not likely to get any cheaper without intervention from the commodity price fairy. By the time you add in warranty costs and automaker's profits, end user battery costs of $400 or even $500 per kWh are a little more than pipe dream unless lithium-air or molten salt technologies make lithium-ion batteries and the factories that make them obsolete.

We've all seen the "hope for the best" stories about how electricity for an EV will cost the equivalent of $1.20 per gallon of gasoline. Those stories, however, assume that like butterflies batteries are free. An optimistic "hope for the best" total cost of ownership scenario looks something like this.



A more rational "plan for the worst" total cost of ownership scenario looks more like this.



I have little or no patience with battery manufacturers, automakers, politicians, journalists and quasi-religious EVangelists who create unreasonable expectations based on hopeful scenarios instead of reasonable expectations based on likely scenarios. A Nissan Leaf may get 4 miles of range per kWh of battery capacity on a sunny afternoon in Florida, but it will be lucky to get half that on a winter morning in Chicago.

EV buyers who pay a filet mignon price and end up eating pork tartar will not be happy. Their lawyers, on the other hand, will be tickled pink.

If the EV and battery industries want to avoid interminable litigation and untold reputation damage they need to get honest with their stockholders and customers. They need to tell potential customers that they might get 4 miles per kWh of pack capacity on a good day, but can't plan on getting more than 2 miles per kWh on a bad one. They need to stop comparing the fueling cost for a brand new EV with the average economics of an aging automotive fleet. They need to stop dividing 12,500 miles per year by 300 days and telling potential buyers that 40 miles of EV range is enough when they know that customers will need at least 80 miles of reliable range to accommodate day-to-day variations and achieve an annual average of 12,500 miles. Instead of bafflegab claims of pennies per mile, they need show more realistic economics based on end-user battery pack costs and reliable ranges in congested traffic and poor weather.

The realities of EV range are a bitch and I'm not the only one who questions whether long-range EVs can ever be cost effective. Industrial revolutions arise from technologies that first prove their economic value in a free market and then seek subsidies to accelerate growth. A business model that can't work without subsidies doesn't make sense because the punch bowl always gets taken away too early, particularly if customers aren’t happy. The green jobs myth of the EV revolution has already proven to be a mirage. The cost effective and reliable transportation myth will be the next to crumble.

The last few weeks have been a busy time in the happy-talk press corps as Ener1 (HEV) arranged $55 million in potentially toxic debt financing to continue its plant construction, Valence Technologies (VLNC) trumpeted a six-year extension of a contract with Wrightbus that may generate a three or four million dollars in annual revenue, A123 Systems (AONE) announced the opening of its new battery manufacturing plant in Livonia, Michigan and Compact Power, a subsidiary of Korea's LG Chem, broke ground for its new battery manufacturing plant in Holland, Michigan. All these events gave rise to great trading opportunities, but there is a wide gulf between progress on the construction of a battery manufacturing plant and profitable operation of that plant.

Every prior generation of electric cars has died of congenital birth defects. While the next generation may not be stillborn, I have no confidence that the outcome will be different. In my view these companies are not equities you want to buy and squirrel away in a safe deposit box for the grandkids. Hope, after all, is not an investment strategy.

Disclosure: None.

Posted by John Petersen at 01:31 AM | Permalink | Comments (1)

Tom Konrad CFA

Many investors find the prospect of selecting individual stocks simply too daunting.  For those investors interested in investing in peak oil, but uncomfortable with the risks and moral dilemmas inherent in oil company stocks, there is another option: Powershares Global Progressive Transportation Portfolio (PTRP). 

I've been researching and writing this series about investments that will benefit from peak oil for half a year.  If you've read the 20+ articles in the series so far, you've learned about several stocks that should be well positioned to benefit from rising oil prices, and you should also have a good idea about which sectors are best to avoid.

On the other hand, if you are just coming across my writing now, you're about to learn about a single investment that should not only benefit from peak oil, but it will give you diversification at a fairly moderate cost.

The Powershares Global Progressive Transportation Portfolio (PTRP) is an Exchange Traded Fund (ETF) that invests in companies that "the Index provider believes stand to benefit substantially from a societal transition toward using cleaner, less costly and more efficient means of transportation.  These companies focus on technologies for utilization of greener, more-efficient sources of energy for transportation. These technologies are designed to improve energy efficiency and reduce the costs for fuel or time in transit and include renewable energy harvesting or production, energy conversion, energy storage, improvements in energy efficiency, power delivery, energy conservation and monitoring of energy information."  In short, the ETF is a collection of many of the same stocks I've been writing about in this series.

Why Use an ETF?

There are several benefits to using an ETF.  One of the most commonly cited is diversification: a single investment gives you a small slice of forty different companies.  My reading leads me to believe that this is more diversification than you are likely to need, given the fact that the ETF itself will only be a fraction of your portfolio.  (I discuss optimal diversification in detail here.)  

I was recently speaking to an investment advisor who made the case for diversification this way: if any individual stock is only 1% of your portfolio, if one of them fails, you will only lose 1% of your portfolio value.   What he was not thinking about was the fact that, the more companies you own, the more likely you are to own a company that goes bust.  For instance, even many "socially responsible" mutual funds had relatively large stakes in BP.   Second, with today's low brokerage commissions, most investors will pay more to own even relatively low-cost ETFs than they will to own stocks.  If a fund's expense ratio is the price you pay to avoid large blow ups, PTRP's 0.75% annual expense ratio, is the same as having one out of 133 stocks in your portfolio guaranteed to fail every year, in addition to any real company failures.

On the plus side, global exchange traded funds like the Powershares Global Progressive Transport Portfolio allow access to foreign-listed companies that many investors might find difficult or expensive to buy.  My analysis of PTRP's holdings found that over 60% of the fund's portfolio does not trade on US markets.

Sector Allocation

Another aspect of an ETF like PTRP is that its holdings are based on an equal-weighted global index of stocks.  That means that if there are not very many publicly traded stocks in a specific sector, the index will give a low weight to the sector, and if there are a great number of publicly traded stocks, the exposure to the sector will be high.  I prefer to weight sectors that have a low degree of investor interest much more heavily than those that have drawn a lot of investor attention.  As I've discussed in this series, my favorite progressive transportation stock are alternative forms of transportation such as bike stocks, mass transit stocks (especially bus stocks such as New Flyer Industries (NFI-UN.TO), a long-time favorite), in addition to IT-based Smart Transportation. 

Below is the sector breakdown of the holdings of PTRP from early August.  For companies such as FirstGroup PLC (FGP.L) which have both rail and bus operations, I split the fund's stock holdings between the relevant sectors.


For my own portfolio, I would like to see a much higher allocation to buses, a higher allocation to bikes and mopeds, and a lower allocation to natural gas vehicles.  The sizable allocations to "Other Alt-energy" and "Non-green" are the inevitable result of the fact that many companies have operations both inside and outside the transportation sector.

Stock Discoveries

Despite my quibbles about PTRP's sector allocation, combing through its portfolio holdings is almost always a useful exercise.  In this case, I found another bicycle stock that I had missed in my previous list of bike stocks, Merida Industry Co (9914.TW), a Taiwanese bicycle maker, as well as London-listed bus manufacturer Stagecoach Group (SGC.L), both of which I've added to my list of companies I plan to research further, given that they are in my favorite progressive transport sectors.

Conclusion

While not without its faults, The Powershares Progressive Transport Portfolio (PTRP) is a good option for investors looking for a one-stop shop of non-oil related stocks that are better prepared to cope with rising oil prices than the vast majority of the companies that comprise our transportation system.  If you want to invest in the sector, but you do not have much time to devote to stock picking and the complications of purchasing foreign-listed stocks, PTRP is a good choice for you.

DISCLOSURE: Long New Flyer Industries

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:54 AM | Permalink | Comments (2)

Tom Konrad CFA

My Ten Electric Vehicle (EV) Stocks article drew considerable attention and comments, including suggestions for stocks that did not make the ten.  Here are my takes on the EV stocks suggested by readers.

All of these companies do have something to do with electric vehicles (EVs) or hybrid electric vehicles (HEVs), but many were omitted from the original list because EV and HEV exposure was quite small as a fraction of total revenue.  This matters because, even when a small segment of a company is growing rapidly, it can have very little effect on the company's overall performance.  For instance, if a company gets 5% of its revenues from its EV-related business, and the revenue from this segment doubles, that doubling will only produce a 5% rise in overall revenues.  The company's overall performance is likely to be dominated by other segments if its revenue and earnings are dominated by other segments.

Rogers Corp (ROG) - suggested by Andy Nagle.
Rogers provides products and materials to "a variety of markets, including portable communications, communications infrastructure, consumer electronics, mass transit, automotive, defense and alternative energy" according to the company.  I believe that Andy recommended this one because they compete with CPS Technologies Corp. (CPSH.OB) (mentioned in Ten EV Stocks.)  CPS Technologies also supplies advanced materials for mass transit, wind turbines, and electric and hybrid electric vehicles.  Rogers Corp seems to be more (but not exclusively) focused on high performance foams, while CPS focuses on combinations of metals and ceramics.  Roger's segment breakdown was unhelpful in determining how much of the firm's revenue comes from these alternative energy segments, but most of these seem to fall in their "Custom Electrical Components" segment, which was about 13% of revenues.  If half of this revenue comes from alternative energy, that's still too little to interest me in the company.  Opinion: Not interesting from a peak oil investing perspective.

Capstone Turbine (CPST) - suggested by Robert B Ferguson
Capstone has a patented technology for micro turbines which allow for the relatively efficient combustion of gaseous and liquid fuels at a smaller scale than is possible with conventional turbines.  In the past, I've highlighted Capstone as a potential beneficiary of a move to distributed combined heat and power or cogeneration applications.  Over the last couple years, the company has also been pursuing opportunities as a generator for hybrid electric vehicles, with an emphasis on larger vehicles such as boats, buses, and trucks.  With the exception of buses, Capstone's HEV applications are still in the demonstration stage, but the many other applications for micro turbines in stationary distributed power should be interesting to investors looking for a broader exposure to alternative energy.  Both DesignLine and EcoPower Technology have developed buses using Capstone's 30 kW turbines.  DesignLine has received an initial order of 90 HEV buses incorporating Capstone turbines from the New York MTA.

Unfortunately, Capstone is not profitable and has little prospect of reaching profitability with current cash on hand.  Opinion: Avoid until financial position improves.

Advanced Battery Technologies (ABAT) - suggested by Deepfryer999
I left this Chinese Polymer Lithium-Ion battery company with an interest in electric bicycles and mopeds off my first list not because it does not deserve to be there, but because John Petersen, who also writes for AltEnergyStocks, covers battery companies (including ABAT) for us.  John will probably forgive me for this brief foray into his territory, but check the comments, because he'll also correct me if I get something wrong.

In my opinion, battery companies are among the better ways to play EVs and HEVs, because the market for such vehicles is still very young leading to a lot of uncertainty as to which EV manufacturers will succeed.  In contrast, the market for batteries is established, with many existing profitable companies, and electrified vehicles represent a large new source of demand for the industry's products.  If EVs are a flop and that demand fails to materialize, battery companies will be hurt due to what will turn out to be overbuilding in anticipation of large demand for batteries and government incentives.  On the other hand, a single EV requires so many batteries that if electric vehicles do become popular, the industry will have trouble keeping up with demand: even HEVs alone should be able to accommodate the increased battery manufacturing capacity.

Turning back to ABAT, the company is profitable and has a solid balance sheet.  At the recent price of $3.54, it has a trailing P/E Ratio (9.1) and Price/Book Ratio (1.75) of a value stock.  ABAT acquired Wuxi ZQ, a manufacturer of electric bikes and scooters in May 2009 for an approximate 4.5% ownership stake in ABAT.  Wuxi ZQ is exporting thousands of two wheeled EVs (2WEV) to the US.  According to the most recent quarterly statement, batteries for EVs account for 46% of ABAT's battery sales.  Although the company did not break out the value of 2WEV sales, we can assume that about half of the company's revenues are attributable to EVs.

Opinion: A good prospect for further research.

Toyota (TM) and Nissan (NSANY.PK) - suggested by Big Bear Lake Hostel
In  2009, Toyota sold 195,545 hybrids and no EVs, out of total sales of 1,770,149 vehicles, or 11% of sales.  The 2011 plug-in hybrid Prius will likely have limited runs as Toyota becomes comfortable with plug-in technology.
Nissan has only one hybrid model, the fun-to-drive Altima Hybrid (I speak from experience when I say it's fun to drive: my wife has one.)   With one model available in only 9 states, Nissan sold only 842 hybrids in 2009.  I could not find annual sales numbers for 2009, but the company expects to sell 850,000 units in 2010, which means that 2009 hybrid sales would be only 0.1% of total 2010 sales.  Nissan's hybrids are not the reason people are excited about the company: the excitement surrounds the rapidly selling Nissan Leaf EV.  Nissan now has 17,000 reservations for the Leaf, but only half of those are in the initial launch markets, and most of those are unlikely to be delivered in 2010.  While Nissan claims that Leaf production capacity "will soon approach 500,000 units per year," more likely sales numbers will be shaped by the number of reservations in target markets: perhaps 5,000 Leafs in 2011, or less than 1% of total auto sales.
If either of these car companies can be considered an EV or HEV company, it's Toyota because of its success delivering hybrids, but with the recent quality problems of the Prius, I expect Prius sales to fall as a percentage of total Toyota vehicles sales in 2010.  Opinion: Toyota and Nissan are best analyzed as conventional car companies, not EV or HEV companies.

Charge port for Nissan Leaf EV

Enova Systems (ENA) - suggested by Investingfun
Enova makes drive systems for electric and hybrid electric buses, medium and heavy duty commercial vehicles, stationary power generation systems, train locomotives, transit buses, and industrial vehicles, as well as for light, medium, and heavy duty trucks. It also makes power management and power conversion components for stationary distributed power generation systems, so from the perspective of exposure to electric vehicles, Enova is extremely well placed.  I especially like the exposure to heavy vehicles which I consider well-suited to electrification, and the exposure to alternative transportation in the form of trains and buses.  They have an impressive line-up of deals, including with Smith Electric Vehicles, the development of an electric drive system with Remy, Inc., and a hybrid school bus order all announced in the last few months.

Unfortunately, Enova is still a long way from profitability and most likely will need to raise additional funds within a year.  Unless the financial climate improves, such fund raising will be at the expense of diluting existing shareholders.  Opinion: Avoid until financial situation improves.

Conclusion

The only company in this list I would consider buying is Advanced Battery Technologies, since all of the others are either unprofitable and in need of outside funding, or not firmly in the electric vehicle space.  If you are looking for a Tesla (TSLA) at a better stock valuation, you would do well to research ABAT, as well as the three decent prospects I found among my previous list of ten EV and HEV stocks.

DISCLOSURE: No Positions.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 09:08 PM | Permalink | Comments (1)

Tom Konrad CFA

Tesla Motors (TSLA) is not the only electric vehicle (EV) stock.  Here are nine other public companies helping to replace petroleum with electricity in our cars and trucks.

Early in this series on the Best Peak Oil Investments, I put together an in-depth comparison of alternative fuels.  I concluded that the best prospect for displacing oil in the long term is electricity supplemented by biofuels.  Vehicle Electrification is likely to come to dominate the transportation sector because only renewable electricity can supply energy on the scale that we currently use for transportation with limited use of land area.  Biofuels require far more land area to propel a vehicle the same distance.

Many investors see the long term promise of Electric Vehicles (EVs) and think it means that the first EV stock to go public on a North American exchange, Tesla Motors, Inc. (TSLA), will inevitably take off.  Similar thinking lead to the strong investor response to the A123 (AONE) IPO last year.  Such investors should remind themselves that just because an industry has great long term prospects does not mean that the early IPOs are great investments.  Solar energy also has great long term prospects, but investors who bought Sunpower (SPWRA) in the month after its IPO in 2006 for $26 to $32 would now only have half their initial investment after four years.  Earlier solar IPOs were even worse.  Does anyone remember Astropower?  The company declared bankruptcy in 2004.  I can't find the date that it went public, but I remember that it was public in 1999 when I attended an investor presentation by the company President Dr. Barnett.  I bought and sold a small position in the stock shortly after for a nice profit, holding it less than a month.  I believe the people who make the most money on Tesla will also be the traders, not the long term investors, at least in the next few years.

A great technology does not guarantee a great stock, and buying the high-profile leader in a hot sector does not make an investor's prospects any better.  So if you still want to invest in vehicle electrification, here are nine other companies to consider.  Most are dogs, but one or two will almost certainly do better than Tesla, and the fact that these stocks are getting so much less investor attention means that you have a much better chance finding a diamond in the rough.

The Dogs

Li-ion Motors (LMCO.OB) develops and markets lithium-ion powered vehicles, from electric bicycles, scooters, and mopeds, to cars.  It's unclear if they have much proprietary technology.  Financially, the company is on shaky ground, with an annual loss of about $2M and net current assets of only $570,000 in the most recent quarter, the majority of which is "advances to related parties."  The cash flow statement is dominated by advances and payments from related parties, which raises questions in my mind about financial transparency and controls.  However, even without that, Li-ion Motors appears to need to continually raise substantial cash in order to continue operations.  Opinion: Avoid.

Raser Technologies (RZ) Raser Technologies is primarily a geothermal power development firm with a hybrid vehicle arm.  The hybrid vehicle division has developed a drive train technology for larger extended range electric vehicles such as SUVs and light trucks.  Raser is currently experiencing a severe cash flow problem requiring it to sell assets to repay debt.  Opinion: Avoid

ZAP (ZAAP.OB) Zap has been around for quite a while, and has earned a reputation for over-promising and under-delivering its neighborhood electric vehicles.  They recently acquired a large stake in a Chinese automaker and intend to ramp up production.  Given the company's continuing losses and weak balance sheet, they will have to continue to raise new equity and convertible debt, most likely diluting current shareholders.  Opinion: Avoid.

Speculative Bets

ZENN Motor Company (ZNNMF.PK)  ZENN Motor Company develops electric vehicle technologies and solutions that will incorporate EEStor's solid state electrical energy storage units. The Company markets its products primarily to original equipment manufacturers.  ZENN has a large stake in the secretive Austin, TX based EEStor.  If EEStor succeeds in commercializing its novel energy storage devices at reasonable cost, they will be transformational for the electric vehicle industry because of their promised high energy density, quick charge time, and light weight.  Zenn shareholders will stand to profit handsomely.  If not, ZENN is likely to continue to bleed cash rapidly, and will probably need to raise more money before the end of 2010, to the detriment of current shareholders.  Opinion: Avoid.

Balqon Corporation (BLQN.OB) is a developer and manufacturer of zero emission heavy-duty electric trucks and tractors for both off-highway and on-highway applications.  I think that the short-haul electric trucks and heavy equipment that Balqon focuses on have much better short term prospects than electric cars because such trucks are typically fleet vehicles and have predictable driving patterns.  The high up-front costs, low operating costs, and limited range of EVs mean that constant-length routes, heavy usage, and a fixed home base all greatly improve the economics.  The industrial and large commercial owners of such trucks are also likely to already have the heavy-duty electric grid connections needed for rapid charging of such vehicles.  Like most of the other companies listed here, Balqon is also not profitable, and will need to raise money on a fairly regular basis before they reach profitability, and which they have been doing through the sale of convertible debt and warrants.  Because of the continued fund raising, I would avoid the common stock, but expert accredited investors might find it worth their while to investigate the terms of the next convertible offering.  Note that I have not investigated the terms, and am not advising on any such investment.  I just think it might be worth looking into for expert investors.  Opinion: Worth watching.

UQM Technologies (UQM) designs and manufactures electric motors and controllers for EVs and HEVs.  They have experience with electrifying everything from bikes to military vehicles to buses, cars, and trucks.  UQM has a collaboration with first tier auto parts manufacturer BorgWarner (BWA) to develop electric powertrain components, and last year signed an agreement with Coda Automotive (a private Califronia based EV maker) to supply electric proplusion systems for ten years.  They have also received one of the ARRA manufacturing grants.  Although UQM is not profitable and has negative cash flow, they have several years' worth of cash on the balance sheet, and so may be able to reach profitability without further fund raising, although they will most likely continue raising money to fuel expansion to meet their rapid growth in orders.  Opinion: Worth watching.

The Profitable Companies

NEO Material Technologies (NEM.TO) is a producer, processor and developer of neodymium-iron-boron magnetic powders, rare earths and zirconium-based engineering materials and applications, and other high value niche metals and their compounds through its Magnequench and Performance Materials business divisions.  NEO's products are useful in miniaturization, emissions control, and the efficient, lightweight motors needed for electric vehicles.  Although most of the company's revenues come from products other than electric motors, a rapid expansion of the EV industry should increase demand for the company's products.  Unlike most of the other EV stocks listed here, NEO is a global company operating in ten countries with a record of positive cash flow and earnings, and no net debt.  With trailing 12 month earnings of C$0.31, the stock is a reasonable value at the July 13 closing price of C$3.62.  Opinion: Worth watching.

CPS Technologies Corp. (CPSH.OB) develops and manufacturers components using advanced materials, especially combinations of metals and ceramics.  While only a small portion of their business currently comes from hybrid and electric vehicles, they are profitable, have a strong balance sheet and cash flow, and no net debt.  Other alternative energy applications for the company's products include mass transit and wind turbines.  Earnings have been only $0.05 per share for the last year, but the company is experiencing rapid growth, with sales doubling between 2008 and 2009.  If this growth were to continue for the next few years, the company should be worth its recent $1.60 share price, but I don't know the company well enough to come up with my own projection. Opinion: Worth researching further.

BYD Company, Ltd. (BYDDY.PK) is a Hong-Kong Chinese battery manufacturer which launched a electric vehicle division in 2003.  They are already selling electric cars and buses in China, and expect to have models meeting Western safety standards for sale in 2011.  The BYD gasoline-powered F3 sold 24,000 units in China in the first five months of 2010. If any company is going to mass produce an affordable, mass market electric car at high volumes in the next couple of years, I think it's a lot more likely to be BYD than Tesla.  BYD's battery business is profitable, with total company 2009 earnings about $0.26 a share.  Warren Buffett's MidAmerican holdings took a 10% stake in BYD for $232 million in 2009, which would value the company at $2.3 Billion, or about $1 per share.  Buffett's investment helped the company by lending credibility and raising investor interest, but at current prices I would not expect new investors to make money.  Opinion: Worth further research if the stock falls below $3.

Conclusion

I've not looked at any of these companies closely enough to make a buy decision, although it was easy to rule out several.  Of the ones that are left, I think Neo Material Technologies, CPS Technologies Corp, and UQM Technologies are the most likely to be good values at current prices.  I'd buy any of these three before I'd buy Tesla.

This article is part 18 of my Best Peak Oil Investments Series, the index of which is here.

DISCLOSURE: No Positions.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:11 PM | Permalink | Comments (0)

Neal Dikeman

For those of you interested in the sector under the sector in electric vehicles, the guts of Li Ion battery technology, the week just got more interesting than an overpriced, over hyped Tesla (TSLA) IPO.

Check out a very quiet unnanouncement in A123's SEC filings noting a multi-year supply deal with ConocoPhillips' Cpreme, the emerging leader in anode materials for Li On batteries.  The technology is a processing technology to make high performance graphite based powders out of plain old petroleum coke materials, that has the potential to be very low cost at scale.  A123 has announced supply deals in the past with Navistar, Fisker, Eaton, Think, the Chevrolet Volt and a number of others.

For those interested in the guts of the Cpreme technology, a good summary is here.  And a quick search of the patents includes: 7,618,678, 7,597,999, 7,323,120.

It wasn't too long ago when the only other contender for Tier 1 battery supplier in the US, Johnson Controls-Saft, was announcing their Cleantech Innovation Award win and DOE award with a Cpreme logo quietly slipped into the presentation, though likewise no announcements were ever made.  Johnson-Controls-Saft had announced lithium ion supply wins with Ford, Mercedes, and BMW.  Maybe the liberal view is right, cleantech can bring manufacturing and green jobs back to the US - courtesy of our oil companies?

Or perhaps we should note that Tesla has announced it's buying its batteries from Panasonic in Japan - with our DOE money (about half of its total capital!) and California tax breaks.  So maybe we'll just ship the new cleantech manufacturing jobs to Japan instead.

Neal Dikeman is a partner at Jane Capital Partners LLC, the Chairman of Carbonflow and Cleantech.org, and a long time cleantech advocate and blogger on Cleantechblog.com.

Posted by Neal Dikeman at 04:48 PM | Permalink

Tom Konrad CFA

I'm bullish on Smart Transportation, which is my term for applying information technology to make our transportation system more efficient.  The majority of my list of Smart Transportation Stocks focus on GPS navigation.  I've been a fan of GPS navigation ever since 2001, when I first experienced the relief using one while driving in an unfamiliar city.  But I'm much less enthusiastic about GPS Navigation stocks: I feel the industry is too competitive, which is great for the consumer, but not so great for the shareholder. 

Hence, I'm drawn to the three Smart Transportation stocks that apply IT to transportation infrastructure, enabling congestion-based tolling and the better timing of traffic lights.  The three stocks I've found are AECOM Technology Corporation (ACM), Cubic Corporation (CUB), and Telvent Git S.A. (TLVT).  AECOM provides technical and management services to governments, some of which is on Smart Transportation projects.  Cubic develops and installs transportation fare collection systems and defense electronics, while Telvent provides IT services to a broad range of transportation and energy infrastructure markets.

Each of these companies gets less than a third of their revenues from Smart Transportation.  But in the case of Telvent, the other two-thirds is also interesting: applying IT to electric and natural gas infrastructure.  In other words, the Smart Grid, and smarter pipelines.  The company also has smaller segments applying information technology to agricultural supply chains and environmental services.

Energy

Telvent's Energy segment accounted for 33.5% of revenues in Q1 2010, mostly in North America (this segment is headquartered in Houston), but also from the EU and Latin America.  They provide enterprise-level information management and automation control to companies with large pipeline networks.  They also provide the information management services electric utilities need to manage and use the information flowing from Smart Grid projects.

The value of applying information technology to energy systems lies in the reduction of waste: better information and controls can let a company move more gas through the same pipeline network, and also detect leaks more quickly.  The Smart Grid is about creating a two-way flow of information on top of the electric grid; Telvent's role is to help utilities take this information and use it to better match energy production and load, and also detect system instability sooner, reducing wear on utility assets and potentially preventing blackouts.

Transportation

Telvent's global Transportation segment accounted for 24.8% of revenues in Q1 2010.  This segment struggled in 2009 but is beginning to show signs of recovery.  SmartMobility™ platform is a collection of information services from automated enforcement such as the traffic signals that take pictures of cars running red lights to traffic signal optimization and toll and fare collection.  These are offered a la carte, or as an integrated solution, and help municipalities and other regions manage their road, rail, and maritime transportation systems more effectively.  In short, they help governments make most of the Smart Transportation improvements I mentioned in my recent article.

Agriculture

Telvent's agriculture business is the result of a recent acquisition, and operates solely in North America, and accounted for 12.0% of revenues in Q1 2010.  The segment helps participants in all parts of the grain and livestock complex with weather information, an agricultural products trading platform and real-time pricing information.  Although I'm not bullish about the earnings prospects of biofuels businesses, I think the growing size of the biofuels industry will put increasing strains on other agricultural businesses, and both will require more and more up-to-date pricing and supply chain information.  If I'm right, this trend will be a boon for Telvent's agriculture business.  Tevent is also realizing some synergies from the acquisition my incorporating the real time weather data from the agricultural segment into their SmartMobility™ transportation offering.

Environment

The Environment segment focuses on water system management, monitoring of weather and air quality, and hazardous material containment.  It accounts for 8.6% of revenues and is growing quickly.

Global Efficiency

At 21.1% of revenue, the Global Efficiency segment is a cross-disciplinary IT consultancy offering to help clients use resources more effectively.  Key markets include insurance, health care, finance, government services, and telecommunications.  This segment is struggling against increased competition in Spain, but sees strong potential growth in Brazil.

Valuation

At a recent price of $18, Telvent has a trailing P/E of a little over 13, and pays no dividend.  Although it trades at only 65% over book value, operating cash flow ($33M) is low compared to net debt ($471M) and it has a low current ratio of around 1.  The company recently refinanced its debt, increasing the maturity and stretching out the payment schedule, which means that debt is not an immediate problem, and if the company can achieve decent growth over the next few years, they should be able to handle it easily.  

Although I could not be much more enthusiastic about the business, the high debt to cash flow means that I'll be watching and waiting for much cheaper valuations before I'm ready to buy TLVT stock.

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:41 PM | Permalink | Comments (0)

John Petersen

Later this month, Tesla Motors plans to launch its initial public offering and sell about 12% of the company for $200 million. If the IPO is successful, Tesla's stock will trade on the Nasdaq Stock Market (TSLA) and its initial market capitalization will be roughly $1.5 billion. Since the IPO has spawned a series of analytical articles from better writers, I'll avoid the temptation to analyze the deal terms and focus on product issues instead. Like their cars, Tesla's IPO will undoubtedly attract vanity investors, the philosophically committed and the mathematically challenged. The more cautious element will probably stay on the sidelines.

Calling Tesla an automaker is like calling France's très chic Louis Vuitton, Möet Hennesy Group (LVMHF.PK) a beverage company. Tesla started with a $100,000 roadster in 2008 and has sold 1,063 cars to date. They plan to add a $50,000 family sedan in 2012 and have booked approximately 2,200 reservations over the last year. As a reference point, the star-crossed Delorean Motor Company sold about 9,000 stainless steel gull-wing sports cars for $25,000 (roughly $60,000 current dollars) in 1981 and 1982.

There will always be a market for vanity goods, particularly in the green space where eco-bling is hard to find. Moving down market will be a major challenge, however, because real consumers live in a world of paychecks, stressed budgets and overwhelming economic uncertainty. So while the eco-bling crowd will pay any price for the right status symbol, real consumers tend to think the green in their wallets is more important than the green in their cocktail party conversation. When people seriously consider their transportation needs and put pencil to paper, EVs will always fall short of the mark.

In a conventional car with an internal combustion engine, or ICE, the fixed cost of the fuel tank is insignificant and the variable cost of gasoline is high. In an electric car the dynamic is reversed. The fixed cost of the battery pack is immense and the variable cost of electricity is low.

At current US gasoline prices of $3 a gallon, an ICE that gets 30 mpg has a fuel cost of $0.10 per mile. At EU prices of roughly $6 a gallon, the fuel cost is $0.20 per mile. These numbers will move up and down with fuel prices and are certain to increase over time as oil prices climb, but they won’t change because of an individual owner’s driving habits.

In an EV, the cost calculation is more complicated because there's a capital cost for the battery pack that must be recovered over a period of years and a variable cost for the electricity.

The appropriate cost recovery period is always a thorny issue with EV evangelists claiming that the goal should be breakeven over the life of the car and consumer surveys indicating that three years is the preferred breakeven period. Since no single number will please everyone, I'll default to IRS regulations that require businesses to depreciate cars and light trucks over a maximum of five years, and to new car loans, which commonly run for five years. Five years is probably not a perfect number, but it's more reasonable than either of the extremes.

The Wall Street Journal recently reported that Nissan’s cost of making a 100-mile battery pack for the Leaf is about $18,000. By the time you add Nissan’s normal 25% markup, the retail price should be about $24,000, or $1,000 per kWh. In spite of the facts, many readers believe $500 per kWh battery packs will be a reality within a couple years. Since I'm weary of arguing the reasonableness of those assumptions, I'll use both a $1,000 and a $500 per kWh pack price for this article.

I'll also use a number of other charitable assumptions including stable electric costs of $0.12 per kWh, no loss of battery capacity over time and no cycle-life limitations. While I cringe when reading discussions of second-life value because (a) nobody's demonstrated a 10-year first-life in the real world, and (b) I don't believe a buyer in 2020 will pay more than scrap value for a battery based on 2010 technology that's already logged a decade of service under unknown operating conditions, I'll assume a 15% second-life value to keep the peace.

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 bold lines show current gas and battery prices. The dashed lines show possible futures that are uncertain as to both timing and magnitude.



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 who don't need much range flexibility, the curves show that the best value will be derived by high-mileage drivers who presumably need far more range flexibility. 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.

The bottom line is that EVs are only economical when you buy no more battery than you need and you use the battery pack heavily. That leads to a life and death struggle between range anxiety and affordability. When you factor in the other uncertainties, I believe plans to electrify passenger cars are doomed until gas prices increase substantially or battery costs fall substantially. While I think both are virtual certainties over the next decade, I don't believe either is likely in time to make Tesla a business success.

Disclosure: None

Posted by John Petersen at 02:33 AM | Permalink | Comments (13)

Tom Konrad, CFA

Satellite (GPS) navigation is a Smart Transport strategy that drivers can implement without waiting for governments to act.  This is a look at five GPS Navigation stocks.   

I recently wrote how Smart Transport stocks may benefit from declining supply and increasing demand for oil.   I call the application of information technology (IT) to transportation "Smart Transportation."  Smart Transportation improves the function of the market for transportation services, just as the Smart Grid improves the market for electricity: by giving market participants better information and making the price of transportation better reflect the costs.  Because reducing congestion also reduces fuel use at very little cost, Smart Transport stocks should benefit from peak oil.

Types of Smart Transport

Smart Transport can be implemented from the top down, or the bottom up.  Top down Smart Transport involves government agencies adding IT such as cameras, card readers, and other sensors to roads or mass transit systems, either to provide drivers or passengers better information about conditions or to charge a usage fee.  Bottom-up involves drivers and riders using IT to acquire better information about road or transit conditions in order to make better decisions about where, how, and when they'll go about getting where they need to be.  That usually means a driver or fleet owner buying a GPS navigation system or systems.

Because GPS Navigation only improves access to information, and does not improve the market structure, it has less potential to reduce congestion than top-down road pricing schemes.  Yet GPS navigation has a major advantage as well: it's quick.  A driver can purchase an learn to use a GPS in an hour or two.  Government agencies seldom implement anything in less than a year, let alone anything that involves charging voters for something they're used to getting for free. In contrast, London's central congestion charge was formally proposed in July of 2001, and was not fully implemented until February 2003.

Will Peak Oil Help GPS Stocks?

If you believe that much of our response to peak oil will be last-minute and on a budget, you may have little trouble imagining growing numbers of people buying increasingly cheap and functional navigation devices or software for their smart phones in order to save gas by avoiding traffic and wrong turns.  As I argued in "The Methadone Economy," my vision of a likely peak oil future, the less prepared we are for peak oil, the more prevalent such bottom-up, quick to implement solutions will become. 

Yet most purchasers of GPS navigation aren't currently motivated by a desire to save gas.  Until drivers begin to make the connection between navigation and gas savings, a higher oil price won't help the share prices of GPS companies.  Some GPS companies know this, and are starting to help customers make this connection.    Features such as Garmin's (GRMN) EcoRoute, which gives drivers feedback on how they can drive more efficiently is an excellent advertisement for the connection between navigation and gas savings, as well as good PR.  Trafficmaster PLC (TFC.L) is even more explicit: Trafficmaster's home page encourages fleet managers to "Cut your fuel bills by up to 30%."  Rising fuel prices will only encourage more GPS companies to jump on the "navigation saves fuel" bandwagon, and encourage more drivers and fleet managers to listen.

Competition

Unfortunately, a company's success requires more than a growing market.  Companies also need to maintain profit margins.  Strong competition in GPS navigation is eroding profit margins.  Smart-phone based navigation programs are challenging the incumbent vehicle based systems and stand alone devices.  Google's (GOOG) entrance into the market with free smart phone navigation software should worry all industry participants.  Before Google entered the market, smart phone based GPS software came with a monthly subscription fee.  A free alternative will make many more drivers wonder if they need a dedicated GPS at all.
  
Stocks

I feel much the same about the GPS navigation industry as I do about the solar PV manufacturing industry.  The industry as a whole has a great future, but there is no guarantee that any industry participant will be able to maintain profitability for long in the face of new competition and constant innovation.  That said, some companies are in better positions than others.  Here are my thoughts on five GPS stocks:

Garmin, Ltd. (GRMN), $32.24

I own a Garmin Nuvï.  It is the best navigation device I've used to date (out of three total,) despite a software bug that sometimes keeps it from booting up properly.  Garmin has an excellent profit margin of 24%, no debt, and great cash flow, with a nice forward dividend yield of 4.4%. I like the fact that Garmin is directly playing the fuel-saving card with ecoRoute software, which might help them in a rising fuel price environment.

Telenav (TNAV), $8.39

Telenav went public on May 13.  The company sells subscription-based navigation software for smart phones.  The direct competition from a free product from Google makes me think this is a good stock to avoid.

TomTom (TOM2.AS), €5.14

TomTom makes stand alone navigation devices as well as software for the iPhone which has received good reviews.  However, the company carries more debt and has a much thinner profit margin than Garmin, leaving it vulnerable to further revenue declines.  TomTom does not pay a dividend.

Trafficmaster PLC (TFC.L), £ 0.47

Much more than other navigation companies, Trafficmaster is focused on helping customers (both fleet and individual) reduce fuel consumption by avoiding congestion.  They use real-time speed from units installed in vehicles to constantly update their congestion data.  They also provide stolen vehicle tracking.  Unlike Garmin and TomTom, the company is still seeing revenue growth, perhaps because of their greater emphasis on value-added services.   The company's trailing P/E is 13, making it one of the best values in the sector.

Trimble Navigation Ltd (TRMB), $30.38

Trimble is a general global positioning company, making GPS chip sets for a large range devices, including navigation systems.  As such, they are in a relatively good position in terms of competition: their chip sets are used in other companies' navigation systems, as well as many other industrial, construction, and agricultural applications.  They're solidly profitable, with no net debt and good cash flow, although with a P/E of 50 (at $30) and no dividend, a lot of expected growth is priced in to the stock.

Conclusion

If I were to buy any stock in this sector, it would be Trafficmaster because of the fuel-saving focus, decent valuation, and value-added services.  Because Trafficmaster uses two-way communication from its units to gather traffic data, the company benefits from network effects.  The more vehicles have Trafficmaster installed, the better the company's data, and the more effective its devices will be at avoiding traffic.  Yet any such advantage may be transitory:  a new competitor might instantly surpass Trafficmaster in network size by using cell phone tracking data from an existing wireless phone operator, or by using some other data source no one else has thought of yet.

The competitive landscape would make me uncomfortable holding any GPS stock for the long term.  As with most highly competitive industries, it's probably better to be a customer than an investor.

DISCLOSURE: No positions.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 02:42 PM | Permalink | Comments (2)

Tom Konrad CFA

What the Smart Grid will do for electricity, "Smart Transportation" will do for road-based travel.  Here are eight companies making Smart Transportation a reality.

Congestion and Peak Oil

In late 2005 Houston was evacuated as hurricane Rita approached.  The memory of Hurricane Katrina was still fresh in everyone's mind, and Houston, also called the Oil Capitol of the World, is extremely car-dependent.   100-mile traffic jams quickly formed on all the major routes out of the city.  Many people were stranded as their cars ran out of gas from driving for hours just to go a few miles.  In the end, the evacuation turned out to be unnecessary as Rita turned and missed the city.

The Rita evacuation is one graphic example of how traffic congestion wastes gasoline to no purpose.  As we look for companies that may benefit from declining oil supplies, one good place to look is companies that help reduce congestion. 

Reducing congestion does a lot more than save oil: it saves everyone time and aggravation, as well as reducing vehicle emissions.  Everyone wants less congestion, but few people want to reduce their own driving, they would prefer that other people get off the road instead.  A 2000 Salt Lake County, Utah referendum on light rail passed in large part because of an advertising campaign that focused on the benefits of light rail to the people who don't use it [pdf, p.7].  The main benefit cited was reduced congestion.  I've heard similar stories about Denver's FasTracks project: the initial polling showed support among commuters not because they wanted to take light rail themselves, but because they wanted other people to take the train and make their driving commute quicker.

Along with buses and road building, light rail projects such as the two referenced above are usually the first options that come to mind when people think about ways to reduce congestion.  Unfortunately, with the exception of bus rapid transit, such projects take a long time to implement.  They are also quite expensive.   FasTracks authorization was passed in 2004, and the project is not scheduled to be completed until 2016.  Although initially cited as a model, it's now billions over budget.

Congestion as Market Failure

The first solutions that come to mind are not often the best solutions. 

Understanding the economic causes of congestion can lead to insights as to the best solutions.

Congestion is an instance of market failure.  In particular, it's a combination of the tragedy of the commons and incomplete information.  The tragedy of the commons occurs when many individuals (drivers in this case) share a common resource (road space) but do not individually pay the incremental cost of using that resource.  Each individual driver benefits by driving, but imposes costs on all other drivers by incrementally slowing traffic and increasing the risk of accidents.  Further, drivers have incomplete information because they typically must chose a route without knowing if the route is congested or blocked by an accident.

The reason that adding lanes and building new roads does not reduce congestion is that these solutions do nothing to address the underlying market failure: they simply increase the size of the common resource, giving drivers a larger incentive to over consume.  Mass transit also increases the common resource (transport services), but, since it is typically not free, mass transit is typically more effective at reducing congestion.  Yet, since mass transit only provides a new option to driving, the congestion benefits of mass transit in the absence of road pricing tend to be small.  Mass transit gives drivers the option of leaving their cars at home, but unless they also have an incentive, only a few drivers will switch to mass transit. 

Enter the Invisible Hand

The most cost effective approaches to reducing congestion address the underlying market failures. 

One way to address the tragedy of the commons is to price the common resource.    The pay per mile pricing programs (also known as Pay as You Drive, or PAYD) for auto insurance and registration I discussed in part X of this series improve the market signal and help reduce congestion.  Electronic ticketing systems can also improve transit ridership by making it easier to pay, effectively lowering the cost of mass transit when compared to driving. In April, a US Department of Transportation (USDOT) report identified several strategies that produce large net savings while reducing CO2 emissions from transportation.  USDOT found urban center cordon pricing, where people are charged to drive into a congested city center, produces $530-640 per tonne in net savings, while congestion based road pricing produces $440-570 per tonne in net savings.  There are relatively few ways to cut CO2 emissions that produce net savings, let alone savings in the hundreds of dollars per ton.  By definition, when a market is efficient, there can be no net gains from changing the market structure.  The large gains found in the USDOT report are the result of massive market failure, and also a sign that congestion based road pricing and urban center cordon pricing both improve the market structure. 

Tackling the problem of incomplete information can also reduce congestion.  New York City has a system of stop lights that respond to traffic conditions and leave fewer people waiting at red lights.  Navigation systems (GPS) with traffic information can help users avoid congestion and accidents, reducing congestion for everyone.  GPS systems without traffic information can also reduce driving by helping drivers find the shortest route to their destinations and make fewer wrong turns.   Routing buses around congestion and signal priority systems can help them arrive on time, encouraging ridership, while satellite tracking systems can keep riders updated about the next arrival time. 

Smart Transportation

I call methods of addressing transportation market failures "Smart Transportation" because they typically apply information technology (IT) to transportation, just as the Smart Grid is the applies IT to the electric grid. Although not obviously IT, pricing structures to address the tragedy of the commons require information about vehicle locations over time in order to charge appropriate prices.

Like most IT, Smart Transportation is scalable: variable costs that come from added vehicles are small compared to the cost of the project.  Smart Transportation requires only relatively cheap tags or navigation systems (from about $30 for tags and $100 to $500 for navigation systems, with prices falling constantly) for each vehicle.  There are even navigation systems for smart phones from Google (GOOG) and TeleNav (TNAV), which had its IPO on May 13th.  Smart phone based navigation is even more scalable than navigation systems, since it requires no new hardware. 

Most Smart Transit project also require sensors, cameras, and/or tag readers placed throughout the covered area.  GPS navigation can benefit from sensors that detect traffic and road conditions, although traffic data can also come from the GPS devices themselves: Trafficmaster (TFC.L) has developed such as system, which becomes more effective the more people use it.  Even when infrastructure is required for Smart Transportation, once it is in place, the infrastructure can service any number of vehicles. 

Stocks

Here are nine stocks that I'd classify as Smart Transportation:

Company (Ticker)	Smart Transportation Businesses	% of Revenues (approx)
AECOM Technology Corporation (ACM)	Transportation planning and design	10-20%?
Cubic Corporation (CUB)	Fare and Toll collection	30%
Garmin, Ltd. (GRMN)	Satellite Navigation (Automotive, Marine, Aviation)	84%
Telvent Git S.A. (TLVT)	Transportation information systems	31%
TomTom (TOM2.AS)	Satellite Navigation and mapping	100%
Trafficmaster PLC (TFC.L)	Vehicle tracking, Satellite Navigation, Traffic monitoring	75%
Telenav (TNAV)	Smartphone based Navigation.	100%
Trimble Navigation (TRMB)	Chipsets for global positioning, vehicle tracking	10-20%?
Google (GOOG)	Mapping and navigation software	<5%

If you know of any I've missed, please add your suggestions in the comments.

Conclusion

Scalability of Smart Transportation can lead to impressive economic outcomes, but road pricing schemes run into political opposition when drivers don't have acceptable transport options other than their car. 
While mass transit projects benefit increased ridership when road pricing is implemented, road pricing is often politically untenable in the absence of reliable mass transit [pdf].  Often these links are made explicit in that the revenues from road pricing are used to improve all transportation options, as is the case with London's successful congestion charging scheme [pdf. p.5]

In future articles of this series on peak oil investments, I plan a more detailed look at some of these Smart Transportation stocks.  I'll also delve deeper into the alternative transport companies such as rail and bus mass transit without which Smart Transportation would be politically untenable.

DISCLOSURE: No positions.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 07:40 PM | Permalink | Comments (2)

John Petersen

Last week the American Chemical Society published a white paper in Environmental Science & Technology from a team of researchers at Tsinghua University, Beijing, and the Argonne National Laboratory Center for Transportation Research titled "Environmental Implication of Electric Vehicles in China." This white paper concludes that:

• Implementing electric vehicles in China will increase national CO2, SO2 and NOX emissions; and
• Gasoline HEVs are more environmentally friendly, more commercially mature, and less cost-intensive.

The following graph comes from page 4 of the white paper and compares the relative fleet wide CO2 emissions for gasoline ICEs, gasoline HEVs and electric vehicles. It's tremendously gratifying to see a high-level analysis that compares all of the available alternatives, instead of simply comparing ICEs with EVs.



While the graph focuses on CO2 emissions and shows that electric vehicles in China will be 50% dirtier than HEVs, the article also explains that EVs in China could double NOx emissions and increase SO2 emissions by 3–10 times. The bottom line is that in the U.S., China and India, PHEVs and EVs will be plugging into a lump of coal for decades to come and popular greenwash extravaganzas like the upcoming Tesla Motors IPO and the $7 to $11 billion Electric Drive Vehicle Deployment Act of 2010 that was introduced in Congress last week will ultimately be condemned for what they are, wholesale plunder of the treasury, the financial markets and the environment.

I have long argued that lithium-ion batteries are too valuable to waste on foolish applications like battery powered electric vehicles. I've even suggested that there won't be a lithium-ion battery glut because the world needs all the advanced batteries it can produce for sensible applications like electric two-wheeled vehicles and HEVs. Insanity is the only word I can use to describe the suggestion that batteries will ever be a cost effective replacement for a fuel tank.

If we wanted to create a hierarchy of possible battery applications going from the highest value per watt-hour to the lowest value per watt-hour, our list would look something like this:



In a normal free market, production capacity is allocated first to high value applications and then to successively lower value applications. In cases where supply is constrained by resource availability, manufacturing capacity or a host of other reasons, high value applications that only need a little battery capacity will always be able to outbid lower value applications that need a lot of battery capacity. The end result is that electric vehicles will always end up at the bottom of the food chain and the only batteries available to them will be the dreck and surplus that nobody else needs or wants. The economics of electric vehicles may work for the eco-religious crowd who will pay any price for the right status symbol to express their world view, but it's insanity to believe that electric vehicles have any future in the real world of paychecks and budget-conscious consumers.

I'm frequently critical of lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV) and Valence Technology (VLNC), but that criticism has nothing to do with the value of their products or the odds that they could develop a sensible business model for the commercialization of those products. The concept of electric vehicles, however, is inherently flawed and when good companies devote immense resources to the pursuit of foolhardy plans the result is invariably catastrophic for investors. Perhaps the latest study out of China will be enough to force some serious soul-searching before it's too late. I have never seen a new business prosper by targeting the most price sensitive, capital intensive and competitive markets first.

Disclosure: Author has no interests in the companies mentioned for obvious reasons.

Posted by John Petersen at 09:11 PM | Permalink | Comments (3)

John Petersen

I've written several articles over the last year that explain why idle elimination is a crucial first step in the global effort to increase fuel efficiency and curb CO2 emissions. For readers who are new to my blog, or confused by a torrent of news stories and analysts reports that wax poetic on the expected benefits, costs and challenges of gee-whiz vehicles that are "coming soon to a showroom near you," altenergymag.com describes stop-start systems, or micro-hybrids, as follows:

"These are conventional vehicles powered either by gasoline or diesel engines in which the 12-volt starter motor has been eliminated and a specially designed, belt-driven integrated starter/generator, or ISG, has been installed in place of the conventional alternator. While the ISG of a micro hybrid cannot help to propel the vehicle, it can provide two important hybrid features. First of all, a micro hybrid will feature idle stop. Engine control circuitry is included in a micro hybrid which will shut down the internal combustion engine when the vehicle is at rest. This feature alone can improve fuel economy by 10% to 15% in city/urban driving environments. The electronic control system in a micro hybrid can also control the charge cycle of the alternator so that it produces electricity to recharge the vehicle battery primarily during deceleration and braking. This provides a mild amount of regenerative braking and an additional gain in efficiency."

I usually talk about an 8% improvement in fuel economy for an incremental cost of $400 when I write about stop-start systems. Since I know that blog entries from guys like me who have an economic dog in the fight are often viewed as less credible than articles from writers who merely have a philosophical or political axe to grind, I also spend a good deal of time searching for concrete supporting data from reliable collateral sources.

I recently found a fascinating and somewhat disturbing slide in a presentation that General Motors R&D made at the 2010 Annual Meeting of the Minerals, Metals & Materials Society titled, "Challenges and Opportunities Relative to Increased Usage of Aluminum Within the Automotive Industry." The following schematic from page 13 of the presentation tells me that the 8% estimate I've been using is too pessimistic by half and the real fuel economy target for stop-start systems is closer to 17%.

Stop-start is not a complete solution to the fuel efficiency challenge, but it is the lowest and juiciest fruit on the conservation tree. Is it any wonder that industry analysts are predicting that stop-start systems will be built into 20 million cars a year by 2015?

The most common question on articles that discuss stop-start systems is, "if stop-start is so important, where are the automakers' press releases touting the technology?" The answer is simple. Stop-start will not normally be offered as a stand-alone option and will usually be bundled in packages like the EfficientDynamics system from BMW that has begun to attract praise from the mainstream media. More importantly, stop-start may be optional equipment for a couple years, but it is almost certain to become standard equipment because there is no compelling reason to waste fuel while waiting at a stop-light.

Automakers in Europe and North America are under tremendous pressure to meet new fuel efficiency and CO2 emission standards or pay huge penalties for failure. The following table summarizes the CO2 emission standards adopted by the European Union in April 2009.

Calendar Year	Percent of Fleet	CO2 Emission Standard	MPG Gasoline	MPG Diesel
2012	65.00%	130 g/km	~42	~48.2
2013	75.00%	130 g/km	~42	~48.2
2014	80.00%	130 g/km	~42	~48.2
2015	100.00%	130 g/km	~42	~48.2

In April of this year, the NHTSA and EPA created comparable standards for the U.S. when they adopted a joint final rule establishing the following fuel economy standards for light duty vehicles including cars, pickups, SUVs and vans.

Model Year	Passenger Cars	Light Trucks	Combined Fleet
2010 (1)	27.5 mpg		23.5 mpg
2011 (1)	30.2 mpg		24.1 mpg
2012 (2)	33.3 mpg	25.4 mpg	29.7 mpg
2013 (2)	34.2 mpg	26.0 mpg	30.5 mpg
2014 (2)	34.9 mpg	26.6 mpg	31.3 mpg
2015 (2)	36.2 mpg	27.5 mpg	32.6 mpg
2016(2)	37.8 mpg	28.8 mpg	34.1 mpg

(1)  Source: Wikipedia Corporate Average Fuel Economy
(2)  Source: NHTSA CAFE-GHG Fact Sheet

The bottom line business dynamic is that every Prius, Volt or Leaf the automakers sell will simplify the task of regulatory compliance, but the lion's share of the progress will come from building simpler efficiency technologies into cars that will be sold to consumers who think the green in their wallets is more important than the green in their conversation.

The second most common question is, "why do you think the widespread adoption of stop-start technology will be a boon to developers of advanced lead-carbon batteries and other systems that combine supercapacitors with conventional starter batteries?" My response has always been that current starter batteries are not robust enough to start an engine several times in a daily commute and systems based on exotic chemistries like NiMH and lithium-ion batteries are too expensive. Until recently, data to prove my point has been limited, which led to some skepticism. Now that hard data is beginning to make its way into the public domain, the task gets easier.

The big problem with stop-start systems is that starting an engine several times in a daily commute is very hard on starter batteries and the constant punishment gives rise to two related problems:

• First, the dynamic charge acceptance rate falls off rapidly, meaning that charge cycles that take 30 seconds with a new battery can take 2 minutes or more after a few months of use;
• Second, charging efficiency falls off rapidly, meaning that more energy is needed to bring the battery back to a full state of charge.

Both of these factors limit the frequency of stop-start events because control electronics won't turn the engine off unless the battery is fully recharged and ready for another start cycle. As the frequency of stop-start events declines, so does the fuel economy.

Last week a reader referred me to a Journal of Power Sources article (Volume 194, Issue 4, Pages 1241-1245) that compared the stop-start cycle-life performance of a conventional starter battery, an advanced lead-acid battery with carbon additives, and a lead-carbon battery-supercapacitor hybrid from Australia's Commonwealth Scientific and Industrial Research Organization called the Ultrabattery. The following graph shows the relative performance of all three devices in simplified cycle life testing that slightly under-charged the batteries to show the differences in dynamic charge acceptance rates.



A graph of their cycle-life testing using a normal charging protocol follows.



Axion Power International (AXPW.OB) reported comparable results in its May 19th presentation at the Advanced Automotive Battery Conference 2010.



The bottom line take-away points for investors are:

• In response to government mandates, stop-start systems will ramp from a few hundred thousand vehicles in 2010 to 20 million vehicles a year by 2015;
• Initial implementation of stop-start systems is planned the 2012 model year, which will require OEMs to reach design specification decisions by the third or fourth quarter of 2010;
• Roughly half of the $400 incremental cost of a stop-start system will be spent on better energy storage devices and the balance will be spent on control electronics and electro-mechanical components;
• While some automakers may choose higher quality conventional lead-acid batteries for stop-start systems, OEMs that want to maximize vehicle efficiency and avoid service problems will prefer technologies that combine the performance characteristics of supercapacitors and batteries; and
• Incremental revenue for manufacturers of storage devices for stop-start systems will run to several billion dollars a year by 2015.

Five public companies are actively developing specialized materials, components and energy storage devices for stop-start systems and will enjoy a substantial first-mover advantage over the next few years, including:

• MeadWestvaco (MWV), a packaging material and container manufacturing company that is developing carbon additives for the lead pastes used in ISS batteries;
• Maxwell Technologies (MXWL), which has teamed-up with Continental AG to develop storage systems for stop-start applications that use supercapacitors in tandem with conventional lead-acid batteries;
• Furukawa Battery Company (Frankfurt - FBB.F), which licensed the Ultrabattery from CSIRO and then sublicensed North American manufacturing rights to privately held East Penn Manufacturing Company, the recipient of a $32.5 million ARRA battery manufacturing grant award in August 2009;
• Axion Power International (AXPW.OB) a manufacturer of lead-acid batteries that has built a formidable patent position in lead-carbon technology and teamed-up with Exide for the commercialization of its PbC® battery-supercapacitor hybrid; and
• Exide Technologies, Inc. (XIDE), a leading global manufacturer of lead-acid batteries that has teamed up with Axion and was awarded a $34.3 million ARRA battery manufacturing grant in August 2009.

While each of these companies is working feverishly to complete OEM testing, build manufacturing facilities and negotiate their first contracts, none of them is truly ready for the anticipated surge in demand. As a result, I believe every company that brings a product to market this year will have more business than it can handle by the middle of next year. When the first design wins are announced later this year, the market response should be impressive, especially in the case of Exide and Axion which are rumored to be trading at depressed prices because of liquidations by troubled funds. Other battery manufacturers will undoubtedly enter the fray, but they'll all be playing catch-up ball for a long, long time.

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

Posted by John Petersen at 10:30 PM | Permalink | Comments (1)

Tom Konrad CFA

CVTech Group (CVT.TO, CVTPF.PK) operates in two of my favorite clean energy sectors: electricity transmission and distribution and efficient vehicles.  Here is a look at the company's fundamentals.

In "The Strongest Strong Grid Stocks" of my 2010: The Year of the Strong Grid? series, I took a quick look at CVTech Group's financial ratios, and decided not to look deeper because they had considerably more debt in comparison to income than the other electricity transmission ("strong grid") stocks I covered in that article.  I came across CVTech again while looking at companies involved in vehicle efficiency for my Peak Oil Investments series.  CVTech came up as a vehicle efficiency stock because it has a division that designs, engineers, and manufactures Continuously Variable Transmissions (CVT).  CVT has the potential to increase vehicle efficiency by 6%, according to independent consultancy Robert Baird & Co, so I decided CVTech deserved a second look. 

Energy Division

CVTech's Energy division accounts for about 88% of revenues, or 84% of the company's EBITDA.  The vast majority of this division is focused on construction and maintenance of electrical utility transmission and distribution (T&D) in Quebec and the Northeastern United States.  According to Judy Chang of the Brattle Group, speaking at the Yale Climate and Energy Institute's Annual Conference in April, the Northeast states will need to invest $10 billion in electricity transmission by 2020 in order to meet their existing renewable energy mandates.  According to a CVTech investor presentation [pdf], Quebec will need to invest more than C$14 billion to upgrade power transmission between 2009 and 2018.  With 2009 Energy division revenues at $140 million, the division could grow rapidly even if it only captures a small fraction of regional T&D spending.

A typical large transmission construction and service contract for the Energy division is a $40M regional "construction, maintenance, of an overhead distribution network" for Hydro-Quebec, with two 1-year renewal options.  A less typical project that caught my eye was installing pole-attached solar panels for PSE&G in New Jersey.  I've been following this project since it was announced because I think it makes a lot more sense for the electric grid to have a large number of small, distributed solar panels than large solar installations.  Distributed solar panels are not subject to large, quick fluctuations in output from cloud transients, yet the mass production and installation of the individual panels for a single owner should allow PSE&G to capture some of the economies of scale that is usually associated with large solar farms.  Because of these advantages, I expect to see more, similar projects in the future, and CVTech's prior experience may give the company an advantage in bidding for them.

Vehicle Division

The vehicle division specializes in the design and manufacture of CVT systems for small vehicles such as snowmobiles, ATVs and Golf Carts.  Because CVTech's CVTs use belts, they do not work well for high-torque applications such as trucks.  They have about 10% of the worldwide market for CVTs in vehicles that use them, but the trend to smaller cars may work to their advantage.  In January, they were selected to supply the automatic transmission option for the Tata Nano, giving them excellent growth prospects.

Valuation

At a $24 trailing P/E ratio and a 1.7% dividend yield, CVTech does not seem like a good value proposition.  However, earnings were depressed by the economic climate in 2009: the P/E ratio would have been below 8 if 2008 earnings were used instead of 2009.   Spending on T&D in the Northeastern US and Quebec needs to not only rebound but grow to keep up with unmet needs, and CVTech should be in a good position to capture some of that growth.  The company also has good potential for a boost from the Vehicle division.  I think the company is well valued at C$1.20, but I plan to delay my own buying because I expect a general market decline has the potential to bring it to a much better valuation sometime this year.

Late Note (5/14/10): CVTech reported first quarter 2010 earnings after this article was written but before publication.  Income was up $0.02 a share, bringing 12 month trailing EPS to $0.07, making the company look slightly more attractive than discussed above.  Top line revenue increased greatly because of a recent acquisition and the severe storms in the Northeast US in Q1 2010. 

Selected data	Date	Value
Stock Price	5/5/2010	C$1.20
Shares Outstanding	12/31/2009	65,288,310
Market Capitalization	5/5/2010	C$78M
Annual Revenues	2009	C$160M
Earnings per Share	2009	C$0.05
Earnings per Share	2008	C$0.17
P/E (trailing 12 month)	5/5/2010 price, 2009 earnings	24.0
Cash per share	12/31/09	C$0.08
Book Value per Share	12/31/09	C$2.24
Net Debt per Share	12/31/09	C$1.19
Current Ratio	12/31/09	1.36
Dividend yield	5/5/2010	1.67%
% Revenues from Electricity(Vehicle) division	2009	88% (12%)
EBITDA from Electricity(Vehicle) division	2009	84% (16%)

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 02:20 PM | Permalink | Comments (0)

Tom Konrad CFA

The easiest way to reduce fossil fuels is to increase vehicle efficiency.  Government mandates already in place will ensure that such improvements occur.  Some stocks may benefit from the trend, but choose carefully.

Dr. Daniel Sperling knows about as much as anyone about what policymakers can do to reduce the use of oil.  He is the Director of the Institute of Transport studies as the University of California Davis, and a long time member of the California Air Resources Board (CARB), so he understands transportation from both the academic and policy perspectives.  He also recently co-authored a book Two Billion Cars: Driving Towards Sustainability, so he understands the magnitude of the problem as well. 

I had the pleasure of hearing Dr. Sperling speak at the Yale Climate and Energy Institute's first annual conference: Overcoming Barriers to A New Energy System on April 24th.  In his talk (you can download the PowerPoint here[13MB],) he provided an illuminating analogy:  Transforming transportation is like a three-legged stool.  The first leg is improving vehicle efficiency, which is easiest because we have both the technology and the regulatory tools to do it.  The second leg is transitioning to alternative fuels, which is harder because in most cases the technology or the infrastructure are not quite there yet (The first eight parts of this series looked into various alternative fuels, and reached a similar conclusion.) 

The third leg, labeled "VMT" for Vehicle Miles Traveled is the transformation of the transportation system, reducing car usage by providing alternatives and giving people better incentives to use the most effective alternative.  From a policy perspective, VMT is the most difficult leg.  Reducing VMT requires the policy maker to persuade people to change their habits. This is difficult in a democracy, were citizens and businesses typically oppose policies that require change. 

For example, one fairly straightforward way to incentivize VMT reductions would be to mandate that auto insurance, registration, and license fees fees be charged on a per-mile basis, as opposed to an annual basis.  For the average driver, these fees amount to about 9.4¢ per mile, compared to about 6.9¢ per mile for fuel.  A change to per-mile charges would increase fairness because people who drive more cause more accidents, road wear, and congestion, and the poor tend to drive less than the rich, so per-mile charges would also make driving more affordable for them.  Yet, while low-mileage drivers would see significant savings from per-mile charges, rural drivers and suburban drivers with long commutes would see large increases (unless they were able to reduce their driving by combining trips, carpooling, or shifting to public transit.)  Auto insurance companies may lobby against VMT charges because it would require them to change.  They may also fear that the policies will be successful in reducing driving and accidents, undermining their market.  High mileage drivers often unite with auto insurance companies to oppose any proposed change, while low mileage beneficiaries are often unaware of the potential benefits to them.

The Easy Leg: Vehicle Efficiency

According to Dr. Sperling, in the last twenty-five years, auto manufacturers have made great strides in engine efficiency... but they have used the progress to deliver more power at the same MPG, rather than increasing MPG.  Since 1985, average fuel economy has dropped 5%, while vehicle weight has risen 29% and average horsepower has increased 86%.  That's what makes vehicle efficiency easy: even without further advances in engine efficiency, we could greatly increase fuel economy by just returning vehicle weight and horsepower to 1985 levels.

In February, our own John Petersen provided a list of technologies for increasing vehicle fuel economy, compiled from a report by Robert W Baird & Co.   The table shows nine different technologies, many of which can be combined in a single vehicle which increase vehicle efficiency an average of 12.5%. 

	Efficiency
Hybrid Electric Technologies	Gain
Prius-class strong hybrids with idle elimination, electric-only launch, recuperative braking and acceleration boost.	40%
Insight-class mild hybrids with idle elimination, recuperative braking and acceleration boost.	20%
Engine Technologies
Direct Fuel Injection (with turbocharging or supercharging) delivers higher performance with lower fuel consumption.	11-13%
Integrated Starter/Generator Systems (e.g. stop-start systems) automatically turn the engine on/off when the vehicle is stopped to reduce fuel consumed during idling.	8%
Cylinder Deactivation saves fuel by deactivating cylinders when they are not needed.	7.5%
Turbochargers & Superchargers increase engine power, allowing manufacturers to downsize engines without sacrificing performance or to increase performance without lowering fuel economy.	7.5%
Variable Valve Timing & Lift improve engine efficiency by optimizing the flow of fuel & air into the engine for various engine speeds.	5%
Transmission Technologies
Automated Manual Transmissions combine the efficiency of manual transmissions with the convenience of automatics (gears shift automatically).	7%
Continuously Variable Transmissions have an infinite number of "gears", providing seamless acceleration and improved fuel economy.	6%

The table shows it should be possible to increase fuel economy by the 40% from 2009 levels by 2016, as required by current law using only engine and transmission technologies.  Hybrid technology, smaller vehicle size, light weighting, low rolling resistance tires, better aerodynamics, or reducing engine power could each increase efficiency further.   Hence, automakers have a wide variety of potential strategies to meet the 2016 targets with existing technology.  While this plethora of options is good news for automakers, it is not all good news for investors.  With the wide choice of existing options for increasing fuel economy, it's difficult to foresee which technologies will bring the greatest returns to investors.  Further, few of these technologies are proprietary to any single publicly traded company. 

Stocks

Here are three companies from our Clean Transportation stock list that earn a fairly large proportion of their revenues from vehicle efficiency:

• Clean Diesel Technologies (CDTI) is a more focused company that might benefit from a larger market for its diesel emission reduction technologies if higher fuel economy standards lead to shift to diesel engines.  Since they operate in most diesel engine markets, changes in the automotive diesel market will be only one driver of profitability.
  
• CVTech Group (CVTPF.PK, CVT.TO) is a Toronto listed company with a division focused on Continuously Variable Power transmission in small vehicles.  Its other divisions provide construction and maintenance for electrical transmission and distribution in Quebec and the Northeast US.  While transport accounts for only 12% of sales, I include CVT in this list because electrical transmission one of my favorite sectors.  See my Year of the Strong Grid series for more on electricity transmission.
  
• UQM Technologies (UQM) designs and manufactures permanent magnet electric motors and drive systems for electric and hybrid electric vehicles.  They have sold technology to all six major automakers for electric vehicle and hybrid electric vehicle development programs, and are also working with several automotive start ups, most prominently CODA automotive.
  

Two other auto parts suppliers have expertise in some of these efficiency technologies. 
Borgwarner (BWA) produces engine and drive train components, including turbochargers and variable cam timing, while Magna International (MGA) is a diversified automotive supplier with some expertise in hybrid and electric vehicle systems.  However, I don't think that these constitute enough of their business to consider their stocks to be vehicle efficiency investments.

Also not on the list are the large number of manufacturers of batteries, and the auto manufacturers themselves.  Batteries are a critical component for hybrid vehicles, as discussed in part II of this series, but I chose not to include them in order to highlight manufacturers of other components.  For an in-depth discussion of battery company investing I recommend John Petersen's recent articles Common Sense in energy Storage Investing, and More Common Sense in Energy Storage Investing on AltEnergyStocks.com.

Conclusion

Clean Diesel Technologies, CVTech, and UQM may benefit from government mandated increases in vehicle efficiency through increased demand by automakers for their products.  However, higher oil prices and the increased cost of cars may undermine these gains by undermining the market for cars.  A declining car market could occur if people drive less because of high fuel pricesand delay purchases of new cars.  If gains in market share do not outpace market shrinkage, automotive efficiency investors will be disappointed.

Cars are only a slice of the larger transportation pie, so there are companies that can benefit from shrinkage of the automobile market.  Below is a graph from Dr. Sperling's talk, where he projects broad growth in all classes of motor vehicles.


I believe this graph overestimates the growth of the personal car, and that buses, cycles, and scooters will take a relatively larger share of the motor vehicle market.  I also believe that public transit and telecommunications may take an increasing share of the overall transportation services market, which may reduce the overall number of vehicles shown in the projection.

Investors looking for the purest automotive efficiency stock should choose UQM Technologies (UQM), which is more focused on the automotive market than Clean Diesel Technologies (CDTI), although both have significant exposure to other sorts of vehicles.  Investors interested in both electricity transmission and automotive efficiency should take a look at CVTech Group (CVTPF.PK).

Shifting Away From Cars

I personally prefer companies that can grab parts of the transportation pie away from auto and air travel, since I believe that betting on the general shift away from cars is a surer than betting on any one vehicle efficiency technology.  I will cover companies benefiting from this shift later in this series on peak oil investments.

Investments in alternative forms of transport depend on behavior change to be profitable.  Most people will not change their behavior on their own, and most of us have difficultty imagining giving up our car to ride the bus or biking.  Most jobs currently don't encourage telecommuting.  There is an oft-repeated mantra in business circles that deals can only be done face-to-face, and so business air travel will continue despite the rise of increasingly effective teleconferencing services.

The inability to envision a world where we travel less or by alternative modes represents conventional wisdom.  But I believe that rising fuel prices will get people and businesses to do a lot of things that they cannot currently envision when gas is a mere $3 a gallon.  If they won't stand for politicians to tell them to get out of their cars today, when gas is $10 a gallon, they'll be clamoring for those same politicians to provide mass transit and mandate that employers allow telecommuting.

Investors who can foresee a future that most other investors cannot currently imagine stand to make out-sized profits compared to the mass of investors who expect business as usual.

DISCLOSURE: No positions.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 11:17 AM | Permalink | Comments (0)

John Petersen

Since last week's article, Common Sense in Energy Storage Investing, was well-received by readers who've recently discovered this blog and want to better understand the energy storage sector, I've decided to continue with the theme and drill down deeper into some broad issues. Most of today's material is pretty basic stuff, but when the hype machine starts spinning a firm grasp on economic reality and investment fundamentals can be important to investors that want to avoid a boom and bust bubble like we had in corn ethanol.

In the fall of 2008 I confessed to being a shameless early adopter of cutting edge technology. I bought the first portable electronic calculator in 1971; bought word processing, laser printing, videotape, compact disks and satellite TV in the early ‘80s; bought a cell phone and established an Internet domain in the early ‘90s; and established a paperless office and a global law practice by the late ‘90s. If it was new and a major advance, I had to have it first regardless of cost. When I look back at the last 40 years, I'm amazed at how quickly the latest and greatest technologies became obsolete when newer, better and cheaper products emerged. The most recent example of how quickly technologies can rise and fall happened just last week when Sony (SNE) announced that will quit making floppy disks next March. As an investor, I'm horrified by the idea that a technology as important as the floppy disk can rise to global dominance and decline to insignificance in forty years.

In most cases, I've adapted well to changing conditions. My only line in the sand has been an almost religious devotion to the Macintosh operating system, which I switched to in the fall of 1989 based on the personal advice of Dr. Wilson K. Talley of the Lawrence Livermore National Laboratory. While I've never questioned my choice in computers, a graph comparing the long-term stock price performance of Microsoft (MSFT) and Apple (AAPL) serves as a stark reminder of how a sound technical decision played out in the equity market.



Today I can sit back and bask in the glow of being right about Apple's inherent technical superiority, but that doesn't change the fact that I was right too early. If I'd been a truly prescient investor, I would have owned Microsoft for the first dozen years and then switched to Apple for the long term.

Last week I re-printed a table from a July 2008 Sandia National Laboratories report that estimated the current and 10-year projected cost of stationary energy storage systems for solar power installations, including the storage devices and power conditioning equipment necessary for turning DC output into 60-Hz AC power suitable for delivery to the grid. The following chart puts the projected future cost of systems using the ten battery technologies included in the Sandia study in graphic form. While the media is enthralled with lithium-ion batteries because of effective PR and the oh so alluring promise of electric cars, my experience as a Mac user tells me that the vast majority of likely buyers will obey the laws of economic gravity and buy the cheapest system that can do the work.



The bottom-line is that major innovations take decades to evolve and work their way through the markets. The process was first explained in the technology adoption lifecycle, a model that emerged in the '50s and has since been refined by contributions from Geoffrey Moore and others who explain the process with graphs like this one from Crossing the Chasm.



We are living in the first days of the Age of Cleantech, the sixth industrial revolution. The media is chock full of stories about how wind and solar power will change the way we generate electricity, the smart grid will change the way we distribute and use electricity, vehicle electrification will free us from pollution and the tyranny of imported oil, and energy storage will be the keystone – an enabling technology that makes all the other advances possible. What the news stories don't tell us, because frankly nobody knows, is when these technological marvels will hit their stride and make a meaningful difference in the way we live. To help put things into perspective I've used data from a press release teaser for the American Wind Energy Association's annual market report for 2009 to create a graph of the annual and cumulative changes in U.S. wind power capacity over the last 15 years.



The first use of a large windmill to generate electricity was a system built in Cleveland, Ohio, in 1888 by Charles F. Brush. If you only consider the cumulative values since 1995 the growth seems pretty stable. If you think about the hundred and twenty year history of wind and study the annual additions and other data from the teaser, it becomes clear that wind power didn't transition out of the innovators stage until 2004, and then it took another three years to reach the early majority stage.

A similar trend is clear in the 10-year history of the HEV market, as shown by the following graph from hybridcars.com.



Viewed in isolation, HEVs have built an impressive growth history. Viewed as a segment of the larger market, they're just beginning to scratch the surface with 2009 numbers that represented 2.8% of light duty vehicle sales. Returning to the technology adoption lifecycle, HEVs are just now transitioning out of the innovators stage and into the early adopters stage. Plug-in vehicles, in comparison, are at the earliest possible point on the curve. I'm very optimistic about the future of HEVs because they've already demonstrated a decade of consistent growth and built a solid core of satisfied consumers. I'm less sanguine about plug-in vehicles because they have no track record and even their strongest advocates acknowledge insurmountable obstacles to widespread vehicle electrification over the next decade including:

1. The high cost of batteries;
2. The lack of recharging infrastructure;
3. Capacity, regulatory and coordination problems in the electric power sector; and
4. Consumer acceptance issues.

While I'm not willing to go out on a limb and predict what future penetration rates will be for powertrain electrification technologies, Roland Berger Strategy Consultants has predicted that full or partial powertrain electrification will be a key automotive efficiency technology by 2020 and forecast high scenario market penetration rates as follows:

	Plug-in	HEV	Stop-start	ICE
Western Europe	20%	7%	67%	6%
United States	13%	13%	51%	23%
Japan	8%	15%	60%	17%
China	16%	6%	30%	48%

If we study the Berger forecast and think back to the technology adoption lifecycle graph, it's pretty clear that HEVs are expected to follow a natural growth path over the next decade as their market share quadruples. It's also clear that something beyond normal market forces is expected to drive the adoption of plug-ins and stop-start systems. In the case of plug-ins the main driver of growth will be subsidies and incentives as governments around the world tax Peter to pay for Paul's new car. In the case of stop-start systems, the main driver will be new CO2 emissions and fuel economy regulations that require automakers to reach increasingly stringent targets. The first approach relies on incentives to create demand that wouldn't otherwise exist. The second approach relies on penalties to force automakers to implement efficiency technologies without regard to consumer preferences. In my experience, government is not very effective when offering a carrot but it's darned good at using a stick. Under the circumstances, I'm inclined to believe the stop-start penetration rates are a sure thing while the plug-in penetration rates include a hefty dose of wishful thinking.

Over the next five years manufacturers of inexpensive energy storage systems for stop-start applications are certain to report major revenue gains from C02 emissions and fuel efficiency regulations that are now fait accompli. The main publicly traded beneficiaries include Johnson Controls (JCI), Exide Technologies (XIDE), Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB). If the planned introductions of plug-in vehicles later this year proceed as planned, the government incentives are successful and innovator class purchasers don't experience too many problems with battery pack failures, range limitations, poor cold weather performance and limited charging infrastructure, battery manufacturers like Ener1 (HEV) and A123 Systems (AONE) may begin realizing revenues that justify their market capitalizations in the second half of the decade.

I've already had my Apple vs. Microsoft experience and don't intend to repeat it. I'll continue to buy green bananas, but my days of trying to carve a new plantation out of the jungle are over.

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

Posted by John Petersen at 11:33 AM | Permalink | Comments (7)

John Petersen

On April 8th the Electrification Coalition, a recently formed industrial lobby comprised of top-level executives from Cisco Systems (CSCO), Aerovironment (AVAV), NRG Energy (NRG), Rockwood Holdings (ROC), Nissan Motors (NSANY.PK), FedEx (FDX), A123 Systems (AONE) and a gaggle of private companies released a slick but wholly unenlightening white paper titled, "Economic Impact of the Electrification Roadmap." I haven't seen so many finely sculpted curves and unspoken assumptions since the tax shelter forecasts of the early-80s. The only clear message is that electric drive will be little more than a footnote in automotive history unless the powers that be agree to provide $121.1 billion in direct subsidies and incur another $100 billion in unspecified budget deficits over the next decade. Then, if everything goes according to plan and nobody develops a better personal transportation alternative, we can start thinking in terms of cost recovery and potential benefit to society.