Battery Technology: A Different Set of Rules

The table excludes grey-market companies like NGK Insulators (NGKIF.PK); fuel cell companies that are truly a sector unto themselves; and diversified companies like Dresser-Rand (DRC) and Johnson Controls (JCI) even though they are likely to benefit from growth in the storage sector. It also reserves space for three privately held storage companies that look to be laying foundations for IPOs in the foreseeable future. Since any oversights are inadvertent, I’ll be happy to add any pure-play energy storage companies that I’ve missed.Disclosure: Author holds a long position in AXPW.OB and is a former director of that company.
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http://seekingalpha.com/article/91361-battery-technology-a-different-set-of-rules
Battery Technology: A Different Set of Rules
The last month has been a lot of fun! I enjoy writing for Seeking Alpha because it’s an open forum where deathless prose is discouraged and key macro-economic concepts take priority over petty detail. While reader comments have made it clear that folks don’t like it when I challenge their assumptions and they like it even less when I criticize a favorite stock, the numerous comments pro and con have helped refine my thinking and clarify the core message.

My fundamental precept is very simple. I believe the energy storage sector is certain to be enormous and is likely to be the next major investment trend. To quote a recent staff report from the California Energy Commission:

Electricity storage technologies... have significant potential to resolve grid stability and operations issues related to higher penetrations of renewables. Energy storage can be applied as generation, on the transmission or distribution system, and even at the end-use customer’s location. Smaller energy storage systems can provide significant grid support whether they are connected at the distribution or end-use customer level, and aggregating these distributed systems can provide grid support when more renewables are introduced. Field demonstrations and pilot projects are needed to address the use of larger energy storage systems (greater than 5 megawatt [MW] ratings for at least four hours) that can be connected to the distribution or transmission system. Additional research should evaluate very large energy storage systems, such as compressed air energy storage [CAES] or pumped hydroelectric, for situations in which there is a need for storage systems that can store hundreds of MWs for several hours.

While I’m very bullish on the energy storage sector, I’ve spent almost five years learning that the battery industry plays by a different set of rules that investors can only ignore at their peril. In the end I’m supremely confident that we’ll find many energy storage solutions that work and equally certain that there is no holy grail.

Over the last 30 years, investors have seen massive changes in technology-driven industries and the rate of change usually accelerates as new industries sprout, grow and flourish. Over time, the oft-repeated experiences have given rise to fatally flawed assumptions that (1) technological progress will always be fast and furious, and (2) better products will always cost less next year. The reality is that investors and consumers who expect big performance gains and sharp price reductions from the energy storage sector will almost certainly be disappointed because:

Battery technologies are based on known chemical reactions that have already been developed to a level that approaches peak efficiency; so future performance gains are likely to be rare and modest.
Batteries are material intensive products where up to 75% of manufacturing costs go for raw materials that cannot be reduced without proportionally reducing capacity.
Battery materials are basic commodities that respond to the law of supply and demand, so new chemistries based on exotic materials will always encounter substantial availability and cost risks.
When it comes to recycling, the key question is not whether an old battery can be recycled, but whether it can be recycled into materials that are pure enough to use in a new battery.
I’m an unrepentant critic of lithium-ion batteries because I believe the technology is hideously expensive overkill for most proposed storage applications. Existing and proposed Li-ion products are high performance miracles that offer energy densities of 150 to 200 Wh/kg and deep discharge battery lives of 8,000 to 10,000 cycles. But a fifth grader with a pencil can figure out that 8,000 to 10,000 cycles at 50 to 120 miles per cycle is 400,000 to 1.2 million miles; a 30 to 95 year bet that the current energy density champ will still hold the crown when we’re long dead and buried.

Extreme energy density begins to lose some of its allure when a presumptive industry leader like A123 Systems reports manufacturing costs in the $1,500 per kWh range; 75% of those costs are attributable to raw materials and experts are predicting lithium carbonate shortages. Likewise, a 30 to 95 year battery life can never make economic sense unless you think long-term mortgages for batteries are a good idea. To make matters worse, nobody has been able to figure out how to recycle Li-ion batteries and use the recycled material for new batteries. With these overwhelming handicaps, I can’t see how Li-ion batteries will ever generate strong end-user demand. Nobody can buy eggs for a dime, sell them for a nickel and make it up on volume. So until the fundamental economics of Li-ion batteries change, I think they’ll remain the Ferraris, supermodels and centerfolds of the battery industry; the magical seeds of male fantasy but beyond the grasp of mere mortals.

I’m a staunch supporter of lead-acid batteries because there was a 30 to 40 year R&D gap when the industry’s focus shifted away from starting, lighting, ignition and backup power applications and turned to portable devices. The fact that R&D was curtailed 30 or 40 years ago does not prove that everything that could be improved had already been improved. It merely proves that the batteries of the era did everything they needed to do and additional R&D was not cost effective.

Renewed interest in lead-acid batteries has already resulted in important advances like Enersys’ (ENS) thin pure plate lead and Firefly’s composite foam electrodes. More importantly, disruptive new technologies like Axion Power’s lead-acid-carbon [PbC] battery-supercapacitor hybrid promise to slash recharge times by 80% and extend deep discharge battery lives into the 1,500- to 2,000-cycle range. Since advanced lead-acid technology is cheap, over 98% of lead-acid batteries end up in recycling centers and old lead-acid batteries are invariably recycled into material for new batteries, I believe we are on the verge of a technical renaissance that will make advanced lead-acid batteries the product of choice for years to come, even if they are heavier and bulkier than their insanely expensive cousins. After all, automotive designs are flexible and a huge trunk has little value if you can’t afford to fill it with groceries.

I’m neutral on most energy storage technologies because I don’t know enough to form a well-reasoned opinion. NiMH batteries apparently perform well in HEVs even though the technology is still a bit too expensive for most consumers. Flow batteries, flywheels and supercapacitors all seem to have significant potential in emerging utility markets. Wal-Mart (WMT) shoppers who vote with their wallets will choose the real winners and losers. Since I believe the entire sector is entering a period of spectacular growth I wouldn’t discount the potential of any active player.

Last week I floated the idea of creating a short-list of pure play energy storage companies that we could follow over time to track the trend. My initial list probably has some holes but I find it more than a little interesting that the combined market valuations of the leading storage companies is only a fraction of valuations the leading solar companies carry. I smell opportunity!

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