John Petersen

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

Objectives

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

Technical Barriers

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

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

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

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

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



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

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

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

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

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

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

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

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

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

John Petersen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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

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

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

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

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

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

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

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

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

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

How about you?

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



Disclosure: None.

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

John Petersen

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

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

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

Press Releases

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

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

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

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

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

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


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

Production Decisions

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

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

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

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



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

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

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

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

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

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

The Hype Cycle

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



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

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

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

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

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

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

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

Posted by John Petersen at 09:57 AM | Permalink | Comments (0)

John Petersen

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

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

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

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

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

There are two basic ways to use batteries in transportation.

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

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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



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

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



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



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

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted by John Petersen at 06:51 AM | Permalink | Comments (23)

John Petersen

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

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

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



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

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

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

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

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

John Petersen

Before moving to Switzerland in 1998 I lived and worked in Houston, Texas, a place that teaches you the importance of keeping an eye on long-term weather forecasts, particularly during hurricane season. Most of the time it turns out to be wasted effort because Mother Nature is fickle and highly unpredictable, but when it's important it's really important. The same logic holds for investments in energy storage and electric vehicle technologies. You have to keep a close eye on the industrial and regulatory climate and be ready to change your plans when conditions change.

For eighteen months I've cautioned that lithium-ion batteries are not suitable or cost-effective for use in cars with plugs, which are collectively classified as grid enabled vehicles, or GEVs, by the Electrification Coalition, a newly organized industrial lobby for the lithium-ion battery and electric vehicle industries. I raised the storm watch flag based on a DOE report that discusses the technical and economic challenges of using lithium-ion batteries in GEVs; a White House report that the GM Volt is not likely to be competitive; an unpublished DOE roadmap for lithium-ion battery development that highlights the need for several generations of improvement in battery chemistry and manufacturing technology; a National Research Council report that battery costs are likely to remain high for decades; and an Energy Information Administration forecast that GEVs won't account for more than 3% of the market before 2035. Politicians, reporters and eco-clerics are all enamored with GEVs, but they generally live in a "wouldn't if be great if ...?" world where economics, paychecks and monthly bills don't matter. In contrast, the people who bear the front line responsibility for implementing unsound policies see nothing but problems.

Now I think it's probably time to upgrade the storm watch to a storm warning.

Storm Warning I: Lithium-Ion Batteries

On December 7, 2009, the DOE's Advanced Research Projects Agency – Energy, which goes by the acronym ARPA-E, released a $100 million funding opportunity announcement for battery research and development projects that have a reasonable chance of achieving the long-term price and performance goals for electric vehicle batteries that lithium-ion technology can't even approach. While DOE funding opportunity announcements are a little arcane for most investors, I found the discussion in the Background section of the Program Overview revealing, which is why I'm upgrading my storm watch to a storm warning.

The background discussion starts out by repeating the widely publicized facts that the U.S. imports roughly 60% of its petroleum and uses almost 70% of available supplies for transportation. After describing the desirable economic and environmental impacts of shifting transportation to the electric grid, ARPA-E lays the blame for the anticipated shortcomings of GEVs squarely at the feet of the battery industry:

"However, the widespread deployment of electric vehicles has been prevented to date by their limited range and high upfront capital costs due to the limitations of currently available battery technologies. Currently available high performance Lithium-ion battery technologies are limited to system level energy densities of ~100-120 Wh/kg, costs of $800-$1200/kWh, and short cycle life, resulting in unacceptably short driving range for the vast majority of consumers and un-economically high lifetime costs for electric vehicles."

After praising recent strides that have been made toward developing high-power batteries for HEVs (without plugs), the tone becomes decidedly ominous on the topic of high-energy batteries for GEVs where oft-stated performance goals "are pushing up against the fundamental energy density limits of traditional Lithium-ion based batteries." After referencing "strong doubts in the battery community as to whether the energy density of Lithium-ion batteries will be able to be pushed to the 200+ Wh/kg system level energy densities required for widespread deployment of all-electric vehicles" and grave reservations "as to whether traditional Lithium-ion based battery production for electrified vehicles offers an opportunity for the U.S. to assert domestic technology and manufacturing leadership within the context of the existing Lithium-ion based battery technology platform," the funding opportunity announcement confirms ARPA-E's "strong interest in supporting the development of new high energy, low cost battery technology approaches beyond traditional Lithium-ion batteries" and offers up to $100 million in grants for battery researchers that are willing to rise to the challenge.

Overall the discussion struck me as a politically guarded admission of the inescapable reality that lithium-ion batteries are not good enough, durable enough or cheap enough for GEVs; and they're not expected to improve much in the foreseeable future. In other words, it's time to kick lithium-ion batteries to the sidelines, launch Plan B and develop new battery technologies that may actually be capable of doing the required work at an acceptable cost.

Storm Warning II: Raw Materials Constraints In Electric Drive Motors

A second storm warning that came to my attention this weekend is an issue that my friend Jack Lifton has been writing about for years -- Chinese domination of the global market for rare earth metals. On December 22, 2009 the DOE released a "Notice of Intent - FY2010 Vehicle Technologies Program Wide Broad Agency Announcement" that includes the following area of interest:

"Subtopic 3 (d)-Motors Using No Rare Earth Permanent Magnets for Advanced EDV Electric Traction Drives

This subtopic is for motor technologies that eliminate the use of rare earth permanent magnets. Analysis of recent price trends and resource availability indicate cost and availability concerns of these material types. Approaches may include the use of non-rare earth magnet materials or motor technologies that do not use permanent magnets to meet the desired size, weight, and cost targets."

I can't wait to see the formal funding opportunity announcement on this one. We may even see a carefully worded admission that the Chinese need their rare earth production to satisfy domestic demand and mining is so unpopular with the eco-clerics that it's easier to do without GEVs unless we can invent a whole new class electric drive motors that are not material constrained. I wonder how long the anti-mining attitudes will last when the general public comes to the realization that the generators in wind turbines are subject to the same raw material constraints.

The Perfect Storm

In combination I view these two DOE funding opportunities as a one-two punch for GEVs. The lithium-ion batteries that the investment world is valuing at nosebleed levels are not going to be up to the job and even if the batteries improve beyond the DOE's wildest expectations there won't be any permanent magnet motors to drive the wheels. From where I sit, it's beginning to look like another abortive government attempt to create a market for technologies that consumers don't want and global supply chains can't support. Other fine examples of the syndrome include:

Timeframe		Revolutionary Technology
25 years ago		Methanol
15 years ago		Electric vehicles
10 years ago		HEVs and Electric vehicles
6 years ago		Hydrogen Fuel Cells
3 years ago		Ethanol
Today		Grid Enabled Vehicles
2011		What’s next?

Every industrial revolution in history has been driven by innovation that gave people the ability to do more with less. While I believe the coming cleantech revolution will be driven in large part by constraint and increasing competition for water, food, energy and virtually every commodity you can imagine, efficiency is inherently cheaper than waste and the winning solutions will be technologies that allow us to do more with less. Technologies that require more and deliver less will, of necessity, end up on the dung heap of history.

Disclosure: Author is a former director Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide Technologies (XIDE), C&D Technologies (CHP) Active Power (ACPW), ZBB Energy (ZBB) and Great Western Minerals Group (GWG.V).

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

John Petersen

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

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



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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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

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

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

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

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

Posted by John Petersen at 08:26 AM | Permalink | Comments (6)

John Petersen

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

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

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

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

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

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

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

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

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



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

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

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

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

Part 2 of 2

Bill Paul

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

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

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

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

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

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

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

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

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

Bill Paul is Managing Editor of EnergyTechStocks.com

DISCLOSURE: None

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

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

David Gold

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

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

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

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

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

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

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

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

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

John Petersen

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

John Petersen

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

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

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

US hybrid market historical sales (1999 – 2009)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It's enough to make you go Hmmm.

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

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

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

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

DISCLOSURE: None

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

John Petersen

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



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

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

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



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

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

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

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

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

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

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

John Petersen

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

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

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

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

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

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

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

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

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

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

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

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

Name	Symbol	Price	Mkt. Cap.	P/E	P/B	P/S
Axion Power	AXPW.OB	$2.12	$75.9		18.3	62.8
ZBB Energy	ZBB	$1.24	$15.4		1.9	8.7

Cheap Sustainable - My cheap sustainable class consists of well-capitalized manufacturers of relatively cheap energy storage technologies that have a substantial customer base. Like their cool counterparts, cheap sustainable companies are typically valued on the basis of their earnings potential and business development plans.

Name	Symbol	Price	Mkt. Cap.	P/E	P/B	P/S
Enersys	ENS	$21.71	$1,040.0	15.7	1.4	0.6
Exide Technologies	XIDE	$8.01	$604.9		2.0	0.2
C&D Technologies	CHP	$2.14	$56.3		1.3	0.2
Active Power	ACPW	$0.88	$58.2		3.1	1.3

Chinese Companies - My last class consists of Chinese companies that have listed their shares in the U.S., but operate solely in Asia. They're generally profitable and may export products to the U.S., but they're not expected to be key players in America's drive to develop a thriving domestic battery manufacturing industry.

Name	Symbol	Price	Mkt. Cap.	P/E	P/B	P/S
Advanced Battery Technologies	ABAT	$4.09	$253.1	11.8	2.1	5.3
China BAK Battery	CBAK	$4.19	$241.7		1.5	1.1
China Ritar Power	CRTP	$5.47	$105.3	20.0	2.8	1.0
Hong Kong Highpower	HPJ	$3.34	$45.3	23.2	2.5	0.7

My fundamental premise is that current conditions in the energy storage sector are a lot like they were in high-school.

There are four publicly held lithium-ion battery developers vying for supremacy in the high profile contest to become the technology superstar for PHEVs and EVs. They're competing against each other, a number of foreign companies and a host of privately held companies for a market that will be a long time coming. While they all trade at prices that would give value investors a nosebleed, the odds that a particular company will make it to the NFL draft are remote at best.

At the other end of the spectrum there are a small number of emerging and sustainable companies that are manufacturing and developing technologies for the more mundane energy storage needs of the average consumer who would be hard-pressed to buy a $22,000 Prius class hybrid, much less a $40,000 Volt class PHEV.

As the newly born excitement over the energy storage sector wanes and fundamental investment analysis gains supremacy, I expect the relative valuations of the cool technology companies to either remain flat or fall while the relative valuations of the cheap technology companies rise to more reasonable levels. On Thursday I'll put together an analysis of how that investment thesis has held up since last November and establish a new set of foundation metrics for future tracking comparisons. I continue to believe cheap will outperform cool for the foreseeable future. Only time will tell whether I'm right or wrong.

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

Posted by John Petersen at 12:02 AM | Permalink | Comments (6)

John Petersen

I've been blogging about the energy storage sector since last July because batteries, single purpose devices that most of us take for granted unless they need to be recharged or replaced, are an essential enabling technology for cleantech, the sixth industrial revolution. With this week's impressive launch of A123 Systems (AONE), the tsunami of investor interest I've been predicting since last fall has finally arrived. Since the A123 Systems IPO has introduced an entirely new class of investors to the energy storage sector, this seems like a particularly good time to go back to square one and explain how energy storage is different from other technology classes. Since I've already written extensively on most of these issues, this article is full of hyperlinks to earlier blogs.

Energy storage is a diverse industrial sector that encompasses a variety of mechanical, electrochemical and electrostatic devices and eighteen pure play public companies that range from well known to unknown. Since some of my earlier blogs came across as fairly harsh, I'd like to make it clear from the outset that I believe there is tremendous long-term potential in every energy storage technology. While I've turned some readers off through my outspoken criticism of wasteful planned uses for extraordinary storage devices and my general disdain for companies that let their stories outrun their business fundamentals, reader comments on my blogs are usually extensive and a well-informed group of regular commenters adds a balance and perspective that I could never achieve on my own. So if you have questions please ask. If I don't know the answer there's a good chance one of my readers will.

Over the last year, I've spent uncounted hours blogging, responding to reader comments and trying to debunk some of the more common misconceptions about energy storage. Those efforts ultimately lead me to a four-sided analytical framework that I believe every energy storage investor needs to understand. The four sides of the framework are:

1. Batteries rely on chemistry, rather than physics, so the rapid rates of change we've come to expect from information technology and electronics will be rare in the battery industry. Moore's Law simply does not apply. It's perfectly reasonable to assume that battery technologies will continue to improve at single digit annual rates, but expecting disruptive changes that result in huge cost reductions or performance gains is unreasonable.
2. The battery business is hard-core manufacturing and revenue growth will be tied to the construction of new factories, a process that requires substantial amounts of time and money. Accordingly, the time lag between a new product announcement and the receipt of substantial revenue from product sales will typically be measured in months or years, rather than weeks. Moreover, revenues will tend to stair-step as new factories come on line instead of following a smooth upward trend.
3. Battery manufacturing requires huge amounts of raw materials that typically account for 70% to  80% of total production costs. So while material constraints have not been major issues in many new industries, they can be important issues for batteries that are based on scarce or expensive raw materials.
4. The cleantech revolution will be unlike anything that's gone before. For the first time in human history we live in a world where six billion people know about the lifestyle that 600 million of us take for granted. Since they know there is more to life than bare subsistence, each of them is working very hard to earn a small piece of the dream. The only way to accommodate six billion new consumers without catastrophic conflict or horrendous environmental damage is to find relevant scale solutions to chronic shortages of food, water, energy and every commodity you can imagine. The first, and perhaps the most important, step down that path is the minimization of waste in all its pernicious forms.

Investors who learn these framework principles and rigorously adhere to sound discipline can prosper in the energy storage sector. Investors who ignore the framework principles and go off chasing rainbows do so at their peril.

Last fall I wrote an article titled "Alternative Energy Storage: Lithium, Lead or Both?" It remains a personal favorite because it explains a number of important energy storage concepts in simple terms, discusses the history of the battery industry, explains the economic and technical drivers that brought the industry to where it is today, and explains why I believe that:

• Commercial and industrial energy storage decisions will always be based on detailed studies that carefully weigh the fully loaded cost of storage against the value of the stored energy;
• Consumer energy storage decisions will be very sensitive to both front-end costs and back-end energy savings;
• There is no silver bullet technical solution to the energy storage problem and our clean energy future will require the use of several different storage technologies; and
• The prize will ultimately be shared by dozens of companies instead of being concentrated in one or two.

Like many commenters, I'm not excited about PHEVs and EVs, but the reasons for my cynicism go beyond the commonly cited issues of high-cost, uncertain reliability and unknown consumer demand. I'm an unrepentant critic of cars with plugs because they waste battery capacity; an expensive resource that I believe will become increasingly precious over the next three to five years. The popular Prius from Toyota (TM) uses 1.5 kWh of battery capacity to slash fuel consumption by roughly 40%. The planned GM Volt will use its much larger battery capacity far less efficiently. If the goal is to reduce dependence on imported oil, we're far better off using our available battery production to build large numbers of Prius class HEVs that cost $22,000 each than we would be using the same battery production to build a far smaller number of Volt class PHEVs that cost $40,000 each. If the goal is to reduce C02 emissions, the contrast is even bleaker because most of the electricity that goes into a Volt class PHEVs will come from coal and natural gas fired power plants for the foreseeable future.

According to Frost & Sullivan, the global lithium-ion battery market was roughly $7 billion in 2008, including $5.5 billion for consumer products, $1.5 billion for industrial products and $28 million for transportation. While a number of new lithium-ion battery plants are planned, some of them won't be built and those that are built won't go into production for another couple of years. Since the NiMH batteries that are currently used in most HEVs are severely resource constrained and demand for all classes of HEVs is expected to skyrocket over the next five years in response to aggressive European CO2 emission standards and accelerated U.S. CAFE standards, I have no doubt that every lithium-ion battery manufacturer with an operating factory and a quality product will have more customer demand than it can possibly satisfy. I also expect the emergence of more robust lithium-ion batteries to create entirely new classes of demand that we don't even recognize today.

On balance my sense is that A123 is probably trading at or near a reasonable value given its financial condition and short- to medium-term revenue prospects. I'm not as sanguine about the market valuations of some of the other domestic lithium-ion battery developers because their financial position is far weaker and they've let their stories and stock prices get ahead of business fundamentals. As a result, I don't see a tremendous amount of short-term upside potential in the lithium-ion subgroup.

Notwithstanding my neutral outlook for the lithium-ion subgroup, I continue to believe that the lead-acid subgroup including Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB) have significant short-term upside potential because lead-acid batteries have been unfairly criticized by lithium-ion battery developers for years and the companies that make them have been largely ignored by a market that's obsessed with searching for the next big thing. Over the next few years, revenue growth in the lead-acid subgroup should outpace revenue growth in the lithium-ion subgroup by a wide margin. Moreover, the companies in the lead-acid subgroup all trade at substantial discounts to their flashier cousins. When I was much younger, a wise old stockbroker taught me that the secret to successful investing was to buy undervalued stocks, hold fairly valued stocks and sell overvalued stocks. Based on everything I know about the battery industry, I believe that cheap will continue to outperform cool over the next year the same way it has since last November.

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

Posted by John Petersen at 12:00 PM | Permalink | Comments (2)

John Petersen

This morning Reuters is reporting that A123 Systems, Inc. (AONE) increased the number of shares offered in its IPO from 25 million to 28.1 million and sold those shares at a price of $13.50. If the underwriters exercise their overallotment option, which is usually the case in IPOs of this size, the total IPO proceeds will be $437.5 million before costs, commissions and discounts. This IPO has been a long time coming but it was worth the wait. I want to congratulate the A123 team and the underwriters on a job well done.

Assuming full exercise of the underwriter's overallotment option, A123 will have 104.1 million shares outstanding and carry a market capitalization of $1.4 billion. The offering proceeds, together with its pre-offering cash reserves of $115 million should leave A123 with enough liquidity to finance the continued development of its technology and provide roughly $310 million in matching funds for its ARRA battery grants and its anticipated ATVM loan. Now it's all in the hands of management to implement their strategic plans and bring an important product to market.

I’ve been writing about the energy storage sector for over a year. I believe energy storage will be a fundamental enabling technology for cleantech, the sixth industrial revolution and a major investment theme for the next 20 to 30 years. I’ve written about an emerging consensus that sales in the energy storage sector will grow from $30 billion to well over $100 billion by 2020. I’ve also written about a variety of technologies and companies that will benefit from explosive growth in the sector.

The challenges facing the energy storage sector are enormous, but so are the opportunities. I see an energy storage future where the developers of every technology we know about and many that we don't know about will have far more business than they can possibly handle. It will be great to have a bright line standard like A123 Systems that investors can use to evaluate the relative merits and risks of both established energy storage device manufacturers and emerging developers of new technologies. I look forward to adding A123 Systems to my list of pure play energy storage companies and covering its progress in detail.

DISCLOSURE: none

Posted by John Petersen at 01:11 AM | Permalink | Comments (0)

John Petersen

This morning, A123 Systems Inc. (AONE) amended its registration statement to increase the price range for its proposed IPO to $10.00 to $11.50. I take this as an indicator that their IPO road show has been well received and the offering will go to market in a timely manner.

While I've avoided commenting on A123's prospectus, business or financing plans, there is one point that deserves some attention. Their prospectus summary says:

According to A.T. Kearney, the global lithium-ion battery market for automotive application in HEVs, PHEVs, and EVs is estimated to be $31.9 million in 2009. A.T. Kearney projects that this market will grow to approximately $21.8 billion by 2015 and $74.1 billion by 2020, based on a moderate drive for change influenced by increasing governmental regulation, emerging powertrain technology, changing consumer demand and OEM product strategies toward more fuel efficient vehicles.

After spending several weeks thinking about that statement, it finally dawned on me that the only way to reconcile A123's market size forecast with its anticipated product cost was with an assumption that lithium-ion batteries would completely displace lead-acid batteries in the automotive market over the next 10 years. With that assumption as a given, a battery cost of $750 per vehicle and a 100 million vehicle per year market would actually work out to about $75 billion in potential battery sales.

While I wish A123 well and hope its offering is very successful, I feel compelled to point out that the lead-acid battery industry is not likely to take such a challenge lying down. As long-term readers know, I believe the new PbC battery that Axion Power International (AXPW.OB) plans to commercialize in cooperation with Exide Technologies (XIDE), together with other emerging lead-carbon battery solutions, are likely to dominate the stop-start and mild hybrid markets because they will offer comparable performance in stop-start and mild hybrids for one third of the cost of lithium-ion.

In the real world of paychecks and budgets, cost is important and the choice of technology always obeys the laws of economic gravity.

Upgrading from a $150 valve regulated lead-acid battery to a $250 PbC battery is not likely to give rise to substantial resistance from automakers who are actively seeking a more robust and reliable battery technology that will stand up to the demands of stop-start applications.

Upgrading from a $150 valve regulated lead-acid battery to a $750 lithium ion battery is a different story altogether, particularly when none of the automakers has any history using lithium-ion batteries which have a less than stellar track record under the harsh operating conditions that have made lead-acid batteries the technology of choice for automotive starting, lighting and ignition worldwide.

In a way it's comforting to know that like me, A123 believes that stop-start systems and other mild hybrid technologies will become standard equipment over the next decade. I still think it's far too early to claim victory in a technology race that hasn't been called to the starting gates. Under the circumstances, I think A123 investors might want to take a hard look at the emerging lead-carbon battery technologies and consider hedging their bets.

Disclosure: Author has a large long position in Axion Power International (AXPW.OB) and a small long position in Exide Technologies (XIDE).

Posted by John Petersen at 09:53 AM | Permalink | Comments (4)

Posted by John Petersen at 09:26 AM | Permalink | Comments (2)

John Petersen

This morning A123 Systems filed another registration statement amendment for its planned IPO. The amendment specifies a preliminary price range of $8.00 to $9.50 and a preliminary offering size of 25 million shares (28.85 million shares with over-allotment option). Amendments like today's filing occur during the late stages of an IPO and it's not unusual to see the price range or offering size increase in later filings.

Both of the preliminary values are about half of what I expected. The price range surprises me because of its rough parity with the $9.20 per share price A123 received in its last private placement. The offering size surprises me because A123 needs to raise significant working capital; needs to raise $250 million in matching funds for the ARRA battery grants it was awarded last month; and needs to raise up to $60 million in matching funds for DOE guaranteed loans it expects to qualify for. If the A123 IPO goes off in the preliminary ranges, it will have an initial market capitalization of $800 to $950 million.

I have to assume that the initial share price and offering size estimates were fixed at conservative levels because of weak conditions in the IPO market over the last year and uncertain current conditions in the broader market. I sincerely hope that the road show surpasses everyone's expectations. I've been waiting for the A123 IPO since the summer of 2008 and believe that a successful offering will draw attention to the energy storage sector in a way that no other event can.

Storage sector investors who want to better understand the impact a significant IPO can have on a sector should read Zachary Scheidt's recent Seeking Alpha article, The Stage is Set for an IPO Rebound. Another worthwhile recent article from Forbes.com that discusses the potential impact of the A123 IPO on the energy storage sector is "Battery IPO Could Recharge New Issue Market."

DISCLOSURE: None

Posted by John Petersen at 09:35 AM | Permalink | Comments (0)

John Petersen

On August 28th, the Office of the Inspector General of the U.S. Postal Service published the results of a feasibility study titled, "Electrification of Delivery Vehicles." While the feasibility study reaches a foregone conclusion and recommends the purchase of a 3,000 unit demonstration fleet, I was surprised by the high level of Federal subsidies the Inspector General thought necessary to bring EVs within Postal Service capital investment policies. I was even more surprised by the conclusion that the tipping point in the economic analysis was revenue from ancillary vehicle to grid, or V2G, services.

The Postal Service operates a fleet of 219,000 vehicles, including 146,000 delivery vehicles. The feasibility study focused on the long-life vehicles, or LLVs, that have been a part of the American landscape since the late 80's.



The current version of the LLV is built on a GM truck chassis, costs the Postal Service about $19,000 and gets about 10 miles per gallon; which isn't bad for the kind of low-speed stop-start driving on a typical mail route. The average LLV is driven about 18 miles a day and roughly 96% of the LLV fleet drives less than 40 miles a day. The vast majority of LLVs are parked at Postal Service facilities from 5 p.m. till 8 a.m.

The proposal evaluated in the Postal Service feasibility study would replace the internal combustion engine and drive train with an electric drive and 20 kWh of lithium-ion batteries of unspecified chemistry. The projected cost of a 3,000-unit fleet of electric LLVs, or E-LLVs, is $120 million, or $40,000 per unit. The projected cost of associated charging station infrastructure and training is $16.75 million.

The most striking aspect of the Inspector General's report is the fact that it was written from the perspective of an EV buyer, rather than an EV seller. After years of reading up-beat promotional materials that talk about ten-year battery lives and seven- to ten-year payback periods, it was refreshing to see a more skeptical buyer's analysis that:

• Assumed the battery pack would have to be replaced after five years;
• Assumed a fifty percent reduction in repair and maintenance costs;
• Assumed a stable correlation between gasoline and electricity prices;
  
• Required internal returns of thirty percent per year like you see in most businesses;
• Required payback periods of less than three years like you see in most businesses;
  
• Concluded that substantial Federal subsidies were essential; and
• Concluded that ancillary revenues from V2G services were essential.
  

The Inspector General's report was not overly kind to E-LLVs, but then I've never expected undue kindness from fleet buyers who are invariably constrained by capital spending policies that require a return on investment, as opposed to a return of investment. The good news for EV developers is that the Inspector General was able to put together a plan that worked for the Postal Service. The bad news is the plan will be difficult for other fleet users to duplicate because the feasibility study assumes that:

• The Postal Service will get grants for 74% of the cost difference between a standard LLV and an E-LLV;
• The Postal Service will save roughly $1,300 per vehicle year from reduced fueling costs;
• The Postal Service will save roughly $1,500 per vehicle year from reduced maintenance; and
• The Postal Service will earn roughly $2,300 per vehicle year from V2G services.

The Inspector General's report analyzed four possible scenarios. In the basic scenario of no grants and no V2G revenue, the E-LLVs were a poor investment that had a negative return over ten years. In two middle of the road scenarios that included (a) grants without V2G revenues and (b) V2G revenues without grants, the payback periods were in the five-year range and internal rates of return were 15% to 20%. In a best-case scenario that included both grants and V2G revenue, the payback period was under two years and the internal rate of return was over 60%. Since the Postal Services has influential friends in high places, I think it's a safe bet that they'll be able to negotiate the details of a best case project.

The only thing that concerns me about the strategy the Postal Service has adopted for its E-LLV demonstration fleet is the long-term stability of V2G revenue. The E-LLV fleet will be on the road every day from 8 a.m. to 5 p.m., the precise period when demands on the power grid are greatest. So while the proposed fleet of 3,000 E-LLVs will have the theoretical ability to provide 45 MW of frequency regulation services, it will only be able to provide frequency regulation services when demand for those services is relatively low. While I've not been able to find any detailed estimates of the national demand for frequency regulation services during off-peak hours, I have to assume that the aggregate demand for frequency regulation is smaller than demand for other grid-based storage systems. I also have to assume that V2G services will compete directly with alternatives like the flywheel systems that Beacon Power (BCON) is developing which will be available 24/7.

Overall, I believe the Postal Service proposal to deploy a fleet of 3,000 E-LLVs presents an unparalleled opportunity to provide a reliable real-world testing laboratory for ideas that have not yet been reduced to practice. The Postal Service has long promised "neither snow, nor rain, nor heat, nor gloom of night, nor the winds of change, nor a nation challenged, will stay us from the swift completion of our appointed rounds." Since one of the biggest challenges facing America is the efficient use of energy and the prevention of waste, I can't imagine a better organization to lead the way.

In a perfect world, the Postal Service would break its planned E-LLV fleet into as many as a half-dozen subgroups that would each use a different battery chemistry from a different vendor. The willing industry participants I can identify off the top of my head include Altair Nanotechnologies (ALTI), Ener1 (HEV), Johnson Controls (JCI), Valence Technologies (VLNC), and A123 Systems (IPO pending). With proper monitoring, the amount and relative uniformity of the data generated in the first few years of testing for both EV and V2G applications could be priceless.

As a side note, I'm pleased to announce that I've accepted an invitation to appear as a luncheon speaker at the Electrical Energy Storage Applications and Technologies conference in Seattle on October 4th through 7th. While bloggers like me frequently get invited to speak at investment conferences, EESAT is in an entirely different animal. It's a biennial international technical conference co-sponsored by the DOE, Sandia National Laboratories and the Electricity Storage Association. The agenda currently includes technical presentations from the U.S. and eleven foreign countries. EESAT is not appropriate for investors, but it's a must for companies that are active in the energy storage sector and for institutional investors who need to better understand why storage is important and where the growth opportunities lie.

DISCLOSURE: None

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.

Posted by John Petersen at 10:53 AM | Permalink | Comments (19)

John Petersen

Since I've stirred up a hornet's nest over the last two weeks first by debunking the mythology that PHEVs and EVs will save their owners money and then by showing how PHEVs and EVs will sabotage America's drive for energy independence, I figured I might as well go for the triple-crown of harsh realities by showing readers that in the U.S., where 70% of electricity comes from burning hydrocarbons, PHEVs and EVs won't make a dent in CO2 emissions. They'll just take distributed CO2 emissions off the roads and centralize them in coal and gas fired power plants.

I started to seriously question the policy arguments in favor of PHEVs and EVs when McKinsey Quarterly published an article titled "Profiting from the low-carbon economy" in early August. The article included a "Global carbon abatement cost curve" that shocked me because it showed that HEVs offered a substantial cash benefit from carbon abatement while PHEVs imposed a significant carbon abatement cost. A few days ago I got permission to reprint the original graph from a recent McKinsey & Company report titled "Pathways to a Low-Carbon Economy. Version 2 of the Global Greenhouse Gas Abatement Cost Curve," 2009."



While the graph is fairly complex because it shows both the benefits and costs of various carbon abatement options and the potential amount of CO2 that each option could eliminate, the key issue is the relative positions that HEVs and PHEVs occupy on the curve. HEVs are shown on the left hand side of the graph between residential insulation retrofit and electricity from landfill gas; which means that HEVs save €30 ($43) per metric ton of carbon abatement. PHEVs are shown on the right hand side of the graph between nuclear power plants and low penetration wind farms; which means that PHEVs cost €12 ($17) per metric ton of carbon abatement. Since the McKinsey graph analyzed abatement costs at a 'global' level, I felt compelled to dig a little deeper and analyse their impact in the U.S.

In its latest report on greenhouse gas emissions in the U.S., the Energy Information Administration said that CO2 emissions from electricity generation were 2,433.4 million metric tons in 2007. In its 2007 annual summary of electric power in the U.S., the EIA reported that net generation of electric power during 2007 was 4,157 billion kilowatt-hours from the sources identified in the following graph.



When you divide the total CO2 emissions from electricity generation by the total amount of electricity generated, it works out to 585.4 grams of CO2 per kWh. While the figures vary among manufacturers, the average electric-only range of the PHEVs and EVs planned by General Motors, Nissan (NSANY), Mitsubishi (MMTOF.PK), BYD (BYDDF.PK), Tesla Motors, Fisker Automotive, Th!nk Global and a legion of others is roughly 4 miles per kWh of useful battery capacity. So in the U.S., a PHEV or EV will ultimately be responsible for about 146 grams of CO2 emissions per mile unless the owner has the foresight and dedication to buy solar panels or wind turbines to generate the electricity his PHEV or EV will use.

To review the math, a gallon of gasoline releases 20.35 pounds of CO2 (9,231 grams) when it is burned in an internal combustion engine. So a normal car that meets current CAFE standards of 27.5 mpg is responsible for roughly 336 grams of CO2 emissions per mile. In contrast, an HEV like the Prius, which slashes fuel consumption by roughly 40% through a combination of recuperative braking, idle elimination and electric launch will be responsible for roughly 201 grams of CO2 emissions per mile.

The following table compares typical vehicle costs (without tax subsidies) and CO2 emissions per mile for each class of vehicle. It then goes two steps further and (a) calculates an average carbon abatement cost for HEVs, PHEVs and EVs, and (b) calculates an incremental carbon abatement cost for PHEVs and EVs. Both carbon abatement costs are expressed in dollars of capital spending per gram/mile of CO2 emissions.

	Vehicle Cost	CO2 Emissions	Average Abatement Cost	Incremental Abatement Cost
Internal combustion	$20,000	336 g/m
Prius HEV	$26,500	201 g/m	$48.15 g/m
GM Volt class PHEV	$40,000	146 g/m	$105.26 g/m	$245.45 g/m
Nissan Leaf class EV	$40,000	146 g/m	$105.26 g/m	$245.45 g/m

Is it any wonder that Vinod Khosla keeps telling interviewers that in the U.S., China and India, PHEVs and EVs will be plugging into a lump of coal for years to come?

News stories, speeches and press releases can only maintain the electric drive illusion for so long. Sooner or later the public is going to realize that it's all hype, blue smoke and mirrors, and that PHEVs and EVs have little of substance to offer customers in the U.S. market. When the public comes to the realization that electric drive vehicles:

• Won't save their owners significant amounts of money;
• Won't be as fuel efficient as HEVs when battery capacity is factored into the equation;
• Won't be as CO2 efficient as HEVs when utility emissions are factored into the equation; and
• Are nothing more than feel-good, taxpayer subsidized eco-bling,

the backlash against lithium-ion battery developers like Ener1 (HEV) and Valence Technologies (VLNC) that have attained nosebleed level market capitalizations based on electric drive hype may be vicious. The big winners should be developers of cheap and efficient high-performance lead-carbon batteries like Exide Technologies (XIDE) in cooperation with Axion Power International (AXPW.OB); C&D Technologies (CHP) in cooperation with Firefly Energy; and East Penn Manufacturing in cooperation with Japan's Furukawa Battery Co. (FBB.DE).

It would be wrong for readers to assume that I dislike lithium-ion battery technology, because I believe it will be an increasingly important part of the coming cleantech revolution. I also believe that companies like Advanced Battery Technologies (ABAT), Altair Nanotechnologies (ALTI), Johnson Controls (JCI) and A123 Systems (IPO pending) that are taking a diversified approach by focusing on products for a wide variety of consumer, industrial, utility and military applications will grow and prosper. But the companies, reporters, financial analysts and politicians that have built a mountain of unreasonable expectations from an electric drive molehill may be in for a tough time.

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.

Posted by John Petersen at 02:49 PM | Permalink | Comments (22)

John Petersen

Yesterday I asked a frequent commenter and staunch electric vehicle advocate whether he ever questioned the ethics of building an EV that can save one owner 400 gallons of gas per year while using enough batteries to build ten Prius-class hybrids that could save their owners a combined total of 1,600 gallons of gas per year. I then spent an hour in stunned silence as the critical importance of that question crystallized in my mind. I didn't get a responsive answer from the commenter, but I did get one of those rare moments of clarity when everything suddenly falls into place.

For years the mainstream media, scientists, elected officials and promoters have written and spoken ad nauseum about how a new generation of plug-in hybrid electric vehicles, or PHEVs, will liberate America from the tyranny of imported oil. The problem is the promises are based on flawed assumptions and utterly false. At their best, PHEVs and EVs are all sizzle and no steak when it comes to national energy independence. At their worst, they are deep cover saboteurs that will undermine America's drive for energy independence while stridently claiming to be part of the solution.

The simple facts

The average American drives about 12,000 miles per year. If his engine meets current CAFE standards and averages 27.5 mpg, the average American will burn about 436 gallons of gasoline and generate about 4.4 tons of CO2 per year.

The Prius is a hybrid electric vehicle, or HEV, manufactured by Toyota Motor Corporation (TM) that carries a base sticker price of $22,750. The Prius has an enviable 10-year track record of slashing gas consumption by roughly 40% through a combination of idle elimination, electric only launch and recuperative braking. It's a marvel of efficiency engineering that eliminates waste wherever possible. Each new Prius uses about 1.6 kWh of NiMH batteries to save the average owner roughly 174 gallons of gas per year while eliminating 1.7 tons of CO2 emissions.

General Motors is getting ready to launch its eagerly anticipated, irresponsibly hyped and largely untested Volt, a PHEV that will use a combination of electric drive and gasoline engine technology to offer 40 miles of electric only range before the gasoline engine kicks in. The Volt is expected to have a base sticker price of roughly $40,000 before tax subsidies of $7,500 per vehicle. Each GM Volt will use 16 kWh of lithium-ion batteries and save the average owner up to 436 gallons of gasoline per year.

In 2010, Nissan Motors (NSANY) plans to launch its highly touted Leaf, a pure EV that will do the Volt one better by eliminating the gasoline engine altogether. The Leaf is rumored to have a base sticker price that will be competitive with the Volt and enjoy comparable tax subsidies. Each Nissan Leaf will use 24 kWh of lithium-ion batteries and save the average owner 436 gallons of gasoline per year.

The following table summarizes the maximum impact that Toyota, General Motors and Nissan can have on gasoline imports for every 48 kWh of battery capacity used in their products:

	Vehicle	Battery	Gas Savings	Number	Total Annual
	Cost	Capacity	Per Vehicle	of Vehicles	Gas Savings
Toyota Prius	$22,750 (a)	1.5 kWh	174 gallons	32 vehicles	5,568 gallons
GM Volt	$40,000 (e)	16 kWh	436 gallons	3 vehicles	1,308 gallons
Nissan Leaf	$40,000 (e)	24 kWh	436 gallons	2 vehicles	872 gallons

I used 48 kWh for this example because it's the lowest common denominator.

Automotive drive-train batteries are scarce resources, which is why President Obama recently announced $1.2 billion in Federal grants to help finance the construction of new battery manufacturing facilities. Despite the scarcity, developers of outrageously expensive PHEVs, EVs and the lithium-ion battery packs that will be used in their manufacture have convinced a gullible Congress that their products, which will only save a little gasoline, deserve huge Federal subsidies while more modest HEVs, which could save a lot of gasoline, deserve no Federal support.

Does anybody in Washington DC have a calculator and the capacity for independent thought?

The battery wars

Much of the blame for the current state of affairs belongs at the feet of lithium-ion battery developers like Ener1 (HEV), Valence Technology (VLNC), Johnson Controls (JCI) and others that have mounted a highly effective PR campaign to convince everyone that lithium-ion is the only battery technology that's small enough and light enough to power a fleet of PHEVs and EVs. Their illusory promise of energy independence coupled with frequent assurances that the cost, performance, abuse tolerance and cycle-life issues that plague lithium-ion batteries will be solved in the immediate future have led to an absurd situation where the Federal government is heavily subsidizing a wasteful alternative that will ultimately sabotage America's drive for energy independence..

I have written at length about the development path lithium-ion battery developers must follow if they want their products to become cheap enough and durable enough for the automotive market. I have compared the performance of lithium-ion batteries with far cheaper lead-carbon batteries being developed by Exide Technologies (XIDE) in cooperation with Axion Power International (AXPW.OB); by C&D Technologies (CHP) in cooperation with Firefly Energy; and by East Penn Manufacturing in cooperation with Japan's Furukawa Battery Co. (FBB.DE). I have demonstrated that lithium-ion batteries are not necessary in micro, mild and full hybrids where a 77 pound weight advantage and 0.7 cubic feet of saved space can't justify $1,250 in incremental battery cost. I have also explained how billions of dollars in existing lead-acid battery manufacturing facilities can be leveraged to facilitate the inexpensive implementation of micro, mild and full hybrid technologies in the U.S. and Europe in years instead of decades without the short-term supply chain constraints that will impede the commercialization of other battery technologies.

In December of last year I wrote that the energy storage sector needs to take baby steps before it can run and I regularly quote a favorite a line from "The Lost Constitution" by William Martin that says, "In America we wake up in the morning, we go to work and we solve our problems." America has the technical ability and the manufacturing infrastructure to implement HEV technology in all new light vehicles within a decade. If we wait for cheap lithium-ion batteries and cost effective PHEVs and EVs, the process will take far longer, cost much more and offer less flexibility to consumers. I strongly advocate the continued development of lithium-ion and other battery technologies because HEVs are not the journey's end and we can do better. We cannot, however, take a giant leap into the future without first taking the reasonable steps that are available and affordable today.

Notwithstanding the deafening drumbeat of hype from mainstream media, academics, elected officials and lithium-ion battery developers, the undisputed facts are that lithium-ion batteries are not ready for prime time and PHEVs and EVs are little more than vanity items for elitists who will happily let up to fifteen other Americans waste up tp 2,610 gallons of gas per year so that they can save 462 gallons by driving a 100% green car. The hypocrisy is appalling.

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.

Posted by John Petersen at 08:02 AM | Permalink | Comments (19)

John Petersen

A123 Systems filed another amendment to the registration statement for its proposed IPO on August 19th. With this amendment, A123 is much clearer on its anticipated Federal funding than it was in earlier filings. In addition to discussing the recent DOE announcement that they'll receive $249.1 million in ARRA battery manufacturing grants, they've reduced their estimate of the ATVM guaranteed loans that they'll be eligible for from $1 billion in their July filing to $235 million in the current filing. This most recent number is specific enough to indicate that it reflects ongoing negotiations rather than hopes and aspirations. I hope they get it.

When A123 originally filed their registration statement last summer, the planned offering amount was $175 million. Under the ARRA battery grant program they'll need to come up with $250 million in matching funds. Similarly, under the ATVM loan program they'll need to come up with roughly $60 million in matching funds. If one assumes that all of the matching funds requirements will need to be satisfied by the IPO, they'll need to raise $500 to $700 million in the IPO to meet their cash requirements.

If the IPO goes off for $500 million or more, it will be a watershed event on Wall Street and likely result in a frenzy of activity for other stocks in the energy storage sector. I'm excited because there are still a number of storage sector stocks that trade at objectively low valuations.

In early August I wrote an article titled "Alternative Energy Storage: Cheap Continues to Outperform Cool" which suggested that the companies in the Cheap Emerging and Cheap Sustainable classes still had significant upside potential. I continue to believe that these companies will be solid performers after a major storage sector IPO. I'm less sanguine about the ability of Ener1 (HEV) and Valence (VLNC) to maintain their current market capitalizations in the wake of a major IPO for a company that makes a competitive product and has far stronger business fundamentals.

September should be a very interesting month.

DISCLOSURE: None

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.

Posted by John Petersen at 04:47 AM | Permalink | Comments (0)

Jason Hamlin

The lithium market is buzzing as GM, Nissan and other car manufacturers get set to roll out a new series of electric cars that will greatly increase demand for the obscure silver-white alkai metal. GM has announced plans to construct a $43 million plant in Michigan to build lithium-ion batteries for its Chevrolet Volt electric-powered car, which captured headlines with its claim of 230 miles per gallon.

Adding to the lithium mania is Washington’s support in the form of $2 Billion in stimulus funding:

“New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea. Well I do not accept a future where the jobs and industries of tomorrow take root beyond our borders –and I know you don’t either. It is time for America to lead again.”

- President Obama

For those with concerns that fuel efficiency alone is not enough to entice America’s automobile consumer, consider the company Tesla Motors. While their roadster is the first production automobile to use lithium-ion battery cells and travel more than 200 miles per charge, it is also capable of doing 0-60 in under 4 seconds. Not only will the Tesla Roadster leave most sports cars in its dust, the car recently set a distance record in April 2009 when it completed the 241-mile Rallye Monte Carlo d’Energies Alternatives with 36 miles left on the charge. While the Roadster’s price tag may be out of reach for the average consumer at just over $100,000, Tesla has taken more than 1,000 reservations for the car and expects to begin production of an all-electric and more affordable sedan starting in late 2011. While Tesla remains a private company whose stock you are unlikely to get your hands on, their success bodes well for the future of lithium battery-powered cars.

Lithium prices have nearly tripled over the past decade with 22% compound annual growth since 2000 for use in laptops, cell phones and other electronics. While this demand is expected to continue rising, the recent lithium mania has been ignited by the fact that electric cars require about 3,000 times the lithium needed for an average cell phone or 100 times the lithium used in a computer battery. This huge spike in demand should propel lithium prices much higher over the next few years. Investors are eager to get ahead of the curve and are scrambling to find the companies that stand to benefit most from this new demand.

While most investors turn to the world’s largest lithium producer, Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM), only a small percentage of their revenue is derived from lithium sales. SQM generates the bulk of their sales from iodine and specialty fertilizers for the agriculture sector.

My preferred way to profit from the coming lithium boom is through the company Western Lithium (CVE: WLC or PINK: WLCDF), which owns the largest known lithium deposit in North America. The near surface lithium clay deposit is located in Nevada, USA and was initially discovered by the US Geological Survey and Chevron USA in the 1970’s. Engineering work completed by Chevron, and later by the US Bureau of Mines in the 1980’s, is now being advanced by Western Lithium.

The company’s flagship Kings Valley property has a National Instrument 43-101 resource estimate for the initial stage of development and in total hosts a historically estimated 11 million tonnes of lithium carbonate equivalent (LCE). The project has a well developed local infrastructure and Nevada has a long history in the metals and industrial mineral mining industry. The company plans a scoping study during Q3 of 2009, a pre-feasibility study with results from additional drilling during 2010 and projected production by 2013. A chart with the world’s largest lithium deposits is below (click on the chart for an enlarged image).

Western Lithium is well-funded and debt free with CDN$7.3 million (US$6.7 million)) cash on the books. They recently completed a CDN$5.5 million (US$5.0 million) private placement in May of this year and have a market cap of CDN$70 million (US$63.8 milllion). As you can see below, the stock has broken out recently on heavy volume. While some might view the stock as overbought, I believe lithium mania is only getting started and that Western Lithium will outperform its peers both in the short and long term. Despite the recent spike in price, shares are selling at a premium of just 20% to their highs which were put in well before the recent flurry of bullish news. The last time the stock made a move like the current one, it continued to produce a gain in excess of 800%!

We might not know for sure “Who Killed the Electric Car?,” but it appears to be making an impressive resurrection.

DISCLOSURE: The author is long Western Lithium

Jason Hamlin owns the Gold Stock Bull. The Gold Stock Bull Portfolio is up 115% year-to-date in 2009 with a record of 29 profitable trades and 14 losing trades. Click here for more information or click here to get started right away.

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Posted by Guest Contributor at 01:00 AM | Permalink | Comments (1)

In August of last year I wrote an article titled "Grid-based Energy Storage: Birth of a Giant." Over the last 12 months I've written a series of follow-on articles that discuss the principal classes of manufactured energy storage devices and the companies that are making or planning to make products for smart grid energy storage applications. My entire archive of articles on the energy storage sector is available here.

One of the biggest problems I've encountered over the last year has been a dearth of reliable third party information that can help investors understand the breadth and depth of the business opportunity, and sift through the frequently contradictory claims of energy storage device manufacturers that plan to target the smart grid as a principal market. Since energy storage investors are generally well-informed and frequently opinionated, most of my articles have lengthy comment streams that round out my perspective and are usually more interesting than the articles themselves.

Two weeks ago I ran across a story on greentechgrid that said NanoMarkets LLC, a leading market research firm from Glenn Allen, Virginia, was predicting that the global market for storage batteries and ultracapacitors on the smart grid would grow from its current level of $326 million to $8.3 billion by 2016. Since the market size and growth rate estimates were very impressive and I track many of the companies identified in the greentechgrid story, I contacted NanoMarkets to see if they would send me a complimentary copy of their report.

A little over a week ago I received a copy of NanoMarkets 102 page report titled "Batteries and Ultra-Capacitors for the Smart Power Grid: Market Opportunities 2009-2016." I've been like a kid in a candy store ever since. While the $2,995 report is a little pricey for individual investors, it's a must read for institutions and other large investors that are analyzing opportunities in the energy storage sector. It's also a wonderful planning tool for companies that are developing go to market strategies for manufactured energy storage devices. Individuals who want to better understand how the smart-grid market is likely to develop and grow over the next several years can gain important insight from a free June 2009 NanoMarkets white paper titled "Plug In to Materials Trends for Smart Grid Applications." NanoMarkets has agreed to offer a $500 discount on the full report to my readers who contact Robert Nolan (rob@nanomarkets.net) and mention this article.

Unlike forecasts from storage device manufacturers and stock market analysts who tend to focus on how a particular product, technology or company might fit in an emerging market, NanoMarkets approached the issue of smart grid storage from the end-user's perspective; meaning that they identified the customer's needs first and then focused on the companies that had cost-effective solutions for those needs. The principal near-term applications identified by NanoMarkets are:

• Load leveling and power quality systems to protect commercial and industrial users from brief power interruptions that cost an estimated $75 to $200 billion per year in lost time, lost commerce and damage to equipment;
• Peak shaving systems to help commercial and industrial users manage their electricity costs under variable utility tariffs and help utilities manage generating assets to minimize waste;
• Transmission and distribution support systems to help utilities reduce grid congestion, defer upgrades and minimize waste; and
• Renewables integration systems to help power producers, utilities and end users cope with the inherent variability of wind and solar power and better match peak wind and solar output with peak demand.

In evaluating the likely development path for energy storage devices on the smart grid, NanoMarkets considered a variety of competing technologies including pumped hydro, compressed air, flywheels, chemical storage batteries, ultracapacitors and superconducting magnets. They ultimately concluded that:

• Pumped hydro and compressed air had limited growth potential because of geographical and geologic constraints;
• Flywheels and superconducting magnets were not likely to be widely used beyond niche applications because of their cost and complexity; and
• Absent a revolutionary breakthrough in cycle life and cost, lithium-ion batteries will have limited application in the smart grid.

From my perspective one of the most refreshing aspects of the NanoMarkets report was their belief that storage systems for the smart grid will be chosen based on fundamental cost-benefit analysis. Equally important was their conclusion that emerging technologies would increase the overall demand for storage and result in rapidly increasing revenue for all product classes. So instead of facing a situation where an emerging technology takes sales away from an established technology, each class of technology can expect rapid sustained growth over the entire forecast period. When the forecasts for individual product classes are stacked on top of each other, it's easy to see why I believe the smart grid storage market will reach explosive growth rates by 2016. The following graph provides a consolidated summary of NanoMarkets' forecast for each of the principal battery classes over the next eight years.



I can't begin to do the NanoMarkets report justice in the limited confines of a financial blog. They thoroughly discuss the economic drivers and development path for each of the principal smart grid markets; carefully review each of the energy storage technologies that have significant potential in the smart grid market; identify the leading developers of energy storage devices for the smart grid; and break their sales forecasts down by both specific applications and geography. If NanoMarkets' forecast is even close to being right, the next decade will be a period of explosive growth for:

• Sodium battery manufacturers like NGK Insulators (NGKIF.PK) and General Electric (GE) that can look for annual revenue in their sub-sector to grow by $1.3 billion over the next eight years;
• Supercapacitor manufacturers like Maxwell Technologies (MXWL) that can look for annual revenue in their sub-sector to grow by $1 billion over the next eight years;
• Lead-acid battery manufacturers like Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP) that can look for annual revenue in their sub-sector to grow by $2.4 billion over the next eight years;
• Lead-carbon battery manufacturers like Furukawa Battery (FBB.F), Axion Power (AXPW.OB) and Firefly that can look for annual revenue in their sub-sector to grow by $2.75 billion over the next eight years; and
• Flow battery manufacturers like ZBB Energy (ZBB) that can look for annual revenue in their sub-sector to grow by $499 million over the next eight years;

For energy storage investors who truly want to understand where the smart grid energy storage device market is today and how it is likely to develop through 2016, the NanoMarkets report could well prove to be the soundest investment of all.

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

Posted by John Petersen at 12:51 PM | Permalink | Comments (4)

John Petersen

On Monday of this week, the treehugger blog published a guest essay from Vinod Khosla that clarified his stance on the future of next generation lithium-ion batteries. The essay was prompted by "blog chatter" about an article in Earth2Tech where he was quoted as saying that lithium-ion batteries are overhyped. Since the Khosla essay included a link to my article "Why Lead-Carbon Batteries Will Deflate the Li-ion Bubble," I think it's important to tell readers that Mr. Khosla has written his own essay on the subject and encourage them to get the full story straight from the source.

The essay from Mr. Khosla is available here.

While we use different terms to frame the issues, it's pretty clear that Mr. Khosla's views of the lithium-ion battery sector are not all that different from mine. We both question the ability of leading lithium-ion battery developers to move down the cost curve and up the performance curve over the next five years. We both believe that without disruptive advances in cell design, battery chemistry and manufacturing technology, the market for PHEVs and EVs will be limited to a small fraction of the potential market. We both hope ongoing R&D will lead to the disruptive advances the industry needs. And we're both a little skeptical about EEstor.

After spending a good deal of time analyzing the Khosla essay, about the only place we disagree is his suggestion that "Even the old lead acid battery suppliers like Firefly and other lead acid battery makers are making a play to reach the electric car specifications."

I've always been very careful to respect the difference between cars that use electric drive to supplement internal combustion engines and cars that use internal combustion engines to supplement electric drive.

That difference is a plug.

I firmly believe advanced lead-acid and lead-carbon batteries will be a dominant technology for micro, mild and full HEVs. I do not expect them to be the first choice for PHEVs and EVs where battery size and weight are mission critical constraints. The only clear exception to my general view is gas guzzler to dual mode EV conversions.

Last November I wrote "Alternative Energy Storage is an Investment Tsunami," which began with a Khosla quote that “500 million people on earth enjoy a lifestyle that 9 billion people will want in 2050.” This quote had a profound impact on my thinking and has gradually morphed into a frequently repeated theme that 6 billion people already know about the lifestyle that 500 million of us enjoy and every single one of them wants to earn his piece of the dream. The trick will be finding a way to raise the standard of living in developing economies without crushing the standard of living in developed economies. For that to happen without catastrophic conflict and horrific environmental consequences, the world must find relevant scale solutions for persistent shortages of water, food, energy and virtually every commodity you can imagine.

Since I admire Mr. Khosla, I deeply regret any trouble I may have caused by not spending more time discussing his vision of the opportunities in next generation lithium-ion batteries. A favorite theme of mine comes from William Martin's novel The Lost Constitution, “In America we get up in the morning, we go to work and we solve our problems.” Solving our energy and carbon emission problems is a daunting task that will take decades and probably never be complete. In the meantime, we need to go to work with the tools we have and be ready to embrace new tools when they're developed. I don't view advanced lead-acid and lead-carbon batteries as the be all and end all of energy storage. They are, however, key bridging solutions that can help us get from where we are to where we need to be.

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.

Posted by John Petersen at 03:36 PM | Permalink | Comments (1)

John Petersen

During his address today at Navistar International's (NAV) facilities in Elkhart, Indiana, President Obama announced a total of $2 billion in ARRA battery manufacturing grants and another $400 million in Recovery Act awards for transportation electrification. The complete list of grant recipients, most of whom are private companies, is available here. The recipients of $1.25 billion in the primary class of grants for cell and battery manufacturing facilities are as follows:

Johnson Controls	JCI	$299.2	Production of nickel-cobalt-metal battery cells and packs, as well as production of battery separators (by partner Entek) for hybrid and electric vehicles.
A123 Systems	IPO pending	$249.1	Manufacturing of nano-iron phosphate cathode powder and electrode coatings; fabrication of battery cells and modules; and assembly of complete battery pack systems for hybrid and electric vehicles.
Dow Kokam	DOW	$161.0	Production of manganese oxide cathode / graphite lithium-ion batteries for hybrid and electric vehicles.
Compact Power	Private (Sub. of LG Chem)	$151.4	Production of lithium-ion polymer battery cells for the GM Volt using a manganese-based cathode material and a proprietary separator.
EnerDel	HEV	$118.5	Production of lithium-ion cells and packs for hybrid and electric vehicles. Primary lithium chemistries include: manganese spinel cathode and lithium titanate anode for high power applications, as well as manganese spinel cathode and amorphous carbon for high energy applications.
General Motors	???	$105.9	Production of high-volume battery packs for the GM Volt. Cells will be from LG Chem, Ltd. and other cell providers to be named.
Saft America	SGPEF.PK	$95.5	Production of lithium-ion cells, modules, and battery packs for industrial and agricultural vehicles and defense application markets. Primary lithium chemistries include nickel-cobalt-metal and iron phosphate.
Exide Technologies with Axion Power	XIDE AXPW.OB	$34.3	Production of advanced lead-acid batteries, using lead-carbon electrodes for micro and mild hybrid applications.
East Penn Manufacturing	Private	$32.5	Production of the UltraBattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications.

Additional awards to other publicly traded companies include:

Celgard/Polypore	PPO	$49.20	Production of polymer separator material for lithium-ion batteries.
Honeywell	HON	$27.30	Production of electrolyte salt (lithium hexafluorophosphate (LiPF6)) for lithium-ion batteries.
BASF Catalysts	BASFY.PK	$24.60	Production of nickel-cobalt-metal cathode material for lithium-ion batteries.
FutureFuel	FTFL.OB	$12.60	Production of high-temperature graphitized precursor anode material for lithium-ion batteries.
General Motors	???	$105	Construction of U.S. manufacturing capabilities to produce the second-generation GM global rear-wheel electric drive system.
Delphi	???	$89.30	Expansion of manufacturing for existing electric drive power electronics components for both passenger and commercial vehicles.
Ford Motors	F	$62.70	Producing a Ford electric drive transaxle with integrated power electronics in an existing Ford transmission facility.
Magna E-Car Systems	MGA	$40	Increasing production capacity of advanced automotive electric drive system component manufacturing plants located in the U.S.
Kemet Corporation	KEM	$15.10	Production of DC bus capacitors including soft wound film and stacked film capacitors necessary for electric drive system power electronics.

On balance, I'd say my predictions from earlier today were not too far off the mark. I was particularly pleased (OK it was closer to "this is almost better than sex") to see that Exide Technologies (XIDE) will receive a $34.3 million grant with Axion Power International (AXPW.OB) for the production of advanced batteries using Axion's proprietary lead-carbon electrode technologies. While sharing of the grant funding will apparently have to be clarified during the contract negotiation phase, the boost to Axion's future revenue and technical credibility will be substantial. I was also happy to see that East Penn will receive an additional $32.5 million for the production of advanced lead-carbon batteries based on the Ultrabattery technology developed by Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO).

While these grants for advanced lead-carbon batteries pale in comparison to the huge amounts allocated to lithium-ion battery manufacturing, they show a clear recognition that the micro and mild hybrid markets will be very important over the next decade and go a long way toward confirming what I've been telling readers for months, that lead-carbon is a game changer for alternative energy storage.

I look forward to reading the press releases from the award recipients which will undoubtedly provide more detail.

ED NOTE: One more: UQM Technologies (UQM) gets $45M.

DISCLOSURE: Author is a former director 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.

Posted by John Petersen at 02:16 PM | Permalink | Comments (0)

John Petersen

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

Posted by John Petersen at 08:31 AM | Permalink | Comments (0)

John Petersen

The next couple months are shaping up as a time of extraordinary change in the energy storage sector. Events that will drive the change include:

• Press reports indicate that the Department of Energy will be ready to announce it's preliminary decisions on the allocation of $2 billion in ARRA battery manufacturing grants sometime this week;
• We've seen numerous reports on automaker's plans to begin manufacturing PHEVs and EVs in limited volumes for testing and demonstration purposes;
• New tailpipe emission standards in Europe and accelerated CAFE standards in the U.S. will effectively compel the widespread adoption and rapid roll-out of stop-start and mild hybrid technologies by all major automakers;
  
• Advanced Battery (ABAT) acquired manufacturing facilities for electric two-wheeled (E2W) vehicles and is diversifying its operations with a sharper focus on the Chinese market;
• Beacon Power (BCON) received a conditional commitment for a $43 million DOE loan guarantee that will be used to complete a 20 MW flywheel energy storage project in New York; and
• A123 Systems filed another amendment to its SEC registration statement, which indicates that they're still on track for an IPO sometime in September.

So now seems like a good time to update the relative performance of the individual energy storage stocks I've been writing about for the last year.

The following table provides comparative price data for the short-list of pure play energy storage companies I track. It shows closing prices on November 14, 2008 and July 31, 2009, calculates the percentage of change over the last eight months, and calculates current market capitalizations based on recent SEC reports.

		14-Nov	31-Jul	Percent	Market
Cool Emerging	Symbol	Close	Close	Change	Cap
Ener1	HEV	$6.75	$6.38	-5.48%	$723.96
Valence Technology	VLNC	$1.88	$1.83	-2.66%	$228.58
Altair Nanotechnologies	ALTI	$0.87	$0.97	12.14%	$90.36
Beacon Power	BCON	$0.82	$0.76	-7.32%	$90.62
Cool Sustainable
Maxwell Technologies	MXWL	$6.50	$14.16	117.85%	$328.26
Advanced Battery	ABAT	$2.13	$4.28	100.94%	$247.47
Ultralife	ULBI	$9.08	$6.42	-29.30%	$108.88
China BAK	CBAK	$1.99	$3.31	66.33%	$190.95
Hong Kong Highpower	HPJ	$3.50	$1.41	-59.71%	$19.12
Cheap Emerging
Axion Power International	AXPW.OB	$1.30	$1.25	-3.85%	$44.53
ZBB Energy	ZBB	$0.93	$1.30	39.78%	$13.80
Cheap Sustainable
Enersys	ENS	$6.86	$19.79	188.48%	$951.70
Exide Technologies	XIDE	$3.38	$4.87	44.08%	$367.78
C&D Technologies	CHP	$1.94	$2.00	3.09%	$52.59
Active Power	ACPW	$0.40	$0.74	83.75%	$48.85

Between November 14, 2008 and July 31, 2009, a $1,000 index investment in the Dow Jones Average, the Nasdaq Index and the S&P 500 would have resulted in an average portfolio appreciation of 17.2%. The following table summarizes the portfolio gain or (loss) that would have resulted from an investment of $1,000 per company in each of my four groups.

Tracking	Percentage
Category	Gain (Loss)
Cool Emerging	(0.8%)
Cool Sustainable	39.2%
Cheap Emerging	18.0%
Cheap Sustainable	79.9%

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 eight months are any indication, the pendulum is moving 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		8.63	48.38	$0.74
Valence Technology	VLNC	124,905			8.39	-$0.55
Altair Nanotechnologies	ALTI	93,153		2.48	16.39	$0.39
Beacon Power	BCON	119,239		3.67	519.28	$0.20
Group Average				4.93	148.11	$0.20
Cool Sustainable Group
Maxwell Technologies	MXWL	23,182		5.41	3.79	$2.65
Advanced Battery	ABAT	57,821	14.31	2.88	5.04	$1.47
Ultralife Batteries	ULBI	16,959	12.64	1.19	0.41	$4.92
China BAK	CBAK	57,688		1.19	0.82	$2.74
Hong Kong Highpower	HPJ	13,563	10.85	1.14	0.28	$1.23
Group Average			12.60	2.36	2.07	$2.60
Cheap Emerging Group
Axion Power International	AXPW.OB	35,625		7.25	42.09	$0.17
ZBB Energy	ZBB	10,618		1.74	15.24	$0.74
Group Average				4.50	28.67	$0.46
Cheap Sustainable Group
Enersys	ENS	48,090	11.56	1.49	0.49	$13.43
Exide Technologies	XIDE	75,519	7.49	1.09	0.11	$4.37
C&D Technologies	CHP	26,296		1.11	0.15	$1.81
Active Power	ACPW	66,458		2.24	0.91	$0.30
Group Average		54,091	9.53	1.48	0.42	$4.98

I have long argued that every energy storage decision boils down to a cost-benefit analysis and the bulk of the incremental sales revenue will flow to companies that serve the mundane needs of the average user, rather than the extreme needs of "power users." Based on his recent statement that lithium-ion batteries are overhyped, it appears that Vinod Khosla, one of Silicon Valley's most active cleantech investors, agrees with me. 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 will continue to believe that investors who want to maximize portfolio performance in the energy storage sector should focus on the cheap groups instead of the cool groups.

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

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.

Posted by John Petersen at 12:44 AM | Permalink | Comments (0)

John Petersen

For over a year I've been cautioning readers that while lithium-ion batteries are glamorous, sleek, sexy and hot; they are about to face a formidable challenge from lead-carbon batteries that are a little bulkier and heavier, but offer competitive cycle-life and power for a tiny fraction of the cost. To placate lithium fundamentalists and EV evangelists, I want to clearly state up front that lead-carbon batteries will probably not be the first choice for plug-in vehicles. Nevertheless, it is crystal clear that lead-carbon batteries will be the only sensible choice for micro, mild and full hybrid electric vehicles (HEV's) and many grid connected energy storage applications. A July 30th article from Earth2Tech titled, “Vinod Khosla On Why Lithium-Ion Batteries Are Overhyped” says it all, "The most important thing to remember is economic gravity – the cheapest thing ends up winning." What do you know; somebody far smarter than me who believes cheap beats cool.

As regular readers know, I recently participated in Infocast's Storage Week 2009 and served on three discussion panels. The core data for this article came from a slide-show that Patrick T. Moseley PhD, the president of the Advanced Lead-Acid Battery Consortium (ALABC), presented at the conference. While I've known about the surprising gains that come from the integration of advanced carbon materials into conventional lead-acid batteries for several years, the Moseley presentation is one of the first public documents to explore the details. A copy of Dr. Moseley's Storage Week presentation is available here. A complete archive of my articles on the energy storage sector is available here.

The media began paying attention to lead-carbon batteries in January 2008 when Autobloggreen reported the results of a road test that used a split-electrode lead-carbon "Ultrabattery" developed by Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO) to power a modified Honda Insight for 100,000 miles. The gist of the report was that in exchange for a weight penalty of 17 kg (37 pounds) and a fuel economy penalty of 2.8%, the Ultrabattery promised to shave up to $2,000 off the sticker price of a mild hybrid. Dr. Moseley's presentation took the Autobloggreen report a couple steps further and provided the following graph of ALABC-sponsored cycle life testing that compared the Ultrabattery to a standard NiMH battery through 180,000 cycles at discharge rates of up to 5C and recharge rates of up to 4.5C using the European Council for Automotive R&D (EUCAR) Power Assist Profile (click on the graph for a larger image).



Similar cycle-life improvement was clear in another graph from the Moseley presentation that compared the performance of conventional lead-acid batteries with lead-carbon batteries that incorporated 2% carbon black and 2% graphite by weight (roughly 10% carbon by volume) in the sponge lead paste for the negative electrodes (click on the graph for a larger image). This particular series of tests compared the two battery strings at discharge rates of up to 4C and recharge rates of up to 3C using a duty cycle developed by BAE Systems for its hybrid transit bus program. Once again, the cycle-life gains were remarkable.



The real meat and potatoes of the Moseley presentation, however, was a slide that compared the performance and price of the Ultrabattery against (click on the graph for a larger image):

• The Power Assist HEV Battery Goals established by the US Advanced Battery Consortium (USABC);
  
• An Advanced Automotive Battery Conference (AABC) performance report on NiMH batteries; and
• An AABC forecast on future generations of lithium-ion batteries.

While I hate belaboring the obvious, a simple battery technology that surpasses USABC goals by a comfortable margin while reducing the sticker price of a mild hybrid by up to 10% is important in hard times because the majority of American and European consumers are carefully weighing car buying decisions and demanding real value. More importantly, lead-carbon batteries can be manufactured in existing plants without building a new manufacturing, supply chain and distribution infrastructure from the ground up. As a matter of simple capital efficiency, lead-carbon battery manufacturing will be an order of magnitude cheaper. It can also ramp up to required volumes in years rather than decades.

In a January 2009 article titled "Lead-Carbon: A Game Changer for Alternative Energy Storage" I reprinted a graph that showed the results of a series of partial state of charge (PSOC) cycle-life tests that Sandia National Laboratories performed in 2008 on five different batteries including a valve regulated lead-acid (VRLA) battery, two VRLA batteries with carbon enhanced pastes, an Ultrabattery, and an advanced lithium-ion (Li-FePO4) battery. I also reprinted Sandia's summary slide which concluded, "The new carbon enhanced negative electrodes in VRLA batteries have dramatically improved utility PSOC cycle-life up to a factor of 10."

In a follow-up article titled "Lead Carbon Batteries: A Game Changer for Alternative Energy Storage - Part II" I compared the relative strengths and weaknesses of the principal lead-carbon battery developers, both public and private. The four public companies that are actively developing lead-carbon battery technology are:

• MeadWestvaco (MWV), a packaging material and container manufacturing company that is developing carbon additives for the sponge lead pastes used in conventional lead-acid batteries;
• Furukawa Battery Company (Frankfurt - FBB.F), which licensed the Ultrabattery from CSIRO and built the batteries used in the 100,000-mile road test;
• Axion Power International (AXPW.OB) a manufacturer of lead-acid batteries that has built a formidable patent portfolio in lead-carbon battery technology and was recently awarded $380,000 in ALABC grants for lead-carbon research and development; and
• Exide Technologies, Inc. (XIDE), a leading global manufacturer of lead-acid batteries that recently teamed up with Axion for the manufacturing and distribution of products based on Axion's proprietary lead-carbon technologies.
  

A 10-fold improvement in the performance of any technology is highly disruptive. The fact that lead-carbon batteries can do the work using cheap and plentiful raw materials from domestic sources and provide a product that is easily recycled in existing facilities is a game changer; particularly when both lithium-ion and NiMH batteries are based on imported raw materials that are likely to face substantial short-term supply constraints and will require the development of new recycling techniques and the establishment of a new recycling infrastructure.

In America we get up in the morning, we go to work and we solve our problems. NiMH and lithium-ion batteries cannot help the auto industry meet accelerated EU tailpipe CO2 emission standards and US CAFE standards because factories to make the batteries do not exist and even if they did the world's mines couldn't extract the needed raw materials fast enough to satisfy the demand. Over the next decade there's a fair chance that lithium-ion batteries will complete the development and testing path described in an unpublished "pre-decisional draft" of a DOE report titled, National Battery Collaborative (NBC) Roadmap, December 9, 2008, which discusses the merits, risks and expected costs of an aggressive eight-year initiative to foster the development and facilitate the commercialization of lithium-ion batteries. However those future advances will have no impact on our current problems.

It's time to quit talking about the distant future and focus on solving today's problems.

In closing I want to once again share an image from cartoonist Jan Darasz that was published in the Winter 2008 edition of Batteries International magazine with my article, America Must Rebuild Domestic Battery Manufacturing Infrastructure.



DISCLOSURE: Author is a former director 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.

Posted by John Petersen at 01:06 PM | Permalink | Comments (5)

John Petersen

Infocast’s Storage Week was all I had hoped it would be, and more. While I thoroughly enjoyed serving on three discussion panels and was warmly received by roughly 250 attendees, including executives of companies that I've occasionally criticized, the most important value for me came from the opportunity to hear four days of high-level presentations by industry executives, national thought leaders and policymakers who repeatedly stressed that:

• From a utility perspective grid-based energy storage is the functional equivalent of an instantly dispatchable generating asset;
• The combination of wind assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
• The combination of solar assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
• When it comes to grid-connected energy storage, cost, reliability, maintenance and cycle life will be the primary decision drivers.

Consensus was that an optimal smart grid configuration will need storage capacity equal to at least 5% of peak system load and areas that rely heavily on intermittent renewables like wind and solar will need a higher capacity to maximize the value of those assets.

In the example of California, the required annual storage build was estimated at 500 MW per year for the next 10 years. Of this total, 50 MW would need to be fast storage in the form of flywheels and Li-ion batteries and the 450 MW balance would be 4 to 6 hour storage in the form of pumped hydro, compressed air, flow batteries and advanced lead acid batteries.

The following table assumes that fast storage for frequency regulation will have an average discharge duration of 15 minutes and load shifting storage will have an average discharge duration of five hours. It shows how the aggregate annual storage build for both California and the U.S. as a whole will break down in terms of both MW of dispatchable power and MWh of stored energy.

State of California	MW	Percent	MWh	Percent
Annual Fast Storage Build	50	10.00%	12.5	0.55%
Annual Load Shifting Build	450	90.00%	2,250	99.45%
Nationwide (8x California)
Annual Fast Storage Build	400	10%	100	0.55%
Annual Load Shifting Build	3,600	90%	18,000	99.45%

Using a quick and dirty pricing metric of $1 million per MW for fast storage devices including flywheels and Li-ion batteries the annual revenue potential of $400 million is impressive. Using an equally quick and dirty pricing metric of $500,000 per MWh for load shifting storage, the annual revenue potential of $9 billion is mind-boggling.

In the fast storage space, the leading contenders are Maxwell Technologies (MXWL), a leading manufacturer of supercapacitors; Active Power (ACPW), which builds low-speed flywheel systems for industrial power conditioning and UPS applications; Beacon Power (BCON), which builds high-speed flywheel systems for utility frequency regulation and recently snagged a DOE loan commitment for a 20 MW fast storage demonstration project; Altair Nanotechnologies (ALTI), which has built and deployed 2 MW of fast storage that is currently being tested by a major utility; and A123 Systems, which has also built and deployed several MW of fast storage for utility customers in the U.S. and overseas.

In the load shifting space, the leading contenders are Dresser Rand (DRC) which builds above ground compressed air systems, ZBB Energy (ZBB), which builds zinc-bromine flow batteries; lead-acid battery manufacturers like Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP); and innovators like Axion Power (AXPW.OB) which is in the early stages of demonstrating the capabilities of its lead-carbon storage technologies.

The broader market has not yet come to grips with the realities that:

• The combination of wind and storage yields better returns than wind as a stand-alone;
• The combination of solar and storage yields better returns than solar as a stand-alone; and
• While the fast storage developers have been grabbing all the headlines because of the push to develop PHEVs and EVs, the manufacturers of cost effective load shifting systems will lay claim to well over 90% of the anticipated revenue.

As investors in the $100+ billion wind and solar sectors come to understand the critical need for storage to maximize the economics of those intermittent renewables, interest in the $2 billion storage sector will surge. As storage sector investors come to understand the critical need for cost-effective load shifting storage, interest in established manufacturers of less glamorous technologies will also surge. It all goes back to my fundamental premise that for the next decade, cheap will beat cool.

I'm in transit from California to Europe and won't have access to electronic copies of the Storage Week presentation materials for a few days. So I apologize for the dearth of links to source materials. When those materials become available, I'll follow up with a more detailed series of articles that get into the grittier questions of which companies are best positioned to capitalize on explosive growth in both fast and load-shifting grid based energy storage.

For the first time in my career, I find myself on the leading edge of a trend that will be larger than most investors can begin to imagine. It's going to be a fun decade for investors who position their portfolios early because events like Storage Week and the anticipated IPO from A123 Systems are rapidly sending a clear signal to the broader 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 a small long position in Exide (XIDE).

Posted by John Petersen at 11:04 AM | Permalink | Comments (8)

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 |