Charles Morand

It seems as though the darkest clouds are finally dissipating over alt energy's financing horizon. Over the past few weeks, money has started flowing into the sector again, as evidenced by a number of recent deal announcements:

1. On June 9, I reported on the upcoming IPO for Magma Energy Corp., a geothermal exploration company. The IPO's size will be upped from an initial C$50 MM to C$100 MM, a sign of increased market appetite 
2. SunPower Corp. raised $418 MM in early May through a share and debt offering, and recently announced it had reached a $100 MM deal with Wells Fargo to fund commercial-scale solar PV projects across the US
3. John reported a few days ago that A123 Systems had amended the SEC registration statement for its proposed IPO, positing that it could be much larger than initially anticipated
4.  In late May, Suntech Power raised $277 MM from a follow-on offering of its American Depositary Shares (ADSs), and recently received a $50 MM convertible loan from the IFC
5. On June 23, Yingli Green raised $193 MM through a follow-on offering of its ADSs
6. On June 25, Trina Solar secured credit facilities of about $57 MM
7. New Energy Finance just reported a slight increase in asset financing for Q2 2009, although it cautioned that money flows into renewable energy projects were: (1) down substantially from what they were a year ago (~66% in the US); and (2) far below the level where they need to be if greenhouse gas emissions are to be brought under control by 2020

As noted by both New Energy Finance and John, requirements for matching funds under the ARRA mean that firms that want to access government grants will have to put up some of their own money, potentially leading some of them to go to market even if conditions aren't ideal.

The recent upsurge in public market financing also certainly has to do with  buoyant markets and higher oil prices, a window that could close if the general sentiment turns negative in the coming weeks.

This increased financing activity is good news to be sure. Pure-play alt energy firms, by virtue of the sectors they do business in, typically have much weaker balance sheets than conventional energy firms or firms in more established industries. They are thus generally in a much weaker position to ride out a long capital markets drought.

But the industry is far from out of the woods yet, and I remain convinced that questionable firms are in a much weaker position to conceal their flaws behind generalized cleantech exuberance than they were in 2006 and 2007. The last rally lifted some boats that didn't deserve lifting, and sooner or later those boats will sink again.

DISCLOSURE: None       
            

Posted by Charles Morand at 11:44 PM | Permalink | Comments (0)

John Petersen  

After six months of regulatory silence and $100 million in new funding, A123 Systems amended the SEC registration statement for its proposed IPO on June 23rd. While this latest filing may simply be A123's way demonstrating its ability to raise matching funds for a scaled back ATVM loan request of $1 billion and pending applications for $438 million in direct Federal grants, my sense is that the proposed IPO will probably come to market in early September. Since ATVM loans will require 20% cost sharing and direct Federal grants will require 50% cost sharing, the IPO will probably be a good deal larger than the $175 million contemplated by A123's original filing.

I'm very interested in A123's IPO for several reasons. First, it will be underwritten by Morgan Stanley, Goldman Sachs, Merrill Lynch and Lazard, which will give us the first clear picture of how the top-tier investment banks and institutional investors value pure-play energy storage companies. Second, the emergence of A123 as a sub-sector leader will encourage lesser Li-ion battery developers to adopt comparably transparent disclosure metrics that will make it much easier to assess their relative strengths and weaknesses. Third, the existence of a large, adequately capitalized and business driven leader in the Li-ion sub-sector will probably dampen some of the unbridled optimism we've seen in the markets for transition stage Li-ion battery developers. Finally, the A123 IPO is likely to launch a renaissance of interest in a basic industrial sector that's been undervalued and ignored for years.

I spent some time over the weekend studying A123's draft prospectus and was able to glean important current data that tends to highlight the yawning economic chasms that Li-ion technology must bridge before it can compete in applications where the end-user has a choice. During the first quarter of 2009, A123's cost of goods sold was $1.89 per watt hour, which does not compare favorably with an average cost of roughly $0.20 per watt hour for lead acid batteries. Likewise A123's $41 million investment in property, plant and equipment that can manufacture up to 151,000 kWh of batteries per year is at least an order of magnitude greater than the capital cost of lead-acid battery manufacturing facilities.

I fully expect that capital outlays and manufacturing costs for Li-ion batteries will both decline dramatically over the next ten years. For the short- to medium-term, however, I expect gross profit margins in the Li-ion sub-sector to remain narrow and sales revenues to ramp-up slowly as Li-ion battery chemistry and manufacturing methods progress through two or three generations of technological change. It all boils down to baby steps; learning to crawl, then toddle, then walk and then run. The bumps, bruises, skinned knees and tears are all part of the learning process.

As regular readers know, I come from the lead-acid side of the battery business and believe that over next ten years the bulk of the expected revenue growth in the energy storage sector will flow to established manufacturers of inexpensive lead-acid batteries that can do the required work for a reasonable cost even if they are bulkier and heavier. Over the longer term, I expect leading Li-ion battery developers like A123 to overcome a myriad of cost, performance, safety, cycle-life, abuse tolerance and raw material constraints that I've written about in other articles, and ultimately usher in a golden age of cheap energy storage for applications ranging from portable power, to vehicles with plugs, to a smart grid that smoothly integrates a host of emerging power generation technologies. The changes won't come overnight and they will be expensive, but by 2020 the world will be very different from the one we live in today.

While I'm not so old that I avoid buying green bananas, I expect to be cold, dead and buried long before competition from Li-ion batteries results in a year on year decline in global sales of lead-acid batteries. Nevertheless, A123's upcoming IPO is certain to focus the market’s attention on the storage sector in a whole new way. Since I've been around long enough to know that a rising tide of investor sentiment lifts all of the boats in the marina, I think astute investors ought to be doing their boat shopping now.

Posted by John Petersen at 12:46 PM | Permalink | Comments (4)

Last week, an article in Green Car Congress summarized a market forecast that Dr. Menahem Anderman presented at this month's Advanced Automotive Battery Conference in Long Beach, California. In his presentation, Dr. Anderman evaluated the market for HEVs in 2011, projected a $1,230 million market for automotive NiMH batteries, and projected a $320 million market for automotive Li-ion batteries. The following graph comes from Green Car Congress, is based on data from Dr. Anderman's AABC presentation, and shows both unit sales and market value of the Li-ion batteries that will be used in HEVs by 2011 (click on the graph for a larger image).



It's sobering if not downright depressing when you get to the middle of the article and read about Dr. Anderman's analysis of the gasoline prices required for HEVs to make economic sense.

Based on a five-year net present value analysis, Dr. Anderman concluded that:

• Stop-start hybrids make economic sense in the $5 per gallon range;
• Mild and strong hybrids require a gasoline price of roughly $7 per gallon; and
  
• PHEVs and full EVs require a gasoline price of about $10 per gallon.

When he performed an eight-year present value analysis, Dr. Anderman concluded that:

• Stop-start hybrids make sense in the $3 per gallon range;
• Mild and strong hybrids make sense in the $5 per gallon range;
• PHEVs require a gasoline price of roughly $7 per gallon; and
  
• Full EVs still require a gasoline price of about $10 per gallon.

I know very few people that can perform a net present value analysis. I know even fewer who go looking for a new car with the idea that they're going to drive it for five to eight years. Given the dismal economics of mild and strong hybrids and the ghastly economics of cars with plugs, I believe the high-end market for the next several years will be limited to the image conscious affluent who are willing and able to pay big premiums to make a statement. While Dr. Anderman's forecast of 40,000 Li-ion powered HEVs in two years strikes me as a very ambitious target, I'm willing to set aside my reservations for purposes of this article and assume that manufacturers of automotive Li-ion batteries will be guaranteed revenues of $320 million in 2011.

While most would agree that $320 million of total revenue by 2011 sounds impressive, it loses a bit of luster when you consider that advanced lead-acid battery manufacturers can expect $900 million to $1.8 billion of incremental revenue by 2011 from the widespread implementation of stop-start technology as standard equipment.

I've used the following graph from an October 2008 Frost & Sullivan presentation in a couple of recent articles, but it bears repeating because the law of large numbers is the fundamental reason that short term revenue growth in the automotive battery market favors lead-acid by 6 to 1 over Li-ion. The long blue segments represent the stop-start market that will be dominated by advanced lead-acid batteries because they can do the required work, they cost 60% to 75% less than NiMH and Li-ion alternatives, and they are the only batteries that can be manufactured in sufficient numbers to serve the short-term needs of automakers. The red, green and violet segments represent the high priced "centerfold" alternatives favored by EV advocates, reporters, politicians and public relations managers who would rather sell a sweet dream than grapple with economic reality.



In How Short-Term Supply Constraints Will Impact Booming HEV Markets, I explained that Frost & Sullivan based their original forecast on European CO2 emission standards but did not account for President Obama's subsequent acceleration of domestic CAFE standards. That change alone will push growth that would normally have occurred between 2015 and 2020 into earlier years and could easily double the growth rates Frost & Sullivan expected last fall. So with that background in mind, let's run the numbers.

Currently automakers spend between $50 and $100 for the commodity lead-acid batteries they use for starting, lighting, ignition and accessories; call it an average of $60. Since stop-start hybrids put far more stress on the battery, the advanced lead-acid batteries needed for stop-start vehicles will probably cost the automakers $250 to $300 per vehicle; call it an average of $260. That means the battery cost increment for a stop-start vehicle will be in the $200 range.

A quick eyeball of the Frost & Sullivan graph shows forecasted sales of 4.5 million stop-start vehicles by 2011, which works out to about $900 million in incremental revenue for lead-acid battery manufacturers, or roughly three times Dr. Anderman's forecast for Li-ion. If accelerated CAFE standards double global demand for stop-start vehicles, the incremental revenue for lead-acid battery manufacturers will be closer to $1.8 billion, or roughly six times Dr. Anderman's forecast for Li-ion.

Li-ion battery developers Altair Nanotechnologies (ALTI), Ener1 (HEV) and Valence Technologies (VLNC) have a combined market capitalization of $935 million and will be vying with a host of established domestic, European and Asian competitors for a piece of $320 million in total revenue.

In comparison, lead-acid battery manufacturers Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB) have a combined market capitalization of $340 million and will be vying with their traditional competitors for a share of $1.8 billion of incremental revenue.

Benjamin Graham said, "In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine." The voting is based on hopes, dreams and expectations. The weighing is based on revenue growth, earnings and other business fundamentals. Any time I can identify one industry sub-sector that trades at one-third of the market value of its more glamorous cousin but is likely to enjoy three to six times the short-term revenue gains, I have to believe the undervalued sector will reward investors handsomely as the weighing machine returns to balance.

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

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2007 he was a director of Axion Power International, Inc. a public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 02:32 PM | Permalink | Comments (1)

John Petersen

For several weeks I've been writing about robust demand in Europe for a new class of HEVs that are usually referred to as "stop-start" or "micro hybrids." According to the EPA's website:

"Stop/Start hybrids are not true hybrids since electricity from the battery is not used to propel the vehicle. However, the Stop/Start feature is an important, energy-saving building block used in hybrid vehicles.

Stop/Start technology conserves energy by shutting off the gasoline engine when the vehicle is at rest, such as at a traffic light, and automatically re-starting it when the driver pushes the gas pedal to go forward."

The concept is simple and so is the technology. Adding micro hybrid capabilities at the factory typically costs less than $1,000 per vehicle and improves fuel efficiency by an estimated 5% to 8%. It's a baby step, but as my first table in The Obama Fast Track for HEVs shows, it's more cost-effective than any other class of HEV technology. The main reason micro hybrids are so affordable is that they use advanced lead-acid batteries instead of more expensive alternatives.

Since the booming European micro hybrid phenomenon has not reached the U.S., a couple skeptical readers challenged me to show them press releases from major European OEMs announcing plans to produce HEVs that didn't use NiMH or Li-ion batteries. They were not satisfied with my initial response that micro hybrids are being adopted as standard equipment without major fanfare. Yesterday I found an October 2008 "Power Solutions Backgrounder" from Johnson Controls, Inc. (JCI) that proves the point nicely:

"We sold 400,000 advanced batteries for start/stop micro hybrid vehicles in Europe in 2007 and 800,000 in 2008, with the expectation of doubling that number again in 2009 to approximately 1.5 million batteries. These vehicles achieve a 5 percent to 8 percent fuel savings compared to conventional gas vehicles."

I then found www.hybridcars.com, a rich source of data that describes itself as the Internet’s premier website dedicated to hybrid gas-electric vehicles. By combining the micro hybrid battery sales data from JCI with additional data from hybridcars.com, I was able to cobble together the following graph that shows the growth of the global HEV market over the last 10 years. Since I don't have access to comprehensive data on the European micro hybrid market, I assumed that JCI was the only competitor. As a result, the graph understates European micro hybrid sales by a couple of percentage points, but in this case shape is far more important than numerical precision.



With historical data to provide context, the following graph from a 2008 Frost & Sullivan presentation that summarizes their forecast of future growth in global HEV sales makes a good deal more sense than it may have in earlier articles.



As I explained in How Growing HEV Markets Will Impact Battery Manufacturing Revenues, the Frost & Sullivan forecast was based solely on European CO2 tailpipe emission standards that take effect in 2012 and did not account for President Obama's subsequent acceleration of CAFE standards. That recent change will have the effect of pushing growth that would normally have occurred in the 2015 to 2020 timeframe into earlier years and could easily double the growth rates that were expected last fall. While I'm happy to leave the work of updating growth forecasts to experts like Frost & Sullivan, it seems safe to conclude that the next few years will be a challenging time for the battery industry.

Under the growth scenario presented in the Frost & Sullivan graph, the bulk of the unit growth in the HEV markets will go to lead-acid battery manufacturers who will not need to make larger numbers of batteries, but will need to make higher quality batteries that are better suited to the performance requirements of micro hybrids. This changing product mix will reduce production volumes for low-margin valve regulated lead-acid batteries and increase production volumes for high-margin advanced lead-acid batteries, and should lead to rapid and sustained revenue and profit growth for all lead-acid battery producers.

As we move away from the micro hybrid market and focus on the higher value markets for mild, full and plug-in hybrids, the challenges become more daunting. Jack Lifton has written several articles on global production constraints for the rare earth metal lanthanum; the "M" in NiMH batteries. His basic concerns are that substantially all of the world's supply of rare earth metals comes from China; their current production of roughly 33,000 tons of lanthanum per year can only provide raw materials for about a million HEV battery packs; and their domestic demand for rare earth metals is growing at an extraordinary rate that will limit future exports. Since it usually takes several years to increase production from an existing mine and even longer to bring a new mine into production, Jack expects the battery industry to encounter substantial short- to medium-term bottlenecks in the lanthanum supply chain. If he's right, automakers will be forced to make a Hobson's choice for an increasing percentage of their HEV battery needs:

• Use Li-ion batteries despite the performance, cost, abuse tolerance and cycle life concerns; or
• Use advanced lead-acid batteries despite the weight and volume concerns.

On its face this seems to be good news for Li-ion battery developers like Ener1 (HEV), Valence Technology (VLNC) and Altair Nanotechnologies (ALTI) who consistently argue that their proposed products are best choice to fill the gap between surging HEV demand and constrained NiMH battery supply. While many find those arguments persuasive if not compelling, I remain skeptical for several reasons.

First, Li-ion batteries have a checkered history in portable electronics that are used indoors. We know almost nothing about their long-term performance when exposed to the heat, cold, moisture, vibration, driving habits, user neglect and physical stress that automobiles have to endure on a daily basis. The only way to develop that knowledge base will be to get Li-ion batteries out of the laboratory and into test fleets. While many automakers have announced plans to begin limited production of HEVs and PHEVs that use Li-ion traction batteries over the next two years, I can't help but wonder whether the Li-ion battery sector isn't in exactly the same position that the NiMH battery sector was in 10 years ago. My next graph comes from the May 2009 Dashboard at hybridcars.com and shows the 10-year U.S. sales history for HEVs with NiMH batteries. Call me a luddite, but I have a hard time accepting the idea that HEVs with Li-ion batteries will follow a development path that goes from zero vehicles per year to hundreds of thousands of vehicles per year over the course of four or five years. From all of the projections I've seen, the DOE and all major automakers share those reservations.



Second, the world's productive capacity for the large-format Li-ion batteries that are needed for automotive applications is very limited. There have been numerous announcements about plans to build new factories, but the bulk of those planned facilities will not be operational until 2011 or 2012. Since most existing Li-ion battery plants are already running at full capacity to make batteries for the high value portable electronics markets, I don't believe Li-ion batteries will be able to make a meaningful contribution to the auto industry's drive to meet European CO2 emission standards by 2012.

Third, I remain concerned that global rates of lithium production will not be able to keep pace with rapidly increasing demand for batteries. According to USGS publications, approximately 25% of global lithium production is used for Li-ion batteries. While global lithium production has grown at an annual rate of roughly 6% over the last couple of years to a 2008 total of 27,400 tons, the production process for lithium from brines involves an 18-month evaporation cycle before the alkali salts contained in the brine are ready for separation, refining, processing and use. Moreover lithium mining is subject to the same expansion constraints as other extractive industries. I'm no longer worried about the long-term adequacy of global lithium resources and I know that production can be expanded over time, but production capacity cannot be expanded quickly and there are certain to be substantial short- to medium-term production bottlenecks.

Finally, I remain concerned about the current development status of large-format Li-ion batteries for automotive use. In a February article titled DOE Reports That Lithium-on Batteries Are Not Ready for Prime Time, I summarized the conclusions of the DOE's 2008 Annual Progress Report for the Energy Storage Research and Development Vehicle Technologies Program that basically said Li-ion batteries would not be suitable for use in mass market HEV and PHEV applications until technical barriers relating to cost, performance, abuse tolerance and cycle life were overcome. I expanded on that theme in Understanding the Development Path for Li-ion Battery Technologies after a reader sent me sent me an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2008, a high-level policy analysis that discusses the merits, risks and expected costs of an aggressive eight-year initiative to foster the development and facilitate the commercialization of Li-ion batteries. While the draft roadmap went a long way toward easing my concerns over the long-term future of large format Li-ion batteries, it merely reinforced my conviction that Li-ion batteries are not currently ready for the big show.

Automakers are a conservative lot and they are intensely sensitive to price, performance and supply chain issues. They understand that NiMH and Li-ion battery supplies are constrained by limited global production of lanthanum and lithium, and that large format Li-ion battery supplies will be further constrained for several years by inadequate manufacturing capacity. They also have substantial reservations about the long-term performance of Li-ion batteries under the extreme heat, cold, humidity and vibration conditions that automobiles have to endure on a daily basis. Notwithstanding these known and very real business constraints, the automakers are under strict regulatory edicts to reduce fleet average CO2 emissions to 130 grams per kilometer in Europe by 2012 and improve fuel economy by roughly 35% in the U.S. by 2016. These are very brief timeframes for changes of this magnitude.

The end result is an untenable situation where proven NiMH batteries won't be available in adequate volumes during the regulatory compliance period and even unproven Li-ion batteries will be subject to daunting supply constraints. In a nutshell, supply constraints will leave the booming HEV markets in a critical state of flux for several years. While nothing can be predicted with certainty, I believe the likely responses from automakers will fit in three distinct categories:

1. Automakers will continue to use proven NiMH batteries as their preferred HEV technology until limited lanthanum supplies restrict the ability to manufacture NiMH batteries;
2. Automakers will accelerate their efforts to build demonstration fleets of high value products using unproven Li-ion batteries, but production volumes will remain small until they gather enough hard performance data to justify the widespread commercialization of the technology; and
3. Automakers will significantly increase their use of advanced lead-acid batteries in high volume budget priced product lines, including mild and full hybrids that can tolerate the seventy-five pound weight gain and one cubic foot space loss that will typically arise from using advanced lead-acid batteries instead of NiMH or Li-ion.

This is a sub-optimal environment for all parties because automakers do not have the flexibility to develop new product lines on a multi-year schedule. They have to go to work immediately with the tools at their disposal and bring their product lines into regulatory compliance in a little over five years. The end result will be an accelerated timeline for Li-ion batteries and increased use of advanced lead-acid batteries in product lines that might have been introduced with NiMH batteries under more normal conditions. As automakers develop experience with using both advanced lead-acid and Li-ion batteries in roughly equivalent applications, the unanswered technical and cost-benefit questions about which technology is best for automotive applications will be conclusively answered. In other words, we're going to have a horse race after all.

DISCLOSURE: Author does not own any of the stocks mentioned in this article because all of his personal investments are in pure-play lead-acid battery manufacturers.

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. (AXPW.OB) a small public company involved in advanced lead-carbon battery research and development.

Posted by Tom Konrad at 07:01 PM | Permalink | Comments (2) | TrackBacks (0)

John Petersen

For the last three weeks I've been writing about why rising oil prices, tightened CO2 emission standards in Europe and accelerated CAFE standards in the U.S. will combine to foster rapid implementation of hybrid electric vehicle (HEV) technology in the automotive industry and result in huge revenue increases for all automotive battery manufacturers. These articles have generated record numbers of comments and questions from readers that want a clearer understanding of what the rapidly changing demand picture means for battery investors. While I generally try to avoid revenue forecasts because they require pricing assumptions that can be fertile ground for nit picking, I'll ask readers to bear with me because the conclusion does not depend on the initial assumptions. The bulk of the hard market data I've used in this article was graciously provided by Frost & Sullivan, a leading global consultancy and market research firm that provides best in class coverage of the energy and power systems markets.

So far, the one bright spot in the global recession has been savings at the gas pump. For every $1 decline in prevailing gas prices, nationwide spending on gasoline falls by $12 billion per month and those savings go directly to consumers. Unfortunately, the relief was short-lived and gas prices are once again rising. The following graph is based on historical oil price data downloaded from the DOE's Energy Information Administration. To give readers an idea of why I'm convinced that oil prices will stabilize around $80 over the next few months and be a primary market driver for the shift to HEVs, I've added a simple price channel overlay on the ten-year trend.




In The Obama Fast Track for HEVs, I explained that there are four basic types of HEVs:

• Micro-Hybrids stop the internal combustion engine ("ICE") when the car comes to a stop and restart the ICE on demand, but do not provide any acceleration boost to the powertrain;
• Mild Hybrids stop the ICE when the car comes to a stop, restart the ICE on demand and provide limited boost to the powertrain during acceleration;
• Full Hybrids stop the ICE when the car comes to a stop, launch the car from a stop in electric-only mode, restart the ICE when needed and provide a higher level of boost to the powertrain during acceleration; and
• Plug-in Hybrids will allow the car to operate in electric-only mode for up to 40 miles before starting an ICE to recharge the batteries.

I then explained how President Obama's decision to accelerate the effective date of Federal CAFE standards will require manufacturers to increase fuel efficiency by roughly 35% over the next seven years and eliminate fleet-wide averaging, thereby forcing each class of vehicles to carry its own weight. My conclusion was that while the accelerated CAFE rules were not an HEV mandate, they put HEVs on a regulatory fast track in the U.S.

In a follow-up article, Why Advanced Lead-Acid Batteries Will Dominate the HEV Markets, I drilled deeper into the economics of using various types of batteries in HEVs and explained how recent changes in European tailpipe CO2 emission standards would accelerate efforts to make micro-hybrid technology standard equipment. That article included the following graph from an October 2008 Frost & Sullivan presentation that explained their estimates of near-term growth in global HEV demand and showed how that growth would be divided up among micro, mild, full and plug-in hybrids.



Since the October 2008 Frost & Sullivan presentation focused on the impact of European CO2 emission standards and assumed that revised CAFE standards would not take effect until 2020, I believe global HEV demand during the forecast period will ramp up far faster than the growth rate reflected in the baseline estimates. For analytical purposes, Table 1 starts from an estimated base of 2 million units in 2009 and then increases production to 5 million units in 2010, 11 million units in 2012 and 20 million units in 2015. In order to put NiMH and Li-ion batteries in the best possible light, Table 1 uses the 2015 Frost & Sullivan market penetration percentages for all years.

Table 1	Market	2010 Increment	2012 Increment	2015 Increment
	Penetration	3 Million Units	9 Million Units	18 Million Units
Micro Hybrid	78%	2,340,000	7,020,000	14,040,000
Mild Hybrid	6%	180,000	540,000	1,080,000
Full Hybrid	15%	450,000	1,350,000	2,700,000
Plug-in Hybrid	1%	30,000	90,000	180,000
Total HEV Demand	100%	3,000,000	9,000,000	18,000,000

All currently available HEVs use beefed-up lead-acid batteries for their start-stop functions and NiMH batteries for their powertrain functions. Table 2 summarizes the incremental battery cost for each HEV type assuming a $150 premium for a more robust start-stop battery system and $800 per kWh for powertrain batteries, a value taken from the most recent DOE cost estimate for heavy-duty NiMH batteries.

Table 2	Start-Stop	Powertrain	Powertrain	Total
	Batteries	Battery Capacity	Battery Cost	Batteries
Micro Hybrid	$150		-0-	$150
Mild Hybrid	$150	0.75 kWh	$600	$750
Full Hybrid	$150	1.50 kWh	$1,200	$1,350
Plug-in Hybrid	-0-	1.00 kWh	$8,000	$8,000

Table 3 summarizes the additional expected demand for lead-acid batteries for new HEVs assuming they will only be used for start-stop applications.

Table 3	2010 Revenue	2012 Revenue	2015 Revenue
	Increment	Increment	Increment
	(millions)	(millions)	(millions)
Micro Hybrid	$351	$1,053	$2,106
Mild Hybrid	27	81	162
Full Hybrid	_68	203	405
Totals	$446	$1,337	$2,673

Table 4 summarizes the additional expected demand for NiMH and Li-ion batteries for new HEVs assuming they will be used for all powertrain applications.

Table 4	2010 Revenue	2012 Revenue	2015 Revenue
	Increment	Increment	Increment
	(millions)	(millions)	(millions)
Mild Hybrid	$108	$   324	$   648
Full Hybrid	540	1,620	3,240
Plug-in Hybrid	240	720	1,440
Totals	$888	$2,664	$5,328

While Tables 3 and 4 paint an optimistic demand scenario for all battery manufacturers, the unvarnished truth is that the incremental near-term demand for NiMH and Li-ion powertrain batteries cannot possibly be satisfied.

Battery manufacturing is capital intensive and it takes 3 to 4 years to build and equip a new NiMH or Li-ion battery plant. According to Frost & Sullivan, global sales of NiMH batteries for automotive powertrain applications were roughly $833 million in 2008. Of that total, $580 million (70%) represented batteries that Panasonic EV Energy, a Toyota subsidiary, made for its parent. Frost & Sullivan has also reported that total global sales of Li-ion batteries were roughly $7 billion in 2008 and substantially all of those batteries were used in non-automotive products. Notwithstanding the flurry of recent press releases about planned battery plant construction in Asia, Europe and North America, those projects cannot be completed before 2011 or 2012 and meeting the incremental automotive powertrain battery production schedule in Table 4 would require manufacturers to build new factories that are equivalent to the world's entire NiMH battery manufacturing capacity every year for the next six years.

Battery manufacturing is also raw material intensive and according to metal mining and natural resource development expert Jack Lifton there are critical production constraints on both the lanthanum that is essential for NiMH batteries and the lithium that is essential for Li-ion batteries. While supplies of both of these metals can be increased over time if enough development capital is available to mine owners, the average lead-time to expand an existing mine or bring a new mine into production is on the order of 5 to 7 years. So even if the battery manufacturing plants could be built fast enough to satisfy the anticipated near-term incremental demand for HEV batteries, the miners can't increase lanthanum and lithium production fast enough.

Automobile manufacturing is a tough business and many product development decisions are driven by legal requirements, supply chain needs and cost considerations that often transcend engineering preferences. The undeniable facts that the auto industry is being forced to come to grips with today are:

• Strict C02 tailpipe emission standards have already been adopted in Europe and must be met by 2012;
• Accelerated CAFE standards have already been adopted in the US and must be met by 2016;
• NiMH battery production cannot increase fast enough to satisfy near-term increases in HEV demand;
• While validation tests are planned, Li-ion batteries cannot currently meet market standards for HEVs;
  
• Li-ion battery production cannot increase fast enough to satisfy near-term increases in HEV demand;
• Lanthanum production cannot increase fast enough to satisfy near-term increases in HEV demand;
• Lithium production cannot increase fast enough to satisfy near-term increases in HEV demand; and
  
• Since it will be impossible to manufacture enough NiMH or Li-ion batteries to meet the regulatory deadlines, the only alternative is less expensive and more readily available lead-based batteries.

Given the crushing manufacturing capacity and material supply constraints that face both NiMH and Li-ion batteries, I believe it is virtually certain that lead-acid and lead-carbon batteries will be used as substitutes for the NiMH and Li-ion batteries that cannot be manufactured at any price. Under the circumstances, I cannot imagine a near-term future where the incremental revenue to lead-acid and lead-carbon battery manufacturers will be less than the incremental revenue to NiMH and Li-ion battery manufacturers.

I don't foresee a time in the near-term future when lead-acid batteries will supplant NiMH and Li-ion batteries in the hearts of scientists and engineers. I also believe that NiMH and Li-ion batteries are likely to retain their current status as the preferred solution for plug-in hybrids. Nevertheless, in a supply constrained environment like the one we will have to deal with for the next 5 to 7 years, automakers will make the difficult choices, use expensive NiMH and Li-ion batteries for their high value products and use cheaper lead-acid and lead-carbon batteries for their budget priced products.

As I discussed in Why Lead-Acid Batteries Will Dominate the HEV Market, the weight advantage of NiMH and Li-ion batteries in micro, mild and full hybrids is less than 75 pounds and the space savings is less than a cubic foot. While automakers pay a lot of attention to weight and space, these savings are insignificant in the context of a 3,000-pound car.

Overcoming an entrenched competitor like NiMH batteries is difficult and without looming supply constraints it would be difficult if not impossible for lead-based batteries to make inroads into the mild and full HEV markets. For the next few years, however, automakers will be forced to use lead-based batteries because there are no alternatives. My fondest hope is that after the industry has accumulated several years of experience with using lead-based batteries in budget priced HEVs, they'll conclude that the added cost of NiMH or Li-ion batteries is not justified. But even if they conclude otherwise, the benefit of using lead-based batteries as a bridge while Li-ion batteries complete the development process I described in Understanding the Development Path for Li-ion Battery Technologies is substantial.

In his book The Lost Constitution William Martin wrote, "In America we wake up in the morning, we go to work and we solve our problems." We use the tools that are readily available to us and we remain willing to adopt newer and better tools when they become readily available at reasonable prices. Sometimes, however, we give the new tools a try and then decide that the old tools are better for the job at hand. That's the way free markets work.

For most Americans and Europeans the word "shortage" has little personal meaning because we've always been able to buy the goods and services we wanted as long as we were willing to pay the price. For the first time, American and European car buyers will have to accept the fact that some HEV battery options are not going to be available at any price. It will come as a shock to many, but it will also be an increasingly common reality in a resource constrained world where 6 billion people want to earn their share of the lifestyle that 500 million of us have and take for granted.

Welcome to the age of cleantech, the sixth industrial revolution.

Fund managers are beginning to recognize the telltale signs of bubble pricing in the Li-ion battery stocks that I've been writing about for almost a year. Moreover, skeptical reports on the near-term potential of Li-ion battery developers are beginning to find their way into the mainstream financial press. The market has not yet come to grips with the inescapable conclusion that the lion's share of the revenue gains from the HEV revolution will flow to companies like Johnson Controls (JCI), Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP) that have substantial existing manufacturing capacity in both Europe and the U.S., and from technology driven newcomers like Axion Power International (AXPW.OB) that can rapidly and inexpensively expand their production capacity to satisfy soaring demand from the HEV market. The window of opportunity is closing rapidly.

DISCLOSURE: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 02:29 PM | Permalink | Comments (0) | TrackBacks (0)

Last Tuesday a reader who works as a consultant in the energy storage and hybrid electric vehicles industries and sent me an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2009, a high-level policy analysis that discusses the merits, risks and expected costs of an aggressive eight-year initiative to foster the development and facilitate the commercialization of Li-ion batteries. The draft roadmap was written during the last days of the Bush administration, has since been partially implemented in the American Reinvestment and Recovery Act of 2009 and has never been officially released by the DOE. It does not necessarily reflect the policy goals of the Obama administration. While I don't generally feel comfortable writing about documents that have not been publicly released, I've discussed most of the basic issues and challenges in other articles and believe the conceptual framework, industry assessment, development goals and timelines discussed in the draft roadmap can help energy storage investors make better decisions. So I've decided to take a deep breath, begin with a couple of important quotes, summarize the broad investment themes that can be extracted from the draft roadmap and try to tie it all back to a likely future for the energy storage sector. This is complex stuff so I encourage readers to offer comments and ask questions.

The introductory paragraph of the draft roadmap says:


While the frank message of the introductory paragraph is stunning, the follow-up discussion of the principal barriers to the development and commercialization of Li-ion batteries is an even bigger eye opener.

• Cost – The current cost of Li-based batteries is approximately a factor of three to five times too high on a kWh basis. The main cost drivers are the high cost of raw materials and materials processing, the cost of cell and module packaging, and manufacturing costs.
• Performance – Much higher energy densities are needed (for the 40-mile or greater system) to both meet the volume and weight targets and to reduce the number of cells needed for an entire battery, thus reducing the system’s cost. In addition, durability and reliability of current batteries needs to be assessed and possibly improved for use in passenger vehicles.
• Abuse Tolerance – Many Li batteries are not intrinsically tolerant to abusive conditions such as short circuits (including internal short circuits), overcharge, over discharge, crush, or exposure to fire and other high-temperature environments. The use of Li chemistries in these larger (energy) batteries increases the urgency with which these issues must be addressed.
• Life – Hybrid systems with conventional engines have a life target of 10 to 15 years, and battery life goals have been set to meet these targets. The goals of 300,000 HEV cycles and 5,000 deep discharge cycles are either unproven or are anticipated to be difficult. Specifically, the impact of combined EV/HEV cycling on battery life is unknown, and extended time at high state of charge (SOC) is predicted to limit battery life.

I've read the draft roadmap several times and think the DOE's development plan for Li-ion batteries has a reasonable chance of success from a governmental policy perspective. Nevertheless, I believe the plan will expose energy storage investors to a high level of business, competitive and technical risk that will take the better part of a decade to resolve. The simple summary for those who do not have the time to study the draft roadmap in detail is:

• Battery manufacturing is a national security issue and America cannot rely on imports for this fundamental need;
• Catching up with Asia is not enough and America must become the global leader in energy storage technology;
• The best available Li-ion battery chemistries are not robust or stable enough to power America's energy future;
• The best available battery manufacturing technologies are too expensive for a mass-market product;
• Current material supply chains are not reliable enough to protect America's national security interests;
  
• Li-ion batteries cannot become commercially viable without a massive government funded effort to advance the state of the art in battery manufacturing and Li-ion chemistry through two generations over the next decade;
• The activity we've seen over the last few years is a good start, but only a start on the work that must be done;
• The major expected reductions in Li-ion battery costs will arise from generational improvements in manufacturing processes and battery chemistry, rather than simple economies of scale associated with scaling-up current technology;
• Substantially all of the recently announced plans to build limited numbers of PHEVs and EVs for sale into "entry markets" like specialty vehicles, state fleets, city busses, utility fleets, USPS vehicles, private delivery fleets and the military are essential steps in the R&D process that allow manufacturers to validate the technical potential of their products prior to full scale commercial roll-out; and
• Commercialization of Li-ion batteries for the mass markets cannot occur unless and until all essential R&D work is successfully completed.

While I'm reluctant to compare the development plan for Li-ion batteries with the Manhattan Project, which cost $24 billion (in CPI adjusted dollars) and employed 130,000 scientists, engineers and technicians, the combined governmental and private sector investments could easily be in the same price range by the time the dust settles.

We are entering the age of cleantech, the sixth industrial revolution. We are also witnessing the birth of massive new consumer markets in South America, India and Asia that will put unimaginable strain on global supplies of water, food, energy and every commodity you can name. In combination, these mega-trends guarantee 10 to 20 years of gut wrenching change and economic dislocation. I have enough oil and gas experience to know that the oil industry will not be able to increase production to levels that satisfy the future demand projected by McKinsey and other macro-economic analysts. I have enough experience in energy storage to believe that by 2020 Li-ion battery manufacturing technology and chemistry will probably advance to a point where PHEVs and EVs are cost effective. But given my age, experience and financial responsibilities, I'm unwilling to put my portfolio at risk by trying to pick the winners of a business marathon that will take a decade or more to run and be subject to the unpredictable and highly variable winds of political and economic change.

I recently reviewed a slideshow presentation from a September 2008 clean air conference that described the auto industry as a serial victim of  technology du jour syndrome and offered the following table to prove the 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.

Every analytical report I've seen concludes that global demand for energy storage devices will grow at extraordinary rates for several decades. Over the next few years, the substantial bulk of the revenue growth will go to existing producers of lead-acid batteries that can deliver proven products from existing factories. As cost-effective Li-ion battery manufacturing technologies and chemistries are developed, tested, validated and commercialized, they will rapidly become the preferred choice for extreme performance applications like PHEVs and EVs. As these technologies mature, Li-ion batteries may even make inroads into less demanding applications that have traditionally been the province of lead-acid batteries. Over the longer term a new equilibrium will develop where lead-acid batteries are used for certain applications and Li-ion batteries are used for others. Unless the market forecasts I've seen are seriously misguided, manufacturers of all classes of energy storage devices will have a hard time keeping up with expected demand.

We don't live in a black or white world and it is patently absurd to think that the future of energy storage will be black or white. The reality is far more likely to be a richly mottled canvas dominated by various shades of green. The simple fact is that we need every energy storage technology that's ever been invented, and more. I believe Li-ion batteries, lead-acid batteries, lead-carbon batteries, flow batteries, pumped hydro, compressed air, thermal solar and flywheels will all make important contributions to the energy storage solution. So I believe a balanced portfolio of energy storage stocks is the only sensible approach for investors who don’t have the time, inclination or ability to do their own detailed research. Articles like this one can provide food for thought, but they should not be relied on as investment advice because every author (including me) has his own agenda, preferences, predilections and prejudices.

As an investor, my goal is to buy low and sell high. Based on five years of work in the energy storage sector, I’m convinced that near-term revenue growth in the Li-ion group will be slower than most people expect while near-term revenue growth in the lead-acid group will be faster than most people expect. If my basic thesis about future rates of technological development and revenue growth is correct, the companies in the lead-acid group are likely to perform far better over the next few years than the companies in the Li-ion group.

Readers that want to develop a deeper understanding of the issues and opportunities in the energy storage sector may want to join me in San Diego for Infocast's Storage Week on the 13th through 16th of July. The speaker's list includes more than 80 thought leaders from the battery industry, the government, the utility and automotive industries and the research and development sector. I'll be participating in three panel discussions and hope to return home with new investable insights that I can share with readers in future articles.

DISCLOSURE: Author is a former director and executive officer 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), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 07:31 PM | Permalink | Comments (4)

My last article, "The Obama Fast Track for HEVs" graphically highlighted some critical cost issues that I've been writing about for several months and was surprisingly popular with readers. After responding to numerous comments and considering the gaps in that article, I believe a follow-on article is appropriate to provide additional color, put a finer point on the differences between advanced lead-acid and lithium-ion batteries and try to relate those differences to the rapidly evolving HEV markets.

As I explained last week and in a November 2008 article titled "Alternative Energy Storage; Lithium, Lead or Both?" micro hybrid, mild hybrid and full hybrid vehicles (HEVs) are classified as "power applications." They use relatively small battery packs to:

• Stop and start the internal combustion engine (ICE) when the vehicle stops and starts;
• Provide moderate amounts of power to launch the vehicle from a stop and improve acceleration;
• Recover all or part of the energy that is normally lost in braking to recharge the batteries; and
• Power accessories like heat and air conditioning while the ICE is off.

Micro, mild and full hybrids need a battery pack that can accept a fast charge over a brief braking interval, deliver that stored electricity over a brief acceleration interval and repeat the process hundreds of thousands of times over the life of the vehicle.

In comparison, plug-in hybrids (PHEVs) are classified as "energy applications." They use much larger battery packs to:

• Power the vehicle in electric-only mode for a distance of 10 to 40 miles before starting the ICE;
• Recover all or part of the energy that is normally lost in braking to recharge the batteries;
• Stop and start the ICE when the vehicle stops and starts; and
• Power accessories like heat and air conditioning while the ICE is off.

Since power is rarely an issue in larger battery packs, the critical requirement for PHEVs is a battery pack that can deliver substantially all of its stored energy over the time required to drive 10 to 40 miles and repeat that process once or twice a day for the life of the vehicle.

Weight and Volume

Most people find that battery comparisons based on energy densities are confusing because they use metric measurement terms and do not provide a meaningful context for the raw numbers. The following table is my effort to re-state the most common energy density values in familiar weight and volume terms. My goal is to show what energy density actually means to the owner of an HEV. For purposes of the table, I used energy densities of 30 Wh/kg and 50 Wh/l for advanced lead-acid batteries and 100 Wh/kg and 150 Wh/l for lithium-ion batteries as my starting point. I then did the necessary conversions and calculated the weight and volume advantage of lithium-ion batteries for each of the principal HEV configurations.

	Fuel	Battery	Li-ion Weight	Li-ion Volume
	Savings	Capacity	Advantage	Advantage
Micro Hybrid	10%	0.50 kWh	26 Pounds	0.2 Cubic Feet
Mild Hybrid	20%	1.00 kWh	51 Pounds	0.5 Cubic Feet
Full Hybrid	40%	1.50 kWh	77 Pounds	0.7 Cubic Feet
PHEV-10	55%	5.00 kWh	257 Pounds	2.4 Cubic Feet
PHEV-40	100%	16.00 kWh	821 Pounds	7.5 Cubic Feet

For reference, a subcompact will typically weigh 3,000 pounds and have 10 to 12 cubic feet of trunk space.

Battery Cost

In a July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program, Sandia National Laboratories estimated the current cost of advanced lead-acid batteries at $500 per kWh and the current cost of lithium-ion batteries at $1,333 per kWh. I'm aware of PR claims and forward looking statements that suggest lithium-ion battery costs may be lower, but I've not been able to confirm lower prices based on published price lists from first tier manufacturers or quantify the meaning of terms like significant and substantial. So while I'm not entirely comfortable that the Sandia values are right, I've not been able to find other numbers that I think are better. The following table compares the estimated cost of using advanced lead-acid and lithium-ion batteries in each of the principal HEV configurations.

	Battery	Li-ion	Advanced	Federal	Advanced
	Capacity	Battery	Lead-acid Battery	Tax	Lead-acid Battery
	(kWh)	Cost	Cost	Credits	Cost Advantage
Micro Hybrid	0.50	$667	$250		$417
Mild Hybrid	1.00	$1,333	$500		$833
Full Hybrid	1.50	$2,000	$750		$1,250
PHEV-10	5.00	$6,665	$2,500	($2,500)	$4,165
PHEV-40	16.00	$21,328	$8,000	($7,500)	$13,328

Total Vehicle Cost

For most American comsumers, I believe the most important number will be the incremental cost of an HEV over a comparable car with an ICE powertrain. The following table compares the estimated cost premium for each of the principal HEV configurations using advanced lead-acid and lithium-ion batteries.

	Fuel Savings	Basic ICE Vehicle Cost	HEV Premium Using Advanced Lead-acid Batteries	HEV Premium Using Li-ion Batteries
Micro-Hybrid	10%	$18,000	$750	$1,167
Mild-Hybrid	20%	$18,000	$1,500	$2,333
Full-Hybrid	40%	$18,000	$2,250	$3,500
PHEV-10	55%	$18,000	$2,000	$6,165
PHEV-40	100%	$18,000	$2,500	$15,828

The following graph summarizes the same basic information in a slightly different format.

(click to enlarge)

Market Forecast

Global market forecasts for HEVs vary widely and are evolving rapidly in response to new laws and regulations. In an October 2008 AW Briefing on "The Global Oil Paradox: Transforming the Automotive Industry," Anil Valsan of Frost & Sullivan presented a slideshow that included two highly informative graphs.

The first graph showed three growth scenarios for the global HEV market. At the time, the biggest unknown was the automobile industry’s response to EU legislation that requires manufacturers to reduce average CO2 emissions from the current level of 160 g/km to 120 g/km by 2012. Eight months later, it’s clear that the industry response has been a concerted effort to standardize micro and mild hybrid technologies throughout Europe. As I noted last week, the Obama administration has recently decided to accelerate CAFE standards by five years. That change can only serve to increase the rate of standardization for micro and mild hybrid technologies. Under current conditions, it looks like Frost & Sullivan’s “optimistic” view from last October will probably fall well short of the emerging reality.


(click to enlarge)

The second graph showed Frost & Sullivan's forecast of HEV sales through 2015 and confirmed my oft repeated argument that cars with plugs will not be a material segment of the HEV market for the foreseeable future and the major business opportunity is in micro, mild and full HEVs.


(click to enlarge)

In combination, the regulatory changes from Brussels and Washington DC have fundamentally altered market dynamics in the HEV sector and increased the critical importance of five facts.

1. Aggressive CO2 emission standards will increase the rate of HEV standardization in the EU;
2. Acceleration of CAFE standards will increase the rate of HEV standardization in the US;
3. The EU standards will be implemented before most proposed lithium-ion battery plants can be built;
4. Since adequate supplies of lithium-ion batteries will not be available during the 2009 to 2012 EU phase-in window, most major automobile manufacturers will turn to advanced lead-acid batteries for a substantial portion of their micro, mild and full hybrid product lines; and
5. Once advanced lead-acid batteries earn the first mover advantage in Europe, it will be very difficult, if not impossible, for lithium-ion batteries to overcome an entrenched and cheaper alternative.

I have consistently argued that budget conscious consumers would prefer cheap lead-acid batteries to smaller, lighter and more expensive lithium-ion batteries, particularly for HEV applications. The timing of the new EU regulations has put automakers in a position where they can’t afford to wait for “the battery of tomorrow.” Instead they have to go to work immediately and meet the CO2 emission standards with batteries they can buy today from established manufacturers. Under those circumstances, I’m convinced that advanced lead-acid batteries will dominate the HEV markets until a clearly superior battery technology is developed.

The market dynamic may change over the long-term if PHEVs become a dominant hybrid configuration. It may also be impacted by future changes in the relative price advantage of advanced lead-acid batteries. For the foreseeable future, however, I believe the lion's share of the revenue gains from the HEV revolution will flow to companies like Johnson Controls (JCI), Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP) that have substantial existing manufacturing capacity in both Europe and the US, and from technology driven newcomers like Axion Power International (AXPW.OB) that can rapidly and inexpensively expand their production capacity to satisfy soaring demand from the HEV market.

DISCLOSURE: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 09:24 AM | Permalink | Comments (2)

John Petersen

Today I'm going to begin with an apology because I've done a terrible job of describing the basics of hybrid electric vehicle (HEV) technology for energy storage investors. Many of my earlier articles dove straight into the mind-numbing details of battery technology without first providing an overview of what those batteries will be used for. In other words I'm guilty of putting the cart before the horse. It's time for me to make amends.

While the differences between HEV technologies have always been important to automobile manufacturers, the public's understanding of those differences is limited. That dynamic is about to change because of President Obama's decision to accelerate the effective date of Federal fuel economy standards that were first adopted during the Bush administration. These accelerated standards will require manufacturers to increase fuel efficiency by approximately 40% over the next seven years. They will also eliminate fleet-wide averaging and force each class of vehicles to carry a fair share of the fuel economy burden. I don't want to oversimplify a very complex topic, but I believe the most cost-effective way to meet the new goals will be the widespread adoption of HEV technology across all classes of cars and light trucks. The new rules are not an HEV mandate, but they have put HEV technologies on a regulatory fast track that will rapidly drive revenue growth across the entire spectrum of battery manufacturers.

There are four primary classes of HEVs including the micro, mild and full hybrids that are available today and the plug-in hybrids (PHEVs) that are scheduled for next year. The following sections provide a simple overview of what the various classes of HEV technology do and what they're expected to cost. More detailed information is available from the Green Car Congress, the National Alternative Fuels Training Consortium and the Electric Drive Transport Association.

Micro Hybrids do not use an electric motor to propel the vehicle. Instead, they rely on hybrid technology to:

• Use a small portion of the energy that is normally lost in braking to recharge their batteries;
• Stop and start the internal combustion engine (ICE) when the vehicle stops and starts; and
• Power accessories like heat and air conditioning while the ICE is off.

The current cost of micro hybrid technology is roughly $500, plus batteries. The main benefit of micro hybrid technology is fuel savings of up to 10% that arise from turning the ICE off when the vehicle isn't moving.

Mild Hybrids use an electric motor that is integrated into the ICE to boost power during acceleration. They also rely on hybrid technology to:

• Use a larger portion of the energy that is normally lost in braking to recharge their batteries;
  
• Stop and start the ICE when the vehicle stops and starts; and
• Power accessories like heat and air conditioning while the ICE is off.

The current cost of mild hybrid technology is roughly $1,500, plus batteries. The main benefit of mild hybrid technology is fuel savings of up to 20% that arise from using a smaller ICE and turning it off when the vehicle isn't moving.

Full Hybrids use an electric motor that's separate from the ICE and powerful enough to move the vehicle on its own. Full hybrids typically launch from a stop in electric mode, start the ICE when needed and then use both the electric and ICE systems for acceleration. They also rely on hybrid technology to:

• Use most of the energy that is normally lost in braking to recharge their batteries;
  
• Stop and start the ICE when the car stops and starts; and
• Power accessories like heat and air conditioning while the ICE is off.

The current cost of full hybrid technology is roughly $2,000, plus batteries. The main benefit of full hybrid technology is fuel savings of up to 40% that arise from using battery power in stop and go traffic, using a smaller ICE and turning it off when the vehicle isn't moving.

Plug-in Hybrids fall into one of two sub-classes. A parallel hybrid is essentially a full hybrid with a larger battery pack that increases the EV range and decreases reliance on the ICE. A series hybrid is essentially an electric vehicle that runs on battery power for the first 10 to 40 miles and then uses a small ICE to generate electricity for the powertrain. Both sub-classes rely on hybrid technology to use most of the energy that is normally lost in braking to recharge their batteries.

The estimated cost of plug-in hybrid technology is roughly $2,500, plus batteries. While fuel economy estimates vary widely depending on assumed driving patterns, most commonly quoted estimates fall in the 60% range.

Cost-Benefit Table The following table summarizes the relative costs and benefits of micro, mild, full and plug-in hybrid technologies using lead-acid batteries for lighting, accessory and related systems, and using NiMH or Li-ion batteries for the electric powertrain. The price of $1,000 per kWh for electric powertrain batteries represents a rough average of the current cost of NiMH and Li-ion batteries published in a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage program.

	Lead-acid	Advanced	Mechanical	Incremental	Fuel
	Batteries	Batteries	Components	Cost	Savings
Micro Hybrid	$200		$500	$700	10%
Mild Hybrid (1 kWh powertrain battery)	$100	$1,000	$1,500	$2,600	20%
Full Hybrid (2 kWh powertrain battery)	$100	$2,000	$2,000	$4,100	40%
Plug-in Hybrid (10 kWh powertrain battery)		$10,000	$2,500	$12,500	60%

Cost-Benefit Graph To help remind readers what matters to buyers, I've put together a simple graph that superimposes the purchase price data from the Cost-Benefit Table over a normal bell shaped curve. In this particular graph there is no direct correlation between the background curve and the price points in the foreground. The curve does, however, help put the cost differences and fuel savings into the context of normal forces in a free market.




In combination, the table and the graph clearly show why I believe the vast majority of buyers will choose micro, mild and full hybrid alternatives over their more expensive plug-in cousins. It's a simple matter of economics. Cars with plugs simply do not work for anyone other than the emotionally committed or the mathematically challenged.

The following graph comes from the DOE’s 2009 Annual Energy Outlook and forecasts that sales of full and mild hybrids will grow from 346,000 units in 2007 to 4.8 million units in 2030. Over the same time frame, sales of micro hybrids will grow from 13,000 units to 3.2 million units. Collectively HEVs will account for roughly 63% of unconventional vehicle sales and approximately 40% of all light car and truck sales by 2030.



The companion graph forecasts that less than 7% of the HEVs sold in 2030 will be plug-ins. The other 93% of sales come from full, mild and micro hybrids. Overall, the forecast corresponds well with the distribution I would ordinarily expect under a normal bell shaped curve.



While the sex, glitz, glamour and hype are clearly skewed toward the PHEV tail of the normal bell shaped curve, the bulk of future sales will almost certainly come from the more affordable micro, mild and full hybrid alternatives. Accordingly, I believe the question that investors need to ask themselves is, "which battery technology is best suited to the requirements of these lesser HEV technologies?" The following summary paragraphs may help in that analysis.

Energy and Power The distinction between energy and power is frequently blurred in discussions of HEV technology. In simple terms, energy measured in kilowatt-hours (kWh) limits the distance of travel while power measured in kilowatts (kW) limits acceleration and speed. In PHEV applications that rely on the batteries for an extended travel range, energy is the most important performance metric. For micro, mild and full hybrid applications that use the batteries for short bursts, power is far more important and there are many battery technologies including lead-carbon, NiCd, NaNiCl, NiMH and Li-ion that can easily do the required work. In other words, no technology has a clear performance advantage.

Size and Weight NiMH and Li-ion battery developers emphasize that they enjoy a substantial weight advantage over lead-acid batteries. I'll be the first to concede that weight differences can be critical in the context of a PHEV that needs to carry a 10 to 25 kWh battery pack to provide the desired range. But the weight advantage is almost irrelevant in the context of a micro, mild or full hybrid that only needs to carry a couple kWh of battery capacity.

Cycle Life NiMH and Li-ion battery developers emphasize that they enjoy substantial cycle-life advantages over the lead-acid batteries normally used for starting, lighting and ignition. Those comparisons are inherently unreasonable because they use the best examples of their technology and the worst examples of lead-acid technology. When the best NiMH and Li-ion technologies are compared with the best lead-acid technologies, the cycle-life advantages disappear.

Battery Cost The one metric NiMH and Li-ion battery developers never emphasize is cost, unless it's in the context of a happy-talk prediction that future economies of scale will slash the cost of their products. The simple fact is that the best NiMH and Li-ion batteries cost an average of three times as much as the best lead-acid carbon batteries and there is no reason to believe that the developers will ever be able to close the cost gap.

Revised Cost-Benefit Graph If one assumes that advanced lead-carbon batteries will be the technology of choice for micro, mild and full hybrid applications, and that NiMH and Li-ion batteries will be the technology of choice for PHEVs, the revised cost-benefit graph looks like this:



Over the last couple years the media has fixated on the romantic notion of PHEVs, which has drawn substantial investor attention to small public companies like Ener1 (HEV) and Valence Technology (VLNC) that are generally perceived as leaders in the PHEV battery market. As a result, the stock prices of both companies have risen to levels that include huge premiums for intangible future potential. While the market for PHEV batteries will undoubtedly be large, my sense is that the market has not fully considered the business, technical, operational, competitive, financial and ethical risks these companies are certain to face. That leads me to conclude that both companies have far more downside risk than upside potential under current conditions.

While the media attention has been focused on the right hand tail of the bell shaped curve, established lead-acid battery companies like Exide (XIDE), Enersys (ENS) and C&D Technologies (CHP), along with technology driven newcomers like Axion Power International (AXPW.OB), have been quietly developing next generation technologies that will be affordable for consumers in the middle of the bell shaped curve who need HEV fuel savings but can't afford Li-ion or NiMH batteries. These middle market solutions won't have the high per vehicle value of Li-ion and NiMH solutions, but with far higher market penetration rates, they should easily make up the difference in volume. As I've discussed in earlier articles, the lead-acid sector has been treated like an orphan stepchild of alternative energy for years. That leads me to conclude that these companies have far more upside potential than downside risk under current conditions.

I believe the revised Federal fuel efficiency standards will drive the implementation of micro hybrid, mild hybrid and full hybrid technologies more rapidly than anyone could have predicted and increase overall penetration rates. While the changes are bullish for the energy storage sector in general, the biggest beneficiaries are likely to be the undervalued lead-acid battery manufacturers that will ultimately be the primary source of middle market HEV battery solutions.

In closing I would like each reader to take another look at the last graph and consider a broader ethical issue that we all need deal with. The resources required for micro, mild and full hybrid technologies ramp up gradually as fuel savings climb from 10% to 40%. The incremental resources required for that last 20% in fuel savings one gets by upgrading from a full hybrid to a PHEV are immense. In effect, to save 100 gallons of gas per year by upgrading a single full hybrid to a PHEV, we will have to forego using those batteries to build four additional full hybrids that could have collectively saved 800 gallons of gas per year. This is one of the most appalling examples of selfish and wasteful arrogance I can imagine. It has no place in a resource constrained world where 6 billion people have come to understand how the other 500 million live and the primary challenge for our species is finding relevant scale solutions to persistent shortages of water, food, energy and virtually every commodity you can imagine.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 12:40 PM | Permalink | Comments (8)

John Petersen

I didn't learn about normal bell shaped curves in kindergarten but I developed a pretty solid understanding of the concept by the second or third grade because at report-card time A's were worth a quarter, B's were worth a dime and C's had no value at all. By the time I reached college I was chasing the right hand tail of the bell curve on my own initiative. Law school and the competitive nature of my profession merely pushed my drive for the right hand tail up a notch.

Old habits die hard, so I still tend to chase that right hand tail of the bell curve in almost everything I do. The only real exception is investing where 30 years of experience has taught me that the most successful companies are the ones that sell products to the 95% of the population that don't command $200,000 salaries. There are companies like LVMH that have a great business catering to the elite, but they're not in the same league as Target and Wal-Mart.

The energy storage sector is undergoing an amazing metamorphosis as the market comes to the realization that a boring old-line industrial sector holds the keys to cleantech, the sixth industrial revolution. Storage isn't a sexy alternative energy technology in its own right; instead it's an enabling technology that makes other technologies more reliable, efficient and profitable. This dynamic has encouraged a different class of investors to investigate energy storage for the first time. Unfortunately most of the attention goes to technologies on the right hand tail of the performance and cost curves. In my view, this is precisely the wrong place for investors that want to position their portfolios for the coming of cleantech.

I love quarterly reporting cycles because they provide a great opportunity for a reality check. This quarter, the reality check is even more important because General Electric (GE) just announced plans to enter the energy storage business in a big way and manufacture sodium nickel-chloride batteries for hybrid locomotives and grid-connected applications. Their plan to make batteries that integrate well with their railroad and wind turbine businesses makes great sense. Their choice of a technology that currently falls into the "cool" category but has the potential to become very cheap speaks volumes about what GE thinks a reasonable price point will be. If any company on the planet has a good feel for what  everybody needs and is willing to pay for, it's GE.

I first wrote about this theme in "Energy Storage Stocks: Performance, Cost and Bell Shaped Curves" and expanded on the topic in "Alternative Energy, Regular Guy Stuff and Rainbow Stew" and "Alternative Energy Storage: Cheap Will Beat  Cool." I then spent months delving into some of the more mind numbing aspects of energy storage technologies and the companies that are developing them. In the process, my core thesis that cheap will always beat cool has been diluted by gee-whiz performance claims of exotic technologies that are too expensive for 95% of potential buyers. To help remind readers what matters in business, I've put together a simple graphic that overlays an average of the DOE's estimated current and 10-year projected cost of various energy storage technologies on a normal bell shaped curve. In this particular graphic, there is no direct correlation between the background curve and the price points in the foreground. The curve does, however, help put the projected cost differentials into the context of a normal market.



Investing would be easy if the market prices of stocks were based solely on financial statement metrics. In the real world, however, the baseline financial values are impacted by a wide variety of intangible factors that increase or decrease the value of a going concern. The factors that are typically identified as important include history and experience, existing customer and supplier relationships, human and intellectual property resources and the potential for exceptional growth and profitability. The following table compares the market capitalizations of the companies I track with their tangible financial statement values. The purpose of this presentation is to highlight the implied market value of the non-financial assets the various companies hold and help investors decide whether they believe the intangible premiums are reasonable.

			Market	Tangible	Intangible
	Trading	Recent	Capitalization	Value	Premium
	Symbol	Price	(Millions)	(Millions)	(Millions)
Cool Emerging Group
Ener1	HEV	$6.12	$694.51	$25.16	$669.35
Valence Technology	VLNC	$2.06	$252.87	($63.08)	$315.95
Altair Nanotechnologies	ALTI	$1.26	$117.37	$37.14	$80.24
Beacon Power	BCON	$0.75	$85.93	$22.12	$63.82
Cool Sustainable Group
Maxwell Technologies	MXWL	$8.90	$200.44	$37.11	$163.33
Advanced Battery	ABAT	$3.47	$183.29	$76.12	$107.17
Ultralife Batteries	ULBI	$7.35	$124.65	$43.28	$81.37
China BAK Battery	CBAK	$2.06	$118.84	$166.91	($48.07)
Hong Kong Highpower	HPJ	$2.16	$29.36	$15.84	$13.52
Cheap Emerging Group
Axion Power International	AXPW.OB	$1.40	$49.77	$6.14	$43.63
ZBB Energy	ZBB	$1.10	$11.68	$7.08	$4.60
Cheap Sustainable Group
Enersys	ENS	$16.00	$767.61	$258.33	$509.28
Exide Technologies	XIDE	$5.45	$411.36	$285.73	$125.63
C&D Technologies	CHP	$1.80	$47.33	($37.04)	$84.37
Active Power	ACPW	$0.54	$32.65	$18.75	$13.89

The numerical average of the intangible premiums the market has attributed to the 15 companies I track is $148.5 million. While it's easy for me to justify substantial intangible premiums for companies like Enersys that have stable operating histories, global customer bases and product lines that are affordable for everybody, I have a much harder time justifying huge intangible value premiums for emerging companies that have neither stable histories nor established customers and plan to manufacture products that 95% of the population can't afford, particularly when the 5% who can afford their proposed products may not want them.

These are treacherous times in the energy storage sector. The new investors who are investigating energy storage for the first time are generally early adopters like me who instinctively focus on the right hand tail of the bell curve. We get so enamored with the technical performance claims that we tend to forget the realities of a free market where the vast bulk of potential customers don't have the economic power to choose a cool solution over a cheap solution.

Mark Twain quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he just made the cheapest cars. Microsoft didn’t make the best operating system; it just made the cheapest operating system. In times like these I believe energy storage investors will be well-advised to heed the philosophy of the great value investor Benjamin Graham who said, In the short run, the market acts like a voting machine, but in the long run it acts like a weighing machine. Otherwise, they may find that they're chasing their tails.

Investors that want to develop an in-depth understanding of the issues and opportunities in the energy storage sector may want to consider attending Infocast's Storage Week in mid-July. The speaker's list includes more than 80 thought leaders the battery industry, the government, the utility and automotive industries and the research and development sector. They've even invited me to participate in three panel discussions. Hopefully I'll return from San Diego with investable insights that I can share with readers in future articles.

Disclosure: Author is a former director and executive officer of 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).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 10:33 AM | Permalink | Comments (2)

John Petersen

I've been writing about the rapidly evolving market for manufactured energy storage devices in grid-based applications since last August when I published Grid-based Energy Storage: Birth of a Giant. At the time, only a handful of smaller public companies were working on grid-based storage solutions including Maxwell Technologies (MXWL), Beacon Power (BCON), Altair Nanotechnologies (ALTI), Active Power (ACPW) and Axion Power International (AXPW.OB). Last November, France's Saft Group (SGPEF.PK) announced a partnership with Switzerland's ABB Group (ABB) to develop and commercialize utility scale solutions. Yesterday, General Electric (GE) joined the fray when it announced plans to build a $100 million plant for batteries that it will use in hybrid locomotives and grid-based systems.

The new GE plant will make large format batteries based on a sodium sulfur (NaS) chemistry similar to one developed by Japan's NGK Insulators (NGKIF.PK). The aggregate storage capacity of the batteries produced at the GE plant will be on the order of 900 megawatt hours (MWh) annually. At current prices for comparable products, GE's annual revenue from battery sales should be on the order of $400 million. In connection with the announcement, GE's chairman and CEO Jeff Immelt said, “We believe the advanced battery business could be a $1 billion business over the next decade."

As impressive as the GE announcement is, the more impressive fact is that NaS battery systems like the ones GE plans to manufacture can only serve a small fraction of the broader grid-connected energy storage market. In a July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program Sandia National Laboratories described the broader market as follows:

"Energy storage devices cover a variety of operating conditions, loosely classified as ‘energy applications’ and ‘power applications’. Energy applications discharge the stored energy relatively slowly and over a long duration (i.e., tens of minutes to hours). Power applications discharge the stored energy quickly (i.e., seconds to minutes) at high rates. Devices designed for energy applications are typically batteries of various chemistries. Power devices include certain types of batteries, flywheels, and ECs. A new type of hybrid device, the lead-carbon asymmetric capacitor, is currently being developed and is showing promise as a device that might be able to serve both energy applications and power applications in one package."

It then presented the following chart to illustrate several battery and capacitor technologies in relation to their respective power and energy capabilities. The niche where GE plans to build a $1 billion business is the yellow oval marked Na/S.
 


After discussing the strengths and weaknesses of the technologies that will compete for a portion of the grid-based storage market, the Sandia report went on to summarize the relative costs of the principal energy storage alternatives. The following table separates the Sandia data into power technologies, short duration energy technologies and long duration energy technologies; orders the contenders based on the average of current and 10-year projected cost data reported by Sandia; and identifies the public companies that are focused on each class of storage technology.

Power	Current Cost ($/kWh)	10-year Projected Cost ($/kWh)
Electrochemical Capacitors      Maxwell Technologies (MXWL)	$356/kW	$250/kW
High-speed Flywheels (composite)      Beacon Power (BCON)	$1,000	$800
Li-ion Batteries      Altair Nanotechnologies (ALTI)      Saft Batteries (SGPEF.PK)	$1,333	$780
Short Duration Energy	Current Cost ($/kWh)	10-year Projected Cost ($/kWh)
Flooded Lead-acid Batteries      Exide (XIDE)      Enersys (ENS)      C&D Technologies (CHP)	$150	$150
Valve Regulated Lead-acid Batteries      Exide (XIDE)      Enersys (ENS)      C&D Technologies (CHP)	$200	$200
Low-speed Flywheels (steel)      Active Power (ACPW)	$380	$300
Lead-carbon Asymmetric Capacitors      Axion Power (AXPW.OB)      Furukawa Battery (FBB.DE)	$500	$250
Long Duration Energy	Current Cost ($/kWh)	10-year Projected Cost ($/kWh)
Zn/Br Batteries      ZBB Energy (ZBB)	$500	$250/kWh plus $300/kW
Na/S Batteries      NGK Insulators (NGKIF.PK)      General Electric (GE)	$450	$350

I would be remiss if I failed to note that in addition to its plans to directly engage in NaS battery production, GE also has a substantial stake in A123 Systems which is currently testing a Li-ion based frequency regulation system.

The best single document I've found to give investors a basic technical background in grid-based energy storage systems is Sandia's July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. There are also two recent reports from the DOE that I think are "must reads" for investors that want a deeper understanding of how the Smart Grid will develop. The first report, “Smart Grid: Enabler of the New Energy Economy,” explains how the Smart Grid will use advanced technology to transform the energy production and distribution system. The companion report, “Bottling Electricity: Storage as a Strategic Tool for Managing Variability and Capacity in the Modern Grid,” explains why the evolution of the Smart Grid will depend on cost effective energy storage.

In addition to the government reports that focus principally on technological merit rather than investment value, I've written extensively on the companies that are active in the sector. If you want to better understand the potential of energy storage, a rapidly emerging sector that may "dwarf IT to the tune of two orders of magnitude," the following articles can provide a good start.

Grid-based Energy Storage: Birth of a Giant
Alternative Energy Storage: Lithium, Lead or Both?
Alternative Energy Storage: Cheap Will Beat Cool
America Must Rebuild Domestic Battery Manufacturing Infrastructure
Alternative Energy Storage Needs to Take Baby Steps Before It Can Run
Alternative Energy Storage: It's All About Price vs. Performance
Lead-Carbon: A Game Changer for Alternative Energy Storage
Alternative Energy Storage: Cheap Outperforms Cool

Each of my articles includes extensive links to underlying source documents and many have wonderful commentary from readers who have different opinions that are fervently held and eloquently expressed. I have several dogs in this fight and am far from disinterested. But I believe the upside potential for astute investors who position their portfolios early for the coming of cleantech, the sixth industrial revolution, will be handsome.

Disclosure: Author is a former director and executive officer of 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).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 09:10 AM | Permalink | Comments (0) | TrackBacks (0)

John Petersen

Last month I wrote about a very smart plan the DOE developed for $4.5 billion in smart grid grants authorized by the American Recovery and Reinvestment Act of 2009 ("ARRA"). I was particularly impressed that the DOE's plan created a functional public-private partnership where grants would be available to companies that could raise matching funds from private sources, but would be denied to companies that could not attract substantial private sector funding. While I hoped a similar plan would be adopted for $2 billion in ARRA battery manufacturing grants, my research was hindered by a broken link at www.grants.gov that wouldn't let me download the Funding Opportunity Announcement ("FOA"). Late last week, a reader sent me a copy of the FOA and I was delighted to learn that the same guiding principles will apply to ARRA battery manufacturing grants.

In the FOA for its "Electric Drive Vehicle Battery and Component Manufacturing Initiative" the DOE established goals for five classes of ARRA grant funding as follows:

Industry subsector	Total Funding	Awards	Award Size
Cell and Battery Pack Manufacturing Facilities	$1,200 million	7 to 8	$100 to $150 million
Advanced Battery Supplier Manufacturing Facilities	$275 million	14	$20 million
Advanced Lithium ion Battery Recycling Facilities	$25 million	2	$12.5 million
Electric Drive Component Manufacturing Facilities	$350 million	3 to 5	$80 million
Electric Drive Subcomponent Manufacturing Facilities	$150 million	6 to 8	$20 million

The FOA also provided that grant recipients will generally be expected to provide 50% of the required funds from private sources. While the DOE has the power to approve grant requests with lower cost sharing ratios (subject to a floor of 25%) any reduction in the cost sharing ratio will count as a negative factor. Teaming among suppliers, manufacturers and end users is encouraged but not required. If the plan works like it's supposed to, $2 billion in DOE grants will be matched with $2 billion in private capital and used to build  $4 billion in new manufacturing plants. It's a far more aggressive start than I could have hoped for when I first argued that America needs to rebuild its domestic battery manufacturing infrastructure.

To put the magnitude of the ARRA battery manufacturing grants in rough perspective, nine of the pure play energy storage companies I track account for about a third of the U.S. battery market and have a combined book value of $1.5 billion. If their ratios are typical, then the book value of the entire domestic battery industry is approximately $5 billion. By the time you add $4 billion in new factories and then add a like amount for associated inventories and accounts receivable, it's easy to forecast outstanding growth in the energy storage sector for several years. It's impossible to identify the likely winners of the grant selection process, but it's a pretty safe bet that every company that can apply will. I also believe that my nine pure play energy storage companies, as a group, are likely to receive a significant share of the awards.

Applications for the first round of ARRA battery manufacturing grants must be filed by May 19, 2009. The DOE plans to select the first round of grant recipients by the beginning of July and finalize the first round of grant awards by the end of September. While there will undoubtedly be a tremendous amount of posturing, positioning and PR over the next several weeks, I don't foresee any clearly investable events before the end of June.

None of the pure play energy storage companies I track has huge cash reserves that can be spent on new factories. This leads me to believe that every company selected for an ARRA battery manufacturing grant will have to go out into the market and find new financing for all or part of its matching funds. Once the new plants are built, a second round of financing will be required for associated inventories and accounts receivable. For most, the required financing will exceed their current capital by a wide margin. Since many of the likely recipients are smaller companies that cannot be classified as high quality credit risks, I expect them to rely heavily on the equity markets. One thing is certain; it will be a target rich environment for investors that are willing to make a long-term commitment to the energy storage sector.

Since it's impossible to talk about large stock offerings without having somebody worry about dilution, this is probably a good time to tackle that issue. I want to apologize in advance for the complexity of the following discussion, but these are critically important issues. So take your time, read it slowly and feel free to ask me about anything that's unclear.

Everybody above the age of five understands the concept of dilution. If you're sitting in a restaurant with a half-empty coffee cup and the server tops it off –

• With water, your beverage is diluted;
• With coffee, your beverage is unchanged; and
  
• With espresso, your beverage is fortified.

The same basic rules apply in corporate finance and substantially all sales of newly issued shares fortify the issuer's balance sheet. Nevertheless perception problems and other complexities frequently arise because every stock sale impacts three distinct groups who think dilution is important and approach the issue from different perspectives.

• New investors typically view dilution from a book value perspective and think they're being diluted if the purchase price they're being asked to pay exceeds book value per share;
• Insiders typically view dilution from a paid-in capital perspective and think they're being diluted if the purchase price of new shares is less than the average price paid for outstanding shares; and
• Public shareholders typically view dilution from a market price perspective and think they're being diluted if the purchase price of new shares is less than the prevailing market price.

All three perspectives are fundamentally valid, fundamentally flawed and irreconcilable. In most cases, the best a company can hope for is a modest discount from market.

Since the differences between book value, paid-in capital and market price per share can be immense, it's important for investors to understand the range of possible outcomes. The following table provides comparative book value, paid-in capital and market price data for each of the pure play energy storage companies that I would classify as likely applicants for ARRA grants. The data has been taken from the most recent SEC reports filed by the companies and gives pro-forma effect to the conversion of any non-redeemable preferred stock.

		Net Book	Total	Book	Paid-In	Market
		Value	Shares	Value	Capital	Price
	Symbol	(000s)	(000s)	Per Share	Per Share	Per Share
Cool Emerging Group
Ener1	HEV	$106,413	113,474	$0.94	$3.39	$6.48
Valence Technology	VLNC	($63,081)	122,754	($0.51)	$4.06	$2.30
Altair Nanotechnologies	ALTI	$37,752	93,153	$0.41	$1.99	$1.09
Cool Sustainable Group
Maxwell Technologies	MXWL	$61,233	23,129	$2.65	$8.56	$9.21
Ultralife Corp	ULBI	$83,065	16,959	$4.90	$10.02	$7.74
Cheap Emerging Group
Axion Power International	AXPW.OB	$7,924	35,333	$0.22	$1.62	$1.55
Cheap Sustainable Group
Enersys	ENS	$661,751	47,975	$13.79	$7.59	$18.99
Exide Technologies	XIDE	$486,382	75,478	$6.44	$14.71	$6.56
C&D Technologies	CHP	$49,116	26,296	$1.87	$1.22	$1.89

I regularly participate in pricing negotiations between investment bankers and emerging public companies that need to raise equity. In each case the first thing the bankers do is paraphrase Benjamin Graham and tell my clients that while the stock market is a voting machine, investment banking is a weighing machine. Next they explain that after completing their due diligence they plan to ignore the market price and base their negotiations on fundamental business, technological and product issues like the ones I've been discussing for the last nine months.

While it is generally easy to move the bankers up from a lowball initial offer by showing how historical expenses created enduring non-financial value for an emerging client, the banker's resolve typically stiffens to the consistency of granite as the negotiation approaches 80% of market price. The final negotiating rounds are always bare-knuckle affairs but when the table pounding and cursing is over, my clients invariably acknowledge the supremacy of the golden rule of capitalism (he who has the gold makes the rules) and accept the best price they can negotiate.

I have no experience with transactions like the ones that will be negotiated over the next few months. Potential investors will rightly argue that the ARRA grants effectively double the benefit of their investment for a grant recipient and its shareholders. The grant recipients will rightly argue that the ARRA grants effectively cut the new investors' dilution risk in half. While my right-brain tells me that the ARRA grants will simplify negotiations between companies and investors, my left-brain knows better. On The Mickey Mouse Club of my youth, Wednesday was "anything can happen day." For the next four months, energy storage investors need to remember that every day is Wednesday.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 02:53 PM | Permalink | Comments (0)

Much of the buzz in the energy storage sector is focused on DOE administered subsidy programs and what they will mean for investors in smaller public companies. The buzz began when Title XVII of the Energy Policy Act of 2005 ("EPACT") authorized $2 billion in loan guarantees for innovative energy technologies. It ramped up rapidly when the Energy Independence and Security Act of 2007 authorized another $2.5 billion in loan guarantees under the Advanced Technology Vehicles Manufacturing ("ATVM") program. It reached a crescendo when the American Recovery and Reinvestment Act of 2009 ("ARRA") authorized $7 billion in smart grid, battery manufacturing and job training grants. Speculation about who will be first in line when Uncle Sugar arrives at the party with duffle bags full of money is running rampant.

I've had nothing but praise for a plan the DOE developed to administer $4.5 billion in ARRA grants for smart grid projects. My fondest hope is that a comparable plan will be implemented for the other classes of ARRA grants. EPACT and ATVM loans, on the other hand, create an entirely different and to my way of thinking dangerous dynamic. I fear that these loans could be a kiss of death for any smaller public companies that are unfortunate enough to survive the application process.

The simple and undeniable truth is that nothing destroys financial statements faster than leveraged investments in depreciable plant and equipment, which is why many tax shelters are based on building and equipment leases. By the time you account for interest accruals on debt and depreciation on hard assets the double hit to earnings is devastating. The problem is compounded by the fact that the lion's share of any positive cash flow ends up flying out the door to cover debt service costs; leaving little or nothing in the till to grow a business and pay for research and development, marketing and corporate overhead. By the time you work your way down to the bottom of the balance sheet, the shareholders' residual interest in total enterprise value becomes almost inconsequential. For proof you don't need to look any further than the latest GM restructuring proposal that will leave 1% for shareholders, 10% for bondholders, 39% for the unions and 50% for the government. It's not pretty, but debt financing never is.

For investors that want to transcend the hype and irrational expectations that frequently accompany government guaranteed loans, I've found that subtracting 10% of the planned debt from the expected annual cash flow works well as a simple and reliable acid test. The net positive cash balance, if any, represents the maximum contribution a leveraged project can make to other corporate activities. Since the 10% figure is based on an assumed 20-year amortization of principal and an assumed annual interest rate of 5%, a higher acid test number may be appropriate.

While debt financing can be a heavy burden for borrowers that are well financed and profitable, it gets almost unbearable when the borrower is a smaller public company. First, the borrower will be required to contribute at least 20% of the project costs from its own resources, and that can be a big stretch for a small company. Second, if the borrower has a weak balance sheet or a history of losses, a lender will usually insist that the borrower obtain enough capital to eliminate the weaknesses and provide a cushion against future losses. In risk averse markets like we have now and can expect for several years, the probability that a highly leveraged smaller public company will be able to negotiate significant unsecured debt is almost non-existent; which means that applicants who get loan approvals will be required to sell substantial equity before the transaction can close.

I have participated in several negotiations between investment bankers and smaller public company clients that needed to raise equity as a closing condition for project financing. The negotiations were always ugly and the per share value offered by the investment bankers was rarely more than a small fraction of the market price of the client's stock. When the table pounding and cursing ended, my clients were stuck with a Hobson's choice of either abandoning their plans or selling stock at a steep discount to the market. Either way, the existing shareholders ended up holding the short straw.

Three of the cool emerging companies I track are pursuing loans under the EPACT and ATVM programs. Beacon Power (BCON) is engaged in advanced due diligence for a $50 million EPACT loan that will be used to build a 20 MW frequency regulation facility. In January of this year Ener1 (HEV) announced that it had applied for a $480 million ATVM loan to expand their existing battery manufacturing facilities and build a new plant. Last month, Valence Technology (VLNC) announced that it had applied for a $608 million ATVM to build a new battery manufacturing plant. Of the three announced applications, Beacon's is the only one that even comes close to having a reliable future revenue stream to pay debt service costs. The other two have business models are entirely dependent on the commercial acceptance of electric vehicles that third parties plan to introduce to the market at a later date. None of the applicants has a history of operating profits or a tangible net worth that represents more than a fraction of the requested loan amount.

My big question is "What the hell are they going to do if the DOE says yes?"

I hope that Beacon will be able to change its pending subsidy application into a request for a combination of ARRA smart grid grants and fill-in EPACT or ARRA loans. They've been working on their 20 MW frequency regulation project for a long time, it represents an important smart grid technology and it deserves to be installed and thoroughly tested. From what I know about the process, I believe the DOE would be likely to approve a combined grant and loan structure. I'm less optimistic about the chances that Ener1 or Valence will be able to negotiate financially sound alternative proposals. If they can't do so, a rejection of their ATVM loan requests would probably be the best thing for their shareholders.

In almost 30 years of practice I have never seen a smaller public company borrow its way to prosperity. The debt financed projects I've been involved in never worked as well in the real world the way they did on paper. The existence of a large secured creditor with a first claim on major assets always complicated negotiations with junior lenders. A highly leveraged capital structure always made negotiations with new equity investors difficult if not impossible. In every case, existing shareholders who bought a debt-free capital structure and ultimately found themselves at the bottom of the food chain felt the lion’s share of the pain. This is not a theoretical issue for me. It's one that has cost me millions of dollars over the years. I've been through the drill more than once and would never go there again.

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 07:30 AM | Permalink | Comments (1)

John Petersen

After devoting several months to articles on arcane technical and economic issues that normal investors should not have to endure, I declared a cease fire last week and advised readers that I was done with technology and planned to focus on more interesting topics like the future of the energy storage sector and making money from energy storage investments. I've spent enough time discussing trees. Now I want to evaluate the forest and show investors how to position their portfolios for the coming of cleantech, the sixth industrial revolution.

I hope old friends and new readers alike will find the change refreshing. I know I will.

I began blogging in July of last year and have concentrated on manufactured energy storage devices and the companies that make them. In a series of 55 articles to date, my fundamental premise has been that:

• Manufactured energy storage devices are just plain boring;
• Energy storage stocks have historically traded at "rust belt" valuations;
• As we enter the cleantech age, the market will discover that energy storage is a core enabling technology for many classes of alternative energy; and
• As the market adjusts to the new realities, valuations in the energy storage sector are likely to soar.
  

Since July, market interest has developed faster than I expected and it's beginning to look like my predictions of rising tides and investment tsunamis may have undershot the mark. Just yesterday, Energy & Capital ran a headline story that screamed "Advanced Energy Storage: It's Worth Billions." Others like it appear regularly. This is a great time for astute investors who are seeking alpha, but the window of opportunity is closing.

In November of last year, I published an article titled "Alternative Energy Storage: Cheap Will Beat Cool" that discussed the difference between cool innovations and successful products. That article was the first time I segregated companies into a "cool group" and a "cheap group." It concluded with the suggestion that investors who wanted to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.

I'm delighted to report that over the last five months, the market performance of the stocks I classified as cheap has absolutely crushed the market performance of the stocks I classified as cool.

The following table provides comparative price data for the short-list of battery companies I track and includes price data for two flywheel companies that I talk about frequently but omitted from my original table. It shows closing prices on November 14, 2008 and May 1, 2009, calculates the percentage of change over the last five months, and calculates current market capitalizations based on recent SEC reports.

		14-Nov	1-May	Percent	Market Cap
Cool Group	Symbol	Close	Close	Change	Millions
Ener1	HEV	$6.75	$5.61	-16.89%	$636.59
Valence Technology	VLNC	$1.88	$2.18	15.96%	$267.60
Maxwell Technologies	MXWL	$6.50	$10.22	57.23%	$235.91
Advanced Battery	ABAT	$2.13	$2.76	29.58%	$150.87
Ultralife Batteries	ULBI	$9.08	$7.39	-18.61%	$127.17
China BAK Battery	CBAK	$1.99	$2.05	3.02%	$118.24
Altair Nanotechnologies	ALTI	$0.87	$1.12	29.48%	$106.57
Beacon Power	BCON	$0.82	$0.85	3.05%	$95.13
Hong Kong Highpower	HPJ	$3.50	$2.00	-42.86%	$27.13
Cheap Group
Enersys	ENS	$6.86	$18.66	172.01%	$895.21
Exide Technologies	XIDE	$3.38	$5.70	68.64%	$430.22
C&D Technologies	CHP	$1.94	$2.10	8.25%	$55.12
Axion Power International	AXPW.OB	$1.30	$1.50	15.38%	$53.00
Active Power	ACPW	$0.40	$0.58	43.75%	$34.76
ZBB Energy	ZBB	$0.93	$1.22	31.18%	$12.82

Between the reference dates, a $1,000 index investment in each of the DJIA, the Nasdaq Index and the S&P 500 would have resulted in an average portfolio appreciation of 3.5%. In comparison, a $1,000 investment in each of the cool companies would have resulted in an average portfolio appreciation of 6.7%. The real shocker is that a $1,000 investment in each of the cheap companies would have resulted in an average portfolio appreciation of 56.5%. I'm reluctant to boldly predict future trends, but I have no reason to believe that the cheap companies won't outperform both the broader market and the cool companies for the foreseeable future because they started from very low valuation levels and have a lot of catching up to do.

Blogging about emotionally charged alternative energy and energy storage issues is always a challenge because the critics are smart, opinionated and outspoken. As a result the comments to my articles are often more interesting than the articles themselves. Since I've received more than my share of fair criticism and learned some things along the way, I've decided to restructure my presentation tables. I'm not going to change the core data or the companies I track, only the manner of presentation.

The biggest impetus for the change is that both of my original groups include two types of entities: established companies with sustainable business models and emerging companies that haven't reached a point where their business models are sustainable. The downside is that it gives me four analytical classes instead of two. The upside is that it will simplify analysis and make the results more useful to investors. My restructured group classification and presentation tables follow.

		14-Nov	1-May	Percent	Market Cap
Cool Emerging Group	Symbol	Close	Close	Change	Millions
Ener1	HEV	$6.75	$5.61	-16.89%	$636.59
Valence Technology	VLNC	$1.88	$2.18	15.96%	$267.60
Altair Nanotechnologies	ALTI	$0.87	$1.12	29.48%	$106.57
Beacon Power	BCON	$0.82	$0.85	3.05%	$95.13
Cool Sustainable Group
Maxwell Technologies	MXWL	$6.50	$10.22	57.23%	$235.91
Advanced Battery	ABAT	$2.13	$2.76	29.58%	$150.87
Ultralife Batteries	ULBI	$9.08	$7.39	-18.61%	$127.17
China BAK Battery	CBAK	$1.99	$2.05	3.02%	$118.24
Hong Kong Highpower	HPJ	$3.50	$2.00	-42.86%	$27.13
Cheap Emerging Group
Axion Power International	AXPW.OB	$1.30	$1.50	15.38%	$53.00
ZBB Energy	ZBB	$0.93	$1.22	31.18%	$12.82
Cheap Sustainable Group
Enersys	ENS	$6.86	$18.66	172.01%	$895.21
Exide Technologies	XIDE	$3.38	$5.70	68.64%	$430.22
C&D Technologies	CHP	$1.94	$2.10	8.25%	$55.12
Active Power	ACPW	$0.40	$0.58	43.75%	$34.76

If I had used this four class analytical grouping from the beginning, the average portfolio performance for a $1,000 investment in each company would have been as follows:

Cool Emerging Group	7.9%
Cool Sustainable Group	5.7%
Cheap Emerging Group	23.3%
Cheap Sustainable Group	73.2%

All experienced investors know that equity markets are driven by a combination of greed and fear, emotional reactions that are often at odds with fundamental economic realities. Over the past few years, both cool groups have been driven by headlines that highlight opportunities while both cheap groups have been driven by headlines that highlight problems. Since headlines invariably feed the greed and fear cycle, the cool groups were driven to relatively high valuation levels while the cheap groups were driven to relatively low valuation levels. If the last five months are an indication, the pendulum is starting to move back toward a more balanced position where cheap group valuations will eventually catch up with cool group valuations. As the following summary valuation metrics show, they still have a long way to go.

		Shares	Price/	Price/	Price/	Book Value
Cool Emerging Group	Symbol	(000s)	Earnings	Book	Sales	Per Share
Ener1	HEV	113,474		6.47	97.60	$0.91
Valence Technology	VLNC	122,754			9.39	-$0.51
Altair Nanotechnologies	ALTI	95,153		2.53	18.87	$0.46
Beacon Power	BCON	112,578		3.56	1367.00	$0.24
Group Average				4.19	373.22
Cool Sustainable Group
Maxwell Technologies	MXWL	23,083		3.58	2.81	$2.86
Advanced Battery	ABAT	54,662	8.85	1.97	3.33	$1.40
Ultralife	ULBI	17,208	9.43	1.40	0.48	$5.10
China BAK	CBAK	57,680		0.73	0.47	$2.92
Hong Kong Highpower	HPJ	13,563	13.16	1.87	0.41	$1.20
Group Average			10.48	1.91	1.50
Cheap Emerging Group
Axion Power International	AXPW.OB	35,333		6.69	60.25	$0.22
ZBB Energy	ZBB	10,512		1.37	10.33	$0.88
Group Average				4.03	35.29
Cheap Sustainable Group
Enersys	ENS	47,975	9.24	1.24	0.38	$13.79
Exide Technologies	XIDE	75,478	7.49	0.87	0.11	$6.21
C&D Technologies	CHP	26,247		1.53	0.16	$1.43
Active Power	ACPW	60,458		1.71	0.83	$0.35
Group Average			8.37	1.34	0.37

As the cleantech revolution unfolds, the market will learn that every energy storage decision boils down to a cost-benefit analysis. It will also learn that the bulk of the incremental sales revenue will be funneled to companies that serve the average needs of the average user, rather than the extreme needs of the rare "power user." While I believe fundamental market drivers will result in rapid and sustained growth across the entire spectrum of energy storage companies, I’m convinced the superstars will be the manufacturers of objectively cheap products that can serve the needs of average users at a reasonable price. Until cheap group valuations approach parity with cool group valuations, I continue to believe that investors who want to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.
Disclosure: Author is a former director and executive officer of 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).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 01:33 PM | Permalink | Comments (3)

David Hannum was right! There's a sucker born every minute and they're all waiting with bated breath for the low-cost plug-in electric vehicles that are coming soon to a dealership near you; if they're not quietly cancelled first.

It's the most insidiously appealing idea of our age: replace those nasty gasoline burning engines with cheap batteries that recharge in minutes and save a fortune on fuel while you "See the USA in Your [electric] Chevrolet." It's so appealing in fact that it ranks right up there with free lunch.

P.T. Barnum would have been proud.

Listen up America – It's a scam! The emperor has no clothes! There is no such thing as a cost-effective electric vehicle that will carry a family of four at highway speeds. But the cautionary if not downright conservative analysis from sources as diverse and credible as the Department of Energy, the White House and Carnegie Mellon University somehow manages to get lost in a media sideshow that focuses on scientific breakthroughs that promise a 5-minute recharge time for batteries nobody can afford to buy.

I hate to be a buzz-kill and point out the brown object floating in the punch bowl but this graph comes from the DOE's brand new Annual Energy Outlook 2009 and shows their best estimate of the market penetration rates for various classes of hybrid electric vehicles over the next 20 years. In this chart, the PHEV-10 and PHEV-40 categories are the only cars with plugs. Everything else is either a full hybrid (HEV) or a mild hybrid (MHEV).



So while your future car is very likely to have modest hybrid capabilities, there is almost no chance it will have a plug or need a charging station. For people like me who think numbers tell a more compelling story, the following table presents some detailed forecast data that I've gleaned from the Supplemental Tables to the Annual Energy Outlook 2009.

New Car Sales (Thousands)	2010	2015	2020	2025	2030
Gasoline ICE Vehicles	5,554	7,567	7,999	7,878	7,678
TDI Diesel ICE	53	152	359	596	802
Electric-Diesel Hybrid	0	3	8	7	5
Electric-Gasoline Hybrid	195	546	985	1,471	2,034
Plug-in 10 Gasoline Hybrid	0	101	138	198	250
Plug-in 40 Gasoline Hybrid	0	49	57	81	113
Other alternative power systems	312	823	1,176	1,150	1,155
Total New Car Sales	6,114	9,241	10,722	11,381	12,035
Percentage of New Cars With Plugs	0.0%	1.6%	1.8%	2.5%	3.0%
New Light Truck Sales (Thousands)	2010	2015	2020	2025	2030
Gasoline ICE Vehicles	5,152	4,701	3,664	3,332	3,033
TDI Diesel ICE	195	381	637	921	1,174
Electric-Diesel Hybrid	0	1	1	1	1
Electric-Gasoline Hybrid	92	336	620	951	1,223
Plug-in 10 Gasoline Hybrid	0	32	22	43	65
Plug-in 40 Gasoline Hybrid	0	0	0	0	0
Other alternative power systems	950	1,884	1,613	1,394	1,269
Total New Light Truck Sales	6,389	7,334	6,557	6,641	6,765
Percentage of New Trucks With Plugs	0.0%	0.4%	0.3%	0.6%	1.0%

With due respect for emotionally committed carbon activists who sincerely believe plug-ins are the only way to save our beloved planet, the DOE estimates that cars with plugs will be 0.0% of the new car fleet in 2010, 1.1% of the new car fleet in 2015, 1.3% of the new car fleet in 2020, 1.8% of the new car fleet in 2025 and 2.3% of the new car fleet in 2030. In simpler terms, plug-in vehicles are not the Greatest Show on Earth and the three ring circus we fondly refer to as the auto industry would close the sideshow if it wasn't such a big draw for children of all ages (including government) that bring fat wallets.

We've all been buried in press releases and reports about carmaker plans to introduce plug-in hybrids over the next few years. These are PR stunts, not business decisions. They remind me of a controversy that erupted in the mid-1800s when an entrepreneur named George Hull had the Cardiff Giant carved from a block of gypsum, aged and buried in a field. He then found the treasure while digging a well and promptly sold a two-thirds interest to a credulous investor syndicate managed by a banker named David Hannum. After the sale, Hannum's syndicate moved the Cardiff Giant to Syracuse and increased the entry fee to $1, which was serious money in the 1860s. Things really got rolling when P.T. Barnum tried to lease or buy the Cardiff Giant and was unable to do so. At that point Barnum had a plaster of paris copy made and promptly began denouncing the original as a fake. In newspaper stories about the dispute, Hannum was quoted as saying, "There's a sucker born every minute" in reference to the people who were paying to see Barnum's fake giant instead of the original giant that his syndicate had bought from Hull, which was also a fake. While it's not entirely clear whether Hannum was a sucker or a huckster, they all ended up in court where Hull confessed that the Cardiff Giant was a hoax and the judge ruled that truth was an absolute defense to the syndicate's lawsuit against Barnum.

There is an immense difference between announcing plans to manufacture a product and actually hitting the start button on an assembly line. I am certain we will see a huge variety of one-off prototypes, concept cars and limited production test vehicles over the next couple of years; but unless the DOE's analysts are as clueless as some vocal critics believe them to be, substantially all of the PHEV programs that are being announced today with great fanfare will be quietly axed before too much money is wasted on politically popular ideas that don't make a bit of economic sense.

The headline news out of China is that BYD is introducing a cheap PHEV-62. The truly impressive story is that China built and sold an estimated 23 million electric two-wheeled vehicles (E2W) last year. Collectively, these E2Ws used enough battery power for a million American style PHEVs; all of which leads to a couple of interesting questions for the PHEV crusaders. First, what do you think the chances are that 23 Chinese will give up a little battery power so that one American can squander a lot of battery power? Second, who do you think will have the greater buying power if it comes down to price competition in a resource constrained world, 23 thrifty Chinese or one profligate American?

Li-ion battery developers have access to the same reports I do and they know the PHEV frenzy is a scam. But its a scam where they can let somebody else wildly exaggerate the economic potential of PHEVs and then use baseless auto industry PR to justify building government subsidized factories that do not make sense under any reasonably foreseeable future conditions.

With a simple Google search anybody can learn that Ener1 (HEV) is seeking $480 million in Federal loans to build battery plants with capacity for 600,000 HEVs by 2011 and 1.2 million additional HEVs by 2015. A123 Systems is seeking $1.8 billion in Federal loans to build battery plants with capacity for 5 million HEVs per year. The National Alliance for Advanced Transportation Battery Cell Manufacture is seeking another $2 billion in Federal funding to build one or more manufacturing and prototype development centers that will be shared by the fourteen NAATB members. While I actually believe the NAATB proposal has considerable merit because it includes giants like 3M (MMM), Enersys (ENS) and FMC (FMC) along with emerging companies like Altair Technologies (ALTI), the nagging question that simply will not go away is "Who is going to buy batteries for over 6.8 million HEVs a year when the DOE's demand forecast is less than half of that number?"

Will we ultimately see those same manufacturers back before Congress demanding HEV and PHEV mandates like we saw with ethanol?

I've written a series of articles on how Li-ion technologies stack up against the competition once you move away from the idea of a PHEV-40 that needs an immense amount of stored energy to move a family of four at highway speeds. The entire archive is available on my Seeking Alpha author's page.

Li-ion is a wonderful technology for portable electronics, E2Ws and personal transportation applications where the vehicle weight to passenger weight ratio is less than about five. It is nonsensical when the goal is to move four passengers and a couple thousand pounds of steel and composites at highway speeds. To date the only rational PHEV proposal I've seen is a gas-guzzler to dual-mode EV conversion initiative that's being developed by Axion Power International (AXPW.OB). The raw end user economics are not as attractive as I would like them to be, but the existing fleet of gas-guzzlers is a far larger problem than the new car fleet will ever be. Since my parents always taught me to focus on the big problems first and leave the petty stuff for later, I have a hard time arguing with a proposal to slash gasoline consumption by almost a billion gallons a year for every 1% of the existing gas-guzzler fleet that's converted into gas sipping EV-50s. Everything else is just a sideshow.

Mark Twain once said, "history doesn't repeat itself but it does rhyme." Like the Cardiff Giant, PHEVs are an appealing bit of fiction that everybody wants to believe. Like the Cardiff Giant there are hucksters prowling the land claiming they have the real deal. In the final analysis, the losers will be the investment syndicate members and the suckers who pay their dollar to see the fake giant.

The DOE's Annual Energy Outlook 2009 makes it perfectly clear that PHEVs are irrelevant for normal people who worry about things like budgets, monthly payments and retirement plans. Fortunately, there are many real energy storage solutions from real companies that actually deserve our attention. I may revisit the PHEV loony bin from time to time to poke a little fun at the true believers, but I'm basically done with this topic.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 10:12 PM | Permalink | Comments (2)

In it's March 30, 2009 summary determination that GM had failed to propose a viable bankruptcy alternative, the President's auto industry task force said:

"GM is at least one generation behind Toyota on advanced, "green" powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable."

This extraordinary conclusion has been public for weeks but I've not seen it reported by any mainstream media. I would have missed it entirely if Plug In America, an EV industry trade group, hadn't made a point of issuing a press release that was drawn to my attention by one of my readers. While the White House did not specifically lay the Volt's problems at the feet of the battery industry, Plug in America did. In their refutation of the auto industry task force report, Plug in America said:

"California law requires that the Volt and other plug-in hybrids come with a 10-year warranty. To ensure this longer life, automakers are as much as doubling the size of the battery pack, increasing cost to manufacturer and consumer. But not a single production plug-in electric vehicle sold to date, from GM’s early EV1 to today’s Tesla, has had a warranty of more than five years, noted Plug In America advisory board member Chelsea Sexton.

“To support early deployment, California should relax the warranty requirement for cars like the Volt to five years, phasing to 10 years over time,” said Sexton, a former GM employee. “This alone could cut the number of batteries required by as much as half and reduce the cost of each vehicle by thousands of dollars."

The warranty reduction would not impose added liability on GM or consumers, Sexton noted, because President Obama has said the federal government will guarantee the warranties of GM and Chrysler vehicles should they go bankrupt. And dealers can sell extended warranties, providing additional security for consumers who want it as well as revenue when auto companies need it most."

In January 2009 the DOE released its 2008 Annual Progress Report for the Energy Storage Research and Development Vehicle Technologies Program that concluded Li-ion batteries were not ready for prime time in PHEV and EV applications.  In March 2009 the President's auto industry task force issued a report that the GM Volt, the first Li-ion powered PHEV proposed by a major manufacturer, was not ready for prime time.

Is anybody out there listening to the facts or are the PR jungle drums from a few undercapitalized Li-ion battery developers simply drowning out the voice of reason and prudence?

Cheap Li-manganese batteries from LG-Chem and $7,500 in Federal Tax Credits are not enough to make the Chevy Volt commercially viable. Comparable batteries from Ener1 (HEV) were not enough to keep Th!nk out of fiscal reorganization in Norway. More expensive Li-phosphate batteries from A123 Systems are unlikely to keep Chrysler out of bankruptcy. While Li-phosphate batteries from Valence Technology (VLNC) and comparably priced Li-titanate batteries from Altair Nanotechnologies (ALTI) are being tested in hybrid transit buses and other commercial vehicles that may put enough stress on the batteries to justify their high cost, none of the companies I criticized last July has demonstrated any ability to meet the challenge and do the heavy work of powering America's transportation future.

I love the Li-ion batteries in my laptop and cell phone and believe it Li-ion an excellent choice for applications like electric two-wheelers (E2W) and other vehicles where there is a rational relationship between vehicle weight and passenger weight. But it is high comedy to suggest that Li-ion batteries will ever be able to power 300 pounds of passengers and 3,000 pounds of steel for 40 or 50 miles at highway speed. It's like using 5,000 golden hamsters to pull a stagecoach when what you really need is a horse.

I've been rational, analytical, courteous and engaging for the last ten months, but it's high time for somebody to stand up and call bullshit on the shameless Li-ion hucksters who have nothing to offer but happy-talk forecasts and hype! It's also high time for taxpayers to stand up and say "Not with my money you don't!"

America's leading Li-ion battery developers including Altair Nanotechnologies, Ener1 and Valence had combined losses of $93 million on $42 million of 2008 sales, yet they sport a combined market capitalization of $1 billion. In comparison America's leading lead-acid battery manufacturers including Axion Power (AXPW.OB), C&D Technologies (CHP), Enersys (ENS) and Exide (XIDE) carry a comparable combined market capitalization even though they had combined profits of $140 million on $6.2 billion of 2008 sales.

Something is dreadfully wrong with this picture. Summary data for each company follows.

	Ticker	Price Per Share	Mkt Cap (millions)	Sales (millions)	Income (millions)
Altair Nanotechnologies Inc.	ALTI	$1.29	$120	$6	($29)
Valence Technology Inc.	VLNC	$2.22	$273	$29	($21)
Ener1 Inc	HEV	$5.40	$613	$7	($43)
Group Total			$1,005	$42	($93)
Axion Power	AXPW.OB	$1.40	$49	$1	($11)
C&D Technologies	CHP	$2.10	$55	$375	($8)
Exide Technologies	XIDE	$4.66	$352	$3,698	$58
Enersys	ENS	$13.96	$670	$2,162	$101
Group Total			$1,126	$6,236	$151

For months my message to storage sector investors has been simple: the energy storage sector will ride the crest of an investment tsunami as we enter the cleantech revolution, but cleantech is all about price vs. performance and there is no room for irrational expectations. The DOE has said the same thing and now the President's auto industry task force has joined the chorus. Lithium dreams have become an investor's worst nightmare. It's time to wake up and smell the coffee, go to work and solve our problems to the best of our ability with cost-effective technical solutions like compressed natural gas and advanced lead-acid and lead carbon batteries.

The airbrushed Li-ion centerfolds may have serious investment merit in the future, particularly if somebody in the EV world develops a product that is proud to be an EV instead of pretending to offer the functionality of a family car. But that day is not today and investors need to stop deluding themselves. Cool technology that cannot provide a cost effective solution to real world problems has all the nutritional value of rainbow stew. So let's stop wasting time and money on feel-good solutions that cannot work and get to work solving the problems with readily available and cost effective technologies.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 08:15 AM | Permalink | Comments (10)

In mid-February President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA), a massive spending bill that spawned gigabytes of analysis and comment from bloggers like me. Unlike many, I've tried to stay politically agnostic and focus solely on the economic impact of ARRA on companies that manufacture batteries and other energy storage devices. From that limited perspective, everything is wonderful!

The principal energy storage appropriations included in the ARRA were:

• $4,500,000,000 for grants for “Electricity Delivery and Energy Reliability” including activities to modernize the electric grid, include demand response equipment, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply;
• $2,000,000,000 for grants to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers;
• $500,000,000 for research, labor exchange and job training projects that prepare workers for careers in energy efficiency and renewable energy; and
• $300,000,000 to purchase high fuel economy motor vehicles including: hybrid vehicles; neighborhood electric vehicles; electric vehicles; and commercially available, plug-in hybrid vehicles.

In a February 22nd article about why I believed energy storage stocks could easily double as a direct result of ARRA spending, I cautiously speculated that a large number of $100 to $200 million grants seemed more likely than a handful of mega-project grants. In response, many readers expressed concerns that the ARRA funding would be hijacked by the utility industry or wasted. While we've all been eagerly awaiting clarification, I'm very impressed with the direction the Administration's policies seem to be heading.

In his early remarks on ARRA policy objectives, President Obama seemed inclined toward an egalitarian approach that would use ARRA funding for a wide variety of projects in a concerted effort to create new jobs, explore reasonable alternatives and rely on market mechanisms rather than policy-wonks. I was particularly impressed by remarks President Obama made at the Southern California Edison Electric Vehicle Technical Center last month when he said:

"Show us that your idea or your company is best-suited to meet America's challenges, and we will give you a chance to prove it. And just because I'm here today doesn't exempt all of you from that challenge - every company that wants a shot at these tax dollars has to prove their worth."

While we all know the opera ain't over 'til the fat lady sings, an April 16th press release from the DOE has spurred my optimism to new heights and given me reason to believe the DOE's plans for smart grid grants will take a very reasonable and pragmatic approach. In discussing their plans for financing smart grid projects, the DOE press release said:

"$3.375 billion for Smart Grid Investment Grant Program"

DOE’s Smart Grid Investment Grant Program will provide grants ranging from $500,000 to $20 million for smart grid technology deployments. It will also provide grants of $100,000 to $5 million for the deployment of grid monitoring devices. This program provides matching grants of up to 50 percent for investments planned by electric utilities and other entities to deploy smart grid technologies. The program will use a competitive, merit-based process to select qualified projects to receive funding.

Eligible applicants include, but are not limited to, electric utilities, companies that distribute or sell electricity, organizations that coordinate or control grid operations, appliance and equipment manufacturers, and firms that wish to install smart grid technology. There will be a 20-day public comment period on the Notice of Intent; the Department will use feedback to finalize the grant program structure and subsequent solicitation.

$615 million for Smart Grid Demonstration Projects

The draft Funding Opportunity Announcement is for smart grid demonstrations in three areas:

• Smart Grid Regional Demonstrations will quantify smart grid costs and benefits, verify technology viability, and examine new business models.
  
• Utility-Scale Energy Storage Demonstrations can include technologies such as advanced battery systems, ultra-capacitors, flywheels, and compressed air energy systems, and applications such as wind and photovoltaic integration and grid congestion relief.
• Grid Monitoring Demonstrations will support the installation and networking of multiple high-resolution, time-synchronized grid monitoring devices, called phasor measurement units, that allow transmission system operators to see, and therefore influence, electric flows in real-time.

Each demonstration project must be carried out in collaboration with the electric utility that owns the grid facilities. An integrated team approach that includes, for example, products and services suppliers, end users, and state and municipal governments, is encouraged. The projects require a cost share of at least 50 percent of non-federal funds."

Frankly, the DOE's goals are more ambitious, reasonable and broad-based than I had hoped they would be. Instead of a relatively small number of $100 to $200 million grants that would provide immense boosts to a small number of companies, the DOE is talking about hundreds of more modest grants that will benefit a much larger number of companies and probably be spent more wisely.

If the policy objectives defined by President Obama and clarified by the DOE flow through the entire ARRA grant allocation process, we may be entering a golden age for investors in companies that are developing batteries, energy storage devices and other smart grid technologies; a tidal wave of public and private funding that will lift all boats in the sector rather than a select few.

The overriding policy objectives I've been able to glean from the statements to date are:

• The DOE will spread the wealth across a broad range of technologies and companies; and
• The DOE will not finance technologies or companies that cannot attract the bulk of the required funding from non-government sources.
  

The result is a true public-private partnership where generous government support is available for companies that the market is willing to support as stand-alone business ventures, but the market holds the ultimate trump card. It's a structure that's simple in its genius and recognizes that the job of government is to enable the market process rather than supplant it.

I've written more than a few unkind words about publicly announced applications under the DOE's Advanced Vehicle Technology Manufacturing Loan Program because many applicants including A123 Systems, Ener1 (HEV), Tesla Motors and Th!nk are underfunded and the amount of the requested loans is disproportionate to the established value of the advanced vehicle technologies they want to manufacture. My basic question has always been "What if they build their proposed factories and nobody wants their products?" That question, in turn, led to the inescapable conclusion that the ATVM loans are a 'heads I win tails you lose' proposition that can be nothing but good for successful applicants and nothing but bad for the government.

We may indeed end up with a wasteful outcome from the ATVM loan program because it takes a lot of money to build manufacturing capacity from the dirt up and the process has been politicized. My sense, however, is that the ARRA grants will be another story altogether. Carefully administered ARRA grants can double the available funding for grid-connected energy storage partnerships like the ones that A123 Systems, Altair Nanotechnologies (ALTI), Axion Power International (AXPW.OB), SAFT Batteries (SGPEF.PK) and ZBB Energy (ZBB) have negotiated with counterparties including AES Corporation (AES), ABB Limited (ABB), Eaton Corporation (ETN) and NYSERDA. If similar policies flow control the ARRA grant policies for advanced battery manufacturing, the impact on the entire energy storage sector can be huge.

I frequently criticize the bloated market capitalizations of Li-ion battery developers, but it's important that readers understand that my criticisms relate to stock market factors rather than an assessment of the underlying technology. We need Li-ion, lead-acid, lead-carbon and flow batteries, and a host of other technologies that haven't even been invented yet if we want to break our addiction to imported oil and pave the way for cleantech, the sixth industrial revolution.

While I've always believed that good things happen in America in spite of government, the evolving policies of the Obama Administration may well change my views. At least for now, I believe the Administration's plans for distributing the ARRA smart grid grants are very smart indeed because they rely on the capital markets and sound business judgment as a counter weight to idealism that frequently drives government action.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds a small long position in ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 06:40 AM | Permalink | Comments (0)

Yesterday Axion Power International (AXWP.OB) announced the signing of a memorandum of understanding with Exide Technologies (XIDE) following fourteen months of negotiation and technical investigation. This alliance could prove to be a sea-change event for the domestic battery industry. Copies of the press release and an archived version of the subsequent investor conference call are available on Axion's website.

As a former chairman of Axion's board of directors and a very substantial Axion stockholder, I've been waiting for an agreement like this for a very long time. I'm delighted to see confirmation from Exide that my faith in Axion's PbC technology, its management and its technical team were justified.

Over the last nine months I've written a series of articles on the energy storage sector in general and the battery industry in particular. My basic premise has been that none of the battery technologies we've relied on in the past are robust enough and cheap enough to satisfy the requirements of cleantech, the sixth industrial revolution. The result has been a race to fill the void as lead-acid battery manufacturers worked to improve performance and Li-ion battery developers worked to reduce costs. The prize to the winners will be major chunks of market share in an industry that expects explosive growth from $30 billion to over $100 billion per year in the next decade. In the words of Merrill Lynch analyst Steve Milunovich:

". . . cleantech markets dwarf IT to the tune of two orders of magnitude. Unlike tech names, cleantech companies often don’t need huge unit growth to succeed – modest improvements mean more. New IT vendors often face a hurdle of a 5-10x improvement over incumbent technology to succeed while in cleantech doing the same amount of work with reduced CO2 emissions might be enough.”

Axion has always been unusual because there was never a question about whether its PbC technology worked. Early technical studies conclusively showed that replacing the lead-based negative electrode in a conventional lead-acid battery with a carbon electrode like you find in most supercapacitors had a tremendous impact on both cycle life and power. Two years ago, when Axion received the prestigious 2006 Technology Innovation Award for North America in the field of lead acid batteries, Frost & Sullivan noted that Axion's PbC technology had:

". . . the potential to revitalize the lead-acid battery industry by breathing new life into an established technology that was not well-suited to the requirements of important new applications like hybrid electric vehicles and renewable power."

The real challenge has always been transitioning the science from a laboratory bench to a factory floor. The  commercialization alliance with Exide is clear independent confirmation that Axion has succeeded where the vast majority of R&D companies fail.

Over the last couple of months the battery industry has been headline news as the Federal government adopted massive loan, grant and subsidy regimes for advanced battery technologies. While the mainstream press has focused most of its attention on the potential of plug-in vehicles, the enabling legislation also recognizes the crucial role that cost-effective energy storage will play in the development and implementation of the smart grid and the more widespread use of wind and solar power. The fundamental goals of all the recent legislation are to build a new domestic battery manufacturing infrastructure that will help liberate America from the economic tyranny of imported oil while enabling the more widespread use of alternative energy technologies and cutting carbon-dioxide emissions.

The biggest advantages Axion's PbC technology offers are low cost and rapid deployment. As of today, there are no large-scale Li-ion battery manufacturing facilities in the U.S. and while a number of companies have disclosed plans to build new factories if Federal subsidies are made available to them, there are significant unanswered questions about whether the battery technology solutions these companies are proposing are cheap enough, robust enough and safe enough to warrant a multi-billion dollar implementation effort. Even if the hoped-for subsidies materialize and the proposed factories are built, the process of building the factories, perfecting manufacturing techniques, establishing reliable supply chains for imported raw materials, introducing new products and training an entire country to use those products will be a major undertaking.

In comparison, there are dozens of companies that already operate lead-acid battery factories in the U.S. and Axion's PbC technology has now reached a point in the development process where it can be implemented in the existing factories starting immediately without substantial changes to existing equipment, components or manufacturing processes. So for the first time America has a real a choice between "sometime a few years from now" and today.

I love it when a plan comes together.

I cannot begin to predict the impact the new alliance will have on Axion or Exide. After giving pro-forma effect to the conversion of its outstanding preferred stock, Axion has 34.7 million shares outstanding and a market capitalization of roughly $31.2 million at yesterday's closing price of $0.89. Exide, in comparison, has a market capitalization of roughly $364 million and annual sales of approximately $3.7 billion. The combination of Axion's technical expertise in lead-carbon chemistry with Exide's manufacturing, distribution and customer service prowess should be exciting. I certainly expect that the news will have a positive short-term impact on both companies and an even greater long-term impact as the pervasive scope of the alliance becomes clearer.

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

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 03:40 PM | Permalink | Comments (1) | TrackBacks (0)

On April 1st CNET News published a story about a previously secret technology that Google (GOOG) has patented and implemented system-wide. The technology, which Ben Jai of Google reportedly described as their "Manhattan Project," builds a 12-volt battery into each server to provide backup power. The point that fascinates me is Google's choice of small format valve regulated lead-acid batteries to keep its servers running. When an ultra-sophisticated company like Google picks cheap over cool for a mission critical function, I think it speaks volumes about the future direction of the energy storage industry.

Stephen Shankland of CNET took the following rear-view photo of a Google server. The lead-acid battery is the small box on the lower right with the red and black leads. Similar batteries are readily available on the Internet for about $20.



Google's motivations for building backup batteries into its servers are obvious; reliability, cost-effectiveness and energy efficiency. Those same motivations drove the choice of valve regulated lead-acid batteries over a more exotic and expensive battery chemistry. I think Google's choice of lead acid batteries to support their mission critical server network provides a great backdrop for a reality check.

First, batteries are boring and as a user I just want them to work. Unfortunately, the only battery I've ever owned that delivered exactly what it promised was a Sears Die Hard I bought in the early '70s. I'm the first to admit that my cell phone and laptop batteries have improved a lot over the last 20 years, but my satisfaction to frustration index is still pretty close to even.

Second, batteries are stupid and the only thing they can do is store electricity in chemical form for future use. If the future use of the stored electricity is valuable to me, so is the battery. If the future use has limited value to me, so does the battery. In the final analysis, any discussion of battery value that is divorced from the specific needs of a particular user is meaningless. It's the usefulness of the electricity that creates the value, not the battery technology.

Third, batteries are fungible commodities that rarely inspire brand awareness, much less loyalty. I have no idea who made the batteries in my car, cell phone and laptop. I'll give long odds that you don't either. Since usefulness for a specific purpose is the only thing that matters to most users, the lowest cost producer of a competitive product will always establish the price.

Fourth, different ways of making the same type of battery are not critical intellectual properties. If several manufacturers make a comparable lead-acid, NiCd, NiMH, Li-cobalt, Li-manganese, Li-phosphate or Li-titanate battery, then nobody enjoys a meaningful technological advantage and the process patents are merely window dressing.

Fifth, small companies that try to run before they learn how to crawl invariably stumble, fall and get crushed by their customers. This is particularly true when a small company's target customers are giants. Bluster, trash talk, hype and drama may be appropriate as prelude to a WWE Championship, but they are deadly in business.

Sixth, energy storage needs do not fit neatly into a few cubby-holes and there are no universal solutions. So instead of a future where a few dominant competitors survive and the rest fall by the wayside, we are more likely to see dozens of strong competitors thrive by selling different technological solutions to discrete billion-dollar market segments.

In my third Seeking Alpha article I wrote:

"For better or worse, the world changed while most of us were busy making other plans. When waste was cheaper than conservation, waste ruled. Now that waste is getting painfully expensive and global energy demand is growing far more rapidly than supplies, we have a serious problem with no easy solution."

That dynamic is still the driving force behind energy storage decisions. Since reliable service is critical to its mission, Google needed to ensure that its servers would not go down in the event of a power failure. One could easily argue that reliability is so important to Google that backup power is priceless. But Google is well known for spending wisely and while any number of energy storage technologies could have served its purposes, Google picked the most affordable and environmentally friendly battery technology over several cooler technologies.

The energy storage sector can be very confusing for investors because of the political appeal of and media hype over plans to use Li-ion batteries in a new generation of plug-in electric vehicles. In an effort to milk the current irrational exuberance for all it's worth, many Li-ion battery developers swan around like minor princes gossiping about the king's impending illness and waxing prophetic on how marvelous things will be once they get government guaranteed loans to build U.S. factories, magically slash their production costs, find customers that aren't bankrupt or teetering on the brink of the abyss and triumphantly ascend to the throne. Since the politicians and press don't know any better, and the environmentalists are eager to embrace any feeble reed that might reduce carbon emissions, the meaningless forecasts of future victories are accepted as fait accompli despite the fact that the king is in fine shape and the minor princes have not shown any ability to lead, much less rule.

Batteries are a not a cause or a crusade, they're a business. Unfortunately for many investors, that message has been lost in the hype and created some incredible market distortions. If you compare market capitalizations, Ener1 (HEV) is almost as valuable as Enersys (ENS). If you compare financial statements, however, you'll find that Ener1 wouldn't qualify as a rounding error if it was part of Enersys. The distortions are every bit as striking if you make the same comparisons between Valence Technology (VLNC) and Exide Technologies (XIDE). Comparable distortions are obvious for late stage technology development companies like Altair Nanotechnologies (ALTI) and Axion Power International (AXPW.OB).

The realities of the battery industry are such that every survivor will prosper and have more business than it can say grace over, but it will take years if not decades for Li-ion developers to grow their businesses to the point where their fundamentals justify their market values. So while the currently unloved lead-acid battery companies are growing their businesses and increasing shareholder value, the minor princes are more likely to stagnate, stumble and fall.

When it came to a mission critical buying decision, cheap beat cool at Google. Does anybody really believe American consumers will act differently when it comes to their own money?

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

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. (AXPW.OB) a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 08:35 AM | Permalink | Comments (1)

On April 6th, Chrysler LLC announced the creation of a strategic alliance whereby A123 Systems, Inc. will become a primary battery supplier for Chrysler's planned line of plug-in electric vehicles. This is a huge step toward rebuilding America's domestic battery manufacturing infrastructure and both companies should be congratulated. The next steps I see in my murky crystal ball are finalization of A123's pending IPO coupled with an announcement that A123's $1.8 billion loan request under the DOE's Advanced Technology Vehicle Manufacturing Program has been approved. If the foundation has been properly laid, it will all come together very quickly.

I've been following A123 since it first filed its SEC registration statement. While the IPO was delayed by last fall's market implosion, its team stayed the course and announced plans to build a $2.3 billion battery manufacturing facility in early January. To help pay for the planned facility, A123 applied for a $1.8 billion loan under the DOE's Advanced Vehicle Technology Program. In an earlier article that focused on the ATVM loan requests from A123, Ener1 (HEV), Tesla Motors and Integrity Automotive, I questioned how those requests could be approved without proof that the applicants would have willing buyers for their products. Yesterday's announcement provides a clearer picture of the negotiations that have been going on behind the scenes for months.

Thirty years ago, Michael Milken popularized the use of letters that said Drexel Burnham Lambert was "highly confident" financing could be arranged on specified terms if the underlying business transaction could be negotiated. These letters then formed the basis for negotiations between sellers, bankers and other necessary parties. My guess is that A123 and Chrysler have used the same mechanism quite effectively. If I'm right, the Chrysler release is just the first piece falling into place and the others will quickly follow.

From a securities regulatory perspective, A123 is almost done with its IPO filings. The registration statement went through three rounds of staff review and comment last year and was basically ready to go by late November. Updating the registration statement to include year-end financial information and disclose the terms of the agreement with Chrysler and the terms that have presumably been negotiated with the DOE should be fairly simple. So the only critical timing issues seem to be a final DOE decision, a registration statement amendment and a road show.

This is great news for the energy storage sector because like I said last August, there is nothing like a high-profile IPO road show to draw market attention to energy storage in a new way and mark the beginning of a major upward trend in a basic industry that's been undervalued for years. It should be a fun spring after a dismally hard winter.

In addition to the visibility boost I think the Chrysler – A123 alliance will bring to the storage sector, there may well be a second tier of good news for other manufacturers of energy storage devices. The ATVM program allocated $22.5 billion to major manufacturers and set aside another $2.5 billion for loans to "small automobile and component manufacturers" that have fewer than 500 employees. While I originally questioned whether A123's loan request was part of the large manufacturer allocation or the small manufacturer set aside, it's now clear that A123 has been joined at the hip with Chrysler for months. Therefore, I think it's safe to assume that the $2.5 billion set-aside for small manufacturers will remain intact. While I remain skeptical about how the small company applicants will be able to meet the stringent business viability requirements I discussed in my earlier article on the ATVM loan program, it is entirely possible that similar behind the scenes negotiations are already in process on other ATVM loan requests.

While the Chrysler – A123 alliance will almost certainly spark a tidal wave of interest in the energy storage sector, I think it's important for investors to remember that the best opportunities are often found in the least glamorous stocks. The energy storage sector is a target rich environment that does not have a single ‘silver bullet’ technological solution. The root causes of the challenge include:

• Storage needs that range from watt hours to megawatt hours or even gigawatt hours;
• Discharge needs that range from seconds to hours or even days;
• Cycling rates that range from infrequent (e.g. back-up power) to intense (e.g. recuperative braking);
• Cycle depths that range from very shallow (e.g. engine starting) to very deep (e.g. fork lifts);
• Technological improvements that are usually incremental gains instead of disruptive advances;
• Products that require huge inputs of high value or exotic raw materials;
• The need to carefully analyze costs and benefits for each potential storage application; and
• The sheer immensity of the current and potential market for energy storage products.

The informed consensus is that annual revenues of companies in the energy storage sector will increase from $30 billion to $100 billion or more over the next several years. While I track a handful of pure-play public companies that are focused on billion-dollar market segments and likely to be strong competitors in those segments, none of their technologies has broad utility across the entire energy storage spectrum. So instead of a future where a couple of dominant competitors survive and the others fall by the wayside, it’s easy to envision a future where dozens of strong competitors will thrive by serving different billion-dollar market segments.

Over the last nine months I've written a total of 47 articles on the energy storage sector and the principal pure play companies that are active in the sector. The entire archive can be accessed from my Seeking Alpha author's page. While I have a strong personal preference for lead-acid technology, I also have a contingent of faithful readers who help round out the discussion so that a clear and informative picture emerges. You may find some of my analysis useful if you're looking at storage for the first time.

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

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.

Posted by John Petersen at 11:28 AM | Permalink | Comments (2)

This May will mark the nine-year anniversary of "Costs of Lithium-Ion Batteries for Vehicles," a seminal study from the DOE and Argonne National Laboratory that sent America lurching down a path toward an HEV, PHEV and EV future based on Li-ion batteries. Since nine years is a respectable length of time in most industries, I thought it might be interesting to review the prevailing expectations in May of 2000, consider the cost reductions achieved over the last nine years and question whether the market frenzy over Li-ion battery companies is even close to rational. Regular readers know that I'm an unrepentant critic of both Li-ion batteries and the companies that make them. So if you're a true believer in Li-ion technology, I would implore you to stop reading now.

To keep it simple, I'll dispense with the foreplay and get straight to the vulgar financial issues. In its May 2000 report "Costs of Lithium-Ion Batteries for Vehicles," the DOE published its estimate of the prices Li-ion battery packs would need to achieve before HEVs, PHEVs and EVs could be cost-competitive. For complete details see Section 6 beginning on page 37.

Battery Type	Baseline	Optimistic	Industry Goal
High-Energy (35 kWh Battery Pack)	$706 per kWh ($24,723)	$250 per kWh ($8,767)	>$150 per kWh (USABC)
High-Power (100 cells, 10 A-h each)	$2,486	$1,095	$300 (PHGV)

These figures were not a forecast of what the Li-ion battery companies were likely to achieve. They were a simple statement of the fundamental economic barriers to entry that had to be overcome before a market could develop.

After nine years of work and incalculable spending on Li-ion battery research and development, the following table shows exactly how far the Li-ion battery industry has come.

Manufacturer	Chemistry	Current Price	Target Price
Ener1 (HEV)	Li-polymer	$660 per kWh	N/A
Valence Technologies (VLNC)	Li-phosphate	$1,000 per kWh	$500 per kWh
Altair Nanotechnologies (ALTI)	Li-titanate	$1,000 per kWh	N/A
A123 Systems (power tool packs)	Li-phosphate	$1,228 per kWh	N/A
2008 DOE SEGIS-ES Estimates (PV Solar battery packs)	Various	$1,333 per kWh	$780 per kWh
2009 NEDO Survey Results (Average of Japanese Producers)	Various	$2,018 per kWh	$1,000 per kWh (next year)

Price stagnation is the kindest term I can use for nine years of research that has failed to reduce costs.

In the 2008 Annual Progress Report for its Vehicle Technologies Program, the DOE reported that the cost of high-energy Li-ion batteries for PHEV and EV applications "is approximately a factor of three-five too high on a kWh basis." Likewise, with respect to high-power Li-ion batteries for HEV applications, the DOE reported that the cost "is approximately a factor of two too high on a kW basis." Is it any wonder that a recent report on the electric two-wheeled vehicle (E2W) market in China says that roughly 85% of new E2Ws are powered by heavy lead-acid batteries instead of their lighter Li-ion cousins? Could it have something to do with a 400% price differential and a population that knows the value of a dollar?

I have seen all the glowing reports about immense progress in the Li-ion battery sector. One of my personal favorites is on Slide 14 from a Summer 2008 presentation by David Anderson of the Rocky Mountain Institute that shows a highly favorable "industry consensus" regarding future Li-ion battery manufacturing costs (Click here for image PDF).



In what alternative universe is that kind of industry consensus reasonable? Over the last nine years Li-ion battery companies have had a hard time maintaining Y2K price levels much less reducing them. While their products are safer, I've seen nothing to indicate that the industry consensus is based on anything other than hope and the certain knowledge that unless prices collapse Li-ion batteries will never be cost effective in HEVs, PHEVs and EVs.

To put it bluntly, the progress the DOE hoped for in Costs of Lithium-Ion Batteries for Vehicles never materialized. We live in a resource constrained world where demand for water, food, energy and every conceivable commodity is increasing rather than decreasing. Since the DOE said in the introduction to Section 6 that materials costs account for 80% or more of finished product costs, it is patently unreasonable to believe that further cost reductions are possible, much less likely.

I am an incurable optimist and believe that cost-effective solutions to our energy storage problems will be found. But in the case of Li-ion batteries what started as cautious skepticism in a DOE report has gradually morphed into a baseless urban legend of immense proportion, a lie so colossal that nobody would expect a responsible industry sector to distort the facts so blatantly or allow the politicians and press to do the dirty work for them. I think it's time for the investing public to rely on their own experience instead of the deafening drumbeat of PR and hype that says, "your experience is meaningless – listen to our promises instead."

Stock market investors are currently placing big bets on Li-ion battery companies in the hope that massive Federal grants and loans will increase the intrinsic value of their investmentss to a level that roughly approximates current market values. While that plan may have short-term appeal for day traders and other speculators, the fact remains that you can tie a pork roast around an ugly baby's neck and the dog will play will play with it for a while, but bad economics are ugly to the bone.

If you want a long-term investment that will grow over time and derive immense benefit from the coming cleantech revolution, then the low-profile lead-acid battery manufacturers including Exide (XIDE) Enersys (ENS) are probably the best choices. If you want a low-cost speculation on advanced acid or lead-carbon technologies in the final development stages, then C&D Technologies (CHP) and Axion Power International (AXPW.OB) may be good choices. In life, the plain and reliable girl next door usually makes for a better wife than an airbrushed centerfold. In batteries, the plain and reliable lead-acid variety that we've used for decades have far more potential to serve our needs than the famously expensive and finicky batteries we use to power our cell phones and laptops.

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

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 01:39 PM | Permalink | Comments (12)

Last November, Merrill Lynch released "The Sixth Revolution: The Coming of Cleantech," a thematic report from strategist Steven Milunovich that heralded cleantech as a new investment theme and forecast a coming age of plenty. A few days later venture capital icon Vinod Khosla warned a Palo Alto 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.

It is remarkably different this time!

Last weekend, I re-read the Milunovich report and spent several hours pondering the fundamental forces that drove the technological revolutions identified in the following table.

	Technological Revolution	Historical Era
FIRST	The "British Industrial Revolution"	From 1771
SECOND	The Age of Steam and Railways	From 1829
THIRD	The Age of Steel, Electricity and Heavy Engineering	From 1875
FOURTH	The Age of Oil, the Automobile and Mass Production	From 1908
FIFTH	The Age of Information and Telecommunications	From 1971
SIXTH	The Age of Cleantech and Biotech	From 2003

I'm not an avid historian, but I recall that the popular reactions to the first five technological revolutions ranged from violent resistance to innovations that threatened job security (e.g. Luddites in England and saboteurs in France) to polite disdain or outright derision of innovations that were not seen as threats (e.g. Fulton's Folly). I still cringe when I remember college boy conversations where I taunted classmates with questions like "You may be able to buy a home computer in ten years but why would anybody ever want one?" The point is we didn't understand how important the innovations were until we viewed them in 20/20 hindsight. This dynamic gave important technologies time to evolve naturally, establish their value and then change the world in ways we couldn't have imagined. The process invariably took decades.

Where the first five revolutions were driven by the individual desire to do something better, faster and cheaper, it seems that cleantech is driven by a different dynamic. We collectively know that water, food, energy and commodities are not resources we can waste with impunity. We collectively understand that 6.2 billion people know how the rest of us live and each of the have-nots wants a fair share of the dream. We collectively fear a tipping point where unrestrained consumption of fossil fuels will irreparably damage our planet. We collectively worry that the world we pass to our children will face catastrophic conflict and horrific environmental consequences because of decisions that were made in a different era by our grandparents, our parents and us. So instead of viewing cleantech developments with a healthy dose of skepticism and requiring inventors to prove their worth, we collectively grasp at the latest research results and grossly overestimate their real value. A great example of this phenomenon are widely circulated stories about an MIT research project that would make it possible to recharge a GM Volt in less than five minutes by plugging it into the nearest available 125,000 watt power source.

Our problems are grave and almost everyone recognizes the desperate need for relevant scale solutions to persistent shortages of water, food, energy and commodities. But instead of acting like adults, accepting personal responsibility and doing the little things like home weatherization that could help alleviate the problems, we demand profound changes without considering whether the changes are enduring solutions or simple band-aids. We then compound the foolishness with the insane delusion that technological development is instantaneous and success is certain.

My favorite story of unbridled optimism is about 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 garden 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 head-first into the manure pile and starts digging. When the surprised father asks what's going on, the boy replies, "There has to be a pony in here somewhere!"

It's a crazy world and an infantile time, but once the tantrum phase passes, we'll do what adults have always done. We'll get up in the morning, we'll go to work and we'll solve our problems. The first casualty will be unbridled optimism. The second will be waste in all its pernicious forms. Ultimately, rational cost-benefit analysis will prevail and we'll begin to find enduring solutions to critical problems.

Since November of last year, I’ve argued that cheap will beat cool when it comes to the commercialization of battery chemistries. As details on the design and construction of the Chevy Volt battery pack emerge and are publicized on sites like Green Car Congress and Popular Science, it’s clear that cheap Li-ion chemistry has already beaten cool Li-ion chemistry and many of the concerns I’ve expressed about using Li-ion batteries in cars have been considered and resolved by thoughtful automotive design engineers. It bodes well for the introduction of PHEVs as long as the tax incentives remain in place, but the long-term impact on developers of high-cost Li-phosphate and Li-titanate chemistries may be devastating.

Battery Cost The Chevy Volt will use Li-polymer batteries manufactured by Korea’s LG Chem. While Li-polymer batteries have had a spotty safety record in cell phones and laptops and do not begin to approach the extreme cycle-life of Li-phosphate and Li-titanate chemistries, they are far and away the cheapest variety of Li-ion batteries with prices in the $600 to $700 per kWh range as opposed to the $1,300 to $2,000 per kWh range.

Passenger Safety To resolve the basic safety issues associated with Li-ion batteries, GM has designed a T-shaped battery pack that sits in front of the rear axle and runs forward through the space that used to be taken up by the driveshaft. At first glance, the battery pack looks like it comes out of a battle tank instead of a passenger car. The topside of the battery pack looks far stronger than the bottom side of the battery pack and it’s clear that the basic geometry has been designed to deflect the potentially explosive force of a battery failure down and away from the passenger compartment. The absence of any visible deformation in the 35 mph crash test photos of the battery pack confirm that GM thinks armor plate is more cost-effective than exotic chemistry. Overall, GM’s battery pack design is a cheap but effective way to avoid potential personal injury risks.

Cycle Life Performance Li-polymer batteries are not renowned for the extreme cycle-life of their more glamorous and expensive cousins like Li-phosphate and Li-titanate. To optimize the cycle life of the batteries in the Volt, GM has chosen to install a 16 kWh battery pack in the Volt but only use 55% of the theoretical capacity to power the car. By limiting the maximum state of charge to 85% and switching to internal combustion when the state of charge falls to 30%, GM believes it can get a 10-year life out of batteries that would die much more quickly with a wider cycling range. Once again, GM has chosen a cheap but cost-effective way to balance battery capacity and cycle life.

Weight and Energy Density The final weight of the Volt battery pack is about 175 Kg. This works out to an energy density of roughly 50 Wh/Kg for useful battery capacity, about the same value as a high quality lead-acid battery.

Recycling While the Chevy Volt battery pack will be built to European recycling standards, those standards only relate to safe disposal of potentially toxic materials and do not get into issues like recovering materials of sufficient purity that they can be used to make new batteries. This is good from a pure disposal perspective, but suboptimal if one’s environmental sensitivities extend beyond landfills to include the environmental damage caused by mining and other resource extraction activities.

In the Chevy Volt, cheap has already beaten cool like I predicted it would. Since GM has established battery cost reduction as a primary goal for future generations of PHEVs, I would not be at all surprised to see GM and other auto makers paying particular attention to advanced lead-acid and lead-carbon chemistries over the next few years because the widely heralded energy density and size advantages of Li-ion chemistry evaporate when the technology is reduced to safe commercial practice. For investors, I think the lesson of the Chevy Volt is that premium priced energy storage stocks like Ener1 (HEV) and Valence Technology (VLNC) are likely to see lower market valuations while bargain basement energy storage stocks like Axion Power International (AXPW.OB) Exide Technologies (XIDE), Enersys (ENS) and C&D Technologies (CHP) are likely to see higher market valuations.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 09:38 AM | Permalink | Comments (9)

As a lawyer, I’ve had the privilege of working with some of the finest scientific minds in the world. They all started with brilliant concepts and impressive laboratory results, but a substantial majority failed to create a viable business. After countless clients that started well and ended up mired in a swamp, I’ve come to understand that technology is a two-edged sword. On the leading edge, developers of low cost technologies can build fortunes. On the bleeding edge, developers that can’t control their costs and manufacture competitive products often morph into the financial equivalent of a black hole. Sadly, I believe most current developers of advanced Li-ion batteries are on the bleeding edge of energy storage technology and are doomed to spend years if not decades hemorrhaging cash.

I frequently feel like Cassandra, the Greek princess who was given the gift of prophecy and then cursed so that no one would believe her. When I read reports about how an MIT researcher has developed a new material that will allow Li-ion batteries to recharge in seconds or how Japan’s national alternative energy development agency has targeted a 50% reduction in Li-ion battery costs over the next year, I don’t get excited over the mirage of progress. Instead, I start asking buzz kill questions like “How much will these new materials add to the cost of a battery?” and “How can anybody reasonably target a 50% price reduction over the next year when the average has been 5% for the last 20 years?” The answers, of course, are “plenty” and “they can’t.” The stories are cheerleading and hype, not rigorous analysis; and we all know what happens when optimistic forecasts collide with immutable economic laws.

The fact is that everyone, including me, wants an easy, quick and painless solution to our growing energy dilemma. However wishes, hopes, dreams and desires can’t change the fact that until somebody overcomes the cost, performance, abuse tolerance and cycle-life issues that the DOE has analyzed in depth and I’ve discussed in earlier blogs, there will be no Li-ion solution for the average consumer’s energy storage needs. Progress is being made, but it’s an uphill battle where the goal is measured in miles and the progress is measured in feet.

Every time I mention the elephant in the living room, I’m inundated with comments suggesting that the data I’ve cited is old or unreliable. The contrary authority invariably says something like “Lyons said that most estimates put the near-future cost for battery manufacturing at $250-300 per kWh once economies of scale are ramped up” or points me to a Chinese website. The only response I can offer is balderdash! With annual revenues of several billion dollars, the Li-ion battery sector already has plenty of scale. What it lacks are meaningful potential economies.

Economies of scale are modest savings that can reduce per unit cost as a profitable business grows. They arise from factors like discounts on raw materials purchases, greater worker specialization, lower financing costs and reduced spending on ancillary items like research and development. For a more detailed discussion of the topic, see “What Are Economies of Scale? An estimated 75% of the cost of a battery goes for raw materials. So unless you insist on believing in a commodity fairy that will slash raw materials costs despite rapidly escalating global demand, you can’t honestly believe that vaguely defined economies of scale will make insanely expensive products affordable. Even the happy talk articles like the most recent one from Japan merely serve to prove the point:

“NEDO also analyzed battery cost (not a cell but a battery pack) as of March 2009. It estimates that the cost is about ¥200,000/kWh (approx US$2,016/kWh) for both types of batteries.”

In January I published a comparative breakeven analysis for an EV-40 and an EV 100 using the $1,333 per kWh value for Li-ion batteries that I took from a July 2008 Sandia Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage Program. That analysis showed that an EV-40 could not break even at gas prices of less than $3.70 and an EV-100 could not break even at gas prices of less than $9.20. Even if I use the latest happy-talk target out of Japan and give effect to the vainly anticipated battery price collapse, the breakeven points work out to $3.02 for an EV-40 and $7.54 for an EV-100. At those prices, there are only two classes of buyers, the emotionally committed and the mathematically challenged. This is not encouraging news in a recession.

When evaluating any company, the first thing I want to know is whether it can sell a product and earn a reasonable gross margin on the sale because without gross income net income is impossible. In general, high gross margins are wonderful things and low gross margins are very bad things.

The universe of publicly traded Li-ion battery manufacturers is small so there are not a large number of reliable data points. Nevertheless, I was able to do some digging through SEC filings and cobble together the following table that compares historical product sales, gross profit and gross margin data for five active Li-ion battery manufacturers (Click on the table for a PDF version).

From both a revenue growth and gross margin perspective, Advanced Battery (ABAT) has been an impressive performer and seems to be on the leading edge of Li-ion technologies. At the other end of the spectrum, Valence Technology (VLNC) and A123 Systems seem to be stuck on the bleeding edge. While Ener1 (HEV) and China BAK Battery (CBAK) have modest gross margins, their performance falls far short of leading edge; in fact, they’d be poor performers among the conventional battery manufacturers that I’ve identified in the following table.

Over the course of my career I’ve had substantial experience with both leading edge and bleeding edge companies. As a lawyer, I try to discourage potential clients from starting down a road that has a low chance of commercial success because life is short and dealing with disappointed investors is never pleasant. Once a project begins I carefully watch for signs that a client is tending away from the leading edge and toward the bleeding edge because an early failure is invariably easier to cope with than a client that lives on the bleeding edge for years. Factors I view as warning flags that a company is approaching the bleeding edge include:

Countertrend revenues	When companies like Ener1’s Korean subsidiary report revenue declines while their peers are reporting substantial revenue increases, I see yellow and orange flags.
Gross margins	High gross margins are usually a reliable indicator of a superior product and small gross margins can be tolerable in high volume industries, but negative margins are a red flag.
Debt financing	In the absence of a long and well-established earnings history, substantial debt is toxic and leading edge companies don’t have substantial liabilities to anyone.
Related party debt	A heavy reliance on insider financing is normal during the formative years, but when the insiders of public companies like Valence and Ener1 purchase secured debt instead of straight equity the risk to common stockholders skyrockets.
Idle factories	In the absence of a cogent explanation, idle factories are a red flag that the owner cannot manufacture and sell a commercially viable product. There are always opportunities for viable products and a manufacturer like Ener1 that can’t harvest the low hanging fruit will rarely succeed with more sophisticated customers.
Operating expenses	Leading edge companies like Advanced Battery aggressively control operating expenses at all levels, which permits them to take over 70% of their gross margin to the bottom line. Profligate spenders like Ener1, Valence and A123 are far closer to the bleeding edge.
Nosebleed valuations	When a market leader like Advanced Battery trades at 6.8 times earnings and has a market capitalization of $110 million, no reasonable investor can justify market capitalizations of $193 million or $483 million, respectively, for companies like Valence and Ener1 that have never even come close to reporting a profit.
PR perspective	Leading edge companies talk about events while bleeding edge companies publicize goals. What will happen if the DOE reviews A123’s $1.8 billion loan request or Ener1’s $480 million loan request and decides the requests don’t meet regulatory requirements?
Veiled hubris	New entrants in a technological field are almost never better at manufacturing and marketing than their entrenched competitors who offer comparable products. Li-titanate batteries from Ener1 may compete with Toshiba’s SCiB line, but they are unlikely to be demonstrably better or cheaper. Likewise Li-phosphate batteries from Valence and A123 may compete with products from BYD, but assuming competitive superiority without demonstrable proof is the pinnacle of veiled hubris.

On August 15, 2008, when the Dow (^DJI) was at 11,660 and the Ardour Global Index (^AGIGL) was at 3,370; I offered a short-list of pure play energy storage companies that were likely to benefit from an unprecedented surge in demand for manufactured energy storage devices that will be driven by cleantech, the sixth industrial revolution.

The intervening eight months have been a tough time as the Dow has collapsed to 7,401, a shocking 36.5% decline; and the Ardour Index has plummeted to 1,285, a breathtaking 62% plunge. As a group, my short list of pure play energy storage companies has tracked the Ardour Index and fallen an average of 60%. The following chart compares closing prices of those companies on August 15, 2008 with their closing prices on March 19, 2009.

Combined, the short list companies have a current market capitalization of $2.1 billion. As I previously reported, Federal grants for advanced battery manufacturing will inject $2 billion in new capital into the battery industry over the next two years and grants for electricity delivery and reliability projects are likely to bump that total by another $1 to $1.5 billion. Moreover, effectively unlimited debt financing will be available through an alphabet soup of DOE guaranteed loan programs. In combination, the likely impact on the energy storage sector is mind-boggling.

If one assumes that the DOE does not understand the difference between the leading edge and the bleeding edge and it decides to treat all applicants equally, there is a remote chance that the bleeding edge battery manufacturing companies will have sufficient resources to justify their current market capitalizations when the dust settles, but those market capitalizations are not likely to increase significantly from current nosebleed levels. Instead, the market performance is likely to come from companies that focus on their accomplishments rather than their goals.

At heart I’m an incurable optimist and I firmly believe that “In America we get up in the morning, we go to work and we solve our problems.” (From The Lost Constitution by William Martin). But our problems are not going to be solved by airbrushed centerfolds that thrive on the bleeding edge and promise simple and economically implausible solutions to incredibly complex problems.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 09:55 AM | Permalink | Comments (8)

I woke up this morning with a dreadful case of writer’s block and feared that I might have to take a week or two off while awaiting the end of the current SEC reporting cycle. Mercifully, one of my readers sent an e-mail message that asked some pointed questions about lead-carbon battery technologies and the relative strengths and weaknesses of the principal lead-carbon battery developers. So instead of dashing off a quick reply, I thought it might be interesting to share both the message and a detailed response. Besides, it seems like a great way to kill two birds with one stone.

Mr. Petersen,

You've convinced me the storage future for key applications is lead-carbon (see for example AEP's project for distributed storage on it's network, a topology I expect will be common, perfect for Axion). I've greatly enjoyed your common sense, economics trumps whiz-bang technology, perspective. I've spent the last half of my career in IT and have seen it time after time. [Hyperlink added by Author]

Would you now please comment on whether Axion still has a competitive future given the Furakawa-East Penn license and production of the CSIRO lead-carbon battery. As best I can tell at a marketing or performance level the CSIRO battery is an Axion look alike. Also, looks like they will get first mover advantage, maybe for years since I can't see how Axion can move quickly or scale production, given it's limited resources. I'm concerned Axion's time may have passed. I’ve also seen lots of small companies with better mousetraps fail for lack of resources and marketing.

Also, are there patent conflicts between what Axion has and the CSIRO patents (spent the first half of my career as a lawyer)? What's current status of the Mega C litigation? Any chance some of Axion's former Canadian penny stock past can come back and bite it, or is Mega successor's upside limited to its 7m shares? What exactly do Axion's patents protect? If not from East Penn's perform/look alike product, are they worthless? My brief search only disclosed a TM registration.

The final issue of concern for me is that both companies are in Pennsylvania, which gives Rendel and other pols a problem in helping Axion with a request for Obama money. Prior to East Penn's news it looked to me Axion was pretty well wired with local politicians. Given all that, to me their future looks bleak. I'm guessing it's either Obama, massive dilution, or giving away it's future to a larger "partner".

In short can you stop replaying the technology story - I got it - and take the kind of informed business look at Axion's prospects you are in position to publish. It would be deeply appreciated. I am unable to perform any reasonable due diligence on my own with this small company. I appreciate your legal and former relationships with Axion make this an area where you need to be careful, but anything you could put in print to your fans would be most appreciated. I'd really like to bet on them - but I'm only so crazy.

Mr. Smith

Ultrabattery Status Australia’s Commonwealth Scientific and Industrial Research Organization (CSIRO) has developed a lead-carbon energy storage device that it refers to as the “Ultrabattery” and licensed the technology to Japan’s Furukawa Battery Co. (Frankfurt - FBB.F). Furukawa, in turn, has sublicensed the NAFTA rights to East Penn Manufacturing.

CSIRO and Furukawa road tested prototypes of the Ultrabattery in a modified Honda Insight HEV in late 2007. They subsequently sent Ultrabattery prototypes to Sandia National Laboratories for inclusion in a series of partial state of charge cycle-life performance tests that Sandia conducted in 2008. While the tests were hugely successful, Furukawa currently classifies the Ultrabattery as an R&D stage technology and the Green Car Congress reports that the product is not scheduled for commercial introduction until late 2010. Since the Ultrabattery is more complex than a normal lead-acid battery, it seems reasonable to assume that it will probably take another year or so to get an Ultrabattery production line up and running in the U.S., which implies a domestic release date of late 2011.

PbC Status When Axion Power International (AXPW.OB) began making and testing prototype PbC devices in late 2003, a top priority goal was to develop a lead-carbon battery technology that could be easily implemented in existing lead-acid battery plants with minimal changes to manufacturing equipment and processes. The New Castle asset purchase in early 2006 was a critical step in Axion’s development plan because it gave the research staff the power to change a design parameter in the laboratory and then immediately integrate that design change into a manufactured prototype using existing manufacturing facilities.

During its first two years in New Castle, Axion’s development effort focused on optimizing electrode performance using labor-intensive manual fabrication techniques. When it finally developed an electrode design that met the performance goals and worked well in the existing manufacturing plant, Axion began negotiating utility scale tests and manufacturing hundreds of pre-commercial PbC prototypes for use in those tests. Pictures of Axion’s Power Cube, which was built for a NYSERDA-funded utility substation upgrade deferral demonstration project, are available on Axion’s website.

Over the last year, Axion’s focus has shifted to developing automated fabrication methods for electrode assemblies. Custom equipment for the carbon sheeting and electrode fabrication processes has been on order since last year. When that equipment is installed, Axion expects to be able to fabricate electrode assemblies for about 1,000 PbC devices per day, or 250,000 units per year. Since I’m no longer privy to inside information, I don’t know what the current status of the equipment orders is, but I hope we’ll hear something in the next earnings call.

First Mover Advantage While I can’t assess the status of Furukawa’s ongoing development work, I have to give the first mover advantage to Axion. Its automated electrode fabrication equipment should be operational this year, which will give Axion a one to two year head start over the Ultrabattery. If the PbC devices are well received, the electrode line can be rapidly expanded to fully utilize Axion’s existing battery manufacturing capacity and permit the sale of electrode assemblies to other manufacturers. The current round of equipment orders is already financed. Additions will not be necessary unless the PbC devices are successful. If Axion is selling 250,000 PbC devices per year at a reasonable price and profit margin, expansion financing and dilution should not be significant problems.

Over the long-term, Axion plans to implement a platform technology business model like Intel’s where it will focus on making electrode assemblies for sale to battery manufacturers that want to offer PbC devices. The advantages of a successful platform technology business model are clear. Specialized facilities for the fabrication of electrode assemblies will be far cheaper to build than new battery manufacturing plants. It’s also easier to increase production if you can leverage a broad pre-existing base of manufacturing, marketing, distribution and customer support infrastructure.

Patent Status The Ultrabattery and Axion's PbC device are similar, but there are important technical differences. The Ultrabattery page on Furukawa’s website includes three schematic drawings; a conventional lead-acid battery is shown on the upper-left, an asymmetric capacitor like Axion’s PbC is shown on the upper-right and the Ultrabattery is centered beneath the two. I used the U.S. Patent Office’s online search utility and could not find a CSIRO patent for the Ultrabattery. I then did a broader Google search and found a recent entry on The Patent Search Blog that said a European patent application for the Ultrabattery was published in September 2008 (priority date March 20, 2007). So it appears that CSIRO does not have any issued patents for the Ultrabattery. In comparison, Axion owns six issued U.S. patents for the PbC device (Nos. 6,466,429, 6,628,504, 6,706,079, 7,006,346, 7,110,242 and 7,119,047) and has seven additional patent applications pending. While I am not a patent lawyer, Axion’s patent position seems to be the stronger of the two.

Prior Litigation To begin with, I want to be perfectly clear that Axion does not have a “Canadian penny stock past.” It has fought to the death with a group of Canadian stock promoters who tried to claim an ownership interest in its PbC technology, but Axion has never been implicated in a questionable penny stock promotion.

I hate Mega-C questions because it was a long and emotionally draining battle. Comparing the Mega-C bankruptcy case and the associated adversary proceedings to a can of worms would be a grave insult to worms everywhere. The final outcome of four years of litigation was that 5.7 million Axion shares are held in court-supervised trusts that will sell enough shares to pay the costs of Mega-C’s bankruptcy and the claims of its creditors, and then distribute the remaining shares to holders of allowed equity claims. As a result of several adversary proceedings that were brought and resolved in connection with Mega-C’s bankruptcy, the individuals that I would have considered a threat to Axion have been effectively neutralized. While I’m reluctant to use the word never, I think the risk of future substantive claims is very remote.

Potential Stimulus Axion, East Penn, C&D Technologies (CHP) and Enersys (ENS) are all based in Pennsylvania. Frankly, I wouldn’t be surprised to see all four companies apply for a portion of the $2 billion in advanced battery manufacturing grants and the $4.5 billion in smart grid deployment grants included in the Obama stimulus plan. It’s important to remember, however, that manufacturing lead-acid batteries is far less expensive than making other types of batteries and while Li-ion producers may request billion dollar grants, requests from lead-acid manufacturers are likely to be far more modest despite the cost advantages of lead-acid products.

Given the importance of battery manufacturing to Pennsylvania’s economy, I would expect the political powers to offer whole-hearted support to all eligible in-State manufacturers. Moreover, as the political battle lines are drawn in D.C., I think Senator Specter’s decision to cross the aisle and vote in favor of the stimulus bill may prove helpful.

Due Diligence Resources When I want to perform a due diligence investigation on a public company, the first place I visit is the SEC’s EDGAR Company Search page. All you need to do is type a company name in the text box and the site will bring up a complete list of the company’s SEC reports that you can select and review on-line. If you want to know about Axion, a good starting point will be the prospectus for a resale registration statement that Axion filed last August and the prospectus supplement that it filed in November.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 11:52 AM | Permalink | Comments (2)

It’s official! Cleantech, the sixth industrial revolution, has arrived on time and in the midst of extraordinary crisis. Like every good revolution, blood is flowing in the streets; the guillotine is en route to Wall Street and the mob is so busy plotting retribution for the excesses of the past that most have no time to consider the future. But as yesterday’s dynasties decay, crumble and fall, a new generation of visionaries is already building on the wreckage of the past. These are indeed troubled times that bear an eerie resemblance to the opening sentence from A Tale of Two Cities.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” Charles Dickens (1812 – 1870)

However like all times of trouble, this too shall pass.

In mid-February, President Obama signed an economic stimulus package that included $38 billion in alternative energy spending. A week later, in a memorable address to a joint session of Congress, the President outlined a vision for America’s future that rests on four pillars: energy independence, improved education, reduced healthcare costs and jobs. Last Thursday, he unveiled a 10-year plan that envisions $150 billion in alternative energy subsidies that will be paid for by a carbon cap and trade scheme. After decades as a backwater agency with a modest mandate and budget, the Department of Energy is finally surging to the forefront as the powerful agency it should be. With a little luck we may even see a comprehensive national energy policy and that would be a wonderful thing.

If you believe the press and listen to the politicians, a brave new world of clean renewable energy is just around the corner, but there are a couple of particularly nasty flies in the ointment. Alternative energy is inherently less stable than its conventional counterparts and cost-efficient transmission, distribution and storage systems do not yet exist. While the litany of potential solutions grows longer with each passing day, these solutions are largely unproven and will take years if not decades to implement nationwide. In the interim, our only option is to wake up in the morning, go to work with the toolbox we own, solve our problems to the best of our ability and be ready to embrace newer and better technologies when they are perfected. If we're lucky and sensible, cheap will triumph over cool.

I’m a dilettante when it comes to power generation, transmission and distribution, so I’ll leave those issues to better-informed writers and focus my attention on a narrow sector that I know well, manufactured energy storage devices.

Historically, batteries have been a critical but largely invisible part of daily life. They start our cars and power our cell phones but the only times they merit more than a passing thought are when they need to be recharged or replaced. With the dawn of cleantech, however, rechargeable batteries are no longer mere conveniences. For the first time in history, rechargeable batteries are fundamental enabling technologies that can help smooth the peaks and valleys in renewable power and foster the development of electric vehicles. Unfortunately, the battery industry is not ready for the current challenges, much less the sweeping changes that the cleantech revolution will require.

To understand the current state of battery technology, one must first understand the historical necessities that were the mother of invention. Around 250 BC, a clever Babylonian discovered that a genie could be released from a clay pot containing the right combination of lead and acid. During the 1800s, people began to find ways to make the genie do useful work beyond electro-plating and parlor tricks. Until the 1970s, there were only two primary classes of batteries: rechargeable lead-acid batteries and disposable dry cells. Lead-acid batteries handled the heavy work like starting cars and providing emergency lighting while dry cells were used for flashlights, toys and consumer goods, including the first portable radios and tape players.

In the mid-70s, maintenance free valve regulated lead-acid (VRLA) batteries were introduced and rapidly became the dominant automotive technology. They worked so well in fact that most battery manufacturers cut their R&D budgets to the bone because VRLA batteries performed well and a complacent auto industry saw no reason to pay premium prices to fund further research. While there was some progress on deep-cycle batteries for golf carts, forklifts and industrial systems, R&D in the lead-acid sector essentially took a 25-year siesta as electrochemistry became passé and college students gravitated toward more exciting, glamorous and rewarding careers in electronics, communications and information technology. Over the last few years, rapidly evolving bulk energy storage needs have sparked a new wave of lead-acid research that uses modern materials and manufacturing methods to improve and revitalize an old-line chemistry. The results have been almost magical and an entirely new generation of advanced lead acid and lead carbon batteries is in the final stages of pre-commercial development. These products are not widely available yet, but the new generation of batteries promise extraordinary performance at a lead-acid price, which once again proves the ancient wisdom that with time, everything old is new again.

The late 70s were a time of sweeping change as electronics manufacturers shifted their focus from toys, radios and tape players to productivity tools. The introduction of business tools like electronic calculators and the pagers, computers and telephones that quickly followed, drove the development of compact and light-weight rechargeable battery chemistries including nickel cadmium (Ni-Cd) nickel metal hydride (Ni-MH) and lithium ion (Li-ion). Since buyers of portable electronics invariably viewed run time between charges as a critical performance metric, R&D spending on these technologies soared and continues to this day.

Until recently, rechargeable batteries were not something the average consumer would think of as a discrete product class. Instead, they were relatively inexpensive components in high-end consumer durables like cars and electronics. In automobiles, batteries typically represent less than 1% of total product cost and in electronics it is rare for batteries to represent more than 5% of product cost. This historically low ratio of battery cost to total product cost resulted in a market dynamic where the auto industry could afford to be complacent, while electronics manufacturers were willing to pay huge premiums for modest improvements in battery performance. Both approaches were sensible in an earlier epoch, but neither has any utility in the emerging world of cleantech.

Where batteries were once viewed as low-cost components in expensive products, the pendulum is swinging in the other direction with a vengeance as the ratio of battery cost to total product cost escalates to the point where the batteries represent up to 20% of the cost of an HEV, up to 50% of the cost of an EV and over 90% of the cost of a grid-based system. Unfortunately, most batteries are simply too expensive for the jobs people want them to do. As thought-leaders, policymakers, manufacturers and consumers come to grips with the cruel and inflexible economic realities, cost accountants and industrial engineers will end up making the hard buying decisions and the opinions of futurists, scientists, techno-geeks and bloggers like me will become increasingly irrelevant. In the end, the only thing that will matter is a rigorous and comprehensive cost benefit analysis for each new energy storage application.

A couple days before Christmas, I published “Alternative Energy Storage Needs to Take Baby Steps Before It Can Run,” an article that was selected as an Editor’s Pick at Seeking Alpha and included cost data from a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage program. While the Sandia report focused on the current and projected capital costs of energy storage for solar power installations, the basic cost structure applies to the entire spectrum of energy storage applications. Several Li-FePO4 advocates promptly pointed me to Chinese Internet sites to support their arguments that Sandia's cost estimates are wrong, but I've found the Sandia estimates consistent with available industry cost data and believe they provide a reasonable basis for investment decisions. The Sandia capital cost estimates are set forth in the following table:

Technology	Current Cost ($/kWh)	10-yr Projected Cost ($/kWh)
Flooded Lead-acid Batteries	$150	$150
Sealed Lead-acid Batteries	$200	$200
Low-speed Flywheel	$380	$300
Na-S Batteries	$450	$350
Asymmetric Lead-carbon Hybrid	$500	<$250
Zn-Br Batteries	$500	$250/kWh + $300/kW
Ni-Cd Batteries	$600	$600
Zebra Na-NiCl Batteries	$800	$150
Ni-MH Batteries	$800	$350
Li-ion Batteries	$1,333	$780
Vanadium Redox Batteries	20 kWh=$1,800/kWh 100 kWh =$600/kWh	25 kWh=$1,200/kWh 100 kWh=$500/kWh
High-speed Flywheel	$1,000	$800

With the basic cost structure firmly established from reliable sources, it’s probably worthwhile to revisit some cherished mythologies and incontrovertible realities that I assembled from eight months of reader comments and discussed at length in an article on the importance of rebuilding America’s domestic battery infrastructure.

Cherished Mythology Lead-acid batteries are environmental hazards.

Incontrovertible Reality With recycling rates approaching 99%, lead-acid batteries are the most highly recycled product on the planet and substantially all of the materials recovered through recycling can be used to make new batteries. Neither NiMH nor Li-ion chemistries can even come close to matching the natural resource efficiency and environmental safety of lead-acid batteries.

Cherished Mythology Li-ion batteries are one-quarter of the weight of their lead-acid counterparts.

Incontrovertible Reality The relentless but frequently unsuccessful quest for product safety has doubled the weight of Li-ion batteries. So while the explosive Li-ion chemistries have four times the energy density of lead-acid batteries, the safe Li-ion chemistries only cut the weight in half. In either event it’s silly to fret about battery weight in the context of a 3,000-pound car or a stationary power storage installation.

Cherished Mythology NiMH and Li-ion batteries have more power than lead-acid batteries.

Incontrovertible Reality The recent development of asymmetric lead-carbon hybrids has improved the power profile of advanced lead-acid batteries to competitive levels at a fraction of the cost.

Cherished Mythology NiMH and Li-ion batteries have far longer cycle-lives than lead-acid batteries.

Incontrovertible Reality The recent development of asymmetric lead-carbon hybrids has improved the cycle-life of advanced lead-acid batteries to competitive levels at a fraction of the cost.

Cherished Mythology NiMH and Li-ion batteries will improve as the technology matures.

Incontrovertible Reality NiMH and Li-ion batteries are already fully mature technologies. Substantially all of the recent advances in Li-ion technology are like changing a carrot cake recipe; call it what you will, but it's still a carrot cake when it comes out of the oven. There have been big safety gains from new flavors of Li-ion chemistry, but those gains have always come at the cost of reduced energy density.

Cherished Mythology Li-ion batteries are an ideal solution for most energy storage problems.

Incontrovertible Reality Li-ion batteries are the best solution for small format energy storage needs including cellular phones, power tools and portable computers. They also have significant potential for use in electric bicycles and hybrid scooters. Their cost effectiveness plummets when the battery pack is bigger than a breadbox. Even if Li-ion batteries could be cost effective in power-hungry applications like EVs and stationary applications, sound economics and rational industrial policies will always favor the manufacture and sale of 5,000,000 cell phones or 500,000 laptops over exporting the same batteries to power 1,000 EVs.

Cherished Mythology Plug-in electric vehicles provide a cost-effective path to a clean energy future.

Incontrovertible Reality Plug-in electric vehicles provide dramatic PR sound bites for politicians, car companies and environmentalists, but even the auto executives are quick to acknowledge that pure electric vehicles cannot be paying propositions for the average consumer until gas prices are far higher than they have ever been.

Cherished Mythology NiMH and Li-ion batteries will get cheaper as demand increases.

Incontrovertible Reality Roughly 75% of the cost of any battery is raw materials and NiMH and Li-ion batteries have been mainline industrial products for almost 20 years. The bulk of the potential manufacturing cost savings have already been achieved and the only way battery prices can fall dramatically is if massive new supplies of raw materials become available at bargain basement prices.

At the dawn of the cleantech revolution, the financial sector is in shambles and the Obama administration has thrown down the gauntlet on healthcare spending. While I have every confidence that the banks and insurance companies will heal with time, I also believe that margins in healthcare will be pressured for the foreseeable future. So the only investable long-term trend that I see in the current economic and political environment is alternative energy. In the alternative energy sector, the fundamental enabling technologies are transmission, distribution and storage. Each of these sub-sectors is essential, each is a target rich environment for investors and each will be a major recipient of long-term government support. Since accepted market wisdom holds that you should never fight the Fed, I think the policy clues for investors are crystal clear.

I can identify a dozen pure play public companies that have the potential to make a real difference in America’s energy storage future. Since I’ve made my personal opinions clear in earlier articles, I won’t bother re-plowing that ground today. However I encourage readers to study each of the principal market participants, consider where their existing and proposed products will mesh with the needs of the coming cleantech revolution, and consider who the likely buyers of their existing and proposed products will be. The short list of pure play public companies includes:

Name	Trading Symbol	Product Class	Product Status
Active Power	ACPW	Low-speed flywheels	Manufacturing
Altair Nanotechnologies	ALTI	Li-titanate batteries	Demonstration
Axion Power International	AXPW.OB	Lead-carbon batteries	Demonstration
Beacon Power	BCON	High-speed flywheels	Demonstration
C&D Technologies	CHP	Lead-acid batteries	Manufacturing
Enersys	ENS	Diversified batteries	Manufacturing
Ener1	HEV	Li-titanate batteries	Demonstration
Maxwell Technologies	MXWL	Ultracapacitators	Manufacturing
Ultralife Batteries	ULBI	Diversified batteries	Manufacturing
Valence Technologies	VLNC	Li-phosphate batteries	Manufacturing
Exide Technologies	XIDE	Lead-acid batteries	Manufacturing
ZBB Energy	ZBB	Zinc-bromine batteries	Demonstration

As a student I strove for the extreme right hand tail of the bell shaped curve. As a businessman, I’m delighted to sacrifice the extremes on both ends of the curve because the bulk of the revenue will go to the company that best serves the needs of the guys in the middle.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 11:43 AM | Permalink | Comments (8)

For several months I’ve been writing about manufactured energy storage devices and the companies that develop and manufacture them. My basic theme has been that these devices are fundamental enabling technologies for cleantech, the sixth industrial revolution. I’ve repeatedly said that profound economic changes were rapidly evolving and that energy storage would be a major investment theme for decades to come, but even my unbridled optimism could not keep pace with the realities. While most investors have been focusing on obvious problems like bad mortgages, tight credit and recessions, immense changes in the energy sector have gone almost unnoticed. As a result, most investors do not understand that the energy storage sector of today does not even bear a passing resemblance to the one I started writing about last summer.

The economic stimulus bill signed into law last Tuesday includes $2 billion in “facility funding awards” for manufacturers of advanced battery systems and vehicle batteries that are produced in the United States. In the context of an $800 million economic stimulus package, $2 billion is little more than a rounding error. In the context of an industry that would report approximately $1 billion of domestic property plant and equipment on a hypothetical consolidated balance sheet, the amount of the facility funding awards is mind-boggling.

In addition to the facility funding awards, the economic stimulus bill provides an indeterminate amount of grants for energy storage research, development, demonstration and deployment (“RDD&D”) as part of a $4.5 billion pool set aside for electricity delivery and energy reliability. Once again the RDD&D number is easily overlooked in the mega-bill, but it eclipses cumulative VC investments in the energy storage sector by a wide margin.

Finally, I’ve previously reported that the bill includes $300 million for Federal purchases of fuel-efficient vehicles and a substantial expansion of the tax credit regime for electric vehicles, but until I saw a chart in the Wall Street Journal that attached a $2 billion budget cost to the tax credits, I didn’t fully understand what was happening on the demand side of the equation.

When you add up $2 billion in facilities grants, a likely $1 to $1.5 billion in RDD&D funding and an additional $3 to $5 billion in tax credit subsidized consumer demand, it’s easy to see the truth in the late Senator Everett Dirksen’s legendary quip “a billion here, a billion there, and pretty soon you’re talking real money.”

When the Wall Street Journal recently asked Energy Secretary Chu about time frames, the Secretary said, “To really stimulate the economy and help the U.S. recover from this dire situation we're in, my feeling is, a substantial fraction, a majority of it … you're starting to cut checks within half a year to a year.” Later in the same interview, Secretary Chu observed, “The synopsis of the loans I've seen in innovative green energy -- they're in the hundred-million dollar range.” When discussing the methodology he wanted to use in evaluating funding applications and allocating funds, Secretary Chu said “There's always a risk. . . . The protection is to get really good people to ask the right questions, to do a real evaluation. There are two ways of doing this: You can ask the right questions, and you can get people who are good at this sort of economic project management, who are experienced in "how do you smell something that doesn't look like it's going to fly?" or the financial business plan or basis of the company.”

Everything I’ve read so far tells me Secretary Chu is a pragmatist who understands that modest projects do more to create jobs than mega-projects; every project entails unavoidable technical, business and market risks; there is no single technology that can provide a cost-effective solution for all essential energy storage needs; and none of the principal players in the energy storage sector has the depth of management, technical and manufacturing expertise to successfully implement a mega-project. While I have no doubt that some battery companies will make the same kind of piggish requests we saw in connection with the auto industry bailout, I believe the only sensible approach open to the DOE is diversification across a broad range of companies and technologies, which tells me that a large number of $100 to $200 million grants are far more likely than two or three mega-project grants.

I’ve been following a group of pure-play public energy storage companies since last August. While companies like Advanced Battery Technologies (ABAT), China BAK Battery (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ) may derive some collateral benefit from increased sales of tax credit eligible products, they are essentially Chinese companies that are not likely to be effective competitors for facility funding awards and RDD&D grants. If you eliminate the Chinese companies from my tracking list, the number of U.S. based companies that have a reasonable chance of effectively competing for a portion of the billions in grant funding gets very short.

The following table identifies twelve pure-play U.S. based public companies that I view as credible competitors in the DOE grant process. The table includes a summary product description, a classification of their current product commercialization status, their 12-month high stock price, last Friday’s closing stock price and their estimated current market capitalization. Every one of these companies is developing or manufacturing energy storage devices that will be essential to our clean energy future and each of them should be able to make a compelling case for a reasonable amount of manufacturing or RDD&D funding (click on the table for a PDF version).

When you consider that the $1.9 billion combined market capitalization of these twelve companies is only a fraction of the available Federal grant funding, it isn’t hard to understand why I see significant potential for impressive short-term gains as the potential federal grants are reduced to approved funding applications over the next year.

I would not presume to pick the winners of the upcoming grant application process or even begin to guess the amounts that the various companies are likely to request or receive. I will, however, suggest that as a group, this short list of pure play energy storage companies stand to receive cash infusions that could easily represent 50% to 300% of their current market capitalizations and propel their business fundamentals to an entirely different level. I think a balanced portfolio of these twelve companies should be an easy double for investors over the next year regardless of what happens in the broader market.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 11:45 AM | Permalink | Comments (0)

On Friday, the House of Representatives and Senate passed H.R. 1, the American Recovery and Reinvestment Act of 2009 and sent the bill to President Obama for his signature. The impact on companies that manufacture advanced batteries and other energy storage devices will be staggering. The principal energy storage appropriations include:

• $2,000,000,000 for grants to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers;
   
• $4,500,000,000 for grants for “Electricity Delivery and Energy Reliability” including activities to modernize the electric grid, include demand response equipment, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply;
   
• $6,000,000,000 to pay the cost of guaranteed loans under a “Temporary Program for Rapid Deployment of Renewable Energy and Electric Power Transmission Projects;
   
• ”$500,000,000 for research, labor exchange and job training projects that prepare workers for careers in energy efficiency and renewable energy; and
   
• ”$300,000,000 to purchase high fuel economy motor vehicles including: hybrid vehicles; neighborhood electric vehicles; electric vehicles; and commercially available, plug-in hybrid vehicles

In addition, the final bill includes tax credits for purchasers of plug-in electric vehicles as follows:

• For new plug-in electric vehicles, a base credit of $2,500 plus $417 for the first 5 kWh of battery capacity plus $417 for each additional kWh of battery capacity, up to a maximum of $7,500 per vehicle:
   
• For new neighborhood electric vehicles, a credit of $2,500 per vehicle:
   
• For plug-in EV conversions, a credit equal to 10% of the first $40,000 in conversion costs

Analyzing Congressional intent is difficult and predicting how regulatory agencies like the DOE will interpret that intent is even harder. Nevertheless, recent DOE publications and the text of the legislation provide some important clues about how the subsidies are likely to be distributed. So I’ll go ahead and climb out on a limb and offer one lawyer’s opinion of how things are likely to evolve.

There are substantial differences between the original House bill and the final version sent to the President. The original House bill included $2 billion in funding for renewable energy research and development and specifically allocated those funds to biomass ($800 million), geothermal ($400 million) and other ($800 million). It also authorized $1 billion in battery manufacturing grants and $1 billion for the cost of guaranteed loans for battery manufacturing. Most of the bells and whistles were eliminated before the final bill was sent to the President. Now we have a single $2 billion appropriation for battery manufacturing grants. I would characterize the final bill as far more results oriented than the original House bill.

In a recent article titled “DOE Reports That Lithium-ion Batteries Are Not Ready for Prime Time,” I reviewed the 2008 Annual Progress Report for the DOE’s Energy Storage Research and Development Vehicle Technologies Program. While DOE concluded that Li-ion technology was promising, it also noted that there were numerous technical barriers that prevented immediate commercialization of Li-ion batteries for use in automotive applications including cost, performance, abuse tolerance and life. Based on the conclusions, tone and tenor of the DOE report, it’s clear that the DOE views Li-ion as a promising R&D stage technology, but believes it is not a prime technology that’s ready for immediate commercialization.

The final bill sent to the President requires the DOE to include Li-ion battery developers in the class of eligible grant applicants. Without that requirement, I think there would have been a reasonable argument that Li-ion developers should be excluded from grant eligibility. While Congress clearly wants some funding for Li-ion battery developers, it’s clear that the battery manufacturing grants are not directed solely or even principally toward Li-ion technology. The Congress wants energy storage solutions that work today, not potential solutions that may work in 5 or 10 years. On balance, I expect the bulk of the battery manufacturing grants to go to companies that are manufacturing and selling existing products into established markets.

In another recent article titled “Alternative Energy Storage: Enabling the Smart Grid,” I reviewed two recent reports from the Department of Energy’s Electric Advisory Committee that discussed the critical enabling role that energy storage technology would play in the evolution of the Smart Grid. At the time of the original House bill, I speculated that some of the $4.5 billion appropriation for electricity delivery and energy reliability might ultimately be used for energy storage devices. Since the final bill sent to the President specifically added, “demand response equipment” to the list of authorized uses, and the final bill includes a new $6 billion appropriation for guaranteed loans to electric power transmission projects that should alleviate some pressure on the $4.5 billion in grant money, I think my earlier speculation can now be classified as certainty. I’m not courageous enough to predict the amount of electricity delivery and energy reliability grants that will ultimately be allocated to energy storage, but I will be surprised if the grant funds allocated to energy storage don’t exceed $1 billion.

I believe a total of $3 billion in battery manufacturing and electricity delivery and energy reliability grants can do an immense amount of good across broad sections of the energy storage landscape as long as the DOE sticks to legislative intent and funds companies that can manufacture and sell commercial products today. It all goes back to my core belief that we need to wake up in the morning, go to work with the tools we currently have available, solve our problems to the best of our abilities and be prepared to embrace new tools and new technologies when the R&D work is done and the commercial value is established.

I have no doubt that the energy storage sector is in for some very interesting times, but this is a jobs, productivity and manufacturing bill, not a research and development bill.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 01:59 PM | Permalink | Comments (4)

by John Petersen

Last month the DOE released its 2008 Annual Progress Report for the Energy Storage Research and Development Vehicle Technologies Program. This report is a frank and relatively upbeat assessment of the current status of Li-ion battery research and development that also provides a stark wake-up call for investors in energy storage stocks. The reality check has been done and the DOE’s verdict is clear: Lithium-ion batteries are not ready for prime time.

In its description of ongoing research efforts to develop high-power batteries for HEVs, the DOE said:

“High-power energy storage devices are among the critical technologies essential for the development and commercialization of HEVs. This effort is focused on overcoming the technical barriers associated with commercialization of high-power batteries, namely:

• Cost – The current cost of Li-based batteries is approximately a factor of two too high on a kW basis. The main cost drivers being addressed are the high cost of raw materials and materials processing, the cost of cell and module packaging, and manufacturing costs.
• Performance – The barriers related to battery performance include a loss in discharge power at low temperatures and power fade over time and/or when cycled.
• Abuse Tolerance – Many high-power batteries are not intrinsically tolerant to abusive conditions such as short circuits (including internal short circuits), overcharge, over-discharge, crush, or exposure to fire and/or other high-temperature environment.
• Life – The calendar life target for hybrid systems (with conventional engines) is 15 years. Battery life goals were set to meet those targets. A cycle life goal of 300,000 cycles has been attained in laboratory tests. The 15-year calendar life is yet to be demonstrated. Although several mature electrochemistries have exhibited a 10-15 year life through accelerated aging, more accurate life prediction methods need to be developed.”

I’m a simple-minded creature and I believe that little things like costs and benefits matter, particularly in the midst of the worst recession since the 1930s. When the Annual Progress Report from the DOE group responsible for supporting Li-ion battery research and guiding national policy concludes that:

• Li-ion batteries will not be a cost-effective solution for HEVs unless and until somebody finds a way to slash manufacturing costs by 50%; and
• Li-ion batteries will not be a cost-effective solution for PHEVs unless and until somebody finds a way to slash manufacturing costs by 67% to 80%;

I believe them.

When the same Annual Progress Report says that the principal cost drivers are the high cost of raw materials and materials processing, the cost of cell and module packaging, and manufacturing costs, I have to wonder whether the DOE’s target price reductions of 50% to 80% are even remotely possible. My limited understanding of the laws of economics tells me that the price of raw materials invariably increases when demand for those materials increases. Since approximately 70% of finished Li-ion battery costs are attributable to raw materials I have to at least ask where the cost savings will come from. I have never heard a reasonably specific answer to that question.

I fully support Federally funded research to develop cost-effective Li-ion batteries for large scale energy storage, but I’ve spent enough time representing R&D stage companies to know that technical dreams and visions are frequently not attainable in the cruel world of cost accountants and the most spectacular failures occur during the transition from the laboratory bench to the factory floor. Li-ion batteries are a great concept for electric transportation but they are not currently viable products for HEV and PHEV applications and they have some very high hurdles to clear before they become viable products.

Until all of the technical barriers identified in the DOE's Annual Progress Report are overcome,  proposals to spend Federal money building factories to manufacture devices based on existing Li-ion battery technologies are nothing more than Catch 22 arguments that the applicants can manufacture a product for a dime, sell it for a nickel and make up the difference on volume.

I’ve written volumes criticizing the nosebleed market capitalizations of U.S. based Li-ion battery developers including Altair Nanotechnologies (ALTI), Ener1 (HEV) and Valence Technologies (VLNC). I’ve also written volumes on why I believe advanced lead-acid battery producers like Exide Technologies (XIDE), Enersys (ENS), C&D Technologies (CHP) and Axion Power International (AXPW.OB) are undervalued. A complete archive of my articles is available at Seeking Alpha.

My recurring theme since day one has been that Li-ion batteries have insurmountable cost, performance, abuse tolerance and cycle life problems that must be overcome before they become viable products. It’s nice to see a hot off the press DOE report that confirms the reasonableness and validity of the questions I’ve been asking for months.

America’s energy problems are too urgent to overlook and its economy is too stressed to invest billions in technologies that may never become cost effective. Our only rational choice is to go to work today with the tools we have and be ready to embrace newer and better tools when they prove to be cost effective.

Disclosure: Author is a former director of and holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and also holds small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 11:55 AM | Permalink | Comments (20) | TrackBacks (0)

America’s electric power grid is subject to immense inefficiencies that arise from the interplay between centralized power generation, local power consumption and on demand utility service. To put things into a broad perspective, the nameplate capacity of U.S. generating facilities is about 1 million Megawatts (MW), so if all of our power plants ran 24/7 we would have a theoretical annual generating capacity of 8.7 billion Megawatt-hours (MWh). Since demand for electricity fluctuates on both a daily and seasonal basis, total electric power generation in 2007 was only 4.2 billion MWh, or less than 50% of nameplate capacity. The goal of the Smart Grid is to maximize the efficiency of existing generating facilities and accommodate the integration of renewable power resources. Since many better-qualified authors are writing volumes about transmission and distribution, demand management and renewable power technologies, I’ll limit this article to manufactured energy storage devices; enabling technologies that will be the beating heart of the Smart Grid for the next 10 to 20 years.

Last August I wrote Grid-based Energy Storage: Birth of a Giant, an introductory article that offered an overview of the potential uses for energy storage systems in the electric grid. At the time I confessed that the subject matter was a bit out of my depth, a problem that was compounded by a dearth of third-party analysis on specific applications. Mercifully, all that changed in December 2008 when the Department of Energy’s Electric Advisory Committee (EAC) published two reports that are must reads for investors that want to understand how the Smart Grid will develop, and position their investment portfolios to profit from cleantech, the sixth industrial revolution.

The first EAC report,“Smart Grid: Enabler of the New Energy Economy,” explains how the Smart Grid will use advanced technology to transform the energy production and distribution system into a more intelligent, resilient, reliable, self-balancing, and interactive network that enables enhanced economic growth, environmental stewardship, operational efficiencies, energy security, and consumer choice. The companion report, “Bottling Electricity: Storage as a Strategic Tool for Managing Variability and Capacity in the Modern Grid,” explains why the evolution of the Smart Grid will depend on cost effective energy storage, particularly in the early stages while other distribution and demand management solutions are being developed, adopted and implemented. This report divides Smart Grid energy storage applications into three functional classes: generation; transmission and distribution; and end-user, and then provides thumbnail descriptions of each potential energy storage application. Since my goal is to encourage readers to download and study the EAC reports and other source documents, this article will use summary tables to identify the major application classes and the existing and emerging manufactured energy storage devices that are expected to be useful in those applications.

I’ll apologize up front for giving short shrift to pumped hydro and compressed air energy storage. Both are highly efficient for storing massive amounts of energy and both are subject to physical and environmental constraints that limit where facilities can be built. More importantly, there are no pure-play public companies that focus on either storage technology, so spending a lot of time discussing cool technologies that you can’t invest in seems futile.

One of the most important concepts in any discussion of grid-based energy storage is discharge duration; or the optimal time required for a particular device to release its stored energy. Some grid-based applications require discharge durations measured in hours, others require discharge durations measured in minutes and still others require discharge durations measured in seconds. In general, manufactured energy storage devices that can store large amounts of energy are not good at discharging the stored energy quickly. Likewise, manufactured energy storage devices that can discharge energy quickly do not generally store large amounts of energy. Since the big challenge for utilities is to only provide slightly more power than customers need at any particular moment in time, they have to focus on peaks and valleys, rather than the averages. That's why a comprehensive solution will require a multi-pronged approach that uses a variety of manufactured energy storage devices to meet particular needs.

The core data in the following table comes from a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. While the original Sandia table focused on the current and projected capital costs for manufactured energy storage devices that can be used in solar power projects, the basic cost structure applies to all Smart Grid applications. Since the EAC’s Bottling Electricity report states that the principal purchase decision metrics in Smart Grid applications will be installed cost, reliability, discharge duration and cycle life, I’ve reordered the Sandia data to create a cost hierarchy and provide summary information for each type of storage device. More detailed information on the advantages, disadvantages, commercial status, current research and development and potential applications for each type of manufactured energy storage device can be found in the SEGIS report.

The following table is my attempt to integrate the cost and performance data from the SEGIS report with the Smart Grid application information in the EAC’s energy storage report. My goal is to identify the principal technologies that might be useful in each application and highlight the technologies that seem most likely to prove cost-effective. Since the EAC’s report highlights the need for substantial additional research, development and testing to better identify the optimal technology choices, the table is only one man’s informed view through a cloudy crystal ball.

At first blush, the percentages of generating capacity that could be satisfied by energy storage systems seem pretty modest, a mere couple of percentage points here and there with higher margins for alternative power installations. But those tiny percentages become massive potential revenue numbers when you consider that the capital cost of energy storage installations ranges from $150,000 to $1.3 million per MWh. Since the principal competitors in the energy storage sector are small compared with similarly positioned companies in other sectors, I believe energy storage is likely to be a veritable investment tsunami that will offer extraordinary returns.

Most of the buzz in the alternative energy sector focuses on renewable power, demand management technology, advanced power transmission systems and batteries for electric vehicles. In the process, the media has largely overlooked the reality that energy storage devices are essential enabling technologies for both transportation and the Smart Grid. A number of analysts are predicting that annual global demand for energy storage devices could grow from $25 billion to $100 billion over the next decade. Most estimates of future growth in the automotive market talk about battery sales the $15 to $20 billion range. The much larger growth will come from using energy storage technologies to support the development and evolution of the Smart Grid. While size and weight may matter when it comes to automotive applications, they will be meaningless in grid-based applications where installed cost, reliability, discharge duration and cycle life are the critical metrics.

There are two pure-play public companies in the flywheel sector. Active Power (ACPW) manufactures systems that use low-speed flywheel technology to provide backup power for server farms and a wide variety of commercial and industrial installations. Since Active Power’s technology is modular, scaling systems to provide Smart Grid support should be relatively simple and I expect Active Power to be an early beneficiary of the trend toward grid-based energy storage. Beacon Power (BCON) has recently begun field-testing of utility scale governor response and frequency regulation systems. While Beacon will likely require a couple years of testing before utilities are willing to commence wide-scale implementation of Beacon’s technology, its stock offers significant long-term potential.

There are five pure-play public companies in the advanced lead acid battery group including Exide Technologies (XIDE), Enersys (ENS), C&D Technologies (CHP), Ultralife Batteries (ULBI) and Axion Power International (AXPW.OB). Each of these companies has proven products that can be rapidly integrated into storage systems for the Smart Grid. Moreover, Axion’s pioneering work on lead-carbon devices promises a level of performance, power and cycle-life durability that has not previously existed in the lead-acid world. In addition to its activities in the transportation sector that have resulted in a couple of significant grants, Axion is involved in two utility scale demonstration projects. Since lead-acid is frequently perceived as old-tech, the group trades at a significant discount to comparable companies that focus on other advanced battery technologies. I believe the market valuation metrics will normalize as the Smart Grid opportunities become more widely understood.

There are three pure-play public companies in the lithium ion group that have expressed an interest in the Smart Grid market. Altair Nanotechnologies (ALTI) has shipped a utility scale frequency regulation system for testing and both Ener1 (HEV) and Valence Technologies (VLNC) have taken preliminary steps to evaluate the potential for using their technologies in utility scale applications. Since size and weight are not mission critical issues in utility scale installations, I expect the cost of Li-ion technology to be a significant impediment. However, there are limited Smart Grid applications like frequency regulation that could benefit from extreme high performance batteries.

The only pure-play public company actively involved in the commercialization of Zinc-Bromine flow batteries is ZBB Energy (ZBB) which has recently partnered with Eaton for the global distribution of its flow battery systems.

Foreign companies that have active plans to manufacture products for the utility sector include France’s SAFT Groupe (SGPEF.PK), which has partnered with ABB (ABB) for large-format Li-ion devices, and Japan’s NGK Insulators Ltd. (NGKIF.PK).

DISCLOSURE: John Petersen is a former director of and holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and also holds small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 11:00 AM | Permalink | Comments (7)

by John Petersen

America’s love affair with the automobile has always been based on the freedom of the road and the ability to hop in the car and drive wherever we want to go; be it to the corner store to buy a loaf of bread or out to the lake for a long weekend. Even though most of our trips are short, people invariably want the flexibility to go for a long drive when the open road beckons. Unfortunately, that mentality is disastrous when it comes to EV economics.

I’ve been writing about energy storage issues for several months and discussing a variety of battery technologies that could be used in EV applications. My basic premise has been that advanced lead-acid and lead-carbon batteries are good enough for EV applications and they are far cheaper than their sexier NiMH and Li-ion cousins. My critics have argued that the size and weight advantages of NiMH and Li-ion batteries are essential to the development and widespread acceptance of EVs that have the flexibility we’ve come to expect in an automobile. It finally occurred to me last week that most of the visionaries who advocate the widespread adoption of EVs do not understand that:

•    You can have an EV that is cost-effective, or

•    You can have an EV that will travel 100 or 200 miles between charges, but

•    You cannot have both in a single package.

It’s a classic economic conflict between capital costs and operating costs. In a conventional automobile, you pay almost nothing for the fuel tank and then pay pump prices for gas when you use it. In an EV, you pay a huge price for the batteries that give you an acceptable travel range and then pay a low price to fill your ‘tank’ with electricity. If you buy more batteries than you use on a daily basis, the breakeven cost of daily travel skyrockets.

In other words, the phrase “cost-effective long-range EV” is an oxymoron and an economic impossibility.

To demonstrate the point, I’m going to become a technology agnostic for a couple of minutes and discuss the basic laws of battery economics. While I will use a pure EV for discussion purposes, the fundamental rules apply with equal force to both EVs and PHEVs. In an attempt to avoid controversy and focus solely on fundamental economics, I’ll work with the following basic assumptions:

•    EV Range – 4 miles per kWh of battery storage;

•    Battery Cost – $500 per kWh;

•    Average Use – 12,000 miles per year (40 miles per day); and

•    Comparable Gas Mileage – 25 mpg (480 gallons per year);

The following table shows the battery economics for EVs that have ranges of 40, 60, 80 and 100 miles based on these assumptions. For purposes of the table, I’ve used straight-line depreciation of 10% per year on battery cost, imputed interest of 6% per year on unamortized battery cost, an average electricity price of $0.06 per kWh and annual maintenance savings of $180. The only assumption that varies is the maximum EV range. If you don’t like my assumptions, feel free to change them and re-run the numbers using assumptions you like better.

The table shows that when you cut through the bafflegab, EVs only offer attractive economics if you carefully match your EV range with your daily driving habits. As soon as you start adding EV range that you won’t use on a daily basis, the economic benefits of EVs plummet. You can have an EV that is cost-effective, or you can have an EV that has long range for the weekend, but you can’t have it both ways!

There is an inherent logical conflict in the visionary argument that we need to develop expensive batteries so that we can manufacture a long-range EV that cannot possibly be cost effective. General Motors’ EV1 was a great car that was initially powered by lead-acid batteries. GM ultimately changed over to NiMH batteries because the lead-acid batteries of the day were not robust enough to handle the heavy demands of an EV. In the last decade there have been tremendous advances in lead-acid and lead-carbon technology and we now have a new generation of products that can stand up to the demands of an EV, but can’t provide the elusive 100 or 150 mile range that the visionaries assume everyone needs and wants.

As the EV markets develop, there will undoubtedly be buyers who insist on a long-range EV and are willing to pay a substantial premium for the flexibility. Those purchasers, however, will be a very small minority who don’t need to worry about petty details like monthly budgets, payment books and cost-benefit comparisons. For average consumers that need to stretch a paycheck and balance a household budget, the only sensible EV will be one where battery capacity and daily use are carefully paired to optimize the cost-benefit relationship. Given the basic laws of battery economics, I can’t help but believe average consumers will choose the cost-effectiveness of advanced lead-acid and lead-carbon batteries over the svelte lines and lower weight of their NiMH and Li-ion cousins.

The underlying theme of the Clinton and Obama campaigns was “It’s the economy stupid!” As long as the newly elected policy team in Washington remembers that theme, the market advantage in the energy storage sector will go to lead-acid and lead-carbon battery producers like Exide (XIDE), Enersys (ENS), C&D Technologies (CHP) and Axion Power International (AXPW.OB) who make affordable products for ordinary consumers. Developers of expensive Li-ion batteries like Altair Nanotechnologies (ALTI), Ener1 (HEV) and Valence Technology (VLNC) will then find themselves fighting over the small percentage of the market that doesn’t care about price. If the new policy team forgets that fundamental economics matter in flyover country, the current push for electric automobiles will follow the same disastrous route as ethanol and result in huge capital outlays for feel-good facilities that have no economic value or enduring benefit.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by Tom Konrad at 03:12 PM | Permalink | Comments (17) | TrackBacks (0)

Quite a while ago, I promised readers that  I'd write an article looking into Lithium Technology Corporation (LTHU.PK,) in addition to articles I've already written on US Geothermal (HTM) and Evergreen Solar (ESLR)  Lithium Tech is a provider of custom lithium rechargeable batteries for military, national security, stationary power, and transportation applications.  Investors hoping for the big score probably have their eyes on the transportation applications, which should drive demand for lithium-ion batteries over the next decade. 

That's all wonderful, but since August, we've had a financial meltdown, prompting me to focus much more on companies' need to raise new financing and balance sheet liquidity.  Although I thought both Evergreen and US Geothermal were good companies for their respective industries (Solar and Geothermal), the stock prices of both have plummeted since the articles were written.  Evergreen has been badly hurt because they had loaned 30.9 million of ESLR shares as part of a financing transaction.  With the Lehman bankruptcy, the recovery of these shares is murky, and the company may find that existing shareholders have been greatly diluted without any new capital flowing to Evergreen.  I have sold my stake in Evergreen as part of my move to re-focus my portfolio on energy efficiency and transmission companies (after the news came out about Lehman, however- ouch).  I can find no reasonable explanation for the decline in US Geothermal's stock price except forced selling due to margin calls.

Now that the financial crisis is upon us, I find it much easier to give my opinion on Lithium Technology: Don't buy it.  Despite the fact that Lithium is so thinly traded that the stock has stayed around $.06 since February, the company has not published any financial data since December 2007.  According to the most recent letter to shareholders from December 2007, the company has had to restate financial data going back to 2004 and 2005.  Even with the uncertainty that such restatements bring to more current financial data, the company showed an operating cash loss of $13 million in 2007, with a levered free cash loss of $2.5 million.  With only a quarter million dollars in cash on hand, and an operating tax loss of  $13 million over 12 months, this is a company which looks likely to have to return repeatedly to the capital markets for new financing.  New financing is unlikely to be available on favorable terms, given current market conditions and the company's weak balance sheet.

All that is based on data which is almost a year old.  With no new data to go by, it is usually best to assume the worst.  Even the data we have looks dire.  If you don't own this company, good for you.  If you do, you can console yourself with the fact that even investors in well capitalized companies have been losing money recently.

DISCLOSURE: Tom Konrad owns HTM.

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

Posted by Tom Konrad at 05:19 PM | Permalink | Comments (1) | TrackBacks (0)

Of all the stocks I've sold in response to the market turmoil, Electro Energy was the most painful to sell, both emotionally and financially.   

The sale was painful emotionally because I've been recommending this company for a year (albeit with the caveat that it was a speculative bet.)  In each article I wrote I said something along the lines of "If EEEI can obtain financing..."

Now even investment grade companies have serious trouble obtaining financing.  If an outside company is interested in EEEI's manufacturing assets or technology, there is little reason for them to buy EEEI stock.  Any outside investor with cash will be in an enviable bargaining position.   I no longer want to be on the other side of that bargain, so I sold my (much diminished) stake.

Other entries in this series:

1. Held: UQM Technologies
2. Sold: Carmanah Technologies
3. Sold: Pacific Ethanol
4. Sold: Dynamotive Energy Systems
5. Sold: Nova Biosource Fuels
6. Sold: VRB Power
7. Ten stocks to buy at the bottom.

DISCLOSURE: None.

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

Posted by Tom Konrad at 03:41 PM | Permalink | Comments (2) | TrackBacks (0)

VRB Power is the only public vendor of a flow battery chemistry, the Vanadium Redox Battery. I bought the company when I first realized that in order to get a large proportion of intermittent wind and solar energy onto the grid, long term electricity storage would be essential.  Of the available technologies, flow batteries are some of most technically elegant.  Since VRB is one of only two publicly traded vendors of large scale batteries, I bought some.  

Lessons Learned

I was not being discriminating.  Even with the belief that large scale storage will soon be needed to integrate intermittent resources onto the grid, buying VRB would still have been a mistake.  Although flow batteries are an extremely elegant solution, they are a solution that is not ready for market.  As Michael DeAngelis, SMUD's Manager of Advanced Renewable and Distributed Generation Technologies, told me, "It's a research project.  It's not price competitive."  SMUD has a share of a 20 kW x 9hr  VRB system [.pdf 1.83 mb, slide 12].

SMUD invests in research projects because they