John Petersen Today is the third anniversary of my blog on investing in energy storage. While the last three years have been profoundly troubled by a market crash, a slow recovery and more ups and downs than a roller coaster, energy storage has been surging to prominence as investors realize that batteries, products we all love to hate, are a critical enabling technology for wind and solar power, efficient transportation, the smart grid and hundreds of other applications that make life more pleasant. With each passing day it's increasingly clear that energy storage is an investment mega-trend that will endure for decades. Most of the smart money is still on the sidelines looking in, which explains the popularity of my blog. As the smart money transitions from analyzing opportunities to making investments, the sector should encounter rising tides that lift all boats. Thomas Edison was the first to identify the biggest risk of energy storage investing a century ago when he complained: “ The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. ” The problem isn't really the batteries, which haven't improved all that much over the last century. Instead, the problem lies in the fertile imaginations of investors who read about new scientific discoveries in research laboratories, overestimate the value of those discoveries and immediately make a wildly optimistic leap from the reasonable to the absurd. The two most common forms of batteries are carry-over relics of the 19th century. Lead-acid batteries have been around for 150 years and spiral wound batteries have been popular for almost as long. While battery chemistry has changed over the years and manufacturing methods have been modernized, the energy storage capacity of today's best batteries is only four or five times greater than the energy storage capacity of the batteries Edison complained about. Regardless of what you read in the paper or hear on the news, making a better battery is very hard work and the vast majority of exciting new discoveries never make it from the laboratory bench to the factory floor because they're just too expensive. It's fun to daydream about the technical possibilities of portable power, but the market will only pay for cheap, reliable and safe portable power. The chasm between technical possibility and economic viability is both wide and deep. Today's most common myth in energy storage is that exponential performance improvements will be accompanied by rapidly falling prices. The current issue of Science includes an article titled " Getting There " that offers a classic example of how the mythology grows and spreads. The article's centerpiece is the following graph that compares the theoretical potential of battery materials and the best results obtained in working cells. A quick read through the article and a glance at the graph would be enough to convince any reasonably imaginative person that a golden age of battery powered everything is just around the corner. The undeniable facts the article and the gee-whiz graph don't reveal with any force are: All lithium-ion batteries in commercial production are in the first category; The performance differences between the various lithium-ion chemistries are minor at best; Current technologies offer little room for improvement because the theoretical limits are absolute; The first category of lithium-ion batteries are the only ones we know how to manufacture in bulk; All advanced technologies will require the development of completely new manufacturing methods; All advanced technologies will require the creation of different infrastructure from the ground up; All advanced technologies are at least five to ten years from production if everything goes right; and The companies that own the best current technologies do not own their advanced counterparts. In other words each step forward will make all the science and all the manufacturing infrastructure required for the prior generation of batteries obsolete. It's the epitome of creative destruction where the future poses an existential threat to the past, but the future can't leverage, build upon or even use the massive infrastructure investments of the past. Progress in IT was immense and rapid because every step along the path built upon and leveraged the past. Progress in energy storage will be agonizingly slow because innovation that builds upon and leverages the past is as rare as hens teeth. In my first Seeking Alpha article , I wrote that the market prices for Ener1 ( HEV ) and Altair Nanotechnologies (ALTI) represented "nosebleed market capitalization based on little more than dreams." In September 2008, I added Valence Technologies ( VLNC ) to my list of dangerously overvalued lithium-ion battery developers because like Jacques Cousteau it was under water to the tune of $68.4 million at mid-year. In October 2009, I added BYD Co. Ltd. ( BYDDF.PK ) to my list and wrote that it was "a classic example of why it's never a good idea to make investment decisions based on simple questions like "What did Warren do?" In November 2009, I added A123 Systems ( AONE ) to the list observing that it was "well up the hype cycle curve and approaching the Peak of Inflated Expectations." Finally, in November of last year, I added the magical gravity defying Tesla Motors ( TSLA ) to my list and suggested a paired trade that would short Tesla and go long Exide Technologies ( XIDE ). In every case the reader outrage over my criticisms was palpable. You'd have thought I was torturing kittens. Subsequent performance tells a very different story. The following table shows the price of each of these companies when I first openly criticized them, their closing price last Friday, and the percentage decline in the interim. Company Symbol Initial Price Friday's Price Change Ener1 HEV $5.91 $0.79 -87.6% Altair Nanotechnologies ALTI $7.92 $0.96 -87.9% Valence Technologies VLNC $3.59 $1.03 -71.3% BYD Co. Ltd. BYDDF.PK $11.12 $2.86 -74.3% A123 Systems AONE $15.88 $5.68 -64.2% Tesla Motors TLA $30.80 $27.58 -10.5% Since I first criticized them, A123 and BYD have fallen to levels where they're beginning to look attractive for long-term investors who believe in the future of electric transportation and are not concerned about the looming lithium-ion battery supply glut I discussed last week. In spite of the happy talk from Silicon Valley, Tesla hasn't even started to bleed. Ener1, Altair and Valence may survive, but only if they receive massive capital infusions. I've been bullish about the lead-acid battery sector for years because the major manufacturers including Johnson Controls ( JCI ), Exide and Enersys ( ENS ) have global manufacturing footprints, established product lines, strong customer relationships, billion dollar revenue streams and rust-belt market capitalizations. My favorite in the group is Exide because it trades at a significant discount to its peers, but in light of recent forecasts that stop-start idle elimination will be deployed in almost a hundred million cars over the next five years , I think JCI and Exide are facing a manufacturers dream scenario where unit volumes will remain stable but revenues will double and margins will ramp sharply as customers gravitate to their premium AGM products. While Axion Power ( AXPW.OB ) has not been a stellar stock market performer over the last couple years, I can't think of another instance where huge companies like BMW and Norfolk Southern have publicly aligned themselves with a nano-cap technology developer that hasn't even launched its first product. The last three years have been a lot of fun and intelligent comments from knowledgeable readers have provided a balance and breadth that I could never have achieved on my own. New readers in particular may find it helpful to peruse my article archive , but be sure to spend enough time reading the comments to understand where the views of others differ. I always try to explain the factual basis for my opinions and provide links to relevant source documents, but in the end I'm only human and I can only speak from the shoes I stand in. I want to thank everyone for their respective contributions, even those who haven't learned how to disagree without being disagreeable. Disclosure: Author is a former director of Axion Power International ( AXPW.OB ) and holds a substantial long position in its common stock.