Plugin Electrics vs All Electric Battery EVs, Epic Throwdown?

I get this every time I discuss EVs.  Something along the lines of oh, you shouldn’t be including PHEVs in with EVs, they don’t count, or are not real EVs, just a stopgap etc.

I tend to think PHEVs may be better product.  At least for now.  And I follow the GM’s Chevy Volt vs the Nissan Leaf with interest.

The main arguments on each:

Plug in Hybrids

  • No range anxiety
  • Still need gasoline
  • Can fuel up at either electric charging station, your home or gas station
  • Depending on driving patterns, may not need MUCH gasoline at all
  • Expensive because:  need both gasoline and electric systems, and batteries are still pretty expensive, even with a fraction of the amount that’s in an EV
  • Get all the torque and quiet and acceleration punch of an EV without the short range hassle
  • But not really an EV, after a few miles it’s “just a hybrid”
  • Future is just a stop gap until EV batteries get cheap? Or just a better car with all the benes and no cons?


Electric Vehicles

  • No gasoline at all (fueled by a mix of 50% coal,20% gas, and the rest nuke and hydro with a little wind :) )
  • Amazing torque and acceleration
  • Dead quiet no emissions
  • Fairly slow to charge compared to gas
  • Lack of charging stations is getting solved, but still somewhat an issue
  • Switching one fuel for another, no extra flexibility on fuel
  • Expensive because lithium ion batteries are still pricey and way a lot
  • Future is cheaper better batteries?  Or they never get there and the future never arrives?

I tend to think the combination of plugins and EVs has actually worked together solved range anxiety.  As a consumer, I get to pick from a full basket when I buy, Leaf, Volt, Prius, Model S, lots of pricey batteries to deal with range anxiety, a plug in that gets me almost there with zero range issues, or a Leaf in between.  Whatever range anxiety I had disappears into consumer choice, just like it should.  I don’t think pure EV is any better or worse than a plugin, just a different choice.  They work together in the fleet, too, plug ins help drive demand for EV charging stations that are critical to electric car success, and EVs drive the cost down on the batteries that brings the plugin costs into line.  Unlike with the Prius over a decade ago, it’s not a single car changing the world, it’s the combination that’s working well for us.

Why is it So Hard to Make Money in New Battery Technology?

Energy storage is still the rage in cleantech.  But after the collapse of A123 and Beacon, and the spectacular failure on the Fisker Karma in its Consumer Reports tests, fire  in Hawaii with Xtreme Power’s lead acid grid storage system and with NGK’s sodium sulphur system, and now battery problems grounding the Boeing Dreamliners, investors in batteries are again divided into the jaded camp, and the koolaid drinker camp.   Not a perjorative, just reality.  New batteries and energy storage is still one of the juiciest promised lands in energy.  And still undeniably hard.  Basically, investors are relearning lessons we learned a decade ago.

Batteries are just hard.  Investing in them is hard.  Commercialization of batteries is hard. So why is it so difficult to make money in new battery technology?

Above and beyond the numbers, there are a number of commonalities related to the commercialization and venture financing life cycle of battery technologies that seem to differ to some degree from other venture investments in IT or even other energy technologies.  Having looked at probably 100+ deals over the years, and on the back of an deep study we did a couple of years ago on benchmarking valuations in energy storage, here’s our take on the why.

Timing – Battery technology commercializations have historically tended to be one of the slower commercialization cycles from lab stage to market.  Startups and investors in batteries have a long history of underestimating both the development cycle, capital required, and the commercialization cycle, as well as underestimating the competitiveness of the market.

Special chemistry risk – There is significant risk in launching a technology in newer battery chemistry.  There have been only a limited number of new chemistries succeed, and when they do, as in the case of NiMH and Energy Conversion Devices, they are typically either co-opted by larger competitors obviating a first mover advantage (that advantage is typically much weaker in this field than others) or requiring expensive patent suits.  Also as in the case of NiMH, there is no guarantee the chemistry will have legs (just when it is hitting its stride, NiMH is already becoming eclipsed by Li-On.  This risk has proven to be especially high for new chemistries (like Zn type) that are not as widely researched, as the supply chain development does not keep pace.  In addition, the battery field is highly crowded, and research is old enough that and despite new chemistry in most cases truly defensible patent positions are extremely hard to come by, or provide only discrete advantages (ability to supply a range of quality product cheaply in high volumes (or with value add to the product) seems to be the primary competitive advantage).  Few battery technologies of any chemistry end up their commercialization cycle with anywhere near as sustained an advantage as their inventors expected.

High capital costs – In any case, almost all battery startups will require extremely large amounts of capital (on the order of US$50 to 100 mm+) to achieve commercialization (much higher for real manufacturing scale), and the end product margins tend not to be particularly high.  Even with stage gate, a very large portion of this investment (US$10-50 mm+), is generally required to be spent while the risk of technical and economic failure is still high.  In addition, during the manufacturing scale up phase post R&D, capital investment required per $1 of revenue growth tends to be linear, making these technologies capital intensive to grow.

Degradation of initial technical advantage – In many technology areas one can expect the performance of the final manufactured product to improve over the performance in initial lab results, In part because of the low cost target, high reliability, high volume requirements of this product type however, promising battery technologies, are often forced to make compromises in the scale up, manufacturing, and commercialization stages that mean the performance of actual product might be expected to fall from levels or rates seen in lab scale experiments (though cost may go the other way).    At the same time, battery performance of standard technologies, while mature, is a moving target, and during the time frame for commercialization, will often improve enough to obviate the need for the remaining technical advantages.

Size matters – Most battery products (whether batteries or components like anode or cathode materials or electrolyte), are sold to large customers with very large volume requirements, and highly competitive quality and performance requirements.  As a result, breaking into new markets generally is extremely hard to do in niche markets, and means a battery startup must prove itself and its technology farther and for a longer period of time than other technology areas (see capital costs, timing and down rounds).  Many battery components technology developers as a result will be relegated for early adopters to emerging customers with high risks in their own commercialization path.

Lack of superior economics from licensing – As a result of these size, capital cost, timing, and commercialization risk issues most battery technologies will command much lower and more short-lived economics than anticipated from licensing (or require expensive patent lawsuits to achieve), and will require almost as late a stage of development (ie manufacturing operating at scale with proof of volume customers) and commensurate capital requirements, as taking the product to market directly.

Propensity for down rounds – In addition, battery technology companies tend to have down rounds in much larger numbers in the post A rounds (Series B through D+) than other venture investment areas, as these challenges catch-up to investors and management teams who overestimated the scope of work, capital and timing required in the seed, A and B rounds.  In particular, battery investors have tended to invest in seed, A and B stage battery technologies (pre-scaled up manufacturing process or even lab and prototype scale) with expectations of typical venture style timing and economics.  Quite often instead, it is the B, C, or D investor group that post cram-down rounds achieve the Series A economics (even when the technology IS successful), and the seed, A and B investors suffer losses or subpar IRRs.

Chicago: Battery Central

At the end of November, the U.S. Department of Energy announced that it had selected Argonne National Laboratory in suburban Chicago to host the Joint Center for Energy Storage Research (JCESR), and bestowed upon it a $120 million grant over 5 years, alongside a $35 million commitment for a new 45,000 square foot facility from the State of Illinois.

As noted in this article in the Chicago Tribune, the goal for the JCESR is to improve battery technologies by a factor of five — five times cheaper, with five times higher performance — within five years.

One of the nation’s Energy Innovation Hubs just being launched, the JCESR has an impressive list of collaborators.  In addition to Argonne, four other national laboratories – Lawrence Berkeley, Pacific Northwest, Sandia and SLAC National Accelerator – will also conduct research under the JCESR umbrella.  University research partners include Northwestern University, the University of Chicago, the University of Illinois at Chicago, the University of Illinois at Urbana-Champaign, and the University of Michigan.  A long list of the leading venture capital firms active in the cleantech arena – including ARCH Ventures, Khosla Ventures, Kleiner Perkins, Technology Partners and Venrock – will serve on an advisory panel to help focus the research on commercially-interesting opportunities.  Corporate titans Applied Materials (NASDAQ: AMAT), Dow Chemical (NYSE: DOW) and Johnson Controls (NYSE: JCI) have loaned their names to the effort.

Whether it was because the team didn’t want their influence or because they didn’t want to be involved, no corporate representatives from the automotive or electricity industries are part of the JCESR constellation.

Especially when paired with the Galvin Center for Electricity Innovation just 30 miles away at the Illinois Institute of Technology, where smart-grid research is a primary focus, the JCESR announcement arguably leapfrogs the Windy City into the top echelon of cleantech technology research clusters, particularly as it relates to electricity management.

Stunning Cleantech 2012

It’s been a busy, ummm interesting year.  We’ve tracked profits to founders and investors of $14 Billion in major global IPOs on US  exchanges and $9 Billion in major global M&A exits from venture backed cleantech companies in the last 7-10 years.  Money is being made.  A lot of money.  But wow, not where you’d imagine it.

5 Stunners:

  • Recurrent Energy, bought by Sharp Solar for $305 mm, now on the block by Sharp Solar for $321 mm.  Can we say, what we have here gentlemen, is a failure to integrate?  This was one of the best exits in the sector.
  • Solyndra Sues Chinese solar companies for anti-trust, blaming in part their subsidized loans????????  Did the lawyers miss the whole Solyndra DOE Loan Guarantee part?  It kind of made the papers.
  • A123, announced bought / bailed out by Chinese manufacturer a month ago, now going chapter bankruptcy and debtor in possession from virtually the only US lithium ion battery competitor Johnson Controls?
  • MiaSole, one of the original thin film companies, 9 figure valuation and a $55 mm raise not too long ago (measure in months), cumulative c $400 million in the deal, sold for $30 mm to Chinese Hanergy just a few months later.  (Not that this wasn’t called over and over again by industry analysts.)
  • Solar City files for IPO, finally!


My call for the 5 highest risk mega stunners yet to come:

  • Better Place – Ummmmmmmmmm.  Sorry it makes me cringe to even discuss.  Just think through a breakeven analysis on this one.
  • Solar City – a terrifically neat company, and one that has never had a challenge driving revenues, margin, on the other hand . . .
  • BrightSource – see our earlier blog
  • Kior – again, see our prior comments.  Refining is hard.
  •  Tesla – Currently carrying the day in cleantech exit returns, I’m just really really really struggling to see the combination or sales growth, ontime deliveries, and margins here needed to justify valuation.

I’m not denigrating the investors or teams who made these bets.  Our thesis has been in cleantech, the business is there, but risk is getting mispriced on a grand scale, and the ante up to play the game is huge.


Going With The Flow

In recent months, I’ve come across more work being done in flow batteries than I’ve seen in the prior decade.

I’ve been known in the past to say that fuel cells are kinda like fueled batteries.  Well, flow batteries really are fueled-batteries.  A traditional chemical battery is one sealed system that charges and discharges chemical elements through a set of electrodes, and the amount of charge/discharge is dictated by the type and volume of chemistry within the battery.  In contrast, a flow battery separates the electrodes from the chemistry, which is stored externally from the electrodes in tanks.  In so doing, a flow battery delinks the relationship between power (an instantaneous concept) and energy (power over time) that is essentially hard-wired within a chemical battery.  In a flow battery, it’s straightforward to expand the energy of a system by adding more to the storage tanks.  And, it’s straightforward to add more “fuel” by injecting more of the reactants into the storage tanks.

Because of this, it is natural to think about how flow batteries can improve the range of electric vehicles, which is the focus of this 2009 article from The Economist.  However, energy density remains a challenge that could limit the utility of flow batteries for vehicular purposes. 

Several flow battery concepts involving different chemistries are being worked on by a number of academic researchers.  DOE’s advanced energy R&D shop ARPA-E awarded a team from Lawrence Berkeley Labs to pursue flow batteries.  Commercially, perhaps the three most well-known flow battery technology development companies are ZBB (NYSE MKT: ZBB), RedFlow and Primus Power.

Most of these efforts are targeting to apply flow batteries in grid-scale electricity storage at the substation level.  This could be an even more impactful role for flow batteries than their use in vehicles:  if flow batteries can provide an economic solution for grid-storage, the implications for expanded renewable energy deployment — enabling intermittent wind and solar energy to achieve more than 15% share of power generation — are possibly massive.