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November 17, 2011

Electric Vehicles; Ineptitude, apathy ... and piles of taxpayer money

John Petersen

The last few weeks have been a media and political circus in the US as a pair of high-profile Department of Energy loan guarantees wound up in bankruptcy court. In the first case, solar power innovator Solyndra filed two years after closing a $535 million loan for a factory that never quite made it into production. In the second case, flywheel storage innovator Beacon Power (BCONQ.PK) filed about a year after scoring a $43 million loan for a 20 MW frequency regulation plant that was commissioned in June. Both are black eyes for the Obama administration’s green energy policies.

Commentators are quick to note that loan guarantees to undercapitalized companies are indistinguishable from sub-prime mortgages for busboys — the ultimate “heads I win, tails you lose” opportunity for the chosen few. While they’re right, of course, I think a superficial analysis of individual outcomes obscures deeper and more disturbing policy choices that are having a disastrous impact on American innovation, particularly in energy storage.

The ancients taught that necessity is the mother of invention, which is why we have such a wide variety of energy storage technologies. They each serve different needs and they’re each important in their own right because we live in a world where there are no silver bullets and the best we can hope for is silver buckshot. Unfortunately, preferential governmental support for a specific technology or family of technologies is the equivalent of an intellectual abortion clinic. The mere act of choosing one technology group for favorable treatment stifles inquiry and innovation on other ideas that deviate from the government sanctioned path of righteousness.

It’s official, OTHERS NEED NOT APPLY!

Lithium-ion has been chosen as the golden child of energy storage and heaven help the innovator who has an idea for a second-generation nickel metal chloride battery, a new flow battery, an advanced lead-acid battery or any other energy storage device or system that doesn’t pay grovelling homage to the official orthodoxy. In the end, society suffers when government chases the pipe dreams and promises of politically connected demagogues, ideologues and snake oil salesmen. The only possible outcome is catastrophic malinvestment that subverts the stated policy goals. While the taxpayers usually get fleeced, investors invariably get gutted.

In August 2009, the US gave a stunning $1.2 billion of ARRA Battery Manufacturing Grants to a handful of battery companies on the theory that good intentions would trump economics and usher in a golden age of electric cars to free America from the tyranny of imported oil. The 95% allocation to emerging lithium-ion technology compared to the 5% allocation to all other battery technologies combined said it all. Pharaoh has spoken – So let it be written, so let it be done!

Nobody bothered to ask whether the world’s mines could produce enough raw materials to make the batteries at relevant scale. In most cases they’re still not asking, even though metal prices are climbing faster than energy prices. Power-drunk political appointees simply assumed there would be no critical supply chain or technology issues and staggered down the primrose path. Similar ill-conceived plans were adopted with reckless abandon by governments worldwide.

We live on a resource challenged planet where six billion people want a small slice of the lifestyle that one billion of us have and take for granted. Our world produces almost two tons of energy resources a year for every man, woman and child on the planet, but it only produces 8.5 kg of non-ferrous industrial metals. Given the stubborn and inflexible nature of metal production constraints, it doesn’t take much math skill to see the problem.

The stark reality is humanity can’t make enough machines to have a significant impact on global energy consumption and CO2 emissions because the world's miners can’t provide the necessary raw materials. It's not just a question of lithium. The physical constraints on global production of aluminum, copper, lead, nickel, cobalt and a host of scarcer metals are staggering and the six billion people who simply want electric lights, a washing machine and maybe a refrigerator will not sacrifice their basic needs so that Tesla Motors (TSLA) can sell electric cars in California financed by a $465 million ATVM loan that it can’t possibly repay without an Exodus-class intervention from the Almighty.

The first fruits are evident. Existing and planned lithium-ion battery plants will be able to manufacture cells for 2.4 million EVs a year by 2015, however, they can only expect 820,000 units of demand in a high penetration rate scenario. While the looming global glut of cell manufacturing capacity is widely recognized, a more pervasive and perverse dynamic exists in the supply chains for several critical components those factories will need if they hope to manufacture cells.

The following graph comes from an August 2011 presentation from Roland Berger Strategy Consultants. It shows that the global supply chain for anodes will be exhausted if cell production reaches 430,000 units per year while the supply chain for separators will be exhausted if cell production reaches 450,000 units per year. It also shows that the supply chain for cathodes and electrolytes will hit ceilings at 660,000 and 770,000 units respectively.

11.17.11 Berger Graph.png

Since it’s impossible to manufacture cells without anodes, cathodes, separators and electrolytes, I have to wonder about the management teams that are building cell manufacturing facilities without first ensuring the integrity of their supply chains. The apparent lack of concern over supply chain issues is staggering. I can’t decide whether it’s reckless apathy or simply a childlike faith that the taxpayers, like doting first-time grandparents, are breathlessly waiting for any opportunity to provide whatever the golden child needs or wants.

How do you justify building cell-manufacturing capacity that’s three times greater than your best-case demand?

How do you justify building cell-manufacturing capacity that’s six times greater than your supply chain can support?

Is government somehow exempt from the duty to conduct reasonable due diligence before investing?

Seriously, where are the adults in this process?

While the media can’t begin to comprehend the magnitude of the impending catastrophe, the dominoes have started to fall.

Ener1 (HEVV.PK) spent about half of its $120 million ARRA Battery Manufacturing grant before an obscenely optimistic investment in Th!nk Motors brought the company to its knees. In the process its stock tumbled from a post-grant high of $7.53 to a current price of $0.11. Now Ener1’s third management team in eight months plans to change the business focus from automotive to heavy-duty transport and grid-based applications. Thanks to $80 million of improvident borrowing and $51.8 million of additional planned goodwill impairments that are buried in an attachment to its recent Notification of Late Filing, Ener1’s fate will probably be decided in a bankruptcy case controlled by its largest creditor Goldman Sachs, which put a $3.75 price target on the stock last March while I was warning readers to run for cover.

How the hell do you default on a grant?

A less dramatic but equally ominous surprise was the Johnson Controls (JCI) - SAFT divorce. Their ambitious plans to make automotive batteries together till death do us part couldn’t even survive the commissioning of a new factory that’s being built with $300 million of DOE grants. In the face of feeble automotive demand, JCI wanted to expand the joint venture's focus to encompass stationary and ancillary markets. SAFT wanted no part of that proposal because it didn’t want yet another competitor for its factory in Florida that was; you guessed it, built with $95.5 million in DOE grants.

While they’re keeping a stiff upper lip in public, I can’t help but feel a little sorry for A123 Systems (AONE), which is building a factory with $249 million in DOE Grants and wants to borrow hundreds of millions more under the DOE's ATVM loan program. Their IPO prospectus spoke of strong relationships with global automotive manufacturers and tier 1 suppliers, but their automotive design wins to date are limited to a $15,000 electric upgrade to the $15,000 GM Spark and the gorgeous but corpulent Fisker Karma, which is being financed with yet another $530 million from the public trough.

While it’s a decidedly pessimistic view I can identify over $3 billion in battery and electric vehicle projects funded by Federal money that have poor to dismal business prospects, including:

$299.2 ARRA Battery Manufacturing Grant to JCI-Saft
$249.2 ARRA Battery Manufacturing Grant to A123 Systems
$118.5 ARRA Battery Manufacturing Grant to EnerDel
$95.5 ARRA Battery Manufacturing Grant to Saft America
$528.7 ATVM Loan to Fisker Automotive
$465.0 ATVM Loan to Tesla Motors
$1,400.0 ATVM Loan to Nissan Motors

I’m a frequent critic of the headlong rush to build electric vehicle manufacturing capacity and infrastructure without any real proof that the planned wonder vehicles will satisfy customer needs, or that the facilities will be used for something other than homeless shelters for displaced green workers.

My fundamental problem arises from the fact that every industrial revolution in history started with a technology that proved its economic merit in a free market and then went on to change the world. Companies and indeed industries that cannot survive without government subsidies can’t thrive with them. Supporting the moribund with the lifeblood of the vibrant may be compassionate, but it can’t produce a good economic outcome.

Over a decade of experience in the HEV market shows that consumer demand ramped sharply for several early years, hit a market penetration rate of about 3% and then flatlined. Over the last three years, clean diesels and plug-ins have begun to cannibalize the HEV market, but they've done nothing to bring new buyers to the fold.

Once again, governments are pushing on a string and trying to force the market to embrace electric drive, the only vehicle class with an unbroken 100-year history of failure. Once again governments will fail, just like they did with other panacea energy solutions including fast breeder reactors, synthetic fuels, hydrogen fuel cells, clean coal and the ever popular corn ethanol and biodiesel that turn food into fuel and make both more expensive.

In late 2008 the world fell into the mother of all recessions as it reached the peak of a decades long debt supercycle. Now the piper is demanding his due and individuals, businesses and governments around the world are being forced to reduce their crushing debt burdens. In the midst of a global deleveraging, I don’t see how insolvent governments can continue to use public funds to subsidize the ideology-based personal consumption of eco-royalty. How many bottomless pits can one nation's taxpayers be expected to fill?

11.17.11 Money Pit.png
Even if our governments are willing to continue this foolishness, I don’t see how a vibrant market for EVs can possibly develop among real world consumers who can buy gasoline versions of a Lotus Elise, Ford Focus or GM Spark for half the price of their electric counterparts.

The transformer Optimus Prime is a big hit with little boys. Spending billions so big boys can pay twice the price for their very own Suboptimus Prime strikes me as a triumph of hope over experience.

This article was first published in the Fall 2011 issue of Batteries International and I want to thank editor Michael Halls and cartoonist Jan Darasz for their contributions.

Disclosure: None.

November 15, 2011

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

John Petersen

Last November I broke with tradition for the first time in over 30 years and suggested a paired trade that bought Exide Technologies (XIDE) and shorted Tesla Motors (TSLA). Over the following three months, investors who made the trade and bought four Exide shares while shorting one Tesla share pocketed the following gains.


16-Nov-2010
16-Feb 2011
Net

Entry
Exit
Gain
Buy Four Exide
-$29.76
$49.68
$19.92
Short One Tesla
$30.80
-$24.73
$6.07
Pair Trade Total
$1.04
$24.95
$25.99

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

11.15.11 2010 Pair.png

Since June, Exide has fallen to unsustainably low levels and Tesla has climbed to unsustainably high levels, which means it's once again time to recommend a paired trade that buys Exide while shorting Tesla. At yesterday's close the ratio works out to an 11.5 share Exide buy for each shorted share of Tesla. The results this time around should be even better than last year because the valuation disparities summarized in the following table are so immense.


Exide
Tesla
Price Per Share
$2.87
$33.22
Market Capitalization
$244.2
$3,464.2
Working Capital
$512.1
$257.9
Book Value
$415.8
$294.1
TTM Sales
$3,092.9
$201.1
TTM Earnings
$8.8
-$224.3

A couple days ago I suggested that Exide's Recent Price Collapse Was Unjustified and explained how forced liquidations by a large Exide shareholder have crushed its stock price on two occasions during the last two years. Today I'll summarize a few of the headwinds that Tesla must face and overcome if it hopes to avoid a major price decline.

Battery Safety Questions. Over the last week there have been numerous news stories about an NHTSA inquiry into the safety of automotive lithium-ion battery packs after a GM Volt that had been used for crash testing spontaneously caught fire at an NHTSA facility. While the stories remain optimistic about the outcome, they overlook the inconvenient truth that safety testing of lithium-ion battery packs is not comparable to the procedures automakers used for other batteries.

In the late 90s Ford built a test fleet of electric delivery vans called the EcoStar that used sodium sulfur batteries. As part of their normal testing, Ford took a "Vlad the Impaler" approach to safety and used a hydraulic ram to drive a ten-inch long four-vaned arrowhead wedge into a fully charged 35 kWh battery pack. The sodium sulfur battery passed the test. As far as I know, safety testing for lithium-ion batteries is limited to driving an eight penny nail into a single cell. I have not been able to find any published reports of destructive pack level testing to determine how the failure of one cell might cascade through a battery pack that contains up to 6,800 cells.

To put the safety question into sharper perspective, Japan's NGK Insulators suspended its sodium sulfur battery production and asked its customers to stop using its products until an investigation uncovered the cause of an unexplained battery fire. Before the incident NGK had a flawless 10-year safety record, but it still asked its customers to suspend operations on an installed base of 305 Megawatts of power and over a gigawatt hour of energy storage at 174 locations worldwide because of a single incident where nobody was hurt.

If the NHTSA reaches an entirely reasonable conclusion that pack-level testing of lithium-ion batteries has been given short shrift in the headlong rush to bring electric vehicles to market, the delays and risks of thorough pack level testing and the associated news coverage could be catastrophic for specialty EV manufacturers.

Charging Infrastructure Issues. For several years China has been perceived as a global leader in vehicle electrification. Over the last several months, public statements from Chinese leaders have grown increasingly wishy-washy, suggesting that fuel efficiency and HEV technologies would be easier and less expensive to implement at relevant scale. Just this week Forbes reported that China’s power-grid giants – China Southern Grid and State Grid – may throw another monkey wrench into the works by insisting on battery exchange schemes instead of distributed charging infrastructure. While actions in Mainland China will probably not have much direct impact on Tesla, the risk of similar restrictive decisions by utilities in more important markets cannot be dismissed out of hand.

Resale Value Questions. One of the biggest unanswered questions in the electric vehicle space is resale value. Advocates assure us that EVs will retain their value better than conventional cars despite the fact that the battery packs that represent up to half of the vehicle cost are consumable and wear out over time. Yesterday's Wall Street Journal reported that vehicle leasing firms in Israel were having second thoughts about Project Better Place because of uncertainty over residual value. While leasing and residual value issues may not be critical to buyers of the Tesla Roaster, they're likely to be important to buyers of the upcoming Model S which is targeted to an upscale consumer market where vehicle leasing is commonplace.

The Valley of Death. There are no greater, crueler or more universal truths in the stock market than the hype cycle and the valley of death. While there are exceedingly rare exceptions like Google, substantially all new companies and new industries go through a cycle of inflated expectations followed by profound disillusionment. Substantially all cases where companies have avoided the hype cycle have involved a high level of business maturity and close to flawless execution. The following graph from the Gartner Group illustrates the typical stages.

11.15.11 2010 Pair.png

Tesla's execution to date has been pretty good and as far as I can tell it hasn't encountered any significant delays or setbacks. Unfortunately its stock is priced to perfection and anything less than flawless execution going forward can be a catalyst that pushes the stock off the peak of inflated expectations and into the trough of disillusionment. Given the substantial external risks I've discussed above and the inherent risks discussed in Tesla's SEC filings, I think the downside risk in Tesla's stock outweighs the upside potential by an order of magnitude.

Disclosure: None.

August 25, 2011

It's Time to Kill the Electric Car, Drive a Stake Through its Heart and Burn the Corpse

John Petersen

I was recently invited to prepare a memorandum on the battery industry for the electric mobility working group of the World Energy Council, a global thought leadership forum established in 1923 that includes 93 national committees representing over 3,000 member organizations including governments, businesses and research institutions. Since my memorandum integrated several themes from this blog and tied them all together, I've decided to publish a lightly edited version for readers. To set the stage for the substantive discussion that follows, I’ll start with an 1883 quote from Thomas Edison:

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

At the time, Edison was a customer who wanted to buy batteries to improve the reliability of the Pearl Street Station, the first coal-fired utility in North America. An essential truth even Edison failed to recognize is that battery developers don't lie, but potential customers consistently lie to themselves. They hear about gee-whiz inventions, overestimate the practical importance of the innovations and then make quantum leaps of imagination from the reasonable to the absurd. Therefore, the most important task for investors is to critically and objectively examine their own assumptions and avoid hopium induced hallucinations.

Cleantech, the Sixth Industrial Revolution

I believe we are in the early stages of a new industrial revolution, the Age of Cleantech. The cleantech revolution will be different from all prior industrial revolutions because the IT revolution forever changed a dynamic that has existed since the dawn of civilization. It gave the poor and the ignorant access to the global information network, proved that there was more to life than deprivation and sparked a burning desire for something better in billions of people who were once content with mere subsistence. It's long-term significance will be more profound than the discovery and settlement of North America.

The inescapable new megatrend is that six billion people have been awakened to opportunity and are striving to earn a small slice of the lifestyle that 600 million of us enjoy and typically take for granted. If the six billion are even marginally successful and attain a paltry 10% purchasing power parity, global demand for everything must double. Therefore, the most important challenge of our age will be finding new ways to satisfy insatiable demand for water, food, construction materials, energy and every commodity you can imagine.

The first and easiest step will be to eliminate waste in all its pernicious forms to make more room at the economic table. After that, the challenges become far more daunting.

The Everything Shortage

There is a widely held but grossly inaccurate belief that energy prices and CO2 emissions are the most pressing problems facing humanity. The reason is simple – in advanced economies everybody buys energy commodities in minimally processed form several times a month. Each of those purchases reinforces a belief that energy prices are an intolerable burden. While few of us purchase other minimally processed commodities beyond energy and food, the following graph compares the prices of non-ferrous industrial metals with the price of crude oil and highlights an inescapable and highly inconvenient truth that almost nobody understands –

METAL PRICES ARE MORE VOLATILE AND INCREASING MORE RAPIDLY THAN ENERGY PRICES.

6.23.11 Metals vs Oil.png

To compound the problem, global production of energy resources is several orders of magnitude greater than global production of critical metals, as the following table based on data from the U.S. Geological Survey clearly shows.

7.10.11 Energy vs Metals.png

Metric tons per person vs. kilograms per person is an insurmountable disparity.

Most alternative energy and electric drive technologies can’t be implemented without large quantities of scarce metals. All of the metals in the table have critical competitive uses in other essential products and significantly increasing global production of any of them is problematic if not impossible. While improved recycling practices have the potential to help alleviate shortages of critical metals, a recent UN study of global recycling rates for 60 industrial and technology metals found that only 18 had end of life recycling rates over 50% while 34 had end of life recycling rates under 1%. The metals that are most important to alternative energy and electric drive are very difficult and expensive to recycle. So with the exception of lithium, which is a plentiful resource that only represents 5% or 6% of the metal content in Li-ion batteries, the world cannot produce enough technology metals to permit a widespread transition to alternative energy or electric drive.

Any alternative that can't be deployed at relevant scale isn’t an alternative at all. It’s merely an expensive distraction for the masses, a bit like the circus in ancient Rome.

The Diminishing Marginal Utility of Batteries

Once you understand that metal supplies are far more constrained than energy supplies, every evaluation of electric drive becomes a simple exercise in optimizing the fuel savings from each unit of metal used. The five generic levels of electrification and the typical fuel savings at each level are summarized below.

Vehicle configuration Battery Savings
Stop-start systems use lead-acid batteries to eliminate idling while a vehicle is stopped but do not provide any electric boost. 1.0 kWh 10%
Mild hybrids like the Honda Insight use NiMH batteries to recapture braking energy and provide up to 20 or 30 horsepower of acceleration boost. 1.5 kWh 25%
Full hybrids like the Toyota Prius use NiMH batteries to recapture braking energy, offer electric launch and provide up to 80 horsepower of acceleration boost. 1.5˚kWh 40%
Plug-in hybrids like the GM Volt use Li-ion batteries to offer 40 miles of electric range before a range extender engine kicks in to power the electric drive. 16 kWh 75%
Battery electric vehicles like the Nissan Leaf use Li-ion batteries to offer up to 100 miles of electric range under optimal conditions. 24 kWh 100%

While NiMH has been the preferred battery chemistry for mild and full hybrids since they were introduced in the late 90s, it is a terribly resource constrained chemistry because the “M” most commonly used in NiMH batteries is the rare earth metal lanthanum. With per capita global lanthanum production running at a rate of 5 grams per year, significant expansion of NiMH battery production is effectively impossible, which is the main reason that Li-ion is gaining traction for use in electric vehicles. While not free from doubt, many industry observers believe NiMH and Li-ion will be the preferred batteries for full hybrids while mild hybrids will use NiMH, Li-ion and advanced lead-acid batteries.

There are important technical differences between the high-power batteries required for hybrid drive and the high-energy batteries required for electric drive. The differences, however, are relatively insignificant when it comes to raw materials requirements. Therefore, it’s not unreasonable to use battery capacity as a rough proxy for metal consumption in a fuel economy optimization analysis. The following comparisons assume that a new car with an internal combustion engine will use 400 gallons of fuel for 12,000 miles of annual driving. For the sake of simplicity, they assume a total of 96 kWh of batteries are available to reduce societal fuel consumption. The numbers are easily scalable.
  • 96 kWh of batteries would be enough for a fleet of 64 Prius-class hybrids that will each save 160 gallons of fuel per year and generate a societal fuel savings of 10,240 gallons per year;
  • 96 kWh of batteries would be enough for a fleet of six Volt-class plug-in hybrids that will each save 300 gallons of fuel per year and generate a societal fuel savings of 1,800 gallons per year; and
  • 96 kWh of batteries would be enough for a fleet of four Leaf class electric vehicles that will each save 400 gallons of fuel per year and generate a societal fuel savings of 1,600 gallons per year.
This example highlights the fundamental flaw in all vehicle electrification schemes. When batteries are used to recover and reuse braking energy that would otherwise be wasted, a single kWh of capacity can save up to 107 gallons of fuel per year. When batteries are used as fuel tank replacements, a single kWh of capacity can only save 19 gallons of fuel per year and most of the fuel savings at the vehicle level will be offset by increased fuel consumption in power plants.

Using batteries to enable energy efficiency technologies like recuperative braking is sensible conservation.

Using batteries as fuel tank replacements is a zero-sum game that consumes huge quantities of metals for the sole purpose of substituting electricity for oil. Since roughly 45% of domestic electric power from coal fired plants and that percentage will decline very slowly, the only rational conclusion is that electric drive is unconscionable waste and pollution masquerading as conservation.

The Green Power Sophistry

EV advocates invariably paint an appealing picture of EVs being charged by wind or solar power and claim that the combination of the two is wondrous beyond reckoning. Beyond the impossibility of charging an EV from home solar panels and driving it to work at the same time, the reality is that the presumptive virtue of wind and solar power arises from generating green electrons, not using them. Once green electrons exist, it makes no difference whether they’re used to power an EV or a toaster oven. Since green electrons that are consumed in an EV can't be used to clean up a toaster oven, there can be no double counting of virtue. In fact, since wind and solar power impose their own burdens on materials supply chains there's a solid argument that the pretty picture is doubly wasteful.

The Fixed Cost Conundrum

In a conventional vehicle, the fixed vehicle cost is relatively low and the variable fuel cost per mile is relatively high. In electric drive the dynamic is reversed and the fixed vehicle cost is relatively high while the variable fuel cost per mile is relatively low. While few financial metrics are more shrouded in secrecy, intrigue and speculation than Li-ion battery manufacturing costs, A123 Systems (AONE) includes enough hard data in its quarterly and annual reports to the SEC to permit a reasonable estimate. The following graph compares A123’s reported quarterly revenue, their adjusted cost of goods sold (after backing out unabsorbed manufacturing costs) and their gross margin per kWh of batteries shipped.

8.8.11 A123 Graph.png

A123’s direct battery production costs have averaged over $1,000 per kWh for the last two years. By the time A123 adds a reasonable profit margin for its effort and an automaker adds another layer of markup, the only possible outcome is an end-user cost of $1,500 per kWh or more.

Since most advocates insist that battery costs will decline rapidly, I’ll assume end-user battery pack costs of $1,000 and $500 per kWh to keep the peace. I'll also use several other charitable assumptions including stable electricity costs of $0.12 per kWh, no loss of battery capacity over time, no cycle-life limitations and a 15% second-life value. The following graph presents alternative gas price scenarios of $3, $6 and $9 per gallon, and then overlays depreciation and charging cost curves for an EV with a 25 kWh battery pack priced at $1,000 and $500 per kWh. The solid red and green lines show current gas and battery prices. The dashed lines show possible futures that are uncertain as to both timing and magnitude.

6.19.10 Fuel Costs.png

The most striking feature of this graph is the shape of the curves. Where prevailing mythology holds that EVs will be wonderful for urbanites with short commutes that don't need much range flexibility, the curves show that high-mileage drivers who presumably need more flexibility will derive the most value. The reason is simple – spreading battery pack depreciation over 5,000 or even 10,000 miles a year results in a higher cost per mile than spreading that depreciation over 20,000 or 25,000 miles a year. Since the GM Volt has an effective electric range of 40 miles per charge and the Nissan Leaf has an effective range closer to 80 miles, it's clear that high mileage users will need to charge more than once a day to get the maximum benefit. Since nobody has claimed a useful life of more than about 100,000 miles for a battery pack, it seems likely that sustained and frequent recharging will impair the economics for high-mileage users who will need to replace their battery packs more frequently.

Moore’s Curse

The IT revolution set the stage for fatally flawed assumptions in cleantech because we all got accustomed to the phenomenon known as Moore’s Law, which describes exponential improvements in the speed and processing power of electronics. In the Moore’s Law world, electronic devices doubled their capacity every 18 to 24 months while requiring the same or smaller natural resource inputs. As a result, we’ve seen decades of falling prices for exponentially better products.

Unfortunately, Moore’s Law has no relevance to electric drive because the energy needed to move a given mass a given distance at a given speed is constrained by the laws of physics. Likewise, the number of electrons in a given mass of chemically active material is constrained by the laws of chemistry. These laws cannot be violated and in practice the theoretical limits can never be achieved. The best we can possibly hope for is highly efficient systems that take us most of the way there.

In the IT world of Moore’s Law the generational progression was 2, 4, 8, 16 etc.

In the cleantech world of Moore’s Curse the generational progression will be 50%, 75%, 87.5% etc.

The following graph is a bit dated, but it shows that current expectations respecting future advances in battery technology are completely out of touch with historical reality.

8.19.11 Batteries.png

When Edison was bitching about batteries specific energies of 25 wh/kg were common. A hundred and thirty years later specific energies of 150 wh/kg are pushing the envelope. A six-fold improvement over 130 years does not provide a rational basis for prevailing expectations.

Investment Conclusions

It's an Iron Law of Nature – things that can't happen won't happen. The world does not and cannot produce enough metals to permit the deployment of electric drive at a rate that approaches relevant scale. Chinese wind turbine producers are reeling from skyrocketing rare earth metal prices that are scuttling wind power deployment plans. Beijing is backing away from its aggressive vehicle electrification policies. If China can't make the numbers work in a command economy that produces over 95% of the world's rare earth metals, nobody can. The inescapable conclusion for investors is that resource dependent alternative energy and vehicle electrification schemes must fail.

Let's face it folks, it's time to kill the electric car, drive a stake through its heart and burn the corpse.

Companies like Tesla Motors (TSLA) are doomed because their vanity products can't possibly make a difference and have all the environmental and economic relevance of pet rocks. The only companies that stand a chance of long term survival are manufacturers of efficiency technologies that reduce aggregate resource consumption. If lithium-ion battery manufacturers like A123 Systems, Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) can stop chasing rainbows and focus on sensible applications like electric two-wheeled vehicles that reduce natural resource waste, they may have long and prosperous futures. Manufacturers of fundamentally cheap energy efficiency technologies like Johnson Controls (JCI) and Exide Technologies (XIDE) are certain to thrive in any event. The surprise winners in a resource constrained world will most likely be disruptive innovations like the PbC® battery from Axion Power International (AXPW.OB) which uses a third less metal while promising a ten-fold improvement in battery cycle life to optimize the performance of efficiency technologies like stop-start systems, stationary applications and hybrid drive for everything from passenger cars to freight trains.

This article provides a summary overview of several topics I’ve examined in detail over the last three years. A complete archive of my work is available on Seeking Alpha. Most of the resource materials I’ve relied on are available through the numerous hyperlinks I’ve embedded in my articles.

Given the nature of the investing process I don't expect anyone to accept my logic without independently verifying the facts. I sincerely hope that this article will give at least a few investors reason to question their own assumptions in a hopium free environment. Most of us grew up in a rare period of privilege, prosperity and plenty that has seriously distorted our worldview. If we don't accept the reality that our supply chain assumptions are fatally flawed, we can’t possibly identify realistic solutions that can be implemented at relevant scale.

My perspective is very different from the views held by many alternative energy and vehicle electrification analysts. Some readers will no doubt find my thinking reactionary if not heretical. But even the Catholic Church requires a Devil's Advocate to argue against the canonization of proposed saints and gives that advocate fair and equal consideration before making a decision.

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

August 19, 2011

EVs, Lithium-ion Batteries and Liars Poker

John Petersen

Last week I stumbled across a link that led to a 2010 report from the National Research Council titled "Hidden Costs of Energy, Unpriced Consequences of Energy Production and Use." This free 506-page book takes a life-cycle approach – from fuel extraction to energy production, distribution, and use to disposal of waste products – and attempts to quantify the health, climate and other unpriced damages that arise from the use of various energy sources for electricity, transportation and heat. After studying the NRC's discussion of the unpriced health effects, other nonclimate damages and greenhouse gas emissions of various transportation alternatives, and thinking about what the numbers really mean, I've come to the conclusion that the electric vehicle advocates are playing liars poker with their cost and benefit numbers – emphasizing a couple areas where electric drive is superior and de-emphasizing or completely ignoring a far larger number of areas where electric drive is clearly inferior. The result, of course, is unfounded and wildly optimistic claims of superiority based on four sevens in a ten digit serial number that don't mean a thing if your goal is to evaluate the entire serial number.

The first graph from the introduction summarizes the unpriced health and other nonclimate damages arising from the use of thirteen different vehicle fueling technologies over the entire cycle life of an automobile and quantifies the unpriced mine to junkyard cost per vehicle mile traveled, including well or mine to wheels costs of manufacturing the vehicle and fueling it over its operational life.

8.19.11 Health Damages.png

The thing I found most surprising was the relative consistency of the numbers across all thirteen classes, both for today and for the future, and the fact that many advanced drive train technologies score lower than their conventional cousins because the unpriced costs of manufacturing the vehicle or processing the fuel exceed the claimed operating benefits. When you look at the realities from a cradle to grave perspective there are no clearly superior choices and the values are all clustered within ±15% of a $1.25 average. While I derive some personal satisfaction from the idea that the low cost winners are a Prius-class HEV or an internal combustion engine with a CNG fuel system, and that electric drive is just a smidgen cleaner than a diesel engine burning fuel produced from Fischer Tropsch coal liquifaction, the reality is that none of the advanced technologies are inherently better. They're just more expensive.

The game is simply not worth the candle. It’s certainly not worth the enormous expenditures of public funds that governments worldwide don't have. There’s nothing electric drive can accomplish that CNG and fuel efficiency can’t accomplish cleaner, faster and cheaper.

The second graph from the introduction summarizes the unpriced greenhouse gas damages arising from the use of the thirteen different vehicle fueling technologies over the cycle life of an automobile. While the range of variation around a current average of about 450 grams of CO2 per vehicle mile traveled is a little wider at ±25%, once again it's just not worth getting worked up over inconsequential differences that entail substantial incremental costs.

8.19.11 GHG Damages.png

One of the most intriguing take aways from these two graphs is the inescapable conclusion that the differences today are modest and as technologies mature and improve the differences will become less important, not more. By 2030, plug-ins will have no advantage over internal combustion when it comes to greenhouse gasses and be significantly worse than internal combustion when it comes to health and other nonclimate costs.

Over the years I've suffered endless abuse from commenters who decry my appalling lack of vision when it comes to lithium-ion superstars like Ener1 (HEV), A123 Systems (AONE), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) that are certain to drive battery performance to new highs while driving manufacturing costs to new lows and enabling a paradigm shift to electric cars from Tesla Motors (TSLA), Nissan (NSANY.PK), General Motors (GM) and a veritable host of newcomers that are positioning for future IPOs and certain to change the world. While the following graph is a little dated, it shows why the electric pipe dream can’t happen unless some genius in a garage comes up with an entirely new way to store electricity.

8.19.11 Batteries.png

Liars poker can be a fun way to fritter away the hours in Wall Street watering holes like Fraunces Tavern, but it creates enormous risk for investors who hear about four sevens but never hear about the other six characters in the serial number. I've seen this melodrama before. For the period from 2000 through 2003 fuel cell developers like Ballard Power (BLPD) and FuelCell Energy (FCEL) carried nosebleed market capitalizations based solely on dreams. From 2005 through 2007, it was the age of corn ethanol kings like Pacific Ethanol (PEIX). Lithium-ion battery developers have already taken it on the chin and there's no question in my mind that Tesla will be the next domino to fall. Its demise is every bit as predictable and certain as Ener1's was.

It's frequently said that those who do not learn from history are condemned to repeat it. There isn't much I can add.

Disclosure: None. | | Comments (12)

July 31, 2011

Aggressive New CAFE Standards; The IC Empire Strikes Back

John Petersen

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

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

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

7.31.11 Cafe Sandards.png

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

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

In early July The Boston Consulting Group released a new report titled "Powering Autos to 2020; The Era of the Electric Car?" that evaluated the combined potential of baby-step fuel efficiency technologies and considered their likely impact on wildly expensive and impractical proposals to convert the world's transportation infrastructure from liquid fuels to electricity. In the report BCG concluded that:
  • Conventional technologies have significant emissions-reduction potential, but OEMs will need to pull multiple levers simultaneously to meet emissions targets.
  • Advanced ICE technologies can reduce gasoline consumption by 40% at a cost to the consumer of $50 to $60 per percentage point of reduction – roughly half what BCG predicted three years ago.
  • Advanced ICE technologies are likely to become standard equipment worldwide during the next decade.
  • Electric cars will face stiff competition from ICE and will not be the preferred option for most consumers.
  • Battery costs will probably fall to about $9,600 per vehicle, but become increasingly uneconomic as the potential fuel savings per kWh of battery capacity plummets.
  • In addition to dismal economics, plug-ins will face substantial go-to-market challenges including battery durability concerns and the absence of adequate charging infrastructure.
In my view the BCG report is a must read for investors who want to profit from this fuel efficiency mega-trend and avoid heavy losses in vehicle electrification schemes that will become increasingly uneconomic over time. The fundamental flaw is simple. Today an EV with a fully charged 24 kWh battery pack can save a consumer the equivalent of 3 gallons of gas. By 2025, the savings will be closer to 1.5 gallons of gas. Even with falling battery prices the value proposition can only get more challenging with each passing year.

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

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

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

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

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

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

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

April 15, 2011

Lux Research Confirms that Cheap Will Beat Cool in Vehicle Electrification

John Petersen

On March 30th, Lux Research released an update on the vehicle electrification market titled "Small Batteries, Big Sales: The Unlikely Winners in the Electric Vehicle Market" that predicts:
  • E-bikes and micro-hybrids carry minimal storage, but compensate with high volume. E-bikes show strong unit sales, as they sustain a 157 GWh storage market totaling $24.3 billion in revenues in 2016. Micro-hybrids benefit from increasingly stringent emissions limits, supporting 41 GWh and $3.1 billion in storage sales.
  • Hybrid electric vehicles (HEVs) like Toyota's Prius grow steadily while PHEVs and EVs are at the mercy of external factors. Both PHEVs and EV sales are sensitive to oil prices, but catalyze growth for Li-ion batteries, along with HEVs powering a $2.3 billion market in our base case scenario.
  • Advanced lead-acid batteries will dominate the storage market now and in the future, resulting in a 165 GWh and $16.1 billion market in 2016.  Lithium-ion follows, showing strong growth from 4.1 GWh and $2.7 billion in 2011 to 32.2 GWh and $11 billion in 2016.
Since the report echoes several themes I frequently discuss in this blog, it seems like an opportune time to back away from the minutiae and revisit the broad opportunities for growth in the vehicle electrification sector.

The basic drivers of all vehicle electrification initiatives are the desire to break the economic stranglehold of increasingly expensive petroleum, reduce CO2 emissions and improve air quality in big cities. The major countervailing force is the economic reality that consumers will not sacrifice the flexibility and reliability of internal combustion engines for a more expensive alternative that doesn't offer a compelling value proposition. Governments and EVangelicals are pushing hard for flashy EV solutions with miserable economics, but Lux believes cheap will beat cool over the next five years.

Electric Two-wheeled Vehicles

In Lux's view, the runaway winner over the next five years will be e-bikes – the most energy efficient transportation in the world. It expects battery sales for e-bikes to double from $12 billion in 2011 to $24.3 billion in 2016. While roughly 85% of today's e-bikes use lead-acid batteries because they cost less, Lux expects lithium-ion batteries to garner an 18% market share in China by 2016, which implies a global market share of closer to 30%. As an avid cyclist who understands the impact of extra weight on a bicycle, I think Lux's market penetration forecast for lithium-ion is low. Lead-acid may retain its dominance in China, the world's biggest e-bike market, but I'm convinced that lithium-ion will be the battery of choice in North America and Europe where e-bikes are rapidly gaining ground.

Lux expects a limited market for e-bikes outside of China, but I think it's a market that could surprise people who haven't really considered the mobility needs and transportation budgets of young adults and cost-conscious commuters. E-bikes are not an all weather solution, but on a pleasant day a $1,000 e-bike is far more attractive than alternatives that cost thirty to fifty times more and can't come close in the fun per mile category.

I've been following Advanced Battery Technologies (ABAT) for a couple years and have been impressed by its cost control and business strategy. It began as a low cost manufacturer of commodity lithium-ion batteries and then expanded into e-bike manufacturing. It's growth rates and profit margins are impressive enough that I've often said ABAT is too cheap to be cool. ABAT's stock price recently tumbled by over 40% when Variant View Research, an acknowledged short seller, published three "hatchet-job" articles that were highly critical of its operations, financial reports and corporate governance. Since I don't want to jump into the middle of a dogfight, I'll simply note that ABAT is the only publicly held pure play in the e-bike space and seems to have a bright future as a vertically integrated manufacturer of e-bikes, the most popular electric vehicles in the world.

Micro-hybrids

The second biggest market over the next five years will be micro-hybrids, conventional internal combustion vehicles that simply turn the engine off when the car is stopped and restart the engine when the driver takes his foot off the brake. In an earlier report titled "Micro-hybrids: On the Road to Hybrid Vehicle Dominance," Lux forecast that the micro-hybrid market would grow from three million units this year to 34 million units a year by mid-decade. The primary drivers of growth will be strict new European CO2 emissions rules and ambitious new CAFE standards that will be phased in over the next few years. According to Lux "micro-hybrids sit in an enviable position as a cost effective approach to improve fuel efficiency, since their start-stop and regenerative braking capabilities can be implemented in the OEMs' current stable of vehicles, without the more drastic redesigns needed to create a full EV, PHEV, or HEV." Overall, Lux believes the market for advanced batteries in micro-hybrid vehicles will grow from $495 million this year to $3.1 billion by 2016.

Competition in the micro-hybrid battery space is intense and diversified. Johnson Controls (JCI) and Exide Technologies (XIDE) are both offering a variety of advanced lead-acid batteries for micro-hybrids that range from enhanced flooded batteries to valve regulated absorbed glass mat batteries. With their global manufacturing footprints, established OEM relationships and proven manufacturing competence both companies should benefit from impressive growth in OEM battery sales over the next five years.

While advanced lead-acid batteries currently dominate the micro-hybrid battery market, there is a growing body of proof that advanced lead-acid batteries are ill suited to the demands of micro-hybrids. In a 2007 Journal of Power Sources article, a team of battery researchers from Ford described the problem as follows:

"Charge acceptance, particularly at low temperatures, is a battery requirement that determines the charge balance of the power supply system. The more the battery has to contribute to supplying electrical loads, the more essential it becomes that it can be recharged quickly. ... [A]dvanced HEV applications will require good charge acceptance in a dynamic discharge/charge micro-cycling operation. We call this feature dynamic charge acceptance (DCA). In the particular case of lead/acid batteries, DCA capability is extremely sensitive to the short-term previous charge/discharge exposure of the battery."

At last September's European Lead Battery Conference in Istanbul (the ELBC) Ford and BMW jointly proposed a new battery testing protocol for micro-hybrids. Under the protocol a 60-second engine off cycle will require 39,600 watt-seconds of energy. Of that total, 36,000 watt-seconds will be used to support accessory loads during engine off interval and the remaining 3,600 watt-seconds will be used to re-start the engine. Until the 39,600 watt-second discharge is recovered, the stop-start system will be disabled. Since a disabled stop-start system can't save fuel by turning off the engine at a stoplight, dynamic charge acceptance is rapidly emerging as one of the important battery performance requirements for micro-hybrids, if not the most important one.

The big drawback of using enhanced flooded batteries and AGM batteries in micro-hybrids is that their dynamic charge acceptance degrades over time. While a new battery needs about 30 seconds to recover from an engine-off event, it can take three minutes or more when a battery's been in service for a year. Since city driving typically offers one or two engine-off opportunities per mile, pushing the battery recovery time from 30 seconds to three minutes or more has a very negative impact on fuel economy.

The following graphs come from the BMW-Ford presentation at the ELBC and show how the dynamic charge acceptance of an AGM battery degrades over time. The graph on the left shows what happens if the generator is disabled for seven seconds after restart to maximize the engine power available for acceleration. The graph on the right shows what happens if the generator kicks in immediately. The downward curving blue lines show the amount of current the battery can accept as the number of stop-start cycles increases. The upward curving black scatters with red overlays show the time required for the battery to regain an acceptable state of charge. The simple summary is that both batteries performed poorly and lost most of their dynamic charge acceptance capacity in a matter of months.

4.13.11 VRLA.png

While advanced lead-acid batteries are currently the best available choice for micro-hybrids, their market dominance is vulnerable because dynamic charge acceptance is so critical. As the market matures, I believe automakers will choose batteries for micro-hybrids on the basis of detailed cost benefit analysis that includes lifecycle fuel economy. When all costs are accounted for, I believe emerging energy storage technologies will gain the upper hand.

Three advanced battery developers have disclosed alternative approaches to the micro-hybrid market.

The first design win from Peugeot-Citroën went to a three-component system from Continental AG and Maxwell Technologies (MXWL) that combines an AGM battery and control electronics from Continental with a small supercapacitor module from Maxwell. In this system, the AGM battery carries the 36,000 watt-second accessory load and the supercapacitor picks up the 3,600 watt-second starter load. While this three-component approach will reduce battery strain by shifting the starter load to the supercapacitor, it can't eliminate the gradual loss of dynamic charge acceptance in the AGM battery that does the yeoman's share of the work.

A second design win from an undisclosed OEM has reportedly gone to A123 Systems (AONE), which has been testing a lithium-ion micro-hybrid battery solution for the last few years. Given the charge acceptance characteristics of A123's lithium-ion chemistry, I believe its stop-start solution will perform well and avoid the dynamic charge acceptance issues that plague advanced lead-acid batteries. The big questions will be cost and cold weather performance. Until A123 releases more details on its micro-hybrid solution, it will be hard to assess its competitive position.

The third contender for a share of the micro-hybrid market is Axion Power International (AXPW.OB), which is working with several automakers and has progressed far enough in its relationship with BMW that the two companies made a joint technical presentation at last year's ELBC. While it's not unusual for an automaker to enter into a development contract or supplier relationship with a micro-cap, I'm not aware of another case where an automaker shared the podium with a battery developer at an industry conference. A more surprising development was a brief conference call reference to a grant application under the DOE's Vehicle Technologies Program that Axion filed as a co-applicant with a major automaker. To the best of my knowledge, this is the first time an automaker has joined in a DOE grant application with a component developer. While the details remain sketchy, the DOE plans to make its award decisions by late June and fund in the third quarter.

Axion is not currently producing PbC batteries for commercial sale to customers. It has recently installed a second-generation automated production line for its patented carbon electrode assemblies and is engaged in manufacturing process, quality control and product performance validation activities with potential customers. Until that work is completed, a design win or production contract will remain out of reach.

EVs, PHEVs and HEVs

While Lux forecasts that EVs, PHEVs, and HEVs will command a solid chunk of storage revenue because of their high per vehicle battery costs, Lux doesn't "expect EVs or PHEVs to take the world by storm, and sees steady but not explosive growth from HEVs." Lux said that consumer acceptance of the GM Volt and Nissan Leaf is "anything but a certainty" and noted that early results indicate only 40% of the non-binding pre-orders for the Nissan Leaf are turning into purchases. It cited high battery costs as a major obstacle to making electric vehicles cost effective. Overall Lux believes that light and heavy PHEVs will depend on high oil prices and "EVs will disappoint in all scenarios." As a product class, Lux predicts that battery sales for EVs, PHEVs, and HEVs will grow from $710 million this year to $2.1 billion in 2016. Since there are so many competitors in the EV, PHEV and HEV markets, it's hard to pick likely winners and I'd rather watch from the sidelines.

Heavy Vehicles

The last class of vehicles considered by Lux was delivery trucks, city buses and railroad locomotives. It forecast that sales in the heavy vehicle segment would grow from $110 million in 2010 to $642 million in 2016. A number of energy storage technology developers are active in the heavy vehicle segment including:
  • Maxwell, A123, Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC), which are actively marketing energy storage systems for hybrid and electric buses and delivery trucks; and
  • General Electric (GE) and Axion Power, which are developing battery systems for hybrid locomotives and retrofit solutions for the existing locomotive fleet.
While there are too many competitors to pick likely winners in the highway vehicle markets, I'll continue watching the railroad market with interest because the existing locomotive fleet includes 24,000 units nationwide and implementing hybrid drive in a train is relatively simple because of the ability to mix and match conventional diesel locomotives and retrofitted electric locomotives to meet the power and recuperative braking needs of a specific load and route.

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

March 18, 2011

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

John Petersen

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

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

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

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

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

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

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

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

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

In their discussion of storage economics, the authors said:

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

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

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

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



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

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

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

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

March 06, 2011

Alice in EVLand – Cracks in the Looking Glass

John Petersen

In his 2006 State of the Union Address, President George W. Bush said:

"Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology."

What a crock of balderdash! If you compare US fuel prices with those in other industrialized countries, gasoline is a screaming bargain and the same can be said for electricity. It's not the energy we use that's a problem. The problem is the immense amount of energy we waste, and that problem will keep getting worse until higher prices force us to change.

The world can't stop using oil without immeasurable suffering. Since we can't simply quit, the best we can do is accept the ugly truth that we're all wasteful petroleum gluttons who need to cut our consumption to more sensible levels. You don't cure drug addiction with better and cheaper drugs, and we can't cure our oil addiction with magic technologies mandated by Congress. We must accept personal responsibility and change our wasteful habits instead of blaming others or looking for a painless solution. In the final analysis, the solution to our problems is visible in every looking glass we pass.

Three weeks ago I wrote "Alternative Energy Technologies and the Origin of Specious," an article that examined the serial failures of panacea energy policies that promised independence without pain. Since then I've seen a number of reports that strike me as cracks in the EVLand looking glass, including:
  • A February 28th earnings release from A123 Systems that reported 69.2 million watt-hours of battery shipments, $73.8 million of battery sales, and $94.3 million of production costs for the year ended December 31, 2010; which pencils out to an average customer price of $1,067 per kWh and an average production cost of $1,363 per kWh.
  • A March 2nd report from hybridcars.com that cumulative sales of the GM Volt and Nissan Leaf for the first two months of this year were a whopping 756 units, as compared to cumulative HEV sales of 42,726 units.
  • A March 3rd Bill Ford Jr. interview at the ECO:nomics Conference where he characterized the Volt and Leaf as "talismanic vehicles" and expressed grave reservations about meaningless sales projections, the lack of charging infrastructure and the grid's ability to support electric vehicles if they ever became mass market products.
Many readers assume that I have an irrational hatred of electric vehicles and the companies that make them when in truth my only concern is whether those companies are good investments at current prices. During his recent presentation at the United Nations Climate Change Conference in Cancun, Dr. Steven Chu, the Secretary of Energy, said:

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

***

Now, how soon will that be? Well, we don't know, but the Department of Energy is supporting a number of very innovative approaches to batteries and its not like its 10 years off in the future, in my opinion. It might be five years off in the future. It's soon. Meanwhile the batteries, the ones we have now, will drop by a factor of two within a couple of years and they're gonna get better. But if you get to this point, then it just becomes something that's automatic and I think the public will really go for that."

When Dr. Chu tells the world that battery manufacturers won't have a competitive product unless their prices fall into the $300 per kWh range and A123's annual earnings release reports that their production costs overshot that goal by a whopping $1,000 per kWh last year, I don't see a lot of upside potential. When a poorly capitalized company like Tesla Motors trades at 11.5 times book value and 20.4 times last year's sales I wonder what the markets are smoking. When more than half of Ener1's equity is in mushy balance sheet categories like intangible assets, goodwill and investments in money losing subsidiaries, I can't help but think back to the asset impairment charges that crushed C&D Technologies last year. I'm completely baffled by the valuation disconnect at Valence Technologies which is upside down to the tune of $67 million but sports a $243 million market capitalization.

I hate to be the bearer of bad news, but these companies are just starting their journey into the valley of death. They may survive the trek, but their bloated stock prices can't. The EV dream may be beautiful, but for the next decade EV investments will be ugly as sin.

Each of us knows that we need to go on a petroleum diet, but none of us is willing to starve in the process. For the next decade, at least, the only real solution will be aggressive steps toward increasing fuel efficiency. Observant investors saw the writing on the wall when the EU and the US adopted stringent new CO2 emissions and fuel economy regulations that will start taking effect this year. I saw the impact last week in Geneva where the press headlines gushed over grand plans for plug-in cars but the vehicles on display proved that manufacturers are turning to diesel and natural gas fuel systems, direct fuel injection, dual clutch transmissions and stop-start systems as their mass market solutions. We all know that actions speak louder than words. I'm here to tell you the automakers' actions don't have plugs.

Two weeks ago I identified a list of five fuel efficiency stocks that should outperform the market by a wide margin over the next couple years because the die is cast and the solutions are being implemented today. To keep things interesting, I'll use last Friday's closing prices to formalize that list in a hypothetical $25,000 long portfolio structured as follows:

Company Symbol Shares Investment
Johnson Controls JCI 121 $4,998.51
Enersys ENS 139 $4,984.54
Maxwell Technologies MXWL 281 $4,993.37
Exide Technologies XIDE 431 $4,995.29
Axion Power AXPW.OB 6,172 $4,999.32
Cash

$28.97
Total


$25,000.00

I'll also use last Friday's closing prices to formalize my long-standing and oft-repeated position on vehicle electrification with a hypothetical $25,000 short portfolio structured as follows:

Company Symbol Shares Investment
Tesla Motors TSLA -200 -$4,990.00
A123 Systems AONE -599 -$4,995.66
Ener1 Inc HEV -1,428 -$4,998.00
Altair Nanotechnologies ALTI -1,953 -$4,999.68
Valence Technology VLNC -3,144 -$4,998.96
Cash

$49.982.30
Total


$25,000.00

In coming months I’ll revisit both hypothetical portfolios on a regular basis and either gloat or eat crow as the circumstances dictate. It will be fascinating to see whether the cracks in the looking glass spread or heal themselves.

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

February 28, 2011

Kandi Technologies (KNDI) Revisited

Company Delivers Electrifying Performance But Stock Gets Shocked.

Arthur Porcari

What’s that old Wall Street saying. “No Good Deed Goes Unpunished”?  Well, management and shareholders of US listed, China based, always profitable uncontested leader in Electric Vehicle (EV) manufacturing and “Quick Battery Exchange” (QBE) development, Kandi Technologies (NASDAQ-KNDI), know the feeling well. As of now, five months after I published my first article on KNDI, the stock, which subsequently more than doubled on incredible volume, has now made a full round trip and is back to where it started. This in spite of significant business advances and a total absence of negative news. Even more incredulous is the 20+% drop last week at a time when oil prices surged above $100bbl, PRC raised gas prices to a record of over $4.30 a gallon, and Beijing had the following revelation:

Beijing air worse than 'hazardous'

 Bloomberg News February 25, 2011 3:10 AM

Beijing's air quality early this week was worse than "hazardous," the lowest rating on an index used by the U.S. Embassy in the Chinese capital to measure conditions, and was classified as "Beyond Index."
Heavy fog and the addition of almost 900,000 automobiles to Beijing's roads last year have contributed to the deteriorating air quality…”
If there every was a positive “Perfect Storm” brewing for a Company, KNDI, now having begun sales in China of its line of three PRC approved (two, full road speed and subsidies eligible) pure EV’s selling for $6-10,000 before subsidy, should be in the “eye” of it.
Five months ago as a Wall Street unknown, KNDI stock was quietly resting in the low 3’s.  At that time I published a multi-part article which was quickly picked up by EV Internet news services and blogs around the world introducing KNDI. As you can see from the chart below, the effect was immediate and significant to the stock price.

Let me again make my position clear as I have on past articles. Though since my first writing, I have personally visited the company and management in Jinhua China, I do not have, nor do I care to have any access to information not available to anyone who takes the time to do good due diligence.  Aside from what I, along with four other investors saw when we visited the Company last November, (which did not include any restricted information), what I publish is made up of public information in the form of past filings, press releases, active use of Google’s on-line translation features scouring Chinese websites, and of course my opinion.

Exceptional Company Execution

If you are new to KNDI, or need a refresher, I strongly suggest you read my past Seeking Alpha articles on KNDI which can be accessed through the links below. It now appears that my revenues and earnings prognostication for 2010 year end stated in my September article will apparently prove to be too high. This miss is primarily due to a few months delay in State Grids’s (China’s dominant electric utility and KNDI partner) completion of its Main Battery Charging Farm in Jinhua.  This in turn delayed initial sales to only the last five weeks of the year. I think you will find that most other speculations I made have not only come to pass, but in many cases were far exceeded.

This chart shows a chronology of events that have taken place since my first article. I have created a corresponding letter on the chart for each published event to the headlines below. Several of the headlines are from Seeking Alpha articles I wrote giving my “take” on prior events. These articles are annotated by the (SA) after the date. Articles annotated (AES) first appeared on AltEnergyStocks.  My point in listing these events is twofold; one to show there was no negative event to cause the drop in the stock price and two to give the reader quick reference to advances made.   

Annotated KNDI chart


Why Electric Vehicles must succeed

Rapidly growing China with its 1.3 billion population may rank second to the US in World Purchasing Power as seen from the table below, but the following comparison of motor vehicles per capita shows a disparity, which based on “Peak Oil” assumptions leaves little room to even noticeably “close the gap” let alone allowing a catching up with internal combustion (ICE) vehicles. With China’s massive coal and hydro resources along with aggressive building of Nuclear Power Plants, there is no reason they must rely on ICE’s.


Top 10 Countries, as listed by PPP GDP
Ranking Country Approximate GDP- Purchasing Power Parity
1 United States of America $13,860,000,000,000
2 China $7,043,000,000,000
3 Japan $4,305,000,000,000
4 India $2,965,000,000,000
5 Germany $2,833,000,000,000
6 United Kingdom $2,147,000,000,000
7 Russia $2,076,000,000,000
8 France $2,067,000,000,000
9 Brazil $1,838,000,000,000
10 Italy $1,800,000,000,000
Source: Economy Watch

China vehicles
US vehicles
Source:TradingEconomics-US


The tables above compare as of 2008 China to the US in per capita motor vehicle ownership (cars, trucks, buses and freight but not 2-wheelers), China on top with 32.2 motor vehicles per thousand population as compared to the table on the bottom for the US with 819.8. On this basis, stunningly, China stands in 2008 where the US stood in 1915.  Considering China’s current population exceeds the US by four fold, it should clearly be evident, even ignoring the rest of the rapidly growing emerging economies, that alternative energy vehicles will soon be mandatory in China, (for that matter, every country irrespective of the price of oil). Thankfully China understands and has made it quite clear it intends to be the world leader in vehicle electrification. A realistic situation made easier for the country since it has totalitarian control over its infrastructure for “refueling solutions”, plenty of cash for initial subsidies and an emerging middle class that can grow into EV’s, rather then be coaxed away from gas powered vehicles.

US Stock Trading Comparisons

As of this writing, there are really only three relatively pure EV US traded stocks for US investors to speculate on this rapidly emerging potential trillion dollar pure EV space.   Listed on NASDAQ is Tesla Motors (TSLA) and (KNDI), and ZAP which trades on the OCTBB (ZAAP).

The table below shows a general comparison I put together of some key numbers of the three companies. TSLA’s numbers came from filings, press releases and a JP Morgan research report; ZAAP’s from recent press releases and SEC filings; and KNDI from press releases and SEC filings. Estimates for ZAAP and KNDI were derived by me based on information gleaned from press releases.  

TSLA ZAAP KNDI

US based TSLA’s current market cap puts it at around 23 times JPM research 2014 estimate of $1.07 a share. Now this report was put out late last Summer, about the same time BYD (BYDDF.PK) was sure it would sell at least a few thousand of its e6 EV’s between China and the US by the end of 2010. As it turns out, KNDI’s sales of 20 KD5010’s on the first day of sales in China surpassed the total number of BYD e6’s sold through the end of October. And, though some $10,000 cheaper then TSLA’s $50,000 after tax subsidy Model S, BYD has now skipped a year and doesn’t plan on bringing the e6 to the US until 2012. Thus, bringing it more then a year behind schedule.

Lets call a spade a spade. TSLA is trading at its lofty levels for two main reasons. It’s charismatic CEO, Elon Musk, knows how to spin a story and there are a whole lot of “Green” funds that were formed after President Obama took office and promised a plethora of Green companies would soon be blanketing the country. This hasn’t happened, so those Funds have to put their money somewhere. Though in an excellent space, my bet is that TSLA is going to give a big shock to a lot of wallets in the not distant future.  The fact that “money pit” TSLA has a market cap twenty times always profitable KNDI is, IMO, incredulous.   

California based ZAP (ZAAP) is probably a company that most don’t realize is now a possible “contender” in the EV space, both in the US and China. But for those who do, I suspect they don’t truly realize how expensive this entry was. I can’t imagine how this stock can currently be trading with diluted market cap of $385 million. And this is well down from the over half billion market cap it had in early January right after it completed and announced a multi-part macro private share placement at around $.24 a share with a lot of $.25 warrants totaling some 200 million shares. The placement was used to raise $30 million to buy 51% of a Jonway Automobile a Chinese gas powered carmaker who had supposed revenues last year of around $77 million.

As stated in their Jan. 25 PR, “With ZAP’s electric vehicle (EV) technology expertise and international experience, the combined company intends to build the necessary production platform to address the Chinese EV market,” they plan on taking their 16 years as a “pioneer in the electric vehicle industry since 1994, engaging in the design, development, commercialization and distribution of 100% pure electric vehicles and power systems,..” and teach this Chinese company how to convert their gas powered cars to EV’s.  Who knows? After generating some $4 million in revenues in 2010 and accumulating a deficit of $143 million over the years developing their “expertise”, maybe they have finally learned a secret or two to teach the Chinese about EV’s.

OK, so back to KNDI. KNDI, like all players in this new EV space doesn’t have a heavy EV track record. But they have sold close to 4,000 mini-ev’s over the past couple of years. Know any other near pure play company in the space that can make such a claim? As seen by his short bio, KNDI’s  CEO, while not high profile, does have an impressive EV background in China. Take this excerpt:

 “From October 2003 to April 2005, Mr. Hu was the Project Manager (Chief Scientist) in WX Pure Electric Vehicle Development Important Project of Electro-vehicle in State 863 Plan.”  

Incorporated in “State 863 Plan” was the genesis of China’s current push to be the world leader in EV technology. The “WX” in the above quote is Wanxiang, China’s largest diversified EV Company, the same Wanxiang that caused Ener1 (HEV) stock to jump 65% on 21 million shares on Jan. 18th on an announcement of a joint venture between the two.  But enough on history, let’s look to the future.

A potential major win for KNDI

For those who have not been following KNDI, but clearly evident in Company announcements going back to the January 2010, KNDI has been leading a coalition of energy giants in China for a “Quick Battery Exchange” (QBE) solution whereby the consumer pays only for the car, and effectively “rents” the expensive battery.  The “rent” is effectively paid by a small surcharge each time the battery is exchanged. This model was put into limited commercial operation by KNDI through the Joint Venture with State Grid in Jinhua in late November, 2010 as an experimental alternative to just plugging the car into a charging post and waiting several hours for recharging. KNDI was at the forefront of this potential paradigm shift due to its ownership of several patents as can be seen by this State Grid announcement on its website.

In January of this year, through subtle but telling comments by PRC owned State Grid, it now appears that QBE has been selected as a major “Standard” for re-electrification of China EV’s. To date KNDI has been silent as to this potentially monumental Company event, in wait for a more definitive announcement by the PRC. Currently it appears there are two QBE models in operation. There is of course KNDI’s “side slide” model as can be seen by this video clip that was taken with a cell phone on my trip to the Company in November, and the second “rear load”, that can be seen in this video clip. The significance to KNDI is not that the Company expects their mode of QBE to be selected exclusively; it is that the concept of QBE seems now to be a chosen “standard” which in turn gives KNDI’s model already in operation with State Grid a major advantage over future competitors.

Valuation

With its current $100 million market cap, the stock is currently trading around replacement cost of just its land and buildings, plus $25 million working capital excess which should soon be apparent with the soon to be released 10k. The current market is giving no value for its always profitable and growing legacy business, let alone value for its China potential. Let’s look at that potential.

Non-China legacy business should reach $50 million in sales in 2011. That should generate non-GAAP net of $.35-.40 a fully diluted share. Each 5,000 cars they sell in China should add another $.30-35 per share. Considering the cost to a consumer after subsidy will only be around $3000, this should not be an unrealistic number and could just as easily be a multiple with some government or fleet orders.

If and when they reach the 100,000 car per year level, which would still make them a minuscule player in a 20 million car a year market, per share earnings would be in the $8-9 a share level. Put whatever PE you want on that type of growth.

Bottom Line

If the market has taught us anything over the last couple of years, EVERY stock is a speculation, no matter how blue chip. Each investment should be looked at from a risk/reward point of view. Based on its 9 year history (3.5 trading in the US) KNDI management has done an exceptional job of growing the Company in spite of the stock price.  The current “disconnect” between the current business and China potential has, IMO, created an incredible upside with negligible downside leaving me confident that KNDI will reward its shareholders with a multi-billion dollar company irrespective of who the shareholders are when that milestone occurs.  

DISCLOSURE: Long KNDI

Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He blogs on Seeking Alpha under “Corstrat” and has been an on-air guest as well has a guest host on Business Talk Radio Network.  His passion and expertise is for small cap emerging growth companies.

February 16, 2011

Alternative Energy Technologies and the Origin of Specious

John Petersen

Thanks to a recent comment from JLBR, I've found a new hero in Dr. Peter Z. Grossman, an economics professor from Butler University who cogently argues that government attempts to force alternative energy technologies into an R&D model that was created for the Manhattan Project and refined for the Space Program will always result in commercial disaster because "the goal of the Apollo Program was the demonstration of engineering prowess while any alternative energy technology must succeed in the marketplace." In a recent article titled "The Apollo Fallacy and its Effect on U.S. Energy Policy" Dr. Grossman summarized the problem as follows:

"The Apollo fallacy has been detrimental to the development of effective energy policies in the US [and] instead of asking what kinds of programs might be useful, the government holds out the promise of a technological panacea to be delivered simply by an act of Congress. The prospect of an energy panacea actually has some political benefits. It allows politicians to claim that they can provide simultaneously the two outcomes most Americans seek from energy policy: low energy prices and energy independence. In fact, with conventional resources these goals are mutually exclusive. To get low prices, the government should provide incentives to drill for oil and gas not just in the US but also in places where they might be exploited more cheaply – of course making the nation more dependent on outside sources. To lessen dependence (true energy autarky is not a feasible goal) on foreign resources, the only method government can use with conventional resources is to raise prices through taxes. But a new technology presumably can to both at once: provide cheap, US-made energy. Unfortunately, the history of energy programs argues that the pursuit of a technological-commercial panacea will fail."

In a 2008 white paper titled "The History of U.S. Alternative Energy Development Programs: A Study of Government Failure," Dr. Grossman started with the Eisenhower Administration's wildly optimistic plans to commercialize nuclear fission reactors for civilian electricity and offered a brief history of serial energy policy failures including:
  • The Nixon and Ford Administrations' support for synthetic fuels from coal and oil shale;
  • The Carter Administration's support for synthetic fuels, nuclear fusion and ethanol; and
  • The Clinton Administration's "Partnership for a New Generation of Vehicles" that failed miserably while privately funded initiatives from Toyota and Honda were remarkably successful.
My additions to Dr. Grossman's list would include Bush the Younger's support for fuel cells, the hydrogen economy and corn ethanol, and the Obama Administration's support for vehicle electrification and alternative energy in general.

These ambitious energy policies all shared three fatal flaws:
  • An inability to distinguish between the technologically possible and the economically desirable;
  • A belief that intervention can force innovation and overcome technical challenges on time and within budget; and
  • A failure to recognize that generous subsidies invariably lead to increased demand for more generous subsidies.
The end result has always been grandiose, unrealistic and extravagant mandates that resulted in catastrophic losses for naive and credulous investors who bought the hopium.

For over sixty years, the government has consistently and predictably failed to understand that industrial revolutions arise from technologies that are perfected by entrepreneurs and prove their value in a free market. The government can accelerate advances in basic science and engineering when cost is not an object, but it can't make technologies cost-effective or ignore the realities of a resource-constrained world. The following cartoon from Jan Darasz appears in the most recent issue of Batteries International Magazine and may overstate the problem a bit, but only a tiny bit.

2.16.11 Daraz Cartoon.png

During the "Sputnik moment" discourse in his recent State of the Union Address, President Obama promised to spend billions of taxpayer dollars to put a million plug-in vehicles on the road by 2015. Back in the business world, Johnson Controls (JCI) and Exide Technologies (XIDE) are spending their own money, together with a $34 million ARRA battery manufacturing grant, to build factories that will make AGM batteries for 14.7 million micro-hybrids a year by 2014. The President's plan will save up to 400 million gallons of gas per year by 2015. The 56 million micro-hybrids that will be built during the same time frame using AGM batteries from JCI and Exide will save 1.6 billion gallons of gas per year. Last time I checked, spending millions to save billions of gallons of gasoline was more sensible than the inverse.

I've frequently argued "Alternative Energy Storage Needs to Take Baby Steps Before it Can Run." A favorite quote from William Martin's novel "The Lost Constitution" says it all – "In America we get up in the morning, we go to work and we solve our problems." Unfortunately government programs never use the tools that are readily available to do the work. Instead they impede sensible actions like using compressed natural gas instead of gasoline and let urgent problems fester while new, exotic and politically popular technologies are invented and refined, but never commercialized. A cynic might suggest that it's a great way for a politician to kick the can down the road while deferring blowback from policy failures and unintended consequences until his successor takes the oath of office.

We have 60 years of experience that proves well intentioned but ill-conceived government alternative energy technology initiatives aren't doing the job. Investing $46 of capital to save a gallon of gasoline with a plug-in vehicle is foolish when you can save that same gallon of gasoline with a $24 capital investment in an HEV. Taxing Peter to underwrite the cost of Paul's new car will impoverish the masses instead of empowering them. Using imported metals to make non-recyclable batteries for the purpose of conserving more plentiful petroleum has all the intellectual integrity and economic appeal of using cocaine as a weight loss supplement.

There are solid growth opportunities in the domestic energy storage sector. JCI and Enersys (ENS) both trade at about eighteen times earnings while Exide trades at about twelve times earnings. In the more speculative small company space, Axion Power International (AXPW.OB), ZBB Energy (ZBB) and Beacon Power (BCON) all present intriguing value propositions as they emerge from the trough of disillusionment and begin to build industry relationships and revenue by proving the value of their products one baby step at a time.

I'm convinced that every manufacturer of energy storage devices that brings a cost-effective product to market will have more business than it can handle as dwindling global energy supplies make storage more cost-effective than waste. That conviction, however, does not extend to market darlings like Tesla Motors (TSLA), A123 Systems (AONE) and Ener1 (HEV) who owe their high profiles and huge swaths of their balance sheets to government largess and glittering promises of an all-electric future once they prove that their wonder products work in the hands of normal consumers and learn how to manufacture better than Toyota Motors (TM), Sony (SNE), Panasonic (PC) and a host of lesser industrial luminaries that have proven their capabilities with decades of successful execution.

Over the last several months I've become convinced that a transition from gasoline to compressed natural gas may be one of the great opportunities of our age. Natural gas is abundant and clean, and an easy domestic substitute for imported oil. While I don't know as much as I'd like to about fiscal multipliers, I have to believe a massive shift from imported oil to domestic natural gas would reduce energy costs to consumers, slash CO2 emissions, generate trillions in additional GDP and go a long way toward ameliorating the looming deficit spending crisis many observers predict.

Just yesterday, the 2011 Honda Civic GX, a conventional vehicle with a CNG fuel system, tied with the all-electric Nissan Leaf for top honors in the American Council for an Energy-Efficient Economy's list of the Greenest Vehicles of 2011, a position it's held for eight years in a row. The Toyota Prius came in fourth, well ahead of the GM Volt, which came in seventh. I can only imagine what the ACEEE ratings would look like if Honda added a hybrid drive to the Civic GX or Toyota added a CNG fuel system to the Prius.

Mark Twain observed that "history doesn't repeat itself but it does rhyme." When it comes to specious and ill-conceived alternative energy technology initiatives that originate on the banks of the Potomac and rapidly mutate into bad investments, I can't help but wonder whether we're just hearing another chorus from the same old song – 99 Bottles of Energy on the Wall.

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

February 13, 2011

Distinguishing HEV Efficiency from Plug-in Vehicle Waste

John Petersen

Over the last couple years I've frequently argued that plug-in vehicles are inherently wasteful on a micro-economic and a macro-economic level. Unfortunately complex economic proofs are hard to grasp at a glance and my biggest challenge has been finding a simple proof for a patently obvious truth that can't be distorted by flimsy assumptions or misconstrued with rosy forecasts. I hope today's article will drive a stake through the undead heart of plug-in vehicle efficiency claims.

To keep it simple, I'll use the Camry Hybrid from Toyota Motors (TM), the Leaf from Nissan Motors (NSANY.PK) and the Roadster from Tesla Motors (TSLA) as examples.

The Camry Hybrid has an EPA fuel economy rating of 31 mpg city and 35 mpg highway while its conventional sister has an EPA fuel economy rating of 22 mpg city and 33 mpg highway. The Leaf and the Roadster both have EPA fuel economy ratings of 99 mpge. To achieve their fuel economy ratings, the Camry uses a 1.3 kWh NiMH battery pack, the Leaf uses a 24 kWh lithium-ion battery pack and the Roadster uses a 56 kWh lithium-ion battery pack.

If we assume that all three vehicles will have a 10-year life and be driven an average of 12,500 miles per year, the following table summarizes the electric drive miles achieved per kWh of battery capacity.


Camry Leaf Roadster
10-year mileage 125,000 125,000 125,000
Gasoline miles 88,710 0 0
Efficiency miles 36,290

Electric utility miles

125,000
125,000
Battery Pack kWh 1.3 24 56
Electric miles per kWh 27,916 5,208 2,232
Fuel saved per kWh 931 174 74

The first point that merits attention is that electric miles in a Camry come from using gasoline more efficiently. In contrast, electric miles in a Leaf or a Roadster come from an electric power plant that consumes coal, natural gas or uranium to make the juice that dives the wheels. Electric drive is more efficient than internal combustion if you start your analysis at a full gas tank or battery, but most of that advantage evaporates when you carry the analysis back through the supply chain and factor in all emissions and inefficiencies starting with the oil well or coal mine.

The second point that merits attention is that for every kWh of battery capacity, the Camry is 5.4 times more efficient than a Leaf and 12.5 times more efficient than a Roadster. Batteries are most valuable when they're worked hard and cycled often. From the perspective of a battery, going to work in a Camry is full-time employment on an assembly line, going to work in a Leaf is a part-time job in a donut shop, and going to work in a Roadster is retirement on a beach in Belize.

The reason is simple. HEVs are an efficiency technology that uses a small battery to save 40% on fuel consumption. Plug-in vehicles, in comparison, are fuel substitution schemes that use batteries to substitute electric power for gasoline and replace the fuel tank at a capital cost of $3,750 to $7,500 per equivalent gallon of capacity.

Regardless of chemistry, advanced batteries are terrible things to waste because they require prodigious inputs of scarce mineral resources and are difficult, if not impossible, to recycle economically. They perform wonderfully when they're used to improve fuel efficiency in an HEV, but they perform poorly when they're used as fuel tank substitutes for a plug-in vehicle.

Future gas prices and battery costs will not change the fundamental truth that batteries are five times more efficient in HEVs than they are in plug-in vehicles. Batteries in HEVs eliminate the use of fuel while batteries in plug-ins can only add long tail pipes that substitute a mix of coal, natural gas and nuclear power for gasoline.

In the final analysis, plug-in vehicles are a luxury no nation and no investor can afford.

Disclosure. None

February 06, 2011

Electric Vehicles and the Natural Resource Cliff

John Petersen

We all love to whine and complain about oil prices because we buy gasoline regularly and that makes the price changes obvious. To solve this overwhelming problem, myopic visionaries with rose colored glasses propose a simple solution – convert personal transportation from vehicles powered by oil to vehicles powered by clean, free and renewable electricity from the wind and sun. Like most fairy tales, it can't happen in real life which means it won't. This is not a technology issue. It's a raw materials issue and electric vehicles cannot solve the problem.

In the first three quarters of 2010, the world produced an average of 86 million barrels of crude oil per day. That works out to 0.65 metric tons, or 200 gallons per year, for each of the planet's 6.6 billion inhabitants. There's no doubt about it, oil is a scarce resource – at least until you compare it with metals that are two to five orders of magnitude scarcer. To put oil in its proper perspective, the following table summarizes global production data for several critical natural resources.

Natural
Global Production
Per Capita
Resource
(Metric Tons)
Production
Crude Oil
4,282,736,000
648.9 kg
Iron & Steel
2,400,000,000
363.6 kg
Aluminum
41,400,000
6.3 kg
Copper
16,200,000
2.4 kg
Lead
4,100,000
0.7 kg
Nickel
1,550,000
0.2 kg
Rare Earths
130,000
20 g
Lithium
25,300
4 g

For every thousand pounds of global oil production, we produce ten pounds of aluminum, four pounds of copper, one pound of lead, six ounces of nickel, a half-ounce of rare earth metals and a tenth of an ounce of lithium. No thoughtful investor can compare per capita production of oil and essential metals and rationally conclude that we can increase metal consumption in the name of conserving oil. The resource sophistry can't work in anything beyond technical puppet shows for lazy, impressionable or childish minds.

To make matters worse, metal prices are anything but stable. We ignore changes in metal prices because they're usually buried in the cost of other products. That doesn't mean that metals are a bargain compared to oil or that their prices are any more stable. The following graph tracks market prices for oil and three of our most important metals over the last 20 years. The trend lines are remarkably similar.

2.6.11 Commodity Prices.png

If we even try to significantly increase metal consumption in an effort to conserve oil, the inevitable supply and demand imbalances will quickly eliminate any advantage and simply make the situation worse. In the final analysis, any energy policy or business model that increases metal consumption in an effort to conserve oil must fail. We've already seen the disastrous results of using food to make ethanol for fuel. There will be blood if we follow the same foolish path with metals.

I am a relentless and unrepentant critic of plug-in vehicle hype and propaganda because any plan to use hundreds of pounds of metal to replace a fuel tank must fail. There aren't enough metals in the world to make a dent in global oil consumption and using scarce metal resources to make non-recyclable components like batteries and motors for plug-in vehicles can only make the problem worse. It's sabotage masquerading as a solution.

The only transportation technologies that stand a chance of survival in a resource-constrained world are those that use tiny amounts of metals to conserve large amounts of oil. Electric two-wheeled vehicles work as long as the empty vehicle weight is less than twice the passenger weight. For automobiles, resource effective technologies range from simple stop-start idle elimination at the low end to Prius class HEVs at the high end, although even these technologies can be marginal if the primary components are not easily recycled. The instant you add a plug the resource balance goes to hell in a handbag along with the investment potential.

All the political will, good intentions and happy-talk forecasts in the world cannot change the ugly facts. We’re driving toward a natural resource cliff at 120 mph and fiddling with the dials on the navigation system.

With the exception of Advanced Battery Technologies (ABAT) and Kandi Technologies (KNDI), which have the common sense to focus on entry-level two- and four-wheeled electric vehicles with minimal natural resource inputs, the entire electric vehicle sector is a bug in search of a windshield. It doesn't matter how cool the products are if there will never be enough affordable raw materials to make them in meaningful volume.

Several companies that I follow have no chance of survival when their business models are analyzed from a resource sustainability perspective. The list includes Tesla Motors (TSLA), Ener1 (HEV), A123 Systems (AONE), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI). In each case their products have extreme natural resource requirements and little or no end-of-life recycling value. They will compound our problems, not solve them.

Several other companies that I follow have good resource sustainability profiles because their products can make major contributions to oil conservation without putting undue strain on global metal production. My list of sustainable companies includes Johnson Controls (JCI). Enersys (ENS), Exide Technologies (XIDE), Beacon Power (BCON), ZBB Energy (ZBB) and Maxwell Technologies (MXWL). In each case their products have moderate resource requirements and high end-of-life recycling value.

There is only one energy storage company that can offer better performance and lower resource requirements in the same product – Axion Power International (AXPW.OB). Its serially patented PbC battery technology uses 30% less lead than a conventional lead-acid battery, boosts cycle life and dynamic charge acceptance by an order of magnitude, and retains the recycling advantages of lead-acid batteries, the most recycled product in the world. The unique performance characteristics of the PbC technology are proven and the principal remaining risk is further refining fabrication equipment and processes for Axion's carbon electrode assemblies. When Axion's equipment, processes and products complete the final stages of validation testing by its principal potential customers, the technology can be easily ramped to a global footprint within a few years for a fraction of the cost of other emerging energy storage technologies.

Axion has never been a stock market darling because its management speaks in the past tense and focuses on challenges overcome, milestones passed and goals accomplished. As a result of its low key approach to the financial markets, Axion carries a $54 million market capitalization despite the fact that its disclosed industry and customer relationships include East Penn Manufacturing and Exide Technologies, the second and third largest lead-acid battery manufacturers in North America, Norfolk Southern (NSC), the fourth largest railroad in North America and BMW, one of the most highly regarded automakers in the world. Any time a tiny company with a transition stage technology can quietly build relationships with several world-class companies, astute investors should pay attention.

Seven years ago I believed Axion had an honest shot at the big leagues. Today I think I may have set my sights too low. The progress I expect won't happen overnight, but it will happen long before we see a million plug-in vehicles on the road in the United States.

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

January 27, 2011

Electric Vehicles – The Opportunity of Which Decade?

John Petersen

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

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

1.26.11 Valley of Death.png

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

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

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

1.26.11 HEV Sales.png

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

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

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

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

1.26.11 Horse Tractor.jpg

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

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

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

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

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

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

January 19, 2011

Alice in EVland Part III; Cost Benefit Analysis For Dummies

John Petersen

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

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

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

1.20.11 Electrification Table.png

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

1.20.11 Cost Graph.png

It doesn't matter whether you use fuel savings or CO2 abatement as your preferred metric. Vehicles with plugs simply can't deliver anywhere near the bang for the buck that their simpler and cheaper hybrid cousins offer.
  • In the four hybrid categories, the average capital cost per gallon of annual fuel savings is $24 and the average capital cost per kg of annual CO2 abatement is $2.24.
  • In the two plug-in vehicle categories, the average capital cost per gallon of annual fuel savings is $46 and the average capital cost per kg of annual CO2 abatement is $7.25.
Cars with plugs may feel good, but until somebody repeals the laws of economic gravity they will never be an attractive fuel savings or emissions abatement solution.

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

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

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

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

January 18, 2011

Plug-in Vehicle Subsidies; Taxing Peter To Buy Paul's New Car

John Petersen

Industrial subsidies have been an important feature of the American economic landscape since the late 19th century for one simple reason – they work. After the steam locomotive proved its ability to quickly and cheaply move people and cargo long distances, the government launched a massive effort to span the country with steel rails and bring the benefits of a rapid, safe and reliable national transportation system to all its citizens. After electric lighting proved its merit, the rush was on to build a national infrastructure and bring the benefits to all. After the internal combustion engine proved its merit the rush was on to build better roads and highways, increase oil production and make automobiles a luxury all men could afford. After advances in communications and information technology proved their merit, we were off to the races again. In fact, it's hard to name an industry that hasn't been richly rewarded by our long tradition of subsidizing the rapid implementation of proven technologies through the creation of productive assets that make the nation richer.

Over the last decade, however, there's been a subtle erosion of subsidy theory that most observers have failed to notice. In addition to traditional subsidies that create productive assets and make the nation richer, we're seeing a proliferation of consumption subsidies that enrich individuals while providing no meaningful benefit to society. The poster child for this unconscionable rape of the treasury is the $7,500 tax credit for buying a plug-in electric vehicle. The government is quite literally taxing Peter to buy Paul's new car.

The credit will be available for the first 200,000 qualifying vehicles sold by a manufacturer at a direct cost of $1.5 billion per automaker. On the positive side of the ledger, Paul's new plug-in will reduce national oil consumption by about 100 barrels over its useful life at a cost of $75 per barrel. On the negative side, Paul's State, city, utility, employer and favored merchants will have to spend their own money adapting to Paul's increased demand for electricity and Paul's desire for a convenient charging infrastructure. I have to wonder if it wouldn't be cheaper to just give Paul a 10-year free gas coupon.

At this juncture I'm not sure which thought is most apropos, Everett Dirkson's quip, "a billion here, a billion there, and pretty soon you're talking real money;" Ayn Rand's bleak warning that "No private embezzlers or bank robbers in history have ever plundered people's savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments;" or the bandit Calvera's self-absorbed arrogance in The Magnificent Seven, "If God didn't want them sheared, he would not have made them sheep!"

In December Vinod Khosla surprised cleantech investors when he called for an end to corn ethanol subsidies, which Al Gore characterized as a mistake motivated by presidential aspirations and the importance of the farm vote. While I agree wholeheartedly with their conclusions about corn ethanol subsidies, I have a very hard time buying into the argument that "subsidies should be a short-term, and not a permanent measure, used for five to seven years after a technology first starts scaling in order to allow it to transition down the cost curve until it can compete on its own merits."

No industrial revolution has ever flowered from a technology that did not first prove its merit to a skeptical, competitive and inertia bound market. Subsidies can accelerate the adoption of cost-effective innovations, but they can't make a silk purse out of a sow's ear. The harsh reality is that a business model that can't survive without subsidies can't thrive with subsidies.

While reasonable men can argue the pros and cons of every subsidy, the historical justification has always boiled down to the fact that subsidies encourage domestic economic activity, create domestic jobs and increase the national wealth. Even the much-maligned corn ethanol subsidies were paired with tariffs on imported ethanol to protect domestic producers. But when it comes to plug-in vehicles, domestic productive capacity and economic activity are irrelevant. The credit doesn't add a single brick to the nation's productive capacity and it doesn't even distinguish between foreign and domestic products. Regardless of where the vehicles are built the batteries that will account for 25% to 50% of their total cost will be manufactured overseas, or made in the US using imported equipment, components and supplies.

We've quite literally gone from sending jobs overseas to subsidizing job creation overseas.

In my adult lifetime, every government sponsored energy independence program has failed because the core technologies were not cost-effective. The schemes that were ultimately disastrous for investors include:

28 years ago Methanol
18 years ago Electric vehicles
13 years ago HEVs and Electric vehicles
8 years ago Hydrogen Fuel Cells
5 years ago Ethanol

Does anybody see a pattern besides me? Have investors who are paying ten times book value for Tesla Motors (TSLA) failed to learn anything from the experience of Ballard Power (BLDP) and Pacific Ethanol (PEIX)? What about battery manufacturers like A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) who have no meaningful protection from foreign competition? Does anybody really believe a feel-good program that taxes Peter to buy Paul’s new car will, or for that matter should, survive looming Federal budget battles?

Albert Einstein defined insanity as "doing the same thing over and over again and expecting different results." Once again we've hared off on a tangent and tried to force uneconomic technologies on a skeptical, competitive and inertia bound market. In the process we've made a mockery of more than a century of sound industrial subsidy theory to enrich individuals while making the nation poorer.

Disclosure: None.

January 08, 2011

EIA Electric Drive Forecasts – Running in Reverse Since 2009

John Petersen

The hardest part of blogging on subjects like energy storage and vehicle electrification is synthesizing the mass of data that's generated every year. While I'm not an engineer and don't have any special technical expertise beyond the lessons I learned as a director and officer of a small battery technology developer, my training as a lawyer and accountant stand me in pretty good stead when it comes to reviewing statistical forecasts and comparing the current version of a forecast with earlier versions of the same forecast.

Every year the US Energy Information Administration, a unit of the DOE, publishes the Annual Energy Outlook, a comprehensive statistical report and forecast that covers all sources and uses of energy in the United States and runs to a couple hundred pages. The supporting data for the reference case includes 128 Excel tables that lay out the detailed assumptions underlying the report. One of the most interesting tables for guys like me is Table 57, Light-Duty Vehicle Sales by Technology Type for the United States, a 25 year forecast that breaks light-duty vehicle sales down into cars and trucks, and then subdivides each category by drive-train and fuel. If you've ever wondered where the government's long-term vehicle production forecasts come from, the answer is Table 57.

Last month the EIA published the Early Release Overview for its Annual Energy Outlook 2011. When I pulled up the latest version of Table 57, it struck me that the forecasted ramp rates for electric drive technology seemed more conservative than they'd been in 2010. Since unanswered questions tend to keep me from focusing on other matters, I went back to the 2010 forecast and did a quick comparison that showed about a 30% across the board decline in forecasted electric drive penetration rates. Since big changes invariably lead to more questions, I decided to pull copies of Table 57 for the years 2007 through 2011 and do a detailed five-year comparison to see how the forecasts changed over time.

Frankly I was amazed by the results. Except for pure electric vehicles, which will apparently remain a quirky niche market for the next 20 years, the Department of Energy's forecasted ramp rate for electric drive vehicles has been running in reverse at breakneck speed since 2009!

For those who prefer numbers, the following table shows the DOE's forecasted sales of HEVs, PHEVs and EVs for 2010, 2015, 2020 and 2030 in the Annual Energy Outlook for each year since 2007.

1.5.11 EIA Table.png

For those who prefer graphs, the following 3-D presentation summarizes the same data.

1.5.11 EIA Forecast.png

In December I used a graph from the Electrification Coalition's November 2010 Fleet Electrification Roadmap that highlighted the differences between the 2010 EIA numbers and comparable forecasts from consulting firms and sell-side investment analysts. Since the DOE has been quietly backing down its forecasted ramp rates for electric drive since the last Bush Administration forecast was updated to include the expected impact of American Recovery and Reinvestment Act of 2009, I'd be more reluctant than ever to rely on optimistic reports from hopium dealers.

12.29.10 Forecast Range.png

The EIA is a single data source and the EV faithful will almost certainly disagree with its forecast, but when the White House and its political operatives say, "we love electric drive and plan to push policy in that direction" and their own analysts and statisticians say, " there's no way it will happen that quickly," I tend to believe the staff.

Tesla Motors (TSLA) is the 2010 poster child for hype-induced overvaluation that bears no rational relationship to financial statements, business fundamentals or economic potential. It will be bleeding cash for years, just like A123 Systems (AONE) and Ener1 (HEV). These stocks may provide fun trading opportunities for professionals, but I wouldn't want to be holding their shares when the music stops.

Disclosure: None.

January 05, 2011

Plug-in Vehicles and Their Dirty Little Secret

John Petersen

Over the last few months I've had a running debate with some die-hard EVangelicals who insist that plug-in cars will be cleaner than simple, reliable and relatively inexpensive Prius class HEVs. Since most of my readers have enough to do without slogging through the comments section, it's high time we lay the cards on the table and show why the myth of zero emissions vehicles is one of the most outrageous lies ever foisted on the American public.

The following graph comparing the life-cycle CO2 emissions of conventional, hybrid and plug-in vehicles comes from a March 15, 2010 presentation by Dr. Constantine Samaras of Rand Corporation. It clearly shows that HEVs and PHEVs are equivalent emitters of CO2 if you take the analysis all the way back to the black earth and base the comparisons on national average CO2 emissions from electric power generation.

1.5.11 GHG PHEV.png

While the graph suggests that there is no meaningful air quality advantage to plug-in vehicles, the reality is much worse because the specific power generation assets that will be used for night-time charging of plug-in vehicles are dirtier than the national average.

The following table is based on data extracted from US Energy Information Administration's recently released "Electric Power Industry 2009: Year in Review." It lists high emissions power from fossil fuels in the top section, zero emissions power from conventional sources in the middle section and "clean power" from renewable sources in the bottom section. Since the data was pulled from different parts of the report, estimates of total power generated from specific renewable sources can't be provided. Since renewables as a class are inconsequential to national power production, I don't think the missing data is relevant.

1.5.11 US Power.png

The most intriguing facts in the table are the capacity utilization rates for both natural gas and hydro power facilities. Natural gas facilities operated at 25% of capacity in 2009, which works out to a national average of six hours per day. You see the same thing with hydro power facilities which operated at 40% of capacity in 2009, or about ten hours per day. While some natural gas and hydro power plants run 24/7, the nation tends to operate both types of facilities as peak power providers rather than baseload power providers. We turn off the clean hydro power and natural gas at night.

The two baseload elements of US power production are nuclear, which usually runs at a steady state 24 hours a day, and coal, which can be ramped up and down within a limited range to help match supply and demand. During night-time hours, the prime time for electric vehicle recharging, the vast bulk of electric power nationwide comes from nuclear and coal because operators want to conserve their more flexible resources including natural gas and hydro power for high value peak demand periods. As a result, coal accounts for a higher percentage of night-time power than it does day-time power or 24 hour power. There's just no avoiding the reality that electricity produced at night is significantly dirtier than the national average while electricity produced during the day is cleaner than the national average.

As you shift the US average emissions line in the Rand graph to the right to reflect the differences between day-time and night-time power, plug-ins become seriously sub-optimal. The conclusions are inescapable when you study the data.

I have searched without luck for a scholarly technical analysis that quantifies the emissions differential between relatively clean day-time power, which has a high proportion of variable hydro power and natural gas, and dirtier night-time power, which has a much higher proportion of coal. If you know of a credible study, I'd love to have a reference.

The dirty little secret of plug-in vehicles is that they'll all charge their batteries with inherently dirty night-time power and be responsible for more CO2 emissions than a fuel efficient Prius-class HEV that costs a third less and doesn't have any pesky issues with plugs, charging infrastructure or range limitations.

News stories, speeches and press releases can only maintain the zero emissions mythology for so long. Sooner or later the public is going to realize that it's all hype, blue smoke and mirrors, and that plug-in vehicles have little of substance to offer consumers. When the public comes to the realization that plug-in vehicles:
  • Won't save their owners significant amounts of money;
  • Won't be as efficient as HEVs when utility fuel consumption is factored into the equation;
  • Won't be as CO2 efficient as HEVs when utility emissions are factored into the equation; and
  • Are little more than feel-good, taxpayer subsidized eco-bling for the politically powerful elite,
the backlash against EV developers like Tesla Motors (TSLA), General Motors (GM) and Nissan (NSANY.PK), together with battery suppliers like Ener1 (HEV) and A123 Systems (AONE), could be unpleasant.

Disclosure: None.

December 27, 2010

Why Cheap Will Beat Cool During The Next Decade Of Vehicle Electrification

John Petersen

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

Technology Timeline

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

12.26.10 Timeline.png

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

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

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

Application Requirements

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

12.26.10 Requirements.png

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

Economic Comparisons

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

12.26.10 Economics.png

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

What It Means For Investors

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

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

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

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

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

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

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

December 01, 2010

Alice in EVland Part II; The Hall Of Mirrors

John Petersen

Mark Twain reportedly said that "Figures don't lie, but liars figure." Truer words were never spoken.

On November 22nd the EPA issued an official fuel economy sticker for Nissan's (NSANY.PK) Leaf that shows an impressive electric drive equivalence of 99 MPG. Two days later it issued an official fuel economy sticker for General Motor's (GM) Volt that shows a comparable electric drive equivalence of 93 MPG, a gasoline drive fuel economy of 37 MPG and a combined equivalence of 60 MPG. Both stickers were heralded as the dawn of a new age in transportation. Unfortunately, they were outrageous lies that account for the distance a car can travel on a kilowatt-hour of electricity but ignore the energy needed to make a kilowatt-hour of electricity in the first place.

To arrive at their magical fuel economy numbers, the EPA started with the scientific fact that 1 kWh of electricity contains 3,412 BTUs of energy and 1 gallon of gasoline contains 124,238 BTUs. After calculating a base energy equivalence of 36.41 kWh per gallon, they adjusted that value to show a 7.5% energy loss in the battery and arrive at a final value of 33.7 kWh per gallon. In the words of autobloggreen "Since the Leaf has a 24 kWh battery pack and can go, officially, 73 miles, then, the EPA says, it could theoretically go 99 miles if it had a 33.7 kWh pack."

Now let's talk about what really happens.

To get a gallon of gasoline we have to drill a well, produce the oil, refine it and transport it to a gas pump near you. Overall, the production, transportation and refining consumes about 20% of the raw energy the crude oil contained at the wellhead. So if we back the entire process up to mother earth, each gallon of gasoline had an initial energy value 155,300 BTUs.

To get a kWh of electricity from sources other than water, wind and solar, we have to consume fuel to create heat in a generating plant and then turn that heat into electricity. The conversion process is very inefficient. According to the Energy Information Administration, it takes 10,378 BTUs of coal energy, 11,015 BTUs of petroleum energy, 8,305 BTUs of natural gas energy or 10,453 BTUs of nuclear energy to make 1 kWh of electricity. In other words, about 2/3 of the raw energy extracted from mother earth is wasted. If we include electricity from water, wind, solar and all other sources, the US consumed an average of 8,775 BTUs of raw energy last year for every kilowatt-hour of electricity it produced. By the time we account for transmission and distribution losses on the electric grid, the energy inputs for each kilowatt-hour of electricity delivered to a wall socket near you is about 9,375 BTUs.

When we track all the numbers back to mother earth, the energy equivalency ratio between gasoline in a car's tank and electricity in an EVs battery is 16.6 kWh per gallon – not 33.7 kWh per gallon.

The EPA's official sticker for Toyota's (TM) venerable Prius shows a respectable combined fuel economy rating of 50 MPG. Since the Prius only burns gasoline but does so very efficiently, we have to extract 3,106 BTUs of energy from mother earth to move the Prius a mile. In comparison, we have to extract 3,388 BTUs of energy from mother earth to move the Leaf a mile and we have to extract a whopping 3,873 BTUs of energy to move the Volt a mile.

The bottom line is all the efficiency talk for plug-in vehicles is based on a fundamental deception that ignores the energy required to produce electricity in the first place, the same way it ignores the emissions impact of producing electricity. As a result, all of the arguments in favor of vehicle electrification have the intellectual integrity of a no peeing zone in a public swimming pool.

William Martin wrote that "In America we get up in the morning, we go to work and we solve our problems." We don't delude ourselves by creating a hall of mirrors where unconscionable waste can masquerade as conservation. We can do better, but not until we take our heads out of the sand and recognize the problems.

Disclosure: None.

November 17, 2010

Vehicle Electrification And The "Too Good To Be True Rule"

John Petersen

One of the first lessons investment professionals learn is that if an investment proposal sounds too good to be true, the proposal is probably materially false and misleading. On November 15th, the Electrification Coalition released its Fleet Electrification Roadmap and once again proved the wisdom of the "Too Good To Be True Rule." I know that lobbyists are supposed to take a policy position and make the best case they can; but when their case is based on deliberate distortions, somebody has to point out the differences between current realities and bafflegab.

In building the best policy case for the electrification of commercial fleets, the Roadmap used this gee-whiz graph of vehicle emissions by technology and fuel type. The source of the data was a 2007 study by the Electric Power Research Institute.

11.16.10 EC Emissions.png

Unfortunately the 2007 EPRI data that served as a basis for graph is meaningless. The fundamental premise is flawed because the graph assumes well-to-wheel CO2 emissions of 450 grams per mile for a car with an internal combustion engine and 300 grams per mile for an HEV. Unfortunately both estimates overstate current realities by about 50%.

The internal combustion engine values may have been good a few years ago, but they're worthless in light of new CAFE standards that the NHTSB and EPA adopted in April. These standards require the new light duty vehicle fleet to meet or exceed the following increasingly stringent CO2 emissions standards.

Model CO2 Emissions CO2 Emissions
Year
Pump-to-Wheel
Well-to-Wheel
2012
295 grams per mile
369 grams per mile
2013
286 grams per mile 358 grams per mile
2014
276 grams per mile 345 grams per mile
2015
263 grams per mile 329 grams per mile
2016
250 grams per mile 313 grams per mile

Similarly, the HEV values may have been good a few years ago, but they are meaningless in light of the fact that the 2010 Toyota Prius has pump-to-wheel CO2 emissions of 89 grams per kilometer, or 143 grams per mile, and well-to-wheel CO2 emissions of 179 grams per mile.

If you reduce the Roadmap's 450 gram per mile ICE estimate to comply with the regulatory mandate of 313 grams per mile by 2016, PHEVs lose much of their appeal. If you reduce the HEV estimate to the current 179 grams per mile performance of the Prius, the only plug-in that can honestly claim parity, much less superiority, is one that's equipped with a dedicated wind turbine.

I wholeheartedly support the Electrification Coalitions desire to "disseminate informed, detailed policy research and analysis," but think that they should consider adding "accurate, current and balanced" to the desiderata. If any of the CEOs that support the work of the Electrification Coalition published this kind of nonsense in their SEC reports, there'd be hell to pay.

Disclosure: None


September 14, 2010

The Cruel Realities of EV Range

John Petersen

An English proverb teaches us to hope for the best but plan for the worst. With the imminent introduction of a variety of plug-in vehicles that will begin hitting showroom floors in the next few months, the phobia du jour is range anxiety, an entirely rational terror that an EV will get you to your destination in eco-chic style but only get you home with the help of a tow-truck. Sadly, most people who extol the virtues of electric drive are incurable optimists that have little or no regard for the risks inherent in complex systems and the widely variable needs of individuals. The quick and dirty overview is that every plug-in owner will have to cope with range degradation before the new car smell fades and his problems will only get worse as time passes.

Nissan Motors (NSANY.PK) will soon start delivering its battery powered Leaf, the world’s first production EV. The Leaf will get its power from a 24 kWh lithium-ion battery pack and Nissan's advertising campaign focuses on a showroom floor range of 100 miles. While they include the usual throw-away warnings that "Range will vary with driving habits, conditions, weather and battery age," they haven't been entirely forthcoming with the inconvenient truth that battery packs start to degrade with the first charging cycle and the process never stops.

The following graph comes from a recent National Renewable Energy Laboratory study that examined the long-term effect of local weather conditions on power degradation in lithium-ion battery packs. This particular graph has an upward slope because it's showing the percentage of power loss over 15 years. To show expected vehicle performance, the curve would need to be inverted. While the study's authors warned that their results were optimistic because they didn't include battery degradation from the heat buildup that happens whenever a car is parked in the sun, most potential buyers will find the optimistic numbers shocking enough.

9.2.10 Climate.png

In Minneapolis, an EV-100 will be an EV-90 after one year and an EV-80 after five. In Phoenix it will be an EV-80 after one year and an EV-60 after five. These are not minor differences to people that need dependable transportation to and from work, particularly if they plan for the worst when they make a buying decision.

Other major range penalties that potential buyers must consider include:
  • Cold weather penalties of 10% to 20%.  While heat increases the rate of battery degradation, the widely reported experience of Mini-e drivers has shown that cold weather is a killer. If you live someplace where your dog's water bowl occasionally freezes over, you need to plan on an occasional 10% range reduction, but if your dog's water bowl frequently freezes solid it's better to plan on a 20% reduction.
  • Hilly terrain penalties of 5% to 10%. Hilly terrain is one of those things that most drivers don't consider because logic dictates that the energy used to climb a hill will be recovered on the downhill. In reality the energy used in climbing is far greater than the energy recovered coasting downhill. While this reality isn’t important to drivers, cyclists quickly learn that 500 feet of elevation gain increases the energy expended on a 60-mile ride by about 5%. While cars have better aerodynamics than bicycles, hills are never free and the downhill wheee! is never fair payback for the uphill grind.
  • Stop and go traffic penalties of 30% to 50%. Of all the factors that impact EV range, stop and go traffic is the biggest offender. According to Nissan, the Leaf's range will fall by 40% in 15 mph stop-and-go-traffic at low temperatures and by 50% in 6 mph stop-and-go-traffic at moderate temperatures.
When you put it all together, a three-year old EV-100 will probably act like an EV-50 on a frosty winter's day in Minneapolis. While a foolish consistency may be the hobgoblin of small minds, I think consumers will tend to be very cautious when it comes to choosing between dependable transportation and an eco-chic image.

The simple solution, of course, will be bigger, better and cheaper battery packs. According to popular media and specious political promises, that wondrous day is just around the corner. While I suppose anything is possible, I find it hard to ignore 30 years of hands-on experience with R&D companies and H.L. Mencken's warning that "A newspaper is a device for making the ignorant more ignorant and the crazy crazier."

In August Greentech Media reported that battery prices were plummeting, Project Better Place would pay $400 per kWh for lithium-ion battery packs with a 2012 delivery date and IBM has plans to demonstrate a prototype lithium-air battery pack within two years. The ecstasy was palpable, but wholly irrational.

Better Place has based its business model on leasing batteries as a service instead of selling them as a product and even a modest level of success will give it buying power comparable to a first tier automaker. Better Place is planning on massive government support and at least in the U.S., the subsidies could exceed its capital costs for a time. Under those circumstances Better Place doesn't need to sweat minor details like battery quality, service life and pack degradation because it can simply discard problem packs that were bought with somebody else's money and continue to collect rental charges with little or no capital investment. It should be a hell of a party until the governments get a clue and take away the punchbowl. The hangover, however, may be painful.

As we leave our pleasant dreams of a Better Place and awaken in the real world, the dynamic changes rapidly. Consumers need warranties to protect their investment and companies that write warranties need to cover their costs. While Tesla Motors (TSLA) has been able to get away with three-year battery pack warranties for its roadster, real automakers will have to provide eight to ten year warranties and eventually earn a normal profit on vehicle sales. So even if they start with a battery pack that costs $400 per kWh at the battery factory, the fully loaded cost to consumers with an eight to ten year warranty and a normal markup will be closer to the $750 per kWh Nissan has ascribed to the battery pack in the Leaf.

In a May 2009 report for the DOE, TIAX LLC pegged the current cost of commodity grade 18650 lithium-ion cells at $200 to $250 per kWh, which resulted in pack costs of $400 to $700 per kWh. Despite the happy talk about economies of scale, large format batteries are a good deal more complex than a giant economy-sized box of laundry detergent. While the cost of large-format automotive grade cells may eventually approach the cost of small-format commodity cells, they're not likely to get any cheaper without intervention from the commodity price fairy. By the time you add in warranty costs and automaker's profits, end user battery costs of $400 or even $500 per kWh are a little more than pipe dream unless lithium-air or molten salt technologies make lithium-ion batteries and the factories that make them obsolete.

We've all seen the "hope for the best" stories about how electricity for an EV will cost the equivalent of $1.20 per gallon of gasoline. Those stories, however, assume that like butterflies batteries are free. An optimistic "hope for the best" total cost of ownership scenario looks something like this.

9.15.10 Hope.png

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

9.15.10 Plan.png

I have little or no patience with battery manufacturers, automakers, politicians, journalists and quasi-religious EVangelists who create unreasonable expectations based on hopeful scenarios instead of reasonable expectations based on likely scenarios. A Nissan Leaf may get 4 miles of range per kWh of battery capacity on a sunny afternoon in Florida, but it will be lucky to get half that on a winter morning in Chicago.

EV buyers who pay a filet mignon price and end up eating pork tartar will not be happy. Their lawyers, on the other hand, will be tickled pink.

If the EV and battery industries want to avoid interminable litigation and untold reputation damage they need to get honest with their stockholders and customers. They need to tell potential customers that they might get 4 miles per kWh of pack capacity on a good day, but can't plan on getting more than 2 miles per kWh on a bad one. They need to stop comparing the fueling cost for a brand new EV with the average economics of an aging automotive fleet. They need to stop dividing 12,500 miles per year by 300 days and telling potential buyers that 40 miles of EV range is enough when they know that customers will need at least 80 miles of reliable range to accommodate day-to-day variations and achieve an annual average of 12,500 miles. Instead of bafflegab claims of pennies per mile, they need show more realistic economics based on end-user battery pack costs and reliable ranges in congested traffic and poor weather.

The realities of EV range are a bitch and I'm not the only one who questions whether long-range EVs can ever be cost effective. Industrial revolutions arise from technologies that first prove their economic value in a free market and then seek subsidies to accelerate growth. A business model that can't work without subsidies doesn't make sense because the punch bowl always gets taken away too early, particularly if customers aren’t happy. The green jobs myth of the EV revolution has already proven to be a mirage. The cost effective and reliable transportation myth will be the next to crumble.

The last few weeks have been a busy time in the happy-talk press corps as Ener1 (HEV) arranged $55 million in potentially toxic debt financing to continue its plant construction, Valence Technologies (VLNC) trumpeted a six-year extension of a contract with Wrightbus that may generate a three or four million dollars in annual revenue, A123 Systems (AONE) announced the opening of its new battery manufacturing plant in Livonia, Michigan and Compact Power, a subsidiary of Korea's LG Chem, broke ground for its new battery manufacturing plant in Holland, Michigan. All these events gave rise to great trading opportunities, but there is a wide gulf between progress on the construction of a battery manufacturing plant and profitable operation of that plant.

Every prior generation of electric cars has died of congenital birth defects. While the next generation may not be stillborn, I have no confidence that the outcome will be different. In my view these companies are not equities you want to buy and squirrel away in a safe deposit box for the grandkids. Hope, after all, is not an investment strategy.

Disclosure: None.

August 19, 2010

What Does GM Really Think About The Volt?

John Petersen

I love IPO registration statements because they have to provide full and fair disclosure of all material facts and forward-looking statements must "bespeak caution." The following quote from the risk factors section on page 19 of the prospectus included in the Form S-1 Registration Statement that NewGM filed yesterday says everything you need to know about the Volt and the other plug-in vehicles that currently reign as media darlings.

"In some cases, the technologies that we plan to employ, such as hydrogen fuel cells and advanced battery technology, are not yet commercially practical and depend on significant future technological advances by us and by suppliers. For example, we have announced that we intend to produce by November 2010 the Chevrolet Volt, an electric car, which requires battery technology that has not yet proven to be commercially viable. There can be no assurance that these advances will occur in a timely or feasible way, that the funds that we have budgeted for these purposes will be adequate, or that we will be able to establish our right to these technologies. However, our competitors and others are pursuing similar technologies and other competing technologies, in some cases with more money available, and there can be no assurance that they will not acquire similar or superior technologies sooner than we do or on an exclusive basis or at a significant price advantage."

While I don't hold myself out as being qualified to analyze GM's business there were a couple of line items on its balance sheet that concern me. At December 31, 2008, OldGM had $91.0 billion in total assets, including $46.7 billion in non-current assets. At December 31, 2009, NewGM had $136.3 billion in assets, including $77.0 billion in non-current assets. When I went through and did a line by line comparison the major changes boiled down to three line items that were insignificant on OldGM's balance sheet but massive on NewGM's balance sheet.
  • NewGM reflects $30.7 billion of goodwill where OldGM didn't have any;
  • NewGM reflects $14.5 billion of intangible assets where OldGM only had $0.3 billion; and
  • NewGM reflects $22.0 billion of stockholders' equity where OldGM had an $85.1 billion deficit.
I don't claim to be an expert in fresh-start accounting or the incredibly complex valuation estimates that generally accepted accounting principles require in a bankruptcy reorganization, but it strikes me as more than passing strange that a bankruptcy could create $45 billion in intangible asset values and stockholders' equity that didn't exist before OldGM failed.

Disclosure: None.

July 23, 2010

Battery Cost Forecasts and The Origin of Specious*

*with humble apologies to Charles Darwin
John Petersen

The Oxford Dictionary defines the adjective 'specious' as:
  • Superficially plausible, but actually wrong;
  • Misleading in appearance, especially misleadingly attractive.
The Wiktionary offers a broader definition as:
  • Seemingly well-reasoned or factual, but actually fallacious or insincere; strongly held but false;
  • Having an attractive appearance intended to generate a favorable response; deceptively attractive.
Over the last two years I've patiently analyzed the evolving price and performance forecasts of electric vehicle advocates and lithium-ion battery developers. In the process I've shown them to be possible, but unlikely, and interdependent to the point where a single flawed assumption can level the entire house of cards.

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

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

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

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

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

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

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

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

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

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

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

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

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

July 14, 2010

Why Energy Storage Investors Must Understand Resource Constraints

John Petersen

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

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

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

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

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

7.14.10 BI Cartoon.jpg

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

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

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

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

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

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

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

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

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

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

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

25 years ago Methanol
15 years ago Electric Vehicles
10 years ago HEVs and Electric Vehicles
5 years ago Hydrogen Fuel Cells
3 years ago Ethanol and Biofuels
Today Plug-in Vehicles
2012 Whither bloweth the wind?

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

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

July 10, 2010

Toyota's Straight Talk On Plug-in Vehicles

John Petersen

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

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

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

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

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

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

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

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

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

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

Toyota believes that PHVs can be part of a solution to climate change and for energy security,
  • for certain customers,
  • in certain geographic areas,
  • with certain grid-mixes,
  • with certain drive-cycles,
  • and with access to charging.
There will be an important role for PHVs, but it will not be in high volume until there are significant improvements in overall battery performance…and battery cost reduction.

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

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

Disclosure: No positions


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