Clean Transportation Archives


November 28, 2016

Shipping Panic Creates Preferred Arbitrage Opportunity

Tom Konrad, Ph.D., CFA

  • Seaspan Worldwide has several classes of publicly traded securities, with different claims on its income streams.
  • The company owns container ships leased under long term contracts to shipping companies. 
  • The shipping industry is in a massive downturn, raising concerns about its customers' ability to pay.
  • The company's preferred shares have sold off more than half as far as its common stock- far more than justified by its relatively low risk.
  • There exists a 5.5% yield opportunity to buy the preferred and hedge the risk by buying puts on the common.

Seaspan Corporation operates as an independent charter owner and manager of containerships. The company charters its containerships under to long-term, fixed-rate time charters to various container liner companies. Its fleet consists of 92 vessels, which are typically newer, larger, and more fuel efficient than other fleets.

Seaspan's top customers included COSCO Container Lines, Mitsui O.S.K. Lines, MOL, Yang Mine and Hapag-Lloyd.  It also had three ships chartered to bankrupt Hanjin shipping.  Although one of these ships has already been rechartered, the bankruptcy highlighted the fact that Seaspan's income and (more importantly) dividend are not safe.

Available Cash Flow

A recent article on Seaspan by transportation professional James Sands looks at the prospects of a dividend cut going forward.  He seems to think that a dividend cut is possible, and may even be likely because the company may decide to expand its fleet by purchasing vessels for sale at distressed prices.

Seaspan's dividends currently amount to $13 million a quarter to preferred shareholders, and $38.3 million to common shareholders.  Cash available for distribution to common shareholders (CAFD) was $90 million in the third quarter (after the $13 million payment to preferred shareholders.)  Third quarter revenue was $225 million.

Understanding Cumulative Preferred Stock

The company's preferred shares (SSW-PD, SSW-PE, SSW-PH, and SSW-PG) are what is known as "cumulative" preferred.  Preferred equity falls in between common stock and debt (bonds) on the spectrum of risk and reward: safer with less potential for upside than common stock, but higher yield and riskier than bonds.  Preferred shares must receive their full dividend so long as any dividend is paid to the common shareholders.  Cumulative preferred shares have the additional provision that, if dividends are ever suspended, all unpaid preferred dividends must be paid in arrears before any dividend is paid to common shareholders.

This means that preferred dividends are much less risky than common dividends.  Expenses are mostly fixed, so declines in revenue will flow mostly flow through directly to CAFD, so let us assume that each $10 decrease in revenue reduces CAFD by $9.

Dividend Cut Estimates

Under these assumptions, let us consider the effects of the following percentage declines in quarterly revenue:

Seaspan Quarterly Revenue, CAFD, and dividends.  All numbers in million $.
% Decline in Revenue
Quarterly Revenue
Common dividend
Preferred divideds
no decline
$38.3 (2.3x coverage)
$13 (safe)
10% decline
$38.3 (1.8x coverage) - cut possible
$13 (safe)
20% decline
$38.3 (1.3x coverage) - likely to be cut
$13 (safe)
30% decline
Dividend cut inevitable, possibly to 0
3.25x coverage, may be delayed
40% decline
Dividend will be cut to 0
1.7x coverage, likely to be delayed
50% decline
cannot be paid
cut to $0, will only be paid if revenues recover.

In summary, Seaspan will continue to have enough cash flow to continue paying the preferred dividends unless revenue falls by more than 50%.  Since the vast majority of Seaspan's revenue comes from long term leases with major shipping companies, this would require that at least a third of its customers (as a percentage of revenues) go bankrupt- the only way to avoid paying a long term lease.  Revenue may also decline over time as leases end, offset as Seaspan re-leases the vessels, possibly at lower rates.

Now comes the tricky part- predicting the future.  If a large number of shipping companies go bankrupt and scrap or idle older, less efficient vessels, revenues and lease rates should improve for the remaining vessels.  Since Seaspan's vessels are generally newer and cheaper to operate than most of the world fleet, Seaspan should be a net beneficiary of this trend.  Hence, a 50% decline in revenue seems nearly impossible.  Keeping this in mind, here are my guesstimates of the likelihood of the above scenarios:

% Decline in Revenue
Expected common dividend cut
Expected preferred dividend cut
no decline
no cut
10% decline
no cut
20% decline
no cut
30% decline
40% decline
50% decline

Using these probabilities, I can estimate the expected dividend cuts for both the common and preferred.  Using these probabilities, the overall expected dividend cut for the common is 52%, and the expected dividend cut for the preferred is 8.5%.

If my guesstimates are correct, another way to say this is that the common dividend is likely to be cut six times as much as the preferred dividends.  This makes sense, since the common dividend has to be cut to $0 before there can be any cut to the preferred dividends.

Effects on the Stock Price

Understanding the effects of dividend cuts on the stock price requires knowing why shareholders own the stock.  Preferred shareholders are income investors, and so are motivated almost exclusively by dividends.  Common shareholders are motivated by a mix of income and potential capital gains.  SSW investors are likely more motivated by income than average, given that the stock's dividend yield is currently over 15%.  Let's say that common shareholders are motivated one third by capital gains and two-thirds by income.

If that is the case, my estimated dividend cuts should have led to an approximate 35% decline in the common shares, and an 8.5% decline in the preferred.  Reality has been different, as shown by the chart below:

ssw vs preferreds

Over the last 6 months, SSW (black line) has fallen 36% (close to my estimate), while the preferred share classes (red and orange lines) have fallen about 19%, more than half as much as the common.  Also shown are Seaspan's exchange traded notes SSWN (blue line), which have declined only 2%, a fall which could be completely explained by recent increases in interest rates.  The performance of SSWN shows that the market thinks that Seaspan is little more likely to go bankrupt than it was six months ago.


While the decline in SSW is eerily close to my very rough estimate (36% vs 35%), the decline in the preferred shares is completely out of proportion.  The preferred shares have fallen more than twice as far as my model would predict.

I believe this is due to excessive risk aversion among the preferred shareholders.  Valuing income above all else, I believe that the preferred shareholders are over-reacting to the actual risks.  The only other options are that my model is wrong, or that common shareholders are not taking the risks seriously enough.

While my model is very rough, the fact that risks for common shareholders are much higher than those for preferred shareholders is an inevitable consequence of the way preferred shares are designed.  Perhaps the expected common dividend cut should not be six times the expected preferred cut, but it could as easily be ten times as large or three times as large.  The resulting declines in the common stock should hence be a significant multiple of the declines in the preferred.  I find the actual ratio of only 1.9x far too small.

Investors could in theory take advantage of this mispricing by buying the preferred stock and shorting the common.  If the common "should" decline 3x as much as the preferred, they can short $1 of the common for every $3 of the preferred they buy.  Taking SSW-PG, the company's cumulative 8.2% preferred as an example (currently yielding 10% at $20.50) an investor could short 1000 shares of SSW for $9,500, with an annual cost of $1500 in dividends, and buy 1390 shares of SSW-PG for $28,500 which pay annual dividends of $2,850.  Hence, a net investment of $19,000 would yield a net $1,350 in dividends (6.8%) and be largely hedged against risks to the company.

Unfortunately, Seaspan shares are difficult to borrow, and so a more achievable hedge is to use long-dated puts.  May 2017 SSW $7.50 puts can currently be bought at approximately $0.60 per share.  While these do not insulate the investor against small declines in SSW, they are an excellent hedge against the large declines in the stock, which would occur if the common dividend were cut to $0 and the preferred dividends were at risk.  For a hedge similar to the 1000 shares of SSW sold short above, an investor would need 10 contracts which would cost $600 plus commission and hedge the position for six months.  During that time, the 1390 shares of SSW-PG would pay $1425 in dividends, so the net annual yield would be 5.5% on the whole hedged position, assuming that new puts could be sold for similar prices every 6 months.

5.5% is an attractive yield for a stock market investment, made even more attractive by the relatively low risk nature of this hedged investment in preferred stock.  It also has the potential of significant capital gains if the preferred shares recover to something closer to their true value.

This is why I have been buying SSW-PG and hedging part of that position with puts on SSW.

Endnote: Is Seaspan Green?

Regular readers may wonder why I'm interested in Seaspan at all, given that I do almost exclusively green investing.  Global container shipping is a key part of world trade, the antithesis of the "buy local" movement.  Buying local is often seen as green, but in my opinion, that depends on what you are buying and how it was made. 

I admit that this is very subjective, so if you think that global trade is always bad, you should avoid investing in Seaspan. That said, here is why I consider Seaspan green:
  1. Shipping is, pound for pound, the most fuel efficient way to move goods over long distances.
  2. Seaspan's ships are among the world's most efficient.
  3. Fuel efficiency can be further improved by "slow steaming," a.k.a. going more slowly.  Slow steaming requires more ships to move a fixed number of goods the same distance in the same amount of time, and so this easy way to reduce fuel use has the effect of increasing the demand for ships, which in turn benefits Seaspan.

In short, I expect that Seaspan should be a net beneficiary of worldwide efforts to reduce greenhouse gas emissions and fuel use.  This precisely my definition for a "green" stock.  I invest in companies I believe will gain from efforts to fight climate change and other environmental problems.

DISCLOSURE: Long SSW-PG. Long Puts on SSW common.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

March 15, 2016

Hyundai Charges Up Green Bond With EVs And Hybrids

by the Climate Bonds Team

Hyundai Capital Services issues first Korean corporate green bond for hybrids and electric vehicles (5yrs, 2.87%, $500m)

Hyundai Capital Services, the subsidiary of Hyundai Motor Company (005380.KS) that provides loans and leases for new Hyundai and Kia cars, issued a $500m green bond. The inaugural green deal has a 5-year tenor and fixed semi-annual coupon of 2.87%. Lead underwriters for the deal were Bank of America Merrill Lynch, Citi, and Credit Agricole.

The green issue is the first corporate Korean green bond and only the third out of Korea after KEXIM’s initial green bonds in 2013 and 2016. It’s also number 3 on the list of green bonds issued for green vehicles following Toyota’s two green ABS for hybrid and EV assets in the past couple years.

Similar to Toyota (TM), Hyundai does not have a second review of its green bond. Independent reviews of a bond’s green credentials provide investors with an important insight to the bond’s adherence with best practice guidelines. Next time round, it would be great to see Hyundai adopt a market leader position and obtain a review.

Proceeds from the Hyundai green bond will finance a range of Hyundai and Kia hybrids (HEV) (including the Sonata HEV, Grandeur HEV, Ioniq HEV, K5 HEV, K7 HEV, Sonata PHEV) and electric vehicles (EVs) (including the Soul EV, Ray EV and Tucson ix Fuel Cell).

So, how do we determine what vehicles are green?

Late last year we finalised the Climate Bonds Standard for Low Carbon Transport, which includes eligibility criteria for low emission passenger vehicles. Our Technical Working Group (TWG) and public consultation process both concluded that private vehicles should meet emissions threshold (based on data from the IEA mobility model and Global fuel economy initiative).

For cars to be considered green under the Climate Bonds Standard, they must meet, or be below, a maximum emissions level of 85-90 grams of CO2 per passenger kilometre travelled (g CO2 p/km).

The Hyundai and Kia Hybrids in this green bond are all under a 110 g CO2/pkm maximum emissions – so not far off the standard threshold. This is compared to the top performing petrol and diesel cars, which struggle to get below 110 g CO2/pkm in emissions.

This threshold decreases over time as part of a trajectory to achieve a 2-degree world by 2050.  As we get closer to the mid-point of the century we need vehicle technology to be improving to achieve lower and lower emissions. It's about pushing fuel efficiency across all modes of transport. ​

These thresholds apply to hybrid vehicles that use both fossil fuels and electric technology for motive power but it’s much easier to classify all electric or fuel cell vehicles.  These types of vehicles ​are considered ​green under the Climate Bonds Standard​.

We sometimes hear arguments along the lines of ‘but what if the electric vehicles are using electricity from a brown grid – is that still green?’ – well, yes! Here’s why: we can’t hang around for 20-30 years until we’ve transitioned all electricity grids to green energy sources before developing and adopting low emission vehicles technologies. 

If we wait until 2050, we will be too late. ​​​

We need to use the time now to get our technology up to scratch so that we develop highly efficient vehicles by 2050. So, all electric vehicles are in; full stop.

Back to this deal - it’s fantastic to see another green bond from a car manufacturer. It is financing technology crucial for a transition to a 2-degree future.

Welcome to green bonds Hyundai!

——— The Climate Bonds Team includes Sean Kidney, Tess Olsen-Rong, Beate Sonerud, and Justine Leigh-Bell. 
 The Climate Bonds Initiative is an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

September 21, 2015

EPA Says VW Running Massive Clean Air Scam

Jim Lane 

VWlogoVW is facing up to $18.07 billion in fines; recalls, mandatory vehicle emission fixes on the horizon; investigations underway at EPA and in California as “defeat devices” uncovered that evade clean air regulations.

In Washington, EPA issued a notice of violation of the Clean Air Act to Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. alleging that four-cylinder Volkswagen and Audi diesel cars from model years 2009-2015 carry a “defeat device” which circumvents EPA emissions standards for certain air pollutants.

Specifically, the EPA alleges that a sophisticated software algorithm on certain Volkswagen vehicles detects when the car is undergoing official emissions testing, and turns full emissions controls on only during the test.

The effectiveness of these vehicles’ pollution emissions control devices is greatly reduced during all normal driving situations, according to the EPA. “This results in cars that meet emissions standards in the laboratory or testing station, but during normal operation, emit nitrogen oxides, or NOx, at up to 40 times the standard. The software produced by Volkswagen is a “defeat device,” as defined by the Clean Air Act,” the EPA wrote in its Notice of Violation.

VW facing up to $18.07 billion in fines

VW is facing up to $18.07 billion in fines for an estimated 482,000 violations of the Clean Air Act, and the EPA may seek injunctive relief. This could take the form of a mandatory recall. Meanwhile, individuals associated with the violations may be subject to a further $1.8 billion in civil penalties.

For purposes of comparison, BP paid $18.7 billion in fines to settle claims stemming from the Deepwater Horizon disaster.

Is there room for some benefit of doubt for VW?

Alas, not much room for hope. According to EPA, VW admitted to installing the software earlier this year, which EPA has characterized as a “defeat device”.

In a statement released Sunday, Volkswagen CEO Prof. Dr. Martin Winterkorn said:

The U.S. Environmental Protection Agency and the California Air Resources Board (EPA and CARB) revealed their findings that while testing diesel cars of the Volkswagen Group they have detected manipulations that violate American environmental standards.

The Board of Management at Volkswagen AG takes these findings very seriously. I personally am deeply sorry that we have broken the trust of our customers and the public. We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case. Volkswagen has ordered an external investigation of this matter.

We do not and will not tolerate violations of any kind of our internal rules or of the law.

The trust of our customers and the public is and continues to be our most important asset. We at Volkswagen will do everything that must be done in order to re-establish the trust that so many people have placed in us, and we will do everything necessary in order to reverse the damage this has caused. This matter has first priority for me, personally, and for our entire Board of Management.

VW’s meteoric diesel sales boom

Volkswagen is touting its line of diesel passenger vehicles as “a whole family of front runners,” ironic in that the company has been accused by EPA of running a front.

One thing there is no doubt about in the background to this story, “Volkswagen has sold more diesel cars in the U.S. than every other brand combined,” and the company attributes its TDI Clean Diesel success to “long range without sacrifice”, describing its efforts as a “Promise kept”.

Investigations pending

California is separately issuing an In-Use Compliance letter to Volkswagen, and EPA and the California Air Resources Board have both initiated investigations based on Volkswagen’s alleged actions.

“Using a defeat device in cars to evade clean air standards is illegal and a threat to public health,” said Cynthia Giles, Assistant Administrator for the Office of Enforcement and Compliance Assurance. “Working closely with the California Air Resources Board, EPA is committed to making sure that all automakers play by the same rules. EPA will continue to investigate these very serious matters.”

“Working with US EPA we are taking this important step to protect public health thanks to the dogged investigations by our laboratory scientists and staff,” said Air Resources Board Executive Officer Richard Corey. “Our goal now is to ensure that the affected cars are brought into compliance, to dig more deeply into the extent and implications of Volkswagen’s efforts to cheat on clean air rules, and to take appropriate further action.”

Vehicles covered

The allegations cover roughly 482,000 diesel passenger cars sold in the United States since 2008. Affected diesel models include:

• Jetta (Model Years 2009 – 2015)
• Beetle (Model Years 2009 – 2015)
• Audi A3 (Model Years 2009 – 2015)
• Golf (Model Years 2009 – 2015)
• Passat (Model Years 2014-2015)

What is NOx again?

NOx pollution contributes to nitrogen dioxide, ground-level ozone, and fine particulate matter. Exposure to these pollutants has been linked with a range of serious health effects, including increased asthma attacks and other respiratory illnesses that can be serious enough to send people to the hospital. Exposure to ozone and particulate matter have also been associated with premature death due to respiratory-related or cardiovascular-related effects. Children, the elderly, and people with pre-existing respiratory disease are particularly at risk for health effects of these pollutants.

Clean Air Act background

The Clean Air Act requires vehicle manufacturers to certify to EPA that their products will meet applicable federal emission standards to control air pollution, and every vehicle sold in the U.S. must be covered by an EPA-issued certificate of conformity. Motor vehicles equipped with defeat devices, which reduce the effectiveness of the emission control system during normal driving conditions, cannot be certified. By making and selling vehicles with defeat devices that allowed for higher levels of air emissions than were certified to EPA, Volkswagen violated two important provisions of the Clean Air Act.

The investigative background

EPA and CARB uncovered the defeat device software after independent analysis by researchers at West Virginia University, working with the International Council on Clean Transportation, a non-governmental organization, raised questions about emissions levels, and the agencies began further investigations into the issue. In September, after EPA and CARB demanded an explanation for the identified emission problems, Volkswagen admitted that the cars contained defeat devices, according to EPA’s Notice of Violation.

So, you were hoping to get good performance and cleaner air from your VW or Audi – what now?

“It is incumbent upon Volkswagen to initiate the process that will fix the cars’ emissions systems,” says EPA.

But, for now, owners of cars of these models and years do not need to take any action. “Car owners should know,”‘ the EPA said in a statement, “that although these vehicles have emissions exceeding standards, these violations do not present a safety hazard and the cars remain legal to drive and resell.”

For now, switch to renewable diesel. Nexte’s (NEF.F) NEXTBTL renewable diesel, sold extensively in the EU and the US, reduces NOx emissions by 9% compared to conventional diesel fuel. More on that here.

VW and renewable diesel

In June, Amyris (AMRS) announced the successful completion of a diesel demonstration program with Volkswagen of America that was designed to test the commercial readiness of Amyris renewable diesel and its ability to enhance VW’s innovative and advanced diesel technology. The collaboration included evaluating emissions reductions and demonstrating performance of Volkswagen’s existing TDI Clean Diesel technology using advanced renewable diesel fuel.

Utilizing vehicles provided by VW in real-world driving conditions, the two-year-long program to assess the results reinforced the company’s data that greenhouse gas (GHG) emissions were reduced by more than 60 percent on a well-to-wheel basis when using Amyris’s No Compromise renewable diesel. In addition, the program demonstrated fuel economy that was similar to or improved over petroleum-based fuels, together while maintaining outstanding engine performance under a variety of conditions.

Audi, renewable diesel and advanced fuels

In April, Audi’s pilot plant in Dresden has started production of the synthetic fuel Audi e diesel. After a commissioning phase of just four months, the research facility in Dresden started producing its first batches of high‑quality diesel fuel a few days ago. To demonstrate its suitability for everyday use, Federal Minister of Education and Research Prof. Dr. Johanna Wanka put the first five liters into her official car, an Audi A8 3.0 TDI clean diesel Quattro on Tuesday.

Joule and Audi formed a partnership in 2011 to accelerate the development and commercialization of CO2-neutral fuels. These efforts include fuel testing and validation, lifecycle analysis and support for Joule’s production facility in Hobbs, New Mexico, where demonstration-scale production of ethanol is underway. Audi is also supporting Joule’s hydrocarbon product, which was previously tested and shown to meet ASTM specifications in diesel blends of up to 50%. This product will follow ethanol to market.

In May, Global Bioenergies and Audi announced that the first batch of renewable gasoline has been produced, converted into isooctane from isobutene, by the Fraunhofer Institute at the Leuna refinery near Leipzig where Global Bioenergies is now building its demo plant.

Not the first defeat device rodeo for the EPA

The Notice is the first major violation involving mass-produced defeat devices in US vehicles since a 1998 consent decree between the EPA and Caterpillar, Cummins, Detroit Diesel, Mack, Renault Vehicles Industriels, and Volvo Truck Corp. Following that NOV, the companies agreed to pay heft fines and were subjected to NTE standards for heavy truck engines.

Why risk evading regulations with defeat devices?

As Fundamentals of Motor Vehicle Technology observes, “devices used to ‘clean up’ vehicle pollutants are costly and their use often results in a lower power output and higher fuel consumption.”

What’s the connection between power, performance, fuel economy and NOx emissions?

In a nutshell, diesel engines that use high compressions and a lean air-to-fuel ratio get great mileage, but they produce high temperatures inside the engine, and at 2500 degrees the nitrogen that is coming into the car with air (Earth’s atmosphere is 78% nitrogen) begins to react with oxygen to produce NOx.

Wasn’t BlueTec technology from Daimler-Benz supposed to address NOx emissions?

Yes, and VW/Audi licensed the technology. It does indeed reduce NOx, when switched on, using a variety of techniques but notably featuring a Selective Catalytic Reduction converter that produces nitrogen and water from nitrous oxides.

When was BlueTec deployed in the Jetta?

The 2008 Model year. Leading us to suspect that in fact it is BlueTec that is at the heart of the issue here.

Why is power a problem especially for diesel vehicles?

Gasoline engines, traditionally, have more pep, or horsepower, which is what you use when you want to travel at high-speed on the highway. Diesel engines are better known for torque, which is what you need when you’re climbing a hill and carrying a heavy load. Consequently, diesel cars have had a “low power” rap for many years, fairly or unfairly, and manufacturers have been eager to maximize and tout the power and performance of diesel cars.

Why is power specifically an opportunity area for mischief when it comes to diesel and emissions control?

At the heart of SCR technology is a diesel exhaust fluid injection, and that specifically can reduce power output and increase engine temperature. Consequently, technology has been developed over the years to delay DEF injection, for example, when climbing hills.

It may well be the case — we don’t yet precisely know — that DEF injection has been postponed via this snarky algorithm that the EPA mentioned, until the vehicle next visits the shop for an EPA emissions test.

More on the story

More information on EPA’s Notice of Violation.
More information on CARB’s In-Use Compliance Letter.

 Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

June 20, 2015

MiX Telematics: Fleet Efficiency, Saftey And Security At An African Discount

by Jan Schalkwijk, CFA

In a recent article I wrote about the tech sector in Africa, I mentioned a South Africa company called MiX Telematics Ltd (NYSE:MIXT). There is a dearth of investable tech names in Africa and the worry is that investors would have to stretch to gain exposure to African tech. With this company, no stretching is necessary and it thus provides exposure to the African technology sector without comprising on value or quality.

MiX Telematics is a company that provides fleet and mobile asset management solutions, delivered through the Software-as-a-Service "SaaS" model. The company seeks to deliver its fleet operator customers improved efficiency, safety, and security. The core technology is real-time vehicle tracking and a software platform to record, interpret, and act on the data. This is what the company offers in a nutshell:

Efficiency: manage poor driver behavior, improve route efficiency and maximize vehicle utilization. The improved efficiency results in fuel savings, reduce wear & tear, faster delivery, and minimal vehicle downtime.

Safety: human error is to blame for 80% of motor vehicle accidents. The company's vehicle/driver tracking and monitoring system can record, analyze, and correct poor driver behavior, thus improving fleet safety. In South Africa, the company also has consumer solutions for insurance approval, roadside assistance, crash alert, and business mileage tracking.

Security: Vehicle tracking and monitoring allows for the recovery of stolen vehicles, the monitoring of precious cargo, and alerts to the driver of possible dangers or suspicious vehicle behavior. On the latter point, if for example your car is close to the South African border, MIXT will call you to make sure you are still in possession of your car and it is not on its unauthorized way out of the country.

The company has over 1,000 employees across offices in South Africa, Uganda, UAE, US, UK, Brazil, and Australia, managing over 0.5 million mobile assets and a network of 130 fleet partners. The company's shares trade on the Johannesburg Stock Exchange and on the NYSE since July 2013 through an IPO that raised the equivalent of 650 million South African rand (650 Rm) gross of fees.

Two thirds of the company's 2014 revenue of 1,272 Rm were subscription revenues, which produce an annuity-like stream of income. It is very much the strategy of the company to grow through increasing the number of subscriptions, rather than the off-the-shelf sale of hardware/software. Today, half of its revenue and 2/3s of its employees are Africa based. The percentage of revenue from Africa is likely to decline as the company's foothold in Brazil and the US expands.

While overall revenue was flat in 2014 in dollar terms (up 8% in rand terms), its revenue from subscriptions increased 8% in dollar terms, which will be a key metric to follow. As the mix shifts towards subscriptions, margins improve, which benefits the bottom line even if overall growth is slow. Using CY 2015 Street estimates, the company is trading at an Enterprise Value to Revenue multiple of 1.4x, this compares to 5.2x for the SaaS industry as a whole and 5.6x its closest competitor Fleetmatics (NYSE:FLTX) in the UK. Also - refreshing for a SaaS company - MIXT consistently generates free cash flow.

Even if the market does not narrow the valuation gap, there is a reasonable chance that a corporate buyer might step in. On June 18th US-based Novatel (NASDAQ:MIFI) announced it was buying Digicore, another (smaller) South African fleet-management and vehicle tracking firm, for $87 million in cash, or 4.40 rand per share. On June 1, prior to the announcement, shares were trading around 2.6 rand. MIXT would cost a little more to acquire, but it is digestible with a market cap of $250m.

On the business side, one of the key metrics to look at is renewal rates. There are other players in the space and therefore a declining renewal rate is an indicator of a deteriorating competitive position. The most recent figure for that metric is 90%, which shows that customers when evaluation SaaS solutions available, have a high rate of resigning with MIXT. This speaks to their technology being world class.

Does this company fit in an Africa fund? The answer is a resounding yes, in my view. If we are investing in the African domestic economies we should not limit our universe to African companies with local ambitions, but also consider Africa-domiciled companies with global ambitions. Such an investment can often prove rewarding, as it enables an investor to buy a world class company that's trading with an Africa discount. Moreover, you are banking on the growth of the African middle class in much the same way as when you are buying a bank or a consumer company, because companies like MIXT grow the middle class income that fuels banking and consumption.

Jan Schalkwijk, CFA has 18 years of experience in the investment industry. He is the founder and Chief Investment Manager of JPS Global Investments, an investment firm specializing in green investing on a global basis, and serves on the portfolio management team of Africa Capital Group, where he co-manages a sub-Saharan Africa strategy. From 1997 – 2005, Jan worked at Franklin Templeton Investments, where he was vice president of investment platforms. There, he was responsible for a book of business of $10 billion in assets under management and raised institutional assets in various sub-advised investment mandates that the firm offered, including domestic and international equity and fixed income.

May 14, 2015

Bears Are Sniffing At Clean Energy Fuels: Should You?

By Jeff Siegel

Clean Energy Fuels (NASDAQ: CLNE) has been having a pretty good year.

The stock reached a 2015 high of $10.48 on May 4. Up from $5.03 at the start of the year.


But the natural gas fueling company co-founded by legendary oilman T. Boone Pickens took it on the chin today after missing analysts’ estimates for earnings and revenue in Q1.

When CLNE first came on the scene, I was a fan. I even recommended the company shortly after it went public. And we did pretty well, eventually clocking out with a gain in excess of 60 percent in less than a year.

Since then, I’ve commented here and there on the stock, but never bothered to get back in. Although I could’ve made a nice chunk of change this year on it, I remain skeptical about the big promises that often come from the “natural gas for fuel” camp.

I have no doubt that natural gas will continue to be a fuel of choice for a number of fleet operators - particularly those relying on buses and large trucks. However, there are still those who claim that natural gas can serve as the perfect bridge fuel for passenger vehicles - transitioning us from gas and diesel to natural gas, then ultimately to electric cars or fuel cells. The latter also being an unlikely occurrence.

In any event, this is an argument I’ve been hearing for years. The only problem is, such a bridge is unnecessary. We’re well on our way to transitioning away from the outdated internal combustion engine.

Yes, we’re still decades away from meaningful numbers, but certainly no natural gas bridge is required. And quite frankly, the only folks that keep harping on this illusion are those with a lot of skin in the natural gas game.

Don’t get me wrong. I’m not trying to knock their hustle. We’re all out here trying to make a buck. But I would remind investors that while Clean Energy Fuels will continue to be quite successful landing deals with fleets, any claims from the peddlers of this camp that natural-gas powered passenger vehicles are coming should be met with an enormous amount of skepticism.

Of course, I’m also a huge supporter of the electric vehicle movement, and have often been critical of natural gas-powered vehicles. But the bottom line is that on performance, design, range and infrastructure availability, natural gas just can’t compete with electric vehicles. And they certainly can’t compete with gasoline-powered cars.

Not looking good …

Getting back to Clean Energy Fuels, I know a lot of analysts still have pretty high price targets on this thing. But I’m skeptical. Here are a few things that bother me about CLNE:

It’s carrying nearly $600 million in debt, yet only has about $215 million in cash
Analysts at Piper Jaffray have suggest that the company will not have enough cash to pay off its convertible debt in 2016. I don’t know how accurate this analysis is, but it does have a $145 million convertible note coming due in August
With lower oil prices, interest in liquid natural gas is waning. Some companies, including Cummins Westport have put their LNG engine manufacturing operations on hold.

I just don’t think Clean Energy Fuels is ever going to be able to live up to the grand expectations its been pitching over the years. That’s not to say the company’s going to go belly up. But I wouldn’t be surprised to see management looking to do a capital raise sometime soon, possibly resulting in dilution of the stock.

All in all, I don’t like the prospects for CLNE. It might be good for a quick trade here and there, but long-term this one just isn’t for me. 


Jeff Siegel is Editor of Energy and Capital, where this article was first published.

February 27, 2015

Tesla Vs. Hydrogen

By Jeff Siegel

One of Governor Arnold Schwarzenegger's dreams may soon be coming to fruition.

During his time as governor, while singing the praises of renewable energy progress in the Golden State, the Terminator would often tell tree-hugging Californians about his dream of building a hydrogen highway that would enable hydrogen-powered vehicles to run from Mexico to Canada — via California.

Not only did Prius drivers and vegans applaud the governor's dream, but it even got a decent amount of support from former GM Chairman Bob Lutz and President George W. Bush.

Since that time, California has managed to build only 10 hydrogen fueling stations in Los Angeles and San Francisco. But we got word over the weekend that the California Energy Commission is about to spend $20 million to build about 50 new hydrogen fueling stations.

According to the LA Times...

Starting in October with a new fuel station in the city of Coalinga, near I-5 in the San Joaquin Valley, hydrogen cars will be able to get from Los Angeles to San Francisco. Such vehicles can go about 300 miles on a fill up.

Hydrogen is Silly

Those who believe hydrogen represents the future of personal transportation have been quick to applaud this news.

Certainly it represents a small but meaningful step in instigating some early growth in the hydrogen vehicle market.

But here's the problem...

No one really cares now that Elon Musk has shown the world a much better mousetrap... and in the process, has been quite vocal about why he actually thinks hydrogen is “silly.”

Sure, the guy's got plenty of reasons to criticize potential competitors. But hydrogen isn't really much of a competitor, as Musk pointed out recently:

Hydrogen is an energy storage mechanism. It is not a source of energy. So you have to get that hydrogen from somewhere. if you get that hydrogen from water, so you’re splitting H20, electrolysis is extremely inefficient as an energy process…. if you say took a solar panel and use the energy from that to just charge a battery pack directly, compared to try to split water, take the hydrogen, dump the oxygen, compress the hydrogen to an extremely high pressure (or liquefy it) and then put it in a car and run a fuel-cell, it is about half the efficiency, it’s terrible. Why would you do that? It makes no sense.

If you're going to pick an energy storage mechanism, hydrogen is an incredibly dumb one to pick. You should just use methane, that's much, much easier. Or propane. The best case hydrogen fuel cell doesn't win against the current case batteries, so then obviously it doesn't make sense. That will become apparent in the next few years.

Too Late

Although I agree with Musk, there's no doubt that plenty of automakers are still getting quite aggressive on hydrogen.

Hyundai, Toyota, Honda, and Volkswagen don't really seem to be too interested in what Musk has to say about the issue. Of course, they also weren't too interested back when he first came on the scene with a silly dream of mass-producing a quality electric car.

You know how that dream turned out...


In any event, while there will likely be a few more opportunities to profit in the fuel cell space with companies like Plug Power (NASDAQ: PLUG) and Hydrogenics Corp. (NASDAQ: HYGS), over the long term, I wouldn't put too much faith in hydrogen vehicles getting as much love as electric vehicles.

In terms of price, performance, ease-of-use, and infrastructure demands, by the time the few automakers pursuing hydrogen actually have a decent number of these cars in the showrooms, electric cars will be even further advanced. Prices will have fallen further, driving ranges will have doubled (if not tripled), and high-speed charging infrastructure will be nearly as common as the infrastructure in existence today for internal combustion vehicles.

In other words, it's too late for hydrogen, because no one can put the electric vehicle genie back in its bottle.

To a new way of life and a new generation of wealth...


Jeff Siegel is Editor of Energy and Capital, where this article was first published.

January 23, 2015

Honda Natural Gas Civic Sales Sputter

By Jeff Siegel

natgacarI learned today that sales of Honda's natural gas Civic tanked 65% in 2014.

I didn't even know they were still trying to sell those things!

I actually remember a few years ago, attending a car show and talking to a Honda rep who was pushing this thing. I didn't have the heart to tell him he was barking up the wrong tree when he tried to sell me on all the benefits.

What benefits?

Inferior fuel economy, a clunky ride, and no infrastructure?

Sure, there was the special fueling unit that could be installed in my garage for a few grand. But I'd be surprised if more than a few dozen folks bit on that one.

It's not that I have a problem with natural gas-powered vehicles. I just think they're better suited for truck and bus fleets, where fleet operators can house their own infrastructure. Certainly Clean Energy Fuels Corp. (NASDAQ: CLNE) has benefited quite well from the growth in this space.

But for personal vehicles, I think the hopes and dreams of the natural gas powered car are coming to an end. Especially now, with electric vehicles continuing to shock and awe even the most skeptical consumers.

You need to look no further than the success of Tesla Motors (NADAQ: TSLA) or the very impressive sales figures on the Nissan LEAF. Not to mention, GM's (NYSE: GM) getting ready to roll out what it believes will be a $30,000 electric car with an all-electric range of 200 miles.

On performance, design, range and infrastructure availability, natural gas cars just can't compete with electric vehicles. And they definitely can't compete with gas-powered cars. Honda would be wise to just put this thing out of its misery and take its electric car plans out of the compliance car slow lane.


Jeff Siegel is Editor of Energy and Capital, where this article was first published.

January 03, 2015

Electic Vehicle Subsidies May Clear A Lane In Chinese Traffic Jam

Bottom line: Traditional car makers will suffer from weak sales growth and plunging margins in China in 2015 and into 2016, while EV makers will start the new year slow but could see improvement by the end of 2015.

A flurry of headlines this week are sending ominous signals for the car industry in the year ahead, with both traditional and new energy vehicle makers likely to face an uphill road as China’s economy slows. The problem could be compounded as big new capacity comes online from many major automakers that have invested billions of dollars on expansion over the last 3 years. Other headwinds could come as major cities take steps to ease traffic congestion, with the southern boomtown of Shenzhen becoming the latest to implement a new program to control the number of cars on the road.

Things were already looking tough for the new energy vehicle industry, following recent reports of slower-than-expected sales for electric vehicles (EVs) from domestic leader BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF) and US high-flyer Tesla (Nasdaq: TSLA). (previous post) Most of the sector’s problems owe to wariness among Chinese consumers, who worry about the lack of infrastructure to support the new energy vehicle industry.

Sensing the lack of progress, Beijing is now signaling that government incentives for people who buy so-called “green” vehicles will be extended to 2020. (English article) The incentives were originally set to expire at the end of 2015, so this latest move could reassure some people who are still waiting to see whether infrastructure will improve. Such improvement is likely to come around the middle of next year, when many recent infrastructure initiatives start come on stream, helping sales of these new-technology vehicles to gain some momentum by the end of the year.

But improvement for EVs won’t come as much consolation to makers of traditional cars, which are probably looking at a much longer downturn that will put a chill on sales for 2015 and into 2016. In the latest signal of that accelerating slowdown, Toyota (Tokyo: 7203) has just said that it’s likely to miss its target of selling more than 1.1 million cars in China this year. (English article)

Toyota cited a faster-than-expected acceleration in the slowdown for China’s auto market for its latest forecast, and said growth next year will also be sluggish. China’s car market zoomed in the years after the global economic crisis on government buying incentives as part of a broader economic stimulus package. But it slowed sharply this year as China’s broader economy undergoes a major adjustment, and forecasters are now predicting relatively anemic sales gains in the 5-10 percent range for next year.

In another sign of headwinds the industry is facing, another media report is detailing complaints that many car dealers are making about aggressive sales targets set for them by the big automakers. (English article) The bottom line is that many dealers have ordered more cars than they can sell in order to please the car manufacturers, and as a result now have large inventories of unsold vehicles in their showrooms. That means they’re likely to sharply slow their new orders in 2015 as they sell off existing inventory, putting a further damper on car shipments from manufacturers.

As all these storm clouds build, another report is detailing one more of the industry’s problems in the form of looming overcapacity. That particular report says Korean automaker Hyundai (Seoul: 005380) is planning a major expansion of its Chinese capacity with plans for 2 new factories. (English article) Hyundai is the latest company joining a trend that has seen most of the world’s top car makers announce multibillion-dollar expansions of their China operations over the last 3 years.

Just how bad the automakers will suffer next year won’t become clear until the spring, as business returns to more normal levels after the Chinese New Year period. But I do expect that profit margins and sales growth will drop sharply for most major traditional car makers. New energy car makers will also suffer in the first half of they year, though their prospects could pick up towards the end of 2015.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

November 05, 2014

HydroPhi: Turbocharging Trucks With Hydrogen

by Debra Fiakas CFA

Casting about for alternatives to burning fossil fuels for energy, hydrogen is a logical candidate.  It is the most abundant chemical on the planet and the energy density of compressed hydrogen is about 5.6 milli-joules per liter.  This compares to 32.4 mj/l for gasoline and 4.3 mj/l for a lithium ion battery.  That is where the romance ends and the realities of hydrogen begin.  Hydrogen poses a safety risks, particularly in transportation and distribution.  Hydrogen gas leaking into the air may spontaneously ignite.  Extremely low temperatures will turn it into a liquid, but that represents added cost.  Furthermore, the most common production method for hydrogen is steam reformation of natural gas, which hardly represents an alternative to fossil fuels.

Included in our novel renewable energy data base is a very small group of companies attempting to develop technologies to produce hydrogen using an alternative methods not dependent upon fossil fuel.  Water molecules are subjected to direct current that leads to a chemical reaction and the separation of the hydrogen and oxygen elements in water.   One of the most recent additions to the group Hydrogen Electrolysis in the Mothers of Invention Index is HydroPhi Technologies Group, Inc. (HPTG:  Other OTC). 

HydroPhi is trying to turn distilled water into a hydrogen-based catalyst for engines using fossil fuels.  The catalyst is injected into the air intake of the engine to improve fuel efficiency and thereby reduce greenhouse gas emissions.  HydroPhi’s electrolysis system is right on-board the vehicle, thereby avoiding the thorny transportation dilemmas.  The company has planned a demonstration project in Poland for heavy duty trucks.

Earlier this week HydroPhi received good news from the European Union’s LIFE Program for environmental protection and water conservation.  The program has given preliminary approved a grant for 577,813 Euros or about US$722,000.  HydroPhi needs approximately $1.3 million to complete the demonstration.  Success with the project should take HydroPhi one step closer to commercialization of its hydrogen fuel catalyst system.

HydroPhi is a very early stage company that is still using cash resources to support development work.  In the most recently reported twelve months, the company used $741,250 to support operations.  It only had $111,730 on the balance sheet at the end of June 2014, revealing the HydroPhi really needs the money from the grant to carry out the demonstration project in Poland.

HPTG trades for just one penny and the market cap of the company is $1.4 million.  Investors interested in the potential in hydrogen could consider the stock as a very inexpensive option on the idea of making it possible for truckers to drive around with their very own hydrogen plant under the hood of their truck.  Pay-off is probably a couple years down the road (no pun intended).  

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

May 06, 2014

Offshore Wind A Big Part Of Why GE Wants Alstom

Who's the Energy Alpha Dog? GE or Siemens?

By Jeff Siegel

General Electric (NYSE:GE) wants to acquire one of the largest companies in France, and it could get what it wants if Germany doesn't get in the way.

Alstom SA (AOMFF), the target of GE's desires, is a French energy and transportation company with a market value of approximately $11.5 billion. It deals in hydroelectric and nuclear power, environmental control systems, wind turbines and battery storage, as well as trains and rail infrastructure.

It's a huge company, and GE could spend as much as $13 billion to acquire it.

On Monday, General Electric CEO Jeff Immelt met with French President Francois Hollande and Economic Minister Arnaud Montebourg to iron out the potential wrinkles in this deal. International news outlets said Hollande has responded favorably to GE's approaches, but Alstom is staying quiet on any potential deals until later in the week.

On Monday, the company released a brief statement that it will “make a further announcement no later than Wednesday 30 April morning. In the meantime, the company has requested that the trading of its shares remains suspended.”

A Rival Suitor

Like General Electric, German industrial firm Siemens AG (NYSE:SI) approached Alstom with its own acquisition interests.

The German company announced on Monday that it wanted to discuss “future strategic opportunities” with Alstom's board. The following day, Siemens announced it would be making its own offer to Alstom, but only if it had access to Alstom's “data room” and that it could do four weeks of due diligence with management and staff.

The Financial Times said Siemens could trade its high-speed rail assets for Alstom's electrical power assets, but this swap is purely speculation at this point.

Ripe for the Picking

Alstom is huge, but it's by no means monolithic. It has undergone restructuring for more than a decade and is currently under a five-year investigation by the U.S. Department of Justice and U.K. Serious Fraud Office for alleged corruption.

In 2003, the company posted a $2.54 billion loss related to poor sales, outstanding debts, and a huge write-down for a wind turbine design flaw. It was on the verge of implosion, but was bailed out by the French government to the tune of $3.4 billion. It was one of the biggest bailouts in European history.

This bailout ended up blocking Siemens from acquiring Alstom's large turbine business.

Yet the company ended up having to sell off a number of its subsidiaries to pay its debts anyway. Since the bailout, it has sold various parts to other multinationals, including Vosloh AG (VOS.DE), Areva SA (ARVCF), and you guessed it, General Electric.

In 2011, GE bought a 90 percent stake in Alstom's Converteam for $3.2 Billion. That company specializes in electric power conversion components and was folded into GE Power Conversion.

As is the case with multinationals, GE has a lot of money floating around outside of the US. By some accounts, it's got nearly $60 billion in cash and equivalents. Rather than repatriate this money and subject itself to heavy corporate taxes, GE has been using it for acquisitions.

The acquisition of Alstom would end up being the biggest in GE's history.

Offshore Wind

Even though GE is a leader in offshore wind turbines, the power and water divisions suffered through depressed demand over the last three years. GE anticipates a worldwide turnaround in 2014.

Acquiring Alstom would give GE some new offshore wind farm contracts which could accelerate growth efforts. In February, Alstom won its first offshore wind export contract, promising five turbines for the Block Island wind farm belonging to Deepwater Wind.

As it happens, Siemens was jockeying for a contract there too, but negotiations fell through.

It seems like Alstom has a knack for thwarting Siemens, and GE has a massive chunk of cash to offer the company as it continues to struggle. But the ink isn't dry yet. So we'll have to wait to see how this one works out.

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

March 17, 2014

Toyota's Asset Backed Green Bond: This Is Big

Sean Kidney

Toyota Motor Corp. (NYSE:TM) will close mid-next week on what will be the world’s first green bond backed by auto loans – electric vehicle and hybrid car loans to be specific. And what a kickstart for that market, at $1.75 billion.

According to a report in International Financing Review (IFR), the bond will be in multiple tranches, each at a different ratings level: A2 tranche, A3 and A4 (Moody’s ratings).

First thing to know: they told the media a week ago it would be a US$774.675 million bond. Rumour has it that initial investor interest was up to three times that. On Tuesday IFR was reporting that the bond would be $1.25 billion; by yesterday someone had told Bloomberg that it would be $1.75 billion. That’s looking like a very successful bond.

Was it because it was green? I mean, people are going to buy a Toyota bond anyway, aren’t they? Citigroup (NYSE:C), who structured the bond, certainly felt it was worth the extra effort to pick up new investors; but we won’t know details until after close next Wednesday. By the way, co-lead-managers with Citi are Bank of America Merrill Lynch (NYSE:BAC) and Morgan Stanley (NYSE:MS). BNP Paribas, Credit Agricole, JP Morgan and Mizuho are co-managers.

Most “labelled” green bonds (see our explanation of this in our review of green bonds in 2013) have been “asset-linked” corporate green bonds, where the investor has no exposure to the underlying asset.

This is different; the different tranches of the bond are apparently fully backed by the cash flows of the auto loan portfolio – which is great for Toyota because they get they original lending capital back and can plough it into a new pile of loans, which all helps to sell more low-carbon cars).

Asset-backed securities are still relatively new to the “labelled” green bonds theme: Hannon Armstrong (NYSE:HASI) kicked this off with a $100 million bond in December backed by energy efficiency and renewable energy cash flows. (Mind you do there are a few asset-backed renewable energy bonds around that we include in our broader Bonds and Climate reporting, such as MidAmerican’s Topaz, last year’s groundbreaking rooftop solar lease securitization from SolarCity (NASD:SCTY) as green, and 2010′s Italian Andromeda bond).

The size of Toyota’s bond signals the start of a major new stage in the green theme. We think it’s safe to expect more.
Two reasons why this is important:

1. It establishes transport as green for the purposes of bonds issuance. Yes yes yes!

Transport is responsible for 23% of global energy emissions – reducing those emissions is vital. Of course the question is then what really is green. Are hybrids really green or is true that they have higher emissions than diesel cars if you drive them intercity? What about a Hummer hybrid, is that good (yes there was one)? And don’t we want to get everyone out of cars and on to trains instead?

It just so happens we have a Low-Carbon Transport Working Group of international experts in the area tackling these issues at this very moment; all under the Climate Bonds Standard and Taxonomy. We expect to be publishing agreed criteria for low-emission vehicles later in April, along with criteria for metro rail, bus rapid transit systems and the like.

From what little we know so far, the Toyota bond looks like it will meet the criteria currently being discussed; they’ve said cars will “be required to meet standards of energy efficiency in regulations set by the California Environmental Protection Agency’s Air Resources Board". We’ll know more about exactly what level later next week and whether they’ve had a credible sign off on the green credentials.

2. Asset-backed issuance is incredibly important to getting increased capital into the green investment pipeline.

Being able to issue asset-backed bonds allows banks and companies to sell green loans and assets to the huge pool of investors looking for low-risk bonds and quickly recycle the capital they raise into new investments.

The more easily and quickly they can sell a mature portfolio, the more project investment and lending they can do with a limited amount of capital.
This is a big moment for the green bonds and climate bonds market.

——— Sean Kidney is Chair of the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

March 08, 2014

MiX Telematics: Global, Green, and Undervalued

Tom Konrad CFA

Disclosure: I am long MIXT.

“The MRM market has been growing quickly, and does not look like it will slow down.”

So says Clem Driscoll, President of C.J. Driscoll & Associates, a leading consultant for the Mobile Resource Management (MRM) industry.

One beneficiary of this growth has been Fleetmatics Group PLC (NYSE:FLTX.)  The company’s revenues have been growing 35% per year for the last four years.  On Friday, the company was knocked down a peg after reporting fourth quarter earnings.  The company reported greater than expected revenues, but lowered earnings guidance for 2014.

According to Driscoll, Fleetmatics’ valuation has been pulling up valuations across the industry, including a large number of private firms (which have been the subject of significant private equity activity) and divisions of other companies with businesses based around Global Positioning Systems (GPS) like Garmin, Ltd. (NASD:GRMN), Trimble Navigation Limited (NASD:TRMB) and TomTom (Amsterdam:TOM2).

MRM ratios.png

As you’ll note from the chart above, MiX Telematics (NASD:MIXT, JSE:MIX) stands out for its modest comparative valuation, especially with respect to Fleetmatics.  Unlike Trimble and Garmin, Mix and Fleetmatics are fully focused on the MRM space.  Both provide Fleet Management Solutions using a Software-as-a-Service (SaaS) model, but Fleetmatics is roughly three times more expensive per share based on sales (P/S), book value (P/B), and trailing earnings (P/E).  Based on the price-earnings-growth (PEG) ratio, FLTX shares are more than twice as expensive as MIXT, even after Friday’s decline.  (Note that the ratios are shown in log scale in order to display them on one chart.)

MiX vs. Fleetmatics

While Fleetmatics and MiX have similar business models, they serve different groups of MRM customers.  Fleetmatics is based in the US, where the industry started, and where fleet management solutions have the highest market penetration.  MiX started in South Africa, but now serves clients in 112 countries worldwide.  The company’s founder and CEO, Stefan “Joss” Joselowitz told me in a phone interview that the move to become a global company started eight to nine years ago.  As part of the transition, he relocated to the US with his family six years ago.  MiX has offices in East Africa, Dubai, the United Kingdom, the US, Brazil, and Australia.  Joselwitz says the move has helped the company in its relationships with international clients.  The company listed its American Depository Shares (ADS) on the Nasdaq stock market with the symbol MIXT in August 2013.  Each NASD:MIXT ADS is equivalent to 25 JSE:MIX South African shares.

According to Driscoll, the whole industry is becoming more international.  Companies based in the US are expanding into overseas markets, or at least looking at overseas markets.  Joselwitz thinks it will be difficult to replicate his company’s international presence and relationships on the ground.  This infrastructure gives MiX an advantage in serving large international companies, where MiX is the market leader, especially in the Oil and Gas industry.

Different industries require different types of MRM solutions.  Oil and Gas and Utility clients require strong integration with mapping and geographical data, while the trucking industry requires hours monitoring, and miles driven on a per state basis, for the purpose of state tax reporting.  A new rule from the Federal Motor Carrier Safety Administration is expected to require electronic driver logs in trucking soon.  Driscoll expects the new requirement is likely to drive adoption of fleet management solutions in the industry, but also lead to some price erosion from increased competition.

Fleetmatics’ main market is small and medium businesses (SMBs), which require simpler solutions than sophisticated multinationals.  According to Driscoll, its offering is fairly basic, but regarded as a good solution for its target market.

Despite it’s simpler offering, SMBs have less pricing power than MiX’s multinational clientele.  At the end of 2013, the companies had active subscriptions for similar numbers of vehicles (445,000 for Fleetmatics compared to 428,500 for MiX), but Fleetmatics’ quarterly revenue was $50.1 million compared to $29.6 million for MiX, despite the former’s relatively simple offering.  Although not all revenue from each company comes from subscriptions, this equates to approximately $450 per vehicle for FLTX compared to $275 for MiX.  This greater revenue is reflected in each company’s gross margins, which are 77% for FLTX, and 66% for MiX.  MiX’s gross margin on subscriptions is slightly higher, “approaching 70%” on subscription revenue, but still low compared to Fleetmatics.

The reason MiX is able to serve its more demanding customers at a lower cost per vehicle  than Fleetmatics is its South African base.  The company keeps as many of its operations as it can in relatively inexpensive South Africa, where Joselowitz says the cost of a software engineer is half that of a software engineer in the US.  With the majority of its expenses in South African rands, and much of its revenues in the dollar, Euro, and other international currencies, a falling rand leads to an earnings boost for MiX.

Growth Drivers

New regulatory requirements such as those mentioned above for trucking may drive some growth, but they are far from the only or primary growth drivers.  Much more important is the extremely attractive financial proposition.  C.J. Driscoll & Associates recently completed a survey of fleet operators regarding their interest in MRM systems.  36% of the respondents use such a system, with higher penetration in larger fleets.

They found:

  • Most operators see a return on investment in less than a year.
  • Fuel savings were the easiest to quantify, although highly variable.  Three different managers reported $550, $850, and $1,400 per year in savings from reduced fuel costs.  One manager reported 5% to 8% fuel savings from day one because of reduced idling.
  • 31% of managers reported receiving an insurance discount as a result of using an MRM system.
  • Many managers also reported significant savings from reduced maintenance, more efficient use of driver time, and fewer accidents.

With all these benefits, it is unsurprising that customers are on the whole very satisfied with their MRM solutions.  79% reported being either very satisfied or somewhat satisfied, and only 6% reporting any level of dissatisfaction.

Driving Safely, Driving Green

While the above results make fleet management easily cost effective for most clients, the greatest safety and fuel efficiency improvements can be achieved with some sort of driver behavior modification (DBM).  These systems give drivers real-time feedback, allowing them to increase safety and reduce fuel use much more quickly and effectively than without the system.

While Driscoll says that all major MRM providers offer driver behavior monitoring as an option, its use is much more suitable for the large, sophisticated fleets which are MiX’s core customers than they are for the SMBs which are Fleetmatics’ customers.  The adoption of DBM is still in its infancy in the US.  Only 6% of the MRM customers in C. J. Driscoll’s study reported using some sort of driver behavior management system.

In contrast, MiX includes a driver behavior management system standard in its fleet management solutions. According to Joselowitz, “A standard feature of our MiX FM range of products is in-cab driver notification which is effected through audible feedback to the driver in the event of a violation. We then offer increasing levels of sophistication where we add visual feedback as well such as with the Ribas and all the way up to color displays.”  Even though most of MiX’s clients opt for the standard offering, their results show it to be highly effective.

Although I do not have comprehensive data, the results of several studies provided to me by MiX seem to confirm that the ability to monitor real time driver performance often produces amazing safety improvements.  The results are impressive even in comparison to the results reported in the C.J. Driscoll study.  MiX shared results from several Middle Eastern clients that had reduced accidents between 50% and 95%.  Such reductions would almost certainly not be possible on the much safer roads of the US and Europe, but they are impressive anywhere.

Mix safety.pngReductions in Road Traffic Accidents and Rollovers by a Middle Eastern Oil and Gas company after implementing a MiX fleet management solution in 2009.

The graph above showing a client reducing road traffic accidents from 215 to 6 in three years is not an isolated example.  Several other studies showed clients reducing accidents and accident related costs between 50% and 95% after the adoption of MiX’s solution.

In terms of efficiency, MiX’s anecdotal evidence points to customers saving from a low of 5% to as much as 27% in fuel costs after the adoption of MiX’s solution.  Most of the clients who quantified their fuel savings had efficiency gains in the low teens.

Will Insurers Drive MRM Adoption?

Overall, I find the evidence that driver behavior management significantly reduces accidents quite compelling.  It may also improve fuel efficiency more than a basic fleet management solution, but it is the increased savings which should prove compelling to insurers.  Yet insurers are only beginning to pay attention.

According to Driscoll, insurance has not yet become a selling point for MRM providers despite the 31% of managers reporting receiving a discount.  Insurers who do give a discount are more interested in the fact that the fleet manager is using an MRM system than if that system includes driver behavior management.

In an article on Telematics Update, Christopher Carver, a former program manager for commercial insurance telematics at Liberty Mutual, was quoted as saying, “Commercial insurance is waking up to telematics.  Fuel efficiency is definitively linked to lower claims costs. Improved efficiency – driving fewer miles at less busy times – means [fleet operators] are a better bet for an insurance company.”

When insurers do wake up to telematics, I expect they will push for higher adoption of driver behavior management.  That in turn should benefit MiX, which has extensive experience with driver behavior management, and the data to prove its effectiveness.


Mix Telematics is a leader in the rapidly growing fleet management industry.  More importantly, it is already a leader in a number of trends which are likely to reshape the industry in the coming years: increasing globalization, growing focus on reducing fuel costs, and an insurance-driven focus on improving driver safety.  Its South African home base and experience with demanding multinational customers gives MiX a low cost base which is likely to serve it well in a highly competitive industry.

Because of its recent listing in the US, MIXT is much less familiar to Wall Street than US-based competitors such as FLTX.  This lack of familiarity is unlikely to last.  Neither is MIXT’s low relative valuation.

This article was first published on the author's blog, Green Stocks on February 26th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

December 28, 2013

The Pros Pick Three Green IT Stocks For 2014

Tom Konrad CFA

bigstock-green 2014.jpg
Green 2014 image via BigStock
Being green is not all about wind turbines and solar panels.  In fact, it’s usually greener to be smarter about using what we have than to replace it with something new, no matter how green.

My panel of professional green money managers understands this.  When I asked them each for their top three green stock picks for 2014, there were as many picks focused on smarter resource use as there were solar stocks.

I recently gave you their three green income stocks here, and I’ll write about their three solar picks in a future article.  Here are three companies that help us use resources more efficiently by applying information technology to better target the resources we have already.

Garvin Jabusch of Green Alpha Advisors

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Shelton Green Alpha  Fund (NEXTX), and the Sierra Club Green Alpha Portfolio.   His “smart” pick for 2014 is Digi International (NASD:DGII).

He says,

Digi is an interesting firm in the machine-to-machine (M2M) Internet space, and, as a smaller firm at only $300 million in market cap, I feel like it’s a little below the mainstream radar, and has yet to have its growth prospects (including takeover potential) be fully appreciated. The growth potential of M2M communications itself is appreciated though, with estimates that up to seven billion devices will be connected to the Internet by the end of next year, and that this “Internet of things” has realistic potential to transform most economic sectors by adding real-time efficiencies to almost any operation. In this sense, that we as a society can thus squeeze ever more economic output out of fewer economic inputs, M2M technology is also a key, innovative, driver of sustainability. M2M is beginning to bring efficiency gains to dozens of applications including connected cars, smart energy metering, building automation and smart cities, microgrid infrastructure, energy transmission efficiency, security, traffic management, inventory management, food production and many more. Looking forward, additional applications of M2M technology may encompass nearly every aspect of a modern economy. That macroeconomic picture is compelling.

Almost limitless applications means great growth potential. We’ve been aware of the potential of M2M for a while now, but this is the first year we’ve become confident enough to start expecting more robust growth as the underlying technology becomes more mainstream and ultimately indispensable. The two main drivers are the rise of cloud computing and the gains in both coverage and speed of the mobile internet, both cell network and satellite enabled.

On the value side, DGII is trading at slightly under three times cash and at (or just below) its book value. With no debt and EPS positive and guided to grow 61% in 2014 and 36% in 2015, DGII looks like a good intersection of growth and value.

Rafael Coven of The Cleantech Group

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)  Coven picked two companies that use information technology to make our economy smarter and more efficient, but he did not have much to say about them.  HE told me that he had to be careful about what he says in the lead up to rebalancing the Cleantech Index on December 24th.

His picks are Trimble Navigation Ltd. (NASD:TRMB) and MiX Telematics Limited (NYSE:MIXT and JSE:MIX).

MiX describes itself as “a leading global provider of fleet and mobile asset management solutions delivered as software as a service to customers in 112 countries. The company’s products and services provide enterprise fleets, small fleets and consumers with solutions for safety, efficiency and security.”  The company is green in that the information collected from vehicles helps drivers reduce fuel use, as well as increasing safety.  While it’s obviously green to save fuel, avoiding traffic accidents may be even greener, since the damage requires resources which we’d rather use elsewhere.

Trimble describes itself as “a leading provider of advanced location-based solutions that maximize productivity and enhance profitability. The Company integrates its positioning expertise in GPS, laser, optical and inertial technologies with application software, wireless communications, and services to provide complete commercial solutions.” Trimble serves agriculture, engineering and construction, transportation, and wireless communication industries.  By using location based technologies, all of these industries (and many others) can deliver material more precisely, reducing both waste and mistakes.  Trimble just announced the acquisition of a private agricultural information firm C3, which will allow the company to integrate more detailed and precise soil data into the solutions it provides to farmers and related industries.


Of all the picks I got from my panel, these three are the ones I’m most interested in adding to my own portfolio.  Reducing waste has long been a central theme of my own green stock portfolios, and these companies seem to be trading at fairly reasonable multiples of earnings.

Don’t be surprised if one or two appear in my own annual list of ten picks for 2014.

This article was first published on the author's blog, Green Stocks on December 18th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

November 10, 2013

Maxwell Technologies in the Balance

Tom Konrad CFA

Maxwell Logo

Will Chinese hybrid bus subsidies be renewed?  The answer will be crucial for Maxwell Technologies (NASD:MXWL) in the coming months.

I, and most analysts following ultra-capacitor manufacturer Maxwell Technologies, (NASD:MXWL) were considerably surprised at the strength of its third quarter earnings.  China had failed to renew subsidies for hybrid buses in the third quarter, and Chinese hybrid bus manufacturers have long been a significant part of Maxwell’s business.

Hybrid bus sales, even without subsidy, ended up better than I expected, accounting for 30% of Maxwell’s ultra-capacitor sales in the quarter.  Also helping results were strong ultra-capacitor sales to the wind industry (25%) and a large contribution from their distribution channel (22%.)

Going forward, sales from the distribution channel will be falling, as this is previously deferred revenue from Maxwell’s recent earnings restatement.  $3.9 million of deferred revenue remains in this channel, most of which is likely to be recognized in the fourth quarter, but significantly down from this quarter, when it amounted to $11.3 million.

China Hybrid Bus Subsidies

The big question mark for the fourth quarter is when and if Chinese hybrid bus subsidies are renewed.

This renewal has been expected for some time, but the Chinese government clearly marches to its own tune.  China did release its “New Energy Vehicle” subsidies in September, but these did not include subsidies for hybrid buses.  According to a 2009 World Bank report on electric vehicles [.pdf], New Energy Vehicles were previously defined as “vehicles that are partially or fully powered by electricity.”  But the new program includes only fully electric vehicles (EV)plug-in hybrid electric vehicles (PHEV), and Fuel Cell vehicles (FCV).

MXWL Q3 and projections.png
My estimates of Maxwell's revenues and earnings per share with and without renewal of Chinese hybrid bus subsidies.

Maxwell’s bus manufacturing customers expect that hybrid subsidies will be released separately.  The catch is, these subsidies have been expected for months, and the delay is leading many investors to question if they will be released at all.  As you can see in my projections above, the impact of subsidy renewal on Maxwell earnings and revenues is likely to be significant.  If the subsidies are not renewed soon, Maxwell’s management is predicting that total revenues could fall 30% ($16 million) in the fourth quarter, although approximately $7-8 million of that decline is likely to come from falling ultra-capacitor sales through the distribution channel.

While I don’t have any special insight into the Chinese government’s plans, the impetus for the new energy vehicle and hybrid subsidies is two-fold.  The goal is partly to combat China’s horrible urban pollution problem, and partly to foster Chinese leadership in what they consider an strategic industry.  When it comes to assessing the likelihood of renewal for the hybrid subsidy, cleaning up air pollution is likely to be helped more by hybrid subsidies than the existing PHEV subsidies alone.  On the other hand, when it comes to nurturing new industries, the current subsidies for PHEVs, EVs, and FCVs are likely to be more effective than a renewed subsidy for hybrids.

Hybrid subsidies are more effective at reducing pollution because hybrid vehicles are typically much more cost effective.  While each PHEV could reduce local pollution  twice as much as a hybrid would, some of that pollution reduction would simply be moved from the city where the bus is operating to the coal plant which generates its power.  Further, the incremental cost of a hybrid is a fraction of the incremental cost of a PHEV, so many hybrids could replace conventional buses for the same cost as a few PHEVs.

On the other hand, hybrid technology is fairly mature, and a foreign company (Maxwell) is the leading supplier of the crucial untra-capacitors for hybrid buses.  In contrast, PHEV buses will use a large number of batteries, and China has many leading battery manufacturers, meaning that China is more likely to favor subsidies (such as those for PHEVs) which help the battery industry than the ultra-capacitor industry.  Further, PHEV and EV technology is still developing, so China is likely to have an easier time becoming a leader.

With these countervailing forces, I find it impossible to predict when or if China’s hybrid subsidies will be renewed.  Given this uncertainty, I have closed out my short position in the stock.

Analyst Reaction

Several of Maxwell’s analysts are much more confident than I am that subsidies will be renewed.  Since the earnings announcement, Ardour Capital and UBS have both upgraded the stock from “Hold” to “Accumulate.”  I can’t imagine they would have made these upgrades if they did not expect hybrid subsidies to be announced soon.

It also may be that, if the analysts are more familiar with ultra-capacitor technology than hybrid vehicle and PHEV technology, they could expect that Chinese PHEV buses could go a long way to replacing lost revenue from Chinese hybrid buses.

Maxwel Technologies' Product Portfolio
The Difference Between Hybrids and PHEVs

In the quarterly conference call, Maxwell’s COO and interim CEO, John Warwick painted the PHEV bus opportunity with an optimistic brush.   To create the first generation of PHEV bus, Maxwell’s customers are “basically taking the diesel hybrid using ultra-capacitors and adding a battery power to it for propulsion for the first 30 plus kilometers.”  Hence, each first generation PHEV bus will use the same number of ultra-capacitors as a hybrid bus.

He did not discuss what the second generation might look like, most likely because they are likely to require fewer ultra-capacitors.  The reason hybrid buses use ultra-capacitors rather than batteries is because batteries have low power, but high energy capacity: While batteries can hold a lot of charge, they are not very good at delivering and accepting a large amount of charge in a short period.   The large mass of a bus means that much of the energy recovered while braking would be wasted if it had to be absorbed by a reasonably sized battery pack for a hybrid.

In contrast, ultra-capacitors have high power but low energy capacity.  They absorb and discharge electricity quickly, but can store very little of it.  This makes ultra-capacitors suitable for a hybrid bus, but not for a PHEV bus.  A PHEV needs to store a significant portion of its fuel as electricity so requires a large battery pack.

Although batteries have low power capacity on a unit basis, the large bank of batteries required by a hybrid bus will still be able to deliver and absorb a significant amount of power in a short time.  This means, as manufacturers seek to cut the cost without sacrificing the performance of future PHEV buses, it will be relatively easy to significantly reduce the number of ultra-capacitors per bus.  Depending on the type of batteries used, it’s quite possible that a PHEV bus will require no ultra-capacitors at all.  American start-up ePower has developed a hybrid drive-train suitable for class 8 diesel trucks using only lead-carbon batteries from Axion Power (OTC:AXPW.)  BAE Systems (LSE:BA) sells a hybrid bus drivetrain using only lithium-ion batteries.  Allison Transmissions (NYSE:ALSN) has been selling hybrid bus drivetrains since 2003 using nickel-metal hydride batteries.  If ePower, BAE, and Allison do not need ultra-capacitors to make a bus-sized hybrid work, surely Chinese companies can do the same with a PHEV bus.

One other reason PHEV buses are unlikely to replace hybrid buses for Maxwell is simply the size of the market.  Given the higher cost of PHEV buses arising from the large battery pack, fewer PHEVs are likely to be sold, even under the new subsidy regime.


If Chinese hybrid bus subsidies are renewed in the near future, I expect Maxwell’s stock to rise rapidly because of its much improved near term prospects.  While I’m far from certain that this will happen soon, if ever, I feel the chance is significant.  Therefore, I decided to close my short position in the stock.

Going forward, the very real possibility of no hybrid subsidy renewal makes me unwilling to recommend the stock, either. If I were to have any position, it would be to bet on a big move in one direction or the other with long calls or puts.

This article was first published on the author's blog, Green Stocks on October 31st.

DISCLOSURE: No Position.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 22, 2013

Two Exciting Alternative Energy Themes For Summer

By Harris Roen

Summer is here, and the sun has been shining on alternative energy.

Two investment themes in the changing alternative energy landscape have emerged as potential profit centers for investors. To take advantage of these trends, the Roen Financial Report has added in four new companies to the list of about 250 alternative energy companies that we track for our readers.

solar energy iconInvestment Theme #1: The growing domestic Japanese solar market

In the wake of the Fukushima nuclear disaster, Japan has committed to growing renewables as a domestic energy source. According to Mercom Capital Group, Japan has already had a 73% quarter-over-quarter growth rate in solar cell shipments, and a massive 343% year-over-year growth. The two companies below are promising plays in this area.

Kyocera Corp. ADR (KYO)

Kyocera is a Japanese electronics company with a wide range of products, including solar and energy management systems. This profitable company is likely set to benefit from the acceleration in domestic Japanese solar installations.

Sharp Corp. ADR (SHCAY)

Sharp is a large Japanese consumer electronics company that has been in the solar business for over 50 years. Its stock price has been struggling as a result of poor earnings reports, but like Kyocera, Sharp should benefit from growth in domestic Japanese solar.

alt fuels iconInvestment Theme #2: Alternative Fuel Engines.

Engineers have been developing and building the next generation of engines that decrease U.S. dependency on foreign oil while reducing greenhouse gas emissions. These latest alternative fuel engines are far more efficient and far less polluting. Importantly, they also cut back on transportation costs. The two companies below are key players in this area.

Cummins Inc. (CMI)

Cummins is a large Indiana-based engine manufacturer whose products include energy efficient diesel engines and low emission natural gas engines. It has a reasonable PE, but its stock looks overpriced at these levels.

Power Solutions International (PSIX)

Power Solutions is a “pure play” company that produces power systems that run on alternative fuels such as natural gas, propane biogas and electric, as well as hybrid technologies. Despite the fact that its stock has doubled in price in the last year, Power Solutions shows excellent sales growth and is likely to continue its uptrend from here.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at


Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.

March 25, 2013

Betting on Alternative Fueling at Clean Energy Fuels

by Debra Fiakas CFA


Clean Energy Fuels
(CLNE:  Nasdaq) is building a nationwide network of natural gas stations for fleet vehicles.  The company supplies compressed natural gas (CNG) fuel for light, medium, and heavy-duty vehicles; and liquefied natural gas (LNG) fuel for medium and heavy-duty vehicles.  While there is a growing number of fleet owners that have invested in natural gas vehicles, Clean Energy has yet to reach the critical mass needed to reach profitability.  The company claimed 650 fleet owners as customers with over 30,000 vehicles in operation.

Clean Energy reported $334 million in total sales in the year 2012, compared to $292.7 million the prior year.  The represents 14.1% year-over-year growth, which is not a bad showing given the state of the U.S. economy.  Unfortunately, the net loss widened in 2012.   First of all, the profit margin slipped to 24% and higher general and administrative expenses served as an additional drag.

What has really been a problem for Clean Energy Fuels is the slow pace of natural gas vehicles by fleet owners.  Engines burning natural gas cost substantially more than gas or diesel engines.  Even with the lower cost of natural gas, truck owners claim the return on investment is too long.

Earlier this week Clean Energy and its partner Westport Innovations (WPRT:  Nasdaq) announced a new program to encourage natural gas vehicle purchases.  The two companies have agreed to bundle the Westport Liquified Natural Gas System and a Clean Energy long-term fuel contract.  The package of rebates and discounts should deliver the kind of savings that will accelerate return on investment for truck owners.

If the program is successful in winning converts to natural gas, Clean Energy will open additional natural gas distribution points.  Indicated demand of 30,000 gallons or more is necessary to support regional fueling stations.  Clean Energy has 60 new stations planned for the expansion that will be added to the 348 natural gas fueling stations it had in operation at the end of 2012.

CLNE has been trading in a range the last few months, held back by a solid line of resistance at the $14.50 price level.  Fortunately, there appears to be a strong level of support near $12.00 per share.  If the sales and marketing program with Westport draws new customers at a faster pace, CLNE will certainly look more attractive despite the recent losses.  Recent trading sessions suggest that is an element of upward momentum in the stock that could propel the price to the $18.50 level.  Management’s report on the first quarter 2013 will certainly included at some news on special offer and that could be enough to pierce the price ceiling near $14.50.

Photo: Clean Energy Fuels CNG Fueling Station with CNG buses via Wikimedia Commons by Jennagraber.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

March 02, 2013

BYD Profit Sputters

Doug Young

byd logo The number 94 seems to have special meaning for BYD (HKEx: 1211; 002594; OTC:BYDDF), the struggling car maker backed by billionaire investor Warren Buffett, which has just reported some preliminary data that show its profit last year fell 94 percent as it failed reverse its sharp decline of the last 2 years. But perhaps more alarming, this new data show the company's operations fell into the loss column in the last 3 months of 2012, even though it technically remained profitable overall due to strong government support. That means that 2013 could continue to be a difficult year for the company, which could start reporting some net losses as it struggles to regain its footing in China's competitive car market.

When I first looked at the newly issued report, the 94 percent profit drop in 2012 actually looked slightly encouraging. (earnings announcement) That's because BYD also reported a 94 percent drop in its third quarter profit and a 94 percent drop for profit in the first 9 months of the year, meaning the fourth-quarter profit also fell by 94 percent. Such massive drops certainly aren't anything to be proud of, but at least they show some stability and didn't get worse over the year.

But a closer look at this new data reveals that BYD's posted an operating loss for the year of 320 million yuan, or about $50 million. That loss contrasts sharply with the 33 million yuan yuan operating profit in the first 9 months of the year, meaning BYD's operations slipped sharply into the red in the fourth quarter with a 350 million yuan operating loss.

I suspect the only reason that BYD managed to post a net profit in the fourth quarter and for all 2012 was because it receives generous support from Beijing and its local government in the southern city of Shenzhen, which are both strong backers of its campaign to develop green energy cars and buses.

In one of the few slightly encouraging signs, BYD said the rapid deterioration in its operating profit was due to weakness in its solar energy business, as well as its older cellphone component business. By comparison, it said business at its car unit was stable as it introduced some promising new models to the market.

So, what kind of conclusions can an observer bring away from all of this? The answer is probably that BYD will continue to struggle for the forseeable future, probably at least the next couple of years. Its newer models appear to be gaining some traction, so perhaps we could see some improvement in its car sales after 2 years of sharp declines. But the solar business will continue to struggle, and stiff competition in the cellphone space will also continue to hurt that part of the business.

The biggest factor to watch will be the company's electric vehicle (EV) program that is both its biggest asset and its biggest liability due to the uncertainty of the future of alternative energy vehicles. After trying unsuccessfully to promote its EVs to general consumers, BYD has shifted to a strategy of targeting big buyers, mostly local governments, with pilot programs for its electric taxis and buses.

Many of those programs have just begun over the last year, so we should see later this year if the buyers like the product and start to expand their EV fleets. New EV orders by existing customers will be an encouraging sign if they come, but it will still probably be at least 2 years before EV sales make a meaningful contribution to BYD's business. In the meantime, look for the company to struggle, and for its stock to stagnate until it has some more positive news for investors.

Bottom line: BYD will continue to struggle for the next 2 years and could even fall into the loss column, as its traditional businesses stagnate and its EV program tries to gain traction.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

January 07, 2013

The Next Zipcar

By Jeff Siegel

Well, I was partly right..zipcar_header_logo[1].png

Last year I wrote the following about the car sharing company Zipcar (NASDAQ: ZIP):

... because Hertz and Enterprise are foaming at the mouth to tap the car sharing market, I wouldn't be surprised if one or both eventually made a bid for ZIP in a couple of years. Either way, I don't think Zipcar is under any serious threat in the near-term, and I may be looking to pick some up on dips.”

When I got to the office on Wednesday morning, I read the following headline:

Avis buying Zipcar in deal worth nearly $500 Million

OK, so I didn't nail it on which rental car behemoth would eventually acquire Zipcar — but I knew Zipcar was an early leader in a market that's destined to grow dramatically going forward, and that it was a prime target for acquisition.

Millennial Money

About six months ago, a new study was released that suggested Millennials (those born sometime between the early 1980s and the mid 2000s), had become so neutral about driving that they were starting to represent one of the many factors behind slower auto sales growth.

That particular study followed a similar survey conducted by Deloitte in 2010 which found Millennials have different attitudes towards cars (different from those shared by many generations prior), and are more likely to take public transportation, bike, walk, or utilize car sharing services like car2go and Zipcar.

If you're a regular readers of these pages, you know I've been quite bullish on the car sharing market since around 2006, and I continue to believe this is a powerful new industry with a lot of robust growth ahead of it.

In fact, a Frost and Sullivan report found that car sharing networks increased 117% between 2007 and 2009 in North America. And within five years, 4.4 million people in North America and 5.5 million people in Europe are expected to sign up for car sharing services.

Of course, I'm not suggesting car sharing services will have a massive impact on individual car sales anytime soon, if ever... although it is likely that car manufacturers offering superior fuel economy will continue to find additional buyers in car sharing companies.

The Next Zipcar

Because gas is often included with car sharing memberships, these services tend to seek out high-mpg vehicles. And increasingly, we're seeing these services focus their attention on hybrids and electric cars.

The latter made quite a spark back in March after Daimler's car2go registered 6,000 members for its electric car sharing program. Zipcar also placed some Toyota Plug-in Priuses in its Boston fleet, and recently introduced a few Chevy Volts in Chicago.

On the hybrid side, Zipcar currently has a ton of Honda Insights in its fleets, though I wouldn't be surprised to see a shift to the Prius or Ford hybrid models, now that Avis is behind the wheel. Avis currently rents the Toyota Prius and eight different Ford models. It also has no Hondas in its rental offerings.

But getting back to the recent Zipcar deal...

Avis agreed to to pay $12.25 per share to acquire the company.

That's almost a 50% premium to Zipcar's closing price the day before the deal was announced!

Those who picked up shares of ZIP near the bottom, which was around $6.00, are now sitting on gains in excess of 104%. Talk about a knockout score — and one of the fastest doubles I've ever seen inside of two months.

Not surprisingly, investors are now looking for the next Zipcar...

But unfortunately, there are none to be found. Zipcar was the only pure play on car sharing, and I don't expect to see another one again.

Zipcar boasted the lion's share of this market before the Avis deal. Now it's simply going to be unstoppable.

To a new way of life and a new generation of wealth...

To a new way of life and a new generation of wealth...


Jeff Siegel is Editor of Energy and Capital, where this article was first published.

December 16, 2012

Zoltek: High in Fiber, Low in Valuation

by Debra Fiakas CFA
  The Stohr DSR has an all carbon fiber body (Photo credit: Rhots/Wikimedia Commons)
Zoltek Companies (ZOLT:  Nasdaq) is in the business of fibers, mostly carbon fibers.  Plain, simple fibers may not seem very impressive.  However, Zoltek’s carbon fibers are in wide demand for renewable energy applications such as wind turbines blades and deep sea oil and gas wells.  After two years swimming in red ink, Zoltek has managed to bring sales back up to 2008 levels.  The company earned $22.9 million in net income on $186.3 million in total sales in the fiscal year ending September 2012.  During the same period Zoltek cleared 9.3% of total sales as operating cash flow.

Analysts are expecting modest growth in the next fiscal year.  The consensus estimate is $0.69 on $189 million in total sales in fiscal year 2013.  The estimate has remained unchanged in the most recent weeks, even though Graftek failed to meet earnings expectations for the September 2012 quarter.

Zoltek’s management is a bit more enthusiastic about its future.  That is because the carbon content of durable goods is rising at a fast pace  -  so fast some manufacturers are concerned about a shortage of carbon fibers in the future.  For example, aircraft are adopting carbon composites for floors, luggage bins and even seats as a means to reduce overall aircraft weight.  Boeing’s Dreamliner 787 is the first large-scale commercial aircraft made using 50% composite materials including plastics and carbon fiber.

The company has been working on new technologies for cutting and milling carbon fibers to facilitate mixing carbon fibers with thermoplastics.  Such plastics are now used in electronics such as computer hard drives and printers.  Lacing the thermoplastic with carbon would add durability and extend the range of potential applications. Most likely new markets would be automotive and aerospace.

Zoltek has spent $23.8 million or 5% of sales on research and development efforts over the past three years.  Indeed, R&D has taken on added visibility over the past couple of years with the central effort carried out at the company’s plant in St. Peters, Missouri.  Much of the effort is aimed at improving production processes, but management is also keen on finding new ways to use carbon.

The automotive industry figures prominently in Zoltek’s growth plans.  In 2010, the company formed a new subsidiary, Zoltek Automotive, to help facilitate the adoption of carbon materials in cars and trucks.  Tesla Motors (TSLA:  Nasdaq) already uses Zoltek fibers for its electric sports cars.

Zoltek can afford to move aggressively on market opportunities.  At the end of September 2012, there was $29.9 million in cash on its balance sheet.  Debt totaled $27.1 million, but the debt to equity ratio is a modest 0.09.

We have added Zoltek to the Materials Group in our Mothers of Invention Index for innovators in energy, efficiency and conservation.  The stock trades at 11.1 times forward earnings, which looks like a bargain for a well-capitalized company that appears poised to offering significantly higher growth.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

December 06, 2012

ePower’s Series Hybrid Electric Drive – Unmatched Fuel Economy for Heavy Trucks

John Petersen

Over the last couple weeks there’s been a lot of message board chatter about ePower Engine Systems, a transportation technology company that has selected the PbC® battery from Axion Power International (AXPW) for its series hybrid electric drivetrain for over-the-road freight haulers who drive heavy Class 8 tractors. Since I introduced ePower to Axion and have tracked their progress for a couple years, I called ePower’s CEO Andy Claypole to ask his permission to share what I’ve learned about ePower’s hybrid electric drivetrain.

12.6.12 Tractor.png

After a series of phone calls and e-mails, Andy graciously sent me a technical presentation on ePower's series hybrid drive and gave me permission to share the presentation with readers and discuss ePower and its technology in greater detail. Click here to download a copy of ePower's presentation.

ePower Engine Systems LLC is a closely-held advanced transportation technology developer that’s using inexpensive off-the-shelf components to bring series electric drive, the mainstay of the nation’s rail transportation system, to highway transportation. Their goal is to narrow the fuel efficiency gap between 480 ton miles per gallon for railroads and 110 ton miles per gallon for heavy trucks.

In a truck with series electric drive, there is no mechanical connection between the engine and the wheels. Instead, the engine powers a generator and electricity from the generator powers an electric drive motor. This configuration maximizes fuel efficiency by running the engine at its optimal RPM and eliminates the need for complex heavy truck transmissions while delivering the instantaneous peak torque of an electric motor.

In furtherance of their goal to maximize fuel efficiency, ePower takes series electric drive a step further by sizing the generator for steady vehicle state operations at highway speed and using an array of 52 PbC batteries to provide additional power for acceleration and hill climbing, and increased energy savings from regenerative braking. The ePower drivetrain is a true series hybrid electric drive and a first for the trucking industry. The design is suboptimal for mountainous routes with substantial elevation changes, but it’s extremely efficient in flatter terrain.

12.6.12 Schematic.png

While a typical Class 8 tractor operating in the US with an 80,000 pound gross vehicle weight achieves fuel economy in the 5.2 mpg range, the same truck with an ePower system will deliver fuel economy of 10 to 14 mpg, values that crush the DOE’s 2018 SuperTruck target of 6.8 mpg for conventional heavy trucks. It works out to an annual fuel savings of roughly 11,500 gallons per vehicle.

During the startup phase, ePower has focused on the retrofit market because around 37% of the 2.7 million trucks in the US-fleet are more than five but less than twelve years old. These trucks have outlived their original drivetrain warranties and are often less efficient than newer trucks, but they have substantial remaining useful life in their chassis, bodies and other components.

The cost of converting a tractor with a conventional diesel drivetrain to a series hybrid electric drivetrain is approximately $70,000 (batteries included) and ePower believes its retrofits will pay for themselves through fuel savings alone in 18 to 24 months.

Currently, ePower is doing all required retrofit work in its own facility. Once its system is fully developed and proven, ePower intends to provide the necessary conversion components in kit form for sale to certified installers including fleet operators and other service entities. It also hopes to license its technologies and systems upstream into the OEM market.

ePower’s original design used absorbed glass mat, or AGM, batteries to provide acceleration and hill climbing boost. Unfortunately, the AGM batteries were poorly suited to long-string use and ePower was not satisfied with the frequency of battery failures. The AGM batteries also tended to degrade rapidly, which impaired acceleration and hill climbing boost while diminishing the efficiency of regenerative braking systems. ePower believes the long-string behavior and high dynamic charge acceptance of Axion’s PbC battery will overcome both of these challenges.

The PbC batteries were delivered to ePower in mid-November and installed in swappable battery boxes that will give ePower the ability to switch back and forth between the old AGM batteries and the new PbC batteries in a couple of hours. During the first week in December, ePower plans to conduct a series of benchmarking tests to compare the on-road performance of the two battery systems in the same vehicle. It will then devote the rest of December to a road show for potential customers. In early January, the first PbC powered truck will be delivered to ePower’s customer and a second AGM powered truck will be brought back into the shop for a PbC upgrade.

I believe the ePower system is intriguing for several reasons. Firstly, it’s a frontal assault on fuel costs, the biggest expense burden in the trucking industry. Secondly, ePower’s initial marketing efforts are directed at medium to large fleet operators who are more inclined to assume the risk of testing an idea in real world conditions instead of devoting years to laboratory work. Thirdly, the ePower system is an extremely efficient use of batteries. Finally, it doesn’t take much market penetration in a million-unit fleet to represent a substantial revenue base for ePower and Axion.

If results from ePower’s prototype demonstrations are favorable, there is a significant likelihood that several large freight operators will purchase multiple retrofits for similar testing programs to determine where series hybrid electric drivetrain would fit into their operations. ePower’s series hybrid electric drive system is not a silver bullet solution for all truckers and all routes, but the economics can be very compelling for firms with established routes and schedules where a series hybrid electric drivetrain can do the required work at a lower cost.

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

November 18, 2012

Axion Power – A Battery Manufacturer Charging Forward

John Petersen

Last week Debra Fiakas of Crystal Equity Research published an article titled "No Battery Producer Left Behind" that was based on old information about the relationship between Exide Technologies (XIDE) and Axion Power International (AXPW) and reached several erroneous conclusions. Since I'm a former Axion director, the stock is my biggest holding and I follow the company like a hawk, Tom Konrad asked me to clarify the record and present a high level overview of Axion's business history, stock market dynamics and technical accomplishments over the last four years.

Since Tom's request is a tall order, the article will run longer than usual, but it will tie together several themes I've discussed in the past.

Axion's price chart since September 2009 has been a vision from investor hell. However, I believe the market performance is 180 degrees out of synch with technical and business realities. I've been an Axion stockholder for nine years and my average cost per share is in the $1.25 range, but I've never felt better about my risk-reward profile than I do today.

11.18.12 AXPW Price.png

Business History

Axion was organized in September 2003 for the purpose of conducting basic research and development on a new lead-carbon battery technology. Axion's PbC® battery is a third generation lead-acid battery that eliminates the primary cause of lead-acid battery failure, the rapid accumulation of lead sulfate crystals on the negative electrodes. It does this by replacing the lead-based negative electrodes with carbon electrode assemblies. The PbC battery is basically a hybrid device that's half lead-acid battery and half supercapacitor. It has a number of unique performance characteristics, including:
  • Lower energy density (±25% to 40%) because carbon stores fewer ions than lead;
  • Five to ten times the cycle life because carbon electrodes eliminate sulfation;
  • Ten to twenty times the charge acceptance because carbon electrodes act like supercapacitors; and
  • Self-equalization in long battery strings that reduces the need for complex battery management systems.

Unlike most R&D companies, Axion went public at a very early stage because there were several groups that claimed partial interests in the technology and the only way to consolidate ownership was in a publicly held entity. Like most R&D projects, expectations were high at the outset but faded over time as the challenges of developing a completely new battery technology and proving its value to cautious and skeptical users became clear. The process took far longer than we thought it would, but the market potential turned out to be far greater we originally anticipated.

From 2003 through the spring of 2009, Axion's R&D efforts focused on optimizing the performance of its materials and components, designing an electrode assembly that could be used as a plug-and-play replacement for the conventional lead based electrodes used in battery plants around the world, developing automated manufacturing methods for the electrode assemblies and characterizing the performance of manufactured pre-commercial prototypes.

The first clear sign of R&D success arrived in April 2009 when Axion entered into a multi-year global supply relationship with Exide. The second and more convincing sign of R&D success arrived in August 2009 when the Department of Energy awarded a $34.3 million ARRA battery manufacturing grant to "Exide Technologies with Axion Power International" for the purpose of producing "advanced lead-acid batteries, using lead-carbon electrodes for micro and mild hybrid applications."

The market reacted well to both events and in August 2009, Axion's stock price peaked at $2.75 per share while its market capitalization peaked at $97 million. It's been a long downhill slide ever since.

Axion's relationship with Exide was always complicated because of size disparities. As an R&D company Axion ran a tight ship and in April 2009 it had $8.4 million in assets, $6.1 million in equity and  $1.8 million in annual revenue. Exide, in comparison, had $1.9 billion in assets, $326 million in equity and $3.3 billion in annual revenue. The ARRA grant made a complicated relationship more difficult because Exide didn't want to share the grant proceeds without extracting a pound of flesh and Axion believed its technology was the fundamental justification for the DOE's decision. By the summer of 2010 it was clear that Axion and Exide had different visions and would be following different paths. Current relations between the two companies are competitively cooperative, but far from close.

Stock Market Dynamics

While Axion's technical prospects were bright in the fall of 2009, its financial condition was grim. In its Form 10-Q for the period ended September 30, 2009, Axion reported $283,000 in working capital and $3.6 million in adjusted net assets. With the equity markets still reeling from the impact of the 2008 crash, there was substantial doubt about Axion's ability to survive another quarter. Those uncertainties persisted until late December when Axion announced a $26.1 million private placement of common stock that saved it from imminent collapse and gave it a sound financial footing for the first time in its corporate history. Axion's 10-day moving average price was $1.65 before the offering and the deal was priced at $0.57, a painful 65% discount. The deal terms were hard, but they weren't unfair for a private placement transaction of that magnitude.

I was thrilled when the 2009 private placement came together because 70% of the stock was bought by four big investors who each acquired blocks that were roughly equal to Axion's total reported trading volume for 2009. When one big investor takes 70% of a deal, you need to worry about the stock flowing back into the market. When four big investors split 70% of a deal and they each buy blocks that represent a full year's trading volume, it's generally safe to assume that they're swinging for the fences and the shares won't flow back into the market for years. Unfortunately, things didn't quite work out according to plan.

The market reacted reasonably to the 2009 private placement and during the month immediately following the offering, the price drifted down into the $1.15 range. Based on my prior experience with substantial private placements by public companies, it looked like the market was reacting normally and the retail price for liquid thousand-share blocks would stabilize at roughly twice the placement price for illiquid million-share blocks.

Axion's market dynamic started to get ugly in late-April and early-May when liquidation trustees for two legacy stockholders that held a combined total of 3.5 million shares started to aggressively compete for buyers by dropping the offering price in a market that traded about 45,000 shares a day. By mid-July, the stock price had fallen by 50% while the average daily volume doubled. That price decline spooked other stockholders and increased the selling pressure, which drove the stock price to new lows. The extraordinary selling pressure continued in 2011 and 2012 as one large stockholder after another began to liquidate their positions for reasons ranging from secondary repercussions of the 2008 crash, to fund management changes and even an accidental death. As a result, the annual trading volume progression over the last four years was:

Calendar 2009
7.2 million shares
Calendar 2010
22.0 million shares
Calendar 2011
77.7 million shares
2012 to Date
76.6 million shares

Axion may have been a very illiquid stock that traded by appointment in 2009, but it has developed a solid liquidity base over the last three years. More importantly, information from SEC reports filed by certain large holders combined with daily short sales data published by FINRA has left me highly confident that substantially all of the Axion shares that were previously held by large stockholders who wanted to sell have been absorbed by retail investors who did their homework, climbed their personal walls of worry and accumulated shares despite Axion's dismal market performance. While market activity over the last three years has been dominated by a few large holders that were willing to sell at any price, I believe the future market will be dominated by a large number of retail investors who were greedy when others were fearful and bought Axion's stock based on the fundamental economic potential of the PbC technology.

Technical Accomplishments

Axion's basic research and development work on the PbC technology was substantially complete by the end of 2009. It had advanced the PbC technology from a glorified science fair project to a manufactured pre-commercial prototype that was suitable for delivery to potential customers who wanted to conduct their own testing and determine whether the PbC battery suited their needs. Axion used a portion of the proceeds from the 2009 offering to build a fully automated second generation production line for its carbon electrode assemblies and upgrade its principal manufacturing facility, but most of the proceeds were used to support customer testing activities and pay for a variety of demonstration projects in the new evolving markets summarized below.

Automotive Idle Elimination Systems In response to new emissions control and fuel economy regulations, the auto industry is in the midst of a fuel economy renaissance. The world's automakers are all implementing proven fuel economy technologies at a torrid pace on a fleet-wide basis. One of the most cost-effective fuel economy systems available to automakers is also one of the most sensible – turn the engine off while a car is stopped in traffic and restart it automatically when the driver takes his foot off the brake. Depending on the manufacturer, these stop-start or micro-hybrid systems improve fuel economy by 5% to 15% for a few hundred dollars in incremental cost.

The biggest challenge of idle elimination is that powering accessories during engine off periods and restarting the engine when the light changes puts tremendous strain on the battery and today's best starter batteries simply aren't up to the task. The batteries begin to degrade as soon as they're placed in service and within a few months a car that turned the engine off at every light when it was new can only turn the engine off once or twice during a commute. Idle elimination systems that don't function properly because of weak batteries can't save fuel.

In the summer of 2009 Axion began quietly working with BMW, which wanted to test the PbC battery for possible use in its mainline vehicles with the EfficientDynamics fuel economy package. The first 15 months of testing were conducted in deep secrecy. Axion's stockholders didn't learn about the existence of the BMW relationship until September 2010 when Axion and BMW jointly presented the preliminary results of their testing at the European Lead Battery Conference in Istanbul.

The following graph is an updated and annotated version of the graphs Axion and BMW used in 2010 to show the superiority of the PbC battery in a stop-start duty cycle. They grey lines relate to the left-hand axis and show changes in the dynamic charge acceptance of the batteries as they age. The black lines relate to the right hand axis and show the amount of time the batteries needed to recover from one engine off event in preparation for the next engine off opportunity. As you look at the graphs, it's important to remember that:
  • The "Charge Time" scale for the AGM graph is 10x the scale for the PbC, and
  • The "Equivalent Drive Time" scale for the AGM is stated in months while the PbC scale is stated in years.
11.18.12 PbC v AGM.png

BMW completed its laboratory and vehicle testing of the PbC this summer and was pleased enough with the results that it hired an independent testing organization to confirm them. If the confirmation testing is successful, Axion believes the next logical step will be fleet testing to demonstrate the PbC's performance in a variety of climate and traffic conditions. Based on the stellar results BMW obtained during its three-year testing and validation program, several other automakers have skipped the preliminaries and gone directly to advanced testing of the PbC for their idle elimination systems.

While US automakers are just beginning to implement idle elimination systems, industry consensus holds that the technology will be used in 34 million vehicles a year by 2015 and substantially all internal combustion engines by 2020.

Battery-Powered Locomotives
Freight and passenger railroads in the US use roughly 3.7 billion gallons of diesel fuel per year, which gives them a huge incentive to reduce their operating costs by using fuel more efficiently. Moreover, like other transportation sectors, the railroads are subject to increasingly stringent emissions regulations, particularly for rail yards in urban areas. In 2007 Norfolk Southern (NSC) launched an ambitious program to develop a battery-powered locomotive that could be used as a switcher in urban rail yards, or combined with conventional locomotives to create a hybrid train that would use battery power to augment the conventional locomotives during acceleration and hill climbing and recover a portion of the energy that's currently wasted in braking and downhill grades. Since NS used 476.6 million gallons of diesel fuel in 2011, it believes the potential economic and environmental benefits of battery-powered locomotives are extremely attractive.

In September 2009, NS introduced its first battery-powered switching locomotive, the NS 999. While the early demonstrations showed that the NS 999 could do the required work, the AGM batteries they selected for the locomotive were not able to withstand the tremendous regenerative braking loads of a switching locomotive. When the original batteries quickly failed, NS began its search for a better energy storage alternative. After discretely testing hydrogen fuel cells and nickel metal hydride, lithium iron phosphate, sodium beta and a variety of lead-acid batteries, NS decided that Axion's PbC battery was best suited to its particular needs. Axion announced the initiation of a development relationship with NS in June 2010.

Over a period of two years, NS conducted a grueling sequence of performance tests using its in-house development staff, Penn State University and Axion to obtain double redundant results. In addition to showing that the PbC could handle the regenerative braking loads from a battery-powered locomotive, the testing program also explained why the first generation prototype failed.

Whenever conventional batteries are connected in series, the resulting battery string is only as strong as its weakest link and as the string ages the differences between batteries get harder to control. Unlike all other batteries, strings of PbC batteries tend to self-equalize over time because of their unique charging behavior. The following graph highlights the differences between the long-string performance of conventional AGM batteries and Axion's PbC batteries.

11.18.12 String Behavior.png

In April of this year, NS ordered $475,000 of PbC batteries for their planned rebuild of the NS 999. Their goal is to have the locomotive working this winter. Upon completion of the NS 999 rebuild, NS plans to build a larger six-axle locomotive for testing in long haul hybrid train applications. If the two planned prototypes perform as expected, the next logical step will be statistically valid fleet testing throughout the NS system. Norfolk Southern's locomotive fleet includes 240 switching and auxiliary units and 3,900 multipurpose units. Collectively, the nation's Class I railroads operate a total of 23,500 locomotives.

Stationary Storage Products In November 2011 Axion commissioned its PowerCube stationary energy storage system. While stockholders knew that the product was being developed, they didn't know that Axion, in cooperation with Viridity Energy, had taken all necessary actions to qualify the PowerCube as a behind the meter frequency regulation resource in the PJM Interconnection, the regional transmission organization for Pennsylvania and twelve other States. In September 2012, Axion unveiled a small version of the PowerCube for residential and small commercial customers.

Over the last couple years grid-based energy storage has become a hot topic and most battery manufacturers are launching products for utilities, renewable power producers and commercial and residential power users. It's an intensely competitive market where the principal differentiators are likely to be reliability, total cost of ownership and customer service. Axion's stationary storage systems perform well and respond in milliseconds, but they don't necessarily perform better than products from Axion's competitors. The self-equalizing behavior of PbC batteries in long string applications should be as attractive in stationary systems as it is in rail applications.

As near as I can tell the key features that will differentiate Axion's products are low maintenance and user-centric design. Axion developed the PowerCube in cooperation with Viridity with the primary goal of maximizing the economic benefit to commercial users who want to reduce their power costs while avoiding costly interruptions. Similarly, Axion developed its residential PowerHUB in cooperation with Rosewater Energy with the primary goal of optimizing performance and minimizing maintenance for small-commercial and high-end residential customers who need reliable, stable and clean power for their sophisticated security, entertainment, climate control and other electronic systems.

Trucking Industry Products In October of this year, Axion made a presentation at the SAE's Commercial Vehicle Congress in Chicago that outlined its plans to introduce specialty products for the trucking industry. The first planned product will be battery systems for the auxiliary power units that are quickly becoming industry standards as most states adopt laws and regulations to restrict idling while trucks are parked for driver rest periods. To date, industry experience has shown that AGM batteries fail quickly in APUs and a better solution is needed. Axion's SAE presentation used this graph to highlight the performance differences between AGM batteries and PbC batteries over a six-month period in a simulated APU duty cycle.

11.18.12 PbC APU.png

The primary target-market for APU battery systems is the 650,000 heavy-duty trucks that haul the nation's freight. In 2006, the average long-haul truck idled for 6 hours per day and total national fuel consumption in idling trucks was estimated at 665 million gallons, or a little over 1,000 gallons per truck. Fuel costs alone make four-battery APUs a compelling economic proposition.

In its SAE presentation Axion said that it planned to begin field testing of PbC-based APU systems by 2013, which suggests that a formal announcement of the testing program and its development partner will be made in the next few weeks. Since the SAE presentation used Freightliner's ParkSmart™ System as an example of the target market, I think there's a pretty good chance that Freightliner will be the development partner.

A second trucking initiative Axion briefly discussed in their last conference call was the shipment of 52 PbC batteries for a prototype Class 8 tractor that combines a small diesel engine with a series hybrid drive to deliver fuel economy in the 12 to 14 mpg range, as opposed to the 5 to 6 mpg performance that's currently prevalent in the industry. Preliminary test data from this project is expected this year.

Risks and Uncertainties

Production Capacity Axion's electrode fabrication line was designed to produce enough electrodes for about 150 batteries per shift. While Axion has not disclosed its cost of building and installing the production line, news stories and financial statement disclosures lead me to believe an estimated cost of $3 million per line is reasonable. By the time you account for efficiency differences in a multi-shift operation, I'd estimate the maximum capacity of the single electrode fabrication line at 350 batteries per day, which is adequate to support testing and evaluation activities, but inadequate for commercial sales. When demand for PbC batteries increases, Axion will need up to $50 million in additional capital to expand its electrode fabrication capacity from 350 to 3,500 PbC batteries per day.

Production Costs Axion's electrode fabrication capacity is very limited, which means that it has no significant negotiating power with suppliers and the fixed costs of its electrode fabrication facility are spread over a small number of units. In combination, these factors make current versions of the PbC objectively expensive. I've done some back of the napkin calculations on the bill of materials for a PbC battery and compared those numbers with the bill of materials for an AGM battery. The bottom line is basically a wash when you substitute ounces of expensive carbon for pounds of cheaper lead. Once demand for PbC batteries ramps, Axion should enjoy a stronger bargaining position with suppliers and derive substantial savings from the more efficient utilization of its physical plant. Additionally, the current electrode fabrication line is a second-generation version. As Axion works its way down the normal learning curve for manufacturing enterprises, additional cost savings are almost certain to arise. While management has scrupulously avoided making promises about future cost reductions, the opportunities for real and substantial economies of scale cannot be overlooked.

Anticipated Financing At September 30th, Axion had $4.2 million in cash, $6.8 million in working capital and $13.3 million in stockholders equity. It will require additional operating capital by the end of Q1-2013. Axion's Form 10-Q disclosed that management is currently seeking additional capital from sources that are in alignment with its business objectives and long term strategy. During the recent conference call, the CEO explained that the next financing transaction would probably be a 2013 event and disclosed that the investors who provided $8.6 million of additional capital in February of this year are willing to participate in another round if an appropriate strategic partner is not identified. Since the terms of a future offering will not be negotiated until immediately prior to closing, they're a significant uncertainty.

Investment Conclusions

In a normal case I would have expected Axion's stock price to stabilize in the $1.15 range after the 2009 offering. I would also have expected the price to slowly appreciate from that base level in response to the following significant technical accomplishments:
  • The June 2010 announcement of a relationship with Norfolk Southern;
  • The September 2010 announcement of a relationship with BMW;
  • The November 2011 commissioning of the PowerCube as the first behind the meter frequency regulation resource in the PJM Interconnect;
  • The decision to use the PbC in Norfolk Southern's battery powered locomotive prototypes;
  • The successful completion of BMW's testing activities; and
  • The September 2012 launch of the residential PowerHUB;
While each of these events would have been big news in a typical micro-cap company, they didn't register on Axion's price chart because of the extremely unusual market dynamics that prevailed when the announcements were made. While Axion's stock has been "broken" for the last three years, I believe the market dynamic that caused the problem has been resolved and the only thing that's holding the stock at present levels is fear that higher prices will only give rise to another round of heavy selling. After three years of unrelenting selling pressure despite an increasing body of proof that the PbC is an extraordinary new battery technology, I understand the fear. I also know that Axion has arrived at a key transition point and is poised to shed the R&D company market dynamic that prevailed for the last nine years as the PbC earns a place in several billion-dollar niche markets where competitive battery technologies simply can't do the work.

11.18.12 Gartner.png

Most R&D companies that enter the valley of death never emerge. For the fortunate few that do, the hard times last longer than anyone expected. The one trait all entrepreneurs share is unbridled optimism. The three traits all survivors share are determination, focus and fiscal restraint.

After nine years of hard work, adversity and limited financial resources, I believe Axion has finally arrived at the "Innovation Trigger" for the next stage in its development.

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

November 06, 2012

Maxwell Beats Earnings, But Scares Investors with Guidance

Tom Konrad CFA

320px-2011LamborghiniAventador[1].jpgThe 2013 Lamborghini Aventador will incorporate Maxwell ultracapcitors. (Photo credit: via Flickr  )

The headline was good: Maxwell Technologies, Inc. (NASD:MXWL) beat analysts’ third quarter (Q3 2012) earnings estimates by 10 cents on improved cost control and revenues in-line with analyst expectations (up 7%).  The good news stopped there, however, and investors are in a panic this morning (the stock is down $1.48 to $6.13 as I write) about some worrying comments made in the earnings call (transcript here.)

Worries About the Chinese Hybrid Bus Market

Revenue growth has been driven in recent quarters by ultracapacitor sales for hybrid buses and wind turbines, mostly in China.  CEO David Schramm discussed worries about both of these markets in his comments.  Part of the problem is uncertainty about subsidies and policy support from the Chinese government given the upcoming leadership change.  According to Maxwell’s Chinese bus customers,

[O]n the one hand, subsidies will be made available to more cities across the country, and on the other, that the Probus subsidy is likely to be lower, shifting some of the investment burden to local and regional governments. Until the leadership transition takes place, and those anticipated adjustments are implemented and digested in the market, it is impossible to forecast future volumes with a high degree of confidence.

Worse, ultracapacitor sales for hybrid buses will be disrupted in Q4 because of potential mechanical problems which Maxwell’s engineers are currently working to fix,

[W]e become aware of some Hybrid Drive System application issues that are impacting our production schedules. There are mechanical vibrations in the system, higher than our module specification, which are causing interface and cabling issues. I should emphasize, that these issues are mechanical, not electrical. And our application engineers are now working with customers to resolve these interface issues, so that normal production can resume in the months ahead.

Potential integration problems like this can be extremely disturbing to investors, despite Schramm’s reassurances that they are mechanical and related to a new racking configuration which puts them higher in the bus.  They have not caused by problems with the ultracapacitors themselves, and are not a problem with previous configurations.  They expect this problem to be resolved by the end of Q1 2013, with improved sales growth again in Q2 2013.

The European Auto Market

Hopes for large sales for stop-start idle elimination technology to European automakers continue to be delayed because of Euopean economic weakness.  Maxwell continues to make technical progress, with sales to smaller automakers like PSA PeugeotCitroen (Paris:UG, OTC:PEUGF) and  Lamborghini, but a major automaker design win remains elusive, although a growing number of automakers are evaluating the stop-start systems.

The truck market is more encouraging, with an ultracapacitor based engine start module in field trials with ten large truck fleets.  Since this is a drop-in replacement for standard Group 31 truck batteries, uptake should be very rapid once fleet operators appreciate the benefits.  Maxwell plans to put significant sales efforts behind this product going forward.

IT and Wind

Maxwell’s IT markets have been down, following recent IT spending in the US, and this market does not have the growth potential to replace hoped-for sales in transportation.

The prospects for wind are much brighter.  Schramm, said,

Wind turbine deployments in China appeared to stabilize following the government imposed slow down, we experienced in the second half of 2011. Looking ahead, China’s five-year plan calls for wind energy to account for 3% to 5% of the country’s total power generation by 2020. And the trend towards larger turbines and offshore installations favors ultracapacitors. So, we anticipate steadily growing demand for our products.


Altogether, Maxwell does not expect any sales growth over the next two quarters, which is a big disappointment to growth investors.  However, long-term potential remains strong.   The mechanical issue with racking in hybrid buses seems a hiccup, not a long term problem.

The recent slower than expected growth has given Maxwell the chance to streamline operations and get a better control of costs, which can be seen in the improved earnings number this quarter.   Cost control will be very important going forward, and is often a problem for companies experiencing rapid growth.  While the current slow-down has been disappointing, it sets Maxwell up to handle future growth much better, while allowing investors a very attractive entry point on the stock.

I had hoped that last quarter would have been the turning point for this battered stock, but that turning point is farther in the future than I expected.  At this point, I think we’re going to have to wait another quarter or two before we again see rapid appreciation in MXWL, but I’ll be watching the stock with an eye to buying more at bargain basement prices as short term investors flee.

Disclosure: Long MXWL

This article was first published on the author's blog, Green Stocks on October 26th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

October 31, 2012

BYD Stalled Despite Japanese Carmakers' Woes in China

Doug Young

Dr. Zhengrong Shi
BYD's G3 at the Shenzen High -Tech Fair in 2009.  BYD needs more exciting new products to thrive despite Chinese buyers spurning Japanese auto brands. Photo credit: Brücke-Osteuropa.
The prognosis isn't looking good for Japanese car brands in China, with Honda (Tokyo: 7267) becoming the latest predictor that the gloom plaguing Japan's big 3 automakers could last into next spring and perhaps even longer. That looks like bad news for not only Honda, Toyota (Tokyo: 7203) and Nissan (Tokyo: 7201), but also their Chinese joint venture partners including Guangzhou Auto (HKEx: 2238) and Dongfeng Motor (HKEx: 489). Meantime, former high-flying car maker BYD (OTC:BYDDY, HKEx: 1211; Shenzhen: 002594) also continues to sputter for its own internal reasons, with the company predicting its profit will continue to plunge for the rest of the year to almost zero.

Both of these stories aren't really new, as Japanese car makers have seen their sales drop sharply since a territorial dispute over a small island chain first flared between Beijing and Tokyo in September. Meantime, BYD's woes date back even earlier, as the company's sales have been plunging for much of the last 2 years due to weakness plaguing its car business. In an alarming sign, it looks like that weakness is also starting to infect BYD's older and more stable battery unit as well.

Let's look first at the latest news from Honda, which quotes the company saying its business in China may not return to normal levels until February next year. (English article) Honda, which operates China joint ventures with both Dongfeng and Guangzhou Auto, also said the sharp drop in its China sales will cause it to miss its full-year profit forecast by around 20 percent.

What's most interesting to me in this latest gloomy report is the prediction that sales may not return to normal until February, as that indicates the Japanese automakers are expecting the current downturn to last longer than many people had expected. In fact, I think even February could be an optimistic prediction and the downturn could last well into the middle of next year, dealing a big blow to both the Japanese brands and their Chinese partners.

Many Chinese may soon resume buying most Japanese products at more normal levels by the end of the year as negative sentiment from this diplomatic crisis starts to fade. But cars are likely to suffer for a longer period due to the lingering images many Chinese consumers have of Japanese brand cars being burned and their owners beaten by angry crowds. Such fears are likely to linger for a while, as many consumers could easily opt to buy a US or European brand car over a Japanese one due to fears that they or their car could become a victim of angry mobs if tensions ever flare again.

Meanwhile, let's look briefly at BYD's latest results that show the woes continue unabated at this former high-flyer backed by billionaire investor Warren Buffett. BYD's profits slid 94 percent in the third quarter to less than $1 million, and the company forecast its profit for the full year would fall by an even bigger 98 percent. (results announcement; English article)

The company loves to talk about the big potential for its newer electric car business, which it sees as its big future growth engine and presumably was a big factor in Buffett's original decision to buy 10 percent of BYD. But the reality is that its core car business is hurting due to lack of exciting new products, and its battery business is now also starting to feel the pains of a slowdown.

I was somewhat amused by one report that said the company expects to return to profit growth in 2013, since it's quite easy to show growth after your profits have shriveled to almost nothing. Then again, I wouldn't completely believe the forecast for return to growth, as BYD could easily slip into the loss column as its prolonged winter continues.

Bottom line: Japanese car brands and BYD are both on the cusps of prolonged winters, as the former group battles negative consumer sentiment and the latter deals with declining businesses.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

June 30, 2012

Energy Storage: Q-2 2012 Review and Analysis

John Petersen

While I jumped the gun last week and published my third quarter outlook for the energy storage and vehicle electrification sectors early, it's worthwhile to take a look back and see how my tracking list of companies performed over the last quarter and examine the past to see what the tea leaves in the bottom of the cup portend for the coming quarter. So without further delay I'll present my price performance table for the second quarter that ended on Friday.

6.30.12 Price Table.png

Q-2 was a dreadful quarter for Maxwell Technologies (MXWL) and ZBB Energy (ZBB) as their prices fell by 64% and 41% respectively. While the declines were precipitous, they were also one-off events and I believe both companies are trading at very attractive prices for investors who want to position their portfolios for the mean reversion upswing that usually follows fast on the heels of a painful downturn. My long-term tracking charts for both companies show distinct bottoms forming and I believe they're both likely to trend up for the rest of the year.

It was also an ugly quarter for UQM Technologies (UQM), Valence Technology (VLNC) and Tesla Motors (TSLA). While I believe UQM is attractively priced, I'm convinced that Valence and Tesla are only seeing the beginning of storms that are likely to get more severe through the summer and fall months.

The following table tracks several key financial metrics for the companies I follow. Today I'll try to explain why I track this data and show how I use peer group comparisons to identify stocks that are either overvalued or undervalued. If you want to understand the balance of this article, you should pay close attention to the table instead of simply blowing past the data and focusing on the words.

6.30.12 Metrics Table.png

The first metric I consider when analyzing any company is working capital adequacy. I see development stage companies that don't have at least twelve months of working capital as problem children because as sure as the sun will rise tomorrow, they'll be going back to the market for more money within a few months. The two companies with the worst working capital positions are A123 Systems (AONE) and Tesla. Both had less than six months of working capital at March 31st, even after adjusting A123's numbers for a recent $50 million toxic debt offering, and both will look truly dismal when their June financial statements are released in early August. Wunderlich Securities recently cut its price target on A123 to $0.50 and I think they're being generous. Absent a major turnaround, I expect A123 to follow the path blazed by Solyndra, Beacon Power and Ener1. While Tesla has a couple more financing rounds left in its bag of tricks, I don't expect the terms to be particularly generous to existing stockholders because the execution risks are so massive and so immediate.

The second financial statement metric I key on when trying to distinguish overvalued from undervalued is the difference between a company's market capitalization and its book value. That number is a good proxy for the value the market puts on a company's technology, customer base and other intangibles that don't show up on the balance sheet. When the market premium is a low or negative number, it indicates either opportunity or risk. When market premium is an objectively high number, it's a sign of extreme price risk – much like a robotic voice screaming "Danger Will Robinson, Danger!"

Turning to the table, A123 is trading at a modest discount to book value that doesn't fully reflect the risks it will face over the next six months as it tries to recover from a simple calibration error that gave rise to roughly $70 million in warranty costs and inventory write-offs. A123's cash needs will be huge and the best they could do in their last financing round is a death spiral note that's payable bi-monthly and convertible at 85% of market. Possible future product offerings in the micro-hybrid and aviation markets aren't even interesting because neither is soon enough or large enough to materially improve A123's operating results over the short-term.

Next on the list is Valance technology, which has had a deficit in its stockholders' equity for years. A bad capital structure has finally caught up with Valence and it will probably lose its Nasdaq listing sometime in July. Valence's LiFePO4 battery technology is proprietary, but it's not all that different from A123's proprietary LiFePO4 battery technology. With both companies needing major equity infusions, I see more risk in Valence than I do in A123 because the market values its technology, customer base and other intangible assets at a $167 million premium to A123. Frankly I just don't see a good reason for the discrepancy.

The only company in the table with an obviously low market premium is Exide Technologies (XIDE) which trades at a 35% discount to book value because the market has grown weary of exaggerated losses flowing from a multi-year business restructuring that's finally coming to an end. Once the bleeding stops, I expect Exide to perform very well.

On the extreme bleeding edge of the market premium spectrum we have Tesla which trades at a silly level of 21.4 times book value while every other company I follow trades at three times book or less. That valuation excess is solely attributable to the Hype Cycle, which seems to be running its course. Over the last two years Tesla has been driven higher and higher as the delivery date for its first Model S cars drew nigh. The long anticipated event finally happened a week ago Friday and the Model S drew spectacular reviews from the automotive press. Despite the good news, the price fell by 7% last week.

The reason is simple. The market expected the deliveries to go off without a hitch and it expected rave reviews. So there was no "good" left in that news. Now, however, the business dynamic has changed. Instead of sounding like a politician and focusing on how good it's going to be, Tesla will have to begin dealing with day-to-day business realities like actual reservation conversion rates, actual production problems and actual manufacturing cost overrruns. While I suppose Tesla could be different from every new manufacturer in the history of business, I see very little in the way of unexpected good news that could lift its stock price while Tesla's business of making electric cars is entering a target rich environment for sequential disappointments that could crush its stock price. This is not a favorable risk reward dynamic for investors who care about their portfolio value.

The thing I like best about the market premium metric is that it lets an investor assemble a hierarchy of opportunity to compare the different companies in a sector. The following table is a simple example that excludes several outliers and shows market premium as an absolute number, and as a relative number compared to book value, my "BS to Book ratio."

6.30.12 Premium Table.png

I'm not a fan of electric cars because the entire sector has been mercilessly over-hyped while the real economic costs and illusory environmental and national security benefits are just now coming to light. If I did want to make an EV investment that had a good chance of significant appreciation instead of an outsized risk of loss, I'd pick UQM and Kandi Technologies (KNDI) over Tesla. Kandi is profitably selling low cost transportation for the masses in China, a country that's striving to raise living standards for all of its people. Kandi has a healthy working capital balance and a low BS to Book ratio. UQM is still reporting modest losses, but its balance sheet is strong and its BS to Book ratio is one of the lowest in my tracking group. The risk-reward dynamic for both companies is quite favorable because the potential for additional price deterioration is modest while the potential for future price appreciation is substantial. In other words, they're both polar opposites of Tesla.

The same kind of analysis holds in the middle range where Axion Power (AXPW.OB), ZBB, Active Power (ACPW) and Maxwell carry market premiums that range from $14.3 million to $72 million and have BS to Book ratios of 2.0 or less. A blog like this one is not a good place to  slice and dice the respective technical strengths of four companies that are focused on different products that have different applications that don't really compete with each other. But all four of them are one or two solid announcements away from market premiums in the $200 to $400 million range which A123 and Maxwell both carried at some point in the last twelve months.

When you're betting on trees to grow, you don't pick the tallest one in the forest because it's the one most likely to get struck by lightning. You don't pick the diseased trees because of their high mortality risks. Instead you pick healthy young trees that have modest mortality risks but are poised to enter a period of sustained growth. For my money all four of these mid-range companies have that kind of significant growth potential for this year, and through 2015 and beyond.

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

June 23, 2012

Energy Storage: Q3 2012 Winners and Losers

John Petersen

I usually write a quarterly recap to summarize what happened in the energy storage and vehicle electrification sectors, but Q2 was a tough enough period that I don't see much sense in dwelling on the bloodletting. So instead of focusing on the past, I'll offer a quick summary table with lots of red ink and turn my attention to Q3, which is shaping up as a time of bright opportunity for some companies and profound risk for others.

6.23.12 Q2 Performance.png

I expect three companies in my tracking group to perform very well in Q3 – Exide Technologies (XIDE), Active Power (ACPW) and Axion Power International (AXPW.OB). All three look terrible if you only look at historical performance, but when you dig deeper into business history and market dynamics it becomes clear why all three have market-crushing potential over the next three to six months.

Q-3 Winners

Exide Technologies has been the Rodney Dangerfield of the battery industry since emerging from Chapter 11 in 2004. The reason is simple. While Exide had solid prospects after its bankruptcy reorganization, it was not a healthy company and it was burdened by a lot of dead weight. During the four years I've been following Exide they've been restructuring their operations, closing marginal facilities and paring fat wherever possible. Over the last five years, Exide has reported total earnings of roughly $35 million after restructuring and impairment charges of almost $210 million. Since its net earnings were so bad for so long, Exide currently trades at a 38% discount to book value, 4.4 times earnings and 8% of sales while its peers trade at 1.5 times book, 11 times earnings and 70% of sales.

Restructuring costs are an accounting oddity. If a company builds a new plant to increase earnings, the costs of that plant are added to the balance sheet and depreciated over time. If a company closes an unprofitable plant to increase earnings, the associated restructuring costs are charged against net income. When a company like Exide embarks on a multi-year restructuring program, the positive earnings impact of the restructuring is not obvious until the restructuring is complete and earnings morph from dreadful to spectacular in very short order. Exide has reached the end of its restructuring and expects to emerge later this year. When the write-offs are old news and the positive impacts of the restructuring become obvious, the market's perception of Exide should change dramatically.

I maintain long-term price tracking charts on all the companies I follow and believe Exide's chart is signaling a sharp turn upward in the third quarter. If you look at the chart you'll see that the 10-, 20- and 50-day weighted moving average prices are clustered in a narrow range below the 200-day average and have already turned sharply upwards. When they push up through the 200-day average, Exide will have a classic golden cross to mark the beginning of a new uptrend. Similar chart patterns existed in the summer of 2009 and the fall of 2010. While I'd be hard pressed to estimate the next peak, Exide's historical price performance is enough to convince me that a double is likely and a good deal more is possible.

6.23.12 XIDE.png

Active Power is a classic Valley of Death stock. It went public in 2000 right before the tech wreck and reached a high in the low $70s before falling to its all time low of $0.25 in late 2008. Since then Active Power has been working its way out of the Valley of Death and getting stronger with each quarter. Like Exide, Active Power's chart is right on the verge of a golden cross like we saw in the spring of 2009 and the summer of 2010. While I'd be hard pressed to guess the next top, Active Power's historical stock price behavior is enough to convince me that a double is likely, if not a triple.

6.23.12 ACPW.png

Axion Power International is another Valley of Death stock that looks like a very ugly duckling until you dig down into the business fundamentals and understand the market dynamics that crushed the stock price over the past three years. Axion went public through a reverse merger in late 2003 when it was still an early-stage R&D company. During its first five years as a public company Axion's stock traded by appointment and total reported trading volume for 2009 was only 7.7 million shares, or about 3.8 million shares on the sell side and 3.8 million on the buy side.

In late 2009 Axion closed an immense private placement of 45 million shares, or the equivalent of 12 years of trading at historic levels. While I believed that the four anchor investors in the private placement were swinging for the fences with venture capital investments in a stock that offered no reasonable prospect of a short-term liquidity at a decent price, an unfortunate series of events including the death of one buyer, management changes in two more and unrelated financial problems in three legacy stockholders forced huge blocks of stock into a market that couldn't handle the selling pressure.

In addition to price data like I provided for Exide and Active Power, my Axion chart includes a fifth line that tracks 200-day average trading volume and highlights the seventeen-fold increase in daily trading volume over the last three years. When I contemplate the sheer mass of shares that have moved during that period, I'm amazed that the price didn't collapse completely.

6.23.12 AXPW.png

In spite of a dismal price chart, Axion's business execution over the last three years has been flawless. Its PbC battery has progressed from a pre-commercial prototype to a production ready energy storage solution that beat all contenders including nickel metal hydride, lithium-ion, sodium metal chloride and fuel cells in two and a half years of testing for battery-powered locomotive applications, was used in the first behind the meter frequency regulation resource in the country, is a front-runner in energy storage for micro-hybrid vehicles and has recently set its sights on hybrid solutions for the long-haul trucking market. I can still account for a few million shares in the hands of likely sellers, but once those shares are absorbed the future market price will be in the hands of the patient long-term investors who have been buying Axion's stock over the last two years and squirreling it away in their sock drawers. Unless trading volume collapses, the selling pressure can't continue for more than another month or two.

Q-3 Losers

After years of supporting a $150 to $200 million market capitalization with a negative stockholders equity it looks like Valence Technology (VLNC) will lose its Nasdaq listing within the next few weeks and be downgraded to the OTCBB. While the listing could be saved with capital infusion in the $60 million range, that possibility seems pretty remote.

While it's riding a wave of euphoria after the delivery of its first Model S sedans last week, I continue to believe Tesla Motors (TSLA) will pass its peak of inflated expectations in Q-3 and begin a dizzying descent into the Valley of Death. I don't want to denigrate Tesla's accomplishments as the first manufacturer of a high production volume electric vehicle and the first fledgling automaker to bring a new car to market since DeLorean, but it seems like all of the possible good news is already priced into Tesla's stock while the bulk of the execution risks and disappointment opportunities have become frighteningly imminent.

I get hundreds of comments every time I mention Tesla's name. The enthusiastic readers I hear from expect rave reviews, expect high reservation conversion rates, expect demand to skyrocket, expect the Model S to perform flawlessly in heavy daily use, expect Tesla's financial resources to be adequate for its foreseeable needs and expect Tesla to avoid the delays, defects and missteps that plague even seasoned manufacturers who launch a completely new product. I may be cynical when it comes to the applicability of Moore's Law in the auto industry, but I'm a firm believer in Murphy's Law, fondly known as the fourth law of thermodynamics, which states: "If anything can go wrong, it will."

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

June 18, 2012

Micro-hybrids And The Multi-Billion Dollar Battery Battle

John Petersen

Last week the stock of A123 Systems (AONE) soared 52% in a day after it announced that an enhanced chemistry would improve the cold and hot weather performance of its LiFePO4 batteries, reduce the need for ancillary temperature control systems and make them more competitive in a rapidly evolving micro-hybrid battery market that's dominated by lead-acid battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE). Investors seem to understand that micro-hybrids will generate several billion dollars of incremental annual revenue for battery manufacturers by 2015, but they haven't quite figured out who the winners will be. Today I'll try to clarify some of the issues.

The idea behind the global shift to micro-hybrid technology is simple and sensible – there's no good reason to run a four, six or eight cylinder engine while a car is stopped in traffic. It wastes fuel and pollutes the air while doing nothing to move the car from Point A to Point B. The solution is to turn the engine-off when it's not powering the wheels, a solution that's quickly finding its way into emissions control and fuel economy regulations worldwide. The problem is that turning the engine-off at a stoplight, carrying accessory loads during engine-off periods and restarting the engine when the light changes color puts immense strain on the battery.

The following graph comes from a joint presentation that Ford and BMW made at an industry conference in 2010. While there's way to much detail for most investors, the core lesson is simple – over 90% of the battery load during a one minute engine-off interval comes from the accessories while less than 10% comes from restarting the engine.

6.17.12 DCAT.png

In a car without stop-start, the battery has to start the engine when you leave for work and it can use the entire commute to recover the 400 to 600 amp-seconds of energy used by the starter. In a micro-hybrid with stop-start, the battery has to start the engine when you leave for work and it has to provide another 3,600 amp-seconds of energy for each engine-off event. In a typical 15-mile commute, a micro-hybrid requires its battery to do 100 times more work than the battery in a car without stop-start. This is not a modest change. It's an immense technical challenge.

The next graph comes from the same Ford-BMW presentation and shows how the performance of a high-quality AGM battery degrades in a micro-hybrid duty cycle. The downward curving blue line near the bottom is the amount of current the battery can accept as it ages. The upward curving black line in the middle is the amount of time required for the battery to regain an optimal state of charge in preparation for the next engine-off opportunity. Once again the core lesson is simple – a micro-hybrid with a new battery can recover from an engine-off event in under a minute, but a micro-hybrid that has 5,000 miles on the battery will need five minutes or more to prepare for the next engine-off event. Micro-hybrids that can't turn the engine off because they're waiting for the battery to recharge can't save fuel or reduce air pollution.

6.17.12 VRLA.png

Automakers understand the problem and their current solution is to disable the stop-start system when the battery hasn't returned to an acceptable state of charge. They also know that a short-term patch is not a long-term solution. Once you understand these two graphs, you'll understand why enhanced flooded batteries and even AGM batteries must eventually lose the battle for the micro-hybrid market. They just can't stand the strain.

The most important word in that last paragraph is "eventually." Automakers plan to build about ten million micro-hybrids this year and global production should ramp to 35 million micro-hybrids a year by 2015. There are several new battery technologies that are better suited to the micro-hybrid duty cycle, but they can't be manufactured in big enough volumes to make a difference over the next few years. That means automakers will be forced to settle for batteries they can buy in volume until the newer batteries are available at relevant scale. For the next several years, enhanced flooded batteries and AGM batteries will win the battle for short-term market dominance, even though they can't win the war.

In the emerging battery technology group the leading public company contenders are A123 Systems and Axion Power International (AXPW.OB). A123 will try to win the hearts and minds of automakers with an LiFePO4 battery solution that is superior to flooded and AGM batteries in most respects. Axion will try to win the same hearts and minds with its PbC® battery, a hybrid lead-carbon battery. Both of these new batteries have strengths and weaknesses, so it's too early to pick a winner. To help investors understand the issues, the following paragraphs will compare A123's LiFePO4 technology with Axion's PbC technology.

Battery weight – A123's LiFePO4 battery is the hands-down winner when it comes to battery weight, but it can only shave 40 to 50 pounds off the weight of a 3,000 to 4,000 pound vehicle. For some automakers the weight savings will be important, but I don't see weight as a mission critical issue in micro-hybrids.

Battery cost – Axion recently charged a customer $400 per battery for a thousand unit PbC order. Based on historic costs, it looks like A123 will have to charge about $800 for an engine start battery. Despite widespread rumors that the cost of manufacturing lithium-ion batteries is falling rapidly, A123's production costs have been stubbornly stagnant for years. As the PbC technology matures and Axion's production processes improve, significant cost savings and other economies of scale seem likely. So for now, at least, it appears that the PbC will enjoy a major cost advantage.

Dynamic charge acceptance Automakers need a micro-hybrid battery that can accept currents of up to 100 or 150 amps, the maximum power their alternators can generate. While the DCA of AGM batteries falls to less than 10 amps in a couple months, both of the new batteries boast DCA in the 100 to 200 amp range. While both batteries offer ten to twenty times better DCA than AGM batteries, neither has a clear advantage over the other in micro-hybrid applications.

Cycle-life – Automakers need a micro-hybrid battery that will last for at least three-years, and preferably longer. The data released by A123 and Axion indicates that both batteries can handle a five-year service life without breaking a sweat and may last the entire life of the vehicle with only modest performance degradation. While both batteries will last five times longer than AGM batteries, neither has a clear cycle-life advantage over the other in micro-hybrid applications.

Materials availability and recycling – Lithium-ion batteries are made from highly refined metals that are widely used in other consumer and industrial products. They can't be economically recycled but they don't pose any particular disposal risks. Lead-acid batteries are made from raw materials that don't have significant alternative uses. They're also the most recycled product on the planet and generate significant profit to recyclers. Lead is hazardous if it's disposed of improperly, but used batteries that contain $70 to $100 of recoverable metal are simply too valuable to throw away.

Capacity constraints and expansion – If all of A123's manufacturing capacity was devoted to stop-start batteries, it could make about 900,000 units a year. Axion will need to spend about $30 million to bring its annual production capacity up to the 900,000-unit level. Since PbC electrode assemblies are designed to work as plug-and-play replacement components in other lead-acid battery factories and Axion ultimately wants to become a component supplier, ramping PbC production will cost about $50 million for a million units of incremental capacity. Ramping LiFePO4 production will cost about $400 million for a million units of incremental capacity because the underlying technology can't leverage existing infrastructure.

Testing and validation – When it comes to their mainline vehicles, automakers are obsessive about performance and quality testing for both components and suppliers. For simple commodity components like flooded lead acid batteries from a new supplier, the process usually takes twenty-four months. For more complex components and systems, testing and validation can take significantly longer. Several automakers began evaluating the PbC for use in micro-hybrids in mid-2009. A123 will not have samples of its enhanced battery chemistry available for testing and validation until later this year. I expect the process to be less time consuming for A123 because several automakers have evaluated its products for use in specialty vehicles and some portion of that earlier work will apply to using LiFePO4 batteries in micro-hybrids. I believe, however, that Axion has a solid head start that should offer a first mover advantage.

Entrenched competition – Lead-acid batteries have owned the automotive starting, lighting and ignition market for almost a century and the industry has an immense and diversified global footprint of installed production and recycling capacity. Over the short-term, lead-acid battery manufacturers will resist innovations like Axion's PbC electrode assemblies because it's easier and cheaper to continue with business as usual. When alternatives like A123's LiFePO4 batteries threaten to encroach on their bread and butter markets, I think leading lead-acid battery manufacturers will quickly change their tune and eagerly embrace technologies that can protect their market position from interlopers. If the lead-acid battery industry rises to the micro-hybrid challenge, I believe automakers will be reluctant to change to more costly alternatives that offer no significant performance advantages beyond a modest weight savings.

Over the next three to five years enhanced flooded and AGM batteries will be the only products that are available in large enough volumes to serve the needs of the micro-hybrid market, so manufacturers like JCI and Exide will thrive as their per vehicle revenue doubles and their per vehicle gross margins triple. During that period advanced batteries like Axion's PbC and A123's LiFePO4 will establish toeholds in the heavy micro-hybrid sector that's expected to ramp to about eight million vehicles a year by 2015. As the performance differences between the new batteries and legacy technologies become clearer, and production capacity for the advanced batteries ramps, demand will shift from the legacy technologies to the newer batteries. When the lead-acid battery industry begins to view lithium-ion batteries as a credible threat in a major market, the rush to third generation lead-acid technologies like Axion's PbC will begin in earnest.

Readers who are looking for a silver bullet technology to dominate the energy storage sector always amaze me. Frankly, I don't think such a technology exists. Energy storage is a sector where you get no extra credit for cool and the only things that matter are price, performance, quality and serving the customers' needs. In that kind of market, the best anybody can hope for is silver buckshot. I do believe, however, that every company that can bring a cost-effective product to market in relevant scale will have more demand than it can handle.

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

May 22, 2012

Stop-Start Realities and EV Fantasies

John Petersen

Last week Johnson Controls (JCI) released the results of a nationwide survey that found that 97 percent of Americans are ready for micro-hybrids with stop-start idle elimination, the most sensible automotive innovation in years. A micro-hybrid turns the engine off to save fuel and eliminate exhaust emissions when it's stopped in traffic and automatically restarts the engine when necessary. While the overwhelmingly positive consumer response didn't surprise me, JCI's short-term growth forecast for micro-hybrids did.

I've been writing about the rapidly evolving micro-hybrid space since 2008 and during that time the market penetration forecasts have built quietly like a tsunami in the open ocean.
  • In October 2008, Frost & Sullivan predicted that global micro-hybrid sales would ramp to 8 million vehicles a year by 2015 while EVs would remain an inconsequential niche.
  • In April 2010, the EPA and NHTSA predicted that stop-start systems would be standard equipment on 39% of new cars sold in the U.S. by 2016 while EVs would remain an inconsequential niche.
  • In June 2011, JCI predicted that up to 22 million vehicles a year would be sold with stop-start systems by 2015 while EVs would remain an inconsequential niche.
  • In February of this year, Lux Research forecast micro-hybrid sales of 25 million vehicles a year by 2015 and 39 million vehicles a year by 2017 while EVs would remain an inconsequential niche.
  • Last week JCI upped the ante once again with a new forecast that 35 million vehicles a year will be equipped with stop-start systems by 2015.
The most fascinating aspect of the JCI forecast is that it's not based on some fuzzy results oriented analysis of what consumers might want. Instead, it's based on planning discussions with automakers that are firming supply chains for their 2015 models. The contracts won't be signed for a couple years, but the decisions have already been made. Stop-start is following the same path as power steering, catalytic converters, anti-lock brakes and air bags. It will be standard equipment within a couple years and the most unexpected technology development in a decade.

A basic stop-start system will add about $300 to the price of a car and save its owner 5% on his fuel consumption. For 35 million vehicles worldwide, the incremental cost will be about $10 billion and the annual fuel savings will be 700 million gallons. To put those numbers into perspective, my favorite toymaker Tesla Motors (TSLA) hopes to ramp its production to 20,000 EVs a year if it can find that many mathematically challenged buyers. The electric drive systems in those EVs will cost at least $800 million, but they'll only save eight million gallons of gas per year.

When you turn the crank on the fuel efficiency numbers, it costs $14 to save a gallon of gas per year with stop-start while it costs $100 to save the same gallon of gas with electric drive. I'm sure the eco-royalty won't mind a paying a 600% premium for flashy fuel savings as long as smarmy politicians are willing to squander public funds on direct and indirect subsidies and give them special perks like HOV lane access. When you look past the hype, however, it’s clear that real companies that deliver real, sensible and affordable value to the mass market will generate the business earnings.

Two publicly held battery manufacturers, JCI and Exide Technologies (XIDE), will be the first to benefit from the rapid global implementation of stop-start technology. They'll each see their per vehicle revenue double while their per vehicle margin triples. In JCI's case, the incremental revenue and margin from stop-start batteries will just make a good company better. In Exide's case, the incremental revenue and margin should turn a long string of losses and disappointments into a healthy stream of future profits.

At Friday's close, JCI was trading at 48% of sales and a 200% premium to its March 2009 lows. In contrast, Exide was trading at 6% of sales and within pennies of its March 2009 lows. There's no doubt that rapid implementation of stop-start technology will lift both boats. Given the big differences between their relative valuations, the percentage impact on Exide's stock price should be several times greater than the percentage impact on JCI's stock price.

While JCI and Exide will be early leaders in the stop-start battery space, there is a persuasive and growing body of proof that conventional lead-acid batteries, including the "enhanced flooded" and AGM batteries both companies are touting as stop-start solutions, aren't durable or robust enough to succeed in the long term.

The basic problem is that a car equipped with a stop-start system needs a battery that can carry the accessory and starter loads when the engine turns itself off in traffic, and then recharge quickly in preparation for the next engine off event. In city driving conditions, conventional lead-acid batteries can't charge fast enough and a few months rapid cycling leads to an unavoidable decline in battery performance that quickly renders the mechanical components inoperable.

The following graph from Axion Power International (AXPW.OB) highlights the dynamic acceptance issue by comparing the performance a high quality AGM battery with the performance of its serially patented PbC® battery, a third generation device that replaces the lead-based negative electrodes in a conventional AGM battery with carbon electrode assemblies.

5.21.12 DCA.png

In both graphs, the grey line represents dynamic charge acceptance measured in amps. While dynamic charge acceptance of the AGM battery plummets from 50 amps to 5 amps within a couple months, the PbC can accept charging currents of 100 amps for five years before its performance begins to degrade. The black lines represent the time needed for the battery to recover from an engine off event. While both batteries start out with a charge recovery time in the 30 second range, the recovery time for the AGM battery increases to about 4 minutes after six months while the PbC stays in the 30 to 50 second range through eight years of use. Additional advanced energy storage solutions that are targeted at the particular performance requirements of stop-start vehicles include a lithium-ion starter battery from A123 Systems (AONE) and a hybrid system that pairs an AGM battery with a supercapacitor module from Maxwell Technologies (MXWL).

The stock market doesn't understand that several billion dollars of incremental revenue from stop-start batteries is already baked into the cake for 2015. It doesn't understand that two established battery manufacturers are the only companies that have enough manufacturing capacity to respond to the demand. It doesn't understand that a handful of advanced technology developers will be nipping at the big boy's heels with energy storage systems that are better suited to the needs of stop-start systems, or that each one percent of market penetration can represent $100 million of incremental revenue.

The die is already cast. The market for high performance stop-start batteries is going to be a free-for-all where unlimited demand chases limited supply from a small number of established manufacturers and emerging energy storage technology developers. Every company that brings a cost-effective energy storage solution to the stop-start market over the next three years will have more customer demand than it can possibly satisfy. Patient investors who position themselves in front of this rapidly developing tidal wave of demand for high-margin energy storage systems are in for a fun ride.

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

April 30, 2012

Report: Electric Cars Cost Less (But watch the assumptions)

Tom Konrad CFA

Pike Research just released a report on the Total Cost of Ownership of Alternative  Fuel Vehicles for Fleet Operators.  The report compares the purchase price plus lifetime fuel cost of mid-sized cars available in the US.

leaf.png Although the authors hesitate to declare any alternative fuel the cheapest option, the chart below clearly shows that the “BEV-100″ (Battery-Electric with 100-mile range, a.k.a. the Nissan Leaf) to be the least expensive option even at high electricity prices ($0.14/kwh) and low gas prices ($3/gallon.)  However, the Leaf only has a clear lead when the $7500 tax credit is taken into account.

Pike TCO comparison.png The other vehicles in the chart are (from left to right):
  • A conventional car with a 4 cylinder, 2.4 liter engine
  • A flex-fuel vehicle (FFV) with a 4 cylinder, 2.4 liter engine
  • A car with a four cylinder diesel engine.
  • The diesel car running on Biodiesel.
  • A conventional car (same engine) with start-stop technology which turns off the engine when the car is stopped.
  • A mid-sized hybrid-electric vehicle with a 2.4 liter engine.
Also compared in the report (but not shown in the chart) were natural gas (CNG), plug-in hybrid (PHEV) vehicles, and also vehicles of various sizes.  The following chart shows the total cost of ownership of these at today's fuel prices.

Pike TCO list.png
So Cost-Conscious Fleet Managers Should Buy the Leaf?

Even with the tax credit, there are a few caveats. 
  1. This analysis does not account for the time value of money.  A cost-conscious fleet manager would be discounting future fuel costs at his company's cost of funds.  For the US government, that may be only a couple percent, given what Treasury bonds are selling for these days.  But most public companies cannot borrow at nearly so low a rate, and raise a good portion of their funds through more-expensive equity, so a discount rate in the 5% to 15% range would be more appropriate.  This will make fuel costs relatively less significant, and disadvantage BEVs and PHEVs relative to other vehicles.
  2. No account is taken of the need for additional fueling infrastructure.  This gives an advantage to BEVs, PHEV-40s, and natural gas vehicles relative to the rest.  PHEV-10s (i.e. the plug-in Prius) have small enough batteries that they should be able to get by with inexpensive level 1 (120 V) charging.  A decent extension cord would do the trick.
  3. No account is taken for differences in maintenance costs, which are lower for pure electric vehicles, and may be somewhat lower for PHEVs as well, when they are run primarily on electric power. 
  4. Flex-fuel and Start-stop technology are currently only available on higher-end vehicles, which makes these inexpensive technologies seem much more expensive than they really are.  Fleet operators wishing to use such higher end vehicles already may find them to be more attractive options than they look like in this comparison.

Conclusion: Get the Prius


After I make back-of-the envelope adjustments to the report’s results for maintenance, charging infrastructure, and the time value of money, the Plug-In Toyota Prius (PHEV-10) seems to have the lowest cost of ownership in most cases among mid-size vehicles.

Fleet operators with low cost of funds (discount rates) will still prefer the Leaf, while operators with relatively high costs of funds will find normal hybrids to be the most cost effective mid-sized cars.

Even cheaper options exist with the largest cost savings coming by down-sizing to a small or compact car, especially if it is a hybrid.

With a larger vehicle you pay for the extra size twice:  First you pay for all the extra metal directly, and you pay again in all the extra fuel needed to move that metal around.

This article was first published on

April 28, 2012

Battery-powered Locomotives – Compellingly Green Economics

John Petersen

For the last two years I've been paying increasingly close attention to trailblazing work by Norfolk Southern (NSC) in the field of battery-powered locomotives. My interest was piqued in June of 2010 when Norfolk Southern hired Axion Power International (AXPW.OB) to develop a battery management system that would allow rail locomotives to run on battery power and recharge their batteries through regenerative braking. I believed the decision was positive news for Axion because nobody hires a battery manufacturer to design a BMS for somebody else's product. My enthusiasm was tempered, however, by knowing that an earlier Norfolk Southern retrofit, the NS 999, was unveiled in September 2009 and quickly proved to be an insurmountable challenge for the AGM batteries that were used in the original design. I also knew that a technical development project for a Class I Railroad would require a couple years of work before a rational implementation decision could be made.

A key milestone was reached this week when Axion announced that NS had ordered $475,000 of PbC® batteries that will be installed in the NS 999 over the next couple months. The two companies are also moving forward on a parallel development track for a larger and more powerful long-haul locomotive that will use twice the battery power.

Now that I have a clear data point on battery costs for both the switcher and a long-haul locomotive, I can finally dig into the fundamental economics of what Norfolk Southern is trying to accomplish with this project.

The raw unsubsidized numbers are amazing!

The technical case for a battery-powered switching locomotive is easy to make because they operate in urban rail-yards assembling and disassembling trains, which means travel distances are short and charging infrastructure is both easy and cheap to install. On average, a switcher spends about 75% of its time idling and only 25% of its time working. While it's a little dated, this 2004 graph from the Argonne National Laboratory summarizes daily fuel consumption for a GP38-2 switcher, the locomotive platform Norfolk Southern used for the NS 999.

4.27.12 Switcher.png

While the exact numbers used to generate the graph are not available, my best estimate of total fuel consumption is about 340 gallons per day, or 85,000 gallons for a 250-day work year. At the current price of around $3 per gallon for off-road diesel, the annual fuel cost for a switching locomotive is $255,000. Since switching locomotives are already equipped with electric drive, dynamic brakes and power control systems, the biggest cost of converting a locomotive to battery power is pulling the fuel tanks, diesel engine and generators and replacing them with a big rack of batteries and a custom BMS to keep things in balance.

I can't accurately estimate the power subsystem costs for a locomotive conversion, but I'm certain that it will be less than the $400,000 per MW that Sandia National Laboratories recently estimated for grid-based power subsystems that use expensive inverters for AC-DC conversions. Using a high-side estimate of $400,000 for the balance of system costs on a switcher retrofit, the cash-on-cash payback period from fuel savings alone will be about 3-1/2 years. Using a more conservative mid-range estimate of $200,000, the cash-on-cash payback period will be closer to 2-1/2 years. When you factor in collateral environmental benefits like 875 tons of annual CO2 abatement and the elimination of diesel emissions from urban train-yards, battery-powered locomotives offer compelling value and utility.

The planned long-haul locomotive, which will cost twice as much but save about 170,000 gallons of diesel fuel per year, should offer similar economic and environmental benefits.

The following table provides summary information on the locomotive fleets operated by the four largest North American Class I Railroads.

Multiple purpose units

Switching units

Auxiliary units

    Total locomotives

In light of the economic and environmental benefits of battery-powered locomotives, it seems reasonable to assume that at least half of the switcher fleet and up to 20 percent of the freight locomotive fleet would change to battery power over the next decade if the second-generation NS 999 and the planned long-haul locomotive perform as expected. The batteries required to support such a transition would cost something on the order of $4.4 billion.

Today, the biggest question on everybody's mind seems to be "since laboratory testing took two years how much longer will it take to test the two prototypes before implementation begins in earnest?"

To understand the likely deployment timeline, you need to understand what the laboratory testing accomplished. As I noted above, a typical switching locomotive spends 75% of its time idling. In a battery laboratory, much of the idle time can be eliminated and a company can pack the equivalent of three or four year's use into a single testing year. It can also stress the batteries with extreme load profiles that go beyond the normal operating range.

In a situation like the Norfolk Southern project where parallel testing was conducted concurrently in three battery laboratories, a company can condense the equivalent 18 to 24 years of application experience into two years. So by the time the batteries are installed in a prototype vehicle, the battery manufacturer and the user know how they're going to perform and the principal goal of the prototype testing is to identify any complications that were missed during the laboratory phase.

In light of Norfolk Southern's prior experience with the NS 999 and the extraordinary amount of laboratory testing that was conducted over the last two years, I expect the next round of prototype testing to be measured in months rather than years. While I'd be pleasantly surprised to see significant implementation beyond the planned freight locomotive in 2012, the ramp rate in 2013 could be impressive because the market is so large and the economic and environmental values are so compelling.

In the November-December 2009 issue of its employee magazine BizNS, Norfolk Southern explained that the biggest challenge was developing "an energy management system that allows us to take maximum advantage of kinetic energy," emphasized that "advances in battery technology will be the primary driver for widespread industry use of electric locomotives" and observed that it was "eying the use of lithium-ion and nickel based rechargeable batteries, as well as improved lead-acid batteries."

Two and a half years later, there's only one contender left standing, Axion's PbC®.

Battery-powered locomotives are a potential billion-dollar niche market where size and weight are not mission-critical but cost and performance are. There are several comparable niche markets in automotive applications like micro-hybrids and stationary applications for power generation, distribution and use. I expect the PbC to be a formidable competitor in many of those markets.

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

April 15, 2012

Hybrid Locomotives, Vehicle Electrification at Relevant Scale

John Petersen

Last month Ricardo PLC (RCDOF.PK) published a report titled "GB Rail Diesel Powertrain Efficiency Improvements" that it prepared for Great Britain's Department for Transport. While most of the fuel efficiency technologies Ricardo evaluated for the report were mechanical systems, its analysis of the fuel efficiency benefits of stop-start and hybrid systems for locomotives offered an intriguing view of a cost-effective vehicle electrification opportunity that can be implemented at relevant scale within a few years. The two types of locomotive systems Ricardo evaluated for the report were simple stop-start idle elimination and full hybridization. The following table compares the relative fuel economy benefits of these alternatives for local, intercity and freight trains in Great Britain.

Technology level
Stop-start idle elimination
up to 7%
up to 4%
up to 41%
Hybrid powertrain
up to 22%
up to 14%
up to 41%

While raw percentages are fascinating, they can't give you a feel for the magnitude of the potential fuel savings. On its website, the Electro-Motive Diesel unit of Caterpillar (CAT) helps put the Ricardo numbers into perspective by showing how a basic stop-start system can offer 10-year savings of up to $357,308 for a switcher duty cycle and up to $222,740 for a line-haul duty cycle. With full hybridization, the fuel savings can be even more striking.

For the last couple years General Electric (GE) has been preparing to launch its Evolution™ Hybrid Locomotive, which will save approximately 440,000 gallons of fuel over a 20-year useful life, or roughly $1.3 million based on an assumed diesel price of $3 per gallon. In February, Japan Freight Railway Company introduced a hybrid shunting locomotive that slashes fuel consumption by 36%. Both of these hybrids are diesel-electric locomotives that were redesigned to capture the energy dissipated during braking and store it batteries. The stored energy can then be used on demand to reduce fuel consumption. The Evolution hybrid uses a GE variant of the Zebra sodium nickel chloride battery that was originally developed by Daimler and refined by FZ Sonick. JR Freight's hybrid shunting locomotive uses a surprisingly small (67.4 kWh) lithium-ion battery pack from Japan's GS Yuasa (GYUAF.PK).

Between now and 2020, Pike Research forecasts that cumulative sales of new hybrid locomotives will approach 500 units worldwide and require roughly 500 MWh of batteries. While Pike expects new hybrid locomotive sales to ramp rapidly through the end of the decade, the larger near-term opportunity will involve retrofitting the existing global fleet of about 100,000 diesel-electric locomotives to save fuel, reduce emissions and improve the bottom line performance of the world's cheapest land-based transportation networks.

Most developers of hybrid locomotive technologies have followed the path blazed by automakers and tried to build all necessary elements of a hybrid system into a single chassis. The exception to the general rule has been Norfolk Southern (NSC), which is focused on developing a pure battery electric locomotive that can be:
  • Charged from the grid and used as a stand-alone locomotive for yard switching operations; or
  • Combined with one or more conventional diesel-electric locomotives to create a "hybrid train."
Norfolk Southern's battery electric locomotive technology is described in US Patent No. 8,136,454, which issued on March 20th of this year. The beauty of the patent is its inherent simplicity and flexibility. Designing a single-chassis hybrid locomotive is a very complex engineering and space optimization challenge. When the battery elements of the system are separated from the internal combustion elements, however, the engineering and space optimization hurdles get lower while overall flexibility increases.

There are very few industries that can compare with the railroads when it comes to calculating the amount of fuel needed to move a train over a given route. The route data is all computerized with precise grade and speed profiles for every foot of track. If a route needs a five to one balance between diesel and battery power, a railroad can configure a six locomotive consist with five diesel electrics and one battery electric. If another route can handle a one to one balance, a railroad can configure a six locomotive consist with three diesel electrics and three battery electrics. That ability to mix and match locomotives to suit the precise requirements of a particular route simply can't happen with single-chassis hybrids.

The concept even makes the retrofit process cheaper since a railroad can convert its least efficient locomotives to battery drive, keep its most efficient locomotives as diesel-electrics, and effectively upgrade the entire fleet by retrofitting a small percentage of the rolling stock.

Norfolk Southern's first battery-electric locomotive, the NS 999, was publicly launched in September 2009 but severe charge acceptance problems in the AGM batteries it used for the original vehicle had Norfolk Southern actively searching for better batteries by the time the November-December issue of its employee magazine,"BizNS," was published. Since 2010, the primary focus of Norfolk Southern's battery evaluations has been the PbC battery from Axion Power International (AXPW.OB), an asymmetric lead-carbon battery that offers the cycle-life, charge acceptance and power of lithium-ion batteries at a lead-acid price point. While the two companies have been tight-lipped about their progress, Axion has reported that the PbC is meeting all expectations in double redundant long-string testing at Axion, Norfolk Southern and Penn State University. In a presentation at last October's William W. Hay Railroad Engineering Seminar hosted by the University of Illinois at Champaign-Urbana, Gerhard A. Thelen, Norfolk Southern's Vice President of Operations Planning & Support, spoke highly of the PbC's performance and offered an upbeat outlook for Norfolk Southern's battery-electric locomotive plans. Prototype trials of switching and long-haul battery-electric locomotives are anticipated later this year.

Stop-start idle elimination and hybridization of railroad locomotives and other heavy freight vehicles will never have the sex appeal of a Fisker Karma, but for companies like Norfolk Southern that spend $1.5 billion a year on fuel, knocking ten or fifteen points off the fuel bill with stop-start and hybrid locomotives is a compelling strategy.

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

April 13, 2012

Compared to what: the low-down on alt energy subsidies

Jim Lane

Hybrids, plug-in electrics struggle to pass the consumer’s “compared to what” test – and how much do those tax credits cost, anyway?

Perhaps the three most important words in technology development, bio-based or otherwise are “compared to what”.

It’s a useful way to look at bioenergy – because most studies look at bio-based technologies in a vacuum. Is there indirect land use change? Can you make fuel from algae? Do fuel tax credits raise the US federal deficit?

Yes, yes, and yes.. But compared to what? What’s the baseline?

You could, for example, ask the questions another way. Can eating at Outback Steakhouse cause indirect land use change? Are fossil fuels made from algae? Does having a baby raise the US federal deficit?

Yes, yes and yes.

There’s no end to the ridiculous line of questions that hard-liners can phrase to make anything look bad. It’s all a matter of the framing. That’s why ‘compared to what’ works. I mean, what are we going to do, stop having babies?

Sometimes the “compared to what” factor is a mechanism by which otherwise-admired technologies run into trouble.

The trouble with hybrids

Take, for example, the trouble with hybrids. We saw a report yesterday that only one in three current owners of a hybrid car, who purchased a new car in 2011, bought another hybrid. That’s not so good.

You notice that the question was not framed in the fashion of something like “do you like your hybrid?” or “does driving your hybrid make you feel like you are making a positive contribution to [fill in the blank].” To which the answer is, yes.

But as BP Biofuels chief Phil New observed last week at ABLC, infrastructure is a tough thing to get around, incumbents are hard to shove out. Just ask Mitt Romney, or Bob Dole, or Walter Mondale if you like.

The problem of the hybrid is not in the inherent qualities of the technology, but in comparing it to the convenience of the incumbent, the internal combustion engine. Electrics have a customer base, but the internal combustion engine’s overall cost-benefit proposition seems to be more compelling than previously understood.

The news, from the automotive market research team at Polk, inspired me to look at how the electric platform is doing. does an amazing job collecting and reporting on those stats – check out that site some time.

(Note: I wish the electrics platform well. Myself, I started in this world back in the 90s setting up demo drives of the old EV-1 for members of the Sierra Club, to which I have belonged for a long time. I’ve never stopped admiring the technology.)
Who’s selling how much what?
Vehicle sales

Here’s what is happening in hybrids and plug-in electrics, in the US market. Share on market has dropped from 2.78% of all new cars sold, in 2009, to 2.25% in 2011. This despite some well-publicized new market entrants.

Plug-ins have started off slowly, 345 cars in 2010 and 17,813 last year. Growing, but not as fast as once hoped. The Volt is outselling the Leaf by nearly 3-to-1. I bet range anxiety has a lot – a lot – to do with it.

Hybrids have had a drop-off, down to 268,807 cars last year from 290,272 in 2009, on the heels of the global financial crisis.

Bottom line, US automakers sold 1.14 million more cars in 2011 than in 2010, but only 11,435 more hybrids and plug-in electrics. Not an encouraging sign that Americans are falling in love with the electric platform, despite almost uniformly good publicity.

The $7500 alt vehicle tax credit

And despite that tax credit. Hmmm, what about that tax credit anyway? Is it the credit that is failing – not enough? Well, compared to what? Let’s look at how the alt-vehicle tax credit stacks up against fuel subsidies.

What is the credit? It’s a $7500 tax write down against the cost of the car, bringing a $42,000 Volt down into the mid-30s, for example. It applies to the plug-in electric.

The tale of the tape

Now, the average US car drives 190,970 miles in a lifetime (16.9 years at 11,400 miles per year, according to the Department of Transportation), and the average new car gets 33.9 miles per gallon (for 2010, according to the EPA). So, the average new car will guzzle 5,633 gallons of gas in its lifetime.

Now, a fuel tax credit is paid out over the lifetime of the car, not all upfront. So, the tax credit is worth less, because of inflation and the cost of money, at the end of the 16.9 years than at the beginning. It’s the bird-in-the-hand principle at work.

Applying a discount rate of 5 percent to the $7500 tax credit, over 16.9 years, a $7500 tax credit has $17,106 in buying power, compared to $7500 in fuel tax credits paid out over 16.9 years.

So what’s the bottom line? A $7500 tax credit, discounted over the life of a vehicle and amortized over the gallons of gasoline that a comparable fuel-burning car would use, is comparable to a $3.04 tax credit, per gallon of gasoline, for a car with an ICU engine.

Now, I can just about guarantee you that, if there were a $3.04 per gallon tax credit for [name your fuel of choice], you would see a different national attitude towards ethanol, LNG, or fueling cars with algae, crocodile pelts, or liquified tennis shoes.

I mean, ethanol is sold wholesale right now for $2.20 per gallon. And we know what 85 cent ethanol days do for gas stations. They cause mayhem – lines reminiscent of oil shocks.

So, where are the long lines to buy hybrids? It’s the problem of battery cost, which is just a complete problem-solving bummer.

But it gets worse. You see, the problem of the $7500 tax credit is that it is absolutely unsustainable. You remember the national outcry over a 45 cent per gallon tax credit for ethanol, when ethanol reached 9 percent market share. Unaffordable! the opponents cried. Imagine what the alternative vehicle tax credit will feel like when the government is fronting out the billions. The government outlay will reach that same level of Unaffordable! before plug-in even reach 2 percent market share.

The Bottom line

For now, electrics have won a fan base, but bio seems to be doing a better job of advancing the technology, reducing or eliminating tax credits, and giving customers more power of choice when it comes to selecting a car. The reason – bio-based is more affordable, and generally more infrastructure-compatible.

Notice, we didn’t say, “infrastructure compatible,” though drop-in fuels are indeed so. But even the dread ethanol is more compatible than plug-in electrics. It’s that old “compared to what” all over again.

You see, that’s the danger of analyzing technologies inside a bubble. The world is too swimmingly complex. But consumers know – in the way that Churchill once said, “there’s one person smarter than anyone, and that’s everyone.” Despite that enormous, unsustainable subsidy, they are sticking with the old ICU. Long-term, they will move away, but for now, bio-based continues to serve the emissions, energy security and employment goals of those who can’t quite yet part with their old engines, or part with the dollars to embrace the electric world. For now.

 Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe  here.

April 01, 2012

Energy Storage: Q1 2012 Winners and Losers

John Petersen

The first quarter of 2012 was the best of times for shareholders of companies that are developing and manufacturing cheap energy storage products like lead-acid batteries, but the worst of times for shareholders of pure-play lithium-ion battery developers. The following table tracks stock price performance in the energy storage and electric vehicle sectors for the first quarter of 2012 and for the twelve months ended March 31st.

3.31.12 Price Table.png

Long-term readers will notice that the current list is a good deal shorter than it was in March of last year because of my decisions to delete China Ritar Power (CRTP.PK), Advanced Battery Technologies (ABAT.PK), New Energy Systems (NEWN), C&D Technologies (CHHP.PK), Ener1 (HEVVQ.PK) and Beacon Power (BCONQ.PK) for reasons ranging from reporting deficiencies and changed business models to outright business failures. It's been a turbulent year.

The best performer for the year and the quarter ended March 31, 2012 was Tesla Motors (TSLA), a stock that investors either love - or love to hate. Tesla is trading at  a 119% premium to its $17 IPO price and one of the market's most heavily shorted stocks. Where sell side analysts see upside potential to $49, more pragmatic types expect the price to collapse into single digits. While experience tells me that consensus among short sellers is usually right, only time will tell.

It was a solid quarter for several companies that were beaten down over the last year but started to recover some of their long-term price declines during the quarter. The lead-acid group in particular is performing very well. The only group that was down for both the year and the quarter were lithium-ion battery developers. That group's performance would have been even worse if I hadn't culled Ener1 after its public stockholders got flushed in a bankruptcy reorganization.

The following summary table shows how the surviving companies in my five tracking categories performed compared to broader market indexes.

3.31.12 Sector Table.png

My last table for the day provides a summary of some key financial metrics I like to focus on when performing a high level forward-looking analysis of the companies I track. The data is stated in millions, derived from the most recent SEC reports filed by the companies and adjusted for material events including financing transactions and extraordinary losses reported after the date of the most recent financial statements.

3.31.12 Financial Table.png

For companies with a history of losses, the first number I focus on is working capital. If a company can't cover expected losses for the next year and make planned capital investments with available funds, it will almost certainly be forced to seek new financing and that can be tough in a turbulent capital market. This year, only three of the companies I follow have clear working capital issues, a significant improvement from last year. While I've been impressed with its business development activities over the last year, I'm less impressed with ZBB Energy's (ZBB) financing activities, which have boosted its share count by 57% while the balance sheet treads water.

A second key metric is the difference between a company's market capitalization and its book value, which is commonly referred to as blue-sky. Public companies normally trade at a premium to their book value because intangible assets like intellectual property, human resources, industry experience, customer relationships and the like usually have no balance sheet value. When the blue-sky premium is inordinately high, it's a bright red warning flag. When the blue-sky premium is out of line on the low side, it can hint at significant upside potential.

To simplify comparisons among companies I like to calculate the ratio between blue-sky and book value. The result is a "BS to Book Ratio" that can be quite illuminating.

The most alarming BS to Book ratios in my tracking group, in fact the most alarming BS to Book Ratios I've ever seen, belong to Valence Technologies (VLNC) and Tesla Motors. Valence has a $60 million deficit in stockholders equity but it carries a market capitalization of $138 million, which makes its BS to Book ratio infinite. Tesla is a little better since it has $204 million in equity and $182 million in working capital, but it's sky-high market capitalization of $3.7 billion gives it BS to Book Ratio of 16.4. To put things in perspective, Apple has a BS to Book ratio of 5.2 and it's become the most successful tech company in history.

Companies with inordinately low BS to Book ratios include Exide Technologies (XIDE) and A123 Systems (AONE) which both trade at a 40% discount to book value. If you adjust A123's book value to include $128 million of ARRA grant proceeds that aren't reflected on the face of its balance sheet, the discount to book value is closer to 60%. While both companies have had more than their fair share of problems over the last few quarters, I continue to believe their market prices have fallen to very attractive entry points.

I believe a BS to Book ratio of one is healthy for large established manufacturers and that BS to Book ratios of up to four are reasonable for transition stage companies that have completed their principal product development and are focused on commercializing new technologies. Enersys (ENS) has had a strong run over the last two quarters but still has a way to go before it achieves parity with Johnson Controls (JCI). Since Maxwell Technologies (MXWL) is currently sporting a BS to Book ratio at the top of the reasonable range, I don't look for it to outperform the market on a go-forward basis. Active Power (ACPW), on the other hand, seems to have significant upside potential if its management can continue to execute. Baring unforeseen negative developments, Axion Power International (AXPW.OB) should be an easy double as revenues continue to ramp and advanced testing programs with a variety of first tier OEMs and battery users mature into orders.

The energy storage sector occupies a unique position global industry because it must prosper as humanity changes the ways it produces and consumes energy. For those who believe conservation of fossil fuels and waste minimization are key elements of our energy future, batteries are essential. They're also essential to a future powered by intermittent power from the wind and sun. No matter what you believe the path will be, the future simply can't happen without cost-effective energy storage. It's not just a desirable thing – it is an essential thing!

There aren't any silver bullet technologies or killer apps in the energy storage sector, but there are several emerging trends that will create new multi-billion dollar markets over the next few years. In that rapidly evolving environment, every company that can offer a cost effective product will have more customer demand than it can satisfy. As global demand for cost-effective energy storage increases, so will margins and profitability.

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

March 15, 2012

Geneva Motor Show Highlights – The Revenge of the Internal Combustion Engine

John Petersen

March is Motor Show time in Geneva and it was fascinating to witness the shift in emphasis away from plug-in vehicles as European automakers highlighted their accomplishments in fuel efficiency technologies like HEVs, micro-hybrids and dual fuel drivetrains that can switch back and forth between gasoline and compressed natural gas. While there were modest displays for Tesla (TSLA), Fisker and other emerging brick-makers, and space was set aside for the obligatory plug-ins that most real manufacturers are toying with, the substantial majority of front-line vehicles at display entrances and halo cars on turntables were HEVs and micro-hybrids. As far as I could tell, this year's theme was The Revenge of the Internal Combustion Engine.

One of the most intriguing concept cars at the show was the "LC Super-Hybrid" from Controlled Power Technologies, which is really a super micro-hybrid. Instead of fooling with the expense and complexity of electric drive, CPT added longer gear ratios, a 2 kw belt driven starter generator, an electric supercharger and beefier electronics to a VW Passat with a 1.4 liter turbocharged gas engine. The changes cost less than $2,000, but the end result was a 50.5 mpg Passat with driving performance that rivals the 1.8 liter version while offering 23.4% better fuel economy. An associated presentation from the Advanced Lead Acid Battery Consortium summarized the value proposition in this table.

3.15.12 Table.png

The logic is compelling because it cooperates with the law of economic gravity. Micro-hybrids and the LC Super-hybrid offer attractive fuel savings at a very modest cost. While it's technically possible to do more with increasingly expensive and complex mild hybrids, HEVs and plug-ins, the incremental cost for a percentage point of incremental benefit starts getting absurd as soon as you add electric power to the wheels. After several years of unrelenting hype from ideologues, advocates, reporters and politicians who can't see the forest for the ferns the message is finally sinking in – The green in a consumer's wallet will always outweigh the green in his cocktail conversation.

On Monday of this week Automotive News published a brief but highly informative interview with Alex Molinaroli, the president of Johnson Controls Power Solutions (JCI), the world's most successful battery manufacturer and the only global manufacturer with major commitments to both lead-acid and lithium-ion batteries. While EVangelicals may be distressed by Mr. Molinaroli's frank assessment that electric cars won't generate big sales for at least a decade, I view it as just one more confirmation of my long-held belief that cheap will beat the pants off cool in the transportation market.

To understand the relative importance of JCI's diverse battery manufacturing activities, you need to dig into the segment information in its Annual Report on Form 10-K. At September 30th, the power solutions segment accounted for 22.4% of JCI's assets, 14.4% of its sales and a whopping 35.4% of its income before interest and taxes. In the last three years, JCI invested $937 million in its power solutions segment, plus an additional $300 million that was provided by a 2009 ARRA Battery Manufacturing Grant to the JCI-SAFT joint venture. Planned spending of several hundred million over the next three years will increase JCI's AGM battery manufacturing capacity from a couple million units in 2009 to:
  • 11.8 million units a year in Europe;
  •  6.8 million units a year in North America; and
  •  2.8 million units a year in China.
The reason is simple, AGM batteries generate twice the per unit revenue and three times the per unit margin of JCI's conventional flooded batteries. As its new AGM capacity comes online, JCI can expect its power solutions revenue to jump by $1.3 billion annually while adding about $500 million a year to operating income. AGM battery manufacturing is a key developing business segment for JCI and it's all being driven by automaker demand for better batteries that will be used primarily in micro-hybrids. A similar albeit less aggressive AGM battery manufacturing expansion is currently underway at Exide Technologies (XIDE) which is expanding its capacity to roughly 8.5 million units a year.

Of the two major battery manufacturers that are rapidly ramping AGM manufacturing capacity, I believe Exide presents the more exciting opportunity because its historic earnings were brutalized by restructuring costs and its stock has been beaten down to a point where it trades at 54% of book value and 8% of sales. If Exide's AGM manufacturing activities generate marginal profits that anywhere close to those expected from JCI, a $150 million boost to operating earnings could send the stock soaring.

Over the last year there's been an increasing amount of market noise as battery and supercapacitor developers hawk new systems for the micro-hybrid market ranging from enhanced lead-acid batteries to supercapacitors and even lithium-ion batteries, which proves once again that the whole world looks like a nail to a hammer manufacturer. Last month, SAE International published an important article on the micro-hybrid space titled "AGM battery takes primary role for idle stop-start in microhybrids" that explained the challenges of micro-hybrid applications with striking simplicity and clarity. I think it's a must read for any investor who wants to understand the space and the opportunities.

While I believe the SAE International article is too important to summarize, I do want to draw reader's attention to one key sentence.

"The fuel-economy improvements vary according to car maker, but a BMW study estimates up to 4% overall for current systems, with the potential for 10% if a higher charge-acceptance-rate battery (over 100 A) were available."

The sentence is important for two reasons.

First, BMW has spent almost three years and an immense amount of money testing the PbC battery from Axion Power International (AXPW.OB), an asymmetric lead-carbon capacitor that offers the charge acceptance of a capacitor and the power and energy of an AGM battery in an integrated hybrid device. A joint presentation from the two companies at the 2010 European Lead Battery Conference in Istanbul showed that alpha prototypes of the PbC offered sustained dynamic charge acceptance of 100 Amps through the equivalent of five years of simulated use under a testing protocol that was jointly developed by BMW and Ford.

Second, at this year's Geneva Motor Show BMW's front and center display space highlighted the new Series I; 116d EfficientDynamics Edition that launches this month and boasts CO2 emissions of 99 grams per kilometer, or fuel economy of roughly 62 mpg. Its turntable star was the BMW 6 Series Gran Coupé which will launch in June. Both cars are advanced micro-hybrids that share a novel BMW driver awareness system called ECO PRO Mode that helps drivers reduce fuel consumption by up to 20%. According to BMW's website:

"As soon as you select the ECO PRO Mode using Driving Experience Control including ECO PRO, everything is geared towards maximum efficiency. Pedal recognition, gear recognition and the best point at which to change gear are optimised and the heating and air conditioning strategy is adapted intelligently. The control display indicates which BMW EfficientDynamics functions are currently operating in order to actively reduce the amount of energy being used, such as Brake Energy Regeneration or optimised temperature control. The driver also receives situation-specific ECO PRO info on fuel efficient driving, such as the optimal gear to drive in. The Bonus Range Display in the on-board computer shows how much further it is possible to drive thanks to the ECO PRO Mode."

When I start connecting the dots an intriguing picture begins to emerge. The ALABC presentation for the LC Super Hybrid shows that automakers are spending €35 to €100 for each 1% of fuel economy in their mico-hybrids. The SAE is reporting that the best the automakers can do with AGM batteries is a 4% improvement in fuel economy, but that a battery with higher dynamic charge acceptance like the PbC could boost efficiency into the 10% range. When I factor in BMW's decision to showcase two advanced micro-hybrids with ECO PRO Mode, I have to think that BMW's found a solution to the dynamic charge acceptance issues they explained at the ELBC. These cars are promising fuel economy gains of up to 20% while providing real-time system performance information to the drivers. There's no indication that they've selected the PbC, but I have a hard time believing that a first tier automaker would introduce a new system that called drivers' attention to the dynamic charge acceptance degradation that all plagues all AGM batteries over time.

Now that the problems and challenges of electric drive are becoming increasingly obvious to the mainstream media and to politicians who need to think about elections later this year, I expect an increasingly difficult time for the developers of electric vehicles and their components. As Mr. Molinaroli said "A mass market for EVs is still a long way off. That's why we don't spend a lot of time talking about all this."

Investors with low risk tolerance who want meaningful portfolio exposure to an automotive mega-trend that's evolved quietly in the background while hucksters hype $100,000 toys for the 1% should take a serious look at JCI, a diversified dividend paying industry leader that's likely to be a dominant force in the micro-hybrid market for years to come. Those with a higher risk tolerance may want to take a good long look at Exide and consider what the market price might be with $150 million of incremental gross profit from AGM battery sales. The lottery ticket in the bunch is Axion, which currently trades at an R&D market capitalization in the $32 million range. Since Axion just tucked $8.5 million away in the bank from an offering at $0.35 per share, the price isn't likely to fall over the next six to nine months. If one or more of its first tier testing relationships matures into a customer relationship, the possibilities are endless.

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

February 03, 2012

Lux Boosts Their Micro-Hybrid Vehicle Forecast to 39,000,000 Cars a Year By 2017

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.

2.3.12 Lux.jpg

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.

January 25, 2012

Dark Clouds Threaten German Clean Energy Ambitions

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:
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.

1.24.12 Tech Lifecycle.png

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

November 28, 2011

Stop-start Idle Elimination Crossed The Chasm While Everyone Was Distracted

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."

9.27.11 Global SS.png

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.

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.

11.27.11 Data Table.png

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.

November 24, 2011

Bernstein and Ricardo Report: Cheap Will Beat Cool in Vehicle Electrification

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.

November 15, 2011

High Conviction Paired Trade – Short Tesla Motors And Buy Exide Technologies, The Sequel

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-Feb 2011

Buy Four Exide
Short One Tesla
Pair Trade Total

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

11.15.11 2010 Pair.png

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.

Price Per Share
Market Capitalization
Working Capital
Book Value
TTM Sales
TTM Earnings

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.

11.15.11 2010 Pair.png

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.

November 02, 2011

Is Stop-start Idle Elimination Crushing Vehicle Electrification?

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.

11.1.11 Pike Graph.png

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.

11.1.11 BMW Ford Graph.png

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.

October 29, 2011

Electric Vehicle and Lithium-ion Battery Investing For Imbeciles

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.

10.29.11 Lux Graph.png

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.

October 18, 2011

Nissan Keeping Options Open: BEVs, Hybrids and Cheaper Fuel Cells

by Clean Energy Intel

Nissan Leaf and
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, produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

October 04, 2011

Micro-Hybrids – The Fuel Efficiency Innovation of the Decade

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.

10.4.11 F&S Stop-start.png

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.

9.27.11 Global SS.png

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.

10.4.11 INL SS Economy.png

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)
Enhanced flooded batteries
(dual battery system)
AGM batteries
(single battery system)
Dual battery - flooded starter battery with
AGM accessory battery
Dual device - supercapacitor starter with
AGM accessory battery
Dual device - flooded starter battery with
PbC accessory battery
Axion Power
Lithium-ion battery
A123 Systems

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.

October 01, 2011

Energy Storage: A Bloody Q3 is Creating a Great Buying Opportunity

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.

9.30.11 Price Table.png

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.

9.30.11 ST Comparison.png

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.

9.30.11 LT Comparison.png

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.

9.30.11 Two Year.png

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.

September 20, 2011

Westport: Likely Beneficiary Of A Potential Quadrupling Of US Natural Gas Vehicles Sales by 2016

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, produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

September 18, 2011

The Shell-Westport Deal - Demers Interview Underlines the Risk For Clean Energy Fuels

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, produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund..

Shell Deal Great For Westport But Not For Clean Energy Fuels

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.

September 14, 2011

NREL Researchers Prove the Law of Diminishing Marginal Utility in Electric Drive

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.

9.15.11 NREL Slide.png

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.

6.23.11 Metals vs Oil.png

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.

9.15.11 German.png
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.

September 02, 2011

Axion Power is Poised to Dominate Energy Storage for Stop-start Idle Elimination

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.

6.27.11 10-year.png

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.

9.2.11 Disruption.png

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.

August 19, 2011

EVs, Lithium-ion Batteries and Liars Poker

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.

8.19.11 Health Damages.png

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.

8.19.11 GHG Damages.png

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.

8.19.11 Batteries.png

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. | | Comments (12)

July 31, 2011

Aggressive New CAFE Standards; The IC Empire Strikes Back

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.

7.31.11 Cafe Sandards.png

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.

July 17, 2011

Three Years of Seeking Alpha in Energy Storage

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.

7.17.11 Science Graph.png

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.

Initial Price
Friday's Price
Altair Nanotechnologies
$0.96 -87.9%
Valence Technologies
BYD Co. Ltd.
A123 Systems
Tesla Motors

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.

July 11, 2011

Saviors and Saboteurs in Alternative Energy

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.

7.10.11 China.png

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.

7.10.11 Energy vs Metals.png

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.

July 03, 2011

Energy Storage: A Turbulent Second Quarter Foretells Major Changes

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.

6.30.11 Performance.png

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.

6.27.11 5-year.png

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.

June 28, 2011

Johnson Controls Forecasts Enormous Stop-Start Growth

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.

6.27.11 5-year.png

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.

6.27.11 10-year.pngIn 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.

6.27.11 AGM Performance.png
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.

6.27.11 PbC Performance.png

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.

6.27.11 PbC AABC.png

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
$26.8 billion
Exide Technologies
$569 million
Maxwell Technologies
$442 million
Axion Power
$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.

June 24, 2011

The Alternative Energy Fallacy

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.

6.23.11 Metals vs Oil.png

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.

June 17, 2011

Maxwell Stakes its Claim in a $2.7 Billion Niche Market

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.

6.17.11 Maxwell.png

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.

June 01, 2011

Plug-in and Hybrid Locomotives; Another Sweet Spot for Axion Power

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.

6.1.11 Green Kid.png

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.

6.1.11 NS 999.jpg

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.

6.1.11 Sulfation.png

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.

April 15, 2011

Lux Research Confirms that Cheap Will Beat Cool in Vehicle Electrification

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.


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.

4.13.11 VRLA.png

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.

March 18, 2011

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

John Petersen

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

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

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

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

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

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

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

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

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

In their discussion of storage economics, the authors said:

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

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

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

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

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

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

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

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

March 08, 2011

Two Stocks For Grid Storage - ZBB Energy and Axion Power

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.

3.8.11 Storage Costs.jpg

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.

3.8.11 LAB Configurations.jpg

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.

February 23, 2011

Just One Sector – Fuel Efficiency Pure Plays

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.

2.23.11 Fuel Efficiency.png

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
Gasoline direct fuel injection
Dual clutch transmissions
Stop-start idle elimination

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.

2.23.11 Market Metrics.png

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.

February 16, 2011

Alternative Energy Technologies and the Origin of Specious

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.

2.16.11 Daraz Cartoon.png

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.

January 06, 2011

Will Chronic Traffic Problems Slow Down Chinese Car Ownership?

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:

IBM Commuter Pain Index

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:

chinese cars per capita

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

October 29, 2010

Watching The EV Rose Wilt

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.

September 26, 2010

ELBC 2010 – Automakers Discuss Their Battery Requirements For Stop-Start Systems

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.

8.26.10 VRLA.png

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.

8.26.10 PbC.png

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.

September 21, 2010

Alice In EVland; Six Impossible Things

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.

September 14, 2010

The Cruel Realities of EV Range

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.

9.2.10 Climate.png

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.

9.15.10 Hope.png

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

9.15.10 Plan.png

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.

September 03, 2010

The Best Peak Oil Investments: PTRP - Powershares Global Progressive Transport Portfolio

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.

PTRP Sector.png
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.


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.

August 04, 2010

The Best Peak Oil Investments: Six More Electric Vehicle and Hybrid Electric Stocks

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 logo
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 FergusonCapstone logo
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 Deepfryer999ABAT logo
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.

Chargeport for Nissan Leaf EV
Charge port for Nissan Leaf EV

Enova Systems (ENA) - suggested by InvestingfunEnova Systems Logo
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.


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.

July 21, 2010

The Best Peak Oil Investments: Ten Electric and Hybrid Car Stocks

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.


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.

June 30, 2010

The Big Oil-Electric Vehicle Connection

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, and a long time cleantech advocate and blogger on

June 22, 2010

The Best Peak Oil Investments Meet the Smart Grid: Telvent GIT SA (TLVT)

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.


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.


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.


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.


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.


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.

June 20, 2010

Electric Cars and the Fixed Cost Conundrum

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.

6.19.10 Fuel Costs.png

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

June 18, 2010

The Best Peak Oil Investments: GPS Navigation Stocks

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.


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.

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.


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.

June 06, 2010

The Best Peak Oil Investments: Smart Transportation

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. 


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

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

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


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.

June 02, 2010

Electric Vehicles Will Increase China's Air Pollution

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.

6.2.10 China CO2.png

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:

6.2.10 Battery Use.png

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.

May 29, 2010

Stop-Start Idle Elimination - Slashing Fuel Consumption By Up To 17%

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," 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%.
5.28.10 GM Efficiency.png
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.

5.28.10 Ultrabattery 1.png

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

5.28.10 Ultrabattery 2.png

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

5.28.10 Axion.png

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.

May 16, 2010

The Best Peak Oil Investments Meet the Strong Grid: CVTech Group

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.

CVTech logoIn "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.


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
Stock Price
Shares Outstanding
Market Capitalization
Annual Revenues
Earnings per Share
Earnings per Share
P/E (trailing 12 month)
5/5/2010 price, 2009 earnings
Cash per share
Book Value per Share
Net Debt per Share
Current Ratio
Dividend yield
% Revenues from Electricity(Vehicle) division
88% (12%)
EBITDA from Electricity(Vehicle) division
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.

May 13, 2010

The Best Peak Oil Investments, Part X: Improving Vehicle Efficiency

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. 
Transforming transportation
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%. 

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. 


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


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.

Billions 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.

May 01, 2010

More Common Sense in Energy Storage Investing

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.

4.30.10 System Cost.png

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.

Wind Growth.jpg

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

HEV Growth.png

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.

April 22, 2010

Two Hundred And Twenty Billion New Reasons To Be A Plug-in Vehicle Skeptic

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.

4.21.10 EC Budget.png

I'd love to be able to provide an in-depth analysis of the assumptions, but they're conspicuously absent. For me, that fact alone makes the analysis about as worthwhile as a call to the psychic hotline. While I hate to be a stick in the mud about history, I think it's always worthwhile to remember other transportation technology schemes conceived in the halls of government and sold to investment markets as the next big thing, including:

25 years ago Methanol
15 years ago Electric Vehicles
10 years ago HEVs and Electric Vehicles
5 years ago Hydrogen Fuel Cells
3 years ago Ethanol and Biofuels
Today Grid Enabled Vehicles
2012 ???

Given the sweeping technological change I've witnessed over the last thirty years, I have to chuckle when anybody is naïve enough to suggest that any technology can ascend to dominance and hold that position for the next thirty years. On balance, I see the forecast decade of sunk-costs as realistically achievable but view the forecast cost recovery and long-term benefit decades as highly suspect.

To their credit the Electrification Coalition has always been upfront about the enormous challenges that electrification of personal transportation entails, including:
  1. The current high cost of batteries;
  2. The current lack of reliable access to refueling infrastructure for GEVs;
  3. Regulatory and coordination problems that will complicate interface with the electric power sector; and
  4. Consumer acceptance issues.
To overcome these seemingly insurmountable problems the coalition members propose several policy initiatives that will use your tax money to underwrite their business goals and pay for somebody else's consumption. The principal policy initiatives are summarized below, along with my personal observations.

Policy One - $13.75 billion
Establish tax credits for installing automotive grade batteries in stationary applications to help drive scale Giving utilities credits for using uneconomic automotive batteries in uneconomic grid applications is like buying eggs for a dime, selling them for a nickel and trying to make up the difference on volume.
Policy Two - $10.00 billion Establish loan guarantees for retooling automotive assembly lines and manufacturers of GEV components.
Last time I checked, $10 billion in loan guarantee costs can add up to $50 to $100 billion in government liabilities if the borrowers default.
Policy Three - $9.70 billion Establish a guaranteed residual value for used large-format automotive batteries.
Doesn't anybody believe the happy talk about the future resale value of used EV batteries?
Policy Four - $74.10 billion Modify electric vehicle tax credits to make them variable such that the upfront cost of a new PHEV or EV is equal to a comparably sized conventional vehicle.
I thought consumers were lining up around the block to pay a premium price for less utility, performance and flexibility.
Policy Five - $12.60 billion Establish business tax credits equal to 75 percent of the cost to construct public charging infrastructure.
Risk money is hard to find in a chicken or egg situation.
Policy Six - $0.80 billion Extend consumer tax credits for home charging equipment.
Home charging stations are part of the car cost.
Policy Seven - $0.18 billion Establish utility tax credits for up to 50 percent of the costs of the necessary IT upgrades to sell power to electric vehicle consumers.
Why is pocket change IT spending even an issue?
Black Hole Policy Costs
The unexplained $100 billion gap between the $121.1 billion in line item costs and the $220 billion cumulative increase in the Federal deficit by 2019.
What's a $100 billion between friends?

When I consider the electrification coalition policy initiatives, it's easy to see why the members are eager supporters of a proposal to convert huge piles of taxpayer money into operating revenue. I have a harder time, however, with the tacit admission that electric drive has no real future without government intervention to force the issue. The wheels really come off the bus when I consider the duplicity of suggesting that we can expect quantum leaps in battery powered electric drive technology, but must ignore the likelihood that some other nascent technology will gain enough ground over the next decade to give battery powered personal transportation a run for the money.

At its core, cleantech is an ethical system based on the responsible application of technology to optimize the use of natural resources, moderate global warming, secure energy independence, offset rising energy costs and increase the well-being of the six billion people that live on this planet. There has never been an industrial revolution led by a technology that promised to deliver less economic benefit at a higher economic cost. Shifting the burden from consumers to taxpayers is like re-arranging the deck chairs on the Titanic, a hollow subterfuge that does nothing to eliminate the burden of unconscionable waste masquerading as conservation.

Were I made of sterner stuff I'd short them all. Fortunately, experience has taught me that the market can remain irrational longer than I can remain solvent. So I'll just watch the predictable train wreck from the sidelines.

Disclosure: None.

April 15, 2010

The Best Peak Oil Investments, Part VII: Peak Substitutes?

Tom Konrad CFA

There are two types of solutions to the liquid fuels scarcity caused by stagnating (and eventually falling) oil supplies combined with growing demand in emerging economies.  The most obvious is to find a substitute to replace oil.  Supply constraints limit the full replacement of oil by most potential substitutes.  Understanding those constraints leads us to the investment opportunities that arise from these substitutes. 

Increasing demand and constrained supply of oil is fueling the search for oil substitutes to use in its place.  Unfortunately, almost all of these potential substitutes also have limited supply.  This article looks at the factors that limit the supply of (or demand for) potential substitutes.  The next article, Part VIII will combine the insights about the barriers to adoption discussed in part VI and the constraints discussed here to highlight the investment opportunities which arise from these barriers and constraints.

Constraint 1: Conversion Efficiency / Alternatives

All alternative fuels require significant resources.  Conventional biofuels require agricultural land, fertilizer, pesticides, water, enzymes, and heat in fermentation.  Gas to liquids uses natural gas. 

To understand if a particular alternative fuel will ever be economic, it helps to consider what else might be done with these inputs.  If the alternative uses for these inputs have more economic value, then making fuel from them will never be an economic proposition.

With conventional biofuels, there is a trade off between one group of people driving, and another group eating (the food-vs.-fuel debate) and also the effects of land use change because of biofuels' tendency to increase the area used for crop land.  These trade offs are typically complex, and often difficult to calculate precisely, but in a few cases, the results are quite clear and enlightening.

Stranded Natural Gas is gas co-produced with oil far from transportation infrastructure.  Such gas is essentially a waste stream which would be burned to prevent it from venting into the atmosphere, so if the gas could be economically transported to market, either as liquefied natural gas or a Gas to liquids (GTL) product that can be shipped out with the oil, there will be a net gain, no matter how much of the gas is lost in the conversion process.  In contrast, pipeline natural gas has many alternative uses, and so its value as a transportation fuel must compete with power generation, domestic, and industrial uses.  Further, the direct use of natural gas as a transportation fuel in vehicles is in direct competition with GTL technologies.  Because much of the energy content is lost in the GTL process, it is unlikely that GTL will be viable for pipeline gas, even though it may make sense for stranded natural gas. 

A useful tool for making these sorts of comparisons is Energy Return on Energy Invested (ERoEI), which is the ratio of the energy put into a process to the energy embodied in the products.  ERoEI is useful in large part because there is a fairly extensive body of ERoEI analysis for various fuels.  In general, if two processes use the same feedstock, the one with the higher ERoEI is likely to be the most economic.  This comes with many caveats, however, since it does not take into account the different qualities of the fuels (can you really compare high-grade energy such as electricity to low grade energy such as heat?)  Further, ERoEI does not take into account the timing of the energy flows.  A process with an ERoEI of 1.1 may be better than a process with an ERoEI of 2, if the first process takes only a day and can be repeated every day, and the latter process takes a year.  I looked at a way to account for the timing of energy flows with a measure I call EIRR here and here.

Many companies are considering ways to use Municipal Solids Waste (MSW) and industrial waste streams to make various alternative fuels.  Purer waste streams with higher energy content have the most alternative uses, and the use with the highest economic value is likely to render most of the other uses uneconomic.  For instance, waste paper can be recycled, burned to produce electricity, or converted into liquid fuels by a variety of enzymatic, chemical, and thermochemical processes.  There is also economic value in reducing the amount of recycled paper at the source, by printing double-sided or moving to paperless processes.  In the case of waste paper, I do not expect it to ever be converted into fuels on a large scale, because of the potential for recycling.  If a ton of waste paper were turned into fuel, that would be a ton of paper which could not be recycled, leading to an additional ton of paper which would need to be made from virgin wood.  This is economically similar to growing the wood for biofuel, and skipping the intermediary paper step.

Another use for MSW with high energy content is to convert it into electricity via incineration.  It can also be used to make ethanol or other liquid fuels with a biomass to liquids process.  Much can also be recycled or composted.  Which one of these processes will be used for any particular waste stream will depend on the nature of the waste itself, as well as the local market for each fuel.  It also depends on the value of carbon credits, since while producing electricity tends to be the most effective way to reduce carbon emissions, electricity is difficult to store or use as a transportation fuel. 

One relatively easy comparison arises from Hydrogen.  Hydrogen currently is made by either reforming natural gas or using electricity to electrolyze water.  In both processes, some energy is lost, and the original natural gas or electricity are better fuels on several measures than the hydrogen itself.  I don't expect the hydrogen economy to progress beyond the demonstration stage unless we first find much more efficient ways of creating hydrogen and cheaper ways of storing it and using it in vehicles.

Constraint 2: Total Supply

The reason we're concerned with peak oil investments is because the total supply of oil is finite.  When total supply over time is finite, the amount pumped in any given year is also limited, and so must have a maximum, or peak.  The timing of the peak is less important than the elasticity of supply.  Elasticity of supply is a measure of how much the price of a commodity has to change in order to increase or decrease the amount supplied in response to changes in demand.  If a small change in demand requires a large change in price in order to bring supply into balance, then the supply of the commodity is inelastic.  If a large change in demand requires only a small change in price to bring supply into balance, then the supply of the commodity is elastic.  The elasticity of demand is the same, with regards to changes in price in response to changes in supply.

Sometime near the peak, oil supplies will become inelastic.  Increasing demand will produce higher prices, but the higher prices will not be able to stimulate supply to match the increased demand.  Instead, oil prices will stay high enough for reduced demand (demand destruction) to bring supply and demand back into balance.

Although we may not have reached "Peak Oil" in the sense of maximum annual production, I believe that the wild swings in the price of oil since 2007 demonstrate that we've reached peak oil in the sense of inelastic supply, as described in the preceding paragraph.  Although worldwide oil production was slightly higher in 2008 than 2005, overall production was basically flat for the whole period since 2005, despite rapidly rising prices.  The increased price volatility combined with tiny changes in market volume are strong signs of decreased elasticity or supply or demand.  I see no reason for demand to have become significantly less elastic in recent years, so I assume the observed decreased elasticity is elasticity of supply.

WTI Oil Price

Biofuels can be produced in relatively small quantities without much impact to the food supply and agricultural system.  Yet as we scale them up to replace a significant fraction of our oil use, they impact farmland and require the conversion of natural ecosystems to farmland.  Intensive biofuel production can also degrade existing farmland.

Only electricity has no real constraints on total supply, with wind and solar resources sufficient to supply all our energy needs hundreds of times over, so long as we build the wind and solar farms. 

Constraint 3: Climate/Environment

How we account for environmental externalities will also have a large influence on which alternative fuels thrive and which ones become historical footnotes.  Because of the fairly large supplies of relatively inaccessible coal, Coal-to-Liquids (CTL) technology compares favorably to all the other alternatives I've discussed until you consider the carbon emissions, disposal of the waste, and the impacts of coal mining that it entails.  All fossil fuels, even coal, are finite, and so using alternative fossil fuels at best delays the impact of peak oil.  Renewable options, in contrast, are steps towards a long-term solution.

Nevertheless, CTL stocks may turn out to be good investments despite the environmental harm.  After all, environmental harm is an externality, and so long as the local government chooses not to make the CTL producer pay the real costs of production, high oil prices could make CTL plants very profitable.  On the other hand, large unpriced externalities represent a significant risk to the companies creating them: new regulation may put a price on Greenhouse Gas emissions or take other regulatory steps which make the process unprofitable at the stroke of a pen.


Failing to take into account all constraints on a technology is a simple and common mistake.  Unfortunately, this common mistake leads investors to overly optimistic conclusions, often followed by overly optimistic investments.  Since overly optimistic investments are one of the surest ways to lose money, investors will be wise to keep these constraints on potential oil substitutes in mind when considering investments.

One reader of part VI made just this mistake.  He made the case that the supply of conventional gas (Constraint 2: Total Supply) might not limit the use of natural gas vehicles because of the potential for biomethane from cattle.  What he failed to consider is that while biomethane can be used as a fuel for natural gas vehicles, it can also be used for anything else that natural gas is currently used for (Constraint 1:Alternatives.)  Because Biomethane and natural gas are essentially interchangeable, it is more informative to consider the potential contribution of Biomethane to total natural gas supply than to calculate how many vehicles could potentially be fueled by biomethane.  I was not able to find a national resource assessment for biomethane, but I did find an assessment for California.  In California, the technically feasible biomethane resource (including biomethane from livestock) was less than 1% of California's natural gas usage.  Hence, fluctuations in natural gas supply are likely to swamp any increases in biomethane production.

If we want to understand the amount of natural gas available for natural gas vehicles, we need only consider the supply of fossil natural gas.  Biomethane is only a rounding error in the overall calculation.  Hence, while biomethane may make some investors rich by growing rapidly from a small base, it will have a negligible difference to the success of natural gas vehicles.  If you believe biomethane will take off, the best way to invest based on that belief would be to invest in dairy farms, not in natural gas vehicles.

In part VIII, I'll bring together these ideas about constraints with my thoughts about barriers from part VI, and highlight the investments that should benefit from both.

Previous articles in this series are available here:
  1. Biofuels
  2. Hydrogen and Vehicle Electrification
  3. Natural Gas Vehicles
  4. GTL and CTL
  5. Algae
  6. Barriers to Substitution

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

April 13, 2010

The Best Peak Oil Investments, Part VI: Barriers to Substitution

Tom Konrad CFA

There are two types of solution to the liquid fuels scarcity caused by stagnating (and eventually falling) oil supplies combined with growing demand in emerging economies.  The most obvious is to find a substitute to replace oil.  These substitute have barriers to their use as a replacment petroleum based fuel.  Understanding those barriers also leads us to the investment opportunities that arise from these substitutes. 

As I wrote the first five parts of this series, looking into potential substitutes for gasoline and diesel, it was clear that many potential substitutes would need to overcome barriers to its adoption.  This article and the next will look at these barriers, and what they say about the potential for investments in substitutes for liquid fuels from petroleum.  Part VII will look at factors which constrain the supply of these substitutes.  Part VIII will combine the resulting understanding of these barriers and constraints to highlight the investment opportunities arising from them.

Barrier: Infrastructure

One great advantage gasoline and diesel have over most of the proposed alternatives is an extensive infrastructure.  In addition to an extensive pipeline network, we also have a large number of competing fueling stations.  If a new fuel requires new fueling stations, like natural gas and hydrogen, or charging points and (potentially) battery swapping stations (electricity) it may not be enough to make sure that enough filling stations exist for would-be drivers to make long trips.  If there is only one national network of filling stations, drivers will likely become concerned that the lack of competition will mean that they overpay for fuel.

Among the possible substitutes, the synthetic fuels discussed in part IV, as well as biogasoline are the best placed in that they can use existing infrastructure. 

In terms of having a nationwide transportation network, the best placed substitutes are natural gas and electricity.  In terms of point of sale delivery, electricity has an advantage in that it's safe and relatively cheap to place charging infrastructure in parking lots, and most homes already have the capability of charging an electric vehicle, although it takes a long time from the 120V outlets in most garages.  Most homes do not have natural gas in the garage, and even when they do, a compressor is necessary. 

Conventional biodiesel and ethanol can be dispensed from the same pumps used for fossil fuels, but both present some difficulties in transport and storage.  Biodiesel cannot be allowed to get too cold, because it begins to congeal, so in colder climates, storage tanks as well as transport tankers must be insulated and even heated.  Ethanol cannot be shipped through pipelines that are also used for gasoline, because it absorbs too much water.  Hence ethanol and biodiesel are mostly shipped in tanker trucks and rail cars.  But both can be blended with conventional fuels, meaning that little new dispensing infrastructure is needed.  The importance of a competitive fueling infrastructure can be seen in in this November 2009 statement from the Trucking industry to the US Senate [pdf] about the conversion of trucking from diesel to natural gas.  They say,

It is not sufficient to have a single LNG vendor with stations built at strategic locations along key freight corridors. Absent a competitive refueling infrastructure, trucking companies could face unreasonably high prices at individual retail LNG stations that have no competition in a particular geographic area. While competition exists in the natural gas industry, the high barriers to entry for retail LNG refueling stations may slow the development of a competitive refueling infrastructure. A competitive LNG refueling model would require the presence of multiple entities selling LNG in the same geographic area.

This objection applies to any potential alternative vehicle which locks the user into one fuel, and includes Electric Vehicles (EVs) such as the Nissan Leaf and Hydrogen Fuel Cell Vehicles, but not to flex fuel vehicles (E85 ethanol) or biodiesel (which can be used in any diesel engine.)  It also does not apply to Plug-in Hybrid Electric vehicles, such as the Chevy Volt, because while charging points and battery swapping stations may be limited, the existing fueling infrastructure provides supply competition.

The fuel with the weakest infrastructure is hydrogen.  Like natural gas, it needs specialized filling stations, but hydrogen lacks a national pipeline network.

Incomplete infrastructure can be either a barrier or an opportunity.  If a potential fuel is compelling for other reasons, firms well placed to provide the necessary infrastructure should be able to profit handsomely.  If, on the other hand, a fuel lacks an existing infrastructure and also faces significant other barriers, it will be unlikely to become a significant transportation fuel, and infrastructure investors are likely to lose their shirts along with everyone else interested in the fuel.

Barriers: Energy Density

When talking about energy density, it's important to consider not only the fuel, but the tank.  Both volume and weight are important.  Few fuels are as energy-dense as gasoline and diesel, both of which can be stored in simple, unpressurized fuel tanks.  In contrast, the fuel tank for electric vehicles is the battery, and batteries are not only large and heavy for the amount of energy they store, they are also extremely expensive and degrade over time.  Although the cost of driving an electric vehicle are very low compared to gas or diesel, the large up-front investment in batteries makes the total cost of owning an eelctric vehicle higher except for drivers who use the vehicle for frequent, short trips with time to recharge in between. 

The big winners for energy density are synthetic fuels, as well as conventional biofuels such as ethanol and biodiesel.  Although ethanol has been criticized because it only contains about 2/3 of the energy of the same volume of gasoline, it's close enough that people using ethanol don't have to completely change their behavior in order to use it in a conventional vehicle.  In contrast, electric vehicle manufacturers find that the range of their vehicles is constrained not only by the cost of batteries, but also by their size and weight.  Weight is particularly important, because as a vehicle gets heavier, more of the energy is used to move the vehicle rather than the occupants, which in turn requires even more batteries.

In between energy-dense biofuels and bulky batteries lie gaseous fuels: natural gas and hydrogen, which have good energy per gram, but require heavy pressurized tanks to pack them into a space small enough to fit in a vehicle.  Hydrogen requires a pressurized tank that takes up a lot of space, even if it is not very heavy.  Natural gas can either be used as Compressed natural gas (CNG) or Liquid Natural Gas (LNG.)  CNG is similar to hydrogen, although it is a little more energy dense.  LNG has the same energy density as diesel, but requires considerable energy to compress into that form, and is not available from a home fueling station.  Hence, natural gas vehicles present a tradeoff between energy density and fueling infrastructure.


Considering just the barriers of energy density and infrastructure, it is clear why the conventional biofuels ethanol and biodiesel gained an early lead over alternatives such as electricity and hydrogen.  The big questions about biofuels arise from constraints in their total supply, and the harm that many forms of biofuel agriculture do to the environment.  Synthetic fuels made from natural gas and coal (GTL and CTL) can also have excellent energy density and can take advantage of existing infrastructure and vehicle fleets, but so far have not been adopted in a large way becasue they have had to compete with cheap oil.  As oil prices rise, we will probably also see the rise of synthetic fuels, but, like biofuels, their long term prospects will be limited by total supply and possibly by concern about the environmental harm they do. 

Such supply constraints and environmental concerns will be the subject of Part VII.  Previous articles have been:
  1. Biofuels
  2. Hydrogen and Vehicle Eletrification
  3. Natural Gas Vehicles
  4. Synthetic fuels: GTL and CTL
  5. Algae


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.

April 11, 2010

EPA and NHTSA Predict 42% Market Penetration for Start-Stop Systems by 2016

John Petersen

On April 1st the National Highway Traffic Safety Administration [NHTSA] and the Environmental Protection Agency [EPA] announced a joint final rule establishing fuel economy standards for all light duty vehicles sold in the United States. In my last article, I focused on the overall fuel efficiency improvements the new CAFE regulations will require. After spending a couple days reading and digesting the Final Rule Release, which runs to 1,469 pages, I've concluded that my initial optimism over the future of start-stop technology was understated.

The Final Rule Release begins with several hundred pages of introductory materials that describe the key efficiency technologies automakers are expected to implement between now and September 2015. It describes start-stop as:
  • 12-volt micro-hybrid (MHEV) – also known as idle-stop or start-stop and commonly implemented as a 12-volt belt-driven integrated starter-generator, this is the most basic hybrid system that facilitates idle-stop capability. Along with other enablers, this system replaces a common alternator with a belt-driven enhanced power starter-alternator, and a revised accessory drive system.
After a lengthy discussion of how each of the principal efficiency technologies will contribute to the overall goal and explaining the freedom the individual automakers will have to pick and choose solutions, the Final Rule Release includes the following table, on page 484, that identifies the automakers and estimates the percentages of their 2016 model year fleets that will incorporate each technology.

CAFE Technologies.png

In the supplemental tables to its "Annual Energy Outlook 2010," the Energy Information Administration forecast new light duty vehicle sales of 16.5 million units in 2016, which implies nationwide sales of 7 million vehicles with start-stop systems if the NHTSA and EPA estimate is accurate.

I've previously explained why start-stop technology is hard on starter batteries. It basically boils down to the fact that the battery will need to start the engine several times during a typical commute instead of starting it once. While the automakers can get better start-stop performance by using ultra-premium lead-acid batteries, even premium batteries have problems with a chemical process known as sulfation which is the primary reason lead-acid batteries fail.

I've also explained how a new generation of lead-carbon battery technologies including the Ultrabattery from Australia's Commonwealth Scientific and Industrial Research Organisation [CSIRO] and the PbC® battery from Axion Power International (AXPW.OB) are a game changer for energy storage because they reduce or eliminate sulfation while significantly increasing both acceptable charging rates and available power. The end result is a battery that's price competitive with premium lead-acid batteries and performance competitive with lithium-ion batteries, as shown in the following graph from Sandia National Laboratories.

Sandia PSOC.png

For eighteen months I've been predicting with increasing confidence that the cleantech revolution would start with baby steps, rather than giant leaps, and that advanced lead-acid and lead-carbon batteries would play a crucial role in the widespread implementation of micro, mild and strong hybrid electric vehicle [HEV] technologies. My confidence ramped up a notch or two last August when President Obama announced $2 billion in ARRA battery manufacturing grants that included:
  • $34.3 million to Exide Technologies (XIDE) with Axion Power International for the "production of advanced lead-acid batteries, using lead-carbon electrodes for micro and mild hybrid applications;" and
  • $32.5 million to East Penn Manufacturing for the "production of the UltraBattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications."
My confidence continued to rise as reports from the Energy Information Administration, Frost & Sullivan, Roland Berger Strategy Consultants and most recently Lux Research concluded that start-stop technology would become a standard option for new vehicles sold in both Europe and the U.S. over the next few years. Now that the NHTSA and EPA have weighed in with their estimate that 42% of the 2016 model year new car fleet will be equipped with start-stop, my confidence level couldn't be higher.

Since I started blogging I've argued that media and political hype about plug-in vehicles has created an odd dynamic where market expectations for the potential long-term beneficiaries of the cleantech revolution are highly inflated while market expectations for the likely near-term beneficiaries are unreasonably low. There is simply no other way to explain the fact that Exide trades at 17% of historical sales while A123 Systems (AONE) trades at 3x forecasted 2012 sales, or that Axion trades at less than 4x its tangible book value of $26 million while Ener1 (HEV) trades at closer to 10x its tangible book value of $57 million.

For the reasons I've discussed at length in a series of articles about the fundamentally flawed idea that we can use batteries to replace fuel tanks, I believe there are significant risks that the lithium centerfolds will fail to meet the market's high expectations and their stock prices will suffer. Conversely, I see a very high probability that Exide, Axion and others will outperform the market's modest expectations and their stock prices will respond accordingly.

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

March 25, 2010

Cleantech Investing – Aspirations vs. Economics

John Petersen

In a November 2008 thematic report, The Sixth Revolution: The coming of Cleantech, Merrill Lynch strategist Steven Milunovich identified cleantech as the sixth technological revolution. He borrowed his definition from Lux Research which describes cleantech as "the universe of innovative technologies designed to optimize the use of natural resources and reduce environmental impact" and warned that "investors must pay attention because cleantech could revolutionize much of the economy, including the utility, oil and gas and auto industries."

The six technological revolutions Milunovich identified were:

The Industrial Revolution
Age of Steam and Railways
Britain spreading to Europe and U.S.
Age of Steel, Electricity and Heavy Engineering
U.S. and Germany
Age of Oil, the Automobile and Mass Production
U.S. and Germany spreading to Europe
Age of Information and Telecommunications
U.S. spreading to Europe and Asia
2004 Age of Cleantech and Biotech
U.S. and Europe going global

The new technology classes he identified as critical to the cleantech revolution include:
  • Renewable energy led by solar, wind, and biofuels;
  • Energy efficiency;
  • Energy storage;
  • Electric vehicles;
  • Nano materials; and
  • Synthetic biology.
The fundamental drivers he identified include:
  • Increasing global CO2 emissions that may contribute to global warming;
  • Rapid industrialization in the developing world that will strain global production capacity for everything; and
  • Practical peak oil, which I prefer to think of as peak cheap oil.
Quoting Carlota Perez, Milunovich also noted that “Two or three decades of turbulent adaptation and assimilation elapse, from the moment when the set of new technologies make their first impact to the beginning of a ‘golden age’ or ‘era of good feeling’ based on them.” With due respect for the lessons of history, I believe the cleantech revolution will be very different from anything humanity has ever experienced.

Because of my father's diverse business interests I learned about computer leasing and pre-stressed concrete building systems in the mid-60s. I also worked in electronic circuit board and plastic products factories in the late-60s before graduating from high school. When I took computer programming in the mid-70s we used punch cards for data entry and by the late-70s my law school was a beta site for computerized legal research. During my professional career I've lived the transition from magnetic card electric typewriters, four-function desktop calculators and late nights at the financial printer proof reading paper regulatory filings to electronic preparation, filing and distribution of almost everything.

In other words, I've not only lived through the information and telecommunications technology revolution, I've been immersed in the changes as they occurred. As an incorrigible early adopter, I've experienced first hand the transitory nature of the latest and greatest new technology. While it's a simplistic example, I think most in my generation can remember buying some if not all of the following: 45 RPM vinyl, reel-to-reel tape, 8-track tape, cassette tape, digital audio tape, compact disks and MP3. In their respective eras, which were surprisingly short lived in most cases, each of these technologies was the latest and greatest thing until the next greater thing came along. Given all the change I've seen over the last 40 years, I have a hard time putting much faith in anyone who believes long-term forecasts of dominant technologies are possible, much less reliable.

My favorite Seeking Alpha contributor is John Mauldin, a big picture macro-economic analyst who's been remarkably prescient in the 10 years I've been following his weekly letter. One of John's recurring themes is that we're living in an era when the rate of technological change is accelerating rapidly. As a result, John suggests that humanity is likely to see twice as much change in the next twenty-one years as it did in during the entire 20th century. Based on my experience over the last 40 years, I tend to think that John is probably right, and that anyone who tries to predict the future beyond 2015, or perhaps 2020 at the outside, is delusional. There is simply no way to predict what the disruptive changes will be or when they will occur. After all, if changes were predictable, they wouldn't be disruptive.

While I believe there are very few certainties, I know that there are 5.5 billion people on this planet who would like a small piece of the lifestyle that 500 million of us have and frequently take for granted. I also know that thanks to the last industrial revolution, about half of the world's poor know there is something better than mere subsistence. Human nature being what it is, the first response of people who want a better life will be to work for it and the second will be to fight for it. To paraphrase Vinod Khosla, the big challenge of the next century will be finding relevant scale solutions to persistent shortages of water, food, energy and virtually every commodity you can imagine. Any failure to achieve the goal could be catastrophic.

Since I started this blog in the summer of 2008, I've built a bit of a reputation as a contrarian who frequently mocks prevailing wisdom and criticizes innovations that others laud as game changers. The reason I do so is simple. First, I steadfastly adhere to the definition of cleantech as "the universe of innovative technologies designed to optimize the use of natural resources and reduce environmental impact." Second, I steadfastly adhere to the idea that in a world of accelerating change, any forecast that involves a period of more than five or ten years will be wrong. I may not know what the intervening technical change or market force will be, but I know to a certainty that there will be one if not several intervening technical changes or market forces.

I'm an unrepentant critic of plug-in vehicles because they violate both of my core rules. I've published calculations that prove plug-in vehicles are suboptimal users of natural resources and suboptimal at reducing environmental impacts. To add insult to injury, none of the reasonable experts are predicting meaningful market penetration in less than ten years, although they invariably predict wonderful developments over 20 to 30 years. Things may turn out exactly the way the experts predict, but given the disastrous natural resource balance and my experience over the last 40 years of rapid technological change, I have to believe future realities will be far different from the parochial and hindsight intensive forecasts we read today.

All the reasons that lead me to believe plug-in vehicles combine immense risk with insignificant reward and are little more than waste masquerading as conservation lead me to support stop-start, mild hybrid and full hybrid solutions. These are technologies that can be widely implemented today and are likely to become standard options over the next five years. They will almost certainly be displaced by something better within 10 to 15 years, but in the interim the companies that supply the components will thrive while the developers of more exotic technologies are losing money as they learn to out-manufacture Japan and Korea. While I'd be reluctant to suggest that any company is doomed to fail, I'd be equally reluctant to assume success too early in the development cycle.

In April of last year, I posted an Instablog that spoke very highly of the GM PUMA, an ultra light EV concept based on technology originally developed for the Segway. My view was that while using batteries to move one or two passengers and 3,000 pounds of vehicle at highway speeds was irrational, but using batteries to move one or two passengers and a few hundred pounds of vehicle at city transit speeds could be a winner. Just this week I ran across a story that discussed a new joint venture where GM and Shangai Automotive Industry Corp. plan to build a gussied up version of the PUMA called the EN-V for use in congested mega-cities.


I thought it was a good idea a year ago and still do. More importantly it's an outstanding example of the kind of outside the box user oriented thinking that will be required in an increasingly resource constrained world.

Every industrial revolution in history has been driven by innovations that have proven their ability to do more valuable work with lower inputs of raw materials, capital and labor. Despite lofty aspirations, consumers are far more motivated by the green in their wallets than the green in their cocktail party conversations. Try as they might, governments are never successful in their efforts to plan economic growth or drive uneconomic technologies into the market. I've long advocated the proposition that a business model that does not make sense without government subsidies does not make sense. I've also been forced by hard experience to shorten my investment horizons from decades to a few years. While I haven't yet reached the point in life where I refuse to buy green bananas, I don't have a great deal of interest in carving a new plantation out of raw jungle.

Disclosure: No companies mentioned.

March 24, 2010

The Best Peak Oil Investments, Part III: Natural Gas Vehicles

Tom Konrad CFA

There are many proposed solutions to the liquid fuels scarcity caused be stagnating (and eventually falling) oil supplies combined with growing demand in emerging economies.  Some will be good investments, others won't.  Here is where I'm putting my money, and why.  This third part looks at the possibility of displacing gasoline with natural gas, by converting vehicles to natural gas.

In Part II of this series, I listed five potential substitutes that have been proposed to replace oil as limited supply and growth in developing markets draw oil away from traditional users.  These were:
  • Biofuels and Biochemicals
  • Vehicle Electrification
  • Hydrogen
  • Natural Gas
  • Coal and Natural Gas to Liquids
Part I looked deeper into the potential for biofuels to displace oil, and made some recommendations as to which stock might benefit most from this trend.  Part II looked at vehicle electrification and hydrogen fuel cell vehicles.  This part looks at natural gas vehicles (NGVs), their potential to displace oil, and associated potential investments.

Why Pickens' Plan Won't Work

  To understand why we should not expect too much from NGVs, I find it useful to start with the reasons proponents expect that NGVs should be able to displace oil.  T Boone Pickens is the leading proponent of this strategy, so let's take the main points from his PickensPlan:
  1. It's off-the shelf technology
  2. Initial costs will fall as manufacturing ramps up
  3. Fuel costs are lower than diesel
  4. We have abundant domestic natural gas supplies.
  5. Electric Vehicles and Hydrogen are not viable for long distance trucking
  6. NGVs are a natural fit for fleet vehicles.
  7. Natural Gas is the cleanest fossil fuel
  8. There is an existing natural gas infrastructure throughout the country.
I recently came across a series of well-argued articles by Eamon Keane, a British Energy Systems Engineering Master's student on why NGVs won't decrease oil dependence.  I'm going to let him do most of the arguing here, since he goes into much more detail than I would, and simply point readers to the articles where he takes on each of these points.

Off-the shelf technology That means that we already know how to use natural gas for transport.  This puts it ahead of fuel cells, but not ethanol, biodiesel, or vehicle electrification.  The other side of that coin is, if this is off-the-shelf technology and it's such a wonderful thing, why aren't we already using it?

Initial Costs Will Fall.  It seems like every form of alternative energy that currently has price problems tries to counter them using this shibboleth.  Sure, anything that is widely adopted will be able to be built more cheaply due to economies of scale.  Vehicle electrification proponents say this about batteries, too.  The question is, how far and how fast can the price fall?  Because we've known how to build NGVs for years, NGV technology is unlikely to make giant advances quickly; that's more to be expected from emerging technologies.  Eamon looks at the economics of NGVs here, and finds them wanting.

Fuel costs are lower.  Fuel costs for NGVs are only marginally lower than for diesel vehicles.  This is the argument for electric vehicles as  well, only the fuel costs for electric vehicles are much lower than for NGVs.  See Eamon's economics of NGVs post again.  Most NGV conversions have been spurred by government incentives and mandates, not economics.  Economic demand is practically non-existent.

Abundant Domestic Natural Gas.  Again, we have even more abundant domestic electricity (since natural gas is just one potential source of electricity.)  And natural gas is not as limitless as many of its boosters claim.  We're already using natural gas for industry, residential and commercial uses, and electricity generation.  Only about 3% of natural gas is currently used for transportation.  The demand for natural gas for electricity generation is likely to increase significantly, as electric utilities increasingly cancel plans for new coal powered generation because of lack of funding and climate risk.  At the same time, there is a growing movement to convert many existing coal plants to natural gas for environmental reasons.

Against this backdrop of rising demand for natural gas, proponents place the promise of abundant new supply from shale gas.  I'll let Eamon do the talking here again, but to sum up, shale gas will have serious problems ramping up enough to 1) replace the decline in conventional gas and 2) meet all the new sources of demand.  It will be very difficult for natural gas production to ramp up quickly enough just to replace diesel used in trucking.  Even if they did, refineries don't have much flexibility in the ratio of diesel and gasoline produced, so displacing only trucking diesel would create a diesel supply glut, but not offset the need to import any oil, since we'd still need as much gasoline.

Electric Vehicles and Hydrogen are not Viable for Long Distance Trucking. True.  But natural gas isn't either.  Ask the trucking industry.  They don't like the fact that the fuel tanks weigh more (so fully loaded trucks can carry less) or and even so have much shorter range than diesel trucks.  The fuel tanks on parked trucks can overheat in the sun, causing the tank's pressure release valve to vent fuel, costing money and adding to greenhouse gas emissions.  Even if a national network of natural gas fueling stations were built, the trucking industry would worry about price gouging unless there were multiple competing stations to choose from.  The extra $40 to $70 thousand initial cost of a natural gas truck and lack of competition among truck vendors is also a significant barrier. 

NGVs are a Natural Fit or Fleet Vehicles So are EVs and PHEVs, but EVs and PHEVs have the advantage that they can charge up somewhere other than the home base.  NGVs can't.

Natural Gas is the Cleanest Fossil Fuel.  Fine, if we assume we have to run our fleet on fossil fuels. 

Existing Natural Gas Infrastructure.  There's an existing electric infrastructure, too, and most garages have outlets that can (slowly) charge an EV.  None can refuel an NGV without major upgrades.  EVs can even be charged on the street with a good extension cord.  The fire department probably wouldn't be too happy if you tried that with natural gas.


The case for natural gas vehicles is only convincing if you don't compare them to the alternatives, or you think you might be able to make money by selling natural gas for fuel.  In most cases, EVs provide a better solution, despite the problems I outlined in Part II.  The only two stocks I'm aware of in this industry are Westport Innovations (WPRT), and Clean Energy Fuels (CLNE).  Westport makes fuel injection systems and engines for gaseous fuels, including natural gas as well as hydrogen and LPG.  Clean Energy Fuels is majority owned by T Boone himself and builds natural gas fueling infrastructure and liquefied natural gas (LNG) shipping terminals.  I'm not sure what the LNG terminals have to do with energy independence... T. Boone does not go into that in his eponymous Plan.

If I had to buy one of these, it would be Westport, because at least they have a diversified business that is not totally reliant on natural gas.  Fortunately, I don't have to buy either... so I won't.  Clean Energy might be worth a short, the next time it spikes, though.  Here's Eamon's take on CLNE.


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.

March 21, 2010

The Best Peak Oil Investments, Part II: Hydrogen and Vehicle Electrification

Tom Konrad CFA

There are many proposed solutions to the liquid fuels scarcity caused by stagnating (and eventually falling) oil supplies combined with growing demand in emerging economies.  Some will be good investments, others won't.  Here is where I'm putting my money, and why.  This second part looks at hydrogen and electrification strategies for replacing oil.

In Part I of this series, I listed four potential substitutes that have been proposed to replace oil as limited supply and growth in developing markets draw oil away from traditional users.  I've since added a fifth to my list of potential substitutes:
  1. Biofuels and Biochemicals
  2. Vehicle Electrification
  3. Hydrogen
  4. Natural Gas
  5. Coal and Gas to Liquids
Part I looked deeper into the potential for biofuels to displace oil, and made some recommendations as to which stock might benefit most from this trend.  In this article I'll look at vehicle electrification (including traditional hybrid electric vehicles (HEVs) such as the Prius, plug-in hybrid electric vehicles (PHEVs) and pure electric vehicles (EVs)), and hydrogen vehicles, since they have many similarities. 

John Petersen on PHEVs and EVs in One Paragraph

Readers of will be familiar with John Petersen's cost-related arguments that PHEVs and EVs are over-hyped bad policy and are unlikely to form a substantial part of the vehicle fleet anytime in the next decade.  From an economics perspective, the core of his argument is that batteries are a limited and valuable resource, and they can be used most effectively to reduce dependence on fossil fuels in HEVs, rather than PHEVs or EVs.  While PHEVs or EVs can use no gas, they require as many batteries as ten or more HEVs.  Ten hybrids will each save 20-50% of a normal car's gas consumption, for a total gas savings equivalent to taking two to five normal vehicles off the road.  For a single PHEV or EV to save more gas than two to five normal vehicles, it will have to be driven two to five times as much as a normal vehicle when powered by electricity.  This means the large battery packs of PHEVs and EVs will only make sense for vehicles that are driven much more than normal vehicles, and which can be recharged multiple times per day. 

You can find another take on the economics of PHEVs and EVs direct from a Lawrence Berkley National Laboratory battery researcher here and here.  He reaches the same conclusions as John, but includes interesting technical discussions of the technological barriers to making batteries small and cheap enough for widespread adoption of PHEVs and EVs.

Chargeport for Nissan Leaf EV
Charge port for Nissan Leaf EV

What Vehicle Electrification Means for Stock Market Investors

From an investment perspective, the above discussion is most useful in that it highlights batteries as the critical, high-value component that makes vehicle electrification possible.  Some industry observers worry that scarcity of rare earth metals may make the electric motor in an HEV too expensive to be practical.  If electric motors become more expensive, the economic solution will be to make each electric motor do more, and and build more PHEVs and fewer EVs.  In either case, batteries will remain a critical component that limits the supply of electrified vehicles for the foreseeable future.  Hence, the best investment in vehicle electrification will be investments in batteries.

Another lesson from the above discussion is that, if PHEVs and EVs are currently over-hyped, then the batteries used in PHEVs and EVs (almost exclusively Lithium-ion) are probably over-hyped as well, at least relative to the batteries used in HEVs (Nickel-metal hydride as well as Lithium-ion.)  Some classes of mild HEV also use advanced Lead-Acid batteries.  In other words, I end up agreeing with John that while Lithium-ion batteries have an extremely bright future, investors would do well not to dismiss the cheaper and more mature battery technologies.  Here is John's list of battery companies, organized by battery type.


I don't see current hydrogen technology as a viable alternative to oil, but I thought I should mention it since it does have its proponents.  The main barriers to the hydrogen economy are
  1. The price of hydrogen fuel cells
  2. Lack of hydrogen infrastructure
  3. Inefficiency of hydrogen electrolysis
A hydrogen fuel cell converts hydrogen stored in the Fuel Cell Vehicle's (FCV) tank into electricity, which is then used to power an electric motor.  Because fuel cells are extremely expensive, it makes sense to use as small a fuel cell as possible.  This can be accomplished by configuring the FCV as a PHEV, and using the fuel cell constantly while the vehicle is in operation keeping the batteries charged for when extra power for acceleration is needed.  Hence, even if I am wrong about FCVs being the wave of the future, battery investors are likely to benefit as well as investors in other vehicle components.

The lack of hydrogen infrastructure and inefficiency of electrolysis (making hydrogen) both point to the conclusion that PHEVs are superior solutions for displacing oil than Fuel Cell Vehicles.  There is already an electric grid everywhere in the developed world, so a charging infrastructure only requires the installation of charging points, not a new set of hydrogen pipelines as well.  And if you have electricity and want to use it to propel a car with an electric motor, your car is going to be able to go much farther if you simply charge the car's batteries than if you first convert the electricity to hydrogen using electrolysis, then convert it back to electricity with a fuel cell, losing energy in each conversion step.


Vehicle electrification does have potential to displace a significant amount of oil demand, but it will come mostly in the form of more HEVs, at least in the short term.  PHEVs, EVs, and especially FCVs are likely to only be viable in niche markets, at least for the next decade.  Hydrogen does not have much potential to displace oil, but if it does, the high cost of fuel cells means that FCVs will also need batteries.  The best investments in vehicle electrification are batteries. The hype about PHEVs and EVs means that companies with less sexy battery technologies are probably better bets than Lithium-Ion companies, simply because you should be able to buy such stocks at a more reasonable price.


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.

March 19, 2010

Vehicle electrification – sticker shocks, delays and manufacturing capacity forecasts

John Petersen

Today we have a bit of a hodge-podge as I consider sticker shocks, delays and manufacturing capacity forecasts in the vehicle electrification and energy storage sector. Since the sticker shock and delay discussions involve recent news, I'll touch on them first before getting into the fuzzier aspects of manufacturing capacity forecasts.

I'd like to begin with a note of thanks to one of my Seeking Alpha followers, MRTTF, for sending me links to both news stories. For readers who don't delve into the comment streams, MRTTF is a PhD chemist who works in R&D for a leading domestic lithium-ion battery manufacturer. I truly appreciate his willingness to correct me when I make mistakes, provide technical detail that's beyond my competence and remind overly optimistic readers "lithium-ion is best for applications where size and weight are of paramount importance and cost is no object."

Sticker shock from Nissan

It will come as a shock to many EV evangelists who expected the Leaf from Nissan Motors (NSANY) to be a cheap plug-in vehicle, but an article in Wednesday's Mainichi Daily News reported that Nissan has set the price for the Leaf at around 4 million yen, which works out to roughly $44,000 at current exchange rates. Given the earlier known price points of $40,000 for the GM Volt and $51,000 for the i-MiEV from Mitsubishi Motors (MMTOF.PK), I would have been surprised by a lower number. I may be wrong, but I just don't see consumers lining up around the block.

Nissan will no doubt develop a slick promotional campaign to show how the total cost of owning and operating a Leaf will be comparable to the cost of a conventional vehicle after accounting for Federal tax credits, available state and/or local subsidies and the expected spread between gasoline and electricity prices. My sense is the explanation will not be eagerly embraced by budget conscious consumers who expect clear short-term savings instead of a potential long-term breakeven. I have no doubt that Nissan will sell modest Leaf fleets to governments, car rental companies, utilities and corporations that are so desperate to project a green image that they'll buy a wasteful status symbol to do so. However once we get past a small and intensely vocal group of philosophically committed consumers, I think the Leaf will be little more than a curiosity item to lure shoppers into Nissan showrooms where they'll end up buying sensibly priced fuel efficient vehicles without plugs.

Delays from BYD

A more ominous news item out of China that went largely unnoticed was BYD Company Ltd.'s (BYDDY.PK) decision to go back to the drawing board and delay the widely heralded commercial rollout of its Model E6 electric car. A Bloomberg article from Monday reported that after selling a total of forty-eight F3DM plug-in hybrids to government and corporate customers in 2009, BYD has given up on its ambitious plans to mass produce electric cars in China by the middle of this year. Instead, it will build a fleet of 100 taxis for its hometown of Shenzhen, China. Many will be gravely disappointed with the decision. I just think it makes good sense.

One of my longest standing objections to the plug-in vehicle mania has been an almost total absence of long-term testing by normal people in real world conditions. Automobiles are incredibly complex machines and humans are infinitely creative when it comes to finding (or is it creating?) problems that engineers can't even imagine. Under those circumstances, I've always believed the first step had to be a small and closely monitored fleet that operates in a small area, performs a limited function and can be promptly repaired when the inevitable problems arise. Once the first phase testing is completed and the common problems are solved, the next logical step is a larger fleet of several thousand vehicles that will be placed in the hands of a wider variety of users, but still limited to a small area where they can be properly monitored and quickly repaired when new problems arise. Once the second phase testing is completed and the second level of problems are solved, the next logical step is an even larger and more widely dispersed fleet that will identify and solve additional problems, and hopefully result in a product that's ready for commercial sale to customers who expect quality and reliability.

The best analog for the process outlined above is the testing and approval of new drugs, a time-honored process that every pharmaceutical in the world goes through before it can legally be sold to consumers. The process is cumbersome, time consuming and expensive, but even then it's not perfect. Drugs are subjected to rigorous testing and monitoring because dangerous ones can be grave threats to health and safety. It strikes me as preposterous that automakers would expect, or for that matter even want, a free pass to sell potentially dangerous vehicles to customers (or is it lab rats?) without widespread and rigorous testing. I suspect that BYD will be the first of many automakers to delay their commercial rollout plans in favor of the prudent and comprehensive long-term testing that other industries conduct as a matter of course. The one thing I can pretty much guarantee is that trial lawyers everywhere will be lying wait for companies who don't.

Capacity forecasts from Roland Berger Strategy Consultants

I've previously mentioned a recent Forbes article that raises the specter of a lithium-ion battery glut within a few years. I've also said that I don't expect a glut for several reasons including faster than anticipated growth in the HEV market and rapid growth in the electric two-wheeled vehicle market. Other reasons for my confidence include 30 years of experience that new technologies invariably create new demands that were not foreseen by their developers, and the fact that plans are always subject to change, delay and cancellation.

In a recent presentation titled "Powertrain 2020; Li-ion Batteries – The Next Bubble Ahead?" Roland Berger Strategy Consultants presented the following graphic analysis of announced capital spending plans for the 20 largest lithium-ion battery manufacturers in the world. It reflects both cumulative spending through 2015 and the estimated production capacity of the planned factories. For presentation purposes, an EV equivalent is defined as a 25 kWh battery pack.

RB Capacity 2015.png

At current exchange rates, €8.2 billion is roughly $11.2 billion for 2.6 million EV equivalents, or 65 million kWh. The three companies with the most ambitious spending plans are AESC, Nissan's battery manufacturing joint venture, LG Chem, which will make battery cells for the GM Volt, and China's BYD. Curiously, the company with the most modest plans is Panasonic EV Energy, a unit of Toyota Motors (TM), the inventor of HEV technology and the dominant manufacturer in that space. While I have to confess a morbid fascination with the idea that the company with the most vehicle electrification experience is the one with the most modest spending plans, I also suspect there may be a deeper message for the perceptive.

Given the level of disappointment I expect over the price of the Leaf, I wouldn't be surprised to see AESC adjust its capital spending plans. The same goes for BYD, which won't need to build battery plants if it isn't going to be building electric vehicles to use the batteries. If other automakers follow BYD's lead and decide to take a traditional and litigation resistant approach to product development and testing, other capital spending plans are likely to be pared, delayed, shelved or cancelled. In the final analysis, the only battery plants that seem certain to be built are the ones that will be financed by the $1.2 billion in ARRA battery manufacturing grants that President Obama announced last August.

I'm a dyed in the wool plug-in vehicle critic because my calculations prove that the concept is inherently wasteful. While the message is not always clear, I'm a big fan of lithium-ion batteries for applications where size and weight are mission critical constraints and cost is a secondary consideration. When I criticize A123 Systems (AONE) or Ener1 (HEV), my criticism is leveled at applications that I see as foolish waste of good and valuable products. I remain convinced that every company that builds a battery manufacturing plant and brings a good product to market will have all the business it can handle. However I'd feel much better if everybody stopped chasing unicorns, cost effective plug-in vehicles and other mythical beasts.

Disclosure: I have no ownership or other interests in any of the companies mentioned.

February 19, 2010

Why You Should Not Join a Portec Rail Products (PRPX) Class Action Lawsuit

Tom Konrad, CFA

Portec Rail Products (PRPX) agreed to be acquired by L. B. Foster Company (FSTR) on February 17. At least four law firms have started class action suits against the Portec board.  Here is why not to join any of them.

Portec Rail Products has been a longtime favorite of mine.  It's profitable, and delivers valuable services to the rail and rail transit industries.  This article goes into a lot more detail as to why I like Portec.  In large part because of the acquisition, Portec is the best performing of my Ten Clean Energy Stocks for 2010.  I will be sad if the merger goes through, because I will need to find a replacement in my portfolio, although the cash will soothe the hurt nicely.  L. B. Forster might be that replacement, but when I have a choice, I prefer microcap companies like Portec.

The lawsuits allege that Forster is not paying enough of a premium (4% over the closing price the day the deal was announced), and that the directors breached their fiduciary duty in not looking for other buyers: i.e. not shopping the company around more to get a higher price.  One analyst of my acquaintance thinks a more reasonable premium would have added another buck per share.

But when was the deal negotiated?  Almost certainly over the last month or more. 

PRPX 2-19-10
For most of January, Portec was trading around $10.50, and it started December at $9.  The purchase price of $11.71 per share is an 11.5% premium over $10.50: not great, but not horrible.  It's a 17% premium over $10 per share.

But no matter what you think of the price, there's no reason to join the lawsuit.  Every dollar going to a lawyer is money that comes, eventually, out of some investor's pocket.  You probably see an ad asking you to join one of the class action lawsuits next to this article: they're plastering them all over the internet.

If you don't like the price, you already have a perfectly viable option.  It's called democracy.  Don't tender your shares.  65% of shareholders must tender their shares for the merger to go through.  If clean energy supporters had 65% of the votes in the US Senate, we'd have climate change legislation by now.

Why has the stock risen so quickly in the last few weeks?  Perhaps rumors got out about the negotiations, and people with this inside information were (illegally) buying shares to make a quick buck.  Despite being illegal, that sort of thing happens all the time.  The trading pattern was particularly suspicious the day before the merger was announced . 

Those insiders are the people to send the lawyers after!


DISCLAIMER: The information and trades provided here and in the comments 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.

February 18, 2010

Energy Efficiency In The Automotive Sector

John Petersen

As a result of sweeping regulatory changes, the second decade of the new millennium is shaping up as a time of unprecedented progress in automotive fuel efficiency. In the EU, where small cars have been prevalent for decades, gasoline prices of $5 to $8 per gallon are the norm and consumers prize diesel engines, new regulations will require automakers to reduce tailpipe CO2 emissions to an average of 130 grams per kilometer (g/km) as follows:
  • For 65% of the fleet, by 2012;
  • For 75% of the fleet, by 2013;
  • For 85% of the fleet, by 2014; and
  • For 100% of the fleet, by 2015.
The penalties for non-compliance start at €5 per vehicle for the first g/km, and ramp up to €15 per vehicle for the second g/km, €25 per vehicle for the third g/km, and €95 per vehicle for each subsequent g/km. The EU's long-term target is 95 g/km by 2020. The following data comes from the European Federation for Transport and Environment and shows how automakers stacked up against the standards in 2008.

2008 Sales CO2 g/km
Fiat 1,131,005 138
PSA Peugeot-Citroen 1,794,593 139
Renault 1,253,371 143
Toyota 784,054 147
Hyundai 467,673 149
Ford 1,388,335 152
GM 1,366,069 153
Honda 245,395 154
BMW 784,736 154
Suzuki 229,074 156
Mazda 229,596 158
Volkswagen 2,870,570 159
Nissan 323,340 161
Daimler      760,925  175
Total 13,628,736 151

The bottom line is automakers must improve the efficiency of their European fleets by an average of 14% over the next few years or pay dearly for their failure to do so. This is a today issue, not a someday issue.

While the EU standards are aggressive, the challenges facing US automakers are even more daunting because they're starting from a less efficient baseline. The following chart comes from the EPA and shows the adjusted fuel economy for cars and light trucks sold in the US from 1975 through 2009.
Fuel Economy.png
Last September the EPA and the NHTSA published their proposed rules for Light Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards. While the rules have not been finalized, they leave no doubt that the pressure on US automakers to radically and immediately improve fuel economy will be immense. The following table summarizes the proposed fuel economy standards, in miles per gallon, for the next few years.

Passenger Cars 30.2 33.6 34.4 35.2 36.4 38.0
Light Trucks 24.1 25.0 25.6 26.2 27.1 28.3
Combined Cars & Trucks 27.3 29.8 30.6 31.4 32.6 34.1

Unlike the European rules, the proposed EPA and NHTSA rules will not let vehicle manufacturers pay fines in lieu of meeting emission standards. So once again, this is a today issue, not a someday issue. The following data comes from the Executive Summary Tables that accompany a recent EPA report on Light-Duty Automotive Technology, Carbon Dioxide Emissions, and Fuel Economy Trends: 1975 Through 2009 and shows how the principal US automotive marketing groups stacked up against the proposed standard in 2009.

Honda 23.6
Hyundai-Kia 23.4
Toyota 23.2
Volkswagen 22.8
Nissan 21.6
BMW 21.6
General Motors 19.9
Ford 20.5
Chrysler 18.7
All 21.1

The bottom line is automakers may well be required to improve the efficiency of their US fleets by an average of 29% by 2012 and by a whopping 38% by 2016. Absent a tea party style revolt among new car buyers, I expect pickups, vans and SUVs to all but disappear from the marketplace. Even with smaller European type vehicles, the bulk of the work will have to be done with a combination of proven technologies that are fully developed and ready for widespread commercialization today, including:

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 foregoing list of energy efficiency technologies was assembled from data on the EPA's website and is not exhaustive. With the exception of the VTEC variable cam and valve timing technology that Honda first introduced in the Acura NSX (far and away the finest car I've ever owned) I don't know who the leaders are. My sense is that almost everybody is working on their own variants for most of these technologies because the pressures are so great and the timing is so tight.

I regularly mock plug-in vehicles because even the EPA acknowledges that "electric cars and trucks are unlikely to be available in large volumes anytime soon," which is a polite way of saying they won't be more than vanity products for years and those that are produced will be horrendously inefficient at reducing national gasoline consumption and CO2 emissions. The more important issue is that manufacturing plug-ins will directly and adversely impact the auto industry's ability to meet rigorous short-term CO2 emission and CAFE standards that are either in place or will be shortly. It's all well and good to daydream about rescuing the princess, but if a dragon guards her you have to deal with first things first.

Batteries are critical enabling devices for three of the four most important fuel efficiency technologies. For the next several years, every vanity car with a plug that rolls off an assembly line will preclude the production of 10 to 20 affordable fuel efficient vehicles. The dynamic may change toward the end of the decade when current battery research may result in the a new generation of inexpensive, safe and abuse tolerant electric drive batteries, but over the next five years fleetwide efficiency will be the only thing that matters.

Ultimately efficiency will be the touchstone for all successful alternative energy investments. Those that deliver more work with lower natural resource inputs will be very successful. Those that deliver less work with higher natural resource inputs will fail. The laws of economic gravity will not tolerate another outcome. While the bulk of the market's attention will invariably focus on the gee whiz, the bulk of the money will be made in mundane applications and sectors that focus primarily on saving money and only secondarily on saving the planet.

Disclosure: No companies mentioned.

February 03, 2010

Electric Cars, The Insanity Escalates

John Petersen

On January 28th the DOE announced the closing of a $1.4 billion ATVM loan to Nissan North America, a unit of Nissan Motors (NSANY), for the purpose of retooling a factory in Smyrna, Tennessee to produce the Leaf, a zero emission electric car that will be released later this year. Nissan will use the loan proceeds to create "up to 1,300 American jobs" at a cost of about $1.3 million each and the 200,000 Leafs it hopes to produce and sell each year will "conserve up to 65.4 million gallons" of gas, a whopping 327 gallons per car per year. Secretary Chu said, "This is an investment in our clean energy future. It will bring the United States closer to reducing our dependence on foreign oil and help lower carbon pollution." I don't know whether to laugh or cry.

With due respect to Nissan and its PR team, no electric car can honestly claim zero emissions because unless they're sold in a bundle with a wind turbine or solar panel, the best any electric car can do is take distributed CO2 emissions from the roads and centralize them in a coal or gas fired power plant. Even under the most optimistic of renewable energy scenarios, American EVs will be plugging into a lump of coal for decades. I'm the first to point out that the Leaf will be responsible for a little less than half the CO2 a comparably sized car with an internal combustion engine would produce, but calling the Leaf 'zero emission' has all the intellectual integrity of a no-peeing section in the public swimming pool.

Nissan's alliance with France's Renault (RNSDF.PK) makes it a major player in the global automotive industry with combined sales of roughly 6 million vehicles in 2009. While Nissan and Renault both make marketable products, neither company has a sterling reputation as an automotive trendsetter, particularly when it comes to electric drive technologies. Nissan was fighting for survival while Toyota (TM) was developing its highly successful Hybrid Synergy Drive. As a result, the best Nissan could do was license the synergy drive from Toyota for use in the Altima. As recently as 2006, Renault was snubbing HEV technology in favor of fuel-efficient diesel engines. Now it seems that they've both found religion and want to leap-frog a decade of real-world electric drive experience by introducing an audacious, expensive and unproven electric car that will be underwritten by taxpayers and sold to customers (a/k/a lab-rats) as part of the grandest science fair project in history.

The best part is, Nissan wins no matter what happens. If the Leaf is a successful product, Nissan will have a taken a clear lead in the field with taxpayer money. If the Leaf is a failure, Nissan will be able to look regulators and EV advocates in the eye and say, "we spent billions to throw your stupid EV party and nobody came." No wonder Nissan CEO Carlos Ghosn is happy. Heck, even P.T. Barnum and W.C. Fields would have been proud.

To date Nissan's pricing plans for the Leaf have been cloaked in mystery, resulting in a plethora of conflicting press reports. Most seem to agree that Nissan will copy the 'batteries not included' section from Mattel's (MAT) business plan and lease the batteries to consumers under a separate contract. This strategy has the dual benefit of concealing the true cost of the Leaf while deflecting customer backlash from battery pack failures or service life issues.

I hate going back to unpleasant realities, but the Smyrna plant will need roughly 4.8 million kWh of lithium-ion batteries per year to build 200,000 Leafs. If Nissan-Renault had taken the time and spent the money to develop a competitive HEV technology of their own, those same batteries would be enough to upgrade more than half of their global auto production to HEVs and save 500 million gallons of gasoline per year in the process.

Last October a White House advisor called it 'calculator abuse' when ABC News had the temerity to suggest that stimulus jobs cost taxpayers an average of $160,000 each. I would love to hear a cogent explanation of how it makes sense to:
  • Put taxpayers on the hook to the tune of $1 million for each new job created in Smyrna;
  • Save 64.5 million gallons of gas with a small fleet of Leafs instead of saving 500 million gallons of gas by upgrading half of Nissan-Renault's global production to HEVs; and
  • Reduce total CO2 emissions by 335,000 tons with a small fleet of Leafs instead of reducing CO2 emissions by 5 million tons with a larger and more affordable fleet of HEVs.
As things presently stand, I have to wonder whether the inmates aren't running the asylum.

Disclosure: None

January 28, 2010

Plug-in Vehicles Are A Luxury No Nation Can Afford

John Petersen

I'm going to apologize up front for revisiting a topic that inevitably draws furious comment from readers who just don't get it, or who refuse to get it. I understand that it's painful to learn that politicians, environmental advocates and the mainstream media have been lying about critical issues, but that doesn't make exposing the lies less important. So I'm going to endure the slings and arrows of the eco-religious one more time and use a new example to show that plug-in vehicles are a luxury no nation can afford.

Ener1 (HEV) is a pure-play manufacturer of lithium-ion batteries. While I am frequently critical of Ener1's penchant for vague disclosures and EV happy-talk, today I'm going to take a different tack and accept their disclosures as gospel. In the Company section of its website, Ener1 describes its domestic production capacity as follows:

"Current production capacity is 10,000 electric vehicle (EV) packs per year, equivalent to 100,000 hybrid electric vehicle (HEV) packs. Capacity will peak at 30,000 EV packs per year in the current Indiana-based facilities at full utilization.

On receipt of the conditional $118.5 million in federal grants from the U.S. Department of Energy (DOE), EnerDel will double this number by 2012, to give a production capacity of 60,000 EV (600,000 HEV) packs per year, creating an estimated 1,700 new jobs in the State of Indiana. ..."

In a press release dated January 21, 2009, Ener1 disclosed that it planned to spend $237.5 million to expand its domestic battery production capacity to approximately 600,000 HEV or 60,000 EV packs per year. Roughly half of the planned expansion funding will come from a $118.5 million ARRA battery manufacturing grant that Ener1 was awarded in August 2009. Ener1 will have to raise the balance from open market equity sales and other non-government sources to fulfill the requirements of its grant.

HEVs and EVs both use advanced batteries and sophisticated electric drive technologies to capture energy that would have been lost in braking, use the captured energy in subsequent acceleration cycles and minimize the waste of gasoline. While HEVs draw the line at maximizing vehicle efficiency, EVs go a step further and use additional battery capacity to replace the fuel tank, which means an outlet in your garage becomes your fuel source instead of your neighborhood filling station.

The typical American drives about 12,000 miles per year and if he buys a new fuel-efficient car he can expect to pay roughly $18,000 for the vehicle and buy about 400 gallons of gasoline per year. In comparison, a consumer who buys a new HEV for roughly $22,000 can expect to buy 240 gallons of gasoline per year and a consumer who buys a new EV for roughly $40,000 won't buy any gasoline at all.

According to burning one gallon of gasoline produces 20 pounds of CO2. While EVs don't burn any gasoline and are widely touted as super-green, the power plants that generate electricity in the U.S. release an average of 9.7 pounds of CO2 for each gallon of gasoline equivalent.

With those numbers firmly in hand, let's do some simple comparisons of what happens when the batteries from the Ener1 expansion leave the plant and are used to manufacture 300,000 additional HEVs or 30,000 additional EVs.

Incremental manufacturing revenue
    Per vehicle
    Plant total
$1.20 billion
$0.66 billion

Annual gasoline savings

    Per vehicle (gallons)
    Plant total (gallons)
48 million
12 million

Annual CO2 emission reduction

    Per vehicle (tons)
    Plant total (tons)
480,000 61,800

It's important to note that the table presents the two extremes on the range of possibilities and the likely impact on manufacturing revenue, gasoline consumption and CO2 emissions is somewhere in the middle. Nevertheless, I think it's important for everyone to understand that using the additional battery production from the Ener1 plant to produce 300,000 HEVs instead of 30,000 EVs would be twice as effective at creating jobs, four times as effective at reducing national gasoline consumption and eight times as effective at reducing national CO2 emissions, especially when I consider that the taxpayers are going to pick up half the tab for the plant expansion.

How about you?

This really isn't a rhetorical question. I want to know what my readers think. Please take a few seconds and respond to the following single question poll.

Disclosure: None.

January 25, 2010

Vehicle Electrification – Press Releases, Production Decisions and The Hype Cycle

John Petersen

Writing an investment blog on hype-riddled sectors like vehicle electrification and energy storage is tough because the topic is emotionally charged and expectations are often based on political promises, issue advocacy, press releases and mainstream media stories that never tell the complete truth. As a result I spend a huge amount of time debunking popular mythology that's 180 degrees out of sync with business realities and responding to commenters who refuse to believe cars with plugs will be:
The risk and the opportunity for investors is that distorted perceptions of commercialization timelines have led to unreasonably high expectations for lithium-ion battery developers that may experience huge revenue growth in the second half of the decade and unreasonably low expectations for lead-acid battery manufacturers that are certain to experience huge revenue growth over the next five years. As the revenue impact of current automotive production decisions becomes more clear and the wide gulf between expectations and reality narrows, I believe that the equities of objectively cheap lead-acid battery manufacturers will surge while the equities of objectively expensive lithium-ion battery developers underperform.

Press Releases

For better or worse the markets are emotional creatures that can't help but react to press releases and news stories designed to fire the imagination and inspire "wouldn't it be great if ...?" thinking. Some of the more inspirational examples of the unrelenting electric vehicle hype we've seen over the last few months include:
If one just reads the press releases and news stories, it seems like the whole world is going electric and the days of sunshine, lollipops and roses along Electric Avenue are just around the corner. Perhaps it's my skeptical nature, but plans alone don't impress me because I've seen so many ill-conceived plans fail. I also remember that:
In isolation, the press releases and news stories seem impressive. In the context of an industry that sold 10.5 million vehicles in 2009 during the worst recession since the 1930s, the planned introduction of cars with plugs is inconsequential. These are PR stunts, not credible products. While cars with plugs may become credible by 2020 if they can earn consumer confidence at rates that are comparable to HEVs, I believe their growth potential over the next five years is modest at best.

The following graph comes from and shows annual domestic HEV sales over the last decade. In light of high cost, limited flexibility and unresolved consumer acceptance, performance and safety issues, I have to believe the ramp rate for cars with plugs will be far slower than the ramp rate for HEVs, which took nine years to hit the million vehicle mark.

1.25.10 Graph 1.png
The eco-religious will strenuously disagree with my admittedly conservative view that a goal of "one million plug-ins by 2015" is sheer presidential fantasy, but differences of opinion are what make horse races and investments interesting.

Production Decisions

Once you back away from the wishful thinking and start looking at automakers' real-time production decisions, a different picture emerges. Instead of trying to leap tall buildings with a single bound, the automakers know that a journey of a thousand miles begins with a single step and they've started on the journey because their customers demand it. The technologies that are going into production, however, are rational incremental steps to improve efficiency without reinventing the industry. The step that is most important for energy storage investors is the rapid implementation of idle elimination technologies, which are typically referred to as either micro-hybrids or stop-start systems.

There are few ideas that are more sensible than idle elimination. Instead of burning gasoline and spewing emissions while you're stuck at a stoplight, turn the engine off until the light turns green. Stop-start systems have little value for a drive in the country, but they can reduce fuel consumption in congested city driving by 6% to 10% for an outlay of a few hundred dollars. After several years of testing, automated stop-start systems have proven themselves to the point where the entire industry is adopting them as standard equipment. A few examples of major stop-start production decisions include:
  • Mercedes Benz, which will introduce stop-start systems throughout its entire passenger car line;
  • BMW, which has already implemented stop-start systems on all Series 1 and 3 vehicles with manual transmissions;
  • Volkswagen, a stop-start pioneer that is implementing the technology throughout its passenger car line;
  • Toyota, which has already impemented stop-start systems in its Auris and Yaris lines; and
  • Ford, which plans to introduce stop-start systems throughout its entire passenger car line.
In short, the widespread implementation of stop-start technology is not something that might happen on some fine day in the vaguely defined future. It is happening today in factories around the world and while the future of cars with plugs is unclear, it is virtually certain that stop-start technology will be standard equipment within a few years because it's a cheap and proven way to improve fuel economy and reduce emissions. The following graph comes from a 2008 Frost & Sullivan presentation and summarizes their forecast of global hybrid vehicle sales over the next five years, broken down by technology type. The blue sections of each column represent stop-start systems.

1.25.10 Graph 2.png

Micro hybrids with stop-start technology are already saving about a hundred million gallons of gasoline per year. By 2015 they'll be saving well over a billion gallons of gasoline per year, which compares favorably to the 400 million gallons that could be saved if the presidential goal of a million plug-ins by 2015 was remotely possible. Once again, sensible action by private enterprise has trumped central planning by delivering vastly superior results for far less money.

The major challenge with stop-start technology is that it's very hard on starter batteries because instead of starting the car once per trip, a stop-start system will stop and restart the engine at every stoplight. The current approach is to use premium lead-acid batteries instead of the lower quality batteries the auto-industry historically used as original equipment. The long-term solutions that are currently in final stages of development include:
  • Using a combination of batteries and supercapacitors to satisfy the intense demands of stop-start systems, an approach that's being developed by Maxwell Technologies (MXWL) and Continental AG (CON.DE).
  • Using lead-carbon batteries that combine battery and supercapacitor characteristics in a single device, an approach that's being developed by Exide Technologies (XIDE), Axion Power International (AXPW.OB) and East Penn Manufacturing.
While the numbers were eclipsed by the headline awards to lithium-ion battery developers and largely ignored by investors, President Obama's August 2009 announcement of the recipients of $1.2 billion in ARRA battery manufacturing grants included:
  • $34.3 million to Exide Technologies with Axion Power for the production of advanced lead-acid batteries using lead-carbon electrodes for micro and mild hybrid applications; and
  • $32.5 million to East Penn Manufacturing for production of the Ultrabattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications.
In other words, these are real technologies that are being built into real production model vehicles and being sold to real customers today. There's no wishful thinking involved. The wave of change has hit the shore and will wash through the entire industry over the next few years.

The Hype Cycle

Professional investors understand that all emerging technologies are subject to a phenomenon the Gartner Group calls "the hype-cycle" and they time their investments accordingly. Venture capital types typically buy before the technology trigger point and sell at the peak of inflated expectations. Value investors frequently wait for the trough of disillusionment before they buy for the long term. The only professional investors that are active during the peak of inflated expectations are traders. TIAX LLC offered the following overview of emerging vehicle technologies and the hype cycle at the Plug-in 2008 Conference.

1.25.10 Graph 3.png

The big problem with graphs like this one is that they don't provide specific guidance to investors on where individual companies stand. Since I've never been one to avoid controversy and experience has proven that my opinions don't impact the markets I've decided to bite the bullet and offer one man's views of where the pure-play energy storage companies are located on the hype cycle curve.

A123 Systems (AONE) had a tremendously successful IPO in September and is currently trading at 132% of the offering price. It finished 2009 in solid financial condition and has done a great job of managing short-term expectations. All things considered, I'd peg A123 somewhere along the upward slope between the technology trigger and the peak of inflated expectations. While I expect A123's focus on cars with plugs to eventually result in significant disillusionment, the day of reckoning is probably 18 to 24 months off.

Ener1 (HEV) has been a centerfold darling of the cars with plugs set for several years and may well be past its peak of inflated expectations. Ener1 finished 2009 in dreadful financial condition and will require massive capital infusions to stay afloat and provide matching funds for the ARRA battery manufacturing grant it received last August. Ener1 recently filed a Form 8-K to disclose the presentation materials it's currently using in discussions with private investors. Given current market conditions and the huge hits that other companies have taken in recent down-round financings, my sense is that Ener1 is headed into the trough of disillusionment unless management can pull off a major miracle.

Maxwell Technologies (MXWL) has done a very effective job of publicizing its work on stop-start solutions and explaining the potential to investors. As a result, its stock has gone from a low of $4.50 to a closing price of $17.23 on Friday. I've toured Maxwell's supercapacitor plant in Rossens, Switzerland and believe their Boostcap technology has an important role to play as the micro-hybrid market develops. My sense is that Maxwell has already passed through its trough of disillusionment and is now working its way up the slope of enlightenment.

Exide Technologies (XIDE) has done a terrible job of publicizing its work on stop-start solutions because it already sells a couple billion dollars of batteries into the automotive market every year. So unlike the new kids on the block, Exide doesn't need to attract new customers. It just needs to visit existing customers and show how the new lead-carbon product will better serve the customer's needs. The same dynamic exists at East Penn Manufacturing, which couldn't care less about PR because it's privately held and already has a massive customer base. I believe that Exide is out on the plateau of productivity and rapidly approaching a new technology trigger point with the lead-carbon solutions for the micro-hybrid market. With a stock price that only equates to 24% of trailing sales, I think Exide has tremendous potential as customer testing of its new products matures into substantial purchase orders over the next year.

Axion Power International (AXPW.OB) is my old home team and I'm far from unbiased because I've watched the PbC technology mature from laboratory experiment through commercial prototype and am proud of the time I served as board chairman. Axion has always been a public relations oddity because it partnered with East Penn in 2004 and Exide in 2008, which means it's always had to behave like a mature manufacturer instead of taking some of the liberties one would normally expect from a technology start-up. As a result of its existing partnerships with two of the three largest automotive battery manufacturers in the world Axion doesn't need to attract its own customers because its partners already have them. Axion's stock price took a bit of a beating in December when it completed a $26 million down-round financing with some very high quality institutional investors, but when its partners start signing high-volume supply contracts with their existing customers, I expect a technology trigger response that bodes well for Axion's future stock price.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also holds a small long position in Exide Technologies (XIDE).

January 22, 2010

The Holdings of the Powershares Global Progressive Transport Portfolio ETF (PTRP)

Tom Konrad, CFA

I included the Powershares Global Progressive Transport Portfolio (PTRP) as an investment option instead of three stocks in my Ten Clean Energy Stocks for 2010, as part of a simplified portfolio for small investors wanting to minimize costs by making fewer trades.  The other Exchange Traded Fund I used in this way was the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (GRID).  I took a look at the holdings of the Smart Grid ETF here, and they are not exactly what you would expect from the name.  Since it makes sense to know what you're buying, I decided to do the same for PTRP.

The left side of the chart below shows my classification of the companies held by PTRP (as of the end of 2009).  Some companies fell into multiple categories, so I divided their industry allocation accordingly.  The right side shows a similar treatment for the three stocks I suggested substituting PTRP for in my "10 for '10" portfolio (New Flyer (NFYIF.PK-bus), Portec Rail Products (PTRP-rail), and First Group PLC (FGP.L - Bus & Rail))

Notes on Categories

  • Smart Transit: routing traffic/freight/etc. more intelligently
  • Efficient Vehicles: Improvements to internal combustion engines, and materials to lighten vehicles.
  • Alt Fuel: mostly natural gas, but some propane and hydrogen as well.
  • Electric/Battery: Battery manufacturers, material suppliers, and suppliers of electric motors and transmissions.
  • Other: the non-transportation parts of the businesses of included companies.

Comparison with the 10 for '10 Portfolio

As you can see, PTRP is far from a perfect substitution for the 3 stocks from my 10 for '10 portfolio.  This is for several reasons:

  1. While I included a battery company (C&D Technologies (CHP)) in the 10 for '10 portfolio, I counted it as a "grid" investment as opposed to an electrified transport investment (since batteries serve both functions.)  If both substitutions for grid and transport investments are made, the allocation to batteries actually works out fairly well.
  2. My favorite transport investments are alternative modes that directly reduce fuel use, such as rail transit, bus transit, and bicycles.
  3. I did not include a bicycle investment in the 10 for '10 portfolio because none trade in the US or Canada.  One of the things I like most about PTRP is the 8% allocation to bicycle companies.

I don't expect that PTRP will track the three companies from the 10 for '10 portfolio very well, but the greater diversity of the holdings makes it a little less risky.  The downside, however, is that I chose the large allocation to busses for a reason: I think this is the quickest and cheapest option (other than bicycles) we have when we finally get serious about reducing our dependence on petroleum.  Such a decision probably won't be voluntary.  Rather, it will be the consequence of our near total unpreparedness for the reality of peak oil.  That very unprepardness is what gives busses and bus rapid transit an advantage over rail based transit: it takes a lot less time and money to order buses and designate a bus lane than it does to build a rail transit system.


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.

January 06, 2010

Plug-in Vehicles, Unconscionable Waste and Pollution Masquerading as Conservation

John Petersen

For eighteen months I've been blogging about the energy storage sector and discussing the current and potential markets for batteries and other manufactured energy storage devices. A recurring theme that I've discussed many times is the unrecognized but undeniable truth that while plug-in vehicles masquerade as conservation measures at an individual level, they're incredibly wasteful at a societal level. The conclusion is counter-intuitive and my articles on the subject invariably draw heated criticism from self-anointed defenders of the faith. Their arguments, however, do not change the inescapable truth that plug-in vehicles are one of the most wasteful concepts ever foisted on gullible government officials and an unsuspecting public.

Today I'm going to do my level best to simplify the numbers and expose the plug-in fraud for what it is. If you want to delve into more detail, you should visit my article archive at Seeking Alpha.

On December 31, 2009 Forbes published an opinion piece titled System Overload that questioned whether the lithium-ion battery industry was overbuilding global manufacturing capacity. The third paragraph said:

"By 2015 the new factories will have the global capacity to produce 36 million kilowatt-hours of battery capacity, enough to supply 15 million hybrid vehicles, or 1.5 million fully electric cars, says Deutsche Bank."

The article then went on to question whether there would be buyers for all those vehicles. I firmly believe that every battery manufacturer that brings an automotive battery to market within the next few years will have more demand than it can satisfy. That being said there is no denying the fact that fully electric cars and plug-in hybrids are unconscionably wasteful.

In America, the average car owner drives about 12,000 miles per year. To power a car for that distance, he'll need about 400 gallons of gasoline for a conventional internal combustion engine; 240 gallons of gasoline for a Prius class HEV; and no gasoline for a fully electric vehicle. The eco-religious among us are beside themselves with glee over the appealing but patently absurd idea that fully electric vehicles are the best way to slash dependence on oil imports and protect mother earth. The numbers tell an entirely different story.

If we stick with the Deutsche Bank numbers quoted in the Forbes article, 1.5 million fully electric cars would save 600 million gallons of gasoline per year. That's a very impressive number until you realize that 15 million Prius class HEVs without plugs would save approximately 2.4 billion gallons of gasoline per year. In my book, the difference of 1.8 billion gallons of gasoline per year is subsidized waste on a massive scale.

While the gasoline consumption comparisons are miserable, the CO2 emission comparisons are nothing short of tragic.

Each gallon of gasoline used in an internal combustion engine releases 20.35 pounds of CO2. While fully electric vehicles are cleaner, they're not CO2 free because the power plants that generate the electricity release a national average of 9.68 pounds of CO2 per gallon of gasoline equivalent. Returning to the Deutsche Bank numbers, 1.5 million fully electric cars would cut annual CO2 emissions by 2.9 million tons, another very impressive number. In comparison, 15 million Prius class HEVs without plugs would slash annual CO2 emissions by a whopping 24.4 million tons. In my book, the difference of 21.5 million tons of CO2 emissions per year is subsidized pollution on a monumental scale.

The final nail in the coffin comes from purchase price comparisons. Toyota's (TM) base sticker price for a 2010 Prius is $22,400. In comparison the base sticker price for the planned GM Volt will be about $40,000. While Federal tax credits of $7,500 are expected to reduce the end-user cost of the Volt to $32,500, it will still cost the consumer $10,000 more than a Prius. The last time I checked, a $10,000 purchase price difference is important to the average consumer, particularly when study after study reports that the Volt is not expected to pay for the price difference in fuel savings.

On a micro-scale, fully electric vehicles and plug-in hybrids are feel good eco-bling for the emotionally committed and the mathematically challenged. On a macro-scale they use more gasoline, emit more CO2 and are more expensive than established HEV technology. At this point I have to wonder, does anybody in Washington DC have a calculator?

I'm a lawyer, a battery guy and a policy geek. I know that six billion people on our planet would like to have a piece of the lifestyle that 600 million of us have and take for granted. I also know that as a result of the information technology revolution, about half of the 6 billion have access to electronic data and understand for the first time in history that there is more to life than subsistence. Even if we assume that they will only become consumers at 5% to 10% of purchasing power parity, the increased pressure on water, food, energy and every commodity you can imagine will be immense beyond imagining. The big challenge will be creating enough room at the table so that we can avoid the unthinkable consequences of inaction.

I love HEV technology because it minimizes waste of both gasoline and other natural resources. I'd love it even more if it were tied to a compressed natural gas fuel system that would eliminate dependence on imported oil, but that's a different discussion. I'm also a big fan of micro- and mild-hybrid technologies that use less robust electric motors and simpler batteries from companies like Johnson Controls (JCI), Exide Technologies (XIDE) and Axion Power International (AXPW.OB) to reduce waste for drivers who can't afford to upgrade to a Prius class HEV. I am offended by the P.T. Barnum class hucksters at Ener1 (HEV), A123 Systems (AONE), BYD Company (BYDDF.PK) and others that use the false promise of fully-electric vehicles to maintain bloated market capitalizations and lead investors down a garden path that will almost certainly end in massive losses once the market understands the true costs and illusory benefits.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock. He also holds a small long position Exide Technologies (XIDE).

January 03, 2010

Storm Warnings For Lithium-ion Batteries and Electric Vehicles

John Petersen

Before moving to Switzerland in 1998 I lived and worked in Houston, Texas, a place that teaches you the importance of keeping an eye on long-term weather forecasts, particularly during hurricane season. Most of the time it turns out to be wasted effort because Mother Nature is fickle and highly unpredictable, but when it's important it's really important. The same logic holds for investments in energy storage and electric vehicle technologies. You have to keep a close eye on the industrial and regulatory climate and be ready to change your plans when conditions change.

For eighteen months I've cautioned that lithium-ion batteries are not suitable or cost-effective for use in cars with plugs, which are collectively classified as grid enabled vehicles, or GEVs, by the Electrification Coalition, a newly organized industrial lobby for the lithium-ion battery and electric vehicle industries. I raised the storm watch flag based on a DOE report that discusses the technical and economic challenges of using lithium-ion batteries in GEVs; a White House report that the GM Volt is not likely to be competitive; an unpublished DOE roadmap for lithium-ion battery development that highlights the need for several generations of improvement in battery chemistry and manufacturing technology; a National Research Council report that battery costs are likely to remain high for decades; and an Energy Information Administration forecast that GEVs won't account for more than 3% of the market before 2035. Politicians, reporters and eco-clerics are all enamored with GEVs, but they generally live in a "wouldn't if be great if ...?" world where economics, paychecks and monthly bills don't matter. In contrast, the people who bear the front line responsibility for implementing unsound policies see nothing but problems.

Now I think it's probably time to upgrade the storm watch to a storm warning.

Storm Warning I: Lithium-Ion Batteries

On December 7, 2009, the DOE's Advanced Research Projects Agency – Energy, which goes by the acronym ARPA-E, released a $100 million funding opportunity announcement for battery research and development projects that have a reasonable chance of achieving the long-term price and performance goals for electric vehicle batteries that lithium-ion technology can't even approach. While DOE funding opportunity announcements are a little arcane for most investors, I found the discussion in the Background section of the Program Overview revealing, which is why I'm upgrading my storm watch to a storm warning.

The background discussion starts out by repeating the widely publicized facts that the U.S. imports roughly 60% of its petroleum and uses almost 70% of available supplies for transportation. After describing the desirable economic and environmental impacts of shifting transportation to the electric grid, ARPA-E lays the blame for the anticipated shortcomings of GEVs squarely at the feet of the battery industry:

"However, the widespread deployment of electric vehicles has been prevented to date by their limited range and high upfront capital costs due to the limitations of currently available battery technologies. Currently available high performance Lithium-ion battery technologies are limited to system level energy densities of ~100-120 Wh/kg, costs of $800-$1200/kWh, and short cycle life, resulting in unacceptably short driving range for the vast majority of consumers and un-economically high lifetime costs for electric vehicles."

After praising recent strides that have been made toward developing high-power batteries for HEVs (without plugs), the tone becomes decidedly ominous on the topic of high-energy batteries for GEVs where oft-stated performance goals "are pushing up against the fundamental energy density limits of traditional Lithium-ion based batteries." After referencing "strong doubts in the battery community as to whether the energy density of Lithium-ion batteries will be able to be pushed to the 200+ Wh/kg system level energy densities required for widespread deployment of all-electric vehicles" and grave reservations "as to whether traditional Lithium-ion based battery production for electrified vehicles offers an opportunity for the U.S. to assert domestic technology and manufacturing leadership within the context of the existing Lithium-ion based battery technology platform," the funding opportunity announcement confirms ARPA-E's "strong interest in supporting the development of new high energy, low cost battery technology approaches beyond traditional Lithium-ion batteries" and offers up to $100 million in grants for battery researchers that are willing to rise to the challenge.

Overall the discussion struck me as a politically guarded admission of the inescapable reality that lithium-ion batteries are not good enough, durable enough or cheap enough for GEVs; and they're not expected to improve much in the foreseeable future. In other words, it's time to kick lithium-ion batteries to the sidelines, launch Plan B and develop new battery technologies that may actually be capable of doing the required work at an acceptable cost.

Storm Warning II: Raw Materials Constraints In Electric Drive Motors

A second storm warning that came to my attention this weekend is an issue that my friend Jack Lifton has been writing about for years -- Chinese domination of the global market for rare earth metals. On December 22, 2009 the DOE released a "Notice of Intent - FY2010 Vehicle Technologies Program Wide Broad Agency Announcement" that includes the following area of interest:

"Subtopic 3 (d)-Motors Using No Rare Earth Permanent Magnets for Advanced EDV Electric Traction Drives

This subtopic is for motor technologies that eliminate the use of rare earth permanent magnets. Analysis of recent price trends and resource availability indicate cost and availability concerns of these material types. Approaches may include the use of non-rare earth magnet materials or motor technologies that do not use permanent magnets to meet the desired size, weight, and cost targets."

I can't wait to see the formal funding opportunity announcement on this one. We may even see a carefully worded admission that the Chinese need their rare earth production to satisfy domestic demand and mining is so unpopular with the eco-clerics that it's easier to do without GEVs unless we can invent a whole new class electric drive motors that are not material constrained. I wonder how long the anti-mining attitudes will last when the general public comes to the realization that the generators in wind turbines are subject to the same raw material constraints.

The Perfect Storm

In combination I view these two DOE funding opportunities as a one-two punch for GEVs. The lithium-ion batteries that the investment world is valuing at nosebleed levels are not going to be up to the job and even if the batteries improve beyond the DOE's wildest expectations there won't be any permanent magnet motors to drive the wheels. From where I sit, it's beginning to look like another abortive government attempt to create a market for technologies that consumers don't want and global supply chains can't support. Other fine examples of the syndrome include:



Revolutionary Technology

25 years ago



15 years ago


Electric vehicles

10 years ago


HEVs and Electric vehicles

6 years ago


Hydrogen Fuel Cells

3 years ago





Grid Enabled Vehicles



What’s next?

Every industrial revolution in history has been driven by innovation that gave people the ability to do more with less. While I believe the coming cleantech revolution will be driven in large part by constraint and increasing competition for water, food, energy and virtually every commodity you can imagine, efficiency is inherently cheaper than waste and the winning solutions will be technologies that allow us to do more with less. Technologies that require more and deliver less will, of necessity, end up on the dung heap of history.

Disclosure: Author is a former director Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide Technologies (XIDE), C&D Technologies (CHP) Active Power (ACPW), ZBB Energy (ZBB) and Great Western Minerals Group (GWG.V).

December 21, 2009

When Airlines Run Out of Fuel

Green Energy Investing For Experts, Part IV

Tom Konrad, CFA

Mass air travel is incompatible with a sustainable economy.  Air travel is energy and capital intensive, creates a gigantic carbon footprint, and is likely to  remain dependant on the high energy density of fossil fuels much longer than surface transport.  As such, it is a prime candidate for the short side of a clean energy portfolio.

I'm writing this post on a United Airlines (UAUA) flight from Baltimore to Denver in a seat that cost me $99, plus $15 to check a bag.  One sign of the economic unsustainability of flying me and my luggage at 8 cents a mile is airlines increasingly undignified scramble for marginal revenue, like that charge for checked baggage.

My flight left a half hour late because of airlines' desperate attempt to raise more revenue without raising prices by charging for checked baggage.  This has the unintended but unsurprising consequence of encouraging people to bring larger and more carry-on baggage, and spend more time wrestling it into the overstuffed overhead bins.  

Because most airlines are now charging for checked bags, it will be difficult for an airline to switch to a more rational policy that does not encourage passengers to bring excess carry-on baggage causing needless delays without making their prices seem relatively more expensive than their competitors.  (It's interesting, if not statistically rigorous, to note that JetBlue (JBLU) does not charge for the first checked bag, and Southwest (LUV) does not charge for the first two. Both usually seem to be among the best airlines for on-time departure rates.)

Airlines blamed an increase in flight delays on weather in October. I blame it on the increase in passenger awareness of the increased cost of checking bags.  In the short term, dropping ticket prices and charging for baggage will probably create a boost for airlines bottom lines.  In the long term, delays and strained backs from packing fewer, heavier bags can only decrease demand for air travel, just as the indignities of airport security have already made many potential passengers think twice when considering air travel.

The Icarus Industry

The above rant about checked baggage is just an example.  Airlines' economic woes are longstanding.  Airlines' current pursuit of short term revenues at the expense of the industry's long-term viability is more a symptom than a cause of industry woes.  Rather, the problem is chronic over-investment (by both private investors and governments) in the airline sector.  Flight has a visceral emotional appeal to humans, and industries with emotional appeal attract both government support and investment dollars, even from investors and governments who should know better.

With nearly unparalleled emotional appeal, the airline industry has been in a state of chronic oversupply practically since its inception.  This deprives airlines of pricing power, and makes it impossible for the industry  to recoup its  true costs over the long term.  Over its entire 120 year existence, the airline industry has racked up a net loss.  I think the Financial Times aptly summarized the consequence of these horrible economics in the line: "Grown up investors avoid the airline industry."

Peak Oil

As bad as the history of the airline industry has been, I expect the situation to get worse over the next few years. As we've seen since 2008, air passenger demand is highly sensitive to the health of the economy.  Hopes of economic recovery are seen by industry insiders as key to a "return" to industry profitability.  But in the current era of tight oil supplies, economic recovery will boost demand for oil, and raise the price of jet fuel, airlines' single largest cost category.   The following slide is taken from a 2004 presentation by Dr. Chris Smith of SH&E, an airline consultancy [pdf.]  With oil prices now around $70 a barrel, we will have seen another increase in the fuel cost category almost as large again as the rise shown.


My $114 flight on a Boeing 757 from Baltimore to Denver alone used about 18 gallons jet fuel (using numbers from here).  Unlike motorists, airlines pay little or no tax on jet fuel, meaning that any increase in oil prices will cause a much larger percentage increase in airline operating costs than it does for ground transportation.  

In short, airlines are a major source of marginal demand for oil.  Since the realities of peak oil constrain the expansion of supply, increases in demand for oil fueled by economic growth or decreases in supply caused by depletion must be matched to decreases in demand somewhere in the economy.  Air travel's profligate use of oil and relative price sensitivity mean that the industry will continue to reduce consumption faster than other transport sectors.  Given slow turnover in the airline fleet and stagnant efficiency improvements, most of the decrease in oil use will have to come from a decrease in passenger miles traveled.

Substituting alternative fuels for oil is also unlikely to help the economics of aviation.  A recent Rand study states, "Early in our study, we recognized that certain fuels may be more appropriate for automotive applications than for aviation.  Moreover, supplies are limited for nearly all the alternative fuels we examined."  (Thanks to Jim at The Master Resource Report.)  In other words, alternative fuels don't solve the underlying problem of not enough liquid transportation fuel to go around.

There's also the real chance that airlines will not only have to deal with peak oil, but climate change legislation as well.  Even if a global tax on air travel does not come out of the Copenhagen summit, airlines are an easily identifiable target for lawmakers and other groups interested in reducing global warming emissions.

None of this will not be good for airline stocks, making the industry a prime candidate for the short side of a green portfolio, the focus of this series.  (So far, I've also looked at the Mexican economy, and Shale Gas.)

How to Short Airlines

There is an airline sector Exchange Traded Fund (ETF), the Claymore/NYSE Arca Airline ETF (FAA), but, as I found with the iShares MSCI Mexico Index Fund (EWW), it is not widely held, and shares are not available for shorting.  Like Mexico, but unlike shale gas, I expect peak oil to erode the economics of aviation over time, and I think this erosion is fairly likely.  Hence, my preferred instrument is to short a stock in combination with a long call on the same stock, and my second choice would be a short call spread.  (See the Mexico entry in this series for my reasoning.)

In the case of EWW, I chose to use a short call spread, because most of the EWW's holdings are not traded on US based exchanges, and so I would also have had trouble obtaining individual Mexican shares to short.  In contrast, many airline shares are widely traded and held, so, rather than selling a short call spread that might require me to cover in haste if an early exercise left me in a short position without available shares to borrow, and so I chose to short individual airline stocks.

Since I'm not an airline industry expert, I wanted to short a representative sample of the airline industry similar to what I would have found if I were to short FAA, so selecting airline stocks to short was as simple as picking the largest holdings of FAA.  

The top three holdings are Delta Air Lines (DAL) at 16.6%, AMR Corp (AMR) the parent of American Airlines at 16.3%, and Southwest Airlines (LUV) at 14.7%.  Beyond these three, the next largest holding is United Air Lines (UAUA) at only 4.4%. Since the top 3 holdings compose 47.6% of the ETF, shorting these three should provide most of the diversification benefits of shorting FAA, but with much better liquidity.  While FAA trades an average of 21 thousand shares a day, Delta, AMR, and LUV trade about 12, 18, and 9 million shares a day, respectively.   They are also all widely held, making it simple to borrow shares to short, and exchange traded options expiring in January 2012 are available.  In contrast, the longest-dated options available on FAA are for June 2010.

Since airlines are one of the least green and most energy intensive forms of transport, a green investor should seriously consider shorting DAL, AMR, and LUV (combined with appropriate out-of-the-money long calls) as an investment in efficient transport.


DISCLAIMER: The information and trades provided here and in the comments 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.

December 17, 2009

National Research Council Report – Grid-Enabled Vehicles Are Not Ready For Prime Time

John Petersen

On December 14th the National Research Council of the National Academy of Sciences issued a new report sponsored by the U.S. Department of Energy titled "Transitions to Alternative Transportation Technologies – Plug-in Hybrid Electric Vehicles." The press release headline announcing the report proclaims, "PLUG-IN HYBRID VEHICLE COSTS LIKELY TO REMAIN HIGH, BENEFITS MODEST FOR DECADES." In other words, grid-enabled vehicles, or GEVs, are nowhere near ready for prime time and investors that buy into the GEV hype can look forward to decades of pain and suffering. Serious investors who want to understand the electric vehicle space and the energy storage sector must make the time to read the entire 140 page report or be prepared to suffer the consequences. You can read a free online version here or download a PDF copy for $30.

The report considered plug-in hybrid electric vehicles with both a 10-mile electric only range (PHEV-10) and a 40-mile electric only range (PHEV-40). The summary results and conclusions from pages 7 through 9 of the report are:
  1. Lithium-ion battery technology has been developing rapidly, especially at the cell level, but costs are still high, and the potential for dramatic reductions appears limited. ... Assembled battery packs currently cost about $1,700/kWh of usable energy.  ... Costs are expected to decline by about 35 percent by 2020 but more slowly thereafter. ...
  2. Costs to a vehicle manufacturer for a PHEV-40 built in 2010 are likely to be about $18,000 more than an equivalent conventional vehicle, including a $14,000 battery pack. The incremental cost of a PHEV-10 would be about $6,300, including a $3,300 battery pack. In addition, some homes will require electrical system upgrades, which might cost more than $1,000. In comparison, the incremental cost of an HEV might be $3,000.
  3. PHEV-40s are unlikely to achieve cost-effectiveness before 2040 at gasoline prices below $4.00 per gallon, but PHEV-10s may get there before 2030. PHEVs will recoup some of their incremental cost, because a mile driven on electricity will be cheaper than a mile on gasoline, but it is likely to be several decades before lifetime fuel savings start to balance the higher first cost of the vehicles.  Subsidies of tens to hundreds of billions of dollars will be needed for the transition to cost effectiveness.  Higher oil prices or rapid reductions in battery costs could reduce the time and subsidies required to attain cost-effectiveness.
  4. At the maximum practical rate, as many as 40 million PHEVs could be on the road by 2030, but various factors (e.g., high costs of batteries, modest gasoline savings, limited availability of places to plug in, competition from other vehicles, and consumer resistance to plugging in virtually every day) are likely to keep the number lower. ...
  5. PHEVs will have little impact on oil consumption before 2030 because there will not be enough of them in the fleet. More substantial reductions could be achieved by 2050. PHEV-10s will reduce oil consumption only slightly more than can be achieved by HEVs. ...
  6. PHEV-10s will emit less carbon dioxide than nonhybrid vehicles, but more than HEVs after accounting for emissions at the generating stations that supply the electric power. PHEV-40s are more effective than PHEV-10s, but the GHG  [greenhouse gas] benefits are small unless the grid is decarbonized with renewable energy, nuclear plants, or fossil fuel fired plants equipped with carbon capture and storage systems.
  7. No major problems are