John Petersen

If EV evangelists have everything their way and lithium-ion battery developers can achieve their lofty cost and performance goals, your long-term future may include a car with a plug. While we wait for that glorious day to arrive your short-term future will almost certainly include a car with stop-start engine technology.

The issue is simple – sitting at a stop light with the engine running wastes fuel and fouls the air. Depending on traffic, weather and driving habits, the waste can range from 5% to 15%. On a personal level the waste may seem modest, but on a national scale the numbers are mind-boggling.

The solution is simple – use cheap and effective automatic stop-start technology to turn the engine off every time a car rolls to a stop and automatically re-start the engine when the driver takes his foot off the brake.

If all cars in the US used stop-start systems, the nation would save 10 billion gallons of gasoline a year while reducing CO2 emissions by 100 million tons. I think saving the equivalent of 50 BP-class oil spills per year is a worthwhile goal. The EPA and the NHTSA seem to agree because they've recently adopted regulations that are expected to drive stop-start technology into at least 40% of the new car fleet over the next five years.

Ford Motor Company (F) has already announced plans to ramp stop-start engine production to 1.5 million units a year by 2013. Other automakers aggressively pursuing stop-start technology include PSA Peugeot-Citroen, BMW, Hyundai, Mazda, Nissan, and Volkswagen. Market penetration estimates range from 10 to 20 million cars per year by 2015, and those estimates will be woefully inadequate if Chinese proposals to require stop-start systems on all internal combustion engines by 2012 are implemented.

The key takeaway for investors is that stop-start technology is not a somewhere over the rainbow solution. The technology is real, it's proven and it's being implemented today in auto factories worldwide.

Reduced to basics stop-start systems are simple. The automaker replaces its normal starter and alternator with a belt driven integrated starter generator and then adds the necessary control electronics. After several years of experience with over a million stop-start vehicles in Europe the biggest issues are battery problems.

Stop-start systems are hard on starter batteries because instead of starting a car once for a normal commute, a car equipped with stop-start can restart the engine 10 or even 20 times. Heavy accessory loads that must be maintained while the engine is off increase the complexity. In stop-and-go urban driving, where two-, three- or even four-light backups at busy intersections are not uncommon, the battery strain is enormous and performance deteriorates rapidly.

Initially, the automakers' response to battery issues was to upgrade from commodity starter batteries to higher quality valve regulated lead-acid [VRLA] batteries. Since their stop-start systems still fell short of optimal performance, a more recent trend has been to use two high-quality VRLA batteries instead of one.

I frequently write about a new generation of lead-acid batteries that use carbon additives or components to increase cycle-life and power while reducing the time required to bring the battery back to a full charge. Last week I found an obscure presentation that Axion Power International (AXPW.OB) used at last September's Asian Battery Conference in Macau. This presentation is the first document I've found that shows how several different types of lead-acid and lead-carbon batteries perform under simulated stop-start driving conditions.

The testing protocol began with a one-minute discharge at 50 Amps to simulate engine-off accessory loads that was followed by a brief 200 Amp starter load. It then measured the maximum current the battery would accept and the amount of time required to return the battery to a full state of charge.

The first graph shows the performance of a high-quality VRLA battery. The 4,000-cycle test period is roughly equivalent to six months of urban driving at 30 stop-start cycles per day. The downward curving blue line shows the maximum charge current the battery would accept as the number of cycles increased. The upward curving black line shows the amount of time required to restore the battery to its initial state of charge.



The second graph shows the performance of a high-quality VRLA battery with high surface area carbon added to the electrode pastes. While charge rates and recharge times improve, the performance degradation is still pronounced over the testing period.



The third graph shows the performance of a high-quality VRLA battery with conductive carbon added to the electrode pastes. While charge rates and recharge times show additional incremental improvement over high surface area carbon, the performance degradation is still pronounced.



The final graph shows the performance of Axion's PbC® battery, a battery/supercapacitor hybrid that replaces the lead-based negative electrodes with carbon electrode assemblies. Further comment seems superfluous.


 
Several publicly held energy storage companies are actively developing solutions for the stop-start market. Johnson Controls (JCI) has sold the lion's share of stop-start batteries to date and seems content to stick with traditional VRLA chemistry while focusing its research and development efforts on lithium-ion batteries.

Exide Technologies (XIDE) and C&D Technologies (CHP) are both actively developing VRLA batteries with carbon additives. Exide is focusing on lead-carbon batteries for stop-start applications and C&D is focusing on lead-carbon batteries for stationary applications.

After seven years of research and development, Axion Power International (AXPW.OB) is just now making the transition to commercial production. Its multi-patented carbon electrode assemblies have been designed to work as plug-and-play replacements for the simple lead electrodes used in battery plants worldwide and its goal is to become a leading manufacturer of high-value electrode assemblies that will be sold to other battery companies that want to offer a better product to existing customers. Axion's manufacturing partners include Exide Technologies and privately held East Penn Manufacturing. It has also entered into a development relationship with Norfolk Southern Railroad (NSC) and quietly conducted product testing for a bevy of first tier automotive OEMs over the last 15 months.

The last serious contender in the stop-start game is Maxwell Technologies (MXWL), which has partnered with Continental AG to develop a stop-start system that uses conventional VRLA batteries in tandem with Maxwell's BoostCap® supercapacitors to satisfy the requirements of stop-start applications.

Given the amount of press and PR hype that have surrounded automakers plans to make tens of thousands of plug-in vehicles over the next few years, most investors are surprised that they haven't heard more about plans to make tens of millions of stop-start equipped vehicles. The only explanation I can offer is that plug-in vehicles have a great deal of long-term PR value while stop-start systems involve bread and butter production decisions that will materially impact the bottom line over the next few years.

If dual-battery stop-start systems become the norm, the short-term revenue gains for a handful of lead-acid battery and supercapacitor manufacturers could easily amount to a couple billion dollars per year. Since high quality VRLA batteries and carbon-enhanced products will typically command a higher margin than commodity lead-acid starter batteries, the bottom line impact should be impressive. For now, most of the likely beneficiaries of stop-start technology implementation trade at bargain basement valuation multiples. As the automakers begin announcing design wins for their upcoming stop-start product lines, that dynamic will change rapidly.

Unlike the lithium-ion advocates, I don't believe in the absurd idea of "One Technology To Rule Them All." Given the size of the market and the variety of potential solutions the only thing that matters in my book is being in the game. Since September is traditionally the month when first tier automakers introduce their new product lines for the coming model year, I think things are about to get interesting.

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 01:00 PM | Permalink | Comments (11)

John Petersen

Over the last couple years I've spent enough time in Asia to be fascinated by the growth opportunities and terrified by my own ignorance of the culture and the business dynamic. Since I know that I don't understand Asia, I tend to give Asian battery companies less attention than they deserve. Today I'll try to rectify that oversight. I'll also be adding New Energy Systems Group (NEWN) to my Chinese companies tracking list with a start date of June 30th.

The first Asian company most investors think of when you mention batteries is BYD Co. Ltd (BYDDF.PK). In my view, BYD is not a battery company. Instead, I view it as an automaker and cellphone component manufacturer that just happens to make some batteries. For the year ended December 31, 2009, BYD reported approximately $3.2 billion in automotive sales, $2.2 billion in cellphone component sales and $687 million in battery sales.

BYD gained a very high profile in 2008 when Warren Buffet's Midamerica Energy Holdings bought 225 million shares for $1.17 per share. At December 31, 2009, the 2.28 billion BYD shares outstanding had a net book value of approximately $1.22 per share. For the year, BYD reported a consolidated net income of approximately $0.26 per share, which works out to a net margin of roughly 10.4%. Based on the 2009 numbers, BYD's current stock price of $6.26 per share works out to 2.5 times annual sales, 5.1 times book value and 24 times earnings. While I don't necessarily think these market multiples represent a fair value, I do believe they can be used as a bright-line standard for comparing the relative valuations of the pure-play Chinese battery manufacturers.

The Chinese battery manufacturers I've tracked for the last year include Advanced Battery Technology (ABAT), China BAK Battery (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ). I originally excluded New Energy Systems from my list because it was a small manufacturer of battery components. Since last December New Energy Systems has bought two new subsidiaries, become a significant battery manufacturer and upgraded their market listing from the OTCBB to the Amex. Therefore I've decided to add New Energy Systems to my tracking list effective June 30, 2010.

The following table uses BYD as the comparison standard and shows how the market valuations of the pure play Chinese battery companies stack up.



Of the five pure play Chinese battery companies, the one that worries me the most is China BAK because its working capital is inadequate and its operating losses are substantial. The others are well-capitalized and exercise remarkable restraint when it comes to spending. My personal favorite in the group is ABAT, which started out as a lithium-ion battery manufacturer and has recently implemented a vertical integration into the electric two-wheeled vehicle market. My second favorite is China Ritar, which makes lead-acid batteries for a variety of applications.

While I'm still a bit provincial when it comes to my own portfolio because I don't understand Asia well enough, there are at least four pure-play Chinese battery companies that deserve serious consideration from investors who want the international exposure in a vibrant and rapidly growing sector.

Disclosure: None

Posted by John Petersen at 04:34 AM | Permalink | Comments (0)

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)

John Petersen

Last week I stumbled across a disturbing quote from Thomas Edison that was published in February 1883.
 
"The storage battery is, in my opinion, a catchpenny, a sensation, a mechanism for swindling the public by stock companies. 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. ... Scientifically, storage is all right, but, commercially, as absolute a failure as one can imagine."

When I overcame my nausea and began researching the business dynamics of the day, several parallels between 1883 and 2010 emerged with striking clarity, providing a useful object lesson for investors.

Edison invented the light bulb in 1879 and established the first investor-owned electric utility in 1882. The Pearl Street Station began operations in September of that year and Edison's primary concern was improving service reliability for 85 lamps in lower Manhattan. Battery backup was the logical solution, but the technology of the day couldn't stand up to the demands of a power plant.  Battery manufacturers promised more than they could deliver and the consequence was a phenomenon I'll refer to as the Edison Blowback, a disillusioned and angry high-profile customer who said some really nasty things to the press.

Edison's disgust with the battery industry ultimately led him to develop a nickel-iron battery in 1901. It became the battery of choice for vehicular transportation until the first generation of electric cars drowned in a sea of cheap and plentiful gasoline. While I've found nothing to suggest that Edison mourned the death of the electric car when internal combustion engines established their superior economics, flexibility and usefulness, he was reportedly upset that nickel-iron lost out to lead-acid as the chemistry of choice for starter applications. After a long and storied history, the last U.S. factory for nickel-iron batteries was closed in 1975.

Our power infrastructure and transportation system might have evolved differently if cost-effective storage had been available in Edison's day. But he couldn't solve the problem and we had to find a workaround. A hundred and thirty years later, cost-effective large scale energy storage remains a seductive but highly elusive goal.

Today, as we stand at the dawn of the Age of Cleantech, large-scale energy storage is once again seen as a key enabling technology for wind and solar power, the smart grid, efficient transportation and a myriad of other applications. Once again battery manufacturers are focusing on overcoming technical hurdles that have thwarted researchers for over a century. Once again imagination is running wild with visions of instantaneous technical progress and immense commercial potential. Once again, it seems that battery developers are ignoring the cost and complexity of developing large scale energy storage solutions and promising more than they can deliver.

I guess Mark Twain was right when he quipped that "history doesn't repeat itself, but it does rhyme."

Until the 1970s, there were two common types of batteries. Rechargeable lead-acid batteries did the grunt work of starting cars and providing backup power while dry cells were used for flashlights, toys and transistor radios. Valve regulated lead-acid (VRLA) batteries were invented in the mid-70s and quickly became the preferred technology. They worked so well that R&D spending on lead-acid batteries collapsed. At about the same time, new rechargeable battery chemistries including nickel cadmium, nickel metal hydride and lithium ion emerged on the scene. Since advanced batteries had immense potential in portable electronics, R&D spending on those chemistries soared, particularly in Asia where the electronic devices were made. The trend continued through the turn of the millenium because lead-acid batteries were good enough for the work they needed to do while advanced batteries for portable electronics were not.

Over the last decade, a new dynamic emerged as people started coming to grips with the amount of energy they waste. Today we're witnessing a seismic shift in the energy storage sector because none of the technologies we used the past is cheap enough, durable enough, big enough or robust enough to meet the demands of an energy efficient future. In response to this market dynamic, companies throughout the energy storage sector have:

• Launched new R&D programs to improve lead-acid batteries;
• Refocused R&D to develop bigger and cheaper lithium-ion batteries;
• Increased R&D on novel battery chemistries and nano-materials; and
• Devoted new R&D resources to physical storage systems like compressed air and flywheels.

The challenge is a classic conflict between technology and economics. Cheap chemistries like lead-acid are not durable enough to serve the storage needs of an energy efficient future and durable chemistries like lithium-ion are not cheap enough. We desperately need disruptive innovation to fill the gap and the billion-dollar question is which outcome is more likely:

• That a cheap and simple chemistry like lead-acid can be made more durable, or
• That an expensive and complex chemistry like lithium-ion can be made cheaper?

If history is a guide, the safer bet is that the cheaper technology will progress more rapidly. The following graph is based on the work of Clayton Christensen and shows how disruptive technologies emerge, evolve and mature.



When you consider the natural evolution of disruptive technologies, factor in a 25-year period from 1975 to 2000 when lead-acid R&D was suspended while lithium-ion R&D was charging forward at breakneck speed, and consider the vast differences in raw materials requirements and natural resource availability, the conclusion that lead-acid is better positioned to fill the gap is persuasive if not compelling.

We live in an age of distorted expectations that have arisen from a universally recognized need for cost-effective large-scale energy storage. Lithium-ion battery technology will undoubtedly progress, but it will progress more slowly than people expect and as the inevitable delays, cost overruns and disappointments accumulate, another Edison Blowback is a virtual certainty. Lead-acid battery technology will also progress, but that progress will come as unexpected good news to a public that has low expectations for the technology. In time, incremental improvements in both technologies will cover the middle ground and relative valuations will equalize.

Great investors avoid the herd and focus on undervalued companies with a bright future. Herd followers that pay premium prices too early don't fare as well. As the cleantech revolution unfolds I believe every company that brings a cost-effective storage solution to market will thrive. The big upside surprises, however, will come from the lead-acid battery complex including Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB).

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 05:01 AM | Permalink | Comments (2)

*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

This Saturday marks the second anniversary of my blog, which began with an article titled Lithium-ion Batteries and Centerfolds. Over time my archive has grown to 142 articles on energy storage devices, the companies that make them and their crucial role as enabling technologies for wind and solar power, transportation and the smart grid. While cleantech bloggers usually focus on new technologies that might be game-changers, I'd rather focus on major enhancements to proven technologies from established industry leaders. The reason is simple, hot new technologies have limited investment value if the world can't produce enough raw materials to implement them.

Last month I spoke at the Ecologic Institute's Smart Energy Dialogue in Berlin. Since most people have a hard time internalizing immense numbers like a trillion dollar budget deficit, I used the following table to summarize global mineral production in 2009 and translate the huge numbers to more digestible per capita figures.

Natural	Annual Production	Per
Resource	(Metric Tons)	Capita
Crude Oil	4,189,210,000	616 kg
Raw Steel	1,100,000,000	162 kg
Aluminum	36,900,000	5.4 kg
Copper	15,800,000	2.3 kg
Lead	3,900,000	1.6 kg
Nickel	1,430,000	570 g
Cobalt	62,000	201 g
Uranium	42,700	6 g
Lanthanum	32,900	5 g
Silver	21,400	3 g
Neodymium	19,100	3 g
Lithium	18,000	3 g

This is scary stuff for baby boomers like me who grew up thinking surplus and plenty were god-given rights and part of the natural order. Production of minor metals can be increased with enough time, effort and investment. Significantly increasing global production of core industrial metals is a different story altogether.

If you're reading this blog, you used more than your share of last year's global resource production. The only reason you got away with it is that somebody else, actually a lot of somebody elses, used less than their share. That, by definition, is an unsustainable long-term dynamic. The ugly truth is we all have to change our wasteful ways because the world's emerging economies are forcing the issue. The following cartoon from Jan Daraz was published in the last issue of Batteries International and is almost too true to be funny.



The biggest challenge of our age is finding relevant scale solutions to persistent shortages of water, food, energy and every commodity you can imagine. The trick will be finding ways to raise the standard of living in emerging economies without crushing our own. We simply can't dig our way out of this hole.

I'm a strident critic of plug-in vehicles like the Nissan Leaf (NASNY.PK), the Mitsubishi MiEV (MMTOF.PK), the Tesla Roadster (TSLA) and the GM Volt because they use pornographic amounts of highly processed new industrial and exotic metals to save a couple hundred gallons of gas per year. Since it doesn't take more than a cursory glance at the mineral production table to see that the natural resource balance is unsustainable, the only rational conclusion is that plug-in vehicle business models are a catastrophe in the making for investors.

While I've occasionally been harsh with lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technology (VLNC) and Altair Nanotechnologies (ALTI), my criticisms have focused on their fawning eagerness to support the plug-in vehicle hysteria instead of focusing on applications that need the size, weight and energy density benefits of their products. There's no escaping the reality, lithium-ion batteries are too valuable to waste on plug-in vehicles. The following table summarizes potential uses for lithium-ion batteries:

Device Type	Battery Capacity	Price Sensitivity
Cellphones & Smartphones	5 to 10 wh	Lowest
Portable medical devices	10 to 50 wh	Very low
Laptop computers	20 to 50 wh	Low
E-bikes and scooters	500 to 1,000 wh	Moderate
HEVs	1,000 to 1,500 wh	Moderate
PHEVs	10,000 to 16,000 wh	High
BEVs	24,000 to 50,000 wh	Very high
Utility applications	500,000+ wh	Highest

Since I learned in kindergarten that one can't buy for a dime, sell for a nickel and make it up on volume, I have a hard time understanding the logic of a business model that's focused on customers who need a premium product but don't want to pay a fair price. That kind of price pressure may be a good thing for consumers, but it's never a good thing for stockholders of battery manufacturers.

In an effort to milk the plug-in vehicle exuberance for all it's worth, many lithium-ion battery developers wax prophetic on how great things will be once they finish their R&D, build their factories, slash their production costs, find customers that aren't insolvent or teetering on the brink and show Asia how to manufacture efficiently. Until these companies accept their own limitations and develop the business sense to focus on the highest and best uses for their products, they'll continue squandering stockholders' money chasing pipe dreams.

I'm a big fan of lead-acid batteries because the raw materials typically come from recycled batteries and offer a sensible balance between conservation and sustainability. In other words, they're cheap and plentiful. Lead-acid may not be the best technology for all uses, and it certainly won't work in cellphones and other devices where size and weight are mission critical constraints, but for mundane storage applications where costs and benefits matter, lead-acid and perhaps molten salt are the only battery technologies that have a chance of success.

Notwithstanding disparaging gossip that compares the best lithium-ion batteries with ordinary starter batteries, the lead-acid sector has experienced a renaissance over the last few years as new manufacturing methods and materials were used to enhance vintage technology. There's no way around the size and weight limitations, but gains in energy, power and cycle life for the best lead-acid batteries have been impressive. As a result today's advanced lead-acid batteries bear little or no resemblance to common starter batteries and offer extraordinary price performance when compared with other advanced batteries.

Despite impressive product performance gains, the leading lead-acid battery manufacturers like Enersys (ENS), Exide Technologies (XIDE) and C&D Technologies (CHP), along with advanced technology developers like Axion Power (AXPW.OB), trade at a fraction of the valuations for their riskier cousins. Over the next few quarters the valuation disparities will become painfully obvious as growth rates the lead-acid sector soar while the lithium-ion sector stagnates.

Like many observers, I believe these turbulent times are the dawn of the Age of Cleantech, the sixth industrial revolution. I also put a lot of stock in Ray Kurzweil's theory that "we won't experience 100 years of progress in the 21st century—it will be more like 20,000 years of progress." Notwithstanding a firm conviction that we're entering a new age, I'm painfully aware that technology alone cannot change resource production constraints, it cannot change population growth, it cannot change the human desire for something better and it cannot change the laws of chemistry. Unfortunately, investors who believe that Moore's Law and the other rules we learned during the IT revolution apply to cleantech are in for a very rude awakening.

The one factor that makes the cleantech revolution different from all its predecessors is the unbridled arrogance of policy wonks who don't understand things like resource constraints and sincerely believe they can control the direction and pace of technological development by spending money on the pet projects of ideologues. A brief history of the serial failures of our technology du jour energy policy follows:

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	Plug-in Vehicles
2012	Whither bloweth the wind?

The Spanish poet and philosopher George Santayana wrote, "Those who cannot remember the past are condemned to repeat it." The government's track record of picking energy technology winners currently stands at 0 for 5. Any questions?

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

Posted by John Petersen at 09:22 AM | Permalink | Comments (2)

John Petersen

Most investors know that Toyota Motors (TM) is the world's biggest manufacturer of hybrid electric vehicles, or HEVs. Since 1997, Toyota has sold over two million cars using its Hybrid Synergy Drive® and earned a sterling reputation for fuel efficiency and customer satisfaction. What many don't realize is that Toyota is also the world's biggest manufacturer of advanced automotive battery packs. Toyota entered the battery business in 1996 when it bought a 40% interest in Panasonic EV Energy, a joint venture company that was formed to make NiMH batteries and battery packs for the Prius. Over time, Toyota gradually increased its stake to 80.5% and Panasonic bought a controlling interest in Sanyo. In June of this year, Panasonic EV Energy changed its name to Primearth EV Energy, presumably to reduce confusion over the fact that Toyota made Panasonic branded batteries while Panasonic made Sanyo branded batteries.

Historically Toyota has been quite conservative about the potential use of lithium-ion batteries in vehicles and has unequivocally stood by NiMH for its HEV lines, primarily because of battery cost concerns. Despite its dominant position in the HEV markets, Toyota has been quietly developing lithium-ion batteries for plug-in hybrid vehicle, or PHV, systems and late last year it launched a three year program to deploy and test a 600 vehicle plug-in fleet in Japan, North America and Europe. Last week a reader sent me a link to Toyota's ESQ Communications, an easy to navigate, feature-rich and informative website filled with straight talk and balanced information to help consumers and investors separate hype from reality in the battery and plug-in vehicle space. I think the ESQ Communications website is a "must read" for every investor that's interested in the advanced automotive battery and electric vehicle sectors. It's short on hype, glittering generalities and promises of an all-electric future, but the depth and accuracy will surprise if not shock some of the more ardent EV advocates that frequently comment on this blog.

The first big surprise is that the Plug-in Prius is a PHV-13, meaning that it has 13 miles of electric drive range as opposed to the 40-mile range of the GM Volt, the 80-mile range of the Nissan Leaf and the 200-mile range of the Tesla Roadster. On the FAQ page for the Prius PHV, Toyota explains the reasons as follows:

"Toyota is of the belief that the smaller the battery in a PHV the better, both from a total lifecycle assessment (carbon footprint) point of view, as well as a cost point of view. Research has shown that plug-in hybrid vehicles with smaller batteries, charged frequently (every 20 miles or less) with average U.S. electricity produce less green house gas emissions than conventional hybrid vehicles. (according to a 2009 Carnegie Melon University study). And as battery size increases, so does the battery cost resulting in higher overall vehicle cost."

The second big surprise is that with over two million HEVs on the road, Toyota doesn't believe it knows enough about how PHVs will perform in the hands of ordinary people. So instead of simply launching a product and praying for the best, Toyota plans to conduct a three-year test of clustered fleets in a variety of locations and publish detailed performance data to inform potential customers instead of treating them like lab rats. The FAQ page for the Prius PHV explains the reasons as follows:

"The Prius PHV will come to market in 2012. The PHV demonstration program is designed to gather real world driving data and customer feedback on plug-in hybrid technology. In addition, the program will confirm the overall performance of the first-generation lithium-ion battery technology in a variety of use cases. Toyota must ensure that the vehicle/battery meets customer’s expectations before it is brought to market. The results of this program will make sure that the vehicle coming to market in 2012 will exceed customers’ expectations and meet plug-in customers’ demands."

The third big surprise is Toyota's skepticism over claims that the cost of lithium-ion battery packs for vehicles will fall into the $500 per kWh range over the short-term. The FAQ page for the Prius PHV discusses the issue as follows:

"In summer 2009, Toyota was asked to testify in front of a committee at the National Academy of Science in Washington, D.C., on the current state of plug-in technology, which of course included a discussion on advanced batteries. That testimony is a matter of public record and has been reported on in the media.

During that testimony a Toyota representative was asked Toyota’s opinion on current battery costs and how significantly it might be reduced. What Toyota said then was that the very rough estimate was approximately $1200 per KWH for a complete pack including instrumentation and ventilation systems…and that efficiencies in scale alone will not create major cost reductions in the near term. Significant reductions in cost will require major technological breakthroughs."

There is no question that many electric vehicle advocates will find Toyota's approach to their dream technology overly conservative. The FAQ page for the Prius PHV describes the reasons for Toyota's conservative approach as follows:

Toyota believes that PHVs can be part of a solution to climate change and for energy security,

• for certain customers,
• in certain geographic areas,
• with certain grid-mixes,
• with certain drive-cycles,
• and with access to charging.

There will be an important role for PHVs, but it will not be in high volume until there are significant improvements in overall battery performance…and battery cost reduction.

For the last two years I've been an unrepentant critic of lithium-ion battery and plug-in vehicle hype that ignores the short-term challenges while focusing on vaguely defined "long-term potential." It's more than a little gratifying to learn that the world's biggest and most experienced carmaker shares my concerns and is taking a rational baby-steps approach to vehicle electrification that focuses on quality, performance and cost, and may very well result in a PHV that works in the real world of paychecks and monthly budgets, as opposed to the go-for-broke eco-bling approach that GM, Nissan (NSANY.PK), Tesla (TSLA), A123 Systems (AONE) and Ener1 (HEV) are pursuing with government subsidies and stockholders' money.

This article will no doubt draw outraged comment from advocates who will argue Toyota is simply protecting its turf. I think the more plausible explanation is that Toyota is simply telling the unvarnished truth.

Disclosure: No positions

Posted by John Petersen at 12:44 PM | Permalink | Comments (1)

John Petersen

On Wednesday a reader sent me a new Goldman Sachs research report on the advanced battery sector titled "Advanced Batteries: Light, but the tunnel is long; Buy ENS, HEV Neutral, AONE Neutral." If the essence of legal argument is "the plausible boldly asserted," then I'd suggest that the essence of sell-side analysis must be "the implausible accepted without question." While I agree with Goldman's conclusions that Enersys (ENS) is a bargain at the current price and caution is best when it comes to A123 Systems (AONE) and Ener1 (HEV), I have major problems with their assumptions about lithium-ion battery costs, safety and consumer acceptance.

Since we're starting a long holiday weekend, I'll keep it brief.

Cost Assumptions

There is no issue in the advanced battery sector that's more contentious and wildly speculative than the future cost of lithium-ion battery packs. While reliable numbers are scarce, there are a couple of clear reference points. In May,  Nissan's chief product planner for North America told the Wall Street Journal that their manufacturing cost for the 24 kWh battery pack used in the Leaf is roughly $18,000, or $750 per kWh. By the time you include a normal markup, the OEM price from an independent battery manufacturer would be about $1,000 per kWh. In its most recent Form 10-Q, A123 reported $1,375 in cost of goods sold for each kWh shipped in the first quarter. While these two examples are not conclusive and rumors of low prices are common as weeds, I tend to believe a pack level cost of $1,000 per kWh is a safe current estimate.

According to Goldman Sachs, the United States Advanced Battery Consortium is targeting pack level costs of $500 per kWh by 2012 and $300 per kWh at volume production by 2014. The long-term goal is $250 per kWh, the current cost of the least expensive consumer batteries. Faced with ambitious auto industry and government expectations, battery developers are caught between a rock and a hard place. They can either tell the automakers, the financial markets and the government "your goals are unattainable" and reject the funding opportunities, or they can say "we think we may be able to reach that goal," trusting that the money will flow and forgiveness will be easier to come by than permission.

In its manufacturing cost discussion, the Goldman report breaks down the current cost of a typical automotive lithium-ion battery pack into the following broad classes of economic inputs.

5%	Lithium
7%	Other active materials
32%	Purchased parts
11%	Labor
14%	Depreciation
14%	R&D
4%	Scrap
13%	Markup

Later on, in the appendices, Goldman identifies the principal manufacturers of binders, foils, coating equipment, separators and electrolytes, and manufacturing systems, which are with very few exceptions Asian.

I'm not a trained industrial engineer, but I am a trained cost accountant. When I take time to consider the classes of economic inputs and their relationships to total product costs, I can't imagine where savings of 50% to 70% will come from.  We live on a resource constrained planet and commodity prices have been increasing for decades. With escalating global demand for all the necessities of life, it seems patently absurd to believe that the prices for lithium and other active materials will collapse or that prices for materials-based foils, separators, electrolytes, cases and other purchased components can fall significantly. It's possible to reduce labor costs and jobs through increased automation, but the trade-off is increased depreciation. When you factor in the reality that over 60% of the economic inputs are directly or indirectly attributable to imports, it's hard to see how medium term forecasts of $500 per kWh and long term forecasts of $250 per kWh are reasonable.

Economies of scale are easy to discuss as glittering generalities. They are extremely hard to achieve in volume manufacturing of a mature product. The Japanese have been making lithium-ion batteries for almost 20 years and it's highly unlikely that Sony, Panasonic, NEC and Toshiba have overlooked easy economies of scale while building billion dollar businesses. I won't argue that the widely hyped cost savings and performance gains can't happen, but I haven't seen anything that leads be to believe they will happen.

Safety Assumptions

In the lithium-ion battery industry the standard penetration safety test is conducted by piercing a single cell with a 3.5 mm steel rod. This is a wonderful test of the damage that might be inflicted if a carpenter drops his tool belt on a battery powered screwdriver, but it proves absolutely nothing about battery pack safety in the class of catastrophic penetration events that can and do occur in automobile accidents.

When automakers conducted safety testing of NaS battery packs in the mid-90s, they took fully charged battery packs and drove a foot long four-bladed wedge into them with a hydraulic ram because it was the only way to learn what the pack level interactions would be in a catastrophic penetration event.

The only event I know of that involved a cascade of battery failures was a spontaneous fire in a storage bunker at the Toxco recycling facility in Trail, B.C. last November. While the newspaper reports of the Toxco fire are sobering, they don't have the same impact as this YouTube Video that shows why pack level studies of cell interactions and failure cascades are an essential prerequisite to battery pack safety claims.



I understand that Tesla Motors (TSLA) is the only automaker that uses or plans to use lithium-cobalt-oxide cells, the most dangerous lithium-ion battery chemistry, but even the benign chemistries use organic electrolytes that are inherently flammable and react violently when penetrated. Single cell safety tests are interesting, but until lithium-ion battery developers conduct pack level tests of catastrophic penetration, there will be no basis to make any safety claims or assumptions.

Consumer Acceptance Assumptions

The nice thing about consumer acceptance forecasts is that they're only wrong in 20/20 hindsight. For most consumers, an automobile is the second most expensive asset they own. Car buying decisions are not made lightly, and while most buyers carefully consider their capital, operating and maintenance costs, they make a buying decision based on a subjective assessment of how well a vehicle suits their needs and driving habits.

All of the consumer acceptance forecasts I've seen assume that battery prices will plummet and large numbers of consumers will be willing to overlook the quirky limitations of EVs to make a political or ideological statement. That may be enough motivation for a few diehards, but it won't cut it for the average consumer who believes the green in his wallet is more important than the green in his cocktail party conversation.

In the final analysis, I believe forecasts about consumer acceptance rates are only as reliable as the future cost assumptions that underlie the forecast. Since there's good reason to believe the cost assumptions are garbage in, there's also good reason to believe the consumer acceptance assumptions are garbage out.

Investment Recommendation

The Goldman report was neutral on A123 and Ener1, but included a buy recommendation for Enersys with a six-month target price of $29. It also reiterated a buy recommendation on France's Saft Groupe (SGPEF.PK). While Goldman does not currently cover Exide Technologies (XIDE), which generates more annual revenue than Enersys and Saft combined, I expect that to change within the next 12 months if the earnings recovery Exide reported for its most recent fiscal quarter continues.

Disclosure: No positions.

Posted by John Petersen at 04:41 AM | Permalink | Comments (0)

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

On June 8th Switzerland's ABB Group Ltd. (ABB) announced an agreement to buy UK-based Chloride Group PLC (CHLD.L) for £860 million in cash, or approximately $1.26 billion. This stunning purchase provides the best evidence yet that lead-acid battery manufacturers including Enersys (ENS), Exide Technologies (XIDE) and C&D Technologies (CHP) are woefully undervalued and offer outstanding opportunity for patient and risk tolerant investors.

ABB is the gold standard in the secure and efficient generation, transmission, distribution and use of electricity in utility, industrial and commercial applications. Its portfolio ranges from light switches to robots, and from huge electrical transformers to control systems that manage entire power networks and factories. With 2009 revenues of $31.8 billion and income of $2.9 billion, you'd have to look long and hard to find a better infrastructure investment in the electric power industry.

Chloride is a highly regarded vendor of uninterruptible power solutions for commercial and industrial customers in Europe (78%), the Americas (10%) and Asia (12%). Chloride's solutions and services protect business critical systems and processes from the effects of poor power quality and power interruptions prevalent in most world economies, both in developed and developing countries. Its products range from battery back-up systems to diesel generators, flywheels and fuel cells, but at the end of the day Chloride's business is buying manufactured energy storage devices and integrating them into power systems that assure "Secure Power Always through leading technology and exceptional customer support." Chloride buys all its batteries from well-recognized manufacturers including Enersys, Yuasa, C&D, Hoppecke, Fiamm, Exide and others. It should be a fine acquisition for ABB and significantly extend that company's reach and depth.

The thing I found fascinating about ABB's purchase of Chloride is the fact that a systems integrator with a fraction of the assets, equity and annual revenue was sold for cash at a far higher value than the market attributes to the original equipment manufacturers. The following table provides summary financial metrics for Chloride, Enersys, Exide and C&D for the trailing 12 months.

	Chloride	Enersys	Exide	C&D
Service revenue	$182.1
Product sales	$308.2	$1,579.4	$2,685.8	$346.7
Gross profit	$208.8	$360.9	$538.1	$42.2
Net income (loss)	$28.6	$87.3	($31.6)	($21.3)
Current assets	$189.3	$895.3	$1,042.8	$138.6
Total assts	$451.7	$1,652.0	$1,956.2	$303.0
Current liabilities	$154.0	$419.5	$613.8	$61.0
Total debt	$271.4	$867.8	$1,608.2	$265.1
Stockholders equity	$177.9	$779.9	$348.0	$38.0
Cash purchase price	$1,264.5
Market capitalization		$1,154.6	$407.5	$23.7

When I study the table, I can't help but conclude that either ABB is overpaying for Chloride, or the market is seriously undervaluing Enersys, Exide and C&D. The best explanation comes from the work of Benjamin Graham who observed, "in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine." For the last couple years, the market has been showing its voting machine side. Over the next couple years I expect the weighing machine to emerge with a vengeance.

In addition to a striking disconnect between market potential and market value at the established manufacturer level, there are similar disparities in companies that are developing new technologies based on old-line battery chemistries. My favorite example is Axion Power International (AXPW.OB), which recently announced that it was launching a program with Norfolk Southern Corporation (NSC) to develop a battery management system that will facilitate efforts to retrofit part of Norfolk Southern's fleet of 3,500 diesel electric locomotives as hybrid vehicles that operate partially on battery power and recharge their batteries through regenerative braking.

Since 2003, Axion has been developing a new technology that combines the positive electrode from a lead-acid battery with a negative electrode from a supercapacitor in a hyrid device that offers the power and cycle life of exotic battery chemistries at a lead-acid price. While Axion has been tight-lipped about the performance specifications and potential applications for its PbC® battery, it has been actively testing the device for hybrid electric vehicle, railroad and military applications for the last couple of years. At last month's Advanced Automotive Battery Conference 2010, Axion unveiled the following graphs that compare the dynamic charge acceptance rates of conventional lead-acid batteries and its PbC battery, and show how lead-acid batteries deteriorate rapidly with shallow cycling while the PbC remains stable.



The Norfolk Southern announcement is the first clear signal that the PbC battery has met or exceeded the battery performance requirements established by a top tier transportation customer and is now ready for the acid test of a locomotive prototype to demonstrate real world performance. With any luck, we'll see comparable signals or outright design wins from one or more first tier automakers later this year.

The Axion - Norfolk Southern project is basically a retrofit counterpart to an OEM initiative that General Electric (GE) kicked off in May of 2009 when it announced plans to build a $100 million plant to make molten salt batteries for use in its ecoimagination hybrid locomotives. While the long-term potential of the retrofit market is not as attractive as the OEM market, there are roughly 24,000 diesel-electric locomotives in the current U.S. fleet and retrofits could cut their fuel consumption by up to 10%, or about 450 million gallons of diesel fuel per year, while improving their emissions profile by an even wider margin. Since locomotive retrofits will cost about $500,000 each by the time you include batteries, battery management systems and other control electronics, the potential revenues from this niche market are on the order $10 billion spread over several years, which doesn't look too bad along side Axion's market capitalization of $68.6 million.

Since July of 2008 I've been writing a regular blog on the manufactured energy storage device sector and the various technologies that will be fundamental enablers of cleantech, the sixth industrial revolution. A complete archive of my articles is available on Seeking Alpha. My consistent message has been that many companies that are developing gee-whiz technologies for plug-in vehicles are overvalued while the lead-acid sector offers great value in companies like Enersys and Exide, and significant speculative potential in companies like C&D and Axion.

When companies like ABB pay premium prices for lead-acid battery integrators like Chloride and companies like Norfolk Southern join forces with lead-acid battery innovators like Axion, the conclusion is clear; the king of energy storage technologies is alive and well and lead-acid battery companies are well positioned to provide market beating returns for risk tolerant investors over the coming decade.

I'm not a disinterested observer. I'm a former director of Axion and own a huge block of its common stock. Since I know that I can only speak from the perspective of the shoes I stand in, my archived articles include extensive links to third-party source documents that can be very useful due diligence tools for investors who want to understand the dynamics of the energy storage sector, and the strengths and weaknesses of the various pure-play companies that are active in the sector. Even if you disagree with my conclusions, I can guarantee that you'll learn more than you ever wanted to know if you download and study the source documents.

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

Posted by John Petersen at 11:43 AM | Permalink | Comments (5)

John Petersen

It's been a very good week for companies in the lead-acid battery sector and from all indications the fun is just beginning. Unlike most market sectors, the principal players in the lead-acid group report on a fiscal year basis instead of a calendar year basis. Enersys (ENS) and Exide Technologies (XIDE) both use fiscal years that end March 31st, and C&D Technologies (CHP) uses a fiscal year that ends January 31st. That makes the first two weeks of June a busy time as Enersys and Exide report annual results and C&D reports first quarter results.

In its earnings release on Tuesday, Enersys reported net income of $17.8 million for the quarter, or $0.36 per share, and net income of $62.3 million for the year, or $1.28 per share. Revenues for the year were $1.58 billion. The earnings for both the quarter and the year exceeded expectations and the subsequent conference call made it clear that management believes earnings will continue improving as the global economy recovers and the company realizes the planned economies from restructuring investments that impaired earnings over the last couple of years. The closing price prior to the earnings release was $21.78, as compared to a price of $24.47 on Thursday. Given its strong earnings and a bright outlook for continued growth and improved margins, I expect Enersys to surpass its 52-week high of $27.23 before year-end.

An even bigger surprise was unveiled on Thursday when Exide reported net income of $40.4 million for the quarter, or $0.53 per share, and a net loss of $11.8 million for the year, or ($0.16) per share. Revenues for the year were $2.69 billion. The earnings for the quarter exceeded expectations by a wide margin and came as a huge surprise for people who don't follow Exide closely. As a result the stock gapped up sharply on very heavy volume and gained about 27% before closing at $5.41.

Over the last couple years Exide has been engaged in a comprehensive restructuring program that crushed earnings. From a $19.66 peak in the spring of 2008, Exide tumbled to a low of $1.83 in November 2009. In yesterday's call Exide's management confirmed that the restructuring activities are almost complete and that product demand and margins are ramping nicely as the economy recovers.

The one big question mark with Exide's future market performance arises from potential distributions and sales by the Tontine funds that bear no necessary relationship with Exide's fundamentals. Tontine owned 23.7 million Exide shares last July and had distributed or sold approximately 8.7 million shares as of May 17th. Until Tontine completes its restructuring, there may be selling pressure that would tend to depress the market price. The market will probably want to see a couple more quarters of stable operating performance before assuming that Exide is out of the woods, but a double or even a triple prior to year-end would not surprise me in the least.

Nothing in life is certain, but I'm hoping C&D Technologies will be the third in the series of lead-acid surprises when it reports first quarter earnings. Last December I wrote an article, Why I'm Buying C&D Technologies, that laid out the fundamental business case for significant improvements in operating earnings beginning with the current quarter. If C&D has experienced growth rates in Asia that were comparable to the rates reported by some of its competitors, it could be an interesting time. At Thursday's closing price of $1.14, C&D is trading for book value and a piddling 9% of annual sales. Since consensus estimates are predicting a loss of roughly ($0.10) per share for the current quarter and ($0.09) per share for the fiscal year, any surprise could result in a significant short-term gain.

My fun take-away of the week came from the Exide conference call and is probably best classified as gossip and conjecture from reading between the lines. Since it could also be very important to readers who follow Axion Power International (AXPW.OB) I'll pass it along for what it is; gossip and conjecture.

A big chunk of the Exide conference call was spent discussing their expectations regarding the implementation of stop-start and micro-hybrid technologies in response to new CO2 emission regulations in Europe and the U.S. When speaking of critical industry trends, Exide's Chief Operating Officer, P..J. O'Leary said, "Our view is that the hybrid market is real and will be significant with approximately 16% of the total worldwide car build by the year 2015. More significantly we estimate that 70% of the hybrid vehicle build will be in the start-stop and micro-hybrid applications." Earlier in the conference call, Chief Executive Officer Gordon Ulsh said, “Exide’s technology development projects with Axion Power, Nano-terra, Savannah River and the University of Idaho are all on track to complete critical evaluation phases within the next six months. One or more of these technologies is expected to be carried forward to commercialization.”

For those who don't follow Exide closely, the Nano-terra relationship was announced last spring and described as an R&D collaboration where "Nano-Terra will use its expertise in surface chemistry and surface engineering to create a number of innovative functionalities for stored energy solutions manufactured by Exide." Similarly, the relationship with the Savannah River National Laboratory and the University of Idaho was announced last summer and described as an R&D collaboration where "these two research institutions can collaborate on their unique strengths, with Exide providing the resources to commercialize the technologies to improve lead-acid battery performance." In comparison, the Axion agreement announced last spring was described as a multi-year, global relationship for the purchase of Axion PbC batteries and other Axion Technologies that contemplated three consecutive phased purchase- and test-periods with Axion supplying an escalating number of batteries to Exide on a monthly basis. The first two phases were to span 18 months and, if successful, serve as trigger events for the final two commercialization phases.

When I combine the discussions in the Exide and Axion conference calls, I have to believe the PbC battery will make the transition from OEM testing to commercial sales sometime this year.

I believe the lead acid battery sector is starting a major bull run. Enersys should continue appreciating, Exide is looking like a multi-bagger, C&D is poised for a turn-around and it looks like Axion is making the transition from development to commercialization. It's a target rich environment for investors who take the time to do their homework and select the companies that best fit their portfolio requirements and risk tolerance.

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

Posted by John Petersen at 11:33 AM | Permalink | Comments (0)

John Petersen

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

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

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



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

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

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



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

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

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

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

John Petersen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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



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



The bottom line take-away points for investors are:

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

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

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

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

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

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

John Petersen

For the last few days the green transportation press has been beside itself with breaking news that the battery pack for the Nissan Leaf costs a staggeringly cheap $375 per kWh. They point to the Times of London as their source, but fail to note that the cost figure was buried in a throwaway sentence in the seventeenth paragraph of an April 4th story about a British executive who'd been transferred to Nissan's headquarters in Tokyo to run their green cars program.

This isn't proof folks, it's hearsay elevated to nonsense that belongs in the same class as the assertion that the $32,780 introductory price for the Nissan Leaf is a better indicator of cost than the Japanese price of ¥3.76 million, or $40,250.

To satisfy my own curiosity, I took a look at Nissan's summary financial statements and found that its normal gross margin is roughly 25% while its normal net income is closer to 5%. With a 20% spread between gross and net it's easy to see how Nissan could claim a small profit while actually taking a beating on each sale. All you have to do is ignore that pesky corporate overhead and everything is beautiful. Despite the halleluiah chorus from the green press, I tend to believe Josh Wolfe of Lux Research was closer to reality when he wrote "Unless Nissan and its battery partner NEC have unlocked the magic Li-ion formula that allows them to manufacture batteries at half the cost of their competitors, Nissan/NEC is almost certainly taking a loss on every Leaf it sells in the U.S., in order to encourage EV adoption and unseat Toyota/Panasonic as the greenest auto-making team."

For those who don't understand how markups work in a business setting, a simple example may be illustrative. If a battery manufacturer spends $375 per kWh to make it's product, it will typically need to sell that product to a customer for roughly $500 per kWh if it wants to pay corporate overhead and earn a profit. By the time a customer builds the battery into a car and then adds its own markup to pay corporate overhead, the battery cost to the end user works out to roughly $667 per kWh. So even if we assume the cost estimate in the Times article is accurate, the cost at the battery manufacturing level is nowhere near a reasonable proxy for the end-user price.

I understand why plug-in idealists want battery prices to collapse. They're all too familiar with the dismal economics that have doomed generation after generation of electric cars to the shredder, and they desperately want lithium-ion batteries to be the automotive equivalent of gene therapy that cures the congenital birth defects. Understanding the motives of idealists, however, does nothing to answer the bigger question – Why would anyone want to own stock in a company that freely admits, "There won't be a market for our product unless we improve performance while slashing our prices by 50% in the short-term and by two-thirds in the long-term." The plan may work for visionaries that want to change the world with battery-powered cars, but I can't see how investors will profit, or for that matter break even.

While the cost arguments of plug-in idealists are economic sophistry based on half-truths, the grander illusion lies in the common belief that lithium wonder-batteries will make all other batteries obsolete and store energy for everything from iPads to solar panels and windmills. It makes for a great story, but it won't happen in our lifetimes.

Most investors are familiar with the concept of disruptive technologies, a term coined by Clayton M. Christensen to describe simple, low-cost technologies that eventually displace established technologies as they mature. According to Dr. Christensen, disruptive technologies often lack refinement and have performance problems because they're new, appeal to an underserved market, and may not yet 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 them to match or even surpass the prevailing technology. The following graph illustrates the phenomenon.



Reduced to basics, the plug-in idealists want to take energy storage technologies that were developed for the most demanding uses and make them cheap enough for low quality uses that require huge amounts of storage. The concept flies in the face of time-proven realities that technological improvements invariably give rise to new applications the developers never contemplated and that modest users of high quality products are much fiercer price competitors than wasteful users. If we wanted to create a hierarchy of possible lithium-ion battery applications from the highest value per watt-hour to the lowest value per watt-hour, the list would look something like this:

Device	Battery
Type	Capacity
Cellphones and MP3 players	5 watt-hours
Portable Medical Devices	10 to 50 watt-hours
Laptop Computers	10 to 50 watt-hours
Electric bicycles and scooters	500 to 1,000 watt-hours
Hybrid electric vehicles	1,000 to 1,500 watt-hours
Uninterruptible power systems	2,000 to 8,000 watt-hours
Plug-in hybrid vehicles	10,000 to 16,000 watt-hours
Pure electric vehicles	24,000 to 50,000 watt-hours
Utility applications	500,000+ watt-hours

I see a bright future for lithium-ion batteries in high value applications that only need a little battery capacity, but think it's foolish to suggest that lithium-ion batteries will become a dominant technology for plug-in vehicles and stationary applications that are incredibly price sensitive. In the world of economics each battery producer will do its level best to sell its products to the customers that offer the highest margins. In the real world, nothing but the dregs will be left for use in plug-in vehicles and utility applications.

In America Must Rebuild Its Domestic Battery Manufacturing Infrastructure, I explained why R&D spending in the lead-acid battery sector was curtailed in the mid-70s after maintenance free valve regulated batteries were perfected and brought to market. Then I explained that while lead-acid research was being curtailed, the emergence of portable electronics led to rapid and sustained growth of R&D spending on advanced batteries, composites and a host of new materials. The dynamic didn't change until the turn of the millennium when emerging large-scale energy storage needs gave researchers reason to go back and investigate the potential impact of new manufacturing methods and materials on old-line battery chemistries. Once the work got started, the result was almost magical.

To date, the most important development in the lead-acid world has been Axion Power International's (AXPW.OB) PbC battery, an asymmetric lead-carbon capacitor that was discussed at length in a recent report from the Naval Research Laboratory, which concluded the PbC and similar electrochemical capacitors have the inherent potential to:

• achieve much higher energy densities than supercapacitors, while maintaining a relatively fast charge-discharge response compared to conventional batteries;
• offer longer cycle life and lower maintenance;
• result in significant reductions in the weight and volume of power systems;
• facilitate the evolution and deployment of hybrid-electric military vehicles; and
• facilitate the development of regenerative power systems for cranes and other naval applications.

Equally important research has been quietly progressing at companies like General Electric (GE), which is developing a molten sodium battery for use in hybrid locomotives and stationary applications, and Italy's FIAMM, which recently joined forces with Switzerland's MES-DEA to accelerate the commercialization of the Zebra battery through a newly formed company named FZ Sonick. Over the next year FZ Sonick plans to triple its production capacity to 300 MWh per year and offer higher energy-density systems at prices that are competitive with lithium-ion. Given MES-DEA's twelve year operating history that has put thousands of electric cars, trucks and busses on the road and subjected them to rigorous testing in challenging conditions like the Alps and northern Italy, I expect FZ Sonick to rapidly become a strong competitor in the energy storage sector.

The PbC is basically a power technology that is best suited to repetitive charge discharge cycling like you find in automotive stop-start systems. Molten sodium batteries, in comparison, are basically energy technologies that are best suited to storing large amounts of energy. The key features that the PbC and molten sodium batteries have in common are that neither is a silver bullet, both are old-line chemistries that rely on cheap and plentiful raw materials, both can be easily recycled in existing facilities and both can be dramatically improved by using advanced manufacturing methods and materials that were developed in the last two decades for use in other products. Those common features leave both technologies in a position where they have substantial disruptive potential because there is ample room for improved performance and reduced cost without reinventing the wheel.

The following graph came from FZ Sonick's presentation at yesterday's session of the Electricity Storage Association's 20th Annual Meeting in Charlotte, North Carolina and shows where electrochemical capacitors and sodium batteries currently fall in a hierarchy of output energy densities. Both will improve with time and experience, but molten sodium could theoretically improve to a point where it eclipses metal-air for the energy density crown.



The next graph comes the ESA's website and shows where electrochemical capacitors and sodium batteries currently fall in a hierarchy of relative capital cost per cycle. Here too, both will improve with time and experience.



In a July 2008 report for its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program, Sandia National Laboratories predicted that the cost of asymmetric lead-carbon capacitors like the PbC would fall by at least 50% over the next decade and the cost of molten sodium batteries would fall by up to 80%. The price declines won't arise from fundamental changes in battery chemistry. Instead they'll arise from the normal learning curve gains that arise whenever a disruptive technology is introduced to the market and improved by profit-motivated manufacturers.

I have no doubt that lithium-ion chemistry will continue to advance and that lithium batteries will be the technology of choice for applications where size and weight are critical, and price is not a priority. But I can't buy the proposition that they'll defy economic gravity and supplant inherently cheaper technologies like the PbC, which is better suited to low value power applications, and molten sodium, which is better suited to low value energy applications.

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 01:04 PM | Permalink | Comments (3)

John Petersen

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

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

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



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

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



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



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



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

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



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

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

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

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

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

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

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

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

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

John Petersen

In the wake of last fall's initial public offering by A123 Systems (AONE) I wrote a four part series on battery investing for beginners. Over the last six months, changes in the storage sector have been coming at a fast and furious pace and many of my recent blogs have focused on technical minutiae rather than the stock market. They've led to heated debate with die hard EV advocates who don't understand the difference between technical and economic reality and religious belief, but I'm not sure how useful they've been for investors who see the potential in energy storage and want to understand how to position their portfolios to capitalize on the opportunities. Since my new followers outnumber old friends and critics by a wide margin, and that points to a surge of interest among mainstream investors, I've decided to back up and try to refocus my attention on the fundamental forces that are shaping the energy storage sector.

Economic fundamentals
 
Everybody hates the inexorable upward spiral in oil prices and we all have a favorite scapegoat to blame. For some it's evil oil companies and ruthless speculators, for others it's grasping and corrupt foreign governments and for others still it's the eco-religious who've consecrated promising oil and gas exploration frontiers as shrines to their green goddess. My favorite explanation comes from a classic December 20, 1973 column by the late Art Buchwald who laid the blame squarely at the feet of the Harvard Business School:

"Almost every sheik now in charge of oil policy for his country was trained at Harvard. Everything they learned there they have put into practice to the detriment of the Free World. The Harvard Business School taught the sons of Arab potentates how to sell oil, raise prices and demand outrageous profits for the black gold they have in the ground. Had these same sons been sent to the University of Alabama, Oklahoma or Texas, they would now be involved in developing football teams instead of putting the screws to everyone."

In the end, there's only one fact that matters. The world's appetite for oil has grown faster than the ability to produce it and immutable laws of supply and demand have had their way with prices. Everything else is a sideshow. The scary news is that oil prices have nowhere to go but up and the only way to avoid the financial pain at the pump is to accept individual responsibility and become more efficient. Ultimately, higher oil prices will be the cure for high oil prices.

Oil prices are foremost in our collective consciousness because we all buy petroleum in minimally processed form on a weekly basis. While the changes are less obvious, prices for every major commodity have been following a relentless upward trend for decades with no signs of moderation. In other words, the world's appetite for everything is growing faster than the ability to produce anything. We're careening toward a commodity cliff at 180 miles an hour and nobody seems to notice because we can't take our eyes off the gas gauge. The problem isn't just peak oil; it's peak everything.

I'd love to tell you that things are going to get better, but they're not. We live on a planet where six billion poor live in squalor and deprivation while 500 million of us enjoy relatively comfortable lives. As long as the poor didn't know that there was more to life than mere subsistence, they neither contributed to nor demanded from the global economy. For better or worse, the information and communications technology revolution gave half of them cell phones so the cat's out of the bag and the existence of a better life is no longer a secret. For the first time in history, we live in a world where more than half of the population knows that a better life exists and they all want a small slice of the economic pie. Human nature being what it is, their first natural response will be to work harder and compete for a place at the global economic table. If that doesn't work, their second natural response is likely to be a far less pleasant.

The challenge of our age is not changing our carbon footprint because every ton of coal we don't burn in developed countries will be burned somewhere else. The same holds true for oil and natural gas. The inconvenient truth is that global consumption of these energy resources will continue apace no matter what we do and if antrhopogenic global warming is more than the latest in a long-string of frightening but profitable alarmist theories, it's already too late to change the future and humanity will have to do what it's done since the dawn of time – adapt.

In the final analysis, our only challenge is finding relevant scale solutions to critical shortages of water, food, energy and every imaginable commodity. Whether we like it or not, the days of plenty have already passed and we must turn our attention to eliminating waste now, because if we don't make room at the table for six billion new mouths the only possible outcomes are catastrophic conflict and horrific environmental devastation.

Last week I described cleantech as "an ethical system based on the responsible application of technology to optimize the use of natural resources and increase the well-being of the six billion people that live on this planet." It all boils down to using every available resource for its highest and best purpose; and that's where storage becomes a critical enabling technology. It can reduce waste in transportation by capturing braking energy for immediate reuse. It can reduce waste in wind and solar power by smoothing out inherent variability. It can reduce waste in the power grid by smoothing out load fluctuations and potentially shifting power from when it's produced to when it's needed. In short, storage is the beating heart of cleantech and an investment mega-trend that will probably outlive us all. Storage is not, however, a silver bullet that can solve all of humanity's problems.

Technical fundamentals

The last forty years have been a time of mind-boggling progress in information and communications technology. As a result, everybody knows next years' products will be more powerful and cheaper than last years' products. We've all gotten used to the idea that Apple can launch iPad in April and sell millions by the end of the year. We've also come to expect that new products will be immediately successful and highly profitable. Unfortunately, none of the factors that drove the information and communications revolution have any bearing on energy storage, or for that matter cleantech in general.

The fundamental technical difference is that the laws of physics ruled our last industrial revolution. Those laws gave innovators the ability to improve performance through miniaturization and double capacity every 18 to 24 months. With minor exceptions, the laws of chemistry rule energy storage. Those laws are less flexible to begin with and they're subject to absolute natural limits. In a Moore's Law world, the performance progression is 1, 2, 4, 8, 16, and each new generation of products needs fewer high-cost material inputs than its predecessor. In the world of chemistry, the progression is 50%, 75%, 87.5%, 93.75%, and each generation of products requires more high-cost material inputs than its predecessor. In a Moore's Law world, the time between generations is falling, but in the world of chemistry a generational change takes seven to ten years and the time lags are increasing.

The bottom line for investors is that energy storage is subject to a different set of rules and while progress is inevitable, it will be very time consuming and very expensive. Over 90% of the advances announced by research scientists will be too expensive or complex to successfully bridge the gulf between science and a manufactured product. The 10% that can bridge the gap will typically require a decade of product development and industrial engineering. As a result, most advances will be modest incremental improvements and while disruptive changes are always possible, they'll usually arise from the combination of new materials with established chemistries. Where our last industrial revolution soared on the wings of eagles, the cleantech revolution will be a long hard slog through an alligator infested swamp.

Emergence of Storage as a Discrete Sector

There is little in life more boring than a battery. In fact, the only time most of us even think about our batteries is when they need to be charged or replaced. It's a classic love hate relationship. We want them, we need them and we know in our hearts that they're going to fail just when we need them the most. Is it any wonder that the modifier most frequently used with with the word battery is 'damned?'

Until a few years ago there were two principal types of batteries that were used for widely divergent applications and didn't face much in the way of crossover competition. Lead-acid batteries started cars, provided uninterruptible power for critical infrastructure and provided traction power for golf carts, forklifts, wheelchairs and the oddball electric car. Advanced batteries like NiCd, NiMH and lithium-ion powered portable electronics and power tools.

Energy storage entered a new epoch in 1999 when Toyota introduced a radical product named the Prius, a hybrid electric vehicle, or HEV, that captures some of the energy normally lost in braking, stores it in a battery, and then uses the stored energy to boost the next acceleration cycle. Over the last decade the Prius has earned a sterling reputation as the most fuel-efficient car in the fleet. In the process Toyota became the undisputed King of Hybrid Hill and built an intellectual property fortress that made life almost impossible for automakers that wanted to compete, but couldn't bear the humiliation of licensing Toyota's technology. So instead of innovating, the laggards went back to the scrapheap of automotive history, resurrected the inherently flawed concept of a battery powered electric vehicle and then excused their lack of imagination with the tired promise that "this time it's different." Experience tells me that this time is never that different.

While Toyota was making impressive progress in transportation, a second and equally important change was occurring in wind and solar power. After 25 years on the fringe, these clean power technologies finally reached an inflection point where they promised nameplate cost parity with conventional power sources within a few years. The only fly in the ointment was that the sun doesn't always shine and the wind doesn't always blow, which limits the usefulness of these variable power sources in countries that expect 99.9999% reliability in the electric grid. Despite the nameplate cost parity claims, the reality is that wind and solar are intermittent and a generator that provides variable power for part of the day isn't equivalent to a conventional plant that provides stable power 24/7. In the end, the best way to maximize the value and reliability of wind and solar is to couple them with cost-effective storage to smooth out the variability and shift power from when it's generated to when it's needed.

A third evolutionary driver that has emerged over the last few years is the recognition that our current power grid isn't up to the challenges of the future and it will need to be upgraded to a smarter, more stable and more efficient system over the next couple decades. While there are only a few grid-scale applications that make economic sense in today's environment, big changes are afoot and the prize to companies that can deliver cheap utility scale energy storage systems is immense.

The rapidly escalating demand for energy storage in cleantech applications created a huge problem for battery manufacturers because none of the technologies we relied on in the last century were good enough or cheap enough. Lead-acid batteries had always been the dominant technology for large-scale storage systems, but they didn't have the durability and cycle-life needed for the new applications. Similarly, advanced batteries were great when it came to durability and cycle-life in portable electronics, but they were designed to store a few watt-hours of energy for devices that would be replaced every couple of years, not mega-watt hours for an industry that thinks in terms of decades. For several years, battery manufacturers worldwide have been working feverishly to upgrade their products to meet the new demands. While they're all making progress, energy storage is not a horse race and there will never be a single winner. Instead there will be a broad range of technologies serving a broad range of needs and every company that brings a cost-effective product to market will have more business than it can handle.

Cheap vs. Cool

There are two basic kinds of energy storage products: cool devices like NiMH batteries, lithium-ion batteries, high-speed flywheels and supercapacitors that promise extraordinary performance and are objectively expensive; and simpler devices like lead-acid batteries, flow batteries, sodium nickel chloride batteries and low-speed flywheels that make less dramatic claims and are far cheaper. My favorite source of cost data on energy storage technologies is a July 2008 report from the Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program at Sandia National Laboratories. While critics often suggest that the Sandia numbers should be ignored because they're not as optimistic as forward looking statements and stories in the mainstream media, I believe the Sandia estimates are less prone to puffery and unbridled optimism.



There are three basic types of pure-play energy storage investments: established manufacturers with sustainable business models, entrepreneurial companies that are developing new technologies, and Chinese companies that have listed their shares in the U.S. but won't be players in America's domestic battery industry. To allow for fundamental differences among their technologies and business models, I've segregated the universe of publicly held pure play energy storage companies into five classes as follows:

Cool	Cool	Cheap	Cheap	Chinese
Emerging	Sustainable	Emerging	Sustainable	Companies
Ener1 (HEV)	A123 Systems (AONE)	Axion Power (AXPW.OB)	Enersys (ENS)	Advanced Battery Technologies (ABAT)
Valence Technologies (VLNC)	Maxwell Technologies (MXWL)	ZBB Energy (ZBB)	Exide Technologies (XIDE)	China BAK Battery (CBAK)
Altair Nanotechnologies (ALTI)			C&D Technologies (CHP)	China Ritar Power (CRTP)
Beacon Power (BCON)			Active Power (ACPW)	Hong Kong Highpower (HPJ)

Since I started writing this blog my basic premise has been that market expectations for companies with objectively cool technologies are too optimistic while market expectations for companies with objectively cheap technologies are too pessimistic. That premise led me to believe that over time the cheap technology companies would outperform the cool technology companies. The following graph tracks the composite market performance of my tracking categories from November 14, 2008 through March 31, 2010.



The past is never a guarantee of the future, but my basic premise seems to be holding up pretty well.

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 11:30 AM | Permalink | Comments (10)

John Petersen

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



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

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

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

To their credit the Electrification Coalition has always been upfront about the enormous challenges that electrification of personal transportation entails, including:

1. The current high cost of batteries;
2. The current lack of reliable access to refueling infrastructure for GEVs;
3. Regulatory and coordination problems that will complicate interface with the electric power sector; and
4. Consumer acceptance issues.

To overcome these seemingly insurmountable problems the coalition members propose several policy initiatives that will use your tax money to underwrite their business goals and pay for somebody else's consumption. The principal policy initiatives are summarized below, along with my personal observations.

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

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

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

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

Disclosure: None.

Posted by John Petersen at 01:57 AM | Permalink | Comments (2)

John Petersen

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

The Final Rule Release begins with several hundred pages of introductory materials that describe the key efficiency technologies automakers are expected to implement between now and September 2015. It describes start-stop as:

• 12-volt micro-hybrid (MHEV) – also known as idle-stop or start-stop and commonly implemented as a 12-volt belt-driven integrated starter-generator, this is the most basic hybrid system that facilitates idle-stop capability. Along with other enablers, this system replaces a common alternator with a belt-driven enhanced power starter-alternator, and a revised accessory drive system.

After a lengthy discussion of how each of the principal efficiency technologies will contribute to the overall goal and explaining the freedom the individual automakers will have to pick and choose solutions, the Final Rule Release includes the following table, on page 484, that identifies the automakers and estimates the percentages of their 2016 model year fleets that will incorporate each technology.



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

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

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



For eighteen months I've been predicting with increasing confidence that the cleantech revolution would start with baby steps, rather than giant leaps, and that advanced lead-acid and lead-carbon batteries would play a crucial role in the widespread implementation of micro, mild and strong hybrid electric vehicle [HEV] technologies. My confidence ramped up a notch or two last August when President Obama announced $2 billion in ARRA battery manufacturing grants that included:

• $34.3 million to Exide Technologies (XIDE) with Axion Power International for the "production of advanced lead-acid batteries, using lead-carbon electrodes for micro and mild hybrid applications;" and
• $32.5 million to East Penn Manufacturing for the "production of the UltraBattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications."

My confidence continued to rise as reports from the Energy Information Administration, Frost & Sullivan, Roland Berger Strategy Consultants and most recently Lux Research concluded that start-stop technology would become a standard option for new vehicles sold in both Europe and the U.S. over the next few years. Now that the NHTSA and EPA have weighed in with their estimate that 42% of the 2016 model year new car fleet will be equipped with start-stop, my confidence level couldn't be higher.

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

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

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

Posted by John Petersen at 02:06 PM | Permalink | Comments (4)

John Petersen

On April 1st the National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA) announced a joint final rule establishing fuel economy standards for all light duty vehicles sold in the United States. Since the existing standards don't apply to light trucks, I used vehicle sales forecasts from the Energy Information Administration's "Annual Energy Outlook 2010" to estimate a current baseline fuel economy of 19.6 mpg. The new rules will be phased in over a five-year period beginning with the 2012 Model Year and are certain to drive rapid evolution in the auto industry. The following table summarizes the new fuel economy standards:

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

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

In plain English, the new rules mandate a 26% improvement in passenger car efficiency and a 30% improvement in light truck efficiency by September of 2011, with long-term goals of 45% and 47% by September of 2015. Overall, the EPA expects to bring CO2 emissions for the new car fleet down to 250 grams per mile by the 2016 Model Year.

The US is not alone in its implementation of stringent fuel efficiency standards. In April 2009, the EU adopted new CO2 emission standards that establish a fleet wide target of 130 grams of CO2 per km that will be implemented on the following timetable:

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

While the EU CO2 standard appears to be more stringent than the US CAFE standards, the two are fairly comparable because the EU standard is subject to adjustment at 45.7% of the base rate for new passenger cars that weigh more than 1,372 kg, or about 3,000 pounds. In the case of a European car like a BMW 5-Series that weighs closer to 4,000 pounds, a fairly typical American value, the allowable CO2 emissions will be 150 grams per km, which works out to 240 grams per mile, a figure that's almost identical to the US target.

While it may be fun to debate the long-term viability of plug-in vehicles, which I characterize as unconscionable waste masquerading as conservation and even the first great fraud of the new millennium, it's clear that plug-ins will offer no help by 2012 and their contribution to meeting 2016 fuel efficiency standards will be insignificant. Therefore the heavy work will have to be done by conventional fuel efficiency technologies that are available and cost effective today.

In mid-February, I wrote an article titled Energy Efficiency in the Automotive Sector that included the following summary of HEV and automotive efficiency technologies I assembled from the www.fueleconomy.gov website.

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

In a presentation at last fall's Frankfurt Motor Show, Dr. Wolfgang Bernhart of Roland Berger Strategy Consultants predicted that full or partial powertrain electrification would become a critical automotive efficiency technology by 2020 and forecast high scenario market penetration rates as follows:

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

If the Roland Berger forecast is accurate, stop-start engine systems will likely become a standard feature within 10 years; a conclusion mirrored in an October 2009 report from HSBC Global Research. The forecasts were a good deal easier to ignore a couple months ago than they are today.

Last month Lux Research published a new industry report titled "Emerging Technologies Power a $44 Billion Opportunity for Transportation and Grid" that forecast energy storage system sales growth of $890 million for stop-start vehicles by 2015. Of that total, Lux reported that roughly 10% would be spent on supercapacitor-based systems and the remaining 90% would be spent on advanced lead-acid batteries.

After the NHTSA announcement, I called the author who confirmed that his estimate of $890 million in stop-start battery purchases was based primarily on EU regulations, and the subsequent adoption of the new CAFE regulations would require a significant upward revision in his forecast. My guess is that by the time the dust settles, the forecast revenue gains for advanced lead-acid battery producers will be on the order of $2 billion by 2015, a number that handily eclipses Lux's forecast of $1.2 billion in lithium ion battery sales growth during the same period.

The four publicly traded U.S. companies that stand to benefit most from the widespread implementation of stop-start technology as standard equipment in the U.S. and Europe are Johnson Controls (JCI) Exide Technologies (XIDE) Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB). For more detailed information on the strengths and weaknesses of these companies in the stop-start space, my author's archive at Seeking Alpha is a good starting point that provides a variety of detailed discussions, along with copious links to third-party source documents.

While there are times when I feel like a broken record for revisiting the same topics over and over again, the last twenty months have been a time of tremendous change in the energy storage sector and every relevant development has supported my premise that cool technologies will progress more slowly than the market expects and companies that manufacture objectively cheap products have a far greater economic potential over the next five years.

I continue to believe the baby steps of the cleantech revolution will be taken with cheap and reliable solutions like advanced lead-acid batteries. Something better, stronger and cheaper will undoubtedly emerge in the future. But until it does we need to go to work with the tools we have, solve our problems through old fashioned hard work and be ready to embrace new technologies when they prove to be something more than airbrushed centerfolds.

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 11:49 AM | Permalink | Comments (4)

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

Since I'm frequently chastised for holding old fashioned views when it comes to vehicle electrification, I'll start this article by quoting one of the oldest known versions of a common English proverb, "A byrd in hand - is worth ten flye at large." While this theme is not always clear in my writing, it's never far from my thoughts. In fact it's the foundation of my conviction that manufacturers of cheap energy storage products are better investments than developers of cool energy storage products and batteries are great at minimizing waste but miserable at replacing fuel tanks. Just for this week, I'm going to take the debate down a notch and focus on what I see as a bird in the hand in the energy storage sector.

I've written about new European standards that will require automakers to reduce CO2 tailpipe emissions to 130 g/km by 2015. I've also written about new U.S. CAFE standards that will require automakers to achieve an average fuel economy of 35.5 mpg by 2016. While I've never written about the rest of the world, many governments are jumping on the bandwagon and adopting emission standards based on the European model. The following chart from Tenneco (TEN), a global leader in automotive fuel efficiency and emission control systems, provides a summary overview of the current global regulatory landscape.



For the last couple of years, a huge amount of hype and media attention has focused on a new generation of plug-in vehicles that automakers plan to introduce soon. What these stories invariably fail to recognize is that one or two million plug-in cars may contribute to the cause, but the overwhelming bulk of the progress must come from efficiency gains in the 48 million cars that can't be built with plugs because the world can't make enough batteries. From my admittedly stodgy perspective, the 48 million cars are a plump bird in the hand while one or two million plug-ins are, at best, wild geese on the wing.

In mid-February, I wrote an article, Exploring Energy Efficiency in the Automotive Sector, that included the following summary table of efficiency technologies for cars without plugs:

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

While all these efficiency technologies are important, the only ones I'm qualified to write about are stop-start systems, mild hybrids and full hybrids.

In a presentation at last fall's IAA Investor & Analyst Conference at the Frankfurt Motor Show, Dr. Wolfgang Bernhart of Roland Berger Strategy Consultants predicted that automotive powertrain electrification would become a critical efficiency technology by 2020 and forecast high scenario market penetration rates as follows:

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

While some may find the distribution surprising, it actually fits nicely into the concept of the standard bell shaped curve that we all learned about in grade school when report card time rolled around. A few buyers will underperform and continue to buy vehicles with internal combustion engines; most average and above average buyers will buy vehicles with stop-start and HEV systems; and a few truly committed souls will buy vehicles with plugs. As an investor looking to minimize risk, I prefer mass-market certainty to early adopter potential.

The biggest impediment to the widespread adoption of stop-start systems is that stopping and restarting an engine several times during a typical daily commute is very hard on flooded lead-acid starter batteries. While stop-start systems don't need an exotic chemistry like NiMH or Li-ion, they do need a better grade of absorbed glass mat, or AGM, battery that can withstand heavier cycling. Where automotive OEMs have historically paid about $55 each for starter batteries, advanced batteries for stop-start applications can cost from $150 to $250 each. The price difference may be pocket change in the price of a car but it's a huge revenue opportunity for the companies that can make starter batteries for millions of stop-start vehicles.

Building top line revenue in any business is hard and the only ways I know are to sell more products or to sell higher value products. The same is true of bottom line profitability where the only options are to improve margins or cut costs. A business that can build revenue by increasing unit prices and simultaneously increase profits by selling at a higher margin is rare, but that's the direction the lead-acid sector is heading in. Assuming a modest price differential of $100 per vehicle, the incremental revenue to starter battery producers should be on the order of a billion dollars within five years and three billion dollars within ten years. Since the revenues will come from product upgrades rather than increased volumes, the stresses on capital spending budgets, supply chains and distribution networks should be significantly lower than they would be with a new product. The net result should be higher revenues and profits, which are always good things for low-priced stocks.

No matter how the stop-start market ultimately unfolds, starter battery manufacturers will thrive. If the OEMs bite the bullet and buy better starter batteries, revenues from original equipment sales will soar. If OEMs don't upgrade their starter battery specifications when they introduce stop-start systems, revenues from replacement battery sales will soar. It's just an updated version of the old Fram Oil Filter advertising campaign, "You can pay me now, or pay me later."

The three publicly traded U.S. companies that stand to benefit most from the widespread implementation of stop-start systems are Johnson Controls (JCI) Exide Technologies (XIDE) and Axion Power International (AXPW.OB).

JCI and Exide are global competitors in the OEM battery space and they each book billions in annual revenue from the starter battery business. JCI's Varta unit is selling batteries for over a million stop-start vehicles annually. Exide is using the proceeds of a $34 million DOE battery-manufacturing grant it received last August to build a new factory that will make batteries for up to 1.5 million stop-start vehicles per year. Both companies truly are bird in the hand investment opportunities that are certain to see significant revenue and profit growth over the next few years from market mechanisms that are already in place.

Axion is a more speculative microcap company that spent the last six years developing a lead-carbon battery technology that's ideally suited to the extreme cycling demands of stop-start systems. During the R&D stage, Axion's prototype PbC® batteries withstood over 1,600 cycles at a 90% depth of discharge while top quality AGM batteries made by others failed after 300 to 500 cycles. After entering into a worldwide supply agreement with Exide last April, the two companies sent pre-commercial PbC devices to several first tier automakers early last summer. Ten months later, the testing continues to yield positive results and negotiations are apparently in process for road testing of PbC batteries in pre-production stop-start vehicles. If the testing turns into orders, Axion will be able to leverage Exide's global manufacturing base by providing carbon electrode assemblies for co-branded products. It's not quite a bird in the hand, but it's a lot closer than the flock of wild geese.

I'm a former director of Axion and a big stockholder, so I'm clearly cheering for my home team. That being said I know several of Axion's directors well enough to feel confident that they wouldn't have closed a $26 million down-round financing in December if management wasn't preparing for a major capital spending program. I expect that we'll hear a good deal more about Axion's short-term plans when its annual report is filed at the end of the month. The one thing I can say for certain is that I feel much better about my risk/reward profile today than I did in October 2006 when I bought the bulk of my shares at a price that's within spitting distance of the current market.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock, together with a small long position in Exide Technologies (XIDE).

Posted by John Petersen at 10:49 AM | Permalink | Comments (2)

John Petersen

It's no secret that I think plug-in electric vehicles are unconscionable waste and pollution masquerading as conservation. To support my opinions, I've published an easy to follow Excel spreadsheet that shows why plug-ins are 5x to 6x less effective than HEVs when it comes to reducing national gasoline consumption and 9x to 12x less effective than HEVs when it comes to reducing national CO2 emissions. To date, the only challenges to my analysis have come from die-hard EV fanatics who seem to believe battery factories grow on trees and raw material supply chains sprout like flowers in an alpine meadow.

In early February, Joann Muller of Forbes warned of a coming Electric Car Battery Glut based on published estimates that global lithium-ion battery manufacturing capacity would reach 36 million kWh by 2016. Just this week, Roland Berger Strategy Consultants released a study that forecasts a lithium-ion battery supply bubble between 2015 and 2017 and predicts an industry-wide consolidation where "only six to eight global battery manufacturers will survive in the next five to seven years."

Despite my abiding disdain for plug-ins and my high regard for Forbes and Roland Berger, I don't buy the theory that excess manufacturing capacity will be a major problem for two simple reasons. First, I believe the Roland Berger forecast of global demand for 1.6 million HEVs in 2015 is far too low given the history of the HEV market and Toyota's (TM) plans to increase its production capacity to 1 million HEVs per year by 2011. Second, the Roland Berger analysis does not consider large format lithium-ion battery demand outside the automotive sector, which is where I expect the exponential growth to occur.

The first hybrid electric vehicles were introduced in 1999 and through 2007 the annual sales growth was spectacular. While the following graph of US HEV sales from hybridcars.com shows that unit volumes fell off a cliff in 2008 and 2009, the decline is easily attributed to two independent but identifiable factors; the economic collapse of 2008 and the growing hype over plug-in vehicles that caused many likely HEV buyers to delay new car purchase decisions.


Now that the roll-out dates for the GM Volt and the Nissan Leaf are only months away, two years of plug-in hype is about to hit an economic brick wall when potential buyers begin making relatively simple total cost of ownership calculations like this one.

	Conventional	Prius-class	Volt-class
	ICE	HEV	PHEV
Sticker price	$18,000	$22,500	$40,000
Tax credits			-$7,500
220 Volt outlet			$2,500
Amount financed	$18,000	$22,500	$35,000
Monthly payment	$307	$384	$597
(60 months at 7%)
Monthly gasoline	$105	$63	$21
($3 per gallon)
Monthly electricity			$20
($0.10 per kWh)
Monthly cost of ownership	$412	$447	$638

The big beneficiary of this exercise will be the Prius-class HEV, particularly if the buyer uses an assumed gasoline price in the $5 to $6 range. No matter how you fiddle with the numbers, PHEVs will come in a distant third for any buyer who thinks the green in his wallet is more important than the green in his cocktail party conversation. Jerry Flint of Forbes recently predicted that Nissan's Electric Car Will Flop. I'll go Jerry one better and predict that every car with a plug will face a similar fate.

While the idea of plug-in cars is just plain balderdash, there is another developing transportation trend that holds immense potential for lithium-ion battery manufacturers. That trend is e-bikes and e-scooters, which are rapidly becoming the vehicle of choice throughout Asia and the developing world. To put things in perspective, Pike Research is forecasting global sales of 80 million electric two-wheeled vehicles in 2016. When you consider that the average e-bike needs about 500 wh of batteries, it's pretty easy to see how an 80-million unit E2W market could make a huge dent in a 36 million kWh battery market. It's not a market that most companies and investors are focusing on, but it's a market that stands a very good chance of sopping up any excess supplies of large-format lithium-ion batteries.

Currently, the only thing standing in the way of lithium-ion dominance of the E2W market is price. While roughly 85% of e-bikes currently use lead-acid batteries because they're cheaper, the E2W market is ripe for the picking by lithium-ion batteries because size and weight truly are mission critical constraints for a 50-pound vehicle that runs on a combination of battery and muscle power. In its report on the coming battery glut, Roland Berger forecast that the price of automotive grade high energy lithium-ion battery cells would fall from the current level of $650 per kWh to $400 per kWh in 2015 and $275 per kWh in 2020. Consumer products grade cells should be cheaper. As lithium-ion battery supplies increase and reasonable economies of scale are realized, there's little question in my mind that they will become the battery of choice for the E2W market.

Currently, the only company I track that focuses on the E2W market is Advanced Battery Technologies, Inc. (ABAT). They've been making e-bike batteries for years and decided to vertically integrate last year when they bought Wuxi Angell Autocycle, a Chinese e-bike manufacturer. In my view, it was a much smarter purchase than Ener1's (HEV) stake in Th!nk Global or A123 Systems' (AONE) stake in Fisker Motors. I haven't changed my view that the lead-acid sector is more attractively priced than the lithium-ion sector, but if I had to invest in lithium-ion, ABAT would be at the top of my list because its profit history is exemplary and its business strategy just makes sense in a world where six billion people are trying to earn a small piece of the lifestyle 500 million of us have and take for granted.

Disclosure: None.

Posted by John Petersen at 10:00 AM | Permalink | Comments (10)

John Petersen

The last few weeks have offered a fascinating object lesson for believers in Benjamin Graham's theory that "In the short run the market acts like a voting machine, but in the long run it acts like a weighing machine." Since January 4th I've watched in awe as Exide Technologies (XIDE) lost roughly 30% of its market value and Ener1 (HEV) lost closer to 40%. The difference is that Exide took a voting machine beat down because it lost a well-known but financially immaterial customer while Ener1 seems to be caught in the early stages of a weighing machine meltdown. I don't want to sound like either Pollyanna or a nattering nabob of negativism, but bargain hunters need to understand that some price declines create opportunity while others do not.

Exide is a global leader in the lead-acid battery business that just reported a nine-month loss of $52 million on sales of $2 billion. While the loss was in line with expectations, the stock declined by 30% on unanticipated news that Wal-Mart Stores (WMT) had decided to shift over to Johnson Controls (JCI) as a sole-source supplier of transportation batteries. The press reports invariably described Wal-Mart as a major customer of Exide's Transportation Americas group and painted a dire picture. During Exide's quarterly conference call, however, it became clear that Wal-Mart represented roughly 5.5% of Exide's total revenue and while the loss was inconvenient, it was far from devastating. While I expected the conference call to result in a fairly sharp rebound, it seems that the pen is mightier than the conference call and stock market voters still don't understand that the long-term impact will probably not be material.

Over the years I've known a lot of businessmen who signed supply contracts with Wal-Mart. Interestingly, they all told the same 'boat owner story' where the two most memorable days in their careers were the day they got the Wal-Mart contract and the day they lost it. Everything in between was low-margin misery accompanied by incredible working capital pressures. While Exide's management team was circumspect in their discussion of the Wal-Mart relationship, my sense is that they're not wasting any time crying over spilt milk and have simply re-focused their attention on developing new customers to maintain or improve capacity utilization rates. In any event, it's clear to me that the market has over-reacted to a relatively insignificant event and last Friday's closing price of $5.37 represents an attractive entry point. After all, it's not often that one can scoop up a company like Exide for 15% of sales while Johnson Controls and Enersys (ENS) trade for 64% and 69% of sales, respectively.

For as long as I've been writing this blog Ener1 has been my poster child for lithium-ion battery hype. Its market capitalization has always exceed tangible book value by a factor of 10x to 20x and the widely touted revenue growth that was just around the corner 20 months ago is still just around the corner. To date, the bulk of Ener1's reported revenues have come from its October 2008 purchase of Enertech, a Korean subsidiary that manufactures batteries for cell phones and consumer electronics. The following table summarizes Ener1's quarterly revenues and net losses for the last two years.

	Q-1	Q-2	Q-3	Q-4
	(000's)	(000's)	(000's)	(000's)
2009 Revenue	$8,192	$7,537	$8,117
2009 Net Loss	($7,308)	($12,861)	($15,837)
2008 Revenue	$97	$437	$39	$6,275
2008 Net Loss	($22,900)	($8,038)	($9,120)	($12,402)

The big problem with an inflated market price is that it's an impediment to future financing. Ener1 has not had a truly attractive balance sheet since Q-2 of 2008 when it reported $32 million of working capital and $35 million of net tangible assets. Over the next 15 months it accumulated $64 million of goodwill and intangible assets and by Q-3 of 2009, its working capital was a paltry $2.4 million. After penciling in disclosed fourth quarter financing and investment activity and likely fourth quarter losses, I figure Ener1 will finish the year with a small working capital deficit and net tangible assets of $50 to $60 million.

In late January, Ener1 entered into a $60 million open market stock sales agreement with Jefferies & Company that mirrored a $40 million open market stock offering it conducted over a four-month period in the summer of 2008. Unless the current offering is wildly successful over the next 45 days, it's easy to imagine some bare-knuckle discussions with the auditors over the wording of their next opinion letter. The more important issue, however, is that the open market stock sales agreement cannot reasonably be expected to provide enough working capital to offset future losses and provide an additional $60 million for capital expansion, which is an absolute requirement of the DOE grant Ener1 was awarded last August. Without an underwritten financing of at least $100 million, I don't see how Ener1 can provide matching funds for the DOE grant and cover its losses during the construction period. With an ugly year-end balance sheet and a market capitalization that represents 8x to 10x net tangible book value, I have a hard time imagining a happy outcome for investors who try to catch this falling knife.

Disclosure: Author owns a small long position in Exide.

Posted by John Petersen at 09:51 AM | Permalink | Comments (1)

John Petersen

Last month the DOE released the 2009 Annual Progress Report for its Energy Storage Research and Development Vehicle Technologies Program. Like the 2008 Annual Progress Report I discussed in a February 2009 article titled DOE Reports That Lithium-ion Batteries Are Not Ready For Prime Time, this new report is a relatively upbeat assessment of lithium-ion battery research and development that once again provides a stark reality check for investors in energy storage stocks. In Section III of the Report, which focuses primarily on meat and potatoes issues like R&D objectives, technical barriers, technical targets and recent accomplishments; the DOE summarized the objectives and technical barriers as follows:

Objectives

• By 2010, develop an electric drive train energy storage device with a 15-year life at 300 Wh with a discharge power of 25 kW for 18 seconds and a cost of $20/kw.
• By 2014, develop a PHEV battery that enables a 40 mile all-electric range and costs $3,400.

Technical Barriers

• Cost – The current cost of Li-based batteries (the most promising chemistry) is approximately a factor of three-five too high on a kWh basis for PHEVs and approximately a factor of two too high on a kW basis for HEVs. The main cost drivers being addressed are the high costs of raw materials and materials processing, cell and module packaging, and manufacturing.
• Performance – The performance advancements required include the need for much higher energy densities to meet the volume and weight requirements, especially for the 40 mile PHEV system, and to reduce the number of cells in the battery (thus reducing system cost).
• Abuse Tolerance – Many Li batteries are not intrinsically tolerant to abusive conditions such as a short circuit (including an internal short circuit), overcharge, over-discharge, crush, or exposure to fire and/or other high temperature environments. The use of Li chemistry in the larger (PHEV) batteries increases the urgency to address these issues.
• Life – The ability to attain a 15-year life with 300,000 HEV cycles or 5,000 EV cycles is unproven and is anticipated to be difficult.

The recent accomplishments section includes about 85 pages of discussion on 25 pending research, development, analysis and testing projects that are nowhere near complete. It's clear from the Report that the DOE is coordinating a massively complex and expensive drive to improve lithium-ion batteries to a point where they will be cost-effective in transportation applications. It's equally clear that the effort has a long-way to go before anybody will be able to accurately assess the likelihood that all or any of the pending R&D projects will result in innovations that can survive the often-difficult transition from the laboratory bench to the factory floor. The R&D is critically important, but favorable results are not guaranteed, costs are likely to exceed budgets by a wide margin and timing is anybody's guess. The only certainties are it won't be soon and it won't be cheap.

When I started writing this blog, my central thesis was that energy storage is the beating heart of cleantech and is destined to become a major investment theme that will endure for decades. Storage is an essential enabling technology for wind and solar power, an efficient smart grid and emerging transportation applications. It's also a difficult industry that's constrained by laws of chemistry, requires massive volumes of commodity raw materials and can only be described as capital intensive heavy manufacturing. That means we can reasonably expect steady incremental progress over a the long-term, but the game changing 'Moore's Law' type advances we've come to expect from information and communications technology are simply not going to happen in energy storage. To borrow a concept from John Mauldin, my favorite Seeking Alpha contributor, energy storage is a 'muddle through' industry that will progress in baby steps that take years, instead of quantum leaps that happen overnight.

When you cut through the happy talk and issue advocacy, energy storage is all about minimizing waste and making inherently variable energy sources more reliable. If waste is cheaper than storage, waste will be the rational choice for over 95% of the population who believe the green in their wallet is more important than the green in their cocktail party conversation. Given the nature of the industry, the law of economic gravity will prevail and the cheapest solution that can do the work will earn the lion's share of the market. The future of energy storage is bright, but it's going to be a long hard slog through the swamp and I can comfortably guarantee that we'll never see teenagers on Sunset Boulevard popping the hood to show off and compare their battery packs.

One of the most difficult parts of blogging on the energy storage sector is explaining that when it comes to investing, entry price and timing are the only things that matter. My favorite example is one everybody knows. I've been a Macintosh user since 1988 and had countless arguments over the years about the technical superiority and ease of use of the Mac OS. The contrary argument, of course, was that products from Apple (AAPL) were too expensive compared to budget priced products that used Microsoft's (MSFT) operating system. Over the last few years Apple products have surged to the forefront as they pared prices to more competitive levels and continued their tradition of technical excellence. The following chart from Yahoo! Finance shows the 25 year comparative stock market performance of the two companies.



As a computer user, I've always insisted on owning Apple. As an investor, the better path would have been to own Microsoft for the first 19 years and then shift to Apple for the last six.

In the long-term, I expect every company that brings a cost-effective energy storage product to market to have more business than it can handle. For the next five to ten years, I expect the biggest gains to accrue in companies like Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP), ZBB Energy (ZBB), and Axion Power (AXPW.OB) that make objectively cheap products today to satisfy immediate needs. When and if advanced battery developers like A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) succeed in their individual and collective efforts to make objectively expensive products affordable, portfolio adjustments to reflect the new realities will be essential. But if Apple vs. Microsoft teaches anything, it's that cheap beats cool until cool becomes cheap. Promises don't matter. Price tags do.

Last year I said that I'm a simple-minded creature and believe that little things like costs and benefits matter. When the brand new annual progress report from the DOE concludes that:

• Lithium-ion batteries will not be cost-effective in HEVs unless somebody finds a way to slash costs by 50%; and
• Lithium-ion batteries will not be cost-effective in PHEVs unless somebody finds a way to slash costs by 67% to 80%;

I believe them. When I combine the DOE's conclusions with a recent opinion from the National Research Council that the DOE's price objectives "beyond 2012 are extremely aggressive and are unlikely to be reached by the target date or even for a significant time beyond" cruel reality seems obvious: lithium-ion batteries are still not ready for prime time and the plug-in vehicle frenzy is leading investors and the public down a garden path that can only end in disaster like most technology du jour schemes that are conceived in the halls of government and then sold to the public as the next big thing, including:

25 years ago	Methanol
15 years ago	Electric Vehicles
10 years ago	HEVs and Electric Vehicles
5 years ago	Hydrogen Fuel Cells
3 years ago	Ethanol and Biofuels
Today	PHEVs and Electric Vehicles
2012	Here Be Dragons

Will Rogers said, "There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves." Albert Einstein reportedly defined insanity as doing the same thing over and over again and expecting different results. When will investors learn that technical hype originating from government with a chorus of support from heavily subsidized companies rarely works out well?

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

Posted by John Petersen at 01:37 PM | Permalink | Comments (2)

John Petersen

In one of my first articles, "Battery Technology: A Different Set of Rules," a commenter suggested that I was a bit of a Captain Buzzkill. Eighteen months later it's clear that a lot of readers share that uncharitable view. This morning I had an e-mail exchange with a reader that raised the same basic issues and reminded me that it's been a while since I've discussed the fundamental differences between energy storage and other technology related sectors. Since the subject matter can be very important to investors who want to make sound decisions, I've decided to edit the e-mail exchange and publish it as an article.

Inquiry: I've read your posts and thank you for your insights into the topics you cover. I have to ask this however ... is there not "anything positive" you can say with regards to lithium-ion battery companies? I mean, can't you give credit for anything? It seems to me that in a necessary longer term evolution of technologies they and others DO play a critical role in getting from proverbial A to B for all of us.

Response: I believe several lithium-ion battery developers have the potential to become fine companies and that the world desperately needs all of the lithium-ion, lithium air, sodium sulfur, zinc bromine, lead acid, lead carbon, sodium metal halide and nickel metal hydride batteries we can make. The products are critical to an energy efficient future and so are the companies that make them. The needs are immense beyond imagining but companies that want to survive and thrive in the energy storage sector need to be willing and able to say:

• We can provide batteries for Application A today and earn a reasonable profit;
• With luck we may be able to provide batteries for Application B in X years and earn a reasonable profit; and
• Until the market dynamics change, we won't be able to provide batteries for Application C and earn a reasonable profit.

Any other approach is certain to set up unreasonable expectations in the collective consciouness of the market and over the years I've seen too many examples of disastrous market reactions to unsatisfied expectations. Given my long and sometimes painful experience advising small companies, I have a hard time remaining sanguine when companies start the game by setting their goals too high.

Over the years I've had a number of friends and clients decide that they wanted to sell products to WalMart. The negotiations were long and brutal, but the vendors were always delighted when their products hit the shelf because the sales volumes were immense. Within about six months, they discovered to a man that it was almost impossible to sell anything to WalMart and earn a reasonable profit margin. Within eighteen months they were all out of business.

Selling batteries for electric cars and utility applications is a lot like selling a product to WalMart. Starting negotiations from a position where you're saying "we understand that we won't be able to business with you unless we can slash our costs by at least 50% coming out of the chute" is darned near suicidal. Small companies need to start in markets where they can earn outsized profits while they learn to optimize their activities. Learning to swim in the shark tank is a good way to get eaten.

Right now the lithium-ion battery developers are promising a brave new world of electric cars and grid-based storage. I've shown why electric cars are a horrifically suboptimal use of batteries. I've also seen drafts of a new report from Sandia National Laboratories that shows most grid based applications will require even cheaper batteries than the automotive sector requires. At last fall's EESAT conference in Seattle, Ali Nourai of American Electric Power explained that they're 'technology agnostic" as a company and their current efforts are focused on lithium-ion batteries because they assume that sales into the automotive market will drive lithium-ion battery prices to low enough levels that they'll be attractive for low-value utility applications.

In Joseph Heller's classic novel Catch 22 a character named Milo Minderbinder planned to buy eggs for a dime, sell them for a nickel and make it up on volume. That can't happen in the real world, regardless of what people want to believe.

If the lithium-ion battery developers were all out telling the market that they planned to focus on high value markets that they could serve today and they hoped to expand into other markets as they built experience and improved their technology, I'd be a huge booster. As long as they're promising things that can't happen in the real world, they're either setting the market up for major disappointment or setting themselves up for a string of losses that won't end until a Chapter 11 petition is filed. I can't be a cheerleader for either of those outcomes.

Follow-up: Thanks so much for your kind reply ... Very interesting conclusions is all I can say. This reminds me of none other than solar, and look at where those stocks are this week "as we speak" eh ? Even the "best of the breed" are subject to subsidy cuts as was obvious just the other day, with the announcements out of Germany, proposing to cut more than were the expectations of the market. The only good things that can be said about it is that is causes prices to get cheaper for the end user, and makes the industry far more competitive in the long run I suppose, but it sure does just basically kill positive forward guidance at a time when it sure would be nice to have some, hmmm ?

Reply: Based on the experience of the last 40 years most investors are optimistic about the future of all things alternative energy. In some cases the optimism is warranted. In others, particularly in energy storage, the optimism is dangerous.

Substantially all of the miracles of the information and communications technology revolution were due to advances in the science of physics. Researchers have found ways to use steadily smaller resource inputs to get exponentially larger outputs. It's been true in communications, computing and even solar cells. As a result the idea that it's always possible to do more with less has been burned into our collective psyche and the masses resist any suggestion that another result is even possible.

The biggest problem with energy storage is that it's all based on chemistry, which is limited by an entirely different set of natural laws. On any given atom there are a defined and immutable number of sites where chemical bonds can be formed and reactions can take place. For hydrogen atoms the number is 1; for oxygen atoms the number is 2; for nitrogen atoms the number is 3 and for oxygen atoms the number is 4. I could continue the series but you get the idea. When you put atoms together to make stable molecules, the number of bonds on each side have to match. That's why chemical compounds are express with formula like H20 or CO2 or NH3 or CH4. No matter what we do the ratios can't change, the number of atoms in a gram of material can't change and the number of possible chemical bonding sites in a gram of material can't change.

Most chemical reactions used in battery chemistry are quite efficient to start with, which means that the best researchers can do is work around the margins to maximize the surface area where reactions can occur. There's a lot of talk about nanotechnology in the battery sector but what it all boils down to is grinding materials into extremely fine particles in order to maximize surface area. In the case of some of the carbon compounds used in batteries, surface area has already been optimized to the point where a single gram of material has as much surface area as a football field. About the only advances on the horizon that promise to significantly increase surface area are materials like carbon nanotubes and graphene, but they're terribly difficult to work with and ungodly expensive. Since the materials have been the subjects of intense research and development for the last 10 to 20 years and progress has been extraordinarily slow, I don't expect breakthroughs tomorrow.

The bottom line is that chemistry is grunt manufacturing that requires immense amounts of raw material. The science is progressing every day but you rarely see disruptive changes from companies like Dow, Monsanto, Exxon and the like. The battery industry will be no different.

Because we're dealing with chemistry instead of physics, current lofty expectations of rapid disruptive change are misplaced. There will no doubt be progress, but it will not be rapid or disruptive. The bottom line is progress in the storage sector will mirror progress in the chemical industry in spite of the fact that the the goal is to store electricity.

Conclusion: I'm a huge booster of the energy storage sector and want everybody in the industry to be fabulously successful. The really crazy part is I don't even think about competition between companies because I believe every company that brings a reliable and cost-effective product to market will have more business than it can possibly handle. What I object to are outsized claims of likely technical progress and cost reductions from advances in chemistry in a resource-constrained world. Human beings always want more than they can possibly have because that's the nature of the beast. Promising to satisfy human desires that are beyond the limits of the possible is neither good business nor good public relations.

Posted by John Petersen at 05:44 AM | Permalink | Comments (0)

John Petersen

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

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

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

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

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

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

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

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

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

Incremental manufacturing revenue	HEV	EV
Per vehicle	$4,000	$22,000
Plant total	$1.20 billion	$0.66 billion
Annual gasoline savings
Per vehicle (gallons)	160	400
Plant total (gallons)	48 million	12 million
Annual CO2 emission reduction
Per vehicle (tons)	1.60	2.06
Plant total (tons)	480,000	61,800

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

How about you?

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



Disclosure: None.

Posted by John Petersen at 04:30 AM | Permalink | Comments (14)

John Petersen

Writing an investment blog on hype-riddled sectors like vehicle electrification and energy storage is tough because the topic is emotionally charged and expectations are often based on political promises, issue advocacy, press releases and mainstream media stories that never tell the complete truth. As a result I spend a huge amount of time debunking popular mythology that's 180 degrees out of sync with business realities and responding to commenters who refuse to believe cars with plugs will be:

• Five to six times less efficient than HEVs when it comes to reducing national gasoline consumption;
• Nine to twelve times less efficient than HEVs when it comes to reducing national CO2 emissions;
• Subject to short-term supply constraints because of their reliance on scarce raw materials;
• Experimental concepts that require years of testing before they're ready for prime time;
• Beyond the price range of all but the most affluent consumers; and
• Wholly unacceptable to consumers that expect a three to five year payback on the cost premium.

The risk and the opportunity for investors is that distorted perceptions of commercialization timelines have led to unreasonably high expectations for lithium-ion battery developers that may experience huge revenue growth in the second half of the decade and unreasonably low expectations for lead-acid battery manufacturers that are certain to experience huge revenue growth over the next five years. As the revenue impact of current automotive production decisions becomes more clear and the wide gulf between expectations and reality narrows, I believe that the equities of objectively cheap lead-acid battery manufacturers will surge while the equities of objectively expensive lithium-ion battery developers underperform.

Press Releases

For better or worse the markets are emotional creatures that can't help but react to press releases and news stories designed to fire the imagination and inspire "wouldn't it be great if ...?" thinking. Some of the more inspirational examples of the unrelenting electric vehicle hype we've seen over the last few months include:

• Tesla Motors' production of its thousandth electric Roadster in time for the 2010 Detroit Auto Show;
• Fisker Automotive's planned production of the Karma plug-in hybrid on the strength of a 1,300 unit order book;
• Th!nk Global's rescue from bankruptcy on the strength of a 2,300 unit order book;
• Toyota Motors' (TM) planned demonstration fleet of 500 plug-in hybrids based on their Prius HEV platform;
• General Motors' planned production of the Volt plug-in hybrid at a rate of 8,000 to 10,000 vehicles annually;
  
• Mitsubishi Motors' (MMTOF.PK) planned production of the MiEV electric car at a rate of 8,500 vehicles annually;
  
• Nissan Motors (NSANY) planned production of the Leaf electric car at a rate of up to 20,000 vehicles annually; and
• President Obama's audacious goal of a million plug-ins on the road by 2015.
  

If one just reads the press releases and news stories, it seems like the whole world is going electric and the days of sunshine, lollipops and roses along Electric Avenue are just around the corner. Perhaps it's my skeptical nature, but plans alone don't impress me because I've seen so many ill-conceived plans fail. I also remember that:

• DeLorean Motor Company produced and sold 9,000 cars in 1981 and 1982 before its CEO decided that he needed to boost revenue by importing agricultural products from South America;
• Ferrari sells approximately 7,000 vehicles per year;
• The Bentley division of Volkswagen sells 8,000 to 10,000 vehicles per year; and
• Toyota Motors (TM) sold its millionth Prius in 2008 and is gearing up to produce 1,000,000 HEVs annually by 2011.

In isolation, the press releases and news stories seem impressive. In the context of an industry that sold 10.5 million vehicles in 2009 during the worst recession since the 1930s, the planned introduction of cars with plugs is inconsequential. These are PR stunts, not credible products. While cars with plugs may become credible by 2020 if they can earn consumer confidence at rates that are comparable to HEVs, I believe their growth potential over the next five years is modest at best.

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


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

Production Decisions

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

There are few ideas that are more sensible than idle elimination. Instead of burning gasoline and spewing emissions while you're stuck at a stoplight, turn the engine off until the light turns green. Stop-start systems have little value for a drive in the country, but they can reduce fuel consumption in congested city driving by 6% to 10% for an outlay of a few hundred dollars. After several years of testing, automated stop-start systems have proven themselves to the point where the entire industry is adopting them as standard equipment. A few examples of major stop-start production decisions include:

• Mercedes Benz, which will introduce stop-start systems throughout its entire passenger car line;
• BMW, which has already implemented stop-start systems on all Series 1 and 3 vehicles with manual transmissions;
• Volkswagen, a stop-start pioneer that is implementing the technology throughout its passenger car line;
• Toyota, which has already impemented stop-start systems in its Auris and Yaris lines; and
• Ford, which plans to introduce stop-start systems throughout its entire passenger car line.

In short, the widespread implementation of stop-start technology is not something that might happen on some fine day in the vaguely defined future. It is happening today in factories around the world and while the future of cars with plugs is unclear, it is virtually certain that stop-start technology will be standard equipment within a few years because it's a cheap and proven way to improve fuel economy and reduce emissions. The following graph comes from a 2008 Frost & Sullivan presentation and summarizes their forecast of global hybrid vehicle sales over the next five years, broken down by technology type. The blue sections of each column represent stop-start systems.



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

The major challenge with stop-start technology is that it's very hard on starter batteries because instead of starting the car once per trip, a stop-start system will stop and restart the engine at every stoplight. The current approach is to use premium lead-acid batteries instead of the lower quality batteries the auto-industry historically used as original equipment. The long-term solutions that are currently in final stages of development include:

• Using a combination of batteries and supercapacitors to satisfy the intense demands of stop-start systems, an approach that's being developed by Maxwell Technologies (MXWL) and Continental AG (CON.DE).
• Using lead-carbon batteries that combine battery and supercapacitor characteristics in a single device, an approach that's being developed by Exide Technologies (XIDE), Axion Power International (AXPW.OB) and East Penn Manufacturing.
  

While the numbers were eclipsed by the headline awards to lithium-ion battery developers and largely ignored by investors, President Obama's August 2009 announcement of the recipients of $1.2 billion in ARRA battery manufacturing grants included:

• $34.3 million to Exide Technologies with Axion Power for the production of advanced lead-acid batteries using lead-carbon electrodes for micro and mild hybrid applications; and
• $32.5 million to East Penn Manufacturing for production of the Ultrabattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications.

In other words, these are real technologies that are being built into real production model vehicles and being sold to real customers today. There's no wishful thinking involved. The wave of change has hit the shore and will wash through the entire industry over the next few years.

The Hype Cycle

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



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

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

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

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

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

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

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

Posted by John Petersen at 09:57 AM | Permalink | Comments (1)

John Petersen

In November 2006, a slick issue-oriented documentary asked the provocative question "Who Killed the Electric Car" and argued that General Motors' EV1 project was terminated because of collusion between the auto and oil industries. The truth is nobody killed the electric car. It died in infancy from congenital birth defects and the same flaws that killed the EV1 will probably kill Tesla Motors, Fisker Automotive, Nissan's (NSANY) Leaf and GM's Volt. This is not a question of cost, performance, abuse tolerance or cycle-life. It's a fundamental flaw in the economics of using batteries to replace a fuel tank; a flaw that will cost investors billions before the current round of electric car hype fades and the rotting corpse of an idea only Hollywood could love is buried with a silver stake through its undead heart.

The electric car died for two simple reasons. First, the batteries are too valuable to waste. Second, it takes a couple hundred pounds of batteries to store the useful energy found in a gallon of gas that weighs 6.4 pounds. In the end you get an obscenely expensive vehicle that virtually guarantees substandard performance if you stray outside your reliable recharge radius.

Batteries of all types are marvels of chemistry and automated manufacturing, but they're made from natural resources that are orders of magnitude more scarce than oil. To put things in perspective, the world produces about 4,500 million tons of oil annually, which is second only to 6,800 million tons of coal. The closest metal is steel at 1,400 million tons. When you start looking at the less plentiful metals that are used to make batteries, annual production rates plummet to 39.7 million tons of aluminum, 15.7 million tons of copper, 3.8 million tons of lead, 1.6 million tons of nickel, 0.124 million tons of rare earth elements and 0.027 million tons of lithium. When you consider that global demand for all of these metals has been climbing for years and the situation can only get worse as several billion people transition from subsistence farming to industrialized society, the time-honored American tradition of planning for unlimited resource availability is more than a little short-sighted.

Simply put, the world produces plenty of oil that can be burned in engines but it only produces tiny amounts of metals that can be used to make batteries. Spending billions of dollars on new mining infrastructure can significantly increase global supplies of most battery metals, but the gains won't be rapid and they won't amount to a rounding error in comparison to global oil production. While Toyota (TM) just spent over $100 million to protect its lithium supply chain by buying an interest in a new mine; everyone else in the industry seems to be relying on the natural resource fairy. Since it violates the fundamental laws of economics to use scarce and expensive natural resources as substitutes for plentiful and cheap natural resources, business plans based on the illusion that you can use batteries to replace gasoline must fail.

Electric vehicle advocates led by the recently organized Electrification Coalition have done a masterful job of positioning the grid-enabled vehicle, or GEV, as a miracle cure for a variety of ills including mounting oil prices, climate change, terrorism and war. While their comparisons with internal combustion engines have tremendous emotional appeal, the claimed benefits disappear in a cloud of blue smoke when you consider the macro-economic picture. A couple weeks ago I wrote an article titled "Plug-in Vehicles, Unconscionable Waste and Pollution Masquerading as Conservation." While I can't criticize a business for putting the best possible spin on a planned product, somebody needs to stand up and shout balderdash when spin crosses the line and morphs into a lie so colossal that investors and taxpayers are likely to lose billions.

There are two basic ways to use batteries in transportation.

• The first uses a relatively small battery to minimize gasoline waste by eliminating idling and capturing some portion of energy that would otherwise be lost in braking for use in the next acceleration cycle. The generic term for vehicles in this class is hybrid electric vehicle, or HEV, and the best example is the efficient and reliable Prius from Toyota (TM).
• The second uses a plug, a power cord and a much larger battery to replace some portion of the fuel tank with electrical energy storage. The generic term for vehicles in this class is grid-enabled vehicle, or GEV, and examples include the Tesla Roadster, the Fisker Karma, the Nissan Leaf and the GM Volt.

While HEVs and GEVs occupy different positions on a common technological continuum, the differences are as stark as night and day, which coincidentally occupy different positions on a common time continuum. HEVs are masters of fuel efficiency that have proven themselves over the course of a decade in over a million vehicles worldwide. GEVs use fuel substitution techniques that have no meaningful track record in the real world, promise more than they can hope to deliver, and are a shameful waste of limited and expensive natural resources. The sooner the public comes to understand the differences between black and white, the sooner we can get to work finding relevant scale solutions to our energy and air quality problems.

Lithium-ion batteries were developed for use in portable electronics and have become mainstays in cellular phones, MP3 players, laptop computers and a host of consumer, medical and industrial products. Last year, the lithium-ion battery industry sold $7 billion of products into these markets. Most consumer applications use somewhere between one and ten cells and the cost of the battery is an insignificant sliver of the purchase price. A Tesla Roadster, on the other hand, uses 6,800 cells and the battery pack represents somewhere between 1/3 and 1/2 of the purchase price. I don't worry about battery cost when I need five watt-hours for my cell phone or 40 watt-hours for my laptop. When you start talking about 20,000 watt-hours for a vehicle, however, it's an entirely different ballgame.

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

Device	Battery
Type	Capacity
Cellphones and MP3 players	5 watt-hours
Portable Medical Devices	10 to 50 watt-hours
Laptop Computers	10 to 50 watt-hours
Electric bicycles and scooters	500 to 1,000 watt-hours
Hybrid electric vehicles	1,000 to 1,500 watt-hours
Plug-in hybrid vehicles	10,000 to 16,000 watt-hours
Pure electric vehicles	24,000 to 50,000 watt-hours
Grid-connected utility applications	500,000+ watt-hours

In a normal free market, production capacity is allocated first to high value applications and then to successively lower value applications. In cases where supply is constrained by resource availability, manufacturing capacity or a host of other reasons, high value applications that only need a little battery capacity will always be able to outbid lower value applications that need a lot of battery capacity. The end result is that GEVs and grid-connected utility applications will always end up at the bottom of the food chain with the weakest bargaining position and the only batteries available to them will be the surplus that nobody else needs or wants. Once again, lithium-ion batteries are simply too valuable to waste on plug-in vehicles. The economics may work for the eco-religious crowd who will pay any price for the right status symbol, but it's insanity to believe that electric vehicles have any future in the real world of paychecks, monthly budgets and cost-conscious consumers.

Historically I've been fairly sanguine about the survival prospects for lithium-ion battery developers including A123 Systems (AONE) and Ener1 (HEV) because I've been convinced that they'd be able to sell all the batteries they could produce for use in HEVs and new small-scale energy storage applications that are certain to emerge as better batteries become available. Over the last couple months, however, I've seen an ominous trend where Ener1 used almost all of its available working capital to rescue Th!nk Global from bankruptcy and A123 invested $23 million in Fisker Automotive so that Fisker could satisfy the 20% matching funds requirement for a $529 million DOE loan. In my experience, the first round of rescue financing for a key customer is rarely the last. While I think it fair to ask why development stage battery manufacturers are using critical capital resources to support other businesses that the capital markets seem reluctant to finance, I'll refrain from further comment except to remind everyone of the famous Rodney Dangerfield quip, "As a baby I was so ugly that my parents had to tie a pork chop around my neck so the dog would play with me."

In closing for today, I'll share a quote from Ardour Capital's 2009 Year-in-review, 2010 Look-Ahead:

"As for energy storage players, while lithium ion is receiving stimulus, we look for lead acid to still be the preferred technology for large scale applications for the foreseeable future. We believe that the $2.4b stimulus is an important step toward launching a US lithium-ion battery industry which has been largely non-existent. In addition, the 2009 IPO of lithium-ion battery maker A123 Systems has stirred significant interest in larger scale lithium ion applications. However, we look for the cheap and reliable lead-acid battery to be the mainstay of industrial battery applications. To those ends, we expect lead acid sales to see recovery in 2010 thanks to improving economic conditions and stronger trends in the automotive markets, primarily for replacement batteries."

In my next article I'll revisit earlier discussions of the start-stop, micro-hybrid and full hybrid technologies that are certain to become mainstays of the global automotive industry over the next decade.

Disclosure: Author is a former director of Axion Power International (AXPW.OB), a developer of advanced lead-carbon batteries, and holds a large long position in its stock. He also holds small long positions in lead-acid battery producers Exide Technologies (XIDE) and C&D Technologies (CHP), and zinc-bromine flow battery developer ZBB Energy (ZBB).

Posted by John Petersen at 09:52 AM | Permalink | Comments (10)

John Petersen

Generation specific cultural references can be treacherous ground for bloggers because the flashback effect is usually limited to readers with long and vivid memories. In this case, however, the lessons of history are so relevant that I'll accept the risk and offer some context for younger readers.

In my youth a war wrapped in the liberal ideology of the Kennedy and Johnson administrations and fueled by an underlying concern over who would control oil and gas resources in the Gulf of Tonkin was fought in the jungles of Vietnam, Laos and Cambodia. By current standards, the toll of 47,424 battle deaths was staggering. By the late '60s opposition to the War was widespread and a galvanizing force behind the antiwar movement was music, including an iconic folksong from Pete Seeger, Waist Deep in the Big Muddy.



While my use of an antiwar anthem to make a point about plug-in vehicles is certain to draw howls of outrage from advocates and true believers, I think the analogy is apt because the ideologically inspired road to disaster we trod during the late '60s is frighteningly similar to the path we're on today with plug-in vehicles where the prevailing attitude seems to be "damn the facts, push on."

Our fundamental energy problems are easy to identify – increasing oil prices and increasing reliance on imports. Both numbers have been climbing steadily for decades and consumers have been stubbornly reluctant to change their behavior in response to prices. The burden on the economy becomes heavier with each passing year and if you're willing to extend the current price channel out for another decade, oil price expectations in the $150 to $180 per barrel range don't seem all that far fetched.



For as long as automakers have been proposing plug-in electric vehicles, skeptics like me have been noting that fuel savings are unlikely to give consumers a cash-on-cash payback of their incremental cost over the life of the vehicle, much less the three to five year window that consumers typically expect. There are countless vague promises about  economies of scale driving down costs as the industry matures, but at least in the battery sector where raw materials and plant automation are the primary cost drivers and labor is almost a rounding error, I have a hard time banking on a fairy godmother to restrain commodity prices and equipment costs. While the following graph of long-term industrial and precious metal prices from Credit Suisse is a little dated, it certainly has the same general shape and slope as the most recent decade on the oil price chart.



"We were knee deep in the Big Muddy, the big fool said to push on."

For several years realists like Vinod Khosla and others have noted that since the U.S. gets roughly 50% of its electricity from coal and will likely do so for decades to come, the environmental benefits of plugging an electric vehicle into a lump of coal will be few and far between. Last week, I offered a simple comparison of plug-in vehicles with conventional HEV technology (without plugs) that proves plug-ins are about one-quarter as effective at reducing oil imports as cheaper HEVs that can point to a decade of performance under real world conditions.

"We were waist deep in the Big Muddy, the big fool said to push on."

The real flies in the ointment are that plug-in vehicles don't significantly change the energy balance, they're far too resource constrained to make a dent in oil imports, and the fundamental economic premise only works if you are willing to assume that historically moderate trends in retail electricity prices will continue forever.

From an overall energy balance perspective, plug-ins don't change the amount of energy needed to move a vehicle down the road. Instead, they merely move the conversion of fuel to energy from under the hood to a local power station while increasing vehicle cost by 50% to 100%.

Likewise, the batteries that will be used in plug-ins are made from raw materials that are orders of magnitude less abundant than oil. The resource constraint issues go far beyond lithium availability and extend to every component in batteries and battery packs. Those materials all have alternative uses in high value products and from a resource availability standpoint, using batteries to conserve oil is a lot like using gold to conserve copper.

Finally, it's almost impossible to find a newspaper or magazine that doesn't have several articles on the evolution of the electric grid. We're seeing massive investments in wind and solar power installations and the estimated cost of the coming smart grid runs to trillions of dollars. Since the one certainty is that private capital will not finance alternative energy or the smart grid without expecting both a return of capital and a return on capital, it's patently absurd to believe that electricity price increases will remain as benign in the future as they have been in the past.

"We were neck deep in the Big Muddy, the big fool said to push on."

When I was but a lad one of my mother's favorite quips was "use your head for something besides a hat rack." It was her way of teaching me to look beyond my immediate circumstances, consider the factors that led me to a decision-point and reflect carefully on the likely consequences of my actions. When it comes to plug-in vehicles, investors and the general public have been little more than hat racks for too long. Instead of thinking things through and questioning assumptions, they've been placated by "wouldn't it be great if ...?" sound bites. Instead of asking whether crossing the big muddy is possible or the effort worthwhile, they've allowed themselves to be led down the garden path by politicians and activists who vainly promise gain without pain and reward without risk.

If it weren't so damned expensive, I'd describe vehicle electrification beyond the HEV stage as a zero sum game. Given the immense costs that are becoming increasingly clear with each passing day, I'd characterize it as a game where we can't reasonably hope to break even.

Disclosure: No stocks mentioned because we all know who they are.

Posted by John Petersen at 10:20 AM | Permalink | Comments (6)

John Petersen

For eighteen months I've been blogging about the energy storage sector and discussing the current and potential markets for batteries and other manufactured energy storage devices. A recurring theme that I've discussed many times is the unrecognized but undeniable truth that while plug-in vehicles masquerade as conservation measures at an individual level, they're incredibly wasteful at a societal level. The conclusion is counter-intuitive and my articles on the subject invariably draw heated criticism from self-anointed defenders of the faith. Their arguments, however, do not change the inescapable truth that plug-in vehicles are one of the most wasteful concepts ever foisted on gullible government officials and an unsuspecting public.

Today I'm going to do my level best to simplify the numbers and expose the plug-in fraud for what it is. If you want to delve into more detail, you should visit my article archive at Seeking Alpha.

On December 31, 2009 Forbes published an opinion piece titled System Overload that questioned whether the lithium-ion battery industry was overbuilding global manufacturing capacity. The third paragraph said:

"By 2015 the new factories will have the global capacity to produce 36 million kilowatt-hours of battery capacity, enough to supply 15 million hybrid vehicles, or 1.5 million fully electric cars, says Deutsche Bank."

The article then went on to question whether there would be buyers for all those vehicles. I firmly believe that every battery manufacturer that brings an automotive battery to market within the next few years will have more demand than it can satisfy. That being said there is no denying the fact that fully electric cars and plug-in hybrids are unconscionably wasteful.

In America, the average car owner drives about 12,000 miles per year. To power a car for that distance, he'll need about 400 gallons of gasoline for a conventional internal combustion engine; 240 gallons of gasoline for a Prius class HEV; and no gasoline for a fully electric vehicle. The eco-religious among us are beside themselves with glee over the appealing but patently absurd idea that fully electric vehicles are the best way to slash dependence on oil imports and protect mother earth. The numbers tell an entirely different story.

If we stick with the Deutsche Bank numbers quoted in the Forbes article, 1.5 million fully electric cars would save 600 million gallons of gasoline per year. That's a very impressive number until you realize that 15 million Prius class HEVs without plugs would save approximately 2.4 billion gallons of gasoline per year. In my book, the difference of 1.8 billion gallons of gasoline per year is subsidized waste on a massive scale.

While the gasoline consumption comparisons are miserable, the CO2 emission comparisons are nothing short of tragic.

Each gallon of gasoline used in an internal combustion engine releases 20.35 pounds of CO2. While fully electric vehicles are cleaner, they're not CO2 free because the power plants that generate the electricity release a national average of 9.68 pounds of CO2 per gallon of gasoline equivalent. Returning to the Deutsche Bank numbers, 1.5 million fully electric cars would cut annual CO2 emissions by 2.9 million tons, another very impressive number. In comparison, 15 million Prius class HEVs without plugs would slash annual CO2 emissions by a whopping 24.4 million tons. In my book, the difference of 21.5 million tons of CO2 emissions per year is subsidized pollution on a monumental scale.

The final nail in the coffin comes from purchase price comparisons. Toyota's (TM) base sticker price for a 2010 Prius is $22,400. In comparison the base sticker price for the planned GM Volt will be about $40,000. While Federal tax credits of $7,500 are expected to reduce the end-user cost of the Volt to $32,500, it will still cost the consumer $10,000 more than a Prius. The last time I checked, a $10,000 purchase price difference is important to the average consumer, particularly when study after study reports that the Volt is not expected to pay for the price difference in fuel savings.

On a micro-scale, fully electric vehicles and plug-in hybrids are feel good eco-bling for the emotionally committed and the mathematically challenged. On a macro-scale they use more gasoline, emit more CO2 and are more expensive than established HEV technology. At this point I have to wonder, does anybody in Washington DC have a calculator?

I'm a lawyer, a battery guy and a policy geek. I know that six billion people on our planet would like to have a piece of the lifestyle that 600 million of us have and take for granted. I also know that as a result of the information technology revolution, about half of the 6 billion have access to electronic data and understand for the first time in history that there is more to life than subsistence. Even if we assume that they will only become consumers at 5% to 10% of purchasing power parity, the increased pressure on water, food, energy and every commodity you can imagine will be immense beyond imagining. The big challenge will be creating enough room at the table so that we can avoid the unthinkable consequences of inaction.

I love HEV technology because it minimizes waste of both gasoline and other natural resources. I'd love it even more if it were tied to a compressed natural gas fuel system that would eliminate dependence on imported oil, but that's a different discussion. I'm also a big fan of micro- and mild-hybrid technologies that use less robust electric motors and simpler batteries from companies like Johnson Controls (JCI), Exide Technologies (XIDE) and Axion Power International (AXPW.OB) to reduce waste for drivers who can't afford to upgrade to a Prius class HEV. I am offended by the P.T. Barnum class hucksters at Ener1 (HEV), A123 Systems (AONE), BYD Company (BYDDF.PK) and others that use the false promise of fully-electric vehicles to maintain bloated market capitalizations and lead investors down a garden path that will almost certainly end in massive losses once the market understands the true costs and illusory benefits.

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

Posted by John Petersen at 06:51 AM | Permalink | Comments (25)

John Petersen

Monday morning a reader sent me a link to a December 23rd press release announcing that the OM Group, Inc. (OMG) had agreed to buy EaglePicher Technologies LLC, a well regarded name in the battery industry, for $171.9 million, or roughly 1.4x sales. While I overlooked the release during the build-up to Christmas, the transaction is important because it provides a current bright-line reference point for energy storage investors on the difficult question, "what is a battery company worth?"

EaglePicher was previously a unit of Eagle Picher Holdings, a public company that filed a voluntary petition under Chapter 11 of the Bankruptcy Code in April 2005. While I can't find detailed disclosures on the reorganized company's lines of business and profitability, EaglePicher's website describes a variety of battery chemistries ranging from lead-acid to lithium-ion and the press release indicates that approximately 60% of revenue comes from its defense business, 31% comes from its aerospace business and the balance comes from medical and commercial battery systems. The EaglePicher acquisition seems to be a logical step in OMG's vertical integration and diversification strategy.

Since the details are limited, it's hard to perform a meaningful analysis of the various factors that give EaglePicher value. Nevertheless, the 1.4x sales number is very interesting because of the huge disparity in price/sales ratios among the 17 pure play energy storage stocks I follow. The following table identifies the companies in my tracking group, shows their December 31st closing price, shows their current market capitalizations, and shows the price/sales valuation ratios reported by Yahoo finance.



While price/sales ratios have little or no utility when it comes to evaluating emerging companies that have not yet hit their stride when it comes to product sales, it can be a useful screening tool when comparing established operating companies that have relatively stable sales histories. Based solely on the price/sales ratio from the EaglePicher acquisition, I would conclude that the following companies might be undervalued:

• C&D Technologies (CHP), which trades at 12% of sales;
• Exide Technologies (XIDE), which trades at 20% of sales;
• Ultralife (ULBI), which trades at 43% of sales;
• Enersys (ENS), which trades at 68% of sales;
• China BAK Battery (CBAK), which trades at 84% of sales; and
• China Ritar Power (CRTP), which trades at 87% of sales.

Investors can't rely on a single metric in making an investment decision. Nevertheless, since the level of investment success frequently has a direct correlation to the initial entry price, knowing how the market price compares with recent real world deals can be very enlightening.

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

Posted by John Petersen at 04:48 AM | Permalink | Comments (4)

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)

John Petersen On December 14th the U.S. Energy Information Administration, a policy-neutral statistics and analysis agency within the Department of Energy, announced the release of reference case statistics for its Annual Energy Outlook 2010, an exhaustive compendium of current data and expected trends that covers the entire spectrum of energy production, consumption and pricing at the regional and national level. For numbers freaks like me, the EIA worksheets are a bottomless well of fascinating minutiae. Since most investors would find the raw data mind numbing, I spent some time pouring through the EIA's data in an effort to wrap my arms around their current view of the automotive sector.

The core data for this article was taken from Table 57, which forecasts light-duty vehicle sales by drive technology type for the years 2007 through 2035. To simplify the presentation I've consolidated all data for passenger cars and light trucks into five broad classes and then prepared a simple stacked column graph to present a market forecast snapshot at five-year intervals.



What are not clear in the 2010 statistics are the changes from 2009. A detailed discussion of the individual changes would be too detailed for a blog, however the general overview is that the EIA increased market penetration for ethanol-flex fuel vehicles by almost 100%, reduced short- to medium-term penetration rates for plug-in vehicles by almost 50% and reduced long-term penetration rates for HEVs by a like amount. Apparently the EIA believes that budgets matter to most consumers and high-end electric assist vehicles will be priced out of the market for the foreseeable future. For those that are interested in tracking the specific changes, the archived workbook for the Annual Energy Outlook 2009 is available here.

Many people have invested in lithium-ion battery companies based on the widely publicized promise that plug-in hybrid electric vehicles and pure electric vehicles, which have recently been christened grid enabled vehicles, or GEVs, by the Electrification Coalition, would be the rising superstars of the automotive markets over the next 25 years. As of two weeks ago the EIA expected GEVs to represent 0.86% of the U.S. market in 2020 and a whopping 2.63% by 2035. Even this cynic was shocked. To drill down a bit further and attempt to translate the EIA's automotive market forecasts into revenue expectations for battery manufacturers I assumed:

• Revenue of $250 per vehicle for advanced lead-acid starter batteries;
• Revenue of $1,000 per kWh for automotive grade lithium-ion batteries;
• A 1.5 kWh battery requirement for an HEV;
  
• A 4 kWh battery requirement for a PHEV-10;
• A 16 kWh battery requirement for a PHEV-40; and
• A 24 kWh battery requirement for a pure electric vehicle.

Based on those assumptions and my Excel workbook, which you can download here, the following table shows the aggregate revenue to battery manufacturers, in millions of dollars, for each year shown in the graph.

	2010	2015	2020	2025	2030	2035
GEV battery sales	$2,012	$2,548	$2,951	$3,750	$4,662	$5,099
HEV battery sales	$372	$967	$1,281	$1,595	$1,961	$2,215
Lead-acid battery sales	$2,530	$3,904	$3,852	$3,864	$4,008	$4,189

While there are many EV advocates who will strenuously argue that a battery cost estimate of $1,000 per kWh for lithium-ion batteries is way too high, it's well within the price range cited by the National Research Council in its recent report titled "Transitions to Alternative Transportation Technologies – Plug-in Hybrid Electric Vehicles." While future lithium-ion battery prices may in fact decline significantly, I've always wondered how rapidly falling battery prices will be a good thing for the shareholders of battery manufacturing companies that presumably would rather make money from selling a reasonably priced product than struggle with the problems of selling a commodity product on paper thin margins. I guess some sophisticated business concepts are above my pay grade. In Joseph Heller's classic novel Catch 22, Milo Minderbinder planned to buy eggs for a dime, sell them for a nickel and make it up on volume. That's not a business plan I want to buy into.

Two of the three largest lead-acid battery manufacturers in the world are publicly held. Johnson Controls (JCI) is a diversified auto-parts manufacturer that derives roughly $3.9 billion per year, or roughly 16% of its total revenue, from the lead-acid battery business. Exide Technologies (XIDE) is a pure play lead-acid battery manufacturer with global revenues of roughly $2.5 billion. The industry newcomer is Axion Power International (AXPW.OB), a developer of advanced lead-carbon batteries for the micro and mild hybrid applications that entered into a global supply relationship with Exide in April, was selected with Exide to receive a $34.3 million ARRA battery manufacturing grant in August, and recently completed a $26 million private equity placement lead by Special Situation Funds, Manatuck Hill Partners and Narragansett Strategic Master Fund.

The leading publicly held companies that operate in the U.S. and plan to manufacture lithium-ion batteries for automotive applications are Johnson Controls (JCI), A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI).

The following table provides summary information on the stock price and market capitalizations of each company:

	Trading	Last	Mkt. Cap
Lead acid batteries only	Symbol	Price	(millions)
Exide Technologies	XIDE	$7.31	$552.58
Axion Power	AXPW.OB	$1.52	$125.67
Lithium ion batteries only
A123 Systems	AONE	$21.07	$2,159.61
Ener1 Inc	HEV	$6.70	$833.22
Valence Technology	VLNC	$0.95	$120.16
Altair Nanotechnologies	ALTI	$0.86	$90.63
Both lead-acid and lithium
Johnson Controls	JCI	$27.89	$18,716.43

I've always believed that successful investing requires a growth industry, a well-managed company, a good product, reasonable profit margins and an objectively low entry price based on current earnings or future potential. If the EIA forecast is even close, the market seriously underestimates the future potential of the lead acid group while fully valuing, if not overvaluing, the future potential of the lithium-ion group. The lead acid battery manufacturers also trade at far lower multiples of sales and book value than the lithium-ion manufacturers. Under the circumstances I think that substantial short-term appreciation is far more likely in low-priced stocks like Exide, Axion and Altair than it is in high-priced stocks like JCI, A123 and Ener1.

I got nothing but flack and disrespect in November of 2008 when I had the gall to suggest that cheap would beat cool. As my year-end review will show next week, the last 12 months have proven me right. The good news is that much of the valuation disparity that existed last year is still present and some very solid companies remain available at attractive prices.

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

Posted by John Petersen at 03:52 PM | Permalink | Comments (2)

John Petersen

This morning Axion Power International (AXPW.OB) announced the closing of a $26 million private placement of straight common stock that was sold to institutional and individual investors lead by Special Situation Funds, Manatuck Hill Partners and Narragansett Strategic Master Fund. While some current shareholders will no doubt complain that the private placement price of $0.57 per share represents a $1.01 discount from yesterday's close and seems pretty dilutive, I'm thrilled that my fondest wish has come true a couple days before Christmas. After several months of nagging doubt over whether Axion would be able to obtain required working capital in a difficult market, its financial future is now secure for at least a couple of years. More importantly, the financing will give Axion the ability to significantly expand production capacity for the carbon electrode assemblies that are the heart and soul of its revolutionary PbC™ battery technology, thereby resolving the age old dilemma of which came first, the production capacity or the purchase contract.

To my way of thinking, the most impressive aspect of Axion's financing is sheer size. Axion had roughly 37 million common share equivalents outstanding before the placement and sold 46 million additional shares. Selling 55% of a company without surrendering control is extremely rare. The more telling fact is that the cumulative reported trading volume in Axion's stock for 2009 has only been 6.6 million shares. In other words, these private placement investors bought roughly seven times the annual trading volume in a single transaction. Nobody in his right mind buys that kind of weight with the expectation that he'll be able to resell at a profit in an illiquid market. That tells me this group of investors is taking a long-term view and swinging for the fences with Axion's other large holders. I'm delighted to have the company, even if they did get a better price.

A less obvious aspect is the level of core stockholder support that was necessary to make the transaction happen. Prior to the financing Axion had two series of preferred stock that were beneficial to holders but a serious impediment to future financing. The principal holders of those preferred shares, including me, agreed to give up the benefit of holding preferred shares if it would mean the difference between mere survival and enough cash to take Axion's business to the next level. They were joined in the sacrifice by Axion's largest common stockholder, The Quercus Trust, which apparently made important concessions of its own.

Over the course of a 30-year legal career in small company finance I've been involved in billions of dollars in private placement transactions. While public stockholders can only rely on information presented in SEC disclosure documents, private placement purchasers are given a much freer hand to conduct their own legal, technical and financial due diligence; ask questions of management; engage in frank discussions with vendors, customers and potential customers; evaluate detailed market data and forecasts; and take other steps that will help them make an informed investment decision. When transactions get this large and the lead investors are investment funds that owe a fiduciary duty to their owners, experience tells me that the due diligence investigation is only a little more intrusive than a visit to the proctologist. I'll probably never know what the new investors learned in their due diligence investigations, but I know they learned enough to justify some very big checks and that fact alone gives me substantial comfort that development and testing activities on the PbC™ battery technology are proceeding apace.

I'm no different from other investors and all things being equal I would have preferred to see a higher price for the placement. But my personal preferences have no impact on market conditions during the worst recession in 80 years and when I consider the size of the financing, the level of core shareholder support, the class of investors and the level of due diligence and negotiation that a large private placement invariably entails, I can't help but conclude that it's all good and this transaction is the beginning of a new era in Axion's corporate development. After giving effect to the private placement and the preferred stock conversions, Axion has 82.7 million common shares outstanding and a market capitalization of roughly $130 million. If its capital spending to revenue ratios are comparable to its larger peers in the lead-acid sub-sector, the capital spending facilitated by the placement should represent revenue potential of $100 to $150 million per year within 18 to 24 months. In an industry where other advanced battery developers are considered fairly valued at 2.3x 2012 revenue, Axion's common stock seems attractively priced and I would view any pull back as a buying opportunity.

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 08:26 AM | Permalink | Comments (6)

John Petersen

Baron Rothschild, an 18th century British nobleman, is credited with saying, "Buy when there's blood in the streets, even if the blood is your own." Later this week I expect a blood in the streets buying opportunity in the stock of C&D Technologies (CHP) and intend to take advantage of it. It's unquestionably a contrarian investment, but one that could pay off handsomely. I want to thank Ben S, a regular reader, for bringing this opportunity to my attention in an e-mail last weekend.

Most investors know that the addition of a company's stock to a major market index creates significant upward price pressure as ETFs move to add the stock to their portfolios. A similar phenomenon occurs when a stock is removed from a major index, which will happen on Friday when C&D is removed from the S&P 600 Smallcap Index (^SML). Recent examples of other companies that have gone through similar index removals include Sterling Financial (STSA) effective November 18, 2009, Independent Bank Corporation (IBCP) and Central Pacific Financial (CPF) effective November 10, 2009 and Wabash National Corporation (WNC) effective July 16, 2009. It will almost certainly be an ugly time for C&D's existing stockholders, but it can be a great buying opportunity for contrarian investors who are actively looking for companies in transition that are reinventing themselves in preparation for a brighter future.

The energy storage sector is one that doesn't make sense to a lot of investors because there are huge disparities in the relative market valuations of old-line companies and new entrants. In general the old-line companies trade at rust belt discounts while the newcomers trade at premium prices. Since I'm a great believer in the idea that age and experience have a clear advantage over youth and optimism when it comes to hard core manufacturing, I expect the established companies to adapt to emerging business realities and appreciate significantly as they maintain or improve their market position in coming years. Conversely, I expect the new entrants to trade in fairly narrow bands as they struggle to complete their product development, prove their manufacturing competence and earn a share of developing energy storage markets that are potentially massive.

C&D and its predecessors have been engaged in the battery manufacturing business for over 50 years. It operates plants in the U.S., Mexico and China, and sells its products globally for use in UPS systems, wired and wireless telecommunications, CATV systems, utilities and other applications. Its revenues increased from $253 million in the year ended January 31, 2005 to $365 million in the year ended January 31, 2009. While C&D suffered a 12% revenue decline for the nine month period ended October 31, 2009 because of the recession, the magnitude of its revenue decline compares favorably with the 37% revenue decline suffered by the industry leader Enersys (ENS).

The scariest things about C&D are a balance sheet that includes far too much debt for my taste and a six year string of operating losses. On a more positive note, the debt seems to be well-structured and manageable, and the operating losses are declining at rates that make management's forward looking statements about turning the corner in the first quarter of next year appear reasonable. While I see a number of potential problems that need to be resolved, I also see tremendous opportunity.

Some of the more intriguing aspects of C&D's business that are not readily apparent to a casual observer include:

• New facilities in China that were commissioned in early 2008 and have roughly $75 million per year in unused capacity;
• A commitment to research that has consistently maintained R&D spending in the $6 to $7 million  range despite cost cutting efforts in the rest of the business;
• A $19 million Department of Defense contract to develop large format lithium-ion batteries for military applications; and
• A manufacturing partnership for a new class of advanced lead-acid battery based on Firefly Energy's composite foam electrode technology.

C&D is not an old-line battery manufacturer that's stuck in another era. It is a visionary manufacturer with substantial sales that has already paid the costs of moving into the high-growth Asian markets and energy storage solutions for the future. The DoD contract would have had a huge impact on a pure-play lithium-ion company, but because of the source it barely caused a ripple.

It would be grave understatement to suggest that C&D's stockholders have had a tough time over the past few years, as evidenced by its 5-year stock price chart.



At yesterday's closing price of $1.31, C&D had a market capitalization of $34.46 million, a price to book ratio of 0.81 and a price to sales ratio of 0.10. If the removal of C&D from the ^SML causes further price erosion, which certainly appears likely, today's rock bottom market metrics will only become more attractive. On balance, I think that C&D has a very attractive risk reward profile that merits further study by experienced investors who have a relatively high risk tolerance. It's not entirely clear whether the ETF liquidations will happen on Thursday or Friday, but one of the two is certain to have far higher volume than normal and with a week to go before Christmas, the short-term price impact could be substantial.

Over the last year I've had pretty fair luck calling the bottom in energy storage stocks. I bought Enersys (ENS) in the $5.90 range and sold it for $23.50. I bought Active Power (ACPW) at $0.26 and Exide (XIDE) for under $2.00 and am up almost 300% on both companies. I've recently quintupled my position in ZBB Energy (ZBB) and still have great expectations for Axion Power International (AXPW.OB). By the end of this week I'll be adding C&D to my personal portfolio. I'm not a trader and I plan to hold C&D for a minimum of 12 to 18 months, but I expect the ^SML removal to give rise to opportunities for both short-term traders and long-term investors alike.

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 Active Power (ACPW), ZBB Energy (ZBB) and Exide Technologies (XIDE).

Posted by John Petersen at 11:44 AM | Permalink | Comments (3)

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 Petersen

Last week I appeared as a luncheon speaker at EESAT 2009, a biennial international technical conference sponsored by the DOE, Sandia National Laboratories and the Electricity Storage Association that focuses on storage technologies for utility applications. The conference included dozens of high-level technical presentations from storage technology developers and was far and away the best-organized event I've ever attended. The only notable absence was a large contingent of buyers, which left some participants wondering whether they were preaching to the choir. Nevertheless, I was encouraged by rapid growth in the number and size of utility-scale demonstration projects and the growing body of proof that storage will be a critical enabling technology for the smart grid. I left Seattle more convinced than ever that the opportunities in grid-based energy storage are huge, but that successful investing will require study, patience, diligence and a firm grasp of economics.

The theme of my presentation was that some developers of energy storage devices are destined to follow in the footsteps of Arkwright, Fulton, Vanderbilt, Carnegie, Rockefeller, Ford, Moore, Gates, and Brin, and become the next generation of industrial legends for one simple reason: we're entering an era where 500 million people in North America and Western Europe can no longer lay claim to the lion's share of global resources because the other 6 billion inhabitants of our planet know for the first time that there's more to life than mere subsistence. While each of them may only want a small piece of the pie, the law of large numbers will give rise to explosive increases in global demand for everything and the only way to avoid armed conflict or catastrophic environmental damage is to minimize waste in all its forms, beginning with energy.

On the cautionary side I returned often to the unpleasant reality that most grid-connected storage applications won't pay under current economic conditions because the spread between the cost of storage and the value of storage remains narrow. That cost-benefit equation is changing rapidly as energy costs rise and renewables are added, but as long as waste is cheaper than storage, waste will prevail. The following graph comes from a November 2004 presentation by John Broyes of Sandia National Laboratories that provided an overview of the DOE's Energy Storage Systems Program. The chart focused on the California utility market and showed the clear inverse relationship between the installed cost of energy storage systems and total demand for those systems. It merits more than a passing glance from investors who want to know where the business is (see p. 11 of the presentation for an expanded version).



While the graph contains a wealth of information on the wide variety of potential uses for storage in the utility market, the most important lesson for energy storage investors is price sensitivity. When total installed costs for energy storage systems are $1,000 per kW or higher, demand for storage is almost insignificant. As installed costs fall into the $600 per kW range, the number of cost-effective utility applications soars. I've been told that an updated version of the graph is in the works and will be released shortly. You can bet that I'll be among the first to write about it.

There were several EESAT presentations that focused on important but expensive frequency regulation technologies that are priced beyond the high-range of the graph. Over the last year, demonstration systems from Beacon Power (BCON), Altair Nanotechnologies (ALTI) and A123 Systems (AONE) have shown a remarkable ability to respond to regulation signals in microseconds and provide up and down regulation at speeds that traditional systems can't even begin to match. Based on estimates from the PJM Interconnection, one of the independent system operators that manage the U.S. grid, national demand for frequency regulation installations is on the order of 6,000 MW and could be much higher if flywheel and battery systems prove capable of handling longer duration load ramping intervals. The ongoing tests are not conclusive because the new systems have not been in service long enough to establish their useful lives, but the preliminary results are promising.

There were also several EESAT presentations that dealt with more mundane energy storage applications that were priced in the mid-range of the graph. Those projects ranged from the use of flow batteries at cellular telephone installations in Africa to a recently completed 12-year demonstration where Exide Technologies (XIDE) used lead-acid batteries to effectively eliminate the need for diesel fueled backup power on a remote island where the primary power source was renewable. Yet another presentation showed how computer analysis of satellite maps was being used to identify new locations in Ireland for pumped hydro, a technology that generally falls in the low-range of the graph but is commonly believed to have limited potential because most of the desirable locations are already developed.

Overall, the most important takeaways from EESAT were that from a utility perspective:

• Storage is the economic equivalent of a dispatchable generating asset;
• Installed cost and reliability will be the primary drivers of decisions to implement storage solutions;
  
• Maintenance and cycle life will be secondary decision drivers;
• An optimal smart grid configuration will need storage equal to at least 5% of peak system load; and
• As renewables become prevalent, storage will become increasingly critical to grid stability.
  

In Energy Storage on the Smart Grid Will Be 99.45% Cheap and 0.55% Cool, I explained that the required annual storage build in the State of California was estimated at 500 MW per year for the next decade. Of this total, 50 MW would need to be fast storage in the form of flywheels and Li-ion batteries and the 450 MW balance would be 4 to 6 hour storage in the form of pumped hydro, compressed air, flow batteries and advanced lead acid batteries. When the California numbers are scaled up to a national level, they translate to billions in new annual demand for as far as the eye can see. When you add in billions in new demand for transportation, it's clear that the sector isn't even close to ready for the near-term demands. To compound the problem, essential raw material supply chains aren't ready either.

In preparation for my EESAT presentation, I spent a good deal of time analyzing how the energy storage industry of today is different from the industry that existed a few years ago. My most important conclusion was that energy storage devices are rapidly evolving from minor components in high-value durable goods to stand-alone end user products. As a result, the cost of energy storage is rocketing from less than 5% of product cost in the case of portable electronics to more than 50% of product cost in the case of an EV like the Tesla roadster. When you get into the utility arena, the storage devices are the products and represent 100% of the product costs. Since consumers generally have higher payback expectations and shorter investment horizons than utilities, I believe consumer price sensitivity will be very high notwithstanding the current flood of optimistic stories, speeches and reports from the mainstream media, politicians and environmental activists.

While some of the stock market valuations in the energy storage sector reflect the emerging reality that energy storage is and will remain a highly price sensitive product, others do not. As a result, we have a weird market dynamic where Enersys (ENS), the world's largest manufacturer, marketer and distributor of industrial batteries, trades at a 50% discount to a newcomer like A123 Systems (AONE); and Exide Technologies (XIDE), the world's second largest manufacturer of OEM automotive batteries, trades at a 28% discount to a newcomer like Ener1 (HEV). While the valuation disparities might be justified if either of the newcomers had a technology that would displace the established leaders or significantly erode their revenues or margins, that outcome can't be expected in the foreseeable future because the newcomers are focused on far more expensive products for markets that don't even exist yet.

Over the last fifteen months I've written 92 blog entries that focus exclusively on the energy storage sector; the established and emerging energy storage technologies; and the principal competitors in the industry. My recurring simple hypothesis has been that cheap energy storage will beat cool energy storage in the market and that companies that manufacture objectively cheap products will experience far more rapid and sustained stock price growth than companies that are developing objectively expensive products. Over that time, my personal trading account that includes Active Power (ACPW), Enersys (ENS), Exide Technologies (XIDE), ZBB Energy (ZBB) and Great Western Minerals Group (GWMGF.PK) has gained over 300%. Nevertheless, I think I've finally reached a point where I've said most things that can be said. Accordingly I plan to slack off a bit and write in response to current events instead of trying to maintain a regular schedule.

Over the next decade, I believe that every energy storage company that brings a product to market will have more business than it can handle. Nevertheless, I believe that companies that have attained lofty market valuations based on ambitious plans to develop exotic products are likely to trade flat or decline in price while the companies that have less ambitious goals and less expensive products have substantial upside potential.

My favorite short-term holding is ZBB Energy (ZBB) because its ZESS 50 and ZESS 500 flow battery systems are market ready and carry an attractive mid-range price while its market capitalization of $15.3 million is but a small fraction of the peer group average. My favorite mid- to long-term holding is Axion Power International (AXPW.OB) because its first generation PbC batteries are in production and have been delivered to select end users for testing, the PbC battery promises a cheap solution for a wide variety of mundane energy storage applications and Axion's market capitalization of roughly $80 million is well below the peer group average.

The only thing that will prove me right or wrong is time.

DISCLOSURE: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock. He also has small long positions in Active Power (ACPW), Enersys (ENS), Exide Technologies (XIDE), ZBB Energy (ZBB) and Great Western Minerals Group (GWMGF.PK).

Posted by John Petersen at 08:24 PM | Permalink | Comments (10)

John Petersen wrote a series of popular articles last week to introduce new investors to the battery sector, following the A123 IPO.  We've had a couple requests from readers who missed one part or another, so here is a quick index to the articles.

1. Part I - Battery industry overview.
2. Parrt II - Comparison of energy storage technologies and companies.
3. Part III - Benchmarking Performance of battery stocks
4. Part IV - Debunking misconceptions about electric vehicles and battery technology.

Posted by Tom Konrad at 11:56 AM | Permalink | Comments (0)

John Petersen

In "The Sixth Revolution: The Coming of Cleantech," Merill Lynch strategist Steven Milunovich heralded cleantech as a new investment theme and forecast a period of gut wrenching change followed by an age of plenty. A few days later venture capital icon Vinod Khosla warned his audience “500 million people on earth enjoy a lifestyle that 9 billion people will want in 2050.” The differences between these two informed viewpoints are more than a little stark, but they highlight a frightening truth about cleantech: for the first time in human history the fundamental drivers of a technological revolution are constraints rather than opportunities. In this final installment of my series on battery investing for beginners, I want to explain why cost considerations and the transitory nature of government policies should temper the optimism of energy storage investors.

Warren Buffett advocates investing in companies you understand, companies that that sell products and services you know, trust and use. Unfortunately, that advice is almost impossible to follow in cleantech because most of the players are new, few can point to a long and successful operating history and the principal disclosures investors rely on are forward-looking statements from people that are trying to build a company in an emerging industry; people who are by nature optimists. Any time you put an optimist's forward-looking perspective into the hands of an optimistic reader, the only possible outcome is optimism squared and that's a dangerous equation.

In 1999, Toyota (TM) introduced a radical concept called the Prius, a hybrid electric vehicle, or HEV, that used recuperative braking, stop-start idle elimination, electric only launch and electric boost to reduce energy waste and slash fuel consumption by roughly 40%. Over the last 10 years, the Prius has progressed from an eco-bling status symbol to a mass-market product. In the process it won the loyalty of consumers and forced other automakers to develop competitive vehicles. The following 10-year graph of domestic HEV sales comes from hybridcars.com and shows how unit sales and product offerings ramped up over time.

US hybrid market historical sales (1999 – 2009)

This chart shows a normal market for an innovative product that evolved organically in response to consumer demand. If not for the current recession, it's easy to see how HEV sales could easily have been in the 500,000 to 700,000 vehicles per year range by now. The HEV is a winning concept that can only get more popular as the base of satisfied customers broadens and gasoline prices rise.

The unspoken truth about PHEVs and EVs is that the fundamental driver for change is government compulsion, not customer demand. The automakers know that they can't possibly meet new U.S. CAFE standards and European CO2 emission standards without including a high percentage of HEVs or a more modest percentage of PHEVs and EVs in their sales forecasts. The government's theory seems to be "if you build it they will come." While there is a high degree of automaker skepticism over whether the average consumer can or will pay an 80% to 100% premium for a PHEV or EV, the automakers all know that if they spend the money to build and introduce PHEVs and EVs and consumers refuse to buy, they'll have the perfect cover when the regulators come calling. Greenwash is expensive, but it's not as costly as being excluded from major markets or finding another line of business.

The hard question I think investors need to ask themselves is, "do you plan to spend at least $40,000 to buy yourself a PHEV or EV?" Unless your answer is an enthusiastic yes, you need to question whether investing in a battery company that has tied its future to the success of PHEVs and EVs makes sense.

My favorite part of the blogging experience is the lengthy debates I get into with informed and opinionated readers. They add a depth and balance I could never achieve on my own. They also provide wonderful insights into what people believe the future holds. The following is a compendium of a few cherished mythologies and incontrovertible realities that I’ve seen time after time in reader comments.

Cherished Mythology lithium-ion batteries are expensive today but they'll get cheaper with economies of scale.

Incontrovertible Reality The lithium-ion battery industry already sells $7 billion of products annually and big companies like Sony, Sanyo, Panasonic, LG Chem, Toshiba and Johnson Controls have done a great job of optimizing their production economies. According to a presentation by RolandBerger Strategy Consultants at last month's Frankfurt Auto Show, between 65% and 75% of the manufacturing cost for lithium-ion batteries represents the purchase price of raw materials and another 20% to 30% represents the cost of increasingly sophisticated and expensive equipment and factories. The balance goes for energy, labor and overhead. The only factors that can reasonably be expected to significantly reduce costs are generational improvements in battery chemistry and manufacturing technology.

Cherished Mythology PHEVs and EVs have limited range for now, but they'll have more flexibility in the future.

Incontrovertible Reality A typical PHEV or EV will get about four miles of travel range for each kWh of useful battery capacity. A comparable car with an internal combusion engine would get at least 28 mpg. In a normal car the fuel tank is cheap and the fuel is expensive. In a PHEV or EV the dynamic is reversed and the battery pack is the functional equivalent of a fuel tank that costs $7,000 per gallon of capacity (28 mpg/4 miles per kWh @ $1,000 per kWh). Once you buy the tank, filling it is dirt-cheap. Under current economic conditions long-range PHEVs and EVs can never be cost effective and the only way to make the economics come close to working is to buy no more battery capacity than you plan to use every day.

Cherished Mythology PHEVs and EVs will help reduce America's dependence on imported oil.

Incontrovertible Reality A PHEV or EV will use 10 times the battery capacity of an HEV. If the batteries are used in one PHEV or EV, national gasoline consumption will fall by 400 gallons per year. If the batteries are used in 10 HEVs, national gasoline consumption will fall by 1,600 gallons per year. In truth, PHEVs and EVs will sabotage America's drive for energy independence instead of supporting it.

Cherished Mythology PHEVs and EVs will help reduce America's CO2 footprint.

Incontrovertible Reality A PHEV or EV will use 10 times the battery capacity of an HEV. If the batteries are used in one PHEV or EV, national CO2 emissions will decline by 190 grams per mile, or roughly 2.375 metric tons per year. If the batteries are used in 10 HEVs, national CO2 emissions will fall by 135 grams per mile, or roughly 16.875 metric tons per year. Until we stop generating electricity with coal, PHEVs and EVs will not significantly reduce CO2 emissions.

Cherished Mythology PHEVs and EVs will become a dominant automotive technology in the next decade.

Incontrovertible Reality In its 2009 Annual Energy Outlook, the DOE estimated that PHEVs and EVs would account for 1.26% of the new light duty vehicle sales in 2020 and grow to 2.28% by 2030. At the Frankfort Auto Show, Roland Berger Strategy Consultants forecast the following market penetration rates for the principal automotive powertrain technologies in 2020:

	USA	Europe	Japan	China
Internal combustion	23%	6%	17%	48%
Micro hybrid	51%	67%	60%	30%
Mild hybrid	5%	6%	9%	4%
Full hybrid	8%	1%	6%	2%
PHEV	9%	15%	4%	10%
EV	4%	5%	4%	6%

 
Cherished Mythology Lithium-ion batteries will be needed for mild, micro and full hybrids.

Incontrovertible Reality Advanced lead-carbon batteries and systems that combine lead-acid batteries with supercapacitors are up to 75% cheaper than lithium-ion batteries and offer acceptable performance in the micro and mild hybrid vehicles that Roland Berger says will account for 56% of U.S. auto sales, 69% of Japanese auto sales and 73% of European auto sales in 2020. While lithium-ion batteries will undoubtedly be used in some luxury hybrid vehicles, they're not expected to be a major factor in the mass markets for affordable light duty vehicles.

Cherished Mythology Revenues will ramp up rapidly for lithium-ion battery manufacturers over the next decade.

Incontrovertible Reality There is no substantial unused lithium-ion battery manufacturing capacity anywhere in the world and future revenue growth will be directly tied to the construction of new factories that typically take three years to plan and build. The only energy storage device manufacturers that already have excess manufacturing capacity are in the lead-acid group. As a rule of thumb, lithium-ion battery manufacturers plan on $1 in capital spending for every $1 of incremental sales revenue. In comparison, lead-acid battery manufacturers generally plan on $1 in capital spending for every $3 to $5 of incremental sales revenue.

Cherished Mythology New battery technologies will take revenue away from established manufacturers and hurt their bottom lines.

Incontrovertible Reality History teaches that increased energy efficiency leads to increased energy consumption and new technology inevitably increases aggregate demand by facilitating the development of new applications that were impossible using old technology. For the foreseeable future, demand for all classes of energy storage devices will increase at rapid rates and the only losers will be companies that can't bring a competitive product to market.

Lithium-ion batteries are a very valuable technology and their future importance to the cleantech revolution cannot be overstated. Nevertheless we've all seen the disastrous consequences investors suffered from ill advised governmental policies to encourage the use of ethanol, the wonder fuel of the new millennium. In a slideshow presentation at a recent clean air conference one auto industry executive described government's "technology du jour syndrome" and offered the following table to prove his point.

25 years ago	Methanol
15 years ago	Electric vehicles
10 years ago	HEVs and Electric vehicles
5 years ago	Hydrogen Fuel Cells
2 years ago	Ethanol
Today	PHEVs and Electric vehicles
2011	What’s next?

It's enough to make you go Hmmm.

As a young lawyer in Houston, my first mentor taught me that you can describe every oil and gas deal with a venn diagram that consists of three concentric circles. The outer circle represents the seller's expectations, the middle circle represents the buyer's expectations, and the innermost circle represents the actual outcome. In the market for energy storage stocks I worry that the venn diagram is distorted because investor optimism exceeds industry expectations by a wide margin. These are conditions that can give birth to bubbles.

My favorite story of unbridled optimism begins with a straight-laced father who thinks his son is overly optimistic and decides to teach the boy a lesson by telling him that a load of manure is his birthday gift. The manure is delivered and dumped in the driveway and the father puts a big red bow on top of the pile. When the son gets home from school, he promptly dives headfirst into the manure pile and starts digging. When the surprised father asks "What's going on?" the boy promptly replies, "There has to be a pony in here somewhere!"

The good news is there are several workhorses in the pile. The bad news is that none of them are the pretty ponies that the government, the mainstream media and the environmental activists are praising with quasi-religious fervor. Unless investors are willing to spend a huge amount of time studying deathless tomes on energy storage, the only rational way to invest in the sector is through a diversified portfolio of cheap and cool stocks.

This will be my last blog for a week or so because I'm scheduled to give a luncheon speech at Sandia National Laboratories’ EESAT 2009 Conference in Seattle on Tuesday. In connection with the speech I'll have an opportunity to attend three days of high-level presentations on electrical energy storage applications and technologies. Hopefully I'll return with some new insights that can help make readers better investors.

DISCLOSURE: None

Posted by John Petersen at 10:47 PM | Permalink | Comments (7)

John Petersen

I've been blogging about pure-play energy storage device manufacturers since July 2008. By mid-November I'd assembled a short list of thirteen pure-play public companies that accounted for almost 25% of the $30 billion global battery market. Frankly I was shocked to learn that major battery manufacturers like Exide (XIDE) and Enersys (ENS) that report billions in annual sales carried tiny market capitalizations when compared with far riskier technology development companies like Ener1 (HEV) and Valence Technology (VLNC) that would be little more than rounding errors on the big boys' financial statements. As I focused on the obvious valuation disparities, it became clear that the market was paying huge premiums for companies that are developing cool energy storage devices and heavily discounting companies that manufacture objectively cheap energy storage devices. My belief at the time was that the cool companies were likely lose ground while the cheap companies were likely to gain ground. My original peer group comparison table follows (click on the image for a larger view).



While the last ten months have been anything but normal, I revisited my valuation analysis in May of this year and showed that from November 14, 2008 through April 30, 2009, the cheap group appreciated an average of 56.5% while the cool group appreciated an average of 6.7%. I revisited the analysis again in August of this year and showed that from November 14, 2008 through July 31, 2009, the cheap group appreciated an average of 59.2% while the cool group appreciated an average of 21.42%. We all know that past performance is never a guarantee of future performance, but the theory seems to be holding up pretty well.

With it's successful IPO last week, A123 Systems (AONE) dropped a $2.2 billion market capitalization rock into what was previously a $4.4 billion market capitalization pond. The ripple effect will be felt for months as analysts and investors perform detailed comparisons of the publicly traded energy storage companies in an effort to ferret out the bargains and identify the diamonds in the rough. Now that the initial volatility of A123's IPO has passed, the market seems to be returning to more normal conditions, and we've reached the end of a calendar quarter, this seems like a convenient time to do a final comparison of market performance since November 14, 2008. It also provides an opportunity to conform the cheap and cool classifications to the tables I used in Battery Investing For Beginners, Part II and reset the baseline for future comparisons using yesterday's closing prices.

The following table provides comparative price data for the pure play energy storage companies I track. It shows closing prices on November 14, 2008 and September 30, 2009; calculates the percentage of change since November 14, 2008; and shows current market capitalization of each company. It also provides comparable tracking data for the Dow, the S&P 500 and the Nasdaq Index. While I've included A123 in the cool sustainable group effective September 30th, I have not adjusted the historical performance of the group for the first week of trading in its stock (click on the image for a larger view).



The following table summarizes the portfolio appreciation that a hypothetical investor would have realized over the last ten months if he had invested $1,000 in each company on November 14, 2008. It also presents comparable data for the broad market indexes.

Tracking Category	Percentage Gain
Broad Market Indexes	25.09%
Cool Emerging Companies	4.30%
Cool Sustainable Companies	75.14%
Cheap Emerging Companies	54.73%
Cheap Sustainable Companies	121.02%
Chinese Battery Companies	126.24%

Equity markets are driven by a combination of greed and fear, emotional reactions that are frequently at odds with economic realities. Over the past few years, the cool companies have been driven by headlines that highlight opportunities while the cheap companies have been driven by headlines that highlight problems. Since headlines inevitably feed the greed and fear cycle, the cool companies were driven to objectively high valuation levels while the cheap companies were driven to objectively low valuation levels. If the last ten and a half months are any indication, the pendulum is moving back toward a more balanced position where the cheap group valuations will eventually reach a more reasonable parity with the cool group valuations. They still have a long way to go.

I have consistently argued that every energy storage decision in transportation, alternative power and the smart grid will boil down to a cost-benefit analysis. As long as the cost of storage exceeds the value of the stored electricity, waste will prevail. When the value of the stored electricity is higher than the costs of storage, the market will respond appropriately. While there is no doubt that the cool companies will have more business than they can handle, there is also no doubt that the bulk of the incremental sales revenue will flow to companies that serve the mundane needs of the average user, rather than the extreme needs of "power users." It's ultimately a choice between meat and potatoes or rainbow stew.

While I believe the cleantech revolution will result in rapid and sustained growth across the entire spectrum of energy storage companies, I remain convinced the best stock market performers will be manufacturers of objectively cheap energy storage products. Vinod Khosla is fond of reminding investors that "The most important thing to remember is economic gravity — the cheapest thing ends up winning." Mark Twain once quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he made the cheapest cars. Microsoft didn’t make the best operating system; it made the cheapest operating system. Xerox invented and then failed to commercialize more cool technologies than I can even begin to count. Examples of the fundamental economic reality that cost trumps coolness are too numerous to mention. When you cut through the energy storage hype and drill down to business fundamentals, I have to believe that investors who want market beating returns in the energy storage sector should be focusing on companies that make cheap products.

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 (XIDE), Enersys (ENS) Active Power (ACPW) and ZBB Energy (ZBB).

Posted by John Petersen at 10:52 AM | Permalink | Comments (0)

John Petersen

Last Friday I published "Battery Investing for Beginners" as an introductory piece for investors who don't know much about the energy storage sector but are interested in learning more because of the hugely successful initial public offering by A123 Systems (AONE). Since the article was well received and there seems to be a good deal of reader interest, I've decided to continue the theme with a series of articles where I'll try to build a contextual framework for the industry and show where various types of energy storage devices and their manufacturers fit into that framework. Since I don't want to spend too much time replowing old ground, I'll rely on hyperlinks to my earlier blogs and third party source documents.

I'm a lawyer, not a journalist. My undergraduate degree was in accounting with a solid base of hard science. I've spent the last 30 years working in securities law where most of my work involved small natural resource or technology development companies. I'm not an engineer or scientist, but my chosen field of practice requires me to understand the science well enough to explain it. My foundation in the energy storage sector dates to 2003 when I took on a client named Axion Power International (AXPW.OB) that was organized to develop a novel energy storage device that's half lead-acid battery and half supercapacitor. I spent the next five years working as Axion's general counsel and served as a member of its board for four of those years. I stepped down from my position as Axion's board chairman in January 2007 and brought in successor legal counsel in early 2008. I still own a substantial long position in its stock. In short, I know the energy storage sector well and understand what the principal players are trying to accomplish, but I come from the lead-acid side of the business and because of my long history with high-tech innovation I'm not as excited by gee-whiz technology as many commenters. I like to think of myself as a cautious optimist who sees the opportunities but never overlooks the challenges.

Everybody understands the basic problem. We passed an inflection point for peak cheap oil in the late '90s and fuels that are expensive today can only become more costly in the future. We've also passed the inflection point for peak cheap electricity. When you factor in concerns over CO2 emissions as a possible cause of climate change, we have a real mess on our hands. The good news is that fundamental economics are finally kicking in and forcing us to attack the issue of energy waste while we search for new ways to generate electricity from non-traditional sources. Merrill Lynch strategist Steven Millunovich believes we are at the dawn a new industrial revolution, the age of cleantech. I believe he's right.

When I started writing this blog, I decided to limit its scope to "pure-play" energy storage device manufacturers that file regular reports with the SEC. The decision resulted in three noteworthy exclusions: Johnson Controls (JCI), which is the largest battery manufacturer in the world but only gets 15% of its revenue from battery sales; SAFT Groupe (SGPEF.PK), a profitable French battery manufacturer that does not file reports with the SEC; and BYD (BYDDY.PK), a Chinese manufacturer of cell phones and automobiles that gets 23% of its revenue from battery sales and does not file reports with the SEC. The decision also left me with a small but reasonably comparable short list of companies that only differ in the nature of their products and the development stage of their businesses. For investors who would rather track an index that includes JCI and BYD, I recommend the Energy Storage and Battery Technology Stocks Index (*BTTRY) published by Tickerspy.

There are two basic classes of energy storage devices: cool devices like lithium-ion batteries, supercapacitors and high-speed flywheels that promise extraordinary performance and are relatively expensive in terms of cost per unit of storage capacity; and cheap devices like lead-acid batteries, flow batteries and low-speed flywheels that offer lower levels of performance but are relatively inexpensive. My favorite source of cost data on energy storage technologies is a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. The following table separates the raw Sandia data into short duration power technologies, short duration energy technologies and long duration energy technologies; orders the technological contenders based on the average of current and 10-year projected cost data reported by Sandia; and identifies the American companies I follow that are focused on each storage technology.

	Current Cost	10-year Projected
Short Duration Power	($/kWh)	Cost ($/kWh)
High-speed Flywheels (composite)	$1,000	$800
Beacon Power (BCON)
Lithium-ion Batteries	$1,333	$780
Altair Nanotechnologies (ALTI)
A123 Systems (AONE)
Electrochemical Capacitors	$356/kW	$250/kW
Maxwell Technologies (MXWL)
	Current Cost	10-year Projected
Short Duration Energy	($/kWh)	Cost ($/kWh)
Flooded Lead-acid Batteries	$150	$150
Exide (XIDE)
Enersys (ENS)
C&D Technologies (CHP)
Valve Regulated Lead-acid Batteries	$200	$200
Exide (XIDE)
Enersys (ENS)
C&D Technologies (CHP)
Low-speed Flywheels (steel)	$380	$300
Active Power (ACPW)
Lead-carbon Asymmetric Capacitors	$500	<$250
Axion Power (AXPW.OB)
Lithium-ion Batteries	$1,333	$780
A123 Systems (AONE)
Ener1 (HEV)
Valence Technologies (VLNC)
Altair Nanotechnologies (ALTI)
	Current Cost	10-year Projected
Long Duration Energy	($/kWh)	Cost ($/kWh)
Zn/Br Batteries
ZBB Energy (ZBB)	$500	$250/kWh

There are also two basic classes of pure-play energy storage companies: emerging entrepreneurial companies that are developing new technologies; and established manufacturing companies that have solid customer bases and sustainable business models. A fifth and final class is a rapidly expanding group of Chinese battery manufacturers that have listed their shares in the U.S. but are not expected to be major players in the growth of America's domestic battery industry. To allow for fundamental differences among their technologies and business models, I've segregated my universe of pure play energy storage companies into five classes that I'll briefly describe below and summarize in a series of tables that identify the individual companies and provide summary data on their share prices, market capitalizations and key financial ratios.

Cool Emerging - My cool emerging class consists of thinly-capitalized developers of relatively expensive energy storage technologies. Their annual operating losses are typically large in relation to their total assets and they'll be dependent on additional financing for an indeterminate period of time. Cool emerging companies are typically valued on the basis of the perceived potential of their technology and their expected time to market.

Name	Symbol	Price	Mkt. Cap.	P/E	P/B	P/S
Ener1 Inc	HEV	$7.07	$826.0		9.8	37.5
Valence Technology	VLNC	$1.81	$229.7		N/A	11.6
Altair Nanotechnologies	ALTI	$1.17	$123.5		2.7	33.8
Beacon Power	BCON	$0.73	$88.1		4.2	213.7

Cool Sustainable - My cool sustainable class consists of well-capitalized developers of relatively expensive energy storage technologies that have a substantial customer base. Their annual operating losses are typically smaller in relation to their total assets and their need for additional financing is generally less pressing. Cool sustainable companies are typically valued on the basis of their earnings potential and business development plans.

Name	Symbol	Price	Mkt. Cap.	P/E	P/B	P/S
A123 Systems	AONE	$18.73	$1,838.9		3.6	20.5
Maxwell Technologies	MXWL	$19.27	$500.5		6.2	5.4
Ultralife Corporation	ULBI	$5.90	$99.8		1.3	0.5

Cheap Emerging - My cheap emerging class consists of thinly-capitalized developers of relatively cheap energy storage technologies. Their annual operating losses are typically large in relation to their total assets and they'll be dependent on additional financing for an indeterminate period of time. Like their cool counterparts, cheap emerging companies are typically valued on the basis of the perceived potential of their technology and their expected time to market.

Name