Viva the Cleantech Revolution

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cherished Mythology Lead-acid batteries are environmental hazards.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

guys in the middle.

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

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

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