HEV Primer Today I'm going to begin with an apology because I've done a terrible job of describing the basics of hybrid electric vehicle (HEV) technology for energy storage investors. Many of my earlier articles dove straight into the mind-numbing details of battery technology without first providing an overview of what those batteries will be used for. In other words I'm guilty of putting the cart before the horse. It's time for me to make amends. While the differences between HEV technologies have always been important to automobile manufacturers, the public's understanding of those differences is limited. That dynamic is about to change because of President Obama's decision to accelerate the effective date of Federal fuel economy standards that were first adopted during the Bush administration. These accelerated standards will require manufacturers to increase fuel efficiency by approximately 40% over the next seven years. They will also eliminate fleet-wide averaging and force each class of vehicles to carry a fair share of the fuel economy burden. I don't want to oversimplify a very complex topic, but I believe the most cost-effective way to meet the new goals will be the widespread adoption of HEV technology across all classes of cars and light trucks. The new rules are not an HEV mandate, but they have put HEV technologies on a regulatory fast track that will rapidly drive revenue growth across the entire spectrum of battery manufacturers. There are four primary classes of HEVs including the micro, mild and full hybrids that are available today and the plug-in hybrids (PHEVs) that are scheduled for next year. The following sections provide a simple overview of what the various classes of HEV technology do and what they're expected to cost. More detailed information is available from the Green Car Congress, the National Alternative Fuels Training Consortium and the Electric Drive Transport Association . Micro Hybrids do not use an electric motor to propel the vehicle. Instead, they rely on hybrid technology to: Use a small portion of the energy that is normally lost in braking to recharge their batteries; Stop and start the internal combustion engine (ICE) when the vehicle stops and starts; and Power accessories like heat and air conditioning while the ICE is off. The current cost of micro hybrid technology is roughly $500, plus batteries. The main benefit of micro hybrid technology is fuel savings of up to 10% that arise from turning the ICE off when the vehicle isn't moving. Mild Hybrids use an electric motor that is integrated into the ICE to boost power during acceleration. They also rely on hybrid technology to: Use a larger portion of the energy that is normally lost in braking to recharge their batteries; Stop and start the ICE when the vehicle stops and starts; and Power accessories like heat and air conditioning while the ICE is off. The current cost of mild hybrid technology is roughly $1,500, plus batteries. The main benefit of mild hybrid technology is fuel savings of up to 20% that arise from using a smaller ICE and turning it off when the vehicle isn't moving. Full Hybrids use an electric motor that's separate from the ICE and powerful enough to move the vehicle on its own. Full hybrids typically launch from a stop in electric mode, start the ICE when needed and then use both the electric and ICE systems for acceleration. They also rely on hybrid technology to: Use most of the energy that is normally lost in braking to recharge their batteries; Stop and start the ICE when the car stops and starts; and Power accessories like heat and air conditioning while the ICE is off. The current cost of full hybrid technology is roughly $2,000, plus batteries. The main benefit of full hybrid technology is fuel savings of up to 40% that arise from using battery power in stop and go traffic, using a smaller ICE and turning it off when the vehicle isn't moving. Plug-in Hybrids fall into one of two sub-classes. A parallel hybrid is essentially a full hybrid with a larger battery pack that increases the EV range and decreases reliance on the ICE. A series hybrid is essentially an electric vehicle that runs on battery power for the first 10 to 40 miles and then uses a small ICE to generate electricity for the powertrain. Both sub-classes rely on hybrid technology to use most of the energy that is normally lost in braking to recharge their batteries. The estimated cost of plug-in hybrid technology is roughly $2,500, plus batteries. While fuel economy estimates vary widely depending on assumed driving patterns, most commonly quoted estimates fall in the 60% range. Cost-Benefit Table The following table summarizes the relative costs and benefits of micro, mild, full and plug-in hybrid technologies using lead-acid batteries for lighting, accessory and related systems, and using NiMH or Li-ion batteries for the electric powertrain. The price of $1,000 per kWh for electric powertrain batteries represents a rough average of the current cost of NiMH and Li-ion batteries published in a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage program . Lead-acid Advanced Mechanical Incremental Fuel Batteries Batteries Components Cost Savings Micro Hybrid $200 $500 $700 10% Mild Hybrid (1 kWh powertrain battery) $100 $1,000 $1,500 $2,600 20% Full Hybrid (2 kWh powertrain battery) $100 $2,000 $2,000 $4,100 40% Plug-in Hybrid (10 kWh powertrain battery) $10,000 $2,500 $12,500 60% Cost-Benefit Graph To help remind readers what matters to buyers, I've put together a simple graph that superimposes the purchase price data from the Cost-Benefit Table over a normal bell shaped curve. In this particular graph there is no direct correlation between the background curve and the price points in the foreground. The curve does, however, help put the cost differences and fuel savings into the context of normal forces in a free market. In combination, the table and the graph clearly show why I believe the vast majority of buyers will choose micro, mild and full hybrid alternatives over their more expensive plug-in cousins. It's a simple matter of economics. Cars with plugs simply do not work for anyone other than the emotionally committed or the mathematically challenged. The following graph comes from the DOE’s 2009 Annual Energy Outlook and forecasts that the HEV market will grow from 359,000 units in 2007 (2.3% of light duty vehicles) to 7.9 million units in 2030 (39.6% of light duty vehicles). The companion graph forecasts that less than 7% of the HEVs sold in 2030 will be plug-ins. The other 93% of sales will be full hybrids and micro hybrids. Overall, the forecast corresponds well with the distribution I would ordinarily expect under a normal bell shaped curve. While the sex, glitz, glamour and hype are clearly skewed toward the PHEV tail of the normal bell shaped curve , the bulk of future sales will almost certainly come from the more affordable micro, mild and full hybrid alternatives. Accordingly, I believe the question that investors need to ask themselves is, "which battery technology is best suited to the requirements of these lesser HEV technologies?" The following summary paragraphs may help in that analysis. Energy and Power The distinction between energy and power is frequently blurred in discussions of HEV technology. In simple terms, energy measured in kilowatt-hours (kWh) limits the distance of travel while power measured in kilowatts (kW) limits acceleration and speed. In PHEV applications that rely on the batteries for an extended travel range, energy is the most important performance metric. For micro, mild and full hybrid applications that use the batteries for short bursts, power is far more important and there are many battery technologies including lead-acid, lead-carbon, NiMH and Li-ion that can easily do the required work. In other words, no technology has a clear performance advantage. Size and Weight NiMH and Li-ion battery developers emphasize that they enjoy a substantial weight advantage over lead-acid batteries. I'll be the first to concede that weight differences can be critical in the context of a PHEV that needs to carry a 10 to 25 kWh battery pack to provide the desired range. But the weight advantage is almost irrelevant in the context of a micro, mild or full hybrid that only needs to carry a couple kWh of battery capacity. Cycle Life NiMH and Li-ion battery developers emphasize that they enjoy substantial cycle-life advantages over the lead-acid batteries normally used for starting, lighting and ignition. Those comparisons are inherently unreasonable because they use the best examples of their technology and the worst examples of lead-acid technology. When the best NiMH and Li-ion technologies are compared with the best lead-acid technologies , the cycle-life advantages disappear. Battery Cost The one metric NiMH and Li-ion battery developers never emphasize is cost, unless it's in the context of a happy-talk prediction that future economies of scale will slash the cost of their products. The simple fact is that the best NiMH and Li-ion batteries cost an average of three times as much as the best lead-acid carbon batteries and there is no reason to believe that the developers will ever be able to close the cost gap. If one assumes that advanced lead-carbon batteries will be the technology of choice for micro, mild and full hybrid applications, and that NiMH and Li-ion batteries will be the technology of choice for PHEVs, the revised Cost-Benefit Graph looks like this: Over the last couple years the media has fixated on the romantic notion of PHEVs, which has drawn substantial investor attention to small public companies like Ener1 ( HEV ) and Valence Technology ( VLNC ) that are generally perceived as leaders in the PHEV battery market. As a result, the stock prices of both companies have risen to levels that include huge premiums for intangible future potential . While the market for PHEV batteries will undoubtedly be large, my sense is that the market has not fully considered the business, technical, operational, competitive, financial and ethical risks these companies are certain to face. That leads me to conclude that both companies have far more downside risk than upside potential under current conditions. While the media attention has been fixated on the right hand tail of the bell shaped curve, established lead-acid battery companies like Exide ( XIDE ), Enersys ( ENS ) and C&D Technologies ( CHP ), along with technology driven newcomers like Axion Power International (AXPW.OB ), have been quietly developing next generation technologies that will be affordable for consumers in the middle of the bell shaped curve who need HEV fuel savings but can't afford Li-ion or NiMH batteries. These middle market solutions won't have the high per vehicle value of Li-ion and NiMH solutions, but with far higher market penetration rates, they should easily make up the difference in volume. As I've discussed in earlier articles, the lead-acid sector has been treated like an orphan stepchild of alternative energy for years. That leads me to conclude that these companies have far more upside potential than downside risk under current conditions. I believe the revised Federal fuel efficiency standards will drive the implementation rate for micro hybrid, mild hybrid and full hybrid technologies more rapidly than anyone could have predicted. While the changes are bullish for the energy storage sector in general, the biggest beneficiaries are likely to be the undervalued lead-acid battery manufacturers that will ultimately be the primary source of middle market HEV battery solutions. In closing I would like each reader to take another look at the last graph and consider a broader ethical issue that we all need deal with. The resources required for micro, mild and full hybrid technologies ramp up gradually as fuel savings climb from 10% to 40%. The resources required for that last 20% in fuel savings from a PHEV are immense. In effect, to save 100 gallons of gas per year in a single vehicle, PHEV advocates want to deny our society the chance to save 1,000 gallons of gas per year spread over five vehicles. This is one of the most appalling examples of selfish and wasteful arrogance I can imagine. It has no place in a resource constrained world where 6 billion people have come to understand how the other 500 million live and the primary challenge for our species is finding relevant scale solutions to persistent shortages of water, food, energy and virtually every commodity you can imagine. Disclosure: Author is a former director and executive officer of Axion Power International ( AXPW.OB ) and holds a large long position in its stock. He also holds small long positions in Exide ( XIDE ) and Enersys ( ENS ). John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.