John Petersen

On December 16th I wrote "My favorites for a strong 2012 include AONE, MXWL, AXPW.OB, ZBB, JCI, ENS, ACPW and XIDE. They all merit serious attention from investors who want exposure to the energy storage sector." Since then four of my favorites have bottomed and turned sharply higher while the Pride of Palo Alto endures a short circuit. The following table compares today's closing prices with the December 16th closing prices for those five companies.



Exide Technologies (XIDE) has been a roller coaster over the last two years. In January 2010 its 10-day weighted moving average price was $7.23. Since then 10-day average has ranged from a high of $12.02 to a low of $2.49. While many are puzzled by Exide's volatility or blame it on operating results, I believe the root cause of the extreme volatility has been the gradual liquidation of a hedge fund that owned 31.4% of Exide's stock two years ago; sold 13.5 million shares in 2010 and sold between 2.5 million and 10.3 million additional shares in 2011. We won't be able to nail down an exact figure for the fund's 2011 sales until the manager files its year-end holdings report in mid-February, but given the volume ramp and price collapse since mid-November, I think it's likely that the fund blew out the balance of its holdings in the fourth quarter.



Stock markets are creatures of supply and demand and prices always reflect the balance between existing stockholders who want to sell and new investors who want to buy. Any time existing stockholders want to sell more shares than new investors want to buy, price is the first casualty. In Exide's case, a single stockholder increased the total number of shares available to the market by almost 50% over a two year period. The end result was a stock that trades at a 41% discount to book value. I've been upbeat about Exide's future for the last couple years because it's completed a major restructuring that trashed historic earnings and its peers trade at multiples of up to two times book value. Baring a global meltdown, it's not hard to foresee a double digit price for Exide by this time next year.

A123 Systems (AONE) has been a classic example of how the Gartner Group's Hype Cycle applies to stock markets in the short term. After a successful IPO in September 2009, A123's stock price reached its peak of inflated expectations in January of 2010 when the 10-day weighted moving average hit $22.15. Since then it's been a steady downhill slide into the trough of disillusionment where the 10-day average recently hit an all time low of $1.70.



While I'm an unrepentant critic of  electric vehicle hysteria on purely economic grounds, A123 makes a fine battery based on an objectively safer chemistry that's important to our energy future and can offer compelling value in several important markets. Since April of last year I've said the market over-reacted to an important financing transaction and A123's price decline was excessive. Since I argued A123 was reasonably valued in the $6 range, I believe its current price of $2.10, a 25% discount to book value, is attractive for investors who want exposure to the lithium-ion space. It's possible that A123 will suffer further price erosion, but for now it looks like the price is ready to begin an impressive turn to the upside.

Active Power (ACPW) is a fine example of how the Gartner Group's Hype Cycle applies to stock markets over the long term. After a successful IPO in August 2000, Active Power's stock price soared into the $70s before beginning a ten-year slide that took the price to an all time low of $0.25 in late 2008. By January 2010 Active Power's stock price was starting to recover and the 10-day moving average was $1.05. In April 2011, the 10-day moving average peaked at $2.84 before beginning another down cycle that recently reached a minimum of $0.66 before turning positive once again.



More than anything else, Active Power's price performance is a solid example of the ancient market wisdom that all stocks have three values – undervalued, fairly valued and overvalued – and they only visit fair value briefly during transitions from one extreme to the other. It also lends credence to my belief that as stock prices oscillate around fair value the amplitude and duration of price swings, both to the downside and upside, are roughly proportional. Active Power is entering a new up cycle at a particularly opportune time because it's on the cusp of sustained profitability, revenues are ramping rapidly and global demand for high-end power quality and reliability systems has never been greater.

Axion Power International (AXPW.OB) has finally turned an important corner and begun to emerge from the mother of all supply and demand imbalances. After completing a huge private placement in December 2009, Axion entered 2010 with a 10-day moving average price of $1.42 that stabilized in the $1.20 range (2X the private placement price) by February. When a resale registration statement for the private placement shares went effective in April 2010, the dynamic was like a fire drill in a sumo training stable as several jumbo-sized private placement purchasers tried to flip more shares for a quick buck than the market could absorb. The result was a precipitous collapse into the $0.60 range that lasted through early 2011 when the stock staged a brief rally into the $1.20 range before sliding to an all time low of $0.28 at year-end. The last nine months have been like Exide on steroids as two sumo champions got into an epic shoving match and collectively accounted for about 22% of trading volume, or almost 45% of all stock sales by existing shareholders.



I don't know whether to laugh or cry when I look at Axion's stock price. At the time of the 2009 offering, the serially patented PbC battery was seen as a potentially disruptive technology, but only if Axion could successfully navigate the transition from product development to commercial production. In June of 2010 Norfolk Southern Railway selected the PbC for electric locomotive applications that ruined top quality AGM batteries from Enersys (ENS) in a matter of weeks. In September of 2010 BMW jointly presented a technical paper with Axion at the European Lead Battery Conference that showed why the PbC is an order of magnitude better than competing lead-acid batteries for automotive stop-start applications. Just before Thanksgiving this year, Axion's PowerCube came on line as the nation's first behind the meter demand response and industrial power quality system to provide frequency regulation services to a regional grid interconnection. In my experience, the 2009 placement at $0.57 should have put a solid floor of $1.20 under the stock prices and each of the subsequent accomplishments should have boosted the stock price. Those increases would, of course, have been tempered by the reality that Axion needs to raise more capital in the first half of 2012, but now that the supply and demand imbalances are resolving themselves, I expect the future price trend to be very different from the past.

Tesla Motors (TSLA) is showing a different pattern from the four breakout stocks discussed above. After a successful IPO in July 2010, Tesla's 10-day moving average stock price stabilized in the $25 range and eventually climbed to a peak of $33.59 in late November. Since the November peak Tesla's price has fallen 23% and plunged down through the 200-day weighted moving average, a clear sign that Tesla has passed its peak of inflated expectations and is headed into the trough of disillusionment.



When Tesla announced the pricing and battery options for its Model S in November, potential buyers found themselves on the horns of a dilemma as they were forced to come to grips with the immense cost of range anxiety. Compared to a CAFE compliant conventional vehicle, the Model S will save the average driver 400 gallons of gas per year, or 4,000 gallons over the course of a decade. To accomplish this wondrous feat, the base model for Alfred E. Newman types who are happy with a 160 mile range comes with a 40 kWh battery pack that costs $20,000 and represents an up-front investment of $5.00 for every gallon of lifetime fuel savings. For the more paranoid Jerry Seinfeld types who want a 230 mile range, Tesla offers 60 kWh battery pack that costs $30,000 and represents an up-front investment of $7.50 for every gallon of lifetime fuel savings. For the high anxiety Mel Brooks types who want a 300 mile range, Tesla offers a whopping 85 kWh battery pack that costs $42,500 and represents an up-front investment of $10.63 for every gallon of lifetime fuel savings. When you combine those cruel product cost realities with the fact that Tesla's stock price is an eye-watering 9.5 times book value, the price has to fall. While Mr. Market may prove me wrong, I believe Tesla's stock price will intersect Exide's stock price in 2012.

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

Posted by John Petersen at 01:31 AM | Permalink | Comments (0)

John Petersen

2011 has definitely been one for the record books; a dreadfully wonderful year for the energy storage sector that reminds me of the opening paragraph from A Tale of Two Cities:

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."

On December 31, 2010, my core list of 18 pure-play energy storage device manufacturers had a combined market value of $5.9 billion. At last Friday's close, the 12 survivors had a combined value of $2.4 billion. The following table summarizes the price performance of my current tracking list of 16 energy storage device and EV manufacturers for the year-to-date and quarter-to-date.



While the broader markets haven't exactly been a box of chocolates, there's blood in the streets in the energy storage sector; the polar opposite of what any reasonable investor would expect from a sector that's certain to be an investment mega-trend for several decades. With the exception of Johnson Controls (JCI), Enersys (ENS) and Maxwell Technologies (MXWL), the entire universe of pure-play energy storage device manufacturers are at or within spitting distance of their thirty-three month lows. Fear and loathing are running rampant as timid investors run for cover and elephant hunters prepare for a feast. There are significant risks in most of the companies I track, but in several cases the opportunities are up to an order of magnitude greater than the risk.

I've pared and restructured my Cool Emerging Companies group to cull two companies that cratered this fall, reflect the growing awareness that vehicle electrification will be a slow and painful process, acknowledge a looming supply glut in the lithium-ion battery space and reclassify Altair Nanotechnologies (ALTI) as a Chinese Battery Company since voting control was sold to Canon Investments Ltd. earlier this year. While I think 2012 will be a tough year for many lithium-ion battery manufacturers, A123 Systems (AONE) is solidly financed and seems to be gaining ground in the commercial EV space while its last standing competitor Valence Technologies (VLNC) seems to be losing ground. A123 is also making significant headway in large-scale energy storage systems for minute-to-minute output smoothing of wind and solar power. In light of a growing awareness that coupling renewable energy generation with energy storage can increase investment returns by up to 50 percent, I continue to believe that A123 Systems is undervalued while Valence is overvalued. My long-term Weighted Moving Average Prices vs Volume charts for AONE and VLNC follow. The red line in each chart represents the 200-day moving average trading volume while the straight blue line is a calculated trend line based on the 50-day weighted moving average stock price. Readers who want to download a two chart per page version of the stock price charts used in this article can do so by clicking here.

    

In the Cool Sustainable Companies group Maxwell Technologies has been trending steadily upward since the dark days following the 2008 crash and its business shows no signs of reversal. Ultralife (ULBI), on the other hand seems to be slowly losing ground and hasn't done much to fire the market's imagination. My long-term Weighted Moving Average Prices vs Volume charts for MXWL and ULBI follow.

    

In the Cheap Emerging Companies group I expect good things from ZBB Energy (ZBB) and Axion Power International (AXPW.OB) in 2012. Both of these companies carry market capitalizations in the $25 million range but are on the cusp of transitioning from research and development to full-scale product commercialization. While both companies have fairly weak financial statements, they've both learned how to conserve cash and control spending while pressing forward with pre-launch product testing and market development activities with high quality business partners. More than 32 years in the trenches have taught me that small companies, like babies in sub-Saharan Africa, rarely die of starvation but frequently perish from dysentery, I'm not concerned that either company will follow their more free-spending brethren down the road to pink sheet perdition. What Axion and ZBB need most is a clear path to target; an identifiable trajectory. As testing and demonstration programs begin to generate meaningful orders, the market's healthy skepticism over their late-stage R&D projects should quickly fade and their stock prices should ramp rapidly. My long-term Weighted Moving Average Prices vs Volume charts for AXPW and ZBB follow.

    

In the Cheap Sustainable Companies group JCI and Enersys are performing well but both companies are significantly below their long-term trend lines. The two stocks in the group that strike me as table pounding bargains are Active Power (ACPW) and Exide Technologies (XIDE). Both are down almost 75% year-to-date but their underlying businesses are performing well. I find Exide particularly attractive because I'm highly confident that its recent price swoon is attributable to forced sales by a hedge fund that owned over 20% of Exide's outstanding stock in late 2009. My long-term Weighted Moving Average Prices vs Volume charts for JCI, ENS, ACPW and XIDE follow.

    

    

It wouldn't feel like Christmas if I didn't take a minute to caution readers that Tesla Motors (TSLA) is sporting a nosebleed market capitalization of 9.9 times book value and 14.5 times trailing twelve month sales. Over the last couple weeks Tesla's chart has peaked and taken an ominous turn to the downside. My long-term Weighted Moving Average Prices vs Volume chart for TSLA follows.



Despite the fear and loathing that's been obvious for much of the year, the energy storage sector is an opportunity rich environment as 2011 draws to a close. My favorites for a strong 2012 include AONE, MXWL, AXPW, ZBB, JCI, ENS, ACPW and XIDE. They all merit serious attention from investors who want exposure to the energy storage sector.

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

Posted by John Petersen at 11:53 AM | Permalink | Comments (0)

John Petersen

In 1883 Thomas Edison said, "The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. ... Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying."

The problem isn't so much the batteries, which haven't improved all that much over the last century. Instead, the problem lies in the fertile imaginations of scientists, engineers, politicians, ideologues, analysts and investors who focus on new energy storage applications, overestimate the potential, underestimate the challenges and make a quantum leap from the reasonable to the absurd. There is no issue in the energy storage sector that's more wildly over-estimated than the short- to medium-term potential for using manufactured energy storage devices in the electric grid.

This week, the Smart Grid Intelligence Team at Lux Research, aka the hype busters, presented a 46 minute webinar on the current state of the grid-based energy storage market and its likely development over the next few years. After listening to the live webinar I asked Lux if they're be willing to share their work with my readers and they graciously agreed. Readers who want to listen to the entire webinar can do so by clicking on this link to "Grid Storage: Connecting dots in a fragmented market." For readers who don't have the time for the webinar, I'll try to summarize some of the highlights.

While respected institutions like Sandia National Laboratories have estimated that grid based energy storage represents a $200 billion opportunity, the global installed base of manufactured energy storage devices cost about $1.1 billion, roughly half of that capacity was built in 2011, and a similar amount of new capacity will be added next year. The following table offers a more granular analysis that allocates the installed base and planned additions, expressed in millions of dollars, among the five storage technologies Lux evaluated.



By 2015, Lux forecasts an annual market for grid-based storage in the $1.5 billion range. Other firms like Pike research expect faster growth rates. While the prospect of rapid and sustained growth is enough to awaken the animal spirits in all of us, Lux took pains to emphasize several key points:

• There is no silver bullet solution for the grid and several technology classes will be important;
• There is no unified mass market for grid-based energy storage technologies;
• The market for grid-based energy storage is highly fragmented and extremely price sensitive;
• The two largest market segments for grid-based storage are behind the meter installations for commercial and industrial facilities and in front of the meter facilities for renewable power generators;
  
• Most buyers of grid-based energy storage will require several years of reliability data before making a major capital commitment to any energy storage technology; and
• End-users of energy storage systems will try to aggregate as many value streams as possible to maximize the total economic benefit of their energy storage investments.
  

For energy storage investors, the most important question is always "Cui Bono?," who will benefit. While there are a lot more questions than answers at this point and Lux did not focus on the principal players in the emerging grid-based storage sector during the webinar, there is a fairly short list of public companies that are actively involved in developing large scale energy storage systems for the grid connected market including:

• Japan's NGK Insulators (NGKIF.PK), which has built and installed the overwhelming bulk of the high-temperature sodium-sulfur battery systems in the world and is currently trading at about 40% discount from recent highs because it has suspended battery sales pending investigation of a recent fire.
• General Electric (GE), which has built a new manufacturing facility for a high-temperature molten salt device known as the Zebra battery and is preparing to launch a series of products for large commercial and industrial users.
• A123 Systems (AONE), which has a strong working relationship with AES Corporation (AES) and is making rapid progress in the renewable power generation market with its high-power lithium-ion battery systems that are used for output smoothing and renewable to grid integration.
• Altair Nanotechnologies (ALTI), which has demonstrated a high-power lithium-ion battery system for frequency regulation and negotiated a significant sale in El Salvador that's bogged down in regulatory approval issues.
  
• Enersys (ENS), which manufactures advanced lead-acid batteries for commercial and industrial power quality, load leveling and uninterruptable power supply systems.
• Axion Power International (AXPW.OB), which has joined with Viridity Energy to demonstrate a behind the meter energy storage system for commercial and industrial facilities that integrates utility revenue and demand response savings with conventional power quality, load leveling and uninterruptable power benefits to users.
• Active Power (ACPW), which is a world-leader in flywheel based power quality and reliability systems for data centers and other critical infrastructure facilities that require absolute reliability.
• ZBB Energy (ZBB), which recently completed a three-year validation test of its flow-battery system in cooperation with Australia's Commonwealth Industrial and Scientific Research Organization, is awaiting UL approval for its power control systems and is rapidly expanding its sales and marketing team.
  

My clearest takeaway from the Lux webinar is that regulated utilities will probably be among the last to invest heavily in grid-based storage because of their risk aversion and their need to justify capital spending to regulatory agencies that are charged with protecting the ratepayers.

On the power producer's end of the grid there are significant opportunities for storage systems to smooth and stabilize power output from wind and solar while optimizing revenue streams to the owners of the facilities. At the power user's end of the grid, the most readily quantifiable values will be derived by commercial and industrial customers who can aggregate the internal benefits of power quality and reliability with external monetary benefits from demand response programs and providing ancillary services to the utility side of the meter. Over time, the most successful technologies will build a long enough track record of reliability to take a direct run at utilities and transmission system operators, but it's not reasonable to expect the utility and transmission markets to develop rapidly over the next five years.

It's far too early in the game for me to try handicapping likely winners and losers, but most of the companies in the list are currently trading at lottery-ticket prices that will not be available once their competitive positions in this rapidly expanding niche are better understood.

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

Posted by John Petersen at 10:07 AM | Permalink | Comments (0)

John Petersen

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

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



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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

John Petersen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

Disclosure: None.

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

John Petersen

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

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



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



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

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

Baby steps and low hanging fruit are important!

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



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

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

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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



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

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



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



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

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

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



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

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

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

John Petersen

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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

“The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing.”

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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



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

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

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



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

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

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

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

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

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

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

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

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

John Petersen

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

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



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

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

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

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

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

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

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

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

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

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

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

John Petersen

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



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

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

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

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

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

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

Disclosure: None.

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

John Petersen

In "An Elephant Hunter Explains Market Dynamics" I discussed the two basic types of public companies; earnings-driven companies that are “bought” in top-tier weighing machine markets and event-driven companies that are “sold” in lower-tier voting machine markets. Today I'll get a bit more granular and show how "sold" companies usually fall into one of two discrete sub-classes that have a major impact on their stock market valuations.

As a starting point, I'll ignore the China-based companies that are listed in the US because their quirky metrics would only confuse the analysis. Then I'll break my tracking list of 14 public companies down into three sub-classes as follows:

• Established manufacturers that have earned a competitive position in their target markets and are or have been stable and consistently profitable;
• Transition stage manufacturers that have progressed beyond the R&D stage and are increasing revenues, but have not turned the corner to consistent profitability; and
• Technology developers that are still in the R&D stage and have not completed a credible product launch or started to develop a predictable revenue stream.

In the following graph from Osawa and Miyazaki that summarizes the business dynamics underlying valley of death analysis, the established manufacturers are all beyond the crossover point between the valley of death and success as a business; the transition stage manufacturers are all between the product launch and success as a business; and the technology developers are all between research and product launch.



The following table presents summary valuation data on each of the companies included in the three sub-classes. Dollar amounts are expressed in millions.



Established Manufacturers

When you consider the five first-tier companies including Johnson Controls (JCI), Exide (XIDE), Enersys (ENS), C&D Technologies (CHHP.PK) and Ultralife (ULBI), you'll note that all of them have long histories and established competitive positions in their target markets. While C&D and Ultralife are currently losing money, they have been profitable in the past.

In general, the members of the established manufacturers class trade on the basis of earnings, have an average price to book value ratio of 1.6 and have an average price to sales ratio of 0.5. While companies in the established manufacturers class usually trade within a reasonable range of their peers, you can occasionally identify special events in the past that are not likely to be repeated in the future. Examples include $48 million in nonrecurring charges reported by C&D for the year ended January 1, 2011 and $53 million in nonrecurring charges reported by Exide for the year ended March 31, 2011. Since both companies are emerging from their own versions of a rough patch, they merit special attention and have a good shot at substantially outperforming their peers in the established manufacturer class.

Transition Manufacturers

When you get into the transition stage manufacturers including Maxwell Technologies (MXWL), A123 Systems (AONE), Ener1 (HEV), Active Power (ACPW) and Valence Technologies (VLNC) the valuation multiples jump abruptly and the price to book and price to sales ratios are also far more variable than they are in established manufacturers class. For transition stage manufacturers, I've found that a far more useful metric is a measure I refer to as blue-sky; the difference between a company's reported book value and its total market capitalization.

Using the blue-sky metric, you'll see that the blue-sky premiums for all five companies are clustered around an average of $190 million. Once you know what thee blue-sky premium is for a peer group of companies you can use it to help select outliers that are significantly over-valued or under-valued compared to their peers. In the peer group of transition stage storage manufacturers, Maxwell is trading at a relatively rich valuation compared to its peers, but the premium seems to be justified by growth. In comparison, Valence is deeply under water from a book value perspective but maintains a high market price in spite of the ugly fiscal realities. The differences lead me to believe that Maxwell is a hold while Valence is a sell or even a short. At the low end of the spectrum, Ener1 is trading at a deep discount until you consider possible future impairment charges that would bring it into line with its peers by reducing reported book value and increasing blue-sky.

Technology Developers

The third class, technology development companies, includes Altair Nanotechnologies (ALTI), Axion Power International (AXPW.OB), Beacon Power (BCON) and ZBB Energy (ZBB). These companies have not reached the point of a credible product launch, although all of them are approaching a point in their development where a significant revenue ramp over the next couple years seems likely. Like the transition manufacturers, the price to book and price to sales ratios are far too variable to provide useful guidance, however the blue-sky premium which averages $20 million for the class can be a very useful tool and help in identifying outliers like Beacon which currently trades at a significant discount to the peer group.

Inflection Point Investing

At some point in their development, all companies either move up the food chain or drift down. I've found that the inflection point between being a transition manufacturer that's valued on the basis of expectations and being an established manufacturer that's valued on the basis of earnings can be a difficult and painful time for investors as management strives to meet the quarterly expectations in order to maintain or grow their stock price. While I don't foresee short-term inflection point for any of the transition stage manufacturers I track, Maxwell and Active Power are the closest and over the next couple years they will experience increasing pressure to meet profit expectations in addition to revenue expectations.

As an elephant hunter, the inflection point I've always liked best comes during the months immediately before and after a credible product launch. During this period the only things that matter are revenue and the market's expectations for future ramp rates. It's generally the time when blue-sky premiums climb from an average of $20 million to something closer to $200 million. It's usually hard to pinpoint a specific revenue level that marks the inflection point, but it's also safe to assume that the magic will happen somewhere between $10 million and $40 million in annual revenue. In my experience there's no other time in the life cycle of a company that offers higher medium-term appreciation potential.

Of the four technology developers I track, the two with the clearest visible paths to a substantial revenue ramp are Beacon and Axion. Beacon recently commissioned its Stephenstown frequency regulation facility and is planning to build a second facility in Pennsylvania later this year. The two facilities should generate annual revenues of $12 to $24 million, depending in large part on the final disposition of a pending pay-for-performance tariff proposal. While $12 million in revenue would likely keep Beacon in the technology development class for a while, approval of the pay-for-performance tariff would probably be enough to move it up into the transition class. Once Axion completes the validation and certification of its automated second generation electrode fabrication line and begins shipping products for demonstration testing by several first tier manufacturing customers, it should be well on the way.

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

Posted by John Petersen at 08:51 AM | Permalink | Comments (0)

John Petersen

The first quarter earning season is usually boring because it follows 45 days after year-end earnings reports and significant changes are the exception, rather than the rule. This year, the energy storage sector has been a clear exception and every company I track, other than the amazing gravity defying Tesla Motors, is down from its March 31st close. The following table summarizes the performance of the stocks I track from June 30th of last year and March 31st of this year through yesterday's close.



While some of the declines can be attributed to transitory market volatility, others are more ominous. There are also some bright spots that point to significant opportunity. I'll briefly summarize the developments I consider important below.

Ener1 (HEV) is a company that's likely to face serious headwinds this year. In the first quarter they decided to write off their equity investment in Th!nk and booked $73.3 million in losses associated with the decision. As painful as these write-offs were, I believe we've only seen the first chapter. Th!nk is in the middle of a restructuring and Ener1 still carries $31 million of loans to and receivables from Th!nk on its balance sheet. Since restructurings are almost never kind to related party creditors, I believe a partial or full impairment of the remaining Th!nk accounts is likely later this year. I'm even more concerned about $10.7 million of intangible assets and $52.8 million of goodwill that arose from the accounting aether when Ener1 issued stock to buy a 19.5% interest in EnerDel and an 83% interest in Enertech. Intangible asset values of that magnitude are hard to justify in a profitable company. They're almost impossible to justify in a development stage company. In a worst-case scenario Ener1 could see 70% of its book value obliterated by additional asset impairments.

Valence Technologies (VLNC) won't report its year-end results till next week, but it looks like they may be losing an important customer to A123 Systems, which recently announced that it's been selected to provide battery packs to Smith Electric Vehicles. It's unclear whether A123 will get all of Smith's future business or if the two companies will both supply batteries. Regardless of the outcome it can't be good news for Valence which was hoping to finally break even after two decades of slow exsanguination. Since Valence is deeply under water from a balance sheet perspective, my outlook remains grim.

Altair Nanotechnologies (ALTI) has maintained a fairly stable market price on the strength of a pending investment from Canon Investment Holdings Limited. After yesterdays close, Altair announced that the closing date has been delayed yet again and that certain restrictions and penalty provisions in the original agreements have been modified or waived. While the outcome is far from certain, the short-term risks to Altair shareholders are not insignificant.

A123 Systems (AONE) is one of the bright spots for investors who believe that plug-in vehicles will become an important market force over the next few years. In late March it announced a public offering that provided about $254 million in new working capital. Roughly half of the financing came from sales of common stock at $6 per share and the balance came from subordinated debt that will be convertible at $7.20. On a fully diluted basis, the shares issued and issuable in connection with the public offering represent 27.5% of the company and imply a minimum market value of $6.32 per share. In the lithium-ion battery space, A123 strikes me as the only logical investment choice.

Axion Power (AXPW.OB) is a second bright spot that reported another quarter of solid execution. It confirmed that its second-generation automated electrode fabrication line has been installed and tested end-to-end, and is currently being tweaked to optimize dwell times. It also reported that a long awaited battery sale to Norfolk Southern was reduced to a purchase order. New disclosures confirmed that Axion has been working on HEV battery systems with a giant US automaker for the last year and that a pending DOE grant application names Axion as the prime contractor with the automaker, a research university and a national laboratory as named subcontractors. While a potential DOE grant in the $6 million range is not a company-maker, this is the first grant application I've heard of where an automaker agreed to share the marquee, much less share the marquee in a supporting role. My regular readers won't be surprised by these developments, but a one of a kind DOE grant will, if awarded, almost certainly draw significant attention from market participants who've never heard my name and don't know that Axion exists.

Exide Technologies (XIDE) won't report its year-end results till June, but it's a bright spot that has substantial short-term upside because it's still suffering the lingering effects of a rough patch it went through in 2008 and 2009. Based on their most recent earnings reports, Johnson Controls (JCI) and Enersys (ENS) are both trading for roughly 16x earnings and 0.8x sales. Exide, in comparison, is trading a 9x earnings and 0.3x sales. As market confidence builds and the weighing machine assumes supremacy over the voting machine, I have to believe Exide's stock price will gain 50% to 75% as it catches up with its peers.

The China Companies Group has been savaged over the last few months by the shamefully xenophobic logic that since some Chinese reverse merger companies behaved badly they must all be evil. They've been subjected to blistering attacks from acknowledged short sellers that take innuendo and conjecture to a whole new level. The problem, of course, is that writers like me can't jump to their defense without an on the ground due diligence investigation. I expect the pressure to continue until saber rattling law firms complete their investigations and either find substantive problems or abandon the crusade. Once the air finally clears, I think many will view the current turmoil as the buying opportunity of the decade.

Tesla Motors (TSLA) continues to defy common sense and gravity as the poster child for irrational exuberance. Its book value at March 31st was $168 million and its market capitalization at yesterday's close was $2.5 billion. In the most recent conference call management telegraphed plans to seek additional equity financing later this year. Last week I moderated an alternative energy panel discussion at a private meeting of money managers. The consensus was that Tesla would be able to raise additional capital, but not at a 15x premium to book. Investors in A123 were distressed when it conducted a public offering at a 25% discount to market that represented a 2x premium to book. I can't even begin to imagine how the Tesla stockholders will respond when irrational expectations hit the brick wall of new investor valuation metrics.

In early March I created two hypothetical $25,000 portfolios. My long fuel efficiency portfolio included JCI, Enersys, Exide, Maxwell Technologies (MXWL) and Axion. Given the poor performance of the sector over the last month that long portfolio was down 9.3% at yesterday's close. My short vehicle electrification portfolio included Tesla, A123, Ener1, Valence and Altair. It's currently in the green by 31% and without the gravity defying performance of Tesla, my gains on the short portfolio would have been much higher.

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

Posted by John Petersen at 09:40 AM | Permalink | Comments (0)

John Petersen

In recent years lithium-ion batteries have been portrayed as glamorous, sleek, sexy and hot – the stuff of adolescent fantasy and mid-life crisis. Reality is more like a surreal remake of the Dance of the Hours sequence in the Disney classic Fantasia where hippos in pink tutus gossip about overweight dancing elephants. Let's face it folks, there are no cheetahs in the battery ballet. While lithium-ion battery packs are smaller and lighter than their lead-acid counterparts, both types of batteries are ridiculously heavy substitutes for a fuel tank. The sad part is that whispers from hippos have convinced dreamers of all ages that energy is more valuable than power and diverted attention from the harsh truth that no current battery technology is cheap enough or light enough to make electric drive competitive with internal combustion.

Reduced to basics energy is a measure of the amount of electricity a battery can store while power is a measure of how quickly the battery can deliver its stored electricity. While energy applications typically cycle a battery once or twice a day, power applications usually cycle a battery dozens of times a day. Once you accept the idea that each charge-discharge cycle has a determinable value, it's easy to see why the payback from power applications usually exceeds the payback from energy applications by a wide margin.

Hippos in pink tutus want us to believe a new age of electric drive is just around the corner. But at last December's United Nations Climate Change Conference in Cancun, Secretary of Energy Steven Chu offered an entirely different and uncharacteristically blunt assessment:

"And what would it take to be competitive? It will take a battery, first that can last for 15 years of deep discharges. You need about five as a minimum, but really six- or seven-times higher storage capacity and you need to bring the price down by about a factor of three. And then all of a sudden you have a comparably performing car; let's say a mid-sized car which has a comparable acceleration and a comparable range."

In the simplest of terms, electric drive can't be competitive with internal combustion until somebody invents and commercializes an entirely new class of battery. In the meantime, the market will remain profoundly confused by snake oil suggestions that the cleantech revolution will mirror the progress that information and communications technology made over the last four decades. It's just not going to happen!

The miracle of the iPad isn't the result of better batteries. It's better electronics that do more work, but only use a small fraction of the energy the legacy technologies required. The eco-clerics and hopium pushers in our midst do not like these truths, but they're truths nonetheless.

In November of 2008 I created list of 13 pure play storage companies and promised to track their performance over time. Since then I've added five companies to the list (names in italics) and broken it down into peer groups to facilitate comparisons. My basic thesis was that investors who want market-beating performance should invest in companies that make objectively cheap energy storage products and avoid hippos in pink tutus. Since today is the 201st article in this series, it seems like a good time to take a look at how my thesis has held up over the last 2-1/2 years.

The price performance of the companies in my tracking list is summarized below. Prices have been adjusted for reverse splits where appropriate. The starting price for A123 Systems is its September 2009 IPO price. The starting price for New Energy Systems is the first reported closing price after its July 2009 reverse merger. Since trading in China Ritar Power is currently suspended, I've reported that stock as a total loss even though I believe such an outcome is unlikely.

		14-Nov-08	05-May-11	Percentage
Cool Emerging	Symbol	Close	Close	Gain (loss)
Ener1	HEV	$6.75	$2.13	(68.44%)
Valence Technology	VLNC	$1.88	$1.26	(32.98%)
Altair Nanotech	ALTI	$3.48	$1.43	(58.91%)
Beacon Power	BCON	$8.20	$1.59	(80.61%)
Group average				(60.24%)
Cool Sustainable
A123 Systems	AONE	$13.50	$5.68	(57.93%)
Maxwell Technologies	MXWL	$6.50	$16.12	148.00%
Ultralife Batteries	ULBI	$9.08	$3.97	(56.28%)
Group average				11.26%
Cheap Emerging
Axion Power	AXPW	$1.30	$0.77	(40.77%)
ZBB Power	ZBB	$0.93	$1.13	21.51%
Group average				(9.63%)
Cheap Sustainable
Johnson Controls	JCI	$15.36	$39.47	156.97%
Enersys	ENS	$6.86	$35.54	418.08%
Exide Technologies	XIDE	$3.38	$9.59	183.73%
C&D Technologies	CHHP	$49.36	$7.60	(84.60%)
Active Power	ACPW	$0.40	$2.16	440.00%
Group average				222.84%
Chinese Companies
Advanced Battery	ABAT	$2.13	$1.45	(31.92%)
China BAK	CBAK	$1.99	$1.49	(25.13%)
China Ritar Power	CRTP	$1.65	$0.00	(100.00%)
Highpower International	HPJ	$3.50	$2.60	(25.71%)
New Energy Systems	NEWN	$2.00	$3.22	61.00%
Group average				(24.35%)

Overall my tracking categories have performed about the way I expected they would.

The Chinese companies have suffered immense damage from widely disseminated rumors of flakey accounting and reporting practices that are based on conjecture advanced by short-sellers. While I would like to believe the Chinese companies can't all be as bad as the innuendo suggests, I don't have the time or the inclination to do the kind of detailed on-the-ground investigations I'd need before jumping into the middle of a dogfight. Therefore I'll be watching that drama from the sidelines.

My only bad pick was C&D Technologies, which reported an unexpected intangible asset impairment late last year and was forced into a restructuring that converted most of its debt to equity. Based on its recent earnings report it looks like C&D is well on the road to recovery and should outperform its peer group on a go-forward basis.

While Axion Power has been quite volatile and took a beating in 2010, I believe its poor performance was due primarily to supply and demand dynamics. In November 2008, Axion was an unknown company that traded by appointment. In late 2009 it closed on a huge private placement that more than doubled the number of outstanding shares. As the private placement purchasers sold their shares into the market, the price fell. For the twelve-month periods ended April 30, 2009, 2010 and 2011, the reported trading volumes were 3.5 million, 8.2 million and 50.3 million shares, respectively. In my experience, no public company can withstand that kind of selling pressure and volume ramp without at least a little suffering along the way.

Notwithstanding the painful supply and demand dynamics of 2010 and early 2011, my confidence in Axion has never been higher. Its disclosed relationships with blue chip companies in the battery, automotive and rail transport industries are very unusual for an OTC company. Those relationships, in combination with recent reports of a new partnership with a giant US automaker leave me convinced that 2011 will be a year of important developments as Axion completes performance testing of its PbC products, completes customer validation of its manufacturing and quality control systems and launches commercial production of PbC batteries. As great expectations become visible in the rear-view mirror, I believe patient stockholders will be pleased by Axion's price performance.

I've recently suggested that the decline in A123's market price is probably overdone and there should be some short-term upside in the stock. I also believe Beacon is about as close to the bottom as I'd care to call. While I’d like to see more meat on the bones, I think ZBB’s upside potential is far greater than its downside risk. I continue to believe hippos in pink tutus should be avoided.

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

Posted by John Petersen at 04:54 AM | Permalink | Comments (3)

John Petersen

The first quarter of 2011 was great for shareholders of companies that are developing or manufacturing cheap energy storage products like lead-acid and flow batteries, but it was miserable for shareholders of Chinese battery manufacturers and companies that are developing cool energy storage products like lithium-ion batteries. The following table tracks stock price performance in the energy storage sector for the first quarter of 2011 and for the twelve-months ended March 31, 2011.



The big winner for the quarter was Axion Power International (AXPW.OB), which seems to be recovering well from the intense selling pressure that kicked in about this time last year. The big winner for the twelve-month period was Active Power (ACPW), which is up 262% over the last year and up 1,027% since I bought it at $0.26 in December 2009. I knew I should have held onto Active Power longer.

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



My final table provides a summary of the key financial metrics I like to focus on when performing a high level forward looking analysis of the companies I track.



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 difficult in a turbulent capital market. The seven companies that have clear working capital issues are identified with a red X in the working capital adequacy column. Altair Nanotechnologies (ALTI) and A123 Systems (AONE) have recently announced follow-on stock offerings that punished their stock prices while fortifying their balance sheets. Others will no doubt follow suit.

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 technologies, human resources, industry experience, customer relationships and the like usually have no balance sheet value. When the blue-sky premium is out of line on the high side, it's a warning flag. When the blue-sky premium is out of line on the low side, it can hint at upside potential. While peer group comparisons aren't always reliable, they can provide useful guidance.

Many investors spend a lot of time obsessing over quarterly results, but I believe trailing twelve-month numbers provide a clearer picture of how a company is performing because they smooth quarter-to-quarter changes in the business cycle and make it easier to spot companies that are performing better than their stock.

In my Cheap Sustainable Companies category, Exide Technologies (XIDE) is trading at a far more attractive valuation than either Johnson Controls (JCI) or Enersys (ENS). The price disparity is understandable because Exide is just now emerging from a couple of rough years. On a trailing twelve-month basis Exide is trading at 10.7 times earnings while JCI and Enersys trade at PEs of 18.6 and 19.6 respectively. A similar disparity shows up in the price/sales ratio where Exide trades at 0.3 times sales while JCI and Enersys are at 0.8 and 1.1 respectively. Since experience has demonstrated that the market prices of comparable companies tend to clump in the same range, I believe that there's a 50% to 100% upside in Exide over the next 12 months.

As a group I tend to think the Chinese companies have been unfairly brutalized over the last year. There have been a few high profile problems with Chinese companies and those problems have cast a pall over the entire sector, but the battery manufacturers as a class seem to be well managed and profitable. Unfortunately the complexities of legal structures that work under both Chinese and American law are confusing to many. Moreover, cultural and language differences frequently put foreign companies at a distinct disadvantage in the US market and there are professional traders on the short side who seem intent on tarring the many with the faults of the few. As a result, Advanced Battery Technologies (ABAT), China Ritar Power (CRTP) and New Energy Systems (NEWN) are all trading at roughly four times trailing twelve-month earnings. I believe there are significant opportunities in this group for investors who are willing to dig into the details and look beyond the cultural differences.

The next twelve-months will be fascinating times in the energy storage sector as technology developers introduce a variety of products and ramp up demonstrations and deployments. I expect good things from Axion Power (AXPW.OB) as it begins a series of demonstration projects in the automotive stop-start, hybrid locomotive and stationary markets. While it's a decidedly unpopular position, I continue to believe that cars with plugs will have a hard time meeting lofty market expectations. While their working capital positions are terrible, Beacon Power (BCON) and ZBB Energy (ZBB) seem to have more upside potential than downside risk and may be good speculations.

One final company that intrigues me is C&D Technologies (CHHPD.PK). Their stock price was savaged last year by intangible asset impairments and an NYSE delisting that forced a debt restructuring. Their current market capitalization of $125 million strikes me as low given the amount of debt that was eliminated in the restructuring and the rough numbers I've cobbled together from their historic SEC filings. The picture won't be clear until they file their annual report later this month, but it looks like C&D has emerged from the restructuring in fine form and may offer significant opportunity to investors who are willing to spend some time digging.

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

Posted by John Petersen at 09:15 PM | Permalink | Comments (0)

John Petersen

The most widely misunderstood subject in the field of energy storage is the potential for grid-based applications. They fire the imagination because the grid is so pervasive and the need is so great. They also present immense challenges to storage technology developers because the fundamental economic value per unit of grid-based energy storage is very low. While the subject of grid-based storage provides rich fodder for media reports and political posturing, the reality bears little relation to the perception. On March 9th, Lux Research published a sorely needed reality check in a new report titled "Grid Storage – Islands of Opportunity in a Sea of Failure," which concluded that "Amongst the sea of possible scenarios, there are few combinations that offer an acceptable payback, while endless potential pitfalls exist."

Lux analyzed the business scenario for 14 emerging energy storage technologies across 23 applications to identify the best investments for utilities, transmission operators, independent power producers and building operators in California, Germany, and China. The report was based in large part on data from a December 2010 study published by the Electric Power Research Institute, "Electricity Energy Storage Technology Options – A White Paper Primer on Applications, Costs and Benefits." While the Lux report and the EPRI study both offer detailed insight for institutional investors that are contemplating investments in energy storage, they're too detailed for individual investors who are mainly concerned with managing their personal portfolios.

The first thing individual investors need to understand is that while global electric power generating capacity is roughly 4,000 GW, total installed energy storage capacity is less than 128 GW, or 3.2% of generating capacity. The second thing they need to understand is that substantially all of the existing storage facilities are pumped hydro. The following graph from the EPRI report provides additional color on how much installed capacity really exists for the exciting new energy storage technologies the press is gushing over.



While EPRI's installed capacity graph should be enough to make cautious investors pause to check their assumptions, another graph from the EPRI report is far more useful. It shows the estimated size of the potential market for 15 key energy storage applications on the horizontal axis and then shows the maximum price per kWh of storage capacity an end-user would be willing to pay on the vertical axis. The red annotations are mine.



Wholesale frequency regulation, the application that's getting the bulk of the media attention, is shown on the left-hand side of the graph. It's the primary target for cool storage technologies like flywheel-based systems from Beacon Power (BCOND) and lithium-ion battery based systems from Altair Nanotechnologies (ALTI), A123 Systems (AONE), Ener1 (HEV) and others. Despite the media's excitement, the reality is wholesale frequency regulation represents less than 1% of potential demand for grid-based storage. The other 99% can only be served by cheap energy storage technologies. Less than a half of the potential market will ever be addressable by manufactured energy storage devices. The rest will remain out of reach without widespread deployment of pumped hydro, compressed air and other large-scale electro-mechanical systems.

There's little question that the potential markets for manufactured energy storage devices in grid-based applications are big enough to support several successful companies. They're just not as easy as the media reports would have us believe. Wholesale frequency regulation in the US is probably limited to something on the order of 400 MW, which works out to about $1.6 billion in domestic revenue potential. The bigger prize is the $16 billion of potential demand for manufactured systems that can be installed at a price point of $500 to $1,700 per kWh. Globally, those target markets are closer to $5 billion and $50 billion, respectively.

Of the electro-chemical energy storage technologies discussed in the EPRI report, conventional and advanced lead-acid batteries and flow batteries usually offered the best cost profiles for the work of transmission and distribution upgrade deferral in both fixed and transportable formats. The economics remain challenging when you include the costs of containerization, interconnect equipment and control electronics, but they are within the realm of reason. Once you get beyond short-duration frequency regulation, however, cool technologies don't stand a chance of being competitive.

The universe of publicly traded US companies that can respond to the need for cheap grid-based energy storage is small. It includes Enersys (ENS), Exide Technologies (XIDE), and C&D Technologies (CHHPD.PK)  in the established manufacturer ranks with Axion Power International (AXPW.OB) and ZBB Energy (ZBB) in the emerging company ranks. Cool technologies will probably continue to claim the lion's share of the headlines, but cheap technologies will almost certainly claim the lion's share of the revenues and profits. From an investor's perspective, those are the only metrics that really matter.

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

Posted by John Petersen at 11:50 AM | Permalink | Comments (16)

John Petersen

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

Since it's clear that Japan will have to turn inward and serve the urgent needs of its own population first, the following direct and immediate impacts seem all but certain:

• Lost electric power from Japan's ruined nuclear plants must be replaced with oil, natural gas and coal because alternative energy technologies like wind and solar can't possibly take up the slack;
• Cleanup and reconstruction must increase total Japanese demand for liquid motor fuels;
• Japanese demand for industrial metals and construction materials must skyrocket; and
  
• Crushing limitations on Japan's base-load power generating capacity must:
• complicate supply chains for equipment, components and materials from Japan;
• increase the cost of Japanese exports;
  
• increase demand for all types of electric efficiency technologies;
  
• increase demand for HEVs and other fuel efficiency technologies;
• increase demand for grid-based energy storage systems; and
• force utilities to shed non-essential loads and abandon their support for plug-in vehicles.

Some years from now, I expect to see rows of headstones in the EV graveyard that read "Lost to the Tsunami."

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

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

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

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

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

A classic example of overblown media hype is Southern California Edison's plans to spend $55 million to demonstrate a battery-based solution from A123 Systems (AONE) that will provide 32 MW of power and 8 MWh of energy to smooth power output from the Tehachapi wind complex. The following graph from the California ISO highlights the variability issue that's the bane of alternative energy facilities everywhere.

While the new energy storage system will probably do a fine job of smoothing minute-to-minute variability, it will be absolutely worthless in the context of Tehachapi's average daily power production swing of over 200 MW. Tehachapi needs several gigawatt hours of storage, not a few megawatt hours.

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

In their discussion of storage economics, the authors said:

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

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

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

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



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

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

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

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

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

John Petersen

On March 4, 2011 the Pacific Northwest National Laboratory published a comprehensive review of "Electrochemical Energy Storage Technologies for Green Grid" that is a must-read for serious investors who want to understand the technical and economic intricacies of the energy storage sector. It explains why storage is a key enabling technology for wind and solar power, the smart grid, efficient transportation and a legion of high-technology manufacturing and service enterprises that can't survive without reliable power. It also explains why energy storage is an investment mega-trend that will endure for decades. While I normally try to provide links to materials that are available for free, this particular review is only available from the American Chemical Society website and their charge for non-members is $35. If you own stock in a battery company or are thinking about investing in one, it's the best $35 you'll ever spend.

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

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

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

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



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

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

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



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

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

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

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

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

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

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

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

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

John Petersen

Hardly a day passes without some talking head breathlessly describing electric vehicles as the opportunity of the decade. The fine point most investors miss, however, is that the decade they're describing won't begin until 2020 and for the next seven to ten years electric vehicle manufacturers like Tesla Motors (TSLA) and lithium-ion battery manufacturers like Ener1 (HEV) and A123 Systems (AONE) will hemorrhage cash as they try to traverse the trough of disillusionment that runs through the cruel black heart of the valley of death.

The following graph is a stylized view of the valley of death from Osawa and Miyazaki with a red overlay that highlights the trough of disillusionment. This is the most difficult period in the life of a product when its manufacturer must identify and eliminate any defects, optimize manufacturing processes, minimize production costs, establish a market presence and earn market share. For big-ticket items like cars, the failures and mediocre performers outnumber successes by a wide margin.



Today we're witnessing the first product launches for the Tesla Roadster, the GM Volt and the Nissan Leaf. Despite their gee-whiz glamor and sex appeal, the crushing economic reality is that it takes $46 of incremental capital investment to save a gallon of gasoline per year with a plug-in while it only takes $24 of incremental capital investment to save the same gallon of gasoline per year with an HEV. Under those circumstances, the tyrannical laws of economic gravity dictate that the time between the "Product launch" and "Success as a new product" will be five to seven years under optimal conditions and a decade or longer under likely conditions. Let's be honest, an 8-year payback on an HEV premium is nothing to write home about but a 15-year payback on a plug-in vehicle premium is absolutely atrocious.

My optimistic self wants to believe that plug-in vehicles will eventually offer a sensible value proposition for the average consumer, but my rational self knows that it won't happen quickly because paradigm shifts never do.

In 2000 Toyota introduced a new fuel efficiency technology to the US market called a hybrid electric vehicle, or HEV. The idea was to improve fuel economy by capturing braking energy and immediately reusing it for electric launch and acceleration boost. While HEVs didn't require drivers to change their driving habits or their behavior, they were met with polite skepticism until they proved their value and performance over a period of several years in the hands of consumers. The following graph summarizes annual HEV sales by manufacturer from 2000 through 2010.



In 2010, HEVs accounted for a miniscule 2.4% of light-duty vehicle sales in the US. It took eight years to sell the first million units because an eight-year payback was hard for consumers swallow and manufacturers were fighting a constant uphill battle with the laws of economic gravity. It took Toyota six years to top the 100,000 vehicle a year mark. Last year Toyota booked 69% of domestic HEV sales, Ford and Honda each booked 12%, GM and Nissan each booked 2.5% and the rest were insignificant. The only HEV model that can fairly be classified as a commercial success is the Toyota Prius.

President Obama may dream of a million plug-ins on the road by 2015, but a 15-year payback will be a non-starter for most buyers. Unless and until the technology premium falls to a point where the incremental capital investment per gallon of annual gasoline savings is competitive with an HEV, plug-ins will only appeal to a niche market of philosophically committed and mathematically challenged buyers.

The crucial fact that talking heads fail to grasp is that plug-in vehicles are not an incremental advance in automotive technology. They're a paradigm shift that will force consumers to change their driving habits and their behavior. Those realities bring human inertia into play along side the laws of economic gravity. It's not an easy market dynamic.

Since paradigm shifts are very rare, it's hard to find a current and directly comparable example. Instead we need to study historical paradigm shifts to see how they unfolded and how long the process took. One of the best examples I could find was the paradigm shift from draft animals to tractors on US farms. In that paradigm shift, the new technology was clearly superior to the legacy technology. The only real drawbacks were higher capital costs and less flexibility. Even so, this graph from Wessels Living History Farm shows that the paradigm shift occurred very slowly and it took 35 years for the new technology to earn a dominant market position.



The decade from 2020-30 may prove to be a golden age for plug-in electric drive if reliability, performance, consumer behavior and cost issues can be overcome during the next 10 years. Until then, the knock down drag out marketing battles will focus on direct competition between HEVs and plug-ins because it's extremely unlikely that electric drive will be cheap enough to compete head-to-head with internal combustion engines before 2020.

Under all reasonably foreseeable scenarios, the major business opportunity for the next decade will be improving efficiency for the 90% to 95% of new vehicles that won't have electric drive. In Europe, existing regulations require automakers to achieve an average fuel economy of 42 mpg for gasoline engines and 48 mpg for diesel engines by 2015. In the US, existing regulations require automakers to achieve an average fuel economy of 37.8 mpg for passenger cars and 28.8 mpg for light trucks in the same time frame. Stricter rules are already being discussed for 2020 and beyond. The specific fuel saving technologies automakers choose to meet these new fuel economy standards will not be offered to consumers as options. Instead they'll be standard equipment. Given a choice between relying on marketing and relying on government regulation, I'll bet on government regulation every time.

While emerging mechanical efficiency systems are a bit out of my depth, the leading electrical efficiency system for the next decade will be stop-start idle elimination. If you think about it for a second, it's the most sensible idea around - turn the engine off while your car's stopped in traffic. For simple systems that improve fuel efficiency by 5% the cost is only a couple hundred bucks. For more complex systems that improve fuel efficiency by 10%, the cost is still under $1,000. The one thing that both types of stop-start systems need is better starter batteries, which sets up a wonderful business dynamic for old line lead-acid battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE) and emerging lead-acid technology developers like Axion Power International (AXPW.OB). They may not sell any more batteries, but they'll sell better batteries that have higher prices and higher profit margins. Once you understand that an estimated 34 million new cars a year will need better batteries by 2015, the top line revenue impact and the bottom line profit impact will be stunning. It's a bird in the hand and nobody's paying attention because the application isn't sexy.

I've spent the last 30 years working as securities counsel for companies that were trying to traverse the valley of death. While it's always a miserable time for management teams, it's a disastrous time for investors and it's not unusual to see equities lose 90% of their value before the price begins to recover. Despite the media hype, investors in electric drive are in for a decade of unrelenting pain as plug-in vehicles experience slow uptake rates and have to compete with simpler and cheaper HEVs for market share. With slow plug-in vehicle uptake rates, it will be at least seven to ten years before widely heralded but vaguely defined economies of scale kick in.

If we learned anything from Microsoft and Apple, it's that the objectively cheap technology is the place to be for the first ten to fifteen years of a technological revolution and the objectively cool technology is only a reasonable investment when they figure out how to make cool cheap.

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

Posted by John Petersen at 11:27 AM | Permalink | Comments (0)

John Petersen

Sometimes I think bloggers like me are the real dummies. We spend so much time delving into the minutiae of a stock or sector that we manage to obscure the big picture with too much detail. I've certainly been guilty of that particular flaw over the last couple years and want to offer an apology to readers I've confused rather than enlightened.

Yesterday a reader sent me a copy of a presentation that Exide Technologies (XIDE) used in its December 2010 Investor Meetings. The slide on page 6 of the presentation did a great job of separating the wheat from the chaff on the subject of vehicle electrification and clarified my thinking on several points I've been trying to make for a long time. Using Exide's presentation data as a guide, I'm going to see if I can finally nail down the economics in terms everybody can understand. I'm sure we'll hear from those who don't want to understand in the comment section.

The following table summarizes the operating capabilities, incremental costs, expected fuel savings and expected CO2 emissions abatement of the leading vehicle electrification technologies. For the baseline case I used a new car with 30-mpg fuel economy and anticipated usage of 12,000 miles per year, which works out to a basline gasoline consumption of 400 gallons per year. The numbers aren't spot-on accurate, but they're certainly in the right range. Since subsidies distort comparisons by shifting the cost of consumption from the buyer of a plug-in vehicle to the taxpayers who pay for the subsidies, I'll ignore them for purposes of this article.



My next graph uses the table data to show the comparative capital cost of leading vehicle electrification technologies per gallon of annual fuel saving and per kilogram of annual CO2 abatement. You can download an Excel file with the calculations here.



It doesn't matter whether you use fuel savings or CO2 abatement as your preferred metric. Vehicles with plugs simply can't deliver anywhere near the bang for the buck that their simpler and cheaper hybrid cousins offer.

• In the four hybrid categories, the average capital cost per gallon of annual fuel savings is $24 and the average capital cost per kg of annual CO2 abatement is $2.24.
• In the two plug-in vehicle categories, the average capital cost per gallon of annual fuel savings is $46 and the average capital cost per kg of annual CO2 abatement is $7.25.

Cars with plugs may feel good, but until somebody repeals the laws of economic gravity they will never be an attractive fuel savings or emissions abatement solution.

Lead-acid batteries from Exide and Johnson Controls (JCI), supercapacitors from Maxwell Technologies (MXWL) and lead-carbon batteries from Axion Power International (AXPW.OB) are the only rational choices for stop-start systems and micro-hybrids. Lux research has recently forecast global production of up to 34 million vehicles per year by 2016. Since the growth of stop-start and micro-hybrids is being driven by pollution control and fuel economy regulations in Europe, the US and elsewhere, it's as close to a bird in the hand as most investors will ever find.

Mild and full hybrids have historically used NiMH batteries for their electric drive functions and lead-acid batteries for their starters. Unfortunately, the "M" in NiMH is the rare earth metal lanthanum and production restrictions in China will limit global ability to ramp NiMH battery production until alternate sources of lanthanum come on line. Due to the rare earth metal crisis, I'm convinced that mild and full hybrids will be a competitive market where lead-acid and lead-carbon batteries vie for a share of the down-market offerings while lithium-ion batteries and supercapacitors vie for a share of the up-market offerings. Since design and production decisions will ultimately be made by the automakers, I won't even try to forecast potential market penetration rates for the competing technologies.

Lithium-ion batteries from A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI), Valence Technology (VLNC) and a host of foreign manufacturers are the only technically feasible choice for plug-in vehicles. Since the basic economics of plug-in vehicles don't make sense to me, neither do the basic economics of their manufacturers and battery suppliers. I'm sure we'll hear from commenters who hold different views.

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

Posted by John Petersen at 05:24 PM | Permalink | Comments (5)

John Petersen

Most readers know I'm a lawyer who works in small company finance. Clients come to us in their earliest development stages and upgrade to a larger law firm when they need more comprehensive service than a boutique firm like ours can offer. As a result, I've spent over 30 years guiding entrepreneurs through the "Valley of Death," an exhilarating, treacherous and often terrifying period in the life of every business that begins with the signing of incorporation documents and ends when cumulative cash flow turns positive.

Most companies that enter the valley of death don't emerge. For the fortunate few that do, the difficult times usually last far longer than anyone expected. The one character trait all entrepreneurs share is unbridled optimism. The three character traits all survivors share are determination, focus and fiscal restraint. The following is a stylized view of the valley from Osawa and Miyazaki.



The next graph comes from the Gartner Group and presents a stylized view of the Hype Cycle, a well known but poorly understood market phenomenon that typically leads to overvaluation during the early stages of a company's development followed by extreme undervaluation in later stages when the major development and commercialization challenges have been overcome, cash flows are about to turn positive and early stockholders have grown so impatient that they're willing to sell at distressed prices despite improving business fundamentals. It's the second most popular story in the financial world – the elephant that got away because I sold too soon.



The two graphs aren't perfect overlays, but they're darned close. Simple logic dictates that two best entry points are the innovation trigger and the trough of disillusionment.  After a 30-year career as a guide in the valley of death, I know to a certainty that there's no better investment risk in the world than a company that's spent several years in the valley of death and survived the trek to the trough of disillusionment. It's a target rich environment for elephant hunters.

With the exception of Enersys (ENS), which was just plain undervalued when I bought it at $6, all of my picks and pans over the last couple years have been based on valley of death analysis. I'm negative on stocks that have a long road to travel before they hit the trough of disillusionment and positive on stocks that are close to the trough or have already arrived. My goal is to buy as close to the trough as possible, when stocks are at their most depressed level, and hold through the transition from negative to positive cash flow until the market finally recognizes the inherent value of determination, focus, fiscal restraint and execution.

A couple years ago, Exide Technologies (XIDE) was a classic example of valley of death analysis. It had emerged from Chapter 11 in the summer of 2004 but was far from healthy. Exide's management spent the next four years restructuring and streamlining operations, a process that punished current earnings but paved the way for consistent future earnings. By the time the crash hit in the fall of 2008, Exide had absorbed most of the restructuring pain and a stock that traded in the mid-$20s in the summer of 2004 had been beaten down into the mid-$4s. Then, to add insult to injury, a hedge fund that that was a large holder of Exide's stock suffered heavy losses in the crash was forced into a wholesale liquidation of its holdings. That drove Exide's stock price down to a low of about $2. For old stockholders it was a tragedy. For investors who took the time to consider my valley of death analysis and understand the underlying dynamics, it was a tremendous opportunity. Exide's business had never been healthier and its stock price had never been weaker. The investors who bought Exide at $2 are up almost 400%. If Exide's earnings and stock price continue to improve, which seems likely at this juncture, it will be a true elephant.

Another classic example of valley of death analysis was Active Power (ACPW) one of the last big IPOs before the tech bubble burst in 2000. From an IPO price of $17, Active Power ran up sharply and then began a slow downward decline into the $2 range as its technology development, validation testing and market development took far longer than anyone expected. By the time the dust settled after the 2008 crash, Active Power's stock price had fallen to a low of $0.26. The collapse had nothing to do with business fundamentals and everything to do with investor fatigue. Sales were building at solid rates and the installed product base was performing admirably. For existing stockholders it was a catastrophe. For new investors who took the time to consider my valley of death analysis and understand the fundamentals, it was another great opportunity. The business had never been healthier and the stock price had never been weaker. Investors who bought Active Power at $0.26 are up over 800%. If Active Power's cash flow and stock price continue to improve, it will be the kind of story hucksters use to sell newsletters.

A good example of an unsuccessful valley of death analysis was C&D Technologies (CHHP.PK). Like the others it was an $8 stock that got beaten down to $2 in the crash and fell into the $1 range after it got dropped from the S&P 500. Unlike the others, C&D's debt burden was high and the due date was dangerously close. While I believed that C&D would have enough time to turn the corner before its debt became problematic, I was caught flat-footed by management's decision to take a huge intangible asset write-off that wiped out stockholders equity. That decision forced a restructuring where debt holders got 93% of the company by converting $115 million in debt to equity. It was terrible for existing stockholders and investors who went elephant hunting too early. It was also a stark reminder that debt is an intolerable burden for all but the strongest of companies that need to traverse the valley of death. Given the number of shares that C&D issued in the restructuring, it will take a long time climb back into the $1 range. A price of $0.40 to $0.60, however, is not an unreasonable goal once the impact of the restructuring becomes clear. There are too many shares outstanding for C&D to be a true elephant, but a double or triple from the current price seems like a pretty fair bet.

ZBB Energy (ZBB) went public at $6 a share in the summer of 2007 and promptly began a slow slide into the $1 range. For most of the last year ZBB traded in the $0.60 range while its management continued to exercise fiscal restraint and implement their business plan. In early December something changed and ZBB's stock price has climbed from $0.57 to about $1.50. It's too early to say for sure whether ZBB has hit the bottom of the trough and started a sustainable climb back toward its IPO value, but the indicators look solid. ZBB's principal product has successfully completed a three-year validation test by Australia's equivalent of the DOE and it's been successful at obtaining working capital when needed at reasonable prices. ZBB is on a run and it looks like the stockholders that gave up hope over the last year are finally out of stock. I'd be reluctant to guess how far ZBB will run before pausing to catch its breath, but this is a fun time for courageous investors that took the time to consider my valley of death analysis when ZBB was trading closer to $0.60.

My current short-list of valley of death buys includes Beacon Power (BCON), Kandi Technologies (KNDI) and Axion Power (AXPW.OB). All three have reached levels of maximum stockholder weariness despite impressive progress in their core business activities. All three have adequate working capital and all three are on the cusp of revenue streams that will either slow the bleeding significantly or reverse it entirely. I can't forecast dates, trigger events or upside potential, but 30 years experience as a guide in the valley of death tells me that further price declines are unlikely and when the trigger events occur the price charts will turn like hockey sticks.

I'm frequently harsh with Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) for one simple reason. They're still at an early stage of their journey into the valley of death and far too optimistic about the time needed to move from today's exciting product launches to future market success and positive cash flow. It may look like a brief span of time on the Osawa and Miyazaki chart, but it took eight hard years for Toyota to turn the corner with the Prius. At some point my outlook for the survivors will change as it recently has for Beacon. Until I can identify a looming inflection point, however, I have to believe the market prices for these companies will follow a long and painful path to the trough of disillusionment.

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

Posted by John Petersen at 11:11 AM | Permalink | Comments (4)

John Petersen

In November 2008 I wrote an article titled "Alternative Energy Storage: Cheap Will Beat Cool" where I created a short list of 13 pure play energy storage companies that I divided into two classes; companies with cheap chemistries and companies with cool chemistries. My premise was simple, the best affordable technology always wins out over best available technology and companies that cater to the masses have greater profit potential than companies that cater to the elite. The following graph compares the performance of my original groups and the Dow since the date of that article.



Over the last two years I've added five pure play energy storage companies and two EV manufacturers to the list and broken the list into six peer groups to facilitate comparisons. The one year and fourth quarter performance for all 20 companies is summarized in the following table. Where necessary, historic prices have been adjusted for reverse and forward stock splits. The starting point for Tesla Motors (TSLA) is its June 29, 2010 IPO price.



My worst bullish call year last was C&D Technologies (CHHP.PK), which took a huge intangible asset write-down in September and was forced into a debt restructuring that transferred over 90% of the company to creditors and will limit its upside potential. My other major disappointment was Axion Power International (AXPW.OB), which got crushed by market conditions that were unrelated to its business and seems well positioned to outperform in 2011. My worst bearish call was Valence Technologies (VLNC), which makes a good product but is burdened by the balance sheet from hell.

Since I only track a few companies and tend to take an accountant's view when it comes to value comparisons, I maintain a simple spreadsheet that starts with the last reported quarterly numbers, factors in changes from subsequent transactions, and compares the adjusted financial statement realities with market valuations. That spreadsheet, which is summarized below, then serves as a starting point for more detailed analysis of which stocks seem likely to rise and which seem likely to fall in coming months.



I remain bearish on Ener1 (HEV) because I see two technical accounting issues that could arise in this year's audit and would have a negative impact if things went badly. First, Ener1's ownership of 48% of the voting power of Th!nk could require a consolidation that would move Th!nk's losses onto Ener1's income statement and impair the $58.6 million carrying value of its investment in Th!nk. Second, Ener1 is carrying $61.7 million of intangible assets and goodwill on its balance sheet and after watching C&D take a $60 million intangible asset write-down in September and Ultralife (ULBI) take a $14 million write-down last week, it's hard to be confident about Ener1's intangible asset values.

I remain bearish on Valence because it's survived for years on loans from a principal stockholder and those debts will have to be paid from earnings, stock sales or conversions. Valence makes a good product and is focused on an attractive battery market for medium-duty electric delivery vehicles – but it's still losing about $19 million a year and a $75.2 million equity deficit is a very deep hole. In my experience, investment bankers and institutional investors are not kind to companies that are negotiating from a position of weakness and need substantial capital for future growth.

Most investors know that 2010 was not a good year for Chinese companies and the storage sector was no exception. After watching them develop over the last couple years I'm increasingly bullish on Advanced Battery Technologies (ABAT) and China Ritar Power (CRTP). These are solid rapidly growing companies that trade at very low multiples of book value and sales. I have to believe they'll both be stellar performers over the next couple years.

In the electric vehicle space I believe Kandi Technologies (KNDI) is far more attractive than Tesla because its valuation multiples are far lower and Kandi will be selling cheap basic transportation to first-time car buyers in China while Tesla focuses on the eco-bling crowd. Given its high profile partnership with China's biggest electric utility, its sensible business model and its obvious ability to access decision-makers within the Chinese bureaucracy, I will not be surprised if Kandi accomplishes great things over the next couple of years.

ZBB Energy (ZBB) and Axion Power remain my two favorite speculations. ZBB seems to have turned a corner recently with the completion of a three-year validation test by Australia's Commonwealth Scientific and Industrial Research Organisation. While I'm not objective when it comes to Axion because I poured four years of my life and a large chunk of my fortune into the company, its progress over the last year has been impressive and any time I see a $47 million market cap surrounded by multi-billion dollar partners and potential customers I pay attention.

It will be interesting to see whether my predictions can be generally right for another year. I’ll revisit this list on a quarterly basis and either gloat or eat crow as appropriate. In the meantime I'd like to wish everyone a Happy New Year and a prosperous 2011.

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

Posted by John Petersen at 03:22 PM | Permalink | Comments (2)

John Petersen

Last Friday I received my copy of the presentations from September's European Lead Battery Conference in Istanbul. Most of the presentations were written for a technically astute audience and don't offer much in the way of concrete guidance for investors, but an overview presentation from Ricardo PLC, a global leader in engineering solutions for low carbon, fuel-efficient transportation, included three slides that merit serious investor consideration and show why I'm convinced cheap will beat cool for the next decade of vehicle electrification. I've posted a copy of the Ricardo presentation here.

Technology Timeline

The first slide is a simple timeline that answers the eternal question "When are the technological wonders we read about on a daily basis likely to become profitable business reality?"



Lead-acid batteries have been the dominant energy storage technology for the last century and the global manufacturing footprint is immense. As vehicle electrification becomes more commonplace and energy storage requirements increase, leading lead-acid battery manufacturers including Johnson Controls (JCI), Exide Technologies (XIDE) and Enersys (ENS) are seeing a pronounced shift in demand patterns. Users who once bought inexpensive first-generation flooded batteries are now buying premium second-generation AGM batteries. Concurrently, lead-acid technology innovators like Axion Power International (AXPW.OB) are finishing development and testing of third-generation devices that will bring the power and cycle-life of lead-acid batteries up to a level that's comparable with NiMH batteries at a reasonable cost. The bottom line for investors is that lead-acid battery technology is rapidly improving and barring a seismic technological shift, manufacturers can only get more profitable over the next decade as global demand for cost-effective mass-market energy storage products surges.

Nickel Metal Hydride, or NiMH, has been the battery chemistry of choice for HEVs since Toyota (TM) introduced the Prius in 1997. Over the last decade HEVs have earned an enviable reputation for efficiency and reliability. Unfortunately, the "M" in NiMH batteries is the rare earth metal lanthanum, which is only produced in small quantities and primarily mined in China. While material supply constraints have not limited NiMH battery production in the past, China has recently announced plans to limit rare earth metal exports in the future. Therefore looming supply constraints will limit the scalability of current HEV technology and most observers believe future HEVs will have to accommodate a lateral substitution of advanced lead-acid batteries and accept a slight weight penalty, or accommodate an upgrade substitution of lithium-ion batteries and suffer a substantial cost penalty.

For several years, dreamers, politicians and environmental activists have shamelessly portrayed lithium-ion batteries as a silver bullet solution to the planet's energy storage needs. From Ricardo's perspective, however, large-format lithium-ion batteries are just beginning to emerge from the prototype stage and enter the early commercialization and demonstration stage. Nissan (NSANY.PK) and General Motors (GM) have recently introduced the Leaf and the Volt and publicized ambitious plans to expand EV production. Those plans, however, will depend on mass-market acceptance of expensive products that haven't been adequately tested under real world conditions by people who just want reliable transportation. I've always believed the ramp rate for plug-in vehicles would be slower than the historical ramp rate for HEVs because users will inevitably have problems with dead batteries, range limitations and other performance issues. As the problem stories spread through the grapevine, the only possible outcome is reduced demand. Ricardo believes it will take at least six years before EVs begin to make the transition from the bleeding edge of early commercialization and demonstration to the leading edge of mass production. I think ten years is more likely.

Application Requirements

The second slide compares the energy and power requirements of various vehicle electrification technologies with the energy and power characteristics of today's leading battery technologies.



There's no question that plug-in vehicles will need the energy and power of lithium ion batteries if they hope to penetrate the mass-market. Nevertheless, HEVs have built an enviable track record over the last decade using NiMH batteries that were only slightly more powerful than first- and second-generation lead-acid batteries. Since third-generation lead-acid battery technologies promise far higher power and tremendous cycling capacity, I tend to believe that lithium-ion will be viewed as overkill for all but the most demanding HEV applications.

Economic Comparisons

The most intriguing slide from the Ricardo presentation is a simple table that shows the economic performance of their HyTrans micro-hybrid in commercial door-to-door delivery cycles using a variety of energy storage solutions. The table excludes the mechanical elements and control electronics, so it doesn't reflect total system cost. It does, however, highlight the striking economic differences that arise from a decision to use an objectively cool technology to do the work when an objectively cheap technology can do the same work for less money.



For the average consumer the only reason to consider vehicle electrification alternatives is to save money. The Ricardo table leaves little room for doubt on the question of which energy storage technology wins the cost efficiency crown.

What It Means For Investors

Over the last few years a slick, carefully coordinated and beautifully executed PR program from the lithium-ion battery sector has convinced many wishful thinkers that the IT model will carry over to electro-chemistry; that economies of scale will conquer all despite the fact that material and component costs for lithium-ion batteries are four times greater than comparable costs for lead-acid batteries; and that modest size and weight differences will somehow dictate the design and performance of a 3,000 pound car.

As a result lithium-ion battery stocks sell at substantial premiums to their lead-acid peers.

If Ricardo is right, most lithium-ion battery developers can plan on another six to ten years of losses before they turn the corner to profitability. In my experience that's not a healthy business dynamic for investors who worry about details like capital preservation. On the other hand it's equally clear that the next decade will be very good for both lead-acid battery manufacturers and lead-acid technology innovators who are certain to be the first major beneficiaries of the trend toward increasing vehicle electrification.

In another decade, the business dynamic may be different if lithium-ion battery developers can meet their aggressive cost reduction goals and prove a compelling value proposition for plug-in vehicles. Until that happens, however, the safest energy storage investments for investors who want superior portfolio performance are in lead-acid batteries.

I frequently remind readers that I've been a Mac user since 1988 and always believed Apple had superior technology. My opinion didn't change the fact that compared to Microsoft; Apple was a poor market performer until 2000. It only goes to prove that in the gritty world of investments, being right too early is no better than being wrong.

Over the last year the four lithium-ion battery stocks I track have lost an average of 22.2% of their value while the three lead-acid battery stocks I track have gained an average of 15.1%. I don't expect that dynamic to change any time soon.

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

Posted by John Petersen at 03:35 AM | Permalink | Comments (2)

John Petersen

In December 2008 I went hunting for opportunities in the energy storage sector and selected six pure-play stocks that seemed seriously undervalued. I bought Enersys (ENS) at $6.00, Exide Technologies (XIDE) at $2.00 and Active Power (ACPW) at $0.26. While Enersys and Exide have been fabulous performers with appreciation to date of 442% and 397%, respectively, Active Power has been the runaway champion with appreciation to date of 923%.

My other three picks have performed poorly. C&D Technologies (CHHP.PK) is down 96% and finalizing a restructuring that will give 95% of its equity to noteholders; so I don't expect stockholders to recover more than a fraction of their losses. ZBB Energy (ZBB) is down 49% and remains a question because of its weak financial condition. Axion Power International (AXPW.OB) is down 51%, but my confidence in its technology, business model and financial health has never been greater.

A diversified portfolio created in December 2008 with a $1,000 investment in each of my six picks would have been worth $19,218 at Friday's close, for a two-year portfolio appreciation of 220%. In comparison, a diversified portfolio created in December 2008 with a $1,000 investment in each of Ener1 (HEV), Valence Technologies (VLNC), Altair Nanotechnologies (ALTI) and Beacon Power (BCON) would have been worth $2,284 at Friday's close, for a two-year portfolio depreciation of 43%. In simple terms, cheap energy storage has outperformed cool energy storage for two years running and I don't expect that dynamic to change anytime soon.

While an occasional glance in the rearview mirror can be an ego booster, it's rarely helpful for investors who want to position their portfolios for an uncertain future. Since Active Power was the best performer over the last two years; it offers a solid medium-term opportunity; and it can serve as a valuable object lesson in speculative stock picking, the balance of this article will focus on Active Power, its growth opportunities and the object lessons hidden in its history.

A recurring theme of this blog is that the energy storage sector plays by a different set of rules than the ones we came to know and love during the information and communications technology revolution. While IT companies can bloom and grow like wildflowers in an alpine meadow, companies in the energy storage sector behave more like vineyards that need years of careful attention before they begin bearing fruit. Investors who do not understand the differences will suffer.

Active Power manufactures, sells and services mission critical power infrastructure solutions for end-users that demand power quality and reliability at the 99.99999%, or seven nines, level. Past customers include factories, refineries, banks, datacenters, broadcasters, law enforcement command centers, airports and hospitals around the world.

Active Power's infrastructure solutions are not the simple battery backups most of us think of when somebody mentions uninterruptible power. Instead, they're multiply redundant integrated power solutions for users that can't afford outages like the one encountered earlier this month at a Toshiba factory in Japan where a 0.07 second voltage drop interrupted operations and damaged up to 20% of the flash memory chips the plant was planning to ship to customers in January and February of 2011. While the incident was an extreme example, credible estimates peg the total productivity losses from power outages in the US at $150 to $200 billion per year.

Active Power went public in August of 2000 and raised $156 million at $17 per share. It was one of the last major IPOs before the tech-wreck. By September 2000, Active Power's stock had surged to a peak of $79.75 before starting a hellish decline to $0.25 a share by December 2008. It was a classic case of a young company that had a promising technology and ambitious plans that:

• let irrational expectations run wild in the early days;
• learned its technology and market development challenges were far more difficult, time consuming and costly than anyone expected them to be;
• buckled down to hard work of refining a world-class technology solution and then proving the value of that solution to skeptical customers who can't afford failures or mistakes; and
• turned the corner at a time of maximum discontent and outright investor capitulation.

Since a ten-year stock price chart is too ugly for an upbeat article like this one, I'll use a five-year version instead.



The following graph tracks several important financial statement metrics over the last decade. Since hard numbers for 2010 won't be available till next March, I've used September 30th balance sheet data and trailing-twelve-month income statement data as approximations. Active Power's actual 2010 numbers should be better than they appear in the graph.



While a detailed discussion of Active Power's products, history and future could fill a small book, there are a few key points that investors need to understand when evaluating Active Power as an investment or as an object lesson.

First, Active Power needed several years to complete the development of its technology and begin installing systems for end-user validation and testing. In the beginning Active Power relied on Caterpillar (CAT) to include its flywheels in power quality systems sold by them. By 2005, it became clear that leaving the marketing function to a large partner that had ready access to several competitive energy storage options didn't always benefit Active Power. That dynamic forced Active Power to adopt a more proactive marketing approach and when it began integrating Caterpillar generators into its own systems instead of relying on Caterpillar as a principal sales channel, the game changed.

Second, end-users needed several years of validation and testing before there was a broad enough experience base to drive working relationships with first tier industrial engineering firms and distribution partnerships with companies like Hewlett Packard (HPQ) and Sun Microsystems (JAVA). Now that core business relationships are established, along with a widespread end-user experience base, Active Power can focus on selling its product line to a rapidly expanding market based on competitive capital cost, high power density, extraordinary system performance and low total cost of ownership.

Third, Active Power's target market is growing very rapidly because global reliance on automation and computerization is increasing while the level of power quality and reliability in many countries is declining. Active Power has no desire to stabilize the grid, but it knows that many industrial, commercial and governmental facilities will readily pay a premium price for the power quality and reliability their utilities can't deliver. Utilities in China typically promise customers 99.1% reliability. While that's an impressive accomplishment for a rapidly developing economy like China's, it's a far cry from the seven nines that many end-users must have.

Fourth, Active Power understands that its flywheel systems must compete with battery-based systems from companies like Emerson/Liebert, Eaton/Powerware and APC/MGE, and rotary systems from companies like Piller, Eurodiesel and Hitec. It also knows that a rapidly growing multi-billion dollar market is large enough to support several successful competitors. Accordingly, its primary goal is market credibility rather than market dominance.

When I first evaluated Active Power in late-2008, it had completed most of the heavy lifting associated with technology development and end-user validation. Its sales were ramping at respectable rates and its losses were narrowing. While Active Power's balance sheet was a mere shadow of its post-IPO glory, it had enough cash and working capital to finance a full year of operations and continue the orderly execution of its business plan. When I combined those factors with a market capitalization that was hovering around 75% of stockholders equity, it was clear that Active Power had limited downside risk and huge upside potential.

Over time, stocks tend to oscillate between undervalued and overvalued and they only touch fair value briefly during the transitions. If Active Power's management can stay the course and continue to execute the way they have over the last few years, I believe today's price is but a fraction of what it will be in 2012. I don't expect another 923% gain because companies like trees don't keep growing forever. However a double or even a triple from current levels would not be an unreasonable target given the magnitude of the undervaluation Active Power suffered through in late 2008.

I've previously written about the Gartner Group's Hype Cycle and think it's worth revisiting here. The following graph shows a stylized version of what happened to Active Power between its peak of inflated expectations in the fall of 2000 and its trough of disillusionment in the winter of 2008. I've seen a similar pattern in the stock of every public company I've ever represented.



In my view there are only two great times to buy a stock for investment. The first is in the early days of the innovation trigger, but investments at that stage are usually reserved for venture capital and by the time a company makes its public debut, the price is already in nosebleed territory. The second is at or near the bottom of the trough of disillusionment when business and financial fundamentals are sound, but the market is too tired or distracted to recognize the opportunity.

I am frequently and fervently chastised for expressing negative opinions on high-flying market superstars and favorable opinions on unloved companies with simple products. My goal, however, is to point out the risks of companies that are near the peak of inflated expectations and the opportunities of companies that are preparing to emerge from the trough of disillusionment. It's more art than science, outcomes are never certain and timetables are impossible to predict because of the market's ability to stay irrational for extended periods. In the fullness of time, however, the weighing machine always does its job.

The next couple years should be a lot of fun as Active Power makes the transition from losing money to making money. It's always an exciting time where positive surprises generate favorable price swings but negative surprises are discounted as part of the maturation process. I look forward to devoting more attention to Active Power.

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

Posted by John Petersen at 09:20 AM | Permalink | Comments (1)

John Petersen

After writing about investment opportunities in the energy storage sector for a couple of years, today marks an important transition because I've accepted Nadsaq's invitation to include my blog in the Community section of their website. I'm grateful for the chance to reach a broader audience and hope that my weekly musings can help new readers separate hype from opportunity and avoid the intellectual short-circuits that are all too common in the energy storage sector.

By way of introduction, I'm a working lawyer and accountant who has spent 30 years guiding emerging energy and technology development companies through the corporate finance process. I earned my stripes in the battery industry during a four-year stint as general counsel for Axion Power International that included 20 months as its board chairman. I'm an inveterate early adopter of new technologies, but my investment perspective is tempered by the knowledge that even extraordinary companies can take decades to achieve their potential and the future beyond a five-year time horizon is inherently unknowable.

During the 20th Century rechargeable batteries became a ubiquitous and largely invisible necessity of modern life. Lead-acid batteries started cars, provided back-up power and ran forklifts, golf carts and the occasional electric car, while compact lithium-ion and NiMH batteries powered portable electronics. None of these batteries performed as well as we wanted them to, but the only time we gave them any thought was when they needed to be charged or replaced. Maybe that's why the adjective most commonly used to modify the noun battery is "damned." The bottom line is batteries are and have always been a grudge purchase; devices that satisfied basic needs but fell short of expectations.

Over the last decade a curious dynamic has emerged in the energy storage sector as environmentalists, futurists and other dreamers latched onto the seductive idea that batteries could do everything from eliminating gas tanks to making wind and solar power stable. The eco-evangelical fervor rapidly spread to the media and government, and what started out as wishful thinking quickly morphed into ill-conceived policy. Faced with unreasonable expectations, battery developers found themselves between a rock and a hard place. They could either tell the government and the markets "your goals are unattainable" and reject piles of money, or they could say "we may be able to attain those goals," trusting that the money would flow, asking for forgiveness would be easier than asking for permission and there might even be an unexpected miracle.

The problem with the plan is that today's emerging energy storage demands are orders of magnitude larger than the applications the batteries were designed for. These emerging applications invariably demand extreme levels of battery reliability and performance, and are unbelievably cost sensitive. In other words, the plan itself is a classic example of the triumph of hope over experience.

Notwithstanding the flaws in the plan, the dynamic is now driving a global effort to improve all types of batteries. It's a long, difficult road, however, because battery technology is fundamentally different from information and communications technology, advances typically take seven to ten years to move from the laboratory bench to the factory floor, and the Moore's law gains we saw in IT and communications are not possible in electrochemistry. The innuendo inspired motto of my high school class was "better living through chemistry," but world-changing advances in electrochemistry have been few and far between.

If you spend any significant time reading media stories and analysts’ reports on energy storage, you'll get the feeling that lithium-ion batteries are an amazing new technology that's arrived just in time to save us from the tyranny of imported oil. The reality is lithium-ion batteries have been around for over 20 years, fine companies like Sony, Panasonic, Sanyo and NEC have already optimized their manufacturing processes, the chemistry accounts for over $7 billion in annual sales and the principal economies of scale have already been realized. From this point forward, the gains will be incremental at best until something truly different comes along.

Most investors have heard of disruptive technologies, a term coined by Clayton Christensen to describe simple, low-cost innovations that eventually displace established technologies. According to Dr. Christensen, disruptive technologies usually lack refinement and have performance problems because they're new, appeal to a limited market, and may not even have a proven practical application; but their low cost creates new markets that induce technological and economic network effects and provide an incentive to enhance the disruptive technologies to equal or surpass established technologies. The following graph illustrates the phenomenon.



If you consider the graph for a minute, the problem with the disruptive technology myth becomes obvious. Lithium-ion batteries were developed for the most demanding applications and are already at the top of the graph. Moving down-market to low quality applications like electric cars and grid-based storage is the industrial equivalent of a salmon swimming upstream to spawn. It's a constant battle with the law of economic gravity, predatory competitors and customers, and natural resource constraints. The lucky ones survive but many perish along the way. The key point to remember is that disruption flows from the bottom up, not from the top down.

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


(1)  Current HEVs use NiMH batteries that are made from the rare earth metal Lanthanum. Since rare earth metal supplies are uncertain, lead-acid and lithium-ion battery developers are working to fill the void.
(2)  In the US and Europe plug-in vehicles will typically use lithium-ion batteries because they're smaller and lighter. In Asia, more thrifty consumers are just as likely to prefer lead-acid. It is unclear whether either chemistry is truly suitable for the application.

I see a bright future for lithium-ion batteries in high value applications that only need a small amount of battery capacity, but think it's foolish to suggest that exotic batteries will become a cost effective technology for electric vehicles or play a critical in stationary applications where size and weight are meaningless but performance and cost are critical.

I consistently write about a short list of 18 pure play energy storage companies. My favorites in the established and profitable manufacturers class include Enersys (ENS), Exide Technologies (XIDE), Advanced Battery Technologies (ABAT) and China Ritar Power (CRTP). In the emerging technology class my favorites are Active Power (ACPW) and Axion Power (AXPW.OB). Unlike many writers, I don't expect leading lithium-ion battery developers like Valence Technology (VLNC), Ener1 (HEV) and A123 Systems (AONE) to thrive over the next couple of years.

In the weeks to come I'll drill down deeper into the myths and realities of the battery industry and the relative competitive positions of the manufacturers and developers I follow. Readers who would like to read my prior articles can find a complete archive at Seeking Alpha. Since I'm bullish on the battery business but bearish on many of today's market darlings, my articles tend to draw a lot of reader comment. I'd encourage investors who want to understand the industry to read my work, follow hyperlinks to source documents and pay attention to the numerous comments from others who disagree with me. If you make the effort, you'll find a depth and breadth of thought and opinion that I could never present if left to my own devices.

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

Posted by John Petersen at 12:28 AM | Permalink | Comments (6)

John Petersen

On October 20th, Maxwell Technologies (MXWL) announced that it has commenced volume deliveries of BOOSTCAP® ultracapacitors to Continental AG (CTTAY.PK) for use in a new stop-start idle elimination system for diesel passenger cars made by PSA Peugeot-Citroen (PEUGY.PK). According to Continental, Peugeot-Citroen plans to sell about a million cars equipped with this technology over the next three years. While the Maxwell design win has been rumored for months, it's great to have confirmation that stop-start is here, it's now and it will become a major new energy storage market over the next three to five years. With an estimated three-year value in the $50 million range, the Continental contract should provide a significant boost for Maxwell's top-line revenue.

Stop-start systems are baby steps in vehicle electrification and the most reasonable concept you can imagine – if the car isn't moving turn the engine off to save fuel and reduce emissions. Under normal conditions, a stop-start system can boost fuel economy and reduce emissions by about 5%. The savings can be up to 15% if a lot of stop and go city driving is involved. While stop-start systems make a world of sense, they're not as sexy as cars with plugs. As a result, stop-start gets precious little media attention despite the fact that for the foreseeable future the fuel savings from stop-start will be an order of magnitude greater than the fuel savings from cars with plugs and the cost per gallon of fuel savings will be at least 50% less.

It's no secret that I believe cars with plugs are an impossible daydream that's been sold to the mathematically and economically challenged by environmental activists and other hucksters. They're no better than Prius-class HEVs when it comes to air pollution; they're wasteful users of batteries; they're suboptimal users of other scarce resources; they're largely untested when it comes to safety, reliability and performance; they're not recyclable in existing facilities; and they're expensive beyond reason – the intense pink diamonds of eco-bling. These are not minor technical issues, they're congenital birth defects. Despite the media hype and the occasional blistering comment on my work from EVangelicals quoting The Gospel According to Elon (TSLA), I'm convinced the next generation of cars with plugs will be stillborn, just like all the others.

Unlike cars with plugs that will depend on consumer choice to restore a dash of uncertainty and adventure to the driving experience, stop-start implementation is being forced by existing fuel economy and emissions standards in the EU and the US, and by proposed standards in Asia. In the simplest terms stop-start is destined to become a global standard on cars with internal combustion engines by the end of this decade.

Under new EU standards, the fleetwide CO2 emissions for passenger cars must be reduced to an average of 130 grams per kilometer according to the following timetable.

Calendar Year	Percent  of Fleet	CO2 Emission Standard	MPG Equivalent Gasoline	MPG Equivalent 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

Similarly, under new US standards, the fleetwide average fuel economy for passenger cars and light trucks must meet the following targets.

Model	Passenger	Light	Combined
Year	Cars MPG	Trucks MPG	Fleet MPG
2012	33.3	25.4	29.7
2013	34.2	26.0	30.5
2014	34.9	26.6	31.3
2015	36.2	27.5	32.6
2016	37.8	28.8	34.1

While stop-start is not enough to satisfy all of the new regulatory requirements, it is the lowest hanging fruit on the vehicle efficiency tree and industry experts are predicting that it will be used in 20 million cars per year by 2015. If plans to make stop-start systems mandatory on all internal combustion vehicles in China are implemented, the number could be closer to 40 million cars per year by 2015.

The big drawback to stop-start is that the technology puts a lot of strain on starter batteries that need to start the engine several times during a commute and support lighting and accessory loads during engine-off intervals. Based on their experience with early stop-start models in Europe, the automakers have learned that conventional flooded lead-acid batteries are not robust enough. Therefore, most current stop-start vehicles have dual-battery systems that rely on more expensive valve regulated absorbed glass mat technology. While systems with dual VRLA batteries are a definite improvement, the rates of battery degradation are still unacceptably high and the automakers are actively evaluating alternatives.

At last month's 11th European Lead Battery Conference in Istanbul, BMW and Ford presented a joint paper that proposed a technology-agnostic testing protocol to assess the impact of battery aging under real world stop-start driving conditions. The protocol focuses 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 include:

1.	A 60 second discharge at 50 Amps to simulate accessory loads during engine-off intervals.	36,000 watt-seconds
2.	A one second discharge at 300 Amps to simulate the engine restart load.	3,600 watt-seconds
3.	A seven second rest period to avoid recharging the battery while the vehicle is accelerating; and
4.	Measurement of the time needed to recharge the battery for the next engine-off opportunity.	39,600 watt-seconds

The technical approach taken by Maxwell and Continental focuses on the second step, an intense discharge for a second or less when the engine restarts and the load on the vehicle's electrical system is heaviest. This interval is particularly important in the case of a diesel engine because higher compression ratios increase the starter load. The expectation is that shifting a portion of the heaviest loads to a BOOSTCAP will help protect the balance of the electrical system and extend battery life. Since Peugeot-Citroen was an innovator in the field of stop-start, I think the Maxwell-Continental system is an step in the right direction.

Regular readers know that I'm a former director of Axion Power International (AXPW.OB), a company that's developing a lead-carbon battery-supercapacitor hybrid that will undoubtedly compete with the Maxwell-Continental system for a share of the stop-start market. Unlike many who believe in the idea of a silver bullet energy storage technology, I'm delighted to know there will be a variety of competitive systems vying for a share of this emerging multi-billion dollar market. The inescapable reality is that that no single technology is likely to dominate and there will be plenty of room at the table for several successful companies. On balance, the biggest challenge I foresee will be ramping up production capacity fast enough to satisfy demand.

In addition to Maxwell and Axion, Johnson Controls (JCI) and Exide Technologies (XIDE) will be vigorous competitors for a share of the stop-start battery market. Their manufacturing expertise, global footprints and industry relationships must not be ignored.

The bottom line for investors is that a multi-billion market for advanced energy storage systems that can stand up to the demands of stop-start is developing in the real world while the media is distracted by the plug-in vehicle sideshow. Unless you're more knowledgeable than me, a diversified portfolio approach will be the safest way to play the automotive stop-start market.

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

Posted by John Petersen at 01:38 PM | Permalink | Comments (6)

John Petersen

I've been writing this blog on pure-play energy storage companies for a little over two years. Initially I focused on broad themes like the importance of price and performance and the fact that every industry must master the baby steps before it can try to run. Over time the analysis got increasingly granular as I focused on individual applications instead of the industry as a whole. While I occasionally revisit basic themes like I did in last fall's Battery Investing for Beginners series, I worry that overly technical discussions of applications are not as useful for investors as they could be.

My readership base has grown exponentially over the last year, which tells me that interest in the storage sector is booming. Since many investors seem to be having a hard time separating the wheat from the chaff, now seems like a good time to revisit the basics for investors who are considering this old-line industrial sector for the first time.

The oil industry and the battery industry are both celebrating sesquicentennials. Colonel Edwin Drake drilled the first commercial oil well in 1858. A year later on the other side of the Atlantic Gaston Planté invented the first rechargeable lead-acid battery. For the last 150 years, oil has been the primary driver of global industrial and economic growth and batteries have been little more than a grudge purchase, devices that nobody wanted but everybody needed. As the world slowly comes to grips with issues like peak cheap oil, climate change and rapid industrialization in Asia and South America, investors are beginning to realize that energy storage will be the beating heart of the cleantech revolution; an enabling technology for more efficient wind and solar power, more efficient transportation and a more efficient and reliable electric grid.

This is not a case of simple evolution;  it's a new industrial revolution where energy storage applications that didn't exist a decade ago will become hundred billion dollar opportunities over the next 20 years.

The mainstream media is full of stories about gee-whiz energy storage applications that scientists and companies are developing for new markets. The articles usually wax poetic on the benefits while downplaying if not ignoring the risks and costs. They almost never talk about the period of time that will pass between the launch of a technological marvel and the happy day when its manufacturer will turn the corner from hemorrhaging cash to breakeven; or the happier day when it will turn the corner from breakeven to sustained profitability.

Since the fair value of an investment is always equal to the risk-adjusted discounted present value of expected future returns, successful investing is all about timing. Being right too early is no better than being wrong. Investing at the wrong point in the hype cycle can be a grave mistake. In the final analysis knowing what will happen is useless if you don't have a reasonable feel for when it will happen.

Since 1988 I've been convinced that Apple (AAPL) had the best technology for the majority who want to use computers without having to understand their inner workings. Since 2004 the market has agreed with me. From 1988 through 2004, however, I'd have been better off owning Microsoft (MSFT). A true financial genius would have owned Microsoft from 1988 to 2004 and then shifted his portfolio to Apple. I wasn't that smart.

Most investors are accustomed to IT where Steve Jobs can introduce the iPad in April and Apple can plan on first year sales of 13 million units. Comparable uptake rates are simply not possible in cleantech. The following graph of a generic technology adoption lifecycle is the single most useful image an energy storage investor can sear into his consciousness.



The next graph from hybidcars.com is a close second because it tracks the increase in HEV sales from 1999 through 2009. The important lesson in this graph is that it took HEVs 10 years to advance from the starting point on the Technology Adoption Lifecycle curve to a point where they’re finally approaching 'The Chasm.' I'm one of many cheerleaders who believe HEVs should cross 'The Chasm' and become mainstream products, but even my optimism is tempered by reports that HEVs are losing market share while clean diesel sales are soaring.



Once an investor understands these two charts, it becomes relatively easy to answer the $64,000 Question:

"When are emerging energy storage applications likely to transition from the bleeding edge to the leading edge, and from the leading edge to sustained profitability?"

Electric Bikes and Scooters. Americans tend to think of cars when the subject is personal transportation, but electric bikes and scooters are immensely successful in Asia and rapidly becoming mainstream products in Europe. According to Pike Research, electric two-wheeled vehicle, or E2W, sales are currently in the 25 million unit per year range and sales are expected to grow to 80 million units per year by 2016. In Asia, E2W is the Microsoft analog in vehicle electrification; a cheap solution for the masses that has already attained 'Early Majority' status.

Stop-start Idle Elimination. Stop-start idle elimination is a baby step toward vehicle electrification that's been largely ignored by the media. The technology is simple - it turns the engine off when a car is stopped and turns it back on when the driver takes his foot off the brake. Since stop-start systems are extremely hard on batteries, current offerings use two VRLA batteries instead of one flooded battery. Even with dual batteries, automakers have had tremendous problems with battery degradation. To solve the problems, they are actively evaluating a variety of advanced energy storage technologies that promise better performance. Unlike the complex vehicle electrification plans that will depend on uncertain consumer acceptance rates, stop-start is being driven into the market by new fuel economy and CO2 emission regulations. Forecasts predict very rapid stop-start implementation in cars with internal combustion engines. The consensus calls for market penetrations in the 40% range by 2015 with near-universal implementation by 2020. The bottom line is that stop-start is the current Microsoft analog in vehicle electrification; an affordable solution for the masses that has already crossed 'The Chasm' and will attain 'Early Majority' status within five years.

Hybrid and Electric Buses. In recent years a huge amount of work has focused on improving the fuel economy of transit buses. The technical approaches range from hybrids that use supercapacitors or batteries to reduce waste to full electric vehicles. The economics seem to be working for transit system operators and order sizes are increasing rapidly. I believe that hybrid and electric transit buses have recently crossed 'The Chasm.' The future is looking very bright and I believe hybrid and electric buses will become mainstream public transit products in the next five years and dominant technologies by the end of the decade.

Plug-in Vehicles. Despite deceptive acronyms and PR claims that tend to confuse rather than enlighten, plug-in vehicles are not an evolutionary development in HEV technology. HEVs use a small battery to minimize wasted energy and improve fuel economy. Plug-in vehicles use a huge battery to replace a fuel tank and substitute electricity from coal for gasoline from oil. So despite the happy talk, plug-in vehicles are at the starting point on the Technology Adoption Lifecycle curve and must overcome six impossible challenges before they can approach 'The Chasm.' If those challenges can be overcome, plug-ins may become mainstream products by 2020. For the next decade, however, companies that make plug-in vehicles and the batteries that power them are likely to perform like Apple did in the 1990s.

Grid-connected Storage. The most exciting emerging energy storage applications are grid-connected systems for frequency regulation, short-duration wind and solar power integration and improved power quality. Many believe grid-connected storage markets will be immense once the new systems prove their worth. Like plug-in vehicles, however, grid-connected storage is at the starting point on the Technology Adoption Lifecycle curve. To complicate matters the potential buyers of grid-connected systems are the most heavily regulated and fiscally conservative companies on the planet. Utilities will need years if not decades of demonstration projects and performance testing before they'll be able to justify implementation decisions to a powerful array of Federal, state and local regulators. The next ten to fifteen years will undoubtedly be a time of intense testing and analysis, but grid-connected systems are unlikely to become mainstream products for another 15 to 20 years

The following graphic is my attempt to put the emerging energy storage markets into perspective in terms of when those markets will hit their stride and transition from the bleeding edge to the leading edge, and from the leading edge to the mundane.



The E2W market is here, its now and its booming. The two best pure plays in that sector are Advanced Battery Technologies (ABAT) and China Ritar Power (CRTP). While Valence Technology (VLNC) has a toehold in the E2W space because of its contracts with Segway and Oxygen SpA, Valence is not currently active in Asia where the bulk of the E2W sales originate.

The stop-start idle elimination market has been flying under most investors' radar to date but its visibility will ramp rapidly over the next three years as companies like Johnson Controls (JCI), Exide Technologies (XIDE) and Axion Power International (AXPW.OB) begin posting revenue gains from higher per vehicle battery content and higher gross margins on advanced battery systems. While Maxwell Technologies (MXWL) has a toehold in the stop-start market, its supercapacitor-based solution cannot eliminate the engine-off accessory load issues that are the principal cause of start-stop battery degradation.

The hybrid and electric bus market will be fascinating to watch over the next five years. Maxwell Technologies has seen a rapid ramp in its order flow for hybrid transit buses and lithium-ion battery manufacturers including A123 Systems (AONE) and Ener1 (HEV) have experienced similar increases in demand. Other contenders include Valence Technology and Altair Nanotechnologies (ALTI). While my guess is that Maxwell and A123 are likely to be the sector heavyweights, I’d have a hard time picking a clear technology winner today.

Since my crystal ball gets pretty foggy if I try to look more than five years out, I'd rather focus on the bird-in-the-hand investments today and turn my attention to the wild geese categories of plug-in electric vehicles and grid-connected storage in 2020 through 2025 when their futures will be clearer and their valuation premiums more reasonable.

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

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

John Petersen

Quarterly updates are among my least favorite tasks because they focus on where the energy storage sector has been instead of where it's going. I still haven't developed a presentation format I like, but it feels like things are heading in the right direction. Reader comments and suggestions on how I can make these updates more useful are always appreciated.

The 12-month performance for the energy storage sector was dismal and the only companies that currently trade above their September 30, 2009 closing prices are Active Power (ACPW) and Enersys (ENS). Most other companies in the sector are way down for the year. While softening markets for Exide Technologies (XIDE) and Axion Power (AXPW.OB) can be attributed to fund liquidations arising from the 2008 crash, most of the softness seems to arise from nagging uncertainty over what the future holds. A number of companies seem to have turned a corner during the third quarter, but sector performance in general can only be described as mixed.

The big winner for the quarter was Altair Nanotechnologies (ALTI), which was weak at June 30th but recently announced plans to sell a 51% interest to Canon Investment Holdings for $49.8 million and expand into China. The big loser was C&D Technologies (CHP), which was struggling at June 30th, recognized an intangible asset impairment $60 million in the quarter ended July 31st, and then negotiated an agreement in principle with certain noteholders that will convert $127 million of debt into equity and give the noteholders a 95% ownership stake.

The Altair and C&D transactions won't close until the fourth quarter, but for purposes of this article I'll treat both as done deals and work with rough pro forma estimates. I'll also adjust the data for other companies as necessary to reflect financing transactions that have been reported since the date of their last quarterly reports.

The following table provides a quick summary view of stock price performance in the energy storage sector for the last twelve months and for the third quarter of 2010.



For the more visually inclined, the following graph tracks the composite price performance of my five categories of energy storage companies over the last year.



The history part is pretty straightforward. Now it's time dust off the crystal ball and take a look at how things are shaping up for the next few months. Since my undergraduate degree was in accounting, the numbers are the first place I go when trying to discern the probable shape and size of future events. The following table provides summary data on a few financial metrics that I like to emphasize in any forward-looking analysis.



For companies with a history of losses, the first number I focus on is working capital. If a company can't cover a year's losses and make its planned capital investments with available funds, it will almost certainly be forced to seek new equity or debt financing and that can be very difficult in a turbulent capital market. The five companies that have clear working capital issues are identified with a red X in the working capital adequacy column.

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 proprietary technologies, human resources, industry experience, customer relationships and the like usually have no recognized balance sheet value. When the blue-sky premium is out of line on the high side, it's a warning flag. When the blue-sky premium is out of line on the low side, it can hint at substantial upside potential. While peer group comparisons aren't always reliable, they can provide useful guidance.

Many investors spend a lot of time obsessing over quarterly results, but I believe trailing twelve-month numbers provide a more reliable picture of how a company is performing because they smooth quarter-to-quarter changes in the business cycle and make it easier to spot companies that are performing better than their stock. Since its last quarter was disappointing but the company is solidly profitable on a trailing twelve month basis, I believe Exide Technologies (XIDE) will be a surprisingly strong performer over the next nine months.

The next twelve months will be turbulent times in the energy storage sector as manufacturers introduce a variety of transportation products and ramp up demonstrations of large-scale stationary storage products. I expect good things from Axion Power (AXPW.OB) as its PbC technology advances from successful laboratory testing with automakers to on-road fleet testing in stop-start systems. While it's a decidedly unpopular position, I think cars with plugs will have a hard time meeting lofty market expectations. If the initial product introductions are not a smashing success, companies that make lithium-ion batteries could falter. While their working capital values are terrible, Beacon Power (BCON) and ZBB Energy (ZBB) seem to have more upside potential than downside risk and may be good speculations at current prices.

While my experience and personal investing preferences are in the lead-acid subsector, one could make strong to compelling arguments about the investment merit of each company I track. The challenges facing some are daunting, but the potential markets for their products are enormous. The information technology revolution was typified by a series of technologies that dominated the market then faded to obscurity. The cleantech revolution in general and the storage sector in particular will be very different because the best any company can hope for is a technology that will dominate a substantial market niche. In information technology, investing was like the hunt for the great white whale. In cleantech, it will be more akin to hunting in a herd of elephants.

The last year has been has been very tough on the energy storage sector, which is down 40% while the broader market indices are up 10%. The sector seems to be turning a corner as the shape of events over the next couple years become more obvious. Once the corner is turned, I expect the sector to outperform the broader market and become a mega-trend that will endure for decades. The sector is on sale for now but it won't be for long.



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

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

John Petersen

Now that the earnings season is almost over, a review of surprises in the storage sector seems appropriate. Before digging into performance surprises, however, I want to share a surprising excerpt from "Reinventing Capitalism: How to jumpstart what the marketplace can’t," an interview with Bill Gates that served as the closing presentation at this month's Techonomy 2010 Conference. While I commend the entire video for those who have 50 minutes to spare, I was particularly intrigued by Mr. Gates response to a question about whether we could reasonably hold out hope that Moore's Law class gains would occur in energy technology.

"Now and then yes, but we’ve all been spoiled and deeply confused by the IT model. You know chip scaling - exponential improvement - that is rare. Now we do see it; we see it in hard disk storage, fiber capacity, gene sequencing rates, biological databases, improvement in modeling software – there are some things where exponential improvement is there. If you believe Ray Kurzweil he takes it and says OK all of technology is subject to that and therefore, mankind in 2042 will be replaced by robots. That’s the, you know, positive view, which I think goes too far. ...

The more realistic view is what you’ll see in Vaclav Smil in terms of writing about energy. He has Thomas Edison reincarnated and he says OK what would Thomas Edison be surprised about and not surprised about? Light bulbs that screw in? He did that screw in thing. Lead-acid batteries? Very similar to what Edison did - no surprises. So you say “oh no, batteries have improved.” They haven’t improved hardly at all and there are deep physical limits. You know I’m funding five battery startups. There’s probably fifty out there. That is a very tough problem and intermittent energy sources force you into that problem. And it may not be solvable in any sort of economic way. There is no one that you look at and say has those pieces together.

So we’re fooled by this, you know. Supersonic transport, OK that was a nice thing in the past. There are things that don’t move forward and energy, nuclear energy, you know, stopped in the 1970s, by and large that got shut down. So this latest Smil book Energy Transitions really is eye opening when you see how long and hard it is for change to take place. So we have to have a blended model of the optimism that we get from our IT thing and the realism that the energy sector teaches us through its history."

In late-July I argued that the origins of specious battery cost forecasts were political and ideological rather than scientific, and drew vitriolic comment from scores of readers who've bought the mythology and think me out of touch with the way technology develops. It's more than a little gratifying to see a man with the technical stature of Bill Gates joining me in the Luddite camp and cautioning that while we can expect baby steps, the giant leaps for mankind will be few and far between.

In general the earnings season turned out pretty much the way I expected it would. The following table includes some key market metrics for the companies I follow that have recently reported earnings.



Ener1 (HEV) finished the quarter with $5.8 million in working capital, which pales in comparison to its losses over the last 12 months, the $100 million in additional company-funded capital spending that will be required under the terms of its ARRA battery manufacturing grant and an unknown amount of company-funded capital spending that will be required if its ATVM loan comes through. While Ener1 has been able to cover its funding requirements to date with a variety of stopgap financings, its balance sheet is a couple hundred million dollars light for its capital spending plans and I think that's a dangerous position when the capital markets are mushy.

A123 Systems (AONE) spent more money and generated less revenue than the analysts expected, and was punished for it. After adjusting A123's cost of goods sold for unabsorbed manufacturing costs, the hard cost of batteries sold to customers during the quarter was $970 per kWh – a far piece from the sub-$400 costs that will be required if it hopes to sell batteries for $500 per kWh by 2015.

Exide Technologies (XIDE) took a significant beat-down for reporting its best first quarter performance in five years. What observers have failed to note is that on a trailing twelve month basis Exide has reported net income of $33 million and the first two quarters of its fiscal year are historically weak due to the cyclical nature of its automotive battery business. Given the trajectory of its performance over the last year, I fully expect Exide to be solidly profitable by the time its next annual report comes around.

While it's not included in the summary table because its fiscal cycle is a month out of synch, C&D Technologies (CHP) has traded down to point where its $14.8 million market capitalization represents 20% of its working capital and 39% of its book value. C&D had a few ugly years while they were restructuring their business and building a new factory in China. Since the Chinese factory is now on line and capacity utilization is building rapidly, my sense is that the current selling pressure is likely coming from institutions that either can't or won't carry sub-$1 stocks on their books. With a market capitalization that's 4.3% of trailing twelve-month sales I tend to believe that C&D is an extraordinary speculation, particularly when you consider that Enersys (ENS) trades at 71% of sales and their business model is very similar.

The big question mark for the coming week is whether President Obama will be bearing gifts when he visits ZBB Energy (ZBB) on Monday. While ZBB was not included in my summary table because it uses a June 30 fiscal year and won't report till late-September, this is another company that trades at a surprisingly low market capitalization of $13.1 million. When I consider ZBB's current market capitalization in light of the numbers that frequently accompany a pre-election presidential visit, it could be fun to watch.

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

Posted by John Petersen at 04:10 AM | Permalink | Comments (0)

*with humble apologies to Charles Darwin
John Petersen

The Oxford Dictionary defines the adjective 'specious' as:

• Superficially plausible, but actually wrong;
• Misleading in appearance, especially misleadingly attractive.

The Wiktionary offers a broader definition as:

• Seemingly well-reasoned or factual, but actually fallacious or insincere; strongly held but false;
• Having an attractive appearance intended to generate a favorable response; deceptively attractive.
  

Over the last two years I've patiently analyzed the evolving price and performance forecasts of electric vehicle advocates and lithium-ion battery developers. In the process I've shown them to be possible, but unlikely, and interdependent to the point where a single flawed assumption can level the entire house of cards.

I've also puzzled over the broader question of why supposedly reasonable businessmen would encourage market expectations that are so aggressive that the probability of delays, cost overruns, performance shortfalls and other predictable failures approaches certainty. Everyone knows that the stock market reacts badly to disappointment, so I've never been able to figure out why companies would voluntarily set themselves up for that kind of pain.

I found my explanation last week. The lights went on when I downloaded a new DOE Report titled "Economic Impact of Recovery Act Advanced Vehicle Investments," which just happened to coincide with groundbreaking ceremonies for Compact Power's new plant in Holland, Michigan that will create one new job for every million dollars of capital investment. When I compared the conclusions of this seven-page DOE report with the exhaustive technical discussions in the 380-page Annual Progress Report on Energy Storage Research and Development the DOE released in January, the differences were breathtaking.

Who'd have dreamed an industry could make that much progress in only six months.

The answer fell into place when I noticed that (a) the DOE press release uses a hyperlink to the White House for people who want to read the full text of the Report, and (b) the Report is not even hosted on the DOE's server. Since I've never encountered a situation where the government agency that generated a report left it out of their official record, the clear inference is that the Report is political theatre wrapped in a DOE cover.

Once you understand that The Origin of Specious is political rather than technical, everything else makes sense. Armed with barrels of taxpayer money, the political class has sought out battery developers who will adopt the party line and add technical credence to questionable ideological goals. Faced with a Hobson's choice between needed funding and technical integrity, the developers make the rational business decision and take the money, confident that future apologies will be easier to spin than current failure. Sprinkle in a healthy dose of optimism from journalists who don't bother checking facts and you have the perfect political story for the next five years.

American presidents are supposed to inspire with challenges like putting a man on the moon or tearing down the Berlin Wall. The great ones sometimes succeed. For lesser men, the grand visions of their day target the highest fruit on the lemon tree and bring us wars on poverty, drugs, terror, foreign countries and CO2 that inevitably fall short of the mark while leaving us no wiser, but a little poorer and a little less free.

We all know how well pre-election promises work out. While it gives me no end of comfort to hear presidential assurances that battery prices, healthcare costs and budget deficits will collapse over the next five years, I'm not quite ready to pay a premium price to invest in those outcomes.

At the close of business on Thursday, the electric vehicle complex including Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV) and Valence Technology (VLNC) had combined 12-month revenues of $258 million and sported a combined market capitalization of $3.4 billion, including $900 million in stockholders' equity and $2.5 billion in blue sky premium.

In comparison, the lead-acid battery complex including Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB) had combined 12-month revenues of $4.6 billion and a combined market capitalization of $1.6 billion, including $1.2 billion in stockholders' equity and $460 million in blue sky premium.

Something is out of kilter when the electric vehicle complex has 6% of the sales and 77% of the stockholders equity of the lead-acid battery complex, but trades at twice the price.

Within a couple weeks, all of these companies will report second quarter results. The electric vehicle complex is likely to report bigger than expected losses - again, and at least for Ener1 and Valence, weak financial condition. In comparison the lead-acid complex is likely to once again report better than expected revenues, margins and financial condition. At some point the market will accept the cruel reality that political promises cannot repeal the laws of economic gravity, we can't waste scarce resources in an effort to conserve plentiful resources, and investments in vehicle electrification are bound to follow the tragic value trajectory blazed by fuel cells and corn ethanol, which have been favorites of the political class since I was a baby lawyer.

It's your money, but at least you understand The Origin of Specious.

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

Posted by John Petersen at 01:17 AM | Permalink | Comments (1)

John Petersen

On June 22nd Scientific American rolled-out a Web-only article titled "The Dirty Truth about Plug-in Hybrids, Made Interactive" that summarizes a January 2008 report from Oak Ridge National Laboratory and shows why plug-in vehicles in the U.S. will, on average, be just a little bit dirtier than gasoline HEVs.

You read that right – dirtier, not cleaner!

I first raised the issue in an August 2009 article titled PHEVs and EVs, Plugging Into a Lump of Coal, where I estimated that plug-in vehicles would be about 25% cleaner than HEVs, but the marginal cost of CO2 abatement with plug-in vehicles would be five times higher than the marginal abatement cost with HEVs. The Oak Ridge report went a couple of levels deeper than my simple calculations and evaluated:

• Baseload power requirements and generating facilities in 13 regions in the year 2020;
• The specific types of generating facilities that would be used to charge plug-in vehicles; and
• The regional CO2 increase or decrease from using those generating facilities to charge plug-ins.

The following graph highlights the comparative CO2 increase or decrease in the 13 regions identified in the Oak Ridge study and discussed in the Scientific American article.



After accounting for the projected number of vehicles in each region, the national average was a 0.37% increase in CO2 emissions. Given the modest CO2 reductions from plug-in vehicles in regions like the Pacific Northwest and the significant CO2 increases in the industrial heartland, it would be easier, cheaper and better policy to use domestic natural gas in HEVs and forget about plugs entirely. Where HEVs cut to the heart of the CO2 problem nationwide, plug-ins only nibble around the edges in a few select regions.

Last month the American Chemical Society published a similar white paper from Tsinghua University, Beijing, and the Argonne National Laboratory Center for Transportation Research titled "Environmental Implication of Electric Vehicles in China," which concluded that implementing electric vehicles in China would increase CO2, SO2 and NOX emissions. It also concluded that gasoline HEVs are more environmentally friendly, more commercially mature and less cost-intensive. The following graph comes from page 4 of the white paper.

While the CO2 emissions data from both China and the U.S. is damning, simple calculations prove that electric vehicles like the Leaf from Nissan (NSANY.PK) and the MiEV from Mitsubishi (MMTOF.PK) save an average of 10.4 gallons of gasoline per year for each kWh of incremental battery capacity while PHEVs like the Volt from General Motors save an average of 7.6 gallons of gasoline per year for each kWh of incremental battery capacity.

I'll encourage each of you to run your own discounted cash flow calculations on annual gasoline savings of 10.4 and 7.6 gallons per kWh and then compare your calculated value with current battery costs of ~$1,000 per kWh and projected future costs of ~$500 per kWh. I've run the numbers and am not impressed.

In addition to Tesla Motors, which is scheduled to go public next week at a price of $14 to $16 per share, there are six pure-play battery companies that focus on electrification solutions for transportation. A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) are all working on lithium-ion battery solutions for plug-in vehicles. Maxwell Technologies (MXWL) is working on supercapacitor solutions for city bus, stop-start vehicle and HEV applications. Exide Technologies (XIDE) and Axion Power International (AXPW.OB) are working on advanced lead-acid and lead-carbon battery solutions for stop-start vehicle and HEV applications.

The following table assumes the Tesla IPO will go off at $15, the mid-point of the price range, and includes summary balance sheet and market valuation metrics for all seven companies. For both working capital and stockholders equity, the table reflects the dollar amount and the percentage of market capitalization those values represent. The Blue Sky column highlights the spread between market capitalization and stockholders equity.


It doesn't take much training to see that valuation premiums are much higher for plug-in vehicle companies than for lead-acid companies. In March of this year I suggested that stop-start idle elimination and other vehicle efficiency technologies were the investment equivalent of birds in the hand while plug-in vehicles were a flock of wild geese on the wing. In April I reported that the EPA and NHTSA were forecasting a 42% market penetration for stop-start systems by 2016. Over the last month we've seen important articles in prestigious publications expose the zero-emission myth as urban legend. With Oak Ridge and Argonne Laboratories, the American Chemical Society and Scientific American targeting the wild geese with double-barreled shotguns, I'm more convinced than ever that the market will soon shift to a more rational focus on economic reality and business opportunity.

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

Posted by John Petersen at 01:42 AM | Permalink | Comments (2)

John Petersen

Since I discussed dilution risks in emerging energy storage companies last week, today I'm going to shift gears and offer an overview of the opportunities that have developed in larger pure-play energy storage companies since last September. The following graph tracks the 18-month composite performance of the five categories I defined in Battery Investing for Beginners, Part II and shows how they stacked up against the Dow Jones Average.



To understand what's happened in the storage sector over the last 18 months it's helpful to remember a few key dates. First, we had the November 2008 crash and the March 2009 retest of the lows. The market started to turn in the spring of 2009 and the storage sector fared better than most because Federal stimulus legislation included billions in direct and indirect subsidies that took final form in August when the President announced $1.25 billion in ARRA battery manufacturing grants. Those grants, in turn, laid the foundation for the successful A123 Systems IPO (AONE) that went off in September. Since September, the euphoria has faded as the market came to grips with the fact that building new factories takes time and changes in the cleantech revolution will be slower than they were in the IT revolution. The market is still adjusting to the reality that storage is governed by a different set of rules, but that adjustment period has created some interesting opportunities for investors who want to position their portfolios for a coming tidal wave of change.

In January of this year I introduced the concept of the Hype Cycle in an article on vehicle electrification and used a graph that TIAX LLC presented at the Plug-in 2008 Conference. I've recently found a generic Gartner Group version of the graph that describes the stages of the hype cycle in greater detail.



While opinions on where particular technologies fit on the hype cycle graph vary, I believe a macro-economic trend that's best described as a "storage supercycle" is just beginning. In IT terms, today is like the late-70s and headline grabbing energy storage applications like plug-in vehicles, frequency regulation and short-duration renewable power integration are analogs of the IBM 5110, the TRS 80 and the Apple II. In effect, the current headliners are little more than timid baby steps in an economic and technical supercycle that will take a couple decades to unfold before reaching its true peak of inflated expectations.

The thing that surprises me most about storage is our profound ignorance of technical, economic and resource limitations. We don't know whether plug-in vehicles will satisfy mainstream transportation needs because except for a couple of small-scale tests, nobody's built a fleet of plug-in vehicles, put them into the hands of ordinary people, and operated them long enough to find out. We don't know whether lithium-ion battery packs will perform as well in practice as they do in computer simulations and we can't know whether any of the promised economies of scale will actually materialize. For that matter, we're not entirely certain that global raw material supply chains will be up to the task. At the end of the day it's an R&D project that may work out well, but may also prove once again that batteries are not cost effective replacements for fuel tanks.

The same dynamic holds for ongoing efforts to use flywheels and a variety of other technologies to regulate the power grid and smooth the output of windmills. The first goal is to find out whether the various technologies are robust enough to do the required work for a reasonable service life. Once technical feasibility is established, the more difficult and demanding task will be identifying applications and installations where the benefits justify the costs. The process has started, but it will be years before the reports are written and wide-scale implementation decisions begin.

Over the next decade I expect all of today's leading technological contenders to be eclipsed by new developments. Some will be improvements on old-line chemistries, others will be improvements on advanced chemistries, and others still will take gee-whiz science out of research laboratories and move it into factories. The end result will be a crazy quilt where a wide variety of storage technologies will dominate billion dollar market segments, but no technology will dominate the industry. Tolkien is not writing this story and we're never going to see "one ring to rule them all."

Cheap Sustainable Companies

My cheap sustainable category, which includes Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Active Power (ACPW), has been the hands down winner in terms of composite performance, but is off significantly from last fall's peak. When you consider the price trends for the individual companies, it becomes clear that Enersys was the star performer while the other three were relative laggards.



Some key valuation metrics as reported by Yahoo! Finance are in the following table.



Exide is emerging from a major restructuring that crushed earnings and drove its price down to roughly 25% of the pre-crash high of $18.80 per share. C&D has recently completed a big construction project in China that drove its stock price down to roughly 11% of the pre-crash high of $9.05 per share. Both are trading at prices that are very close to book value and represent obscenely low multiples of sales. They're also emerging from difficult times into a rapidly changing market that's demanding better performance and should favor their high-end product lines. In my view both Exide and C&D could easily double or triple over the next twelve months as the accomplishments of the last few years begin to show up in reported operating results.

Active Power is a textbook example of how a hot IPO can wallow for years if technological and business developments take longer and cost more than the market expects. After starting from an adjusted IPO price of over $70, it faded to an all time low of $0.26 in the winter of 2008. Since then, its flywheel-based power quality systems have gained traction in the data center market and just last week it announced an $8 million order, or roughly 25% of its 2009 sales. It seems that Active Power has finally found its footing after a lost decade of disappointment. If its business continues to follow the trajectory established over the last 18 months, it should be a solid performer in the coming year and could easily double or triple.

Chinese Companies

My Chinese category, which includes Advanced Battery Technology (ABAT), China BAK Battery (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ), has also been a solid performer that's trading way off its peak from last fall. When you consider the price trends for the individual companies, it becomes clear that CRTP and ABAT were the star performers, HPJ did well, and CBAK was the only true laggard.



Some key valuation metrics as reported by Yahoo! Finance are in the following table.



My two favorites in this category are ABAT, which is pursuing a vertical integration strategy in the booming electric two-wheeled vehicle market, and CRTP, which is a major manufacturer of cheap lead-acid batteries. While Hong Kong Highpower has been a solid performer and is down by 50% from its recent high, most of its sales come from NiMH batteries that require the rare earth metal Lanthanum. Given uncertainties over rare earth metal supplies, I worry that HPJ may face significant resource constraint issues over the next few years. While CBAK is one of the largest lithium-ion battery manufacturers on the planet and has a world class customer list, its financial results highlight a nagging concern that great customer lists aren't always good things if the customers are so tight fisted that you can't earn a decent gross profit.

Cool Sustainable Companies

My cool sustainable category includes A123 Systems, Maxwell Technologies (MXWL) and Ultralife (ULBI). While Maxwell has been a solid performer, Ultralife has trended downward since I started following it and A123 is currently trading for about 75% of its $13.50 IPO price after a run into the mid-$20s.



Some key valuation metrics as reported by Yahoo! Finance are in the following table.



Of the cool sustainable companies my favorite is Ultralife because it has a history of profitability, trades at 1x book value and 45% of sales, and has been beaten down by almost two-thirds from its peak in December 2008. I expect Maxwell to perform well over the next year, but think reasonable performance expectations are already priced into the stock. A123 worries me a bit because market expectations for plug-in vehicles are so high and it will be hard for any lithium-ion battery manufacturer to live up to those unreasonable expectations.

Conclusion

These are times of immense risk and once in a lifetime opportunity. Unless you're an expert, the only rational way to invest in the energy storage sector is with a diversified portfolio that focuses on a relatively short time horizon and leaves room to adapt to rapidly changing conditions. All other roads lead to the technology du jour minefields that have been snaring the unwary for as long as I've been practicing law:

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	PHEVs and Electric Vehicles
2012	The next big thing?

Disclosure: No positions.

Posted by John Petersen at 05:00 PM | Permalink | Comments (0)

John Petersen

The greatest truth in micro-cap corporate finance is that small companies have a lot in common with small children in third world countries – they rarely die of starvation but they frequently die of dysentery. In hard times, small companies that need additional capital can usually find the cash if their management has enough humility to accept the price the new financiers are willing to pay. The problems can quickly become life threatening, however, if management fails to adjust spending to accommodate business conditions or rejects available financing because the terms seem predatory. My advice to clients has always been "take the money when it's available, even if you don't like the terms, because shareholders adjust quickly to sensible decisions but they rarely forgive failure."

Last December a former client Axion Power International (AXPW.OB) found itself with a Hobson's choice because it needed substantial financing to pursue its development plans and the price the new financiers were willing to pay was painfully low. Management made the right decision and sold 45.8 million common shares at $0.57 per share, which was a big discount from the prevailing market price of $1.58 per share, but worked out to roughly 5.7x the company's adjusted pre-financing book value of $0.10 per share.

Earlier this week, ZBB Energy (ZBB) filed an SEC registration statement for an offering of up to $10 million in common stock. Concurrently, it added going concern language to the footnotes in its quarterly financial statements. The market's reaction was violent and shares that closed at $0.80 on March 31st closed at $0.28 yesterday, or 1.27x its book value of $0.22 per share. There's no way to predict what ZBB's offering price will be, or for that matter whether the offering will be successful in a tough market, but given the very small spread between the current price of ZBB's stock and its book value per share, I tend to think the market reaction was overblown and ZBB's shares are attractive at current prices in spite of the uncertainties. In any event I have to admire a management team that's willing to bite the bullet and take appropriate steps to insure their company's survival.

While Axion and ZBB each followed a rational path and got punished by the market for a good business decision, all the companies in my "cool emerging" category have comparable if not greater problems that seem to be complicated in some cases by an unwillingness to bite the bullet on financing terms or slash spending to accomodate current realities. The following table provides summary information on the six companies in my "cheap emerging" and "cool emerging" categories in ascending order of unsatisfied funding needs for the balance of 2010. Comments on each company follow the table.



Axion has enough cash and working capital to support up to three years of operations at historic levels. Now it's all up to the PbC battery. If ongoing testing by first-tier European and American automakers leads to significant purchase orders, Axion will be able to begin plant expansion with existing capital and, if necessary, go back to the market with a proven value proposition and a solid book of business. If it encounters delays or disappointments, there will be enough cash to weather the storm and solve the problems without going to the market in a position of weakness. Either way the stockholders win because there is no reasonable prospect of dilutive financing for the foreseeable future. Cash is a great thing and I'm delighted that management made the right decision even if the market reacted badly.

Altair Nanotechnologies (ALTI) has a reasonable market capitalization ratio of roughly 2x book value and modest capital spending plans for this year that will be contingent on increases in customer demand for its products. Altair believes its working capital together with revenue from product sales will be sufficient to support its operations for approximately six months.  Consequently, Altair will seek stockholder authorization for a reverse split at its annual meeting next week and plans to raise an undisclosed amount of new capital during 2010. There's no way to predict what the terms of a future Altair offering will be, or for that matter whether the offering will be successful in a tough market, but given the reasonable spread between the current price of Altair's stock and its book value per share, I tend to think Altair's shares are attractive at current prices in spite of the uncertainties. Altair's planned financing and reverse split may prove to be unpopular with some stockholders, but they seem likely to insure the company's survival and that's ultimately the only thing that matters.

Beacon Power (BCON) has a reasonable market capitalization ratio of roughly 1.8x tangible book value and more rigid capital spending plans that represent its share of PP&E spending that is not provided by DOE loan facilities.  Beacon believes it will need to raise $18 - $20 million in 2010 to continue the orderly implementation of its business plan and will seek stockholder authorization for a reverse split at its annual meeting in July. There's no way to predict what the terms of a future Beacon offering will be, or for that matter whether the offering will be successful in a tough market, but given the very small spread between the current price of Beacon's stock and its book value per share, I tend to think Beacon's shares are attractive at current prices in spite of the uncertainties. Beacon's planned financing and reverse split may prove to be unpopular with some stockholders, but they seem likely to insure the company's survival and that's ultimately the only thing that matters.

Valence Technology (VLNC) has always baffled me because I can't understand how a company that's under water to the tune of $75 million maintains a $120 million market capitalization. As near as I can tell Valence owes its survival to loans from a principal stockholder and occasional open market sales of its common stock. In a case like Valence, all I can do is paraphrase the late Billy Holliday, "papa may have, and mama may have, but god bless the company that got its own."

Ener1 (HEV) has consistently carried a market capitalization that's way out of line with its tangible book value. It also has a very high burn rate and aggressive capital spending plans that will require huge amounts of new financing in the immediate future. Ener1's most pressing problem is a $15 million note to Credit Suisse that matures in late June, but its capital spending plans are critical to an ARRA battery manufacturing grant the DOE awarded in August of last year. Ener1 plans to finance its operations and capital spending from open market stock sales and other sources. While Ener1 believes it has access to sufficient capital to continue its planned operations, I'm left with the nagging question "at what price?" In connection with its IPO, A123 Systems (AONE) sold stock for 5.75x its pre-offering tangible book value before. Unless Ener1 can convince investors that it's a better company than A123, I have a hard time imagining a substantial equity offering priced above $1.50 to $2.00 per share.

As a younger man I spent some time in the oil business and learned you don't start drilling a well without enough cash to reach your target depth, complete a successful well, build pipeline and storage facilities and provide for reasonably anticipated contingencies. That's a tall order in corporate finance where the cost of reaching the next milestone is always uncertain. A123 raised enough cash in its IPO to build a U.S. plant and begin production. As painful as its December financing was, Axion has at least a couple years of running room. All of the other emerging companies on my tracking lists will have to endure some pain over the next few months as they seek new capital in a tough market. Those that make solid decisions will emerge stronger for it. Those that don't will fail.

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

Posted by John Petersen at 10:48 AM | Permalink | Comments (6)

John Petersen

The first quarter was unkind to publicly traded companies in the energy storage sector, which saw their stock prices fall by an average of 16.22% over the last three months. While the shares of Enersys (ENS) and C&D Technologies (CHP) posted gains of 12.8% and 3.2% respectively, all of the others in my universe of 17 pure play energy storage companies traded down. The following table summarizes first quarter performance and provides some important valuation metrics.



The following table summarizes the portfolio performance a hypothetical investor would have realized over the last three months if he invested $1,000 in each company and the three broad market indexes on December 31, 2009.

Broad Market Indices	+4.89%
Cool Emerging Companies	-14.85%
Cool Sustainable Companies	-25.50%
Cheap Emerging Companies	-29.24%
Cheap Sustainable Companies	-6.65%
Chinese Battery Companies	-13.70%

After publishing performance updates for a year and a half, I've decided that quarterly snapshots don't provide enough information to show how my tracking categories and companies have performed over time. In an effort to make these summaries more useful to investors, I'm going to introduce a new format that breaks the data down into more digestible chunks. I hope it helps.

Cool Emerging Companies

My Cool Emerging Companies category includes four companies that are developing cool but objectively expensive energy storage technologies that are not fully commercialized. The companies in this category are Ener1 (HEV), Valence Technology (VLNC), Altair Nanotechnologies (ALTI) and Beacon Power (BCON). These four companies were down an average 14.85% in the first quarter and have fallen an average of 36.80% since November 14, 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



Cool Sustainable Companies

My Cool Sustainable Companies category includes three companies that manufacture cool but objectively expensive energy storage devices and generate substantial recurring revenue from product sales. The companies in this category are A123 Systems (AONE), Maxwell Technologies (MXWL) and Ultralife (ULBI). These three companies were down an average 25.50% in the first quarter, but have gained an average of 12.19% since November 14, 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



Cheap Emerging Companies

My Cheap Emerging Companies category includes two companies that are developing effective but objectively cheap energy storage technologies that are not fully commercialized. The companies in this category are Axion Power International (AXPW.OB) and ZBB Energy (ZBB). These two companies were down an average 29.40% in the first quarter and have fallen an average of 12.76% since November 14, 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



Cheap Sustainable Companies

My Cheap Sustainable Companies category includes four companies that manufacture effective but objectively cheap energy storage devices and generate substantial recurring revenue from product sales. The companies in this category are Enersys (ENS), Exide Technologies (XIDE) C&D Technologies (CHP) and Active Power (ACPW). These four companies were down an average 6.65% in the first quarter, but have gained an average of 103.72% since November 14, 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



Chinese Companies

My Chinese Companies category includes four companies that manufacture a variety of energy storage devices including lead-acid, NiMH and lithium-ion batteries, and generate substantial recurring revenue from product sales. The companies in this category are Advanced Battery Technology (ABAT), China BAK Batteries (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ). These four companies were down an average 13.70% in the first quarter, but have gained an average of 80.28% since November 14, 2008.

The following table provides quarterly price information for each company's stock and is accompanied by a graph that illustrates their relative price performance compared with their closest peers and the Dow.



Murky Crystal Ball

Since July of 2008 I've consistently told readers that energy storage is an essential enabling technology for the cleantech revolution and has immense potential in transportation, wind and solar power and the smart grid. I've also consistently cautioned that the prevailing valuation metrics in the cool technology groups were far less attractive than the prevailing valuation metrics in the cheap technology groups. Since I believe Benjamin Graham was right when he said, "In the short run, the market acts like a voting machine, but in the long run it works like a weighing machine," I've consistently predicted that the cool technology groups were likely to stagnate or underperform on a go-forward basis while the cheap technology groups were likely to outperform. I think the comparative price performance charts say it all, particularly when you realize that China Ritar Power (CRTP) makes lead-acid batteries, instead of the lithium-ion and NiMH batteries made by the other Chinese companies.

The biggest challenge for energy storage investors is separating business reality from press release hype and establishing a realistic mental timeline for expected changes in the energy storage sector. Late last month, Lux Research published a new industry report titled "Emerging Technologies Power a $44 Billion Opportunity for Transportation and Grid." Some of the more intriguing conclusions I gleaned from my copy of the report are:

Heavy electric vehicles like hybrid buses, electric delivery vehicles, and hybrid trains will represent a $0.4 billion opportunity over the next five years for supercapacitors, and lithium-ion and molten salt batteries;

Annual revenue from battery sales for vehicle electrification will grow by about $6.8 billion over the next five years, including:

• $4.5 billion in battery sales for e-bikes and e-scooters (predominantly lead-acid);
• $1.2 billion in battery sales for plug in vehicles (predominantly lithium-ion)
  
• $0.9 billion in battery sales for stop-start micro hybrids (exclusively lead-acid);
  
• $0.5 billion in battery sales for HEVs (predominantly NiMH);

Annual revenue from grid-based storage will grow by about $1 billion per year, led by applications like wind and solar power integration ($810 million) and frequency regulation ($140 million); and

While lithium-ion battery sales will increase faster than lead-acid battery sales, lead-acid will remain the king of energy storage for the foreseeable future.

The futurist in me likes to look ten; twenty or even thirty years down the road and imagine what the world might be like. The realist in me knows long-term forecasts are always wrong because technological change is inherently unpredictable and the rate of change has been accelerating for decades. Therefore the investor in me tries very hard to concentrate on where the growth will occur over the next five years, and where market perceptions are out of synch with reality.

The combined market capitalization of the lithium-ion and NiMH battery companies I track is about $2.75 billion. In comparison, the combined market capitalization of the lead-acid battery companies I track is about $1.8 billion. When a highly regarded firm like Lux reports that over 75% of the expected revenue growth during the next five years will go to companies that make lead-acid batteries, I have to believe the market's weighing machine mechanisms will significantly increase the valuation of the cheap technology companies while the cool technology companies tread water or decline. So far the theory seems to be holding up pretty well.

The following table identifies six pure play energy storage companies that I'd classify as speculative. For each company I've taken the raw financial data from their December 31, 2009 SEC reports, eliminated derivative accounting impacts that make no sense in micro-cap companies and adjusted for stock conversion and financing transactions reported since year end.



If you focus on the intangible premium column, you’ll see a huge variation among the six companies. At the low end of the spectrum ZBB Energy’s (ZBB) market capitalization is only $6.8 million more than its tangible net worth. In my experience that’s a low premium for a speculative stock. At the other end of the scale, Valence Technologies (VLNC) and Ener1 (HEV) have intangible premiums of $185.7 million and $536.5 million, respectively. In my experience, both premiums are unsustainably high. The other three companies are clustered in the $40 to $70 million range, which is low compared to historical norms, but probably not unreasonable under current economic conditions.

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

SPECIAL SUPPLEMENT:

Tom Konrad suggested that it might be worthwhile for me to prepare a composite graph that showed the average performance of my five tracking categories to either support or refute my cheap vs cool methodology. I ran the graph for him and decided to add it to this article.



Cheap may not always beat cool, but it's done a heck of a job over the last 18 months.

Posted by John Petersen at 12:05 AM | Permalink | Comments (3)

John Petersen

Albert Einstein once said, "If you can't explain it simply, you don't understand it well enough." So when the editor of Batteries International asked if I could present my analysis of plug-in vehicles in two pages and prove my numbers in a way that any open-minded adult could follow, understand and verify with an Internet search engine, I jumped at the challenge. The article was published yesterday in their Winter Edition. Since the numbers have profound implications for the energy storage sector and an expected flurry of ill-conceived electric vehicle projects like the planned Tesla Motors IPO, I've decided to reprint the article here and then offer some thoughts and observations on what the numbers mean for prudent investors.

The first great fraud of the new millennium
(Reprinted from Batteries International, Winter 2010)

PT Barnum would have been proud.

While hype-masters loudly proclaim that plug in cars will save the planet by slashing oil consumption and CO2 emissions, the numbers tell a different story; that plug-ins are all sizzle and no steak. The result is the industrial equivalent of a snipe hunt, a wild goose chase based on flawed assumptions.

Let me explain how I reached this conclusion. On December 31, 2009 Forbes published an opinion piece titled System Overload that questioned whether the battery industry was overbuilding global manufacturing capacity. The third paragraph noted:


While the article went on to question whether there would be buyers for all those batteries, the capacity estimate got me thinking: “In a world that wants to save fuel and reduce CO2 emissions, but can only make 36 million kWh of batteries per year, what is the highest and best use for the batteries?”

I hate unanswered questions. So I fired up my computer and went to work. Within a few minutes, I found myself wondering whether anybody in Brussels or Washington DC owns a calculator and understands grade school math.

The calculations were simple but the answers were amazing — at least to me. The sweet and simple summary is that the venerable Prius-class hybrid is five to six times more effective at reducing global gasoline consumption than its plug-in cousins and, in the US, it's seven to 10 times more effective at reducing CO2 emissions.

In other words, plug-in vehicles are not the effective albeit expensive saviours of the planet that have been sold to credulous reporters and intellectually lazy regulators. They're unconscionable waste masquerading as conservation.




I'm agnostic when it comes to the relationship between CO2 emissions and global warming. I simply don't know enough to have a firm conviction.

I'm not the least bit agnostic when it comes to the fact that six billion people on this planet want a small piece of the lifestyle that 500 million of us have and take for granted.

For all of recorded history, the poor toiled in ignorance and didn't know that there was more to life than subsistence.

Thanks to information and communications technology, the cat's out of the bag and fully half of the world's poor know that there is something better. The biggest challenge of this century will be making room at the table for six billion new consumers.

Accomplishing that without horrific environmental consequences and catastrophic conflict requires relevant scale solutions to persistent shortages of water, food, energy and every commodity known to man.

Using 100% of the forecast global battery production capacity to make plug-in vehicles will save less than five hours of oil production and CO2 emissions per year. I can’t see how any thinking man would consider that scale sufficiently relevant to justify the plunder of far scarcer mineral resources.

In my opinion, the plug-in vehicle industry is perpetrating the first great fraud of the new millennium by using one-on-one vehicle comparisons instead of fleet comparisons.

Yes, indeed PT Barnum would have been proud.



Implications for prudent investors

The most fascinating aspect of this analysis is that battery chemistries and costs are irrelevant. The numbers don't work any better if you use NiMH or even lead acid batteries instead of lithium-ion. They also don't work any better if you slash battery costs and make really cheap plug-in vehicles. Those factors might change the cost-benefit analysis for an individual driver or a particular vehicle, but they wouldn't change the cost-benefit analysis for the only planet we have. It is arrogant insanity to believe we can conserve a relatively plentiful natural resource like petroleum by plundering scarcer mineral resources like aluminum, copper, lead, rare earth metals and even lithium to make batteries for plug-ins.

The gaping flaw in the logic of EV evangelists is their insistence that all analysis stop at the fifth step; a point where plug-ins can look reasonable to a casual observer. In the real world, rational energy, economic, and industrial policies compel the sixth step comparison of fleet-wide performance, which is where the house of cards comes tumbling down. Over the next few years, global investments in advanced battery, plug-in vehicle and charging infrastructure schemes will be north of $20 billion. The best possible outcome will be a one or two percent reduction in global oil consumption by 2020.

That dog won't hunt. We can and must do better.

My core philosophy comes from Benjamin Graham, the patron saint of value investors, who observed, "In the short run, the market acts like a voting machine, but in the long run it acts like a weighing machine." While the numbers have convinced me that business models based on the plug-in dream are doomed because the concept is fundamentally flawed; I understand the hype cycle, recognize that markets can be irrational for extended periods of time and know that irrational markets can be alluring to opportunistic traders who are smart enough to enjoy popping corks and go home before the music stops.

For those who can't resist the hype and glitz, my favorite for "Best in Show" honors is France's SAFT Groupe (SGPEF.PK). While I don't write about SAFT regularly because it isn't registered with the SEC, it's a fine company that was the second largest beneficiary of the ARRA battery manufacturing grants President Obama announced last August. Unlike the other ARRA grant recipients, SAFT walked away with a double dip from a $299.2 million award to its U.S. joint venture with Johnson Controls (JCI) and a separate $95.5 million award to Saft America.

SAFT has a diversified revenue base from battery sales to military and industrial customers. As a result, SAFT earned €28.9 million on 2009 sales of €559.3 million and had €306.8 million in stockholders equity at year-end. Despite its solid track record, SAFT carries a relatively modest market capitalization of €730.5 million, which works out to 1.3 times trailing sales, 25.3 times trailing earnings and 1.3 times equity plus anticipated DOE grant funding.

For "Domestic Best in Breed," my favorite is A123 Systems (AONE), which edged out SAFT for the top spot on the ARRA battery grant list at $249.1 million. A123 also plans to borrow up to $233 million under the DOE's Advanced Technology Vehicle Manufacturing (ATVM) loan program.

In the wake of a successful IPO last September, A123 finished 2009 with $528.2 million in stockholders equity and a clean balance sheet, but it lost $85.8 million on sales of $91 million. A123's market capitalization of $1.7 billion works out to 18.2 times trailing sales and 2.3 times equity plus anticipated DOE grant funding. While A123 doesn't offer SAFT class value, it stands head and shoulders above other domestic lithium-ion battery developers, particularly in light of its ongoing efforts to hedge its plug-in vehicle bets with forays into the utility and industrial markets.

Ener1 (HEV) has always struck me as a company that could go either way, but was likely to disappoint investors who bought at inflated prices. Ener1 took fifth place on the ARRA battery grant list with a $118.5 million award. It also applied for loans under the ATVM program, but hasn't completed due diligence. Since the ARRA battery grant requires matching funds equal to 100% of the grant amount and any ATVM loans will require matching funds equal to 25% of the loan amount, management recently cautioned that the company will need $150 million in additional equity before the dust settles.

Ener1 finished 2009 with a $3.7 million working capital deficit and $116.2 million in stockholders equity, but its balance sheet includes $13.2 million of intangible assets and a whopping $51 million of goodwill. Since both values strike me as incredibly speculative in the context of a company that lost $51 million on 2009 sales of $34.8 million, I believe potential investors will probably focus on Ener1's net tangible book value of $51.9 million for analytical purposes.  Based on 30 years of experience with investors who were willing to invest in my clients but wore brass knuckles to pricing negotiations, my big concern is that Ener1 will have a tough time justifying a huge multiple of net tangible book value to large investors who know that its grants and loans can't close without matching funds.

If it successfully completes it's planned IPO, I'd put Tesla Motors a couple tiers below A123 because there isn't a whole lot of  diversification potential for an electric vehicle manufacturer. There may be a couple years of splash and spectacle before the inevitable becomes obvious, but Tesla is not a stock that I'd buy and put in a drawer for my grandkids.

I believe plug in vehicles combine immense risk with insignificant reward, a potentially catastrophic dynamic. SAFT strikes me as a decent investment because its fundamentals are sound without considering any speculative upside from plug-in vehicles. If A123 can diversify into commercial and industrial markets, it may also be a long-term survivor. Until Ener1 solves it's chicken or egg dilemma of not having the cash it needs to absorb future losses and close on its ARRA grant and ATVM loan, I'd be extremely cautious.

Disclosure: I plan to sit this one out.

Posted by John Petersen at 12:05 AM | Permalink | Comments (12)

John Petersen

The electric power system in the U.S. is dirty, antiquated, stupid, unstable, and a security nightmare. After years of discussion and debate, consensus now holds that the generation, transmission and distribution infrastructure will need hundreds of billions in new investment to reduce emissions, improve reliability, minimize waste and inefficiency, improve security, and facilitate the integration of wind, solar and other emerging alternative energy technologies. Commonly cited capital spending estimates range from $200 billion globally by 2015 to $2 trillion overall. In his November 2008 report, "The Sixth Industrial Revolution: The Coming of Cleantech," Merrill Lynch strategist Steven Millunovich observed that cleantech markets will dwarf IT to the tune of two orders of magnitude. While there's plenty of room to debate how the future will unfold, there's little question that we're watching the emergence of an investment mega-trend that will endure for decades.

The elephant in the living room is that while some smart grid spending will be recovered through increased efficiency, consumers will ultimately pay for any excess costs in the form of higher electric bills.

In the early release overview for its 2010 Annual Energy Outlook, the Energy Information Administration forecast that over the next 25 years, the constant dollar costs price per million BTUs of energy would change as follows:

	2009	2035	Price	Percent
	Price	Price	Change	Change
Crude Oil	$10.24	$23.04	$12.80	125.0%
Natural Gas	$3.24	$7.84	$4.60	142.0%
Coal	$1.56	$1.44	-$0.12	-7.7%
Electricity	$28.07	$29.87	$1.80	6.4%

To put these seemingly benign price forecasts into historical context, I prepared the following graph to show what happened to constant dollar energy costs over the last 17 years expressed as a percentage of their April 1993 values.



When I look at the historical trend-lines and factor in what I know about the energy industry and global economics, my sense is that:

• The estimate for crude oil prices is too low given likely economic development in Asia and elsewhere;
• The estimate for natural gas prices is too high given the recent emergence of shale gas as a resource; and
• The estimates for coal and electricity prices must assume continuation of the status quo into the indefinite future.

When I consider the costs of alternative energy from wind and solar, the storage required to make these inherently variable alternative resources stable, the carbon mitigation requirements that will almost certainly be imposed on the coal mining and electric power industries, initiatives to move transportation from fossil fuels to electricity, and the huge amounts of capital spending required for the transition to a smart grid, the only conclusion I can reach is that electricity prices will have to climb and the increase is likely to be dramatic, particularly in the early years of a smart-grid build out. I don't have the skills required to forecast the probable magnitude of the coming price escalations, but I don't believe for a second that a flat line on the price graph is either a possible long-term outcome or a rational expectation. In short, there is no free lunch.

Every industrial revolution in history has been driven by new technologies that proved their ability to do more beneficial work with fewer economic inputs. The fundamental dynamic will be no different in cleantech, however the need will be even more pressing as global demand for energy, along with water, food and every commodity you can imagine, continues to skyrocket. My friend and colleague Jack Lifton is fond of reminding readers that the "Green Road to a sustainable energy future begins in the black earth." We truly can't have a secure energy future without a security in raw materials supplies, which is why I'm an unrelenting critic of ideologically appealing but resource foolish notions like plug-in vehicles that promise to do less beneficial work while requiring far greater economic inputs. It's all about getting the energy we need at the lowest possible price. But discussing energy options without carefully considering the natural resource constraints for proposed solutions is a non-starter.

Many of the adjustments we'll be forced to make in coming decades will be quite painful, but the world has already moved on while we were paying attention to other things. I'm a firm believer that energy storage is a critical enabling technology for our energy future, but unless and until storage is cheaper than waste, the potential benefits of storage will remain unrealized. This truly is a sector where price is the only thing that matters and the technology that does the required work for the cheapest price will win the lion's share of the potential market.

Disclosure: No companies mentioned.

Posted by John Petersen at 02:19 PM | Permalink | Comments (0)

John Petersen

Last week I introduced a new study titled "Energy Storage for the Electricity Grid: Benefits and Potential Market Assessment" that was commissioned by the DOE's Energy Storage Systems Program, identified seventeen discrete storage applications for the electricity grid, discussed the technical requirements of each application and summarized the potential economic benefits.

If the Yahoo! message boards are any indication, investors are already jumping to inaccurate and wildly optimistic conclusions because they don't understand that many storage applications are synergistic and every storage system purchaser will try to maximize the value of its investment by capturing as many value streams as possible. The process is called "aggregation" and while it will speed the implementation of storage on the smart-grid, it will ultimately destroy the high value niche markets for frequency regulation, short-duration wind integration, electric service reliability and similar ancillary services.

To truly understand the issues, investors need to stop looking at individual trees and focus instead on the forest.

One of the biggest challenges facing developers of grid-based energy storage systems is that electricity is cheap and abundant, and storage can be incredibly expensive. As a result, most of the grid-based applications identified in the new DOE study are not attractive as stand-alone value propositions. In the following table, the applications highlighted in blue make economic sense today as stand-alone value propositions. Conversely, the applications highlighted in yellow won't generally work unless a particular installation can capture and monetize several value streams. As utilities and other users begin installing significant storage capacity and aggregating value streams to maximize their returns, total system capacity will rapidly outrun demand for niche services, thereby eliminating the value premium. Over the long-term, the economics of grid-based storage will obey the laws of economic gravity. The only companies that will survive, much less thrive, are manufacturers of cheap, durable and dependable energy storage systems that can do the required work at the lowest cost.



A prime example of the prevailing "can't see the forest for the trees syndrome" is the wildly over-hyped idea that we can use plug-in vehicles to provide ancillary services while they're connected to a charging station. The silly values floating around for vehicle to grid, or V2G, services are all based on the theory that EV batteries can be used for frequency regulation and other high value ancillary services. While the theory sounds wonderful in the telling, the fundamental premise is fatally flawed and the promised benefits to plug-in vehicle owners will never be realized because they violate the law of supply and demand. The easiest way to demonstrate the point is with an example.

At last year's EESAT conference in Seattle, a representative of the PJM Interconnect estimated that total national demand for frequency regulation was on the order of 6,000 MW. Storage companies that are actively pursuing opportunities in frequency regulation include Beacon Power (BCON), Altair Nanotechnologies (ALTI) and A123 Systems (AONE). In general the battery companies that are working on fast response products claim their systems can provide two to four MW of frequency regulation service for each MWh of battery capacity. Beacon is claiming a 20-year life for its flywheel systems. Demonstration projects are currently under way to determine whether these performance claims will withstand the tests of time and intensive use. For purposes of this example I will assume that all systems perform up to expectations.

President Obama has established a policy goal of one million plug-in vehicles on the road by 2015. If that goal is reached and the average plug-in vehicle is equipped with 20 kWh of batteries, a figure that's mid-way between the GM Volt and the Nissan Leaf, then the total battery power available for V2G services will be roughly 20,000 MWh and the aggregate amount of frequency regulation those batteries could theoretically provide would be somewhere between 40,000 MW and 80,000 MW.

It doesn't take a PhD economist to know that if sellers try to force 40,000 to 80,000 MW of supply into a 6,000 MW national frequency regulation market, prices will collapse. Similar issues exist across the entire spectrum of grid storage applications.

In a 2007 "Guide to Estimating Benefits and Market Potential for Electricity Storage in New York" that was commissioned by the New York State Energy Research and Development Authority, Mr. Eyer and his colleagues identified and evaluated a number of potential synergies between different grid-based storage applications and concluded that users would need to carefully consider the potential value of the following complimentary uses when planning a new grid-based storage installation.

Electric energy time shift	Transmission and distribution (T&D) upgrade deferral; Transmission congestion relief; Electric service reliability; Electric service power quality; and Ancillary services.
Electric supply capacity	T&D upgrade deferral; Transmission support; Electric service reliability; Electric service power quality; and Electric supply reserve capacity.
Reduce transmission capacity requirements	Electric energy time shift; T&D upgrade deferral; Electric service reliability; Electric service power quality; Transmission support; and Ancillary services.
Transmission congestion relief	Electric energy time shift; T&D upgrade deferral; Electric service reliability; Electric service power quality; Transmission support; and Ancillary services.
T&D upgrade deferral	Electric energy time shift; Transmission congestion relief; Electric service reliability; Electric service power quality; and Ancillary services.
Operating reserves	Voltage support; Electric service reliability and Electric service power quality.
Regulation and frequency response	Limited.
Electric service reliability	Electric service power quality and Demand charge management.
Electric service power quality	Electric service reliability and Demand charge management.
Demand charge management	Electric service reliability and Electric service power quality.
Time-of-use energy cost management	Limited.
Renewables energy time shift	Generation capacity deferral; T&D upgrade deferral; Transmission congestion relief; Electric service reliability; Electric service power quality; and Ancillary services.
Renewables capacity firming	Electric service power quality; Electric energy time shift; T&D upgrade deferral; and Transmission congestion relief.

The point of the foregoing is not to pick winners and losers in the emerging market for grid-based storage solutions. Rather my goal is to highlight the immense differences between demonstration projects that establish whether a particular storage device can meet the technical requirements of a specific application and a detailed cost-benefit analysis that establishes whether a particular storage system will be cost effective for a particular user. As the market unfolds, I expect many demonstration projects to be impressive technical successes. Most of those technical successes, however, will be dismal economic failures because the cost of the storage system will be far too high for widespread implementation by potential users. The utilities all understand they can't buy a service for dime, sell it for a nickel and make it up on volume.

In a July 2008 report on its Solar Energy Grid Integration Systems–Energy Storage (SEGIS-ES) program, Sandia National Laboratories provided a summary table of current and projected capital costs for grid-quality manufactured energy storage systems. While commenters often criticize this table for conflicting with more the optimistic numbers that appear in corporate presentations and the mainstream media, I tend to believe Government studies are more reliable than public relations.



When I compare the capital cost figures in the SEGIS-ES table with the economic benefit per kWh values that I derived from the new DOE report on grid-based storage applications, the only companies I see that are within reasonable striking distance of a 10-year product life and a capital cost that compares favorably with the economic values are:

• Enersys (ENS), a leading manufacturer of lead-acid batteries for commercial and industrial applications;
• C&D Technologies (CHP), a leading manufacturer of lead-acid batteries for uninterruptible power systems;
  
• Active Power (ACPW), an established manufacturer of flywheel-based uninterruptible power systems;
• ZBB Energy (ZBB), which is scaling up manufacturing of a zinc-bromine flow battery system; and
• Axion Power International (AXPW.OB), which is preparing to begin commercial production of its PbC line of asymmetric lead-carbon supercapacitors in cooperation with Exide Technologies (XIDE).

All of the other systems that I'm aware of suffer from crushing raw materials or capital cost constraints. I understand that every storage system developer is actively pursuing research and development programs that may significantly reduce costs at some future date. Unfortunately, experience has taught me that it's unwise to count chickens before they hatch and hope is not an investment strategy.

The grid-based energy storage sector is in its infancy and there is no reasonable way for an average investor to learn enough to pick individual stocks with any level of confidence. While I'm a stock picker when it comes to my personal holdings, I believe that a balanced portfolio of established and emerging energy storage companies is the only rational way for non-professionals to invest in the sector. Disproportionate investments in individual companies should be avoided unless you're prepared to do a whole lot of investigation and analysis.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also has small long positions in Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP), ZBB Energy (ZBB) and Active Power (ACPW).

Posted by John Petersen at 11:42 AM | Permalink | Comments (5)

John Petersen

The California Energy Storage Alliance just issued a press release that describes new legislation to require utilities to incorporate energy storage in their distribution networks. The rules will mandate storage equal to 2.25% of daytime peak power by 2014 and 5% of daytime peak power by 2020. The press release is available here.

A quick check of the California ISO website forecasts a peak load of approximately 29,000 MW for tomorrow. If one assumes an average peak demand of 30,000 MW, a 2.25% storage penetration would require an annual storage build of 135 MW per year in each of the next five years.

Using the average values reported in the Energy Storage for the Electricity Grid: Benefits and Potential Market Assessment report that I introduced last week, the incremental revenue to storage manufacturers from the sale of grid-scale storage systems in California would be worth roughly $200 million per year.

If the legislation is passed by the legislature and signed into law, the new storage portfolio standards will be great kick-off for the storage sector.

Disclosure: No companies mentioned

Posted by John Petersen at 03:05 PM | Permalink | Comments (2)

John Petersen

Yesterday a reader sent me a copy of an exhaustive new 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 prepared by Jim Eyer and Garth Corey. I've been following the work in progress on this report since last summer and have eagerly awaited an opportunity to shift away from the overhyped electric vehicle market and focus instead on a far larger market where cost, performance and substantive business merit will be the only drivers. It looks like my time has finally come. For technology aficionados that want a detailed understanding of what the various grid-based storage applications are, the entire report (232 pages including appendices) is a must read. Over the next few weeks I'll try to extract some high-level technical and market data and translate that information into a form that will be useful to energy storage investors.

The Eyer-Corey Report identifies 17 discrete grid-based energy storage applications, discusses the performance requirements of each application and assesses the 10-year economic potential for each application. The Report also includes a great summary that condenses a couple hundred pages of detail into a single table.


From an investor's perspective, the problem with the summary table is that it focuses on the needs of utilities instead of economic opportunities for storage device manufacturers. As a result the summary table uses a range of discharge durations, a range of power capacities and a range of economic benefits per kW of nameplate power capacity. Since investors typically think in terms of megawatt-hours of potential demand and economic benefit per kilowatt hour of storage, we have to take the Eyer-Corey calculations a couple steps further to arrive at a simple translation that fits an investor's perspective.

In an effort to translate the summary table data into terms investors will understand, I've calculated an average discharge duration and an average economic benefit for each grid-scale application identified in the Report. I've then used those averages to calculate potential demand in MWH, economic benefit per kWh and revenue opportunity to manufacturers. I've also reordered the data based on declining economic benefit per kWh to highlight the inverse relationship between economic benefit per kWh and potential demand in MWH. If you're interested in more detail, I've posted a copy of my Excel spreadsheet here. I've discussed this methodology with Mr. Eyer and feel comfortable that my potential demand, economic benefit per kWh and revenue opportunity calculations are at least in the ballpark. Since we're dealing with averages of values that covered a wide range to start with, my numbers are best characterized as rough estimates, but they're certainly good enough for a first pass. The summary results of my calculations are set forth below.



The color coding in the table represents my attempt to segregate economic benefit per kWh into cool technologies like flywheels, supercapacitors and lithium ion batteries, which are highlighted in blue, and cheap technologies like flow batteries, lead-acid batteries, compressed air and pumped hydro, which are highlighted in yellow.

Last summer I wrote about energy storage on the smart grid and said that in terms of potential demand, the market would be 99.45% Cheap and 0.55% Cool. Depending on how you want to classify the voltage support line that I've highlighted in orange, my estimate was either spot-on accurate or off by a half-point. Now that I can refer to a reasonable third-party estimate of storage system values, it's clear that revenue opportunities in smart grid storage will be about 90% cheap, 8% cool and 2% in-between. Any way you cut it, the substantial bulk of the revenue opportunity for energy storage on the smart grid will flow to companies that manufacture objectively cheap storage solutions. There will be meaningful 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 immense opportunities for cheap energy storage technologies.

The following table provides summary information on the pure play energy storage companies I track that are actively working on storage applications for the smart grid. To keep things as simple as possible I've used the same color coding to segregate their planned product offerings into objectively cool technologies and objectively cheap technologies.



For several years the market has been enthralled with gee-whiz energy storage technologies and references to potential markets that represent billions of dollars in potential for highly specialized niche applications like frequency regulation. In the process, investors have lost perspective on the question of how the niche applications fit into the overall market. This dynamic has led to inflated expectations for companies that are developing cool emerging technologies and unrecognized value in companies that manufacture the cheap established technologies that will do the yeoman's share of the heavy lifting for the smart grid. Unless I'm way off the mark, that dynamic will shift very rapidly as outsized revenue gains begin accruing to manufacturers of cheap solutions.

When I started writing this blog I believed energy storage would become a major investment trend over the next few years because cost efficient storage systems can reduce waste while enhancing the reliability of most alternative energy technologies. Since then, the fundamental market drivers have developed faster than I imagined and what I initially described as a rising tide is rapidly becoming a full-blown investment tsunami. While rising tides lift all boats, the critical points for investors to remember are:

• Percentage gains in the stock market are largely dependent on entry price and it's easier to bag a double or triple in a cheap stock than it is to get the same result in an expensive stock;
• While it's all well and good to look a decade down the road and dream of a brighter future, America has pressing energy storage needs that require solutions today;
• In America we get up in the morning, we go to work and we solve our problems using the tools that we have in our toolbox, however we remain ready to embrace new tools as they are developed, perfected and proven; and
• Successful investing requires diligent monitoring to adjust portfolio positions to a rapidly changing market and technical landscape, and emerging technologies that are not ready for prime time, but will be someday.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a large long position in its stock. He also has small long positions in Enersys (ENS), Exide (XIDE), C&D Technologies (CHP) and ZBB Energy (ZBB).

Posted by John Petersen at 05:43 AM | Permalink | Comments (1)

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:

Timeframe		Revolutionary Technology
25 years ago		Methanol
15 years ago		Electric vehicles
10 years ago		HEVs and Electric vehicles
6 years ago		Hydrogen Fuel Cells
3 years ago		Ethanol
Today		Grid Enabled Vehicles
2011		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).

Posted by John Petersen at 08:20 PM | Permalink | Comments (12)

John Petersen

With only a couple trading days left in 2009, this is as good a time as any for a performance review. The predictions I made at this time last year were pretty solid with an 80% accuracy rate on price direction. For the year, a $1,000 investment in each of my green star companies would have yielded a portfolio appreciation of 67%, which handily beat the broader market indices. That being said, my star and caution ratings were a good deal less prescient because I seriously underestimated the potential of both Maxwell Technologies (MXWL) and Active Power (ACPW), which appreciated by over 200%.

The following table identifies my current universe of pure play energy storage companies, reiterates my outlook at the beginning of this year, summarizes their performance during 2009 and offers my assessment of likely price performance during 2010. In the table, a single star signifies a neutral position.



Valence Technologies (VLNC) scares the hell out of me. It had a working capital deficit of ($10.8) million at September 30, 2009 and its stockholders were under water to the tune of ($74.7) million. Valence is currently surviving on life support financing from the open market re-sale of 650,000 shares every two weeks. The financing is enough to keep the doors open, but leaves little or no room to build a business. My experience with companies in comparable financial straits has not been good.

Ener1 (HEV) is in a better position than Valence, but not much. It had $2.4 million in working capital at September 30, 2009 and then raised $20 million by selling stock to an equipment vendor, so short-term operating cash does not seem to be a problem. Nevertheless, Ener1's September 30th balance sheet includes a $13.6 million investment that allowed Th!nk Motors to emerge from the Norwegian equivalent of a bankruptcy reorganization; $13.7 million of intangible assets; and $50.4 million in goodwill. Even after the $20 million cash infusion, Ener1 had a net tangible book value of roughly $0.54 per share before fourth quarter losses. Since Ener1 needs to come up with $118.5 million in matching funds for an ARRA battery manufacturing grant that was awarded in August and it also needs an indeterminate amount of working capital, I can't help but believe that the company will face substantial financial challenges over the next few months. Management may be able to pull off a miracle, but given market conditions I would expect any major financing to go off at a big discount to the current price.

I remain quite bullish on established battery manufacturers with a global presence that trade for mere pennies on the dollar of annual sales including C&D Technologies (CHP) where the market cap equals 11% of sales, Exide Technologies (XIDE) where the market cap equals 21% of sales, Ultralife (ULBI) where the market cap equals 43% of sales and Enersys (ENS) where the market cap equals 67% of sales. All these companies have been actively restructuring operations to improve profitability and when the fruits of those efforts become more obvious, I expect significant upside potential across the board. Since I don't fully understand the business culture or the market, I'm a bit more cautious when it comes to the Chinese companies.

My two favorite speculations are ZBB Energy (ZBB), which has an ultra-low market capitalization for an exchange listed public company, and Axion Power International (AXPW.OB). I'm far from objective when it comes to Axion because I poured four years of my life and a large chunk of my personal fortune into the company. However, Axion's tangible accomplishments since I stepped out of an active role are truly impressive. Now that the pain of a recent down round financing is largely history and Axion's short- to medium-term financial future is secure, it's all up to the PbC battery.

It will be fascinating to see whether my predictions can be generally right for another year. I’ll revisit this list at least quarterly over the next year and either gloat or eat crow as appropriate. In the meantime I would like to wish everyone a Happy New Year and a prosperous 2010. It should be a fascinating year for the energy storage sector.

Disclosure: Author is a former director of 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) and ZBB Energy (ZBB).

Posted by John Petersen at 02:43 AM | Permalink | Comments (2)

Part 2 of 2

Bill Paul

Neither Daewoo Shipbuilding & Marine Engineering Co. Ltd., which trades OTC under the symbol DWOTF, nor Ener1 Inc., which trades on NASDAQ under the symbol HEV, is an obvious candidate for having hidden potential.

Heck, Daewoo isn’t even a green energy stock. Or is it?

Lost in the hubbub of Copenhagen and Congress, there’s been important news about both these companies that strongly suggests – at least to me – that each has plenty of undiscovered potential that will really start paying off over the next 18 to 24 months.

South Korea’s Daewoo Shipbuilding was just awarded a contract by German utility RWE AG’s (Symbol: RWEOY) renewable energy unit for up to three vessels specially designed to install offshore wind farms. The contract reportedly could be worth upwards of half a billion dollars, depending on whether RWE picks up the option on the second and third ships. The first ship is scheduled to be completed in 2011.

A couple things: at present, offshore wind power is going gangbusters thanks to healthy project returns that one European investment bank puts at around 15%. But installing the new large wind turbines under often harsh conditions requires a special kind of vessel. Daewoo’s reportedly will be the first – quite possibly the first of many. (Simultaneously, Daewoo just said it may build a wind power equipment plant in China.)

As for Ener1, seasoned green investors may think they know everything about this lithium-ion battery manufacturer. If Pike Research is correct, the future is bright for all li-ion battery manufacturers, Pike having just forecast that the global li-ion transportation battery market will total nearly $8 billion by 2015, compared with $878 million in 2010.

But the big li-ion winners should be those companies whose batteries also meet the critical need of providing energy storage for power grids. The really big winners should be those companies whose li-ion batteries also go into cars whose manufacturers can provide the rapid recharging infrastructure that consumers have indicated they want.

Tuck this away: Ener1 is the battery supplier in the world’s first project linking grid storage, electric vehicles, rapid recharging infrastructure and solar power. Other participants in the just-announced Japanese project include Mazda Motor Corp. (Symbol MZDAY) and Kyushu Electric Power, which trades in Tokyo under the symbol 9508.

Footnote: in Part 1 of this series, we explored the undiscovered potential of PFB Corp. (Symbol PFB), Vodafone Group (Symbol VOD), and Telefonica S.A. (Symbol TEF). For more please see: http://energytechstocks.com/wp/?p=2194.

Bill Paul is Managing Editor of EnergyTechStocks.com

DISCLOSURE: None

DISCLAIMER: This is a news article. Please read terms and policy.

Posted by Bill Paul at 05:21 PM | Permalink | Comments (0)

David Gold

Grants for smart grid projects. Grants for battery manufacturing lines. Loan guarantees for renewable energy project development. Grants to private companies for energy efficiency projects. And with each it seems that the cleantech world cheers. Yet for all our desire to create sustainability in our consumption and use of energy, this model of getting us there is not only unsustainable but is of questionable value.

I want to emphasize that I am speaking about government grants to the private sector where the government is not the end customer and where the grants are for implementation of projects that businesses may (or may not) have done otherwise as opposed to grants to conduct basic R&D. Projects like smart grid implementations, battery manufacturing lines, biofuels plants or industrial energy efficiency implementations that have represented the bulk of cleantech grants to the private sector this year. Instead of focusing on cultivating businesses that can sustain themselves via customers, government handouts have focused company time and money on lobbyists and grant writers. And if you haven’t noticed, the handouts are huge, with many in the tens of millions and even hundreds of millions of dollars for a single award. Some award winners, like ECOtality, are honest enough to admit that their efforts to secure government funding directly attributed to a drop in their revenues. For every company that wins a cleantech grant, there are as many as 10 times the companies that applied and lost. All those losers spent significant time and money chasing those funds and, in the process, neglecting their real business and real customers. Lately the discussion in board rooms often has concentrated more on how to win the next government grant and which lobbyist to hire than on how to build a successful and sustainable business.

At the most basic level, the goal of current U.S. energy policy should be to speed our transition to sustainable domestic energy consumption – a transition that would occur naturally as carbon-based energy sources declined but likely too slowly to avoid the environmental, economic and national security implications. Presumably, the concept behind hundreds of billions of dollars in grants to the private sector is to enable and encourage acceleration of this change. As such, it also must presume that government employees can select winners better than the private sector, do so without political influence, and that the projects being funded are absolutely ones that would not have occurred without government funding. Finally, those same government employees; 1) must be able to select projects that will help accomplish our goal and; 2) must either be able to continue to fund those projects or have effectively analyzed that a one-time grant will be sufficient to incentivize the private sector to take over from there.

My Democratic friends may scream at me, but those are an awful lot of largely unrealistic presumptions that defy the history of government grant programs to the private sector. (Synfuels and the National Institute of Standards and Technology’s Advanced Technology Program are just two examples.) And to add insult to injury, large amounts of the recent cleantech grant money handed will help the competitiveness of foreign corporations as it was awarded to U.S. subsidiaries or joint ventures of those companies (for example, hundreds of millions in battery grants involving LG Chem, Kokam, Itochu Corporation, BASF and Saft). While the government has long had a role in advancing basic R&D, the concept that the U.S. will jump-start, let alone build, a sustainable energy economy through government handouts for implementation of manufacturing plants, production facilities or enhanced utility grids is, quite simply, ludicrous.

Government grants to the private sector are great PR and make the cleantech public feel good. But they don’t provide quick economic stimulus to the economy (see Cleantech Stimulus Not Very Stimulating) and will not provide meaningful acceleration on the path to sustainable domestic energy consumption. In the end, the only way to have sustainable change is to have a change in the fundamental economics of energy – both in the cost of non-sustainable sources and in the regulatory infrastructure through which carbon based energy companies and utilities earn money. We all saw how quickly things began to change when oil hit $100 a barrel and how quickly they reverted when prices went back down. Reform the regulatory environment so that utilities can profit from conserving energy instead of from building power plants and watch how things change.

In my home state of Colorado, wind turbine manufacturer Vestas just announced it is furloughing all 500 workers at the plant it built not long ago. Why? Vestas notes the challenge of natural gas prices being so low that wind turbines can’t compete. I guess we need to borrow more money from the Chinese and other foreign governments to further increase our grants to the wind turbine market…or, we can focus on a sustainable solution.

Nothing can provoke an economic transformation more quickly than the free market appropriately motivated by profit. That, in fact, is largely how we got to where we are today with our reliance on carbon-based energy sources. And the most sweeping and powerful thing the government can do is to influence the profit motive for the private sector by changing energy economics. But that is a topic for another blog post. (And now my Republican friends can scream).

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com). This article was first published on his blog, www.greengoldblog.com.

Posted by David Gold at 12:10 AM | Permalink | Comments (3)

John Petersen

Mother always taught me that if you can't say something nice, it's usually better to say nothing. While regular readers might question my ability to follow Mom's advice, this is an article I had really hoped somebody else would write. The quick summary is that while the shares of A123 Systems (AONE) may be a reasonable investment at current prices, the shares of BYD Co. Ltd. (BYDDF.PK) are an irrational value proposition, the shares of Ener1 (HEV) are even worse, and the shares of Valence Technologies (VLNC) are beyond understanding. Since many readers find detailed tables more confusing than enlightening, I'll use words instead of numbers to explain my reasoning. I'll also assume that every company I mention has a great technology. Accordingly, this article will focus exclusively on the hard-core financial data and be far shorter than most.

To create a baseline for comparisons, I'll start with Exide Technologies (XIDE) and Enersys (ENS), the two largest pure-play battery manufacturers in the world. During the twelve calendar months ended June 30, 2009, Exide was restructuring its operations and lost $113.1 million on sales of $2.9 billion. During the same period Enersys earned $67.5 million on sales of $1.7 billion. Exide's current market capitalization of $552 million represents roughly 176% of book value and 19% of annual sales. Enersys' current market capitalization of $1.14 billion represents roughly 157% of book value and 66% of annual sales. For the sake of simplicity, I believe a baseline market price standard of 2x book value and 1x sales is probably reasonable for established manufacturers of traditional battery products.

Until recently, it was almost impossible to establish a baseline for emerging manufacturers of advanced battery products. That all changed when A123 Systems (AONE) completed its IPO last month. After adjusting A123's June 30, 2009 financial statements for roughly $400 million in IPO proceeds and $250 million in ARRA battery manufacturing grants, A123 had a pro forma stockholders equity of $823 million and potential annual revenue from existing facilities of roughly $233 million. Its actual revenue for the twelve months ended June 30, 2009 was roughly $72.1 million. Based on yesterday's closing price, A123's market capitalization of $2.35 billion represents roughly 3x book value, 10x potential sales and 33x trailing sales. As A123 uses its available resources to build new manufacturing capacity, its market capitalization to potential sales ratio should fall to roughly 2x potential sales. While I'm convinced that PHEVs and EVs are suboptimal uses for advanced batteries, I have no doubt that A123 will have more demand than it will be able to satisfy. Accordingly, I believe a baseline of 3x book value and 2x potential sales is probably reasonable for emerging manufacturers of advanced battery products.

BYD Co. Ltd. (BYDDF.PK) is a classic example of why it is never a good idea to make investment decisions based on simple questions like "What did Warren do?" Everybody knows that MidAmerican Energy, a subsidiary of Berkshire Hathaway (BRK.A), agreed to buy a 10% stake in BYD for $230 million in September 2008. At the time, BYD was generating roughly $4 billion in annual sales that included $1.6 billion in cell phone components (43%), $1.3 billion in automobiles (31%) and $1.1 billion in batteries (26%). For the first six months of 2009, auto sales more than doubled to $1.3 billion (55%), cell phone components remained flat at $780 million (33%), and batteries fell by a third to $281 million (12%). While it started out as a battery manufacturer, BYD is currently an automaker first, a cell phone manufacturer second and a battery manufacturer by default because it needs the batteries for its core product lines. With first half sales of roughly $2.4 billion, it would be hard to classify BYD as anything other than an established manufacturer of traditional products. BYD's financial statements are available here. According to Yahoo! currency. the conversion factor between the U.S. Dollar and the Chinese Yuan is 6.8336.

So far, the one critical fact that seems to evade most commenters and investors is that MidAmerican's purchase price worked out to $1.02 per share, or 1.2x book value and 0.5x sales. Overall, the MidAmerican purchase is exactly what one would expect from Messrs. Buffett and Munger, a solid value with good growth potential. Since the Berkshire announcement (the purchase didn't actually close till July of this year), the share price of BYD has rocketed to $10.82 per share, which works out to 10x book value and 5x sales. At present, BYD has 2.275 billion outstanding shares and a market capitalization of $24.6 billion. These valuation metrics are out of line with the auto industry, out of line with the cell phone industry and out of line with the battery industry; proving once again that the value of an investment depends on your entry price. BYD was a great deal at $1.02, but it's terrible for investors at $10.82.

Following Ener1 (HEV) over the last year has been a lot like watching a slow-motion train-wreck. Its final private financing round brought in $42 million of offering proceeds in 2007 and $31 million of warrant exercise proceeds in 2008. In the second quarter of 2009, Ener1 entered into a $40 million open market sale agreement that generated $5.8 million in proceeds during the second quarter and has presumably generated another $33 million since the end of June. When these fundraising activities are offset against operating losses, Ener1 has been treading water for a long time.

At June 30, 2009, Ener1 had a $1 million working capital deficit and $26.3 million in long-term debt, including $9.7 million in related party debt. After giving effect to $33 million in new financing, an $18 million investment to rescue a potential customer from bankruptcy and estimated third quarter losses of roughly $10 million, I expect Ener1 to report approximately $129 million in stockholders equity and about $4 million of working capital at September 30, 2009. Its current market capitalization of $758 million is roughly 6x estimated book value and 34x trailing sales. If you adjust Ener1's book value to eliminate $14 million of intangible assets and another $48 million of goodwill, the ratio of market capitalization to estimated net tangible book value soars to 11x. On balance, I think Ener1's report for the quarter ended September 30th will paint a very bleak picture.

While Ener1 was awarded a $150 million ARRA battery manufacturing grant in August, that award is wholly contingent on its ability to provide a like amount of matching funds. With no meaningful working capital, a major investment in a fledgling EV manufacturer that's just emerging from bankruptcy and a large related party debt balance, I can't see where the matching funds will come from. It's certainly not a business picture I would encourage a client to take to market for a secondary offering.

Valence Technology (VLNC) carries a market valuation that never ceases to amaze me. For the last several years, Valence has relied on loans from its principal stockholder to support average losses of roughly $20 million per year. At June 30, 2009, Valence had $27 million in assets and $95 million in debt, resulting in a negative stockholders equity of $69 million. While Valence has recently inked a deal that will throw off up to $2 million per month in proceeds from dribble-out sales of its common stock, the expected proceeds will do little more than keep the company afloat until the next bi-weekly closing. Since Valence's market capitalization of $190 million represents 9.5x trailing sales and the common stockholders are under water to the tune of $0.55 per share, all I can do is scratch my head.

DISCLOSURE: Author has small long positions in Enersys (ENS) and Exide Technologies (XIDE).

Posted by John Petersen at 10:07 AM | Permalink | Comments (6)

John Lounsbury

With the furor over the potential for hybrid, plug-in hybrid and all-electric cars recently, one might think the hydrogen car was dead. Nothing could be further from the truth. Feasibility at an affordable price appears to be established and market availability of hydrogen powered cars may come sooner than you think.

Many issues remain to be addressed and this article will try to cover them. The problems to be overcome are not insurmountable, but are also not trivial. These problems include the economics of hydrogen production, transportation, distribution and storage systems, as well as safety issues for cars involved in collisions.

Alan Ohnsman, writing for Bloomberg, reports that GM (MTLQQ), Toyota (TM), Daimler AG (DAI) and other car makers want to start supplying car fueled by hydrogen as soon as six years from now. Quoting from the article:

"The advances that have been made by the automobile manufacturers are remarkable,” said Scott Samuelsen, director of the National Fuel Cell Research Center at the University of California, Irvine. “Infrastructure is the Achilles’ heel.”

The fuel cell center opened in 1998 and is funded mainly by the U.S. government and California Energy Commission. It has also received grants from Toyota and Royal Dutch Shell Plc’s hydrogen unit, said Kathy Haq, a spokeswoman for the center.”

Here is a picture of a Royal Dutch Shell (RDS-B) hydrogen fueling station in New York City, discussed in a Seeking Alpha Instablog in August



According to the Ohnsman article, the economic factors are starting to line up for hydrogen. He quotes a Toyota objective of a $3,600 price premium for a hydrogen fuel cell powered car. This compares to the current price premium for the Synergy Hybrid Drive system from Toyota, currently averaging around $4,000 for the Camry. This is quite a change from the $1,000,000 price tag estimated to build one of these vehicles just a few years ago.

Advantages of Hydrogen Fuel Cells over Batteries

To understand the significance of this topic, one must first recognize how the hydrogen fuel cell powers a vehicle. Hydrogen fuel cell powered vehicles are electric vehicles. Hydrogen is not burned like a hydrocarbon fuel. Hydrocarbons are storage media for thermal energy which is released for power in an internal combustion engine. The hydrogen fuel cell is a storage medium for electrical energy, which is released when hydrogen and oxygen are combined electrochemically to release electricity. The hydrogen fuel cell is conceptually a battery, providing electricity to power an electric car. Unlike other battery powered cars, the fuel cell uses an onboard source of energy (hydrogen “fuel”) to generate electricity and does not have to stop to be recharged. The advantage of hydrogen powered cars is basically a long driving range, requiring only a fuel refill like internal combustion cars do today.

The hydrogen powered car has advantages for long trips. For daily commutes under 100 miles round trip, the operational convenience of battery and fuel cell energy storage is similar. In fact, it could be argued that the convenience of plugging in within your own garage to recharge batteries is more convenient than finding a refueling station every few hundred miles. The ultimate decision for most commuters will be which power source is cheaper.

Fuel Cost

The most convenient metric to compare fuel costs across the ICE (internal combustion engine) – electric drive interface is the fuel cost per mile. Miles per gallon (mpg) becomes an awkward measurement. Consumers will be required to start thinking in cost per mile terms, because that will become the comparative price on the new car sticker. According to http://www.costpermile.org/, the electricity “fuel” cost per mile (CPM) for electric cars will be between $0.01 and $0.05. Currently electric utility charges per kWh (kilowatt hour) run between $0.10 an $0.15 in most of the U.S., so most of this large range in costs must be associated with the difference in engineering technology and size of the vehicle.

Since I like a larger car, my example will compare to a mid-size Toyota Camry Hybrid. The assumed cpm for an equivalent electric car will be $0.05. (Disclosure: I own a Camry hybrid.) At $2.50 per gallon (near the national average price as this is written), the Camry has a cpm of $0.07 at $3.50 per gallon, the cpm is $0.10. I have used 35 mpg for the Camry hybrid. This is 3% higher than the sticker and 10% lower than my actual experience.

For the standard Camry the cpm would be $0.08 and $0.11 (highway and city, respectively) at $2.50 per gallon and $0.11 and $0.16 at $3.50 per gallon. The sticker mileage numbers have been used for the ICE Camry. These fuel costs are summarized in the following table.

Estimated Cost per Mile (CPM)
Car	Gas at $2.50 per gallon		Gas at $3.50 per gallon
Design	City	Highway	City	Highway
Camry ICE	$0.11	$0.08	$0.16	$0.11
Camry Hybrid	$0.07	$0.07	$0.10	$0.10
"Camry"* Electric	$0.05	$0.05	$0.05	$0.05
*An electric car equivalent to the Toyota Camry.
Electricity cost assumption for Camry equivalent is $0.05 cpm

If the range available with an all electric car is sufficient, then customer acceptance will require that purchase costs (and maintenance costs, which will be ignored here) to be such that the purchase price difference is more than recovered in, say, 100,000 miles. The cost savings for city driving at $2.50 per gallon for gasoline is $6,000 per 100,000 miles of driving, compared to an ICE car. At $3.50 per gallon the cost savings would be $11,000. If two cars are available for our commuter and the electric car purchase cost difference is less than $5,000 more, there will be a big market. If the purchase price is $12,000 more, the market will be limited until the cost of gasoline exceeds $3.50-$4.00 per gallon.

In an August 6 press release, Toyota reported the results of a one-time driving test comparing a Toyota Hybrid Highlander with a new 4^th generation fuel cell equipped Highlander Hybrid. In that test, the cpm for the production hybrid was more than double the cost for the fuel cell equipped model. I am taking this test result with a grain of salt because it was a one time test.

The remaining comparison to be made is hydrogen fuel cells to plug-in electric vehicles. Hydrogen requires power for production by electrolysis of water. If the same power is used that is available at the residential power plug, all the added costs of handling, storing, transporting and distributing hydrogen are added to the costs that one has at his own power plug. Hydrogen is very uncompetitive on a cost basis with other sources of power in this scenario. If the cost of gasoline goes much higher than the $3.50 we have in our examples, then hydrogen might compete there. But hydrogen can never compete with electricity for local driving (right now under 100 miles per day) if the same electricity source is used for both battery recharging and fuel cell operation.

Never forget that a hydrogen fuel cell is nothing more than another form of battery, wherein a chemical reaction produces electrical current. A hydrogen fuel cell car is an electric car.

Can Hydrogen be Produced with Cheap Power?

Do sources of electrical power exist that are cheaper than what we produce (or can produce in the future) for domestic consumption? The short answer is: Yes. (Well, maybe.)

One possible source of cheap electrical energy is from ocean currents that have a large temperature differential between the surface currents and those at depths of 1000 feet or so. This process is called OTEC, Ocean Thermal Energy Conversion.



The above graphic, from The World Energy Council 2007 Survey of World Energy Resources, shows that most of the areas with the largest thermal differentials occur in areas that are too far from populated shorelines to make feasible electricity generation for transmission into a power grid. Temperature differentials of 20^o C or more are necessary for efficient power generation.

The cost estimates for power from OTEC are somewhat problematic. The World Energy Council estimates that a single 10MW demonstration plant would produce electricity at a cost somewhere between $0.14 and $0.21 per kWh, depending on factors such as recovery of potable water and marketable chemicals such as ammonia and various salts. The existence of carbon tax credits could lower the costs further by as much as $0.03.

It is only with the building of multiple plants of the same design that costs may come down below $0.12, the reference cost for existing electricity generation. For example, eight 10 MW plants could produce electricity at a cost between $0.098 and $0.119.

There is potential here, but the costs have to come down more to bring electricity from OTEC to a price to make hydrogen production economically attractive. Remember, we need to transport this hydrogen from the point of generation by ocean going tanker and distribute it by truck or rail tanker (or pipeline) to retail points.

Another potential source of electricity for hydrogen production is wave and tidal motion. To supply electricity for a power grid, the waves and tides must be close to populated shore lines. Wave motion can be used anywhere for hydrogen production, not just where is occurs close to populated shore lines. The same is true for tidal action in remote regions of the planet. The picture below, from New Scientist, shows a SeaGen tidal electricity generator, made by Sea Generation Ltd, in the tidal currents at Strangford Lough in Northern Ireland. Sea Generation is a division of privately held Marine Current Turbine Ltd.



Generation costs for electricity from capital costs alone will be about $0.07 per kWh for a 25 year depreciation. There will be additional unspecified maintenance and operation costs.

Wave action can also be used to generate electricity. The picture below (from New Scientist) shows a wave operated electrical power generator in a generation farm off the north coast of Portugal.



These generators are made by privately held Pelamis Wave Power Ltd. Each generator is a 150-meter-long steel jointed structure, which flexes to drive hydraulic generators and produce 750 kilowatts of power. The company claims electricity generation a competitive costs, but provides no specifics.

The reasons I selected these examples as potential hydrogen generation power sources are:

1. Potential for a lower electricity price point;

2. Electricity generated with plentiful raw material (water) present to produce hydrogen; and

3. With OTEC, the potential for additional revenue from side products.

Battery Costs vs. Fuel Cell Costs

The implications from currently available information are that the costs and durability will be similar. The current objective for Toyota is to have a price premium for hybrids less than the current price premium for a hybrid. The latest generation fuel cell engine is about the same size as a typical 4-cylinder ICE engine and contains about 30 grams of platinum. This is down from the previous generation fuel cell stack which was more than twice the size and contained 80 grams of platinum. The costs just for the platinum alone have been reduced from more than $4,000 in the previous generation to less than $1,500 in the current one. The final fuel cell structure is expected to use only 10 grams of platinum, the same amount as a typical catalytic converter today.

The dramatic change from the previous generation hydrogen fuel cell stack power system to the current generation is seen in the following picture from AutoBlogGreen.com, showing the latest fuel cell drive system on the left next to the drive system used in the past few years in the Chevy Equinox test vehicles that have been driven by volunteers in California, Washington, DC and New York. The power, range and performance of the two systems are the same. The horsepower rating is the equivalent of a current four-cylinder ICE.



Transportation of Fuel and Wholesale Distribution

The technology for distribution by tanker truck and railway car exists today. You can not spend a few hours on any interstate highway near a population center without seeing several pressurized gas tank transports sharing the roadway with you. Pipeline distribution for pressurized hydrogen gas may require different features than currently use for natural gas, but there is no reason to believe that the engineering and construction would present any more challenges or costs. Currently, there is no data reflecting transportation and wholesale distribution impediments to scaling up the use of hydrogen to higher volumes.

Retail Distribution

The cost to build a new gasoline station has been estimated to be in the $250,000 to $450,000, with the largest variable being land cost, using estimates obtained from national average costs at RS Means Cost Works. Obviously, where land costs are extremely dear, near the center of major cities, for example, the cost to build a gasoline station could be much higher, up to $1,000,000 or more.

The cost of building the first 32 hydrogen refueling stations in Southern California has been quoted as $32 million. As high as this cost projection is, it is less than the current cost for a hydrogen refueling pump in Los Angeles, according to Phil Baxley, President of Shell Hydrogen, quoted in the Ohnsman article. He said currently the cost is from $1 million to $5 million per pump, depending on capacity. Even the lower quoted cost, averaging $1 million each for 32 stations, seems to be more costly than all but the most expensive gasoline stations. However, there are three factors related to hydrogen refueling stations that mean this apparent current cost difference may decrease or even be reversed. These are:

1. externality cost exposures for gas stations;

2. lower costs for hydrogen stations in the future through economies of scale; and

3. lower costs to add hydrogen to existing gas stations than to build new.

There are major externality exposures for petroleum based fueling stations. The biggest exposure pertains to future liabilities for soil and ground water contamination by petroleum products and fuel additives. When these externalities are realized, they can be more than the original construction cost (even adjusted for inflation) and occasionally are many millions of dollars. Hydrogen refueling stations do not have these environmental cost exposures.

When the initial costs and the externalities are considered, the refueling stations for hydrogen have an original construction cost of the same order as petroleum fuel stations. Hydrogen refueling stations may decrease in construction costs from the estimates for the first 32 stations in Southern California when many hundreds are constructed per year. If hydrogen were to become ubiquitous, there might be a few thousand new stations per year for a couple of years. A more likely progression would be the modification of existing gas stations to also offer hydrogen refueling facilities at a fraction of the cost of building new stations.

Other countries have more advanced plans for infrastructure development.Both Japan and Germany are working to build large scale distribution networks, with over 1,000 stations on line for each county in five years.

Safety

To start with, we mu