John Petersen
In one of my first articles, “
href="http://seekingalpha.com/article/91361-battery-technology-a-different-set-of-rules">Battery
Technology: A Different Set of Rules,” a commenter suggested that I
was a bit of a Captain Buzzkill. Eighteen months later it’s clear that
a lot of readers share that uncharitable view. This morning I had an
e-mail exchange with a reader that raised the same basic issues and
reminded me that it’s been a while since I’ve discussed the fundamental
differences between energy storage and other technology related
sectors. Since the subject matter can be very important to investors
who want to make sound decisions, I’ve decided to edit the e-mail
exchange and publish it as an article.
Inquiry:
style="font-style: italic;">I’ve read your posts and thank you for
your insights into the topics you cover. I have to ask this however …
is there not “anything positive” you can say with regards to
lithium-ion battery companies? I mean, can’t you give credit for
anything? It seems to me that in a necessary longer term evolution of
technologies they and others DO play a critical role in getting from
proverbial A to B for all of us.
Response: I believe several
lithium-ion battery developers have the potential to become fine
companies and that the world desperately needs all of the lithium-ion,
lithium air, sodium sulfur, zinc bromine, lead acid, lead carbon,
sodium metal halide and nickel metal hydride batteries we can make. The
products are critical to an energy efficient future and so are the
companies that make them. The needs are immense beyond imagining but
companies that want to survive and thrive in the energy storage sector
need to be willing and able to say:
- We can provide batteries for Application A today and earn a
reasonable profit;
- With luck we may be able to provide batteries for Application B
in X years and earn a reasonable profit; and
- Until the market dynamics change, we won’t be able to provide
batteries for Application C and earn a reasonable profit.
Any other approach is certain to set up unreasonable expectations in
the collective consciouness of the market and over the years I’ve seen
too many examples of disastrous market reactions to unsatisfied
expectations. Given my long and sometimes painful experience advising
small companies, I have a hard time remaining sanguine when companies
start the game by setting their goals too high.
Over the years I’ve had a number of friends and clients decide that
they wanted to sell products to WalMart. The negotiations were long and
brutal, but the vendors were always delighted when their products hit
the shelf because the sales volumes were immense. Within about six
months, they discovered to a man that it was almost impossible to sell
anything to WalMart and earn a reasonable profit margin. Within
eighteen months they were all out of business.
Selling batteries for electric cars and utility applications is a lot
like selling a product to WalMart. Starting negotiations from a
position where you’re saying “we understand that we won’t be able to
business with you unless we can slash our costs by at least 50% coming
out of the chute” is darned near suicidal. Small companies need to
start in markets where they can earn outsized profits while they learn
to optimize their activities. Learning to swim in the shark tank is a
good way to get eaten.
Right now the lithium-ion battery developers are promising a brave new
world of electric cars and grid-based storage. I’ve shown why electric
cars are a horrifically suboptimal use of batteries. I’ve also seen
drafts of a new report from Sandia National Laboratories that shows
most grid based applications will require even cheaper batteries than
the automotive sector requires. At last fall’s EESAT conference in
Seattle, Ali Nourai of American Electric Power explained that they’re
‘technology agnostic” as a company and their current efforts are
focused on lithium-ion batteries because they assume that sales into
the automotive market will drive lithium-ion battery prices to low
enough levels that they’ll be attractive for low-value utility
applications.
In Joseph Heller’s classic novel
style="text-decoration: underline;">Catch 22 a character named
Milo Minderbinder
planned to buy eggs for a dime, sell them for a nickel and make it up
on volume. That can’t happen in the real world, regardless of what
people want to believe.
If the lithium-ion battery developers were all out telling the market
that they planned to focus on high value markets that they could serve
today and they hoped to expand into other markets as they built
experience and improved their technology, I’d be a huge booster. As
long as they’re promising things that can’t happen in the real world,
they’re either setting the market up for major disappointment or
setting themselves up for a string of losses that won’t end until a
Chapter 11 petition is filed. I can’t be a cheerleader for either of
those outcomes.
Follow-up:
style="font-style: italic;">Thanks so much for your kind reply …
Very interesting conclusions is all I can say. This reminds me of none
other than solar, and look at where those stocks are this week “as we
speak” eh ? Even the “best of the breed” are subject to subsidy cuts as
was obvious just the other day, with the announcements out of Germany,
proposing to cut more than were the expectations of the market. The
only good things that can be said about it is that is causes prices to
get cheaper for the end user, and makes the industry far more
competitive in the long run I suppose, but it sure does just basically
kill positive forward guidance at a time when it sure would be nice to
have some, hmmm ?
Reply: Based on the experience
of the last 40 years most investors are optimistic about the future of
all things alternative energy. In some cases the optimism is warranted.
In others, particularly in energy storage, the optimism is dangerous.
Substantially all of the miracles of the information and communications
technology revolution were due to advances in the science of physics.
Researchers have found ways to use steadily smaller resource inputs to
get exponentially larger outputs. It’s been true in communications,
computing and even solar cells. As a result the idea that it’s always
possible to do more with less has been burned into our collective
psyche and the masses resist any suggestion that another result is even
possible.
The biggest problem with energy storage is that it’s all based on
chemistry, which is limited by an entirely different set of natural
laws. On any given atom there are a defined and immutable number of
sites where chemical bonds can be formed and reactions can take place.
For hydrogen atoms the number is 1; for oxygen atoms the number is 2;
for nitrogen atoms the number is 3 and for oxygen atoms the number is
4. I could continue the series but you get the idea. When you put atoms
together to make stable molecules, the number of bonds on each side
have to match. That’s why chemical compounds are express with formula
like H20 or CO2 or NH3 or
CH4. No matter what we do the ratios can’t change, the
number of atoms in a gram of material can’t change and the number of
possible chemical bonding sites in a gram of material can’t change.
Most chemical reactions used in battery chemistry are quite efficient
to start with, which means that the best researchers can do is work
around the margins to maximize the surface area where reactions can
occur. There’s a lot of talk about nanotechnology in the battery sector
but what it all boils down to is grinding materials into extremely fine
particles in order to maximize surface area. In the case of some of the
carbon compounds used in batteries, surface area has already been
optimized to the point where a single gram of material has as much
surface area as a football field. About the only advances on the
horizon that promise to significantly increase surface area are
materials like carbon nanotubes and graphene, but they’re terribly
difficult to work with and ungodly expensive. Since the materials have
been the subjects of intense research and development for the last 10
to 20 years and progress has been extraordinarily slow, I don’t expect
breakthroughs tomorrow.
The bottom line is that chemistry is grunt manufacturing that requires
immense amounts of raw material. The science is progressing every day
but you rarely see disruptive changes from companies like Dow,
Monsanto, Exxon and the like. The battery industry will be no different.
Because we’re dealing with chemistry instead of physics, current lofty
expectations of rapid disruptive change are misplaced. There will no
doubt be progress, but it will not be rapid or disruptive. The bottom
line is progress in the storage sector will mirror progress in the
chemical industry in spite of the fact that the the goal is to store
electricity.
Conclusion: I’m a huge booster
of the energy storage sector and want everybody in the industry to be
fabulously successful. The really crazy part is I don’t even think
about competition between companies because I believe every company
that brings a reliable and cost-effective product to market will have
more business than it can possibly handle. What I object to are
outsized claims of likely technical progress and cost reductions from
advances in chemistry in a resource-constrained world. Human beings
always want more than they can possibly have because that’s the nature
of the beast. Promising to satisfy human desires that are beyond the
limits of the possible is neither good business nor good public
relations.