Why Energy Storage Investors Must Understand Resource Constraints

John Petersen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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