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March 25, 2015

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Jim Patterson

Greetings:

Kiplinger's Energy Alerts is a digital heads-up on coming trends and breaking developments in the energy industry. This issue zeros in on how battery technology -- so vital to the future of sustainable power distribution -- is advancing and on which areas of battery research show the most promise. We also provide a road map for energy investors attempting to navigate the big tumble in oil prices.

Keep in mind that you have a standing invitation to e-mail me anytime with questions on any aspect of energy you're interested in -- no matter how large or small the issue -- and I'll run down the answer for you. The positive response to our inaugural issue was overwhelming. Thank you for the many comments, suggestions and insights.

As noted in our previous issue, solar power is growing rapidly in the U.S. But given its intermittent nature, much of it will go to waste -- unless utilities and solar customers have a cost-effective way to store the energy during sunny periods and tap into it at night.

Affordable energy storage is seen as a key to the future of electricity distribution that will let utilities meet heavy power demand while better harnessing wind, solar and other variable energy sources. Such a storage system is the pursuit of a wide array of researchers, tech firms and utilities.

Most of the energy industry is placing bets on better batteries to do the job. Though large-scale lithium-ion and other advanced batteries are still expensive, the costs are coming down enough that utilities are eyeing them as a way to synchronize increasing volumes of on-again, off-again wind and solar power with ever-changing demand for electricity.

The Energy Storage Association, which represents companies that make or design batteries, flywheels and other storage tech, sees 2015 as a breakout year for adding battery capacity to the electric grid. The ESA projects that 220 megawatts of energy storage capacity -- most of it in the form of lithium-ion and other batteries -- will come on line this year. That's more than double the capacity added in 2013 and 2014 combined.

California is pushing hardest to ramp up grid-scale storage, with a mandate that utilities install more than a gigawatt of capacity by 2020. But utilities in Arizona, Texas, Hawaii and elsewhere are also sizing up batteries as part of their future energy mix.

Utilities want to meet spikes in power demand without having to build new power plants that will sit idle most of the year when demand is lower, says ESA Executive Director Matt Roberts. He pegs the cost of utility-scale batteries at about $1,500 per megawatt-hour, roughly the amount of power consumed by an average home in one month. While that's not cheap, it's competitive with backup, or "peaker" power plants, the traditional tool for boosting generation during surges in power demand. Plus batteries can potentially deliver more energy to the grid in less time than a power plant could.

Lithium-Ion and Beyond

Of all the new batteries hooking up to the grid this year, ESA expects 70% to be lithium-ion, the same type that's powering cell phones, laptops and tablets. Although lithium isn't an abundant material in the U.S., a growing number of manufacturers are betting that the cost of lithium-ion batteries can be driven down enough to make large versions attractive for utility-scale storage and other industrial applications.

Electric-car maker Tesla is working with Panasonic on a huge lithium-ion battery factory in Nevada that Tesla claims will single-handedly churn out more batteries in 2020 than the entire world produced in 2013. In the process, the company says it'll cut the cost of batteries for its future electric cars by more than 30%. Some of those batteries also figure to find their way into rooftop solar power systems installed by SolarCity -- Tesla cofounder Elon Musk just happens to be its chairman -- and other solar firms.

The cost improvements in lithium-ion that Tesla is targeting should be attainable. Larger, more efficient manufacturing processes of the sort that Tesla, Chinese electric-vehicle maker BYD and other producers are planning promise to cut battery prices significantly.

Researchers hope even bigger gains can be realized by using new chemistries that either hold more energy than lithium-ion batteries or feature cheaper components. Nowhere is the quest for such game changing advances more intense than at the Joint Center for Energy Storage Research, a collaboration among the Department of Energy's national laboratories, universities and private companies hoping to commercialize the next big thing in battery tech.

JCESR is rushing to do in a few years for advanced batteries what private industry spent decades doing for lithium-ion: assemble a huge body of scientific knowledge that will enable a wave of commercial products.

After modeling thousands of candidate materials via high-power computers, the initiative has identified about 30 promising electrolytes for further study, says JCESR Executive Director Jeff Chamberlain.

This sort of research -- involving computer modeling to evaluate the advantages, disadvantages and costs of potential batteries from many different materials -- is painstaking. But it's "really exciting to us nerdy scientists," Chamberlain says, because it helps them understand the underlying physics of advanced batteries and avoid pursuing ideas that won't ultimately deliver the dramatic improvements in cost and performance that JCESR is seeking.

For instance, the research team initially thought that lithium-air batteries held great promise, but concluded that they pose some hefty engineering problems. So instead they're concentrating more on magnesium-ion technology, with patents in the works. (For a deep dive into what the group has been up to, click here.)

Chamberlain says his group has some exciting news coming on flow batteries, which store chemical energy in fluid solutions that have the potential to pack a lot of power very efficiently. That research is confidential for now, but he expects a major announcement later this year.

Energy Investing

Because so many readers wrote in two weeks ago asking about investing in energy-focused master limited partnerships, or MLPs, I'm citing a recent piece by my colleague, Jeff Kosnett, who addressed this very topic in the March issue of his newsletter, Kiplinger's Investing for Income. Commenting on which MLPs look like the best investments given the big fall in oil prices, Jeff had this to say:

The best segment continues to be midstream, and so we would put at least one-half, if not two-thirds, of any MLP portfolio there. Gainers since July include Energy Transfer Partners (ETP), Magellan Midstream Partners (MMP), Phillips 66 Partners (PSXP), Sunoco Logistics Partners (SXL) and TC Pipelines (TCP). Others, including ... Plains All American Pipeline (PAA), nearly broke even. More important, midstreamers tend to increase distributions every three or six months, and they do that from operating revenue and not from fresh capital raised by selling stock or bonds.

"The midstream guys have enough cash around for the foreseeable future," says John Cusick, an MLP analyst for Miller/Howard Investments. His test is that cash flow be at least 1.2 times distributions. That is, if an MLP pays $1, it should have at least $1.20 in cash flow. All six names above qualify. You can expect their distributions to grow 5% to 8% a year.

Sincerely,
Jim Patterson signature
Jim Patterson
jpatterson@kiplinger.com

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