Micro-hybrids And The Multi-Billion Dollar Battery Battle
Posted: 18 Jun 2012 01:18 AM PDT
Last week the stock of A123 Systems (AONE) soared 52% in a day after it announced that an enhanced chemistry would improve the cold and hot weather performance of its LiFePO4 batteries, reduce the need for ancillary temperature control systems and make them more competitive in a rapidly evolving micro-hybrid battery market that’s dominated by lead-acid battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE). Investors seem to understand that micro-hybrids will generate several billion dollars of incremental annual revenue for battery manufacturers by 2015, but they haven’t quite figured out who the winners will be. Today I’ll try to clarify some of the issues.
The idea behind the global shift to micro-hybrid technology is simple and sensible – there’s no good reason to run a four, six or eight cylinder engine while a car is stopped in traffic. It wastes fuel and pollutes the air while doing nothing to move the car from Point A to Point B. The solution is to turn the engine-off when it’s not powering the wheels, a solution that’s quickly finding its way into emissions control and fuel economy regulations worldwide. The problem is that turning the engine-off at a stoplight, carrying accessory loads during engine-off periods and restarting the engine when the light changes color puts immense strain on the battery.
The following graph comes from a joint presentation that Ford and BMW made at an industry conference in 2010. While there’s way to much detail for most investors, the core lesson is simple – over 90% of the battery load during a one minute engine-off interval comes from the accessories while less than 10% comes from restarting the engine.
In a car without stop-start, the battery has to start the engine when you leave for work and it can use the entire commute to recover the 400 to 600 amp-seconds of energy used by the starter. In a micro-hybrid with stop-start, the battery has to start the engine when you leave for work and it has to provide another 3,600 amp-seconds of energy for each engine-off event. In a typical 15-mile commute, a micro-hybrid requires its battery to do 100 times more work than the battery in a car without stop-start. This is not a modest change. It’s an immense technical challenge.
The next graph comes from the same Ford-BMW presentation and shows how the performance of a high-quality AGM battery degrades in a micro-hybrid duty cycle. The downward curving blue line near the bottom is the amount of current the battery can accept as it ages. The upward curving black line in the middle is the amount of time required for the battery to regain an optimal state of charge in preparation for the next engine-off opportunity. Once again the core lesson is simple – a micro-hybrid with a new battery can recover from an engine-off event in under a minute, but a micro-hybrid that has 5,000 miles on the battery will need five minutes or more to prepare for the next engine-off event. Micro-hybrids that can’t turn the engine off because they’re waiting for the battery to recharge can’t save fuel or reduce air pollution.
Automakers understand the problem and their current solution is to disable the stop-start system when the battery hasn’t returned to an acceptable state of charge. They also know that a short-term patch is not a long-term solution. Once you understand these two graphs, you’ll understand why enhanced flooded batteries and even AGM batteries must eventually lose the battle for the micro-hybrid market. They just can’t stand the strain.
The most important word in that last paragraph is “eventually.” Automakers plan to build about ten million micro-hybrids this year and global production should ramp to 35 million micro-hybrids a year by 2015. There are several new battery technologies that are better suited to the micro-hybrid duty cycle, but they can’t be manufactured in big enough volumes to make a difference over the next few years. That means automakers will be forced to settle for batteries they can buy in volume until the newer batteries are available at relevant scale. For the next several years, enhanced flooded batteries and AGM batteries will win the battle for short-term market dominance, even though they can’t win the war.
In the emerging battery technology group the leading public company contenders are A123 Systems and Axion Power International (AXPW.OB). A123 will try to win the hearts and minds of automakers with an LiFePO4 battery solution that is superior to flooded and AGM batteries in most respects. Axion will try to win the same hearts and minds with its PbC® battery, a hybrid lead-carbon battery. Both of these new batteries have strengths and weaknesses, so it’s too early to pick a winner. To help investors understand the issues, the following paragraphs will compare A123’s LiFePO4 technology with Axion’s PbC technology.
Battery weight – A123’s LiFePO4 battery is the hands-down winner when it comes to battery weight, but it can only shave 40 to 50 pounds off the weight of a 3,000 to 4,000 pound vehicle. For some automakers the weight savings will be important, but I don’t see weight as a mission critical issue in micro-hybrids.
Battery cost – Axion recently charged a customer $400 per battery for a thousand unit PbC order. Based on historic costs, it looks like A123 will have to charge about $800 for an engine start battery. Despite widespread rumors that the cost of manufacturing lithium-ion batteries is falling rapidly, A123’s production costs have been stubbornly stagnant for years. As the PbC technology matures and Axion’s production processes improve, significant cost savings and other economies of scale seem likely. So for now, at least, it appears that the PbC will enjoy a major cost advantage.
Dynamic charge acceptance – Automakers need a micro-hybrid battery that can accept currents of up to 100 or 150 amps, the maximum power their alternators can generate. While the DCA of AGM batteries falls to less than 10 amps in a couple months, both of the new batteries boast DCA in the 100 to 200 amp range. While both batteries offer ten to twenty times better DCA than AGM batteries, neither has a clear advantage over the other in micro-hybrid applications.
Cycle-life – Automakers need a micro-hybrid battery that will last for at least three-years, and preferably longer. The data released by A123 and Axion indicates that both batteries can handle a five-year service life without breaking a sweat and may last the entire life of the vehicle with only modest performance degradation. While both batteries will last five times longer than AGM batteries, neither has a clear cycle-life advantage over the other in micro-hybrid applications.
Materials availability and recycling – Lithium-ion batteries are made from highly refined metals that are widely used in other consumer and industrial products. They can’t be economically recycled but they don’t pose any particular disposal risks. Lead-acid batteries are made from raw materials that don’t have significant alternative uses. They’re also the most recycled product on the planet and generate significant profit to recyclers. Lead is hazardous if it’s disposed of improperly, but used batteries that contain $70 to $100 of recoverable metal are simply too valuable to throw away.
Capacity constraints and expansion – If all of A123’s manufacturing capacity was devoted to stop-start batteries, it could make about 900,000 units a year. Axion will need to spend about $30 million to bring its annual production capacity up to the 900,000-unit level. Since PbC electrode assemblies are designed to work as plug-and-play replacement components in other lead-acid battery factories and Axion ultimately wants to become a component supplier, ramping PbC production will cost about $50 million for a million units of incremental capacity. Ramping LiFePO4 production will cost about $400 million for a million units of incremental capacity because the underlying technology can’t leverage existing infrastructure.
Testing and validation – When it comes to their mainline vehicles, automakers are obsessive about performance and quality testing for both components and suppliers. For simple commodity components like flooded lead acid batteries from a new supplier, the process usually takes twenty-four months. For more complex components and systems, testing and validation can take significantly longer. Several automakers began evaluating the PbC for use in micro-hybrids in mid-2009. A123 will not have samples of its enhanced battery chemistry available for testing and validation until later this year. I expect the process to be less time consuming for A123 because several automakers have evaluated its products for use in specialty vehicles and some portion of that earlier work will apply to using LiFePO4 batteries in micro-hybrids. I believe, however, that Axion has a solid head start that should offer a first mover advantage.
Entrenched competition – Lead-acid batteries have owned the automotive starting, lighting and ignition market for almost a century and the industry has an immense and diversified global footprint of installed production and recycling capacity. Over the short-term, lead-acid battery manufacturers will resist innovations like Axion’s PbC electrode assemblies because it’s easier and cheaper to continue with business as usual. When alternatives like A123’s LiFePO4 batteries threaten to encroach on their bread and butter markets, I think leading lead-acid battery manufacturers will quickly change their tune and eagerly embrace technologies that can protect their market position from interlopers. If the lead-acid battery industry rises to the micro-hybrid challenge, I believe automakers will be reluctant to change to more costly alternatives that offer no significant performance advantages beyond a modest weight savings.
Over the next three to five years enhanced flooded and AGM batteries will be the only products that are available in large enough volumes to serve the needs of the micro-hybrid market, so manufacturers like JCI and Exide will thrive as their per vehicle revenue doubles and their per vehicle gross margins triple. During that period advanced batteries like Axion’s PbC and A123’s LiFePO4 will establish toeholds in the heavy micro-hybrid sector that’s expected to ramp to about eight million vehicles a year by 2015. As the performance differences between the new batteries and legacy technologies become clearer, and production capacity for the advanced batteries ramps, demand will shift from the legacy technologies to the newer batteries. When the lead-acid battery industry begins to view lithium-ion batteries as a credible threat in a major market, the rush to third generation lead-acid technologies like Axion’s PbC will begin in earnest.
Readers who are looking for a silver bullet technology to dominate the energy storage sector always amaze me. Frankly, I don’t think such a technology exists. Energy storage is a sector where you get no extra credit for cool and the only things that matter are price, performance, quality and serving the customers’ needs. In that kind of market, the best anybody can hope for is silver buckshot. I do believe, however, that every company that can bring a cost-effective product to market in relevant scale will have more demand than it can handle.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.
Ram Power Negotiates for Higher Revenue
Posted: 17 Jun 2012 07:20 AM PDT
Tom Konrad CFA
Geothermal well photo via Bigstock
Ram Power (OTC:RAMPF, TSX:RPG) recently provided an update on progress at its flagship San Jacinto project in Nicaragua. This was the project where cost overruns and construction delays last year sent the stock plummeting from over C$2 a share to around C$0.50 a share at the start of the year. The decline has continued, despite the fact that the project seems back on track with the hiring of a new subcontractor, and the stock now trades at C$0.23, a fraction of book value (C$0.91.)
According to the update, a tariff increase was “contemplated by the initial Project concession [and] will allow the Company to recover unanticipated Project costs associated with both the development of the resource and plant construction.” Because it was part of the original agreement, it seems likely that some tariff increase will be granted.
The company estimates that a new tariff would result in an annual revenue increase for Ram of between $8 million and $11 million upon completion of 72MW San Jacinto project expansion, which the company expects in December 2012.
Since any additional revenue from a tariff increase would not involve additional costs, we can expect substantially all additional revenue to flow to pre-tax income, and would amount to an additional 2 to 4 cents per share. I expect the stock to jump on this news, with a much bigger jump in the event that the tariff negotiations are successful. I think successful negotiations are very likely, since management would probably not have announced the negotiations if they had significant doubts.
I think past setbacks at Ram and the high profile problems at rival geothermal company Nevada Geothermal Power (OTC:NGPLF,TSXV:NGP) have led markets to heavily discount Ram’s chances of completing San Jacinto on time and on schedule. In particular, I don’t think markets are considering the fact that geothermal field expansions are substantially less risky than initial development, because much more is known about the structure of the geothermal reservoir.
Ram’s COO of Latin America, Tono Rodriguez says,
With a majority of the engineering and construction completed, the Phase II expansion construction continues at a rapid pace. We fully expect the project to come in on time and on budget, with an expected on-line date in the fourth quarter of this year.
I believe this. The riskiest part of project development is over, but investors are treating it as if it were riskier than ever. While I doubt Ram will see a C$2 share price in 2012, I think a price double is likelier than not upon completion of San Jacinto and a successful tariff renegotiation.
Disclosure: Long RAMPF
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.