John Petersen

The first quarter of 2012 was the best of times for shareholders of
companies that are developing and manufacturing cheap energy storage
products like lead-acid batteries, but the worst of times for
shareholders of pure-play lithium-ion battery developers. The
following table tracks stock price performance in the energy storage
and electric vehicle sectors for the first quarter of 2012 and for
the twelve months ended March 31st.

Long-term readers will notice that the current list is a good deal
shorter than it was in March of last year because of my decisions to
delete China Ritar Power ( href="http://www.altenergystocks.com/comm/content/china-ritar-powe/">CRTP.PK),

Advanced Battery Technologies ( href="http://www.altenergystocks.com/comm/content/abat/">ABAT.PK),

New Energy Systems ( href="http://www.altenergystocks.com/comm/content/newn/">NEWN),

C&D Technologies ( href="http://www.altenergystocks.com/comm/content/chp/">CHHP.PK),

Ener1 (HEVVQ.PK)
and Beacon Power ( href="http://www.altenergystocks.com/comm/content/beacon-power-corporation/">BCONQ.PK)
for reasons ranging from reporting deficiencies and changed business
models to outright business failures. It’s been a turbulent year.

The best performer for the year and the quarter ended March 31, 2012
was Tesla Motors ( href="http://www.altenergystocks.com/comm/content/tesla/">TSLA),

a stock that investors either love – or love to hate. Tesla is
trading at  a 119% premium to its $17 IPO price and one of the
market’s most heavily shorted stocks. Where sell side analysts see
upside potential to $49, more pragmatic types expect the price to
collapse into single digits. While experience tells me that
consensus among short sellers is usually right, only time will tell.

It was a solid quarter for several companies that were beaten down
over the last year but started to recover some of their long-term
price declines during the quarter. The lead-acid group in particular
is performing very well. The only group that was down for both the
year and the quarter were lithium-ion battery developers. That
group’s performance would have been even worse if I hadn’t culled
Ener1 after its public stockholders got flushed in a bankruptcy
reorganization.

The following summary table shows how the surviving companies in my
five tracking categories performed compared to broader market
indexes.

My last table for the day provides a summary of some key financial
metrics I like to focus on when performing a high level
forward-looking analysis of the companies I track. The data is
stated in millions, derived from the most recent SEC reports filed
by the companies and adjusted for material events including
financing transactions and extraordinary losses reported after the
date of the most recent financial statements.

For companies with a history of losses, the first number I focus on
is working capital. If a company can’t cover expected losses for the
next year and make planned capital investments with available funds,
it will almost certainly be forced to seek new financing and that
can be tough in a turbulent capital market. This year, only three of
the companies I follow have clear working capital issues, a
significant improvement from last year. While I’ve been impressed
with its business development activities over the last year, I’m
less impressed with ZBB Energy’s ( href="http://www.altenergystocks.com/comm/content/zbb-energy/">ZBB)
financing activities, which have boosted its share count by 57%
while the balance sheet treads water.

A second key metric is the difference between a company’s market
capitalization and its book value, which is commonly referred to as
blue-sky. Public companies normally trade at a premium to their book
value because intangible assets like intellectual property, human
resources, industry experience, customer relationships and the like
usually have no balance sheet value. When the blue-sky premium is
inordinately high, it’s a bright red warning flag. When the blue-sky
premium is out of line on the low side, it can hint at significant
upside potential.

To simplify comparisons among companies I like to calculate the
ratio between blue-sky and book value. The result is a “BS to Book
Ratio” that can be quite illuminating.

The most alarming BS to Book ratios in my tracking group, in fact
the most alarming BS to Book Ratios I’ve ever seen, belong to
Valence Technologies ( href="http://www.altenergystocks.com/comm/content/valence-technologies/">VLNC)
and Tesla Motors. Valence has a $60 million deficit in stockholders
equity but it carries a market capitalization of $138 million, which
makes its BS to Book ratio infinite. Tesla is a little better since
it has $204 million in equity and $182 million in working capital,
but it’s sky-high market capitalization of $3.7 billion gives it BS
to Book Ratio of 16.4. To put things in perspective, Apple has a BS
to Book ratio of 5.2 and it’s become the most successful tech
company in history.

Companies with inordinately low BS to Book ratios include Exide
Technologies ( href="http://www.altenergystocks.com/comm/content/exide/">XIDE)
and A123 Systems ( href="http://www.altenergystocks.com/comm/content/a123/">AONE)
which both trade at a 40% discount to book value. If you adjust
A123′s book value to include $128 million of ARRA grant proceeds
that aren’t reflected on the face of its balance sheet, the discount
to book value is closer to 60%. While both companies have had more
than their fair share of problems over the last few quarters, I
continue to believe their market prices have fallen to very
attractive entry points.

I believe a BS to Book ratio of one is healthy for large established
manufacturers and that BS to Book ratios of up to four are
reasonable for transition stage companies that have completed their
principal product development and are focused on commercializing new
technologies. Enersys ( href="http://www.altenergystocks.com/comm/content/enersys/">ENS)
has had a strong run over the last two quarters but still has a way
to go before it achieves parity with Johnson Controls ( href="http://www.altenergystocks.com/comm/content/johnson-controls/">JCI).

Since Maxwell Technologies ( href="http://www.altenergystocks.com/comm/content/maxwell-technologies/">MXWL)
is currently sporting a BS to Book ratio at the top of the
reasonable range, I don’t look for it to outperform the market on a
go-forward basis. Active Power ( href="http://www.altenergystocks.com/comm/content/active-power/">ACPW),

on the other hand, seems to have significant upside potential if its
management can continue to execute. Baring unforeseen negative
developments, Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
should be an easy double as revenues continue to ramp and advanced
testing programs with a variety of first tier OEMs and battery users
mature into orders.

The energy storage sector occupies a unique position global industry
because it must prosper as
humanity changes the ways it produces and consumes energy. For those
who believe conservation of fossil fuels and waste minimization are
key elements of our energy future, batteries are essential. They’re
also essential to a future powered by intermittent power from the
wind and sun. No matter what you believe the path will be, the
future simply can’t happen without cost-effective energy storage.
It’s not just a desirable thing – it is an essential thing!

There aren’t any silver bullet technologies or killer apps in the
energy storage sector, but there are several emerging trends that
will create new multi-billion dollar markets over the next few
years. In that rapidly evolving environment, every company that can
offer a cost effective product will have more customer demand than
it can satisfy. As global demand for cost-effective energy storage
increases, so will margins and profitability.

Disclosure: Author is a
former director of Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
and holds a substantial long position in its common stock.

John Petersen

After eight years of rarely speaking above a whisper, Axion Power
International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
has found its voice, taken the scientific wraps off its PbC®
battery technology and shown potential customers, competitors and
investors that it’s carrying a big stick and is poised to dominate
energy storage for stop-start idle elimination – a cheap and
sensible fuel efficiency and emissions reduction technology that’s
expected to grow at spectacular rates for the rest of the decade as
shown in the following forecast of battery demand in vehicles
equipped with stop-start systems.

In a new white paper on dynamic charge acceptance that’s available
in the Investor section of its
website, Axion has thrown down the technology gauntlet and
shown why flooded and valve regulated lead-acid batteries from
Johnson Controls ( href="http://www.altenergystocks.com/comm/content/johnson-controls/">JCI),

Exide Technologies ( href="http://www.altenergystocks.com/comm/content/exide/">XIDE)
and others aren’t good enough for today’s stop-start systems and
won’t be good enough for even more demanding second generation
systems. In the process it’s also shown why a dual device system
from Maxwell Technologies ( href="http://www.altenergystocks.com/comm/content/maxwell-technologies/">MXWL)
and Continental AG ( href="http://seekingalpha.com/symbol/cttay.pk">CTTAY.PK) that
combines a supercapacitor module with a valve regulated AGM battery
can’t be an optimal solution either.

The basic problem is that stop-start systems require their batteries
to operate at a partial state of charge and conventional lead-acid
batteries rapidly deteriorate if they’re not kept fully charged.
There’s a fundamental mismatch between the needs of the application
and the capabilities of the battery. With flooded lead-acid
batteries the deterioration is obvious within weeks. With valve
regulated AGM batteries it takes a few months. As the battery
deteriorates, the mechanical systems just stop working. Stop-start
systems that lose their functionality over a few
weeks or a few months because of feeble batteries aren’t efficiency
technologies at all – they’re greenwash. Automakers desperately need
a better solution, but it has to be easy to manufacture, easy to
scale and cheap enough for a price sensitive mass market.

In simple terms, the PbC is a battery-capacitor hybrid that loves
operating at a partial state of charge and doesn’t deteriorate
rapidly with age. While the basic chemistry is pure lead acid, Axion
replaces the lead-based negative electrodes found in conventional
batteries with carbon electrode assemblies that eliminate battery
deterioration and pave the way for second-generation systems that
will offer even better performance. Since the white paper does a
fine job of explaining the science, I’ll focus on the business
dynamics that favor rapid launch and widespread implementation of
the PbC technology.

The PbC offers 10x the dynamic charge acceptance and 20x the
cycle-life of conventional lead acid batteries for one reason – it’s
a third-generation device that takes valve regulated AGM battery
technology to a whole new level. While the science underlying the
PbC technology was patented in 2002, the challenge was developing
production methods and equipment that could leverage existing
manufacturing and distribution infrastructure instead of replacing
it. Axion spent eight years developing PbC electrode assemblies that
can be used as plug-and-play replacements for the lead-based
electrodes used by battery manufacturers worldwide. The last step is
earning OEM certification for its automated electrode manufacturing
processes. Once the OEM’s have certified Axion’s electrode
manufacturing processes, it will be easy for an AGM battery
manufacturer to substitute PbC electrode assemblies for their
conventional lead electrodes and offer a better battery to customers
without having to requalify their factories or their products.

Unlike other battery manufacturers that want to build new factories
and develop new customers, or wrestle business away from entrenched
competitors, Axion plans to pursue a platform technology strategy
where it will focus on manufacturing a high value component for sale
to existing manufacturers that want to offer a better product to
current customers. Axion’s strategy was lifted from the Intel
playbook. They don’t care who manufactures the battery for a
particular customer as long as it uses Axion’s electrodes. With a
strong intellectual property estate that will keep new entrants away
from its sandbox, Axion is well positioned to forge a variety
of cooperative relationships with battery manufacturers worldwide.

The only battery technology on the market that can offer comparable
performance in stop-start applications is lithium-ion. While
lithium-ion developers like A123 Systems ( href="http://www.altenergystocks.com/comm/content/a123/">AONE)
are actively developing products for the stop-start market, their
batteries are more expensive than the PbC and harder to scale
because they can’t leverage existing infrastructure. They also
suffer from significant cold weather performance issues and have
limited potential for future cost reductions while the PbC is at the
upper left-hand corner of the learning curve. There’s a reason that
first tier battery buyers like BMW and Norfolk Southern publicly
aligned themselves with the PbC technology before there was a PbC
product.

In his seminal book The
Innovator’s Dilemma, Dr. Clayton Christensen uses the term
disruptive
technologies to describe low-cost innovations that satisfy new
customer needs, improve over time and eventually displace
established technologies. The following graph illustrates the
phenomenon.

If you believe Dr. Christensen’s theory it’s impossible to believe
that lithium-ion batteries that were developed for the most
demanding uses will be the ultimate winner in energy storage for
stop-start idle elimination. Technologies simply do not transition
downstream from high quality uses to low quality uses. Disruptive
technologies always start at the bottom and work their way to the
top. Given a choice between embracing the PbC technology and working
with Axion or losing critical market share to more expensive
lithium-ion products, the lead-acid battery industry will do the
only sensible thing.

At yesterday’s close Axion had a $48 million market capitalization
and a serially patented technology that holds the price and
performance keys to a multi-billion dollar market. The math seems
obvious to me. In less than two weeks Axion will present at the
Rodman & Renshaw conference in New York. It’s stock had a strong
run in February and March of this year after similar presentations
at lower tier cleantech conferences sponsored by Piper Jaffray,
Jefferies and Kaufman Bros. While the first run was crushed by
selling pressure from a couple of large stockholders, cumulative
trading data leads me to believe that the willing sellers are
effectively out of stock and can’t cause a comparable reversal of
the next run.

Disclosure: Author is a
former director of Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
and holds a substantial long position in its common stock.

John Petersen

Today is the third anniversary of my blog on investing in energy
storage. While the last three years have been profoundly troubled by
a market crash, a slow recovery and more ups and downs than a roller
coaster, energy storage has been surging to prominence as investors
realize that batteries, products we all love to hate, are a critical
enabling technology for wind and solar power, efficient
transportation, the smart grid and hundreds of other applications
that make life more pleasant. With each passing day it’s
increasingly clear that energy storage is an investment mega-trend
that will endure for decades. Most of the smart money is still on
the sidelines looking in, which explains the popularity of my blog.
As the smart money transitions from analyzing opportunities to
making investments, the sector should encounter rising tides that
lift all boats.

Thomas Edison was the first to identify the biggest risk of energy
storage investing a century ago when he complained:

“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.”

The problem isn’t really the batteries, which haven’t improved all
that much over the last century. Instead, the problem lies in the
fertile imaginations of investors, ideologues and demagogues who read about scientific
discoveries in research laboratories, overestimate the value of
those discoveries and then make a wildly optimistic leap from
the reasonable to the absurd.

The two most common forms of batteries are carry-over relics of the
19th century. Lead-acid batteries have been around for 150 years and
spiral wound batteries have been popular for almost as long. While
battery chemistry has changed over the years and manufacturing
methods have been modernized, the energy storage capacity of today’s
best batteries is only four or five times greater than the energy
storage capacity of the batteries Edison complained about.
Regardless of what you read in the paper or hear on the news, making
a better battery is very hard work and the vast majority of exciting
new discoveries never make it from the laboratory bench to the
factory floor because they’re just too expensive.

It’s fun to daydream about the technical possibilities of portable
power, but the market will only pay for cheap, reliable and safe
portable power. The chasm between technical possibility and economic
viability is both wide and deep.

Today’s most common myth in energy storage is that exponential
performance gains will be accompanied by rapidly falling
prices. The current issue of Science includes an article titled “ href="http://www.sciencemag.org/content/332/6037/1494">Getting
There” that offers a classic example of how the mythology
grows and spreads. The article’s centerpiece is the following graph
that compares the theoretical potential of battery materials and the
best results obtained in working cells.

A quick read through the article and a glance at the graph would be
enough to convince any reasonably imaginative person that a golden
age of battery powered everything is just around the corner. The
undeniable facts the article and the gee-whiz graph don’t explain
with any force are:

• All lithium-ion batteries in commercial production are in the
  first category;
• The performance differences between today’s lithium-ion
  chemistries are minor;
• Current technologies offer little room for improvement because
  the theoretical limits are absolute;
• The first category are the only batteries we know how to manufacture in bulk;
• All advanced battery technologies will require the development of
  completely new manufacturing methods and equipment;
• All advanced technologies will require the construction of
  different infrastructure from the ground up;
• All advanced technologies are five to ten years from
  production if everything goes right; and
• The companies that own the best current technologies do not
  own their advanced counterparts.

In other words each step forward will make all the science and all
the manufacturing infrastructure required for the prior generation
of lithium-ion batteries obsolete. It’s the epitome of creative destruction
where the future poses an existential threat to the past, but the
future can’t leverage, build upon or even use the massive
infrastructure investments of the past. Progress in IT was immense
and rapid because every step along the path built upon and leveraged
the past. Progress in energy storage is agonizingly slow
because innovation that builds upon and leverages the past is rare.

In href="http://seekingalpha.com/article/85365-lithium-ion-batteries-and-centerfolds">my
first Seeking Alpha article, I wrote that the market prices
for Ener1 ( href="http://www.altenergystocks.com/comm/content/ener1/">HEV)
and Altair Nanotechnologies (ALTI) resulted in “nosebleed market
capitalizations based on little more than dreams.” In September 2008,
href="http://seekingalpha.com/article/93401-opportunities-in-energy-storage-stocks">I
added Valence Technologies ( href="http://www.altenergystocks.com/comm/content/valence-technologies/">VLNC)
to my list of dangerously overvalued lithium-ion battery developers
because like Jacques Cousteau it was under water to the tune of
$68.4 million at mid-year. In October 2009, href="http://www.altenergystocks.com/archives/2009/10/a123_systems_vs_byd_and_other_irrational_battery_investments.html">I
added BYD Co. Ltd. ( href="http://seekingalpha.com/symbol/byddf.pk">BYDDF.PK) to my
list and wrote that it was “a classic example of why it’s never a
good idea to make investment decisions based on simple questions
like “What did Warren do?” In November 2009, href="http://www.altenergystocks.com/archives/2009/11/grid_enabled_vehicles_i_told_you_so.html">I
added A123 Systems ( href="http://www.altenergystocks.com/comm/content/a123/">AONE)
to the list observing that it was “well up the hype cycle curve and
approaching the Peak of Inflated Expectations.” href="http://www.altenergystocks.com/archives/2010/11/high_conviction_paired_trade_short_tesla_motors_and_buy_exide_technologies_1.html">Last November, I added the magical gravity defying Tesla
Motors ( href="http://www.altenergystocks.com/comm/content/tesla/">TSLA)
to my list and suggested a paired trade that would short Tesla and
buy Exide Technologies ( href="http://www.altenergystocks.com/comm/content/exide/">XIDE).
In every case the reader outrage over my criticisms was palpable.
You’d have thought I was torturing kittens. Subsequent price performance
tells a very different story. The following table summarizes the market price of
each of these companies when I first openly criticized them, their
closing price last Friday, and the percentage decline in the interim.

My record at picking winners isn’t perfect, but I’m batting a thousand when
it comes to identifying over-hyped stocks near the peak of inflated expectations.

Since I first criticized them, A123 and BYD have fallen to levels
where they’re beginning to look attractive for long-term investors
who believe in the future of electric transportation and are not
concerned about a href="http://www.altenergystocks.com/archives/2011/07/the_lithiumion_battery_glut_will_be_massive_1.html">looming
glut of lithium-ion battery manufacturing capacity that will increase losses
and force marginal manufacturers out of business without reducing material,
manufacturing or finished battery costs. In
spite of the happy talk from Silicon Valley and buy-side cheerleaders, Tesla hasn’t even
started to bleed. Ener1, Altair and Valence may survive, but only if
they can negotiate massive capital infusions on terms acceptable to new money.

I’ve been bullish about the lead-acid battery sector for years
because the major battery manufacturers including Johnson Controls ( href="http://www.altenergystocks.com/comm/content/johnson-controls/">JCI),
Exide and Enersys ( href="http://www.altenergystocks.com/comm/content/enersys/">ENS)
have global manufacturing footprints, established product lines,
strong customer relationships, billion dollar revenue streams and
rust-belt market capitalizations. My favorite in the group is Exide
because it trades at a significant discount to its peers and is href="http://seekingalpha.com/article/273156-exide-technologies-post-earnings-a-great-buying-opportunity">well-positioned
to out-perform market expectations on a go-forward basis.

In light of recent forecasts that href="http://www.altenergystocks.com/archives/2011/06/ohnson_controls_forecasts_enormous_stopstart_growth.html">stop-start
idle elimination will be deployed in almost a hundred million cars
over the next five years, I think JCI and Exide are facing a
dream scenario where unit volumes remain stable
but per unit revenues double and margins ramp sharply as customers
gravitate to their premium AGM products.

My old company Axion Power ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
has not been a stellar stock market performer over the last couple
years, but the delays have arisen from the stringent manufacturing
and quality control requirements of it’s principal potential customers. Since I
can’t remember another instance where huge companies like
BMW and Norfolk Southern have publicly aligned themselves with a
nano-cap technology developer that hasn’t even launched its first
product, I can live with delays that disappoint the market but please them.

The last three years have been a lot of fun and intelligent comments
from knowledgeable readers have provided a balance and breadth that
I could never have achieved on my own. New readers in particular may
find it helpful to peruse href="http://seekingalpha.com/author/john-petersen/articles">my
article archive, but be sure to spend enough time reading the
comments to understand where the views of others differ from mine. I always
try to explain the factual basis for my opinions and provide links
to relevant source documents, but in the end I’m only human and I
can only speak from the shoes I stand in. I want to thank everyone
for their respective contributions, even those who haven’t learned
how to disagree without being disagreeable.

Disclosure: Author is a
former director of Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
and holds a substantial long position in its common stock.

John Petersen

I hate being wrong, but Mother always taught us, “if you have to eat
crow don’t nibble.”

In February 2010 I wrote an article titled “ href="http://www.altenergystocks.com/archives/2010/02/why_i_dont_expect_a_lithiumion_battery_glut_1.html">Why
I Don’t Expect A Lithium-Ion Battery Glut” that’s shaping up
as one of the worst predictions in the history of my blog. This week
Lux Research published a report titled “ href="http://www.luxresearchinc.com/images/stories/brochures/Press_Releases/RELEASE_EVs_Partnerships_7_12_11.pdf">Using
Partnerships to Stay Afloat in the Electric Vehicle Storm”
that has me convinced that the capacity glut in lithium-ion
batteries will be massive for at least a decade.

I humbly and sincerely apologize to any readers who
bought shares in lithium-ion battery developers based on my starry-eyed
optimism for the EV battery market.

The basic premise of my February 2010 article was that while plug-in
electric vehicles would almost certainly die a slow and agonizing
death from the href="http://www.altenergystocks.com/archives/2010/01/lithiumion_batteries_are_too_valuable_to_waste_on_plugin_vehicles_1.html">congenital
birth defects that have doomed every generation of EVs to the
scrap heap of history, booming sales of electric two-wheeled vehicles, or
E2Ws, and Prius-class hybrid electric vehicles, or HEVs, would be
enough to absorb the slack. With eighteen months of history to look
back on, it’s just not working out the way I thought it would.

As I expected, plug-in vehicles are drawing breathless reviews from
the press and EVangelicals, and indifference or outright scorn from the
car buying public. Automakers are toying with plug-in vehicle
concepts that may go into production over the next few years if
the plans aren’t scrapped due to customer apathy, but they’re
all rushing to make href="http://www.altenergystocks.com/archives/2011/06/ohnson_controls_forecasts_enormous_stopstart_growth.html">new fuel efficiency technologies like stop-start idle
elimination standard equipment. With the exception of Advanced
Battery Technologies ( href="http://www.altenergystocks.com/comm/content/abat/">ABAT)
which makes both ebikes and the batteries that power them, E2W manufacturers are letting their customers decide and the overwhelming
majority of E2W buyers are voting with their wallets and deciding
that cheap and reliable lead acid batteries are better suited to
their needs despite a little extra weight.

Can you believe it? Cheap is beating cool. Who could have predicted
such an outcome in the depths of the worst financial crisis since the 1930s?

In all seriousness, Lux forecasts a catastrophic supply and demand
imbalance in the lithium-ion battery sector over the next decade. On
the supply side it predicts that global manufacturing capacity will
ramp to about 21,000 MWh by next year (875,000 Leaf-class BEVs)
and climb to almost 30,000 MWh (1.25 million Leaf-class BEVs) by
2015. On the demand side, Lux’s optimistic case based on $200 oil
predicts annual battery sales of about 6,000 MWh in 2015 (250,000
Leaf-class BEVs) ramping to 22,500 MWh (937,500 Leaf-class BEVs)
by 2020. Under their more conservative $140 oil price
scenario, demand won’t hit 6,000 MWh until 2020. The low oil price
scenario is aggressively ugly. Is it any wonder that href="http://www.automotiveworld.com/news/components/88064-france-renault-battery-plant-loan-withdrawn">France
has recently withdrawn €100 million of subsidized loans for a
planned Renault battery plant?

The Lux forecast is bad news for diversified first tier
manufacturers like LG Chem, GS Yuasa, SB LiMotive, AESC, and Sanyo;
terrible news for financially sound second tier manufacturers like Toshiba, Hitachi,
and JCI-Saft; and an “existential threat” for emerging third tier battery
developers like A123 Systems ( href="http://www.altenergystocks.com/comm/content/a123/">AONE),
Ener1 (HEV),
Valence Technologies ( href="http://www.altenergystocks.com/comm/content/valence-technologies/">VLNC)
and Dow Kokam that were counting on transportation markets that are
unlikely to develop.

Now you know why so many lithium-ion battery developers are suddenly
talking trash about using their batteries for grid-scale storage. In
the near future, that myth will be buried along-side its brother the
electric car because the world’s utilities can’t possibly soak up
20,000 to 25,000 MWh per year of excess lithium-ion battery
manufacturing capacity.

Last February, the Department of Energy released a comprehensive
study on the economic potential of grid-based storage titled “ href="http://www.smartgrid.gov/sites/default/files/pdfs/sandia_energy_storage_report_sand2010-0815.pdf">Energy
Storage for the Electricity Grid: Benefits and Market Potential
Assessment Guide.” It was commissioned by the href="http://www.sandia.gov/ess/About/mission.html">Energy Storage
Systems Program and written by Jim Eyer and Garth Corey. Based
on the conclusions of that study, which I discussed in “ href="http://www.altenergystocks.com/archives/2010/02/gridbased_energy_storage_a_200_billion_opportunity.html">Grid-Based
Energy Storage; A $200 Billion Opportunity,” I cobbled
together a table that identifies the principal
grid-based energy storage applications, quantifies the potential
national demand and quantifies the 10-year economic value for
a kilowatt-hour of grid-based storage dedicated to an
application. The table is mine, but the baseline numbers are Sandia’s.

The color coding in the table represents my attempt to segregate
system value per kWh into cool technologies like flywheels,
supercapacitors and lithium ion batteries, which are highlighted in
blue, and cheap technologies like flow batteries, lead-acid
batteries, compressed air and pumped hydro, which are highlighted in
yellow. If you total up the potential demand for all of the blue
highlighted applications and throw in the orange for good measure,
you get to a likely US demand of 11,500 MWh spread over a period of
several years. It won’t make a dent in 20,000 to 25,000 MWh per year of excess
lithium-ion battery manufacturing capacity.

Like bloggers, outfits like Lux want every dark cloud to have a
silver lining and their new report is no exception. In addition to
forecasting doom, gloom and bust for the lithium-ion battery space, it
focuses on the expected development of a $300 million annual market
for supercapacitors in the transportation markets. In that market,
Lux identified Maxwell Technologies ( href="http://www.altenergystocks.com/comm/content/maxwell-technologies/">MXWL)
as the dominant competitor and took pains to observe that “For the
numerous supercapacitor technology developers to gain market share
in transportation, they will need to validate products with a clear
edge over Maxwell’s incumbent technology, and not rely on growing
demand to create ripe opportunities for new entrants.”

While I’m a fan of Maxwell’s products and business potential, I’d be
remiss if I didn’t point out that its stock trades at 4.3 times book
value and 3.3 times trailing twelve-month sales of $131 million.
Even if you assume that Maxwell will walk away with the lion’s share
of the $300 million transportation supercapacitor market that Lux is
forecasting for 2016, its upside potential will be limited as it
negotiates the transition out of the valley of death and begins
trading on the basis of sales, growth and profitability.

Disclosure: Author is a
former director of Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
and holds a substantial long position in its common stock.

John Petersen

On June 27th Johnson Controls ( href="http://www.altenergystocks.com/comm/content/johnson-controls/">JCI)
hosted their href="http://www.johnsoncontrols.com/publish/us/en/investors.html">2011

Power Solutions Analyst Day and unveiled their expectations
for the future of stop-start idle elimination systems. After noting
that all automakers are developing a range of powertrains, JCI used
this graph to emphasize their view that the overwhelming bulk of
alternative powertrain vehicles over the next five years will have
simple, cost effective and fuel efficient stop-start systems.

You don’t see much about stop-start systems in the mainstream media
because politicians and reporters are too enchanted with plug-in
vehicles and other exotica to deal with mundane issues like purchase
prices and payback periods, but JCI has made it crystal clear that
its meat and potatos business over the next five years will be
cheap, not cool.

JCI’s estimates for market growth over the next ten years were
equally impressive, particularly when you realize that the advanced
energy storage systems required for stop-start generate twice the
per unit revenue and three times the per unit margins of flooded
lead-acid batteries. It’s a manufacturer’s dream come true, stable
unit volumes with rapidly increasing revenues and margins.

In their presentation JCI explained that the three key
attributes of energy storage systems for stop-start are:

• Cycling – reliable
  system charge/recharge cycles over time;
• Useable energy – range
  of stored energy that can be used to optimize the system; and
• Charge acceptance –
  rate of recharge to maximize opportunity capture.

It ties perfectly to a href="https://files.me.com/john.petersen/r941cj">joint
presentation from BMW and Ford at last fall’s European Lead
Battery Conference where the two automakers explained why the
stop-start duty cycle is so hard on conventional batteries. In a
normal vehicle, you start the engine at the beginning of the trip
and turn it off at the end. In a car equipped with stop-start, the
engine turns itself off automatically every time the car is stopped
and restarts automatically when the driver takes his foot off the
brake. While the difference between one start per trip and one start
per mile is enormous, a more critical problem arises from the fact
that stop-start systems require the battery to carry all accessory
loads during frequent engine off intervals.

In the segment of the BMW-Ford presentation that quantified a
typical stop-start duty cycle, the accessory load was 50 amps for 60
seconds, or about 3,000 amp seconds while the starter load was 300
amps for one second. In other words, the accessories accounted for a
whopping 91% of total load. Their graph of AGM battery performance
over time shows that charge acceptance (the downward curving blue
line) plummets as the battery ages while the time required to
recover from an engine off event (the upward curving red line) soars
from 30 seconds to three minutes or more.

Since all systems are designed to disable the stop-start
functionality until the battery has recovered an acceptable state of
charge, system efficiency falls off rapidly as the battery ages. The
automakers want and need something better than AGM batteries, the
principal solution that old line auto battery manufacturers like JCI
want to provide.

The first advanced technology introduced for stop-start systems was
developed by href="http://www.altenergystocks.com/archives/2010/10/maxwell_announces_an_important_stopstart_design_win.html">Continental
AG in cooperation with Maxwell Technologies ( href="http://www.altenergystocks.com/comm/content/maxwell-technologies/">MXWL)
for use in diesel stop-start systems from Peugeot. In this dual
device configuration an AGM battery carries the accessory load and a
supercapacitor module carries most of the starter load. It insures a
reliable engine restart, but can’t do much about the bigger problem
of accessory loads. Contiental and Maxwell expect that their system
will be installed in up to a million Peugeot vehicles in the next
three years. If the system works well for Peugeot and stop-start
vehicle sales ramp as rapidly as JCI expects them to, implementation
rates will probably be higher.

A second advanced technology solution for stop-start systems is a
third generation lead-acid-carbon hybrid that’s being developed by
Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB),

which hopes to begin a commercial roll-out of its PbC battery later
this year. In a joint
presentation by BMW and Axion at last fall’s ELBC, the
performance differences were obvious. The graph that tracked PbC’s
performance over time using the BMW-Ford test protocol showed that
charge acceptance (the flat blue line) stayed stable at 100 amps, or
twice the charge acceptance of a new AGM battery, while recovery
times (the flat black line) remained stable at 30 seconds.

The BMW-Ford graph shows that AGM batteries fade very rapidly over
the first 5,000 miles of use in a stop-start equipped vehicle. The
BMW-Axion graph shows that the PbC offers optimal performance
through 40,000 miles. In a recent presentation at the href="http://www.advancedautobat.com/conferences/automotive-battery-conference-Europe-2011/index.html">2011

Advanced Automotive Battery Conference in Mainz, Germany,
Axion unveiled an updated graph of follow-on testing through 80,000
cycles, or approximately eight years of use, with only modest
degradation.

I’ve been bullish about the future of stop-start idle elimination
technology for a couple years. If the JCI forecasts are even close
to accurate, I’ve been seriously understating the potential. Since
JCI is the largest lead-acid battery manufacturer in the world and
has a 36% share of the global automotive OEM and battery replacement
markets, it will undoubtedly be the biggest beneficiary of the rapid
worldwide implementation of stop-start idle elimination systems. The
second biggest beneficiary will probably be Exide Technologies ( href="http://www.altenergystocks.com/comm/content/exide/">XIDE),

which is emerging from several years of tough restructuring and
trades at a significant discount to JCI on a forward looking
earnings basis. Emerging technology developers like Maxwell and
Axion also have significant opportunities to grab a sizeable share
of what’s shaping up as $6 to $12 billion market niche. Their
respective market capitalizations are summarized below:

As former Axion director, I’m all too aware that it’s a very little
fish in a very big pond. I also understand why the PbC’s extreme
cycling performance and charge acceptance can be crucial to the
future development of stop-start, a world-class fuel efficiency
technology that’s already being produced at scale and will become
dominant in this decade. It’s easy to dismiss my ramblings
because I have a large stake in Axion. It’s harder to dismiss BMW, a
first tier automaker that joined Axion as a co-presenter at last
year’s ELBC. It will be darned near impossible to dismiss a big
three US automaker that’s apparently signed on as an Axion
subcontractor in a pending DOE grant application.

Disclosure: Author is a
former director of Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
and holds a substantial long position in its common stock.

John Petersen

Last Wednesday Maxwell Technologies ( href="http://www.altenergystocks.com/comm/content/maxwell-technologies/">MXWL)
href="http://finance.yahoo.com/news/Maxwell-Technologies-prnews-4112001946.html">announced
the launch of a new ultracapacitor product that insures reliable
engine starting for commercial trucks and other heavy vehicles.
According to the href="http://www.eia.gov/forecasts/aeo/sector_transportation.cfm">Energy
Information Administration, the existing US fleet includes 4.2
million heavy-duty diesel trucks. All of these vehicles are subject to
strict anti-idling laws and regulations that strain their battery
systems and increase the risk that the engine won’t be able to start
when it needs to. While a dead battery is a pain for the average
consumer, it can cause a world of problems for a commercial truck that
has to stay on schedule and can’t afford the lost time or the
out-of-pocket costs associated with a roadside service call.

The Maxwell solution is simple, but effective. They’ve packed twelve of
their 3,000 Farad BoostCap ultracapacitors into a standard Group 31
battery case along with the necessary control electronics. Since heavy trucks
frequently use four or more lead-acid batteries to power starting, lighting
and accessories, the ultracapacitor pack is swapped for one of conventional
batteries, wired directly to the starter and then connected to the rest of the electrical
system. The installation is simple and can be done in less than an hour. Once the ultracapacitor
pack is installed, it will assure trouble-free starting for the life of
the truck even if the batteries get severely depleted. With an expected
retail price of $1,299, the product should pay for itself in a couple
of years by reducing the frequency of battery replacements, avoiding
service calls that can cost up to $600 each and reducing downtime costs
including late deliveries and spoilage of perishable products.

While Maxwell has not released specifics on its expected revenue per
ultracapacitor pack, I’d have to guess that something on the order
of half the retail price should flow back to Maxwell. With a national
fleet of 4.2 million trucks and a revenue potential of $650 per
vehicle, the addressable market works out to $2.7 billion. It’s a niche
market, but a very attractive opportunity in a transportation sector
that truly needs a better energy storage solution for starter systems.

Maxwell was kind enough to share their preliminary marketing
presentation with me and it clearly lays out the advantages. The
ultracapacitor pack draws its energy from the other lead-acid batteries
with a trickle charge that takes about 15 minutes and draws about 36
watt-hours of energy from batteries that have a combined capacity of
roughly 3,000 watt-hours. When it’s fully charged the ultracapacitor
pack can deliver up to 1,900 amps of starting current and support up to
three cold cranking events per charge. Since the system is ultracapacitor based,
temperatures as low as -40° F will not impact performance.

While the product is an important milestone for Maxwell, it’s also a
great object lesson in how economies of scale work. The ultracapacitors
Maxwell will use in the system are part of its href="http://www.maxwell.com/products/ultracapacitors/docs/DATASHEET_K2_SERIES_1015370.PDF">K2
series. These are the same basic devices that Maxwell uses for its
hybrid bus and wind turbine products. Each of the 12 ultracapacitors is
roughly the size of a soda can, which makes integration into a compact
starter pack relatively straightforward. The biggest reason Maxwell could afford
to develop this product for the trucking industry is that it’s already
making millions of the basic ultracapacitor every year and the new
starter solution is simply another use for a proven product that’s
already being manufactured at scale. As a result Maxwell was able to
develop the product in-house and plans to take it directly to end-user
and OEM markets without bringing in another manufacturer as a partner.
It should enjoy a significant first mover advantage, retain a higher
degree of control over its own destiny and enjoy higher long-term
margins than it would if the product had been developed in cooperation
with somebody else.

Last fall Maxwell’s stock price ran from $12 to $17 in response to an href="http://www.altenergystocks.com/archives/2010/10/maxwell_announces_an_important_stopstart_design_win.html">automotive
design win that will involve the installation of $50 BoostCap
modules in up to a million new passenger cars over the next three
years. When I compare the relative value of the two products and the
fundamental end-user benefits of the two solutions, I have to believe
the starter solution for heavy trucks will be an order of magnitude
more important to Maxwell’s top and bottom lines over the next few
years.

This is a very important product announcement that the market seems to
have missed.

Disclosure: None.

John Petersen

I’m a cynic and a heretic when it comes to plug-in vehicle schemes
because most defy the laws of economic gravity and violate a cardinal
rule that
Ford engineers developed for the href="http://en.wikipedia.org/wiki/Ford_Ecostar">EcoStar light
delivery vehicle program in the early ’90s:


– The unloaded
weight of a plug-in vehicle should never exceed 70% of its loaded
weight.

Investors who pay attention to this simple rule can easily distinguish
between pipe-dream vehicle electrification schemes that are nothing
more than feel-good
eco-bling and realistic vehicle electrification projects that make
economic sense.

For the last few weeks I’ve been studying a technology partnership
between Norfolk Southern (NSC)
and
Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
that
is developing cost effective battery and hybrid electric drive
retrofit systems for railroad locomotives. After extensive research
I’ve decided that battery and hybrid electric locomotives are
applications that even a heretic can
love because:

• Vehicle weight to cargo weight ratios range from good to
  extraordinary;
• Expected payback periods are in the three to four year range;
• Electric retrofits can avoid emissions abatement costs
  mandated by EPA
  regulations; and
• Axion’s PbC technology appears likely to overcome the battery
  problems
  that plagued earlier efforts.

Like e-bikes, stop-start idle elimination and hybrid electric vehicles,
battery and hybrid electric locomotives are clean fuel efficiency
technologies that just make sense.

The Green Goat

The first hybrid electric switching
locomotive was introduced in 2004 by Railpower Technology and called
the “Green Goat.” It replaced the 1,750 hp diesel engine in a General
Motors EMD GP9
locomotive with a 290 hp diesel generator
and 60,000 pounds of lead-acid batteries that offered a combined power
output of 2,000 horsepower. The Green Goat’s core strengths were a href="http://www.wired.com/science/planetearth/news/2005/03/66998">$750,000
price
tag that compared favorably with the $1.5 million price of a
new switching unit and a battery dominant hybrid electric drive
promised fuel savings of 40% to 60%. Subsequently, Railpower launched a
smaller version called the “Green Kid” that offered a combined power
output of 1,000 horsepower.

In a href="http://www.tc.gc.ca/eng/programs/environment-ecofreight-rail-tools-casestudies-idc-99.htm">year
long
field trial by IDC Distribution Services, the operator of an
inter-modal port facility in British Columbia, the Green Kid logged 3.6
million feet of switching operations over 2,347 hours, saved 10,450
gallons of diesel fuel, and reduced CO2, CH4
and N2O emissions by 53% compared to a conventional
switching locomotive.

Initially, the Green Goat was well received and railroads including
BNSF, Union Pacific (UNP)
and
Canadian Pacific (CP)
ordered a combined total of 175 units. Despite the initial marketing
successes, the Green Goat had significant battery problems and only 55
units were delivered before Canadian Pacific returned four units and
canceled the balance of a 35-unit order citing unsatisfactory
performance. The company went bankrupt in 2009 and href="http://www.american-rails.com/green-goat-locomotives.html">emerged
as a subsidiary of the RJ Coleman Co. that no longer builds the Green
Goat.


The NS 999

In 2009, href="http://www.nscorp.com/nscportal/nscorp/Media/News%20Releases/2009/batteries.html">Norfolk
Southern unveiled an experimental electric switching locomotive
that it built in cooperation with the Department of Energy, the Federal
Railroad
Administration and Penn State University with the aid of a $1.3 million
Federal grant. Unlike the Green Goat, the NS 999 draws all its power
from an array of 1,080 lead-acid batteries that provide a power output
of 1,500 horsepower. The project’s goal was to demonstrate the
feasibility of a plug-in battery powered locomotive that would
eliminate direct rail yard emissions and save up to 50,000 gallons of
diesel fuel per year.

During href="http://www.nscorp.com/nscportal/nscorp/Employees/BizNS/2009/1-6.html">initial
trials
with 80% of its batteries connected, the NS 999 “ style="font-style: italic;">operated a full switcher shift, at one
point pulling 2,200 tons of rail cars on an uphill track – without
using a sanding system, which helps locomotives gain traction. After
the shift, the four-axle locomotive had enough juice in its 12-volt
batteries to run two more eight-hour shifts.” Like the Green
Goat, however, the NS 999 ran into battery performance issues that had
Norfolk Southern evaluating lithium-ion batteries, nickel-based
batteries and advanced lead-acid batteries in a matter of weeks. In
June of 2010 Norfolk made its battery technology selection and
recruited Axion Power to develop a new battery management system and
integrate its disruptive PbC battery technology into the NS 999.
The project is scheduled for completion later this year.

In addition to the NS 999 project, Norfolk Southern is working with
Axion to develop a retrofit hybrid drive system for multi-purpose
locomotives that will use 1,600 to 1,700 PbC batteries to improve fuel
economy in long distance freight transportation. A prototype is
expected by next spring.

The Battery Problem

The fundamental battery problem encountered by both the Green Goat and
the NS 999 is a chemical process known as negative electrode sulfation.
During discharge, a lead-acid battery’s electrodes are partially
dissolved and lead sulfate is created. During charging, the bulk of the
lead sulfate gets dissociated and redeposited on the electrodes. In
practice complete dissociation of lead sulfate never happens. Instead,
a portion of the lead sulfate is deposited on the negative electrode in
the form of hard crystals. As the number of cycles increases so does
the level of crystallization. When the crystal build up is extreme, the
battery fails. The following electron micrographs show how sulfation
increases over time in a shallow-cycle partial state of charge
environment.

The PbC Solution

Axion’s patented PbC battery is a hybrid device that uses conventional
lead plates for the positive electrodes and carbon electrode assemblies
for the negative electrodes. The PbC is technically classified as an
asymmetric ultracapacitor. Due to its unique architecture, the PbC does
not experience negative electrode sulfation. It also offers
significantly higher charge and discharge currents than a conventional
lead-acid battery. In a shallow cycling environment like the Green
Goat, prototype PbC batteries have demonstrated the ability to
withstand tens of thousands of cycles without degradation. In a deep
cycling environment like the NS 999, prototype PbC batteries have
demonstrated the ability to withstand up to 2,000 cycles at a 100%
depth of discharge without battery damage.

After several years of working with alpha and beta prototypes of its
PbC electrodes and electrode fabrication processes, Axion is just now
completing the installation, optimization and certification of its
first commercial electrode fabrication line. While it has not launched
a commercial product yet, that launch is expected later this year.

The Business Opportunity

North America’s Class I Railroads operate a combined fleet of
approximately 1,500 switcher units that each burn about 50,000 gallons
of diesel fuel per year. The average switching locomotive is 30 to 40
years old and was manufactured during an era when emissions control
regulations were far less stringent than they are today. As a result of
new EPA regulations and a variety of state air quality initiatives, the
railroads are under intense pressure to reduce N2O and
particulate emissions in their switching yards, which are often located
in heavily populated urban areas.

Based on a recent report to the href="http://www.arb.ca.gov/railyard/ted/tedr_loco_options.pdf">California
Air
Resources Board, it appears that the cost of bringing an old
locomotive up to current standards is roughly equivalent to the cost of
converting an old locomotive from diesel-electric to battery powered
electric. While an emissions abatement upgrade will improve fuel
economy through the application of newer technology, a battery retrofit
can eliminate all direct emissions and fuel consumption. Based on a
current off-road diesel price of $3 per gallon and an estimated fuel
consumption of 50,000 gallons per year, a battery retrofit should offer
a payback period in the three to four year range. In comparison, the
payback period for an emissions abatement upgrade will be closer to ten
years. The long-term revenue potential of retrofitting a portion of the
switcher fleet to run on batteries isn’t a company maker, but it’s a
darned good start.

The Voting Machine

Over the last year Axion’s stock price has stagnated in the $0.50 to
$0.75 range as shares that were sold in December 2009 moved from
relatively weak hands to stronger hands. While I’ve responded to
countless comments and questions from readers, many have missed the
crucial fact that Axion is focused on completing the development of its
technology, rather than marketing a fully developed product. It’s never
had a marketing team and except for the odd technical presentation at
industry events, its selling efforts have been non-existent.

Despite a lack of marketing for a development-stage product that wasn’t
ready for commercial use, Norfolk Southern found the path to New Castle
because it was looking for a cost-effective solution to a critical
performance problem that could not be solved with conventional
lead-acid batteries. Based on its own technical evaluation of the
prototype PbC batteries Axion was able to make in 2009, Norfolk
Southern hired Axion to design and build a new battery management
system that would facilitate the integration of PbC batteries into the
NS 999. After about eighteen months of working with the technology, the
refurbishing project for the NS 999 continues apace. If there was any
substantial reason to believe the PbC would not stand up to the rigors
of the NS 999, Norfolk Southern would have terminated its relationship
with Axion long ago. The same can be said for BMW which also found the
path to New Castle because it was looking for a cost-effective
solution to a crucial performance problem that could not be solved with
conventional lead-acid batteries.

In its last quarterly report, Axion disclosed that it had received
notification from the Department of Energy that a grant application
under the Vehicles Technology Program had passed the first round of
criteria testing and advanced to the final round of review. In its last
conference call, management told participants that the grant
application identified Axion as the prime contractor, and included a
top-three US automaker, a research university and a national laboratory
as subcontractors. While details of the application will remain
confidential until a funding decision is made, it appears that this
time around a first tier US automaker has found the path to New Castle
because it was looking for a cost-effective
solution to a critical performance problem that could not be solved
with conventional lead-acid or lithium-ion batteries.

Given the mainstream media’s infatuation with lithium-ion batteries,
the voting machine that is the market does not want to believe the PbC
will be a disruptive energy storage technology. When I consider the
growing parade of world-class companies that found the path to New
Castle before Axion even had a product to sell, I have to believe there
is more substance to the PbC than even I understand.

Disclosure: Author is a former
director of Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
and
holds a substantial long position in its common stock.

John Petersen

The last thing regular readers expect from me is an article praising a
vehicle electrification plan, but I’ve seen one that overcomes
most of the problems I’ve been writing about for the last couple years
and
is
simply too intelligent to ignore. It’s a uniquely Chinese solution to
their
particular problems, which means it might not
work in the U.S. or Europe, but the potential in the target market
could be huge.

Kandi Technologies ( href="http://www.altenergystocks.com/comm/content/kandi/">KNDI)
has developed the “KD5010″ a two-passenger electric vehicle for city
dwellers that looks a lot like a stretched Smart Car. Earlier versions
of the KD5010 include a 60-unit plug-in fleet that Kandi delivered to
the China Postal Service last summer and the Kandi-Coco, a shorter
plug-in “neighborhood electric vehicle” that Kandi’s distributors are
offering in the U.S. for $10,600 (before subsidies). From left to
right, the following picture shows the China Post version, the KD5010
and the Kandi-Coco.

The KD5010 costs about $6,000 in China (without batteries and before
subsidies) and has a
150-kilometer (100-mile) range with a top speed of 52 mph. Unlike its
sexier cousins from Nissan ( href="http://seekingalpha.com/symbol/nsany.pk">NSANY.PK), General
Motors (GM) and Tesla ( href="http://www.altenergystocks.com/comm/content/tesla/">TSLA),
the KD5010 doesn’t have a
plug. Instead, it draws the needed power from six flat-profile
lead-acid batteries that href="http://www.youtube.com/watch?v=BMocYfRbR84">slide into
horizontal slots under the driver and passenger doors and can be
changed in minutes with simple and inexpensive equipment. Without
batteries, the KD5010 tips the scale at 1,000 pounds. With batteries
the
total vehicle weight is closer to 2,000 pounds.

The genius of the KD5010 lies in the absence of a power cord and plug.
Instead of giving the owner the ability to decide when and where he
wants to recharge the batteries, the KD5010′s plug free design requires
the owner to drive to the nearest battery swapping station and pay
about $6.00
to have the discharged batteries replaced with fresh ones. The process
only takes a few minutes and should a KD5010 run out of power on the
road, an emergency roadside swapping service is available for a
modest premium. Discharged batteries are then returned to a smart
central
charging facility with a high capacity grid connection that can adjust
its demands as needed to optimize overall grid efficiencies.

The swapping stations and central charging facility are operated by
a three-party joint venture between Kandi (30%), Tianneng Power
International, China’s largest lead-acid battery manufacturer (30%),
and
Jinhua Bada Group, a unit of State Grid Power, a company that provides
91% of China’s electricity and ranks as the seventh largest corporation
in the world. Kandi launched its unique vehicle electrification and
battery swapping station plan in late November with its first sales to
retail customers in the city of Jinhua, China, but it’s easy to predict
a
wider rollout if the demonstration is successful.

The principal end-user advantages of Kandi’s approach to vehicle
electrification include:

• Offering automotive transportation to users who have no
  preconceived notions;
• Offering an electric alternative that’s cheaper and lighter than
  a conventional car; and
• Offering a battery swapping system that’s comparable to a quick
  fill-up with $3 gasoline.

The advantages to Kandi and its charging infrastructure partners
include:

• Conducting battery charging in a dedicated facility that can
  optimize battery life and performance;
• Centralizing battery charging to eliminate infrastructure build
  out costs and grid stability issues;
• Facilitating the recycling of old batteries while
  alleviating raw material supply chain issues; and
• Generating recurring long-term revenue from battery swapping
  operations.

The battery-swapping plan is just plain smart. Since the KD5010 uses
lead-acid batteries, the battery cost of roughly
$1,500 per vehicle includes about $1,000 in lead and $500 in
manufacturing costs. Once the lead is in the first KD5010 battery pack,
it can be recycled
over and over, reducing the consumable cost of the batteries to about
$500. Even if the batteries only last for a few hundred cycles
before they’re returned and recycled, the net battery cost per
charge-discharge
cycle will be in the $1 to $2 range, plus electricity
for recharging and labor to operate the swapping infrastructure. With
an end-user swapping fee of $6.00, Kandi and
its partners should profit handsomely.

The following table presents summary income and cash flow data for the
last twelve months, summary balance sheet data at the last reporting
date, and market valuation metrics for Kandi and BYD Co.
Ltd. (BYDDF.PK),
the
best-known Chinese automaker.

Kandi’s
historical financial statements do not reflect major electric
vehicle operations, I think its fair to expect substantial revenue
growth over the next few quarters.

BYD has been a market darling since Warren Buffet’s Mid-America
Holdings bought a 10% interest in 2009. The big difference between the
two is Kandi is just starting out with a pair of extremely powerful
partners
while BYD is trying to grow a mature business. When I consider
problems inherent in growing any business, I have to believe it will be
easier for Kandi to ramp sales by a factor of ten than it will be
for BYD to double sales. I’ve always taken a very conservative “wait
and see” attitude when it comes to vehicle electrification in the U.S.
and Europe, but when it comes to capitalizing on emerging vehicle
electrification opportunities in China I have to believe that Kandi’s
approach will be a hands-down winner.

In the final analysis, it’s a lot like the business dynamic that might
have developed if Henry Ford had partnered with John D. Rockefeller or
one of the other oil barons in the early 1900s.


Disclosure: None.

John Petersen

After seven years of cautious disclosures about the development status,
performance and market potential of its serially patented PbC®
battery technology, Axion Power
International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB),
in conjunction with BMW ( href="http://seekingalpha.com/symbol/bamxy.pk">BAMXY.PK), has
finally released
impressive performance test results that show why the PbC battery is a superior choice for
automotive stop-start applications. Concurrently, Axion href="http://files.me.com/john.petersen/ro1e9q">released a white paper
that discusses stop-start battery requirements in detail and offers
some hints about the PbC battery’s potential for use in other emerging
energy storage markets.

The presentation and the white paper do not show small, incremental
gains like you would normally expect from new developments in a
150-year old technology like lead-acid battery chemistry. Instead, they
show that compared to a top quality AGM battery the PbC battery
provides:

• 10 times the dynamic charge acceptance;
• 5 times the cycle life;
• Stable round trip energy efficiencies in the 85% range; and
• 30% less weight.

The details of the presentation and white paper are complex, but the
results can be quickly summarized with two simple graphs. The graph on
the left tracks the dynamic charge acceptance of an AGM battery over
two years of simulated use in a vehicle equipped with a stop-start idle
elimination system while the graph on the right tracks the dynamic
charge acceptance of the PbC battery over four years of simulated use.
Where the AGM battery graph shows that the charging rate plummets and
the time needed to recharge the battery soars within months after the
battery is placed in service, both values remain stable for the entire
duration of the PbC battery test.

In a href="https://portal.luxresearchinc.com/research/document_excerpt/7099">recent
report on the battery market for micro-hybrid vehicle applications,
Lux Research stated that most automakers believe flooded lead acid
batteries are “inadequate” for stop-start applications. It also
observed that AGM batteries are “barely suitable” for high performance
stop-start systems. In light of early European experience with stop-start systems
and the new test data from Axion and BMW, it looks like the PbC will be
the best battery choice for automakers that want to optimize the
performance of their stop-start systems and minimize exposure to
battery-related warranty claims. After all, it’s senseless to upgrade
mechanical systems in an effort to conserve fuel and slash CO2
emissions, and then handicap the new systems by using batteries that
can’t handle the load.

For more information on the market forces that will drive rapid global
implementation of stop-start idle elimination technologies, my href="http://seekingalpha.com/author/john-petersen/articles">blog
archive at Seeking Alpha is a great resource. You may also want to
visit  EV Insights for
the recorded version of a recent conversation I had with Jack Lifton
and Gareth Hatch.

Axion began development work on the PbC battery in late 2003 and in early
2006 it bought the manufacturing equipment of an old-line battery
producer in a foreclosure sale. While Axion paid $700,000, replacement
cost estimates were an order of magnitude higher. For the last four
years, Axion has primarily used the plant as a prototyping facility for
PbC batteries. Nevertheless, its permitted capacity is 3,000 batteries
per day and the installed equipment includes two flooded battery
production lines and one AGM battery production line.

The principal research and development work on the PbC battery is
finished, but the device is not yet available as a commercial product.
Axion built a first generation fabrication line for the carbon
electrode assemblies that are the heart of the PbC battery in 2008 and
2009. Based on lessons learned from the first generation line, Axion
has upgraded or replaced several workstations on the first generation
line and designed a second generation line that should be operational
in the first quarter of 2011. With two electrode fabrication lines,
Axion should be able to produce electrode assemblies for about 250 PbC
batteries per shift, or 150,000 PbC batteries a year with a three shift
operation. Its existing AGM battery line has enough idle capacity to
fully absorb electrode production from the first two electrode
fabrication lines.

Axion has no debt and enough cash to support its planned demonstration
activities in automotive, stationary and rail transportation
applications through 2011. It does not, however, have sufficient financing or
production capacity to support a full-scale commercial rollout of the
PbC battery. Such a rollout would require about $75 million in funding
from grants, loans or stock sales to increase electrode fabrication
capacity to a million units per year and cover associated working
capital requirements.

The first use of future electrode capacity additions will be to bring
Axion’s AGM line up to full capacity. Excess electrode production will
be sold to Axion’s manufacturing partners Exide Technologies ( href="http://www.altenergystocks.com/comm/content/exide/">XIDE)
and East Penn Manufacturing, two of the largest battery companies in
North America. Over the long term, Axion intends to focus on electrode
manufacturing and sell its electrode assemblies to industry partners
that own and operate existing AGM battery plants. The PbC electrode
assemblies have been designed to work as plug-and-play replacement
components in any AGM battery plant and Axion’s business model has been
designed to leverage existing global manufacturing capacity while
giving its partners an opportunity to sell a premium co-branded product
to their existing customers.

From late 2003 through early 2007 I was a director of Axion and I’ve
watched the PbC technology progress from the laboratory prototype stage
to a pre-commercial product that has drawn a surprising amount of
interest from automakers, railroads and developers of wind and solar
power installations. While we originally expected to start at the
bottom of the food chain and work our way up as the PbC technology
matured, it’s hard to complain about too much attention from first tier
energy storage users. At this point the remaining challenges relate
primarily to industrial engineering refinements and completing the
rigorous validation and performance testing that first tier users
always require before they write a purchase order. In light of the BMW
test results, I’m convinced the only open question is “When?”

Over the last year market forces that had nothing to do with Axion’s
business fundamentals or the PbC battery’s performance have
brutalized its stock price. The stock currently trades within spitting
distance of the price paid by several highly regarded institutions last
December. As an understanding of the new performance data begins to
spread, I think the upside potential is significant. For more
conservative investors, a solid alternative play on the PbC technology
is the stock of Exide Technologies, an Axion partner that I think is
fundamentally undervalued.

Disclosure: Author is a former
director of Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
and holds a substantial long
position in its common stock.

John Petersen

I frequently observe that market valuations in the energy storage
sector have been wildly distorted by electric vehicle hype that has
nothing to do with business fundamentals. Last February I wrote an href="http://www.altenergystocks.com/archives/2010/02/a_tale_of_two_battery_companies_1.html">article
that
compared Exide Technologies with Ener1, but obviously didn’t
quite get to the meat of the matter. Since both companies reported
earnings on November 4th, this seems like an opportune time to be more
direct in the comparison and present a brief primer on valuations in
the energy storage sector.

Since a lot of investors never get beyond stock price movements, the
first graph presents a simple price performance comparison of the two
companies over the last year.

The second graph comes from my quarterly tracking data and compares the
relative market capitalizations of the two companies since September
2009. For novices, market capitalization is calculated by multiplying
the total number of shares outstanding by the price per share, which
serves as a quick estimate of total stockholder value.

The following table compares the balance sheet fundamentals of the two
companies, their income statement performance over the last twelve
months, and some important per share valuation metrics. The figures
shown for Ener1 give pro-forma effect to an October 1st transaction where
the Ener1 Group bought 6.7 million Ener1 shares for $23.7 million in cash and an October 25th transaction where Rockport Capital Partners exchanged 10.2 million shares of Series B Preferred
stock in Th!nk Holdings for 4.3 million Ener1 shares.

I understand that Ener1 ( href="http://www.altenergystocks.com/comm/content/ener1/">HEV) is
developing a way-cool lithium-ion
battery technology and Exide ( href="http://www.altenergystocks.com/comm/content/exide/">XIDE) is
so yesterday with its stodgy
lead-acid batteries, but let’s get real here. Even if Ener1′s plant was
fully funded and operational, and it could sell 60,000 EV battery packs
per year at $1,000 per kWh, its revenues wouldn’t be half of Exide’s.
If you believe the happy talk about collapsing lithium-ion battery
prices, the expectation is more like a quarter of the revenue
potential. Since falling prices have a nasty tendency to squeeze
operating profits, I don’t see any chance that Ener1′s bottom line
income will be anywhere near Exide’s over the next five years.

It’s no secret that I see far more downside risk than upside potential
in the plug-in vehicle market, which will supposedly be one of Ener1′s
strong suits. It’s also no secret that I see huge upside potential and
very little downside risk in batteries for automotive stop-start systems,
which will almost certainly be a strong suit for Exide given its relationship with Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB).
When presented with a choice between betting on
a weak business model or a strong business model, I’ll take the strong
business model every time.

Investing is a cruel dollars and cents business and the market value of
a share of stock is supposed to represent the risk adjusted discounted
present value of anticipated future returns. Even if you assume that
Ener1 will be smashingly successful, it’s risk adjusted discounted
present value can’t hold a candle to Exide’s. The dynamic may change in
the future, but for now there is simply no comparison if your goal is
to grow an investment portfolio.

Next week I’ll go through the same drill with A123 Systems ( href="http://www.altenergystocks.com/comm/content/a123/">AONE) and
Enersys (ENS).

Disclosure: Author is a former
director of Axion Power International ( href="http://www.altenergystocks.com/comm/content/axion-power/">AXPW.OB)
and holds a substantial long position in its common stock.