Friday, October 16, 2009

Energy Storage Opportunities on the Smart Grid

Adapted from John Petersen, Seeking Alpha, by Richard L. Wottrich, Blog Editor

There has been recent rapid growth in the number and size of utility-scale demonstration Energy Storage Projects and a growing body of proof that storage will be a critical enabling technology for the electrical smart grids of the future.

Modern Developed Economies are entering an era where 600 million people in North America and Western Europe can no longer lay claim to the lion's share of global resources because the other 6 billion inhabitants of our planet are subject to rising expectations. Our escalating populations in Emerging Economies will give rise to exponential increases in global demand for everything. Methodologies to avoid armed conflict or catastrophic environmental damage include minimizing waste in all its forms, beginning with energy.

It is an ugly reality that most grid-connected storage applications won't pay under current economic conditions because the spread between the cost of storage and the value of storage remains narrow. That cost-benefit equation is changing rapidly as energy costs rise and renewables are added, but as long as waste is cheaper than storage, waste will prevail.

The most important lesson for Energy Storage Investors is price sensitivity. When total installed costs for energy storage systems are $1,000 per kW or higher, demand for storage is almost insignificant. As installed costs fall into the $600 per kW range, the number of cost-effective utility applications soars.

Energy Storage demonstration systems from Beacon Power (BCON), Altair Nanotechnologies (ALTI) and A123 Systems (AONE) have shown a remarkable ability to respond to regulation signals in microseconds and provide up and down regulation at speeds that traditional systems can't even begin to match. Based on estimates from the PJM Interconnection, one of the independent system operators that manage the U.S. grid, national demand for frequency regulation installations is on the order of 6,000 MW and could be much higher if flywheel and battery systems prove capable of handling longer duration load ramping intervals. The ongoing tests are not conclusive because the new systems have not been in service long enough to establish their useful lives, but the preliminary results are promising.

Other energy storage applications include the use of flow batteries at cellular telephone installations in Africa, to a recently completed 12-year demonstration where Exide Technologies (XIDE) used lead-acid batteries to effectively eliminate the need for diesel fueled backup power on a remote island where the primary power source was renewable. Yet another application utilizes computer analysis of satellite maps to identify new locations in Ireland for pumped hydro, a technology that is commonly believed to have limited potential because most of the desirable locations are already developed.

Energy Storage is the economic equivalent of a dispatchable generating asset. Installed cost and reliability will be the primary drivers of decisions to implement storage solutions. Maintenance and cycle life will be secondary decision drivers. An optimal smart grid configuration will need storage equal to at least 5% of peak system load; and as renewables become prevalent, storage will become increasingly critical to grid stability.

For example, the required annual storage build required in the State of California is estimated at 500 MW per year for the next decade. Of this total, 50 MW would need to be fast storage in the form of flywheels and Li-ion batteries and the 450 MW balance would be 4 to 6 hour storage in the form of pumped hydro, compressed air, flow batteries and advanced lead acid batteries. When the California numbers are scaled up to a national level, they translate to billions in new annual demand for the foreseeable future. When you add in billions in new demand for transportation, it's clear that the sector isn't even close to ready for the near-term demands. To compound the problem, essential raw material supply chains aren't ready either.

Energy storage devices are rapidly evolving from minor components in high-value durable goods to stand-alone end user products. As a result, the cost of energy storage is rocketing from less than 5% of product cost in the case of portable electronics to more than 50% of product cost in the case of an EV like the Tesla roadster. When you get into the utility arena, the storage devices are the end product and represent 100% of the product costs. Since consumers generally have higher payback expectations and shorter investment horizons than utilities, consumer price sensitivity will be very high.

While some of the stock market valuations in the energy storage sector reflect the emerging reality that energy storage is and will remain a highly price sensitive product, others do not. As a result, we have a distorted market dynamic where EnerSys (ENS), the world's largest manufacturer, marketer and distributor of industrial batteries, trades at a 50% discount to a newcomer like A123 Systems (AONE); and Exide Technologies (XIDE), the world's second largest manufacturer of OEM automotive batteries, trades at a 28% discount to a newcomer like Ener1 (HEV). While the valuation disparities might be justified if either of the newcomers had a technology that would displace the established leaders or significantly erode their revenues or margins, that outcome can't be expected in the foreseeable future because the newcomers are focused on far more expensive products for markets that don't even exist yet.

The source of these observations is John Petersen of Seeking Alpha. His recurring simple hypothesis has been that cheap energy storage will beat cool energy storage in the market and that companies that manufacture objectively cheap products will experience far more rapid and sustained stock price growth than companies that are developing objectively expensive products. Over that time, Petersen says that his personal trading account of Active Power (ACPW), Enersys (ENS), Exide Technologies (XIDE), ZBB Energy (ZBB) and Great Western Minerals Group (GWMGF.PK) has gained over 300%.

Petersen believes that every energy storage company that brings a product to market will have more business than it can handle. Nevertheless, he believes that companies that have attained lofty market valuations based on ambitious plans to develop exotic products are likely to trade flat or decline in price while the companies that have less ambitious goals and less expensive products have substantial upside potential.

Petersen’s favorite short-term holding is ZBB Energy (ZBB) because it’s ZESS 50 and ZESS 500 flow battery systems are market ready and carry an attractive mid-range price while its market capitalization of $15.3 million is but a small fraction of the peer group average. His favorite mid- to long-term holding is Axion Power International (AXPW.OB) because its first generation PbC batteries are in production and have been delivered to select end users for testing, the PbC battery promises a cheap solution for a wide variety of mundane energy storage applications and Axion's market capitalization of roughly $80 million is well below the peer group average.

DISCLOSURE: John Petersen is a former director of Axion Power International and has a substantial long position in its stock. He also has small long positions in Active Power, Enersys, Exide Technologies, ZBB Energy and Great Western Minerals Group.

No comments: