My last article, " The Obama Fast Track for HEVs " graphically highlighted some critical cost issues that I've been writing about for several months and was surprisingly popular with readers. After responding to numerous comments and considering the gaps in that article, I believe a follow-on article is appropriate to provide additional color, put a finer point on the differences between advanced lead-acid and lithium-ion batteries and try to relate those differences to the rapidly evolving HEV markets. As I explained last week and in a November 2008 article titled " Alternative Energy Storage; Lithium, Lead or Both ?" micro hybrid, mild hybrid and full hybrid vehicles (HEVs) are classified as "power applications." They use relatively small battery packs to: Stop and start the internal combustion engine (ICE) when the vehicle stops and starts; Provide moderate amounts of power to launch the vehicle from a stop and improve acceleration; Recover all or part of the energy that is normally lost in braking to recharge the batteries; and Power accessories like heat and air conditioning while the ICE is off. Micro, mild and full hybrids need a relatively small battery pack that can accept a fast charge over a brief braking interval, deliver that stored electricity over a brief acceleration interval and repeat the process hundreds of thousands of times over the life of the vehicle. In comparison, plug-in hybrids (PHEVs) are classified as "energy applications." They use much larger battery packs to: Power the vehicle in electric-only mode for a distance of 10 to 40 miles before starting the ICE; Recover all or part of the energy that is normally lost in braking to recharge the 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. Since power is rarely an issue in larger battery packs, the critical requirement for PHEVs is a battery pack that can deliver substantially all of its stored energy over the time required to drive 10 to 40 miles and repeat that process once or twice a day for the life of the vehicle. Weight and Volume Most people find that battery comparisons based on energy densities are confusing because they use metric measurement terms and do not provide a meaningful context for the raw numbers. The following table is my effort to re-state the most common energy density values in familiar weight and volume terms. My goal is to show what energy density actually means to the owner of an HEV. For purposes of the table, I used energy densities of 30 Wh/kg and 50 Wh/l for advanced lead-acid batteries and 100 Wh/kg and 150 Wh/l for lithium-ion batteries as my starting point. I then did the necessary conversions and calculated the weight and volume advantage of lithium-ion batteries for each of the principal HEV configurations. Fuel Battery Li-ion Weight Li-ion Volume Savings Capacity Advantage Advantage Micro Hybrid 10% 0.50 kWh 26 Pounds 0.2 Cubic Feet Mild Hybrid 20% 1.00 kWh 51 Pounds 0.5 Cubic Feet Full Hybrid 40% 1.50 kWh 77 Pounds 0.7 Cubic Feet PHEV-10 55% 5.00 kWh 257 Pounds 2.4 Cubic Feet PHEV-40 100% 16.00 kWh 821 Pounds 7.5 Cubic Feet For reference, a subcompact will typically weigh 3,000 pounds and have 10 to 12 cubic feet of trunk space. Battery Cost In a July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program, Sandia National Laboratories estimated the current cost of advanced lead-acid batteries at $500 per kWh and the current cost of lithium-ion batteries at $1,333 per kWh. I'm aware of PR claims and forward looking statements that suggest lithium-ion battery costs may be lower, but I've not been able to confirm lower prices based on published price lists from first tier manufacturers or quantify the meaning of terms like significant and substantial. So while I'm not entirely comfortable that the Sandia values are right, I've not been able to find other numbers that I think are better. The following table compares the estimated cost of using advanced lead-acid and lithium-ion batteries in each of the principal HEV configurations. Battery Li-ion Advanced Federal Advanced Capacity Battery Lead-acid Battery Tax Lead-acid Battery (kWh) Cost Cost Credits Cost Advantage Micro Hybrid 0.50 $667 $250 $417 Mild Hybrid 1.00 $1,333 $500 $833 Full Hybrid 1.50 $2,000 $750 $1,250 PHEV-10 5.00 $6,665 $2,500 ($2,500) $4,165 PHEV-40 16.00 $21,328 $8,000 ($7,500) $13,328 Total Vehicle Cost For most American comsumers, I believe the most important number will be the incremental cost of an HEV over a comparable car with an ICE powertrain. The following table compares the estimated cost premium for each of the principal HEV configurations using advanced lead-acid and lithium-ion batteries. Fuel Savings Basic ICE Vehicle Cost HEV Premium Using Advanced Lead-acid Batteries HEV Premium Using Li-ion Batteries Micro-Hybrid 10% $18,000 $750 $1,167 Mild-Hybrid 20% $18,000 $1,500 $2,333 Full-Hybrid 40% $18,000 $2,250 $3,500 PHEV-10 55% $18,000 $2,000 $6,165 PHEV-40 100% $18,000 $2,500 $15,828 The following graph summarizes the same basic information in a slightly different format. (click to enlarge) Market Forecast Global market forecasts for HEVs vary widely and are evolving rapidly in response to new laws and regulations. In an October 2008 AW Briefing on "The Global Oil Paradox: Transforming the Automotive Industry," Anil Valsan of Frost & Sullivan presented a slideshow that included two highly informative graphs. The first graph showed three possible growth scenarios for the HEV market where the principal variable was the likely standardization of micro-hybrids by European OEMs in response to EU legislation that requires manufacturers to reduce their fleet average CO 2 emissions to 120 g/km by 2012. Since the date of the original presentation, the Obama administration has advanced the effective date of domestic CAFE standards by five years and eliminated the historic practice of fleet-wide averaging, both of which should create an additional substantial jump in HEV demand that is not reflected in the October 2008 graph. (click to enlarge) The second graph showed Frost & Sullivan's forecast of the percentage of total HEV unit sales that would be attributable to micro, mild, full and plug-in hybrids. (click to enlarge) In combination, the Frost & Sullivan graphs make two critical points crystal clear: PHEVs will not represent a material percentage of HEV sales for the foreseeable future; and Since none of the proposed lithium-ion battery manufacturing facilities will be on-line before 2012, the biggest leaps in HEV demand will occur before lithium-ion battery plants can be built. In the context of micro, mild and full hybrids, I believe the volume and weight advantages of lithium-ion batteries are insignificant while the cost advantages of advanced lead-acid batteries are substantial. I also know there is no possibility that lithium-ion battery production can ramp up quickly enough to satisfy expected demand for micro, mild and full hybrids. Accordingly, I'm left with the inescapable conclusion that the gap will have to be filled by advanced lead-acid batteries. Once advanced lead-acid batteries have claimed the first mover advantage, I believe it will be difficult if not impossible for lithium-ion battery manufacturers to overcome an entrenched competitor by offering a more expensive product that does not offer extraordinary performance advantages. The market dynamic may change over the long-term if PHEVs become a dominant hybrid configuration. It may also be impacted by future changes in the relative price advantage of advanced lead-acid batteries. For the foreseeable future, however, I believe the lion's share of the revenue gains from the HEV revolution will flow to companies like Enersys (ENS ), Exide ( XIDE ) and C&D Technologies ( CHP ) that have substantial existing manufacturing capacity, and from technology driven newcomers like Axion Power International ( AXPW.OB ) that can rapidly expand their production capacity to satisfy soaring demand from the HEV market. 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.