Energy Storage revisited

Source: BCG, Revisiting Energy Storage (Feb 2011)

Boston Consulting Group released a research update on energy storage.

In this report, the team suggests that Compressed-Air Energy Storage or CAES could be a strong intermediary technology for stationary energy storage. This based on the assumption that the current costs for batteries are still relatively high. CAES offers lower upfront CapEx. However, the technology is somewhat dependent on fossil fuel, provides low efficiency and its operational flexibility is questionable. For the time being, Utility providers can still absorb the relatively low variability of supply from wind power (which makes up only 2% of the US energy mix today) and thus CAES is a viable interim solution. Should the variable component of the energy mix raise to 20% or thereabout and energy supply from those sources renewable sources outstrip demand, grid operators will face significant risks. (see Rachel Johnson’s article ‘Energy Storage: enabling a shift away from baseload generation‘ on ifandp.com)

Interestingly, the BCG team sees Hydrogen Storage Tech as the tech-app that will super seed CAES in the medium term (post 2020). The business case is simple. Today, 100 gigawatts of pumped energy storage exists globally. ‘More than 1GW of stored power relies on technologies such as CAES or batteries, and an additional 4GW of electricity storage projects have been announced.’

The global market demand for energy storage solutions is likely to scale as Renewable Energy becomes more widespread amongst the energy mix. The addressable market is estimated to be €1bn today, increasing to €2-3bn pa until 2015 after which this could steadily rise to €4-6bn annually to 2020. After 2020, BCG sees the global market at €10bn per annum and possibly more.

So how should we play it? Where is the investment opp? Firstly, VC and PE firms alike see significant value in the electricity segment which is probably no news. Yet, capitalizing on the opportunity appears harder than at first glance. In a nutshell, the investment case is simple from a utility perspective as ultimately the market will end-up as ‘coupon-clipping’/ bond like investment model. As we have pointed out on a number of previous posts, lithium-ion battery technology companies are worthwhile having a look at.  Obviously, the pure-play investment would be into the raw-material market, i.e. investment in commodities. The price volatility may not be for the faint hearted, however.

Source: ThompsonReuters, US CleanTech 2010

The electric vehicle market is probably closest to the consumer and is in itself another interesting and very contested market with significant fragmentation at this stage. This should enable the savvy investor to earn a substantial return if one is able to estimate which firm will end up grabbing a significant market share. ‘Independent’ electric vehicles producer have certainly grabbed headlines in the past few years but whether they have the business execution capabilities, global distribution, and marketing competence remains to be seen (we think of Tesla, Th!nk City et al). For our part, we monitor what the global middle-class car manufacturers including Mitsubishi, Peugeot, Renault and Volkswagen are up to. General Motors appears to have found a new footing by refocusing their efforts on the E-segment and is likely to have the distribution power that will be needed to pay for the CapEx and OpEx required to succeed in the race to E-Vehicle glory. On the marketing side, BMW has recently unveiled that it will call its E-fleet ‘BMW-i Born Electric‘ analog to Apple’s iPhone, iPad etc series. We will have to wait and see whether BMW can live up to consumer expectations.

BCG further suggests that manufacturers of components linked to energy technology could be an interesting play. Examples include, pumps, compressors, turbines, inverters, switchgear. We agree, yet at this stage clear segment leaders have yet to emerge whilst process design is still emerging and efficiency in all design steps are still being developed. Technology start-ups are sitting in the starting blocks to either receive Series A funding or indeed are waiting for re-ups after the trough periods 2009/2010. We continue to focus on energy storage as one of the most viable ways to make money in renewable energy for investors.

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Bloomberg News: Lead-Battery Demand for cars to increase 2.6% on China, India

Source: Johnson Controls

It is great to see that battery demand is on the up. Yet the YoY growth rate, as reported by Bloomberg below, appears relatively modest. Lithium-ion battery supply is only modestly raising. We have yet to hear a statement from EV manufacturers how they deal with input prices. Passing those costs on to the consumer and/ or fleet operators may slow down the S-curve of pick-up demand.

For now, we continue to favour Johnson Controls as a play on the sector as the firms overall revenue stream is well diversified.

Bloomberg News
Lead-Battery Demand for Cars to Increase 2.6% on China, India

Feb. 25 (Bloomberg) — Global demand for lead-acid batteries may rise 2.6 percent this year amid increased car sales in China, India and Southeast Asia, said an executive at GS Yuasa Corp., the world’s third-biggest producer.

Demand for car batteries will rise to 390 million units from 380 million in 2010, Hiroharu Nakano, general manager at the Kyoto, Japan-based company, said in an interview yesterday. GS Yuasa forecast demand will climb to 400 million units in 2012.

Johnson Controls Inc. and Exide Technologies, both based in the U.S., are the biggest producers. GS Yuasa has a 7 percent share in the automotive battery market and has partnerships with Honda Motor Co. and Mitsubishi Motors Corp. to make lithium-ion power cells for electric and hybrid cars.

“Demand from China, India and Southeast Asian nations has been leading global growth and this will continue for the time being,” Nakano said in Tokyo. Battery demand for new vehicles has increased in those countries, while worldwide replacement demand has risen moderately, he said.

In 2010, actual demand was expected to exceed the company’s forecast of 380 million units by about 5 million units following higher-than-expected car sales in China and other emerging markets, he said.

China’s vehicle sales will grow 10 percent to 15 percent this year after jumping 32 percent to 18.06 million vehicles in 2010, the China Association of Automobile Manufacturers forecast.

China Demand

Demand in China will increase 9 percent to 49 million units in 2011 and then 54 million units in 2012, while consumption in India may climb to 14.5 million units in 2011 and then 16 million in 2012 from 13 million last year, Nakano said.

Lead for immediate delivery was unchanged at $2,500 a metric ton on the London Metal Exchange at 1 p.m. in Tokyo. The price has gained 16 percent in the past year, touching $2,712.75 on Jan. 6, the highest level since May 2008.

Demand for lithium-ion batteries will jump to 3.8 million cells in 2015 from 1 million cells in 2012, he said.

Nakano said the lead-acid battery market will not be affected by growing demand for lithium-ion cells. Battery demand for new idling-stop systems, which consume more lead, has also been increasing, he said.

GS Yuasa plans to produce 30 million units this year, up from 28 million units last year, and 32 million in 2012, Nakano said. The company produces about 70 percent of these overseas.

The company plans to increase its share in China to 11 percent or 6 million units in 2012 from 9 percent or 3.8 million units in 2009. It also expects to raise its share in Southeast Asia to 45 percent or 9.4 million units from 43 percent or 7.5 million units in 2009, and 10 percent or 1.6 million in India from 5 percent or 0.6 million.

To contact the reporters on this story: Jae Hur in Tokyo at jhur1 Ichiro Suzuki in Tokyo at isuzuki

To contact the editor responsible for this story: James Poole at jpoole4

Green opportunities for storage-battery production

China Daily reports an interesting story on Energy Storage, aka Batteries, today. (see: Green opportunities for storage-battery production)

According to the paper, China account for about 25% of global lead-acid storage batteries. These batteries are widely used in Electric Vehicles. The export growth has been a staggering 23% p.a. CEEIA estimates that annual growth is likely to continue with a rate of 15% p.a. for the next five years.

As we highlighted in our China’s 12th 5-year plan piece, the government is keen to promote green technologies and has earmarked the renewable sector as part of its Magic-7 industries.

Climate Equity Selection and Climate Opportunity

HSBC released a recent report on their Climate Equity Opportunity list (pdf), or short ‘CEO’-list. The list comprises 88 companies that derive 20% plus from their low carbon energy, energy efficiency and storage, or water and waste.

HSBC sees the fastest growth for Renewable Energy in Emerging Markets and proposes that Energy Efficiency makes up the largest opportunity, about 53%. Overall, HSBC estimates that the total market size could be around $2.2trn. Sizing the Climate Opportunity accompanies HSBC’s Climate Equity Opportunity research piece.

HSBC’s report ‘includes five key segments: transport efficiency (USD677bn, CAGR 18%), building efficiency (USD245bn, CAGR 10%), industrial efficiency (USD183bn, CAGR 6%), energy storage (including fuel cells) (USD66bn, CAGR 15%) and smart grid (USD23bn, CAGR 8%)’.

However one sector stands out. HSBC suggests that the electric vehicle market will grow more than 20x by 2020 to reach USD473bn. This based on the assumption that the grow will be back-loaded, i.e. the growth will be faster in the second half of the decade as input prices fall and the industry starts to see scale. Importantly, the report estimates that battery costs will come down from about USD1000/kWh to about USD350/kWh. Underlying the assumptions are global electric vehicles (EV) sales of 8.65m units and sales of 9.23m plug-in and hybrid electric vehicles (PHEV). The average prices for PHEV gasoline and diesel vehicles in 2020 will be 5-10% lower than average EV prices (USD27,500).

Source: HSBC, September 2010

Saft Groupe makes an interesting appearance in the HSBC report. According to the analysis, 75% of Saft’s sales comes from markets where it ranks sector leader. More importantly, sales are diversified across other industries including the military. We mentioned Saft Groupe back in February 2010 when we advocated that the automotive industry will change forever. But not without an improvement in the Energy Storage sector. We connected our argument to the Lithium-Ion market. Overall, we continue to rank Saft Groupe as a very interesting play on the interconnection between EVs and Energy Storage. However, HSBC prefers Energy Efficiency over Energy Storage. We cannot agree more, in the near-term anyway.

The past, the now and the future of A123 Systems

A123 Systems appearance on the listed market came with full support by both its private investors (incl. Kleiner Perkins via its SC X Management LLC vehicle, North Bridge Venture Management IV) and many institutional investors (GE, Morgan Stanley, Gilden Gagnon Howe & C0., Janus Capital Management, Fidelity, and Invesco) who were happy to get their hands on the stock. But doubts about the firm’s current progress and medium-term outlook are appearing on the horizon.

Our insight
Morningstar put a note out which gives a factual summary of recent activities. The firms market cap is around $1bn (compared to Johnson Control’s $21bn) with a share price at approximately $9.70. Ahead of the analyst call tonight, the stock trades up +5%+ at $10.23. Q1/2010 Sales of $23m is a good sign.

Although the firm still faces major headwind, we continue to support the company’s vision. Nonetheless, we need more transparency from management on how (A) the technology development is progressing, (B) how production ramp-up capabilities are positioned, and (C) how they go about both securing a deeper bench of customers and how management deals with potential bad-debt (Th!nk City?).

Not much to ask for but competition is generally building. In particular we are keeping an eye on Saft Group/ Johnson Control’s JV. Equally, we are also monitoring most of the Asia player’s that are making good progress.

A123 Systems – The Past
AONE
went public at $13.50 a share. Surely, Kleiner Perkins hype machine was in full swing to maximize their exit valuation. The stock rose to some $28 before coming down below $10 recently. The fact that this stock was scheduled to IPO at $8 or $9, but ended up at $28 a few weeks later is hurtful because it mismanaged the public’s expectations. So here we are eight months later and the stock goes back to reality- and some people think this is a sign of failure.

What has happened, what changed in the thesis? What changed with regards to customers and customer contracts? Any change in technology developments and/or did R&D plans go wrong? For now, A123 secured significant DOE funding and that gives the firm a cushion to move on with business.

We should not forget that A123 was never profitable and still is a quasi ‘start-up’ company. The company reports in the 12/31/2009 10-k filing that “We have had negative cash flow before financing activities of $56.1 million for 2007, $76.0 million for 2008, and $114.7 million for 2009. We anticipate that we will continue to have negative cash flow for the foreseeable future as we continue to make significant future capital expenditures to expand our manufacturing capacity.”

There is a potential risk in the firm’s limited client base also. We extracted their 10-k filing statement on Customer concentration risk: “During each of the years ended December 31, 2007 and 2008 and 2009, Black & Decker, together with its affiliates, represented 66%, 44%, and 14% of our revenue, respectively. We expect revenue from Black & Decker will continue to decline in 2010 and therefore represent a smaller percentage of our revenue in future periods. During the years ended December 31, 2008 and 2009, revenue from Mercedes-Benz High Performance Engines represented 12% and 8%, respectively, of our revenue, but we do not anticipate receiving any revenue from Mercedes-Benz High Performance Engines in 2010. For the year ended December 31, 2009, revenue from BAE Systems represented 35% of our revenue. For the year ended December 31, 2009, revenue from AES Energy accounted for 9% of our revenue.”

A123 Systems – The Now
The firm’s progress is supported by various government programs [$249.1m from ARRA (DOE) at 1:1 leverage, i.e. $1 from ARRA needs to be matched by $1 from A123’s cash and $233m of DOE ATVM money at 4:1 leverage] that amount to significant cash sums. However, our sources tell us that there is some doubt about the value-added its private investors are bringing to the table to ensure the firm can be retained as a going-concern.

We listened to the Q1/2010 analyst call. Here are the facts and our thoughts:

Management talked about market share growth. In particular, the customer relationship with major EV manufacturers appears to be going well. Specifically, four questions were addressed during the Q1/2010 update call:

(1) Adoption of electrification
(2) Progress with Customers
(3) EV battery prices are declining faster than anticipated
(4) A123 making progress to hit its long-term financial model

On (1) above, the CEO was excited to report on a recent purchase order one of the largest automotive OEM manufacturers. He believes that it speaks to its technology. But could it also mean that there is a lack of choice at that level of scale, in particular in the US market? They further have been selected by Eaton Corporation to help build a new truck- A123 is to deliver the battery system for a Ford F550 truck. This contract can be seen as an extension to their Navistar contract awarded the previous quarter.

In light of rising demand, management is ramping up a further 200MWh of capacity. Once completed this translates into firm-wide capacity of 760MWh (an increase of 350% of end of 2009). Ceteris paribus, this could translate into a total annual revenue line of +/-$500m once completed. In the same breath, the CEO management a generous offer for a $5m forgivable loan from the State of Massachusetts. Proceeds are used to build out HQ, among other things.

As regards to (2) Project activity: the firms pipeline keeps growing and momentum continues to build. Transportation projects doubled since IPO (September 2009) from 18 to 36. 50% are passenger car applications of which 80% PHEV/ EV vehicles. Furthermore, half of the contracts are sourced from a global customer base.

The CEO briefly addressed their Grid/ Consumer business: to sum it up, management did not come across very confident but still put the message out that they can win business.
To that end, management is ramping up its Sales force and enhancing spending over 2009 to grab further market share. AES bought some $5m worth of grid system technology in Q1/2010. We do challenge the view whether, in the medium term, it is viable to focus on all segments in the battery space or whether it would make more sense to concentrate all efforts to become the #1 by volume, number of customers and market share in the automotive sector. As far as cost competitiveness is concerned this may further enhance the time to bring the costs down to make PHEV etc economically viable. Just a thought.

As far as future growth is concerned, management highlighted two areas:

(1) Product Innovation
(2) Cost of Manufacturing

As to product innovation, the firm had filed for 250 patents worldwide prior to the IPO. Since the IPO, the company added 89 patent filings. On a cost-down plan (2012-2013 time frame), internal matrices are in place and engineers are responsible to deliver.

Management felt obliged to comment on Battery system pricing which was reported to be in $350/kWh range. From A123’s standpoint, it is important to look at the ‘usable energy’ not ‘nameplate energy’ alone. Management simply used this headline story to inform us that their system delivers better output than its competitors (i.e. their 20kWh system delivers as much usable energy as their peers 24kWh systems = 20% difference). Secondly, warranty issues and what is covered were addressed. A123 is a diversified business, longer term margins will be most aggressive on automotive systems. In return, grid and more complex system will cushion an overall erosion of margins. Further, the company believes that hosting the technology, sourcing of raw material, keeping production in-house and vertically integrating the value chain is the most viable path going forward. We believe that this may be true in the short term but longer term ‘specialists’ are likely to emerge similar to today’s OEMs. Disagree with us? Comment below!

Overall, it appears that investors need to sit tight before they will see a positive EPS. In particular, as demand for battery systems and electromobility ramps up, A123 is keen to scale alongside the demand. The comment that they are ramping up another 200MWh certainly demonstrates that. In essence we are supportive. In our view however, and we do believe in the EV segments as demonstrated throughout this blog, A123 needs to ensure that it not over-trades. Simply put, without government grants the companies cash position and Working Capital respectively need to be aligned with actual demand rather than ‘potential’ demand alone. In the end, it may take longer for consumer demand to buy into the EV story. (see Th!nk City which was near collapse last year despite several thousand customer pre-orders.)

A123 Systems – the Future
Looking ahead, execution of the business plans remains important. Increasing global share both by number of customers but also by volume must be a key exercise for management. Any announcement to that end should be a positive for the firm. On the technology front, it would be good to get some positive news from the company or from customers confirming that they are on track and happy with the performance, customer servicing, and a ‘felt’ partnership-level relationship. Their technology ultimately is a key factor for success in the long run and very few people mention this. Auto OEMs usually take a long time to test and evaluate- for good reasons. If A123 has a superior battery they will ultimately succeed in spite of potential risks in other areas (to some degree.)

It is important that we focus only on A123 fundamentals such as cash flows, technology and client contracts. Ignoring hype, stock volatility and speculation is key to a more accurate analysis.

We will continue to monitor A123: we would like to see the firm managing their growth adequately and not excessively. We still look back at some of the consumer stories back in the dot.com days as a comparison. No doubt, A123 has a ‘real’ product and its strong governmental support and key relationships with EV manufacturers will see this company go far. Let the share price reflect this, please.

UPDATE: see this article that mentions General Electric (GE) as a potential bidder for A123.

Tresalia Capital makes Artega Investment: Fraunhofer’s EV platform/ Electromobility concept

What do BMW, Aston Martin and Artega have in common? Its designer: Klaus Dieter Frers. He was instrumental in designing BMW’s Z8 and Aston Martin’s Vantage. The Artega GT was his latest work. Now Artega has been sold to Mrs Maria Asunción Aramburuzabala. She heads Tresalia Capital.

Tresalia Capital is probably most famous for its interest in ‘Corona’ brewer Modelo Group. Tresalia essentially acts as a family office to the estimated $2bn net worth of Mrs Aramburuzabala. The office is relatively secretive and information is difficult to come by. Nonetheless, it appears an odd addition to the stable of deals the office has made recently or are electric vehicles only a ‘lifestyle’? We would disagree if that is what Mrs Aramburuzabala and her team think.

On a more serious note, Germany’s Fraunhofer institute uses the Artega GT to test its latest research in electric hub motor technology. The Fraunhofer Institute has been granted significant resources to pursue Germany’s thought leadership in electromobility. The institute secured €14m of the Stimulus I package and a further €44m are likely. The electromobility research is overseen Fraunhofer Institute for Structural Durability and System Reliability LBF. Recently, the Economist issued a critical piece on Germany’s research heritage. The paper cites that the nations research capabilities measured by researchers age 25-24 years is the smallest in the EU. For what it is worth, the fact that both the public and private sector appear to be working together to put resources into this paradigm shifting industry and technology may just be enough. Germany’s Mittelstand and corporates are likely to be among those firms that will drive the future of electromobility.

The electric hub engine research appears to gather momentum. Firms such as Continental, Protean Electric, Bosch, Michelin and other traditional tire manufacturers appear to make progress.

To echo the efforts made by the Fraunhofer’s Institute, the political debate surrounding Electric Vehicle’s (EV) and electromobility continues to get ever more attention not only among parliamentarians but with the general public also. The German government released a 2009-report (German Federal Government’s National Electromobility Development Plan) that set forth the neccessary investment that is needed ‘to speed up research and development in battery electric vehicles and their market preparation and introduction in Germany’.

The forecasts made by the Fraunhofer Institutes are exciting. As ever, execution will be key. We will monitor in which ways corporates engage. Thus far, Aral Petrol Company (in German) has published a study that shows that Germans are willing to pay a small premium for EV’s. That premium is between €2000-€3000. Thus the cost of new technology has to come down further or the price for fossil fuel to raise substantially before a significant change in consumer trend may be observed.

Path to Greener Flight – Part 2

If we are to consider other forms of energy storage we should also explore how it could be put to use. Developments with superconductors are laying the way for very high power to weight electric motors that could be used for aviation with the potential to be lighter than a turbofan based propulsion system, allowing the use of an energy store that does not need to be ejected to create thrust. With the potential development of room-temperature superconductors (currently at 254K or -19 degrees C), this becomes even more appealing by making refrigeration of the motors redundant (another sizeable weight saving).

The turbofan propulsion system used in a Boeing 747 is powered on jet fuel (Kerosene) with an energy density of about 45MJ/kg. Currently only being able to hypothesise on energy conversion efficiencies and weight reductions obtainable above, it would only be realistic to power an aircraft with an energy store with a comparable energy density. EEstor is a battery company claiming to have a device (a form of an ultracapacitor) capable of 1.47 MJ/kg. This claim is not without its sceptics, after all this is three times the energy density of today’s lithium-ion batteries (0.58 MJ/kg). While well suited to automotive applications, this is currently far too low to be used for aviation but progress is progress. Lithium-air batteries offer hope with theoretical energy densities in excess of 5,000 Wh/kg (18 MJ/kg). While battery energy densities may not reach the required levels to allow for all-electric propulsion (or no hydrocarbon fuels), a hybrid generator powering superconductor engines could be the path of the future.

A Boeing 747 has an average power consumption of 140MW. Power delivery is as crucial as energy density for an aircraft. Numbers of this scale are normally associated with power stations. If we look far enough into the future it may be reasonable to put a power station on an aircraft, after all we do have nuclear submarines. Granted, there is no shortage of obstacles when it comes to considering a flying nuclear power station. However, there is a lot of progress being made on nuclear fusion. There is a program being funded by DARPA for naval power generation with the aim of developing a 100MW-1GW fusion reactor for ship propulsion.
IEC Fusion, if successful, would be able to provide a source of nuclear energy generation within a relatively tiny space, producing no nuclear waste and no risk of a runaway nuclear reaction via a proton-Boron fuel (PB11). Updates available on their blog. The ignition and waste products of this reaction are not radioactive, in fact far safer than current aviation fuel. On the other hand, if nuclear fusion would be able to be harnessed on a commercial aircraft I think we would have found a solution to a much larger problem. The final alternative to flight dependent energy storage is none (well, excluding reserve systems and batteries at least). Strictly speaking I am referring to remote energy generation and transmission.

The electrical genius Nikola Tesla had a vision of global wireless power at the turn of the 20th century. This has eventually led to technologies such as electromagnetic resonance and microwave transmission.Witricity is focusing on using short-range energy transmission at home, providing a means to charge devices without wires within several meters. While electromagnetic induction is well suited for domestic applications, microwave appears the only current feasible contender for wireless energy transmission to aircraft. Whilst microwave power transmission has been proved to be very efficient obstacles remain with distance (currently effective up to 1km) and public image. No one wants to be boiled from the inside out on their way to a summer retreat.

Air travel may be seen as indispensable in modern times; however there are possibilities of replacing long-haul flights with a greener alternative. Why do we fly? – To get across vast distances on earth in short periods of time. For shorter distances a dedicated maglev train with speeds reaching over 350 mph would be a possible substitute. If green air travel can be achieved, it will start with shorter distances. The real issue is transatlantic / long-haul flights. A variation of the maglev offers an alternative with an exceptional engineering challenge. The Discovery Channel recently aired an episode of Extreme Engineering called Transatlantic Tunnel which explored this option. Known as a Vactrain, it is merely a maglev train placed within a vacuum tube. The reduced drag from wind resistance and friction offers speeds in excess of 4,000 mph, shortening a trip from London to New York to around one hour. The costs of submerging a transatlantic vacuum-pumped tunnel 300m below sea level for nearly 3,500 miles are staggering (estimated at $1trillion). Of course this would require a clean energy source to be considered green. The good news is that it wouldn’t have to be airborne.

Path to Greener Flight – Part 1