How to profit as the world struggles to keep the lights on

published 31 May 2012

In 2010 Britain experienced its coldest December for a century. Temperatures around the country plummeted; snow piled up; roads froze. Everyone whether they were stuck at home or somehow made it into work cranked up the heating. Power demand soared as the cold dug in.

But December wasn't simply cold it was unusually still, something that caused a new kind of problem for the National Grid. Wind farm output fell by two-thirds from forecast levels as the nation's turbines and great renewable energy hope slowed and stopped. As a result, the National Grid was forced to import more electricity from France.

For those who still hadn't thought through the implications of relying on renewable energy sources, December 2010 offered a lesson in the core problem: you never know when the sun is going to shine or when the wind will blow. Surges of wind power in the middle of the night when no one needs heating are of little use, any more than is solar power in the middle of summer.

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You might think that this shouldn't be a major problem after all, we use batteries to store the energy we need for most things. But you'd be wrong. Chemical batteries be they the older lead-acid ones in our cars or the lightweight lithium-ion version in our iPods do a great job of storing electricity for our daily needs. Yet so far, attempts to scale up conventional batteries for massive grid-scale applications have been less successful.

That's partly because they aren't good at dispatching electricity at high voltages and high voltage transmission is the most efficient way to transport electricity over long distances. But it is also about size. With the right conditions the biggest offshore wind farms can produce up to 400MW of power, but the largest sets of conventional chemical batteries can only store a few megawatts at a time.

So here's the rub we can't control the supply of renewable energy from its various sources and we can't store it to control the supply to its end destination either. The result, says Fiona Harvey in the FT, is twofold: we waste a huge amount of the renewable energy we do produce and we also have to keep expensive fossil fuel stations on constant standby for when we aren't producing it.

That makes storing electricity reliably, safely and cheaply absolutely vital. Indeed, as renewables become a larger part of global energy supplies (American forecasts suggest the amount of energy around the world produced by renewables will rise 124% between 2008 and 2035), this challenge is becoming "the Holy Grail of the alternative energy industry". No wonder American energy analysts Lux Research estimates that the global demand for grid storage will increase to $113bn in 2017 from $50bn today.

Two types of storage are required. The first is long-term we need to store energy to take advantage of the daily, weekly and seasonal variations in renewable energy. The other is short-term from minutes to milliseconds and which can handle the rapid surges and drops in renewable energy.

The former has long been dealt with via pumped-storage hydroelectricity (PSH), which accounts for 99% of the world's electricity storage. Electricity produced in times of low demand is used to pump water to a higher point. When power is needed, the water is released, powering generators as it heads downwards.

PSH has a lot going for it. It's 70%-80% efficient, can store power indefinitely, dispatch it at high-grid voltages and be started up at a moment's notice. However, you can't just set up a conventional PSH scheme anywhere. To do it the traditional way you need hills and lakes to hand and they're in limited supply.

The answer? Gravity Power in the US has a new system that drills two compact shafts, one larger than the other, and shifts water between the two. Surplus electricity is used to pump water down the smaller shaft to raise a weight in the larger.

Then, when electricity is needed, the weight is allowed to sink down, forcing water turbines to generate power. Meanwhile, engineers in Germany and Holland are experimenting with a method of using abandoned mine pits to build PSH facilities underground.

Another approach being explored is to use gas instead of water. Compressed air energy storage (CAES) uses excess electricity to cool and compress air. The pressurised gas is then stored underground and released to turn turbines when power is needed.

Traditionally, CAES has proved less efficient than PSH (only about 40% of the energy is retained). However, new technologies that also capture the heat used in the process are improving it. The best prototypes have an efficiency rating of 70%.

A third promising area is hydrogen. The plan here is to use surplus electricity to produce hydrogen from water. The resulting hydrogen can be stored in caverns or existing gas pipeline networks then used to fuel power stations when electricity is needed.

The process is already used in some industrial applications, but has yet to be proved on a grid-scale power project. That makes these technologies a riskier bet than the others, but "thanks to their high energy density and versatile employability", they have "the greatest potential" of the long-term options, says Deutsche Bank analyst Josef Auer.

So what about short-term solutions? These are as vital as longer-term ones because electricity supply across a grid must always match demand. If demand outstrips supply, electricity is dispersed too widely, the frequency falls and our lights start to dim. Likewise if supply outstrips demand the frequency rises something that can damage electric devices.

Traditionally grid operators have relied on fossil-fuel plants to increase or cut production to balance short-term supply and demand. This allows them to regulate the quality of electricity on the network and keep the frequency within a tight band around 50Hz. But due to the unpredictability of wind and solar, incorporating greater amounts of renewable energy into the grid makes this balancing act more difficult. That in turn is driving demand for something able to smooth out variations in supply.

One possibility is the flywheel. The physics here is pretty simple. Spare electricity is used to spin a disk. Momentum keeps the disk spinning and when the power supply dips that momentum can be used to generate more electricity. In itself, this is nothing new, says The Economist. "For nearly as long as man has used wheels to turn all sorts of energy efficiently into motion, he has been performing the reverse trick with flywheels. From spindle whorls to steam engines, they have served to harvest and store energy for use in the (immediate) future."

But modern flywheels are more efficient than the average spindle whorl. To cut friction they're now suspended in a vacuum by electromagnetic forces and spin at twice the speed of sound. Until recently they were used in small-scale applications, such as helping trains over unelectrified parts of the track. But now US firm Active Power has developed a grid-scale flywheel that can absorb or dispatch megawatts of energy at a time.

Old-fashioned batteries are also turning out to have a role in short-term storage. Axion Power International has added supercapacitors (in this case carbon electrodes) to lead-acid batteries to create an efficient hybrid. These batteries are bundled into shipping containers. The Powercube, as the firm calls the container, can be used by grid operators to regulate the quality of electricity on the network.

Firms are also exploring ways to turn the buildings in which power firm customers operate into storage units. Some on-site appliances, such as freezer units or ventilation systems, can act as a type of storage. By using extra energy in the present, they need less in the future, meaning future demand can be released for another user.

The impact of one ventilation system may seem slight, but in America more than 30,000MW of demand is now controlled by demand response companies (firms that manage customers' electricity consumption in return for a discount from the utilities). For comparison purposes that's around half of Britain's total installed power capacity.

But the most effective storage method could be electric vehicles (EVs). Right now EVs and hybrids (which use petrol and electricity) make up less 3% of the world's cars. But "car manufacturers seem to have conceded that electric vehicles and plug-in hybrids are part of the industry's future", says John Reed in the FT. All the world's big carmakers, even the "initially electric-sceptical Germans", have launched or plan to launch them.

This will have a huge impact on the National Grid. According to Dr Nigel Burton from the Institution of Engineering and Technology, "electric cars are perfect for storing wind power. They charge overnight and if there's a drop they just stop charging." Car owners can even sign up for a discount on their bills on the condition that they send power back to the utilities if demand rises.

Still, buying an electric car might not be the best way for you to profit from the boom.Below, we look at the alternatives.

The three stocks to buy now

Picking a winner in renewable energy storage is not easy. The Nasdaq is already littered with the shells of companies that once promised to change the world.

Take A123 Systems. The American electric car battery-maker listed to great fanfare in 2009. Since then its shares are down 96%. It's not that A123 or its many peers are bad companies per se. It is just that they compete in embryonic industries where new technologies or government intervention can change everything. That makes them unpredictable investments. However, if you are prepared to take a big risk, these companies can also offer exciting opportunities.

First up is Canadian battery-maker Electrovaya Inc (US: EFLVF). The company designs lithium-ion batteries for electric vehicles. So far the product is a prototype but it has huge potential, says Dev Bhangui at Fraser Mackenzie. "We still continue to believe in the technical superiority and elegance of Electrovaya's solution The large pot of gold' (from selling batteries into electric vehicles all over the planet) exists and can transform a company like Electrovaya into a billion dollar market cap within a matter of two years."

Electrovaya gets extra revenues from selling lithium-ion battery systems that help utilities regulate renewable power. The sale of one of these to a Japanese utility helped push sales to $2.5m in the first quarter of 2012. The firm is on a sounder financial footing than its peers, but trades on a forward p/e of 31.

Not everyone is convinced by lithium-ion. At the moment it dominates the market because it's proven to work and has a high energy density. However, these batteries are expensive, making up about £9,000 of the cost of a £24,000 electric car. An alternative is Axion Power's modified lead battery. The problem here is that since 2003 Axion Power (US: AXPW) has regularly disappointed shareholders. However, after years of testing there are signs that its hybrid lead-carbon battery is finally beginning to come good.

One of the battery's main selling points is that it's tough. It can be charged and discharged 7,000 times, compared to 400 for a normal car battery. Like Electrovaya's, Axion's batteries can power vehicles or be grouped together and sold to utilities as a larger, grid-scale battery. Its durability has also caught the attention of the US military, who have awarded it a $1.2m development grant.

While waiting for its new battery to take off, the firm generates extra sales by selling speciality lead-acid batteries for racing cars and antiques. That bought in a nice $1.8m in sales in the first quarter, bringing the company's first-quarter losses down to $2.3m. It's definitely a risky investment, but it seems like Axion is finally about to live up to its potential.

When it comes to longer-term storage, Canada's Hydrogenics (TSX: HYG) looks well-placed. It makes hydrogen and fuel cell products, but a recent deal with Enbridge, Canada's largest natural gas distributor, could turn it into one of the world's leading hydrogen storage companies.

The plan is that Hydrogenics will use its specialist technology to build a power-to-gas' facility and connect it to Enbridge's pipe network. Surplus electricity will be used to power the plant and create hydrogen. The hydrogen will then be fed into Enbridge's gas network and used to fuel power stations at a later point. The technology is to be trialled in Ontario and the hope is that it will one day be rolled out throughout Canada. Unlike pumped storage hydroelectricity, which needs favourable topography, if the technology is successful Hydrogenics could sell to other countries with gas pipelines. It's still not making profits, but it could have big potential.

This article was originally published in MoneyWeek magazine issue number 591 on 1 June 2012, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.

James graduated from Keele University with a BA (Hons) in English literature and history, and has a NCTJ certificate in journalism.

After working as a freelance journalist in various Latin American countries, and a spell at ITV, James wrote for Television Business International and covered the European equity markets for the Forbes.com London bureau.

James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report.

He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.