In the winds of profit

A village near the northern tip of Japan's main island is the proving ground for a 5-meter-high (16- foot) bank of batteries built by NGK Insulators Ltd., the Japanese industrial-ceramics maker that may be the world's cheapest wind-energy play.

Nagoya-based NGK's sodium-sulfur units, costing a reported 294 million yen ($2.9 million) per megawatt, store electricity for sale when demand is greatest and have 4.3 times the capacity of lead-acid devices. They may permit Japan Wind Development Co. to triple to 27 yen per kilowatt-hour what it charges at peak times for power from the turbines in Rokkasho, while the profit surges sixfold to as much as 13 yen, said Nobuyoshi Sato, an analyst at Ichiyoshi Securities Co. in Tokyo.

Batteries may make up 10 percent of NGK's sales in two years, versus 4 percent in the fiscal year ended last month, said Keith Olson at Bowen Capital Management in Hong Kong. NGK, trading in Tokyo at 16 times this year's projected earnings, is about 43 percent cheaper than Vestas Wind Systems A/S of Randers, Denmark, the world's biggest wind-turbine maker.

``Wind farms need to get more peak prices and they need the sodium-sulfur battery system in order to get there,'' said Olson, whose firm oversees $380 million and invests in environmental- technology companies including NGK. Batteries may generate ``as much as 15 percent of operating profit in two to three years' time, and beyond that it can really get big.''

3,500 Yen unstopabble

Bowen Capital's Green Dragon Fund, co-managed by Olson, returned 44 percent last year. He says NGK shares are worth about 3,500 yen, based on a discounted cash-flow model that values the stock at 20 times estimated earnings in 2013.

The shares have fallen 38 percent this year as the yen rose 11 percent against the dollar, hurting Japanese exports. The stock added 0.1 percent to 1,883 yen today while the broader Topix index slumped 1.2 percent.

Wind-energy capacity, equal to 0.5 percent of global electricity consumption in 2007, will grow by 21 percent a year through 2012, the Brussels-based Global Wind Energy Council estimated in January, led by increases in the U.S. and China.

The storage units are being tested by Xcel Energy Inc. and American Electric Power Co. in the U.S. Minneapolis-based Xcel is installing 1 megawatt of capacity from NGK, enough to power 500 Minnesota homes for seven hours.

``In the summertime, the wind blows much more at night than during the daytime,'' said Frank Novacek, director of corporate planning at Xcel. ``Since peak demand occurs on summer days, when everyone is running their air conditioners, being able to time- shift the delivery of wind power is important.''

Ceramics, Batteries

NGK's NAS storage units, named for the periodic-table designations of sodium (Na) and sulfur (S), have the highest density of any commercial battery, meaning they can retain the most power in the least amount of space.

Developed over more than two decades with Tokyo Electric Power Co., Asia's largest power generator, the products were originally sold to save energy produced overnight so it can be used during the day.

``It's extremely difficult to uniformly produce the high- grade ceramics'' used in the devices, said Hironobu Matsunaga, a spokesman for NGK. ``We are the only ones who have been able to successfully make the NAS batteries.''

AEP, based in Columbus, Ohio, and the largest U.S. producer of coal electricity, has purchased 7 megawatts of NGK storage to test for smoothing out existing power production.

``We've begun marketing these in the overseas market, starting with AEP, and we've seen a lot of customer interest,'' Matsunaga said.

Profit Forecast

NGK estimates its NAS division turned to a profit for the first time. The company expects this month to report 500 million yen in operating earnings on sales of 15 billion yen for the year ended in March.

That's less than 1 percent of anticipated overall profit of 67 billion yen. The ceramics segment, which makes soot filters for diesel-powered vehicles, will account for 65 percent of earnings.

Some analysts covering NGK are skeptical about the power- storage units.

``It's too early to make a call on whether batteries will be a growth driver,'' said Yuji Matsumoto at Nomura Holdings Inc. in Tokyo, the top-ranked glass and construction materials analyst by the Japanese newspaper Nikkei Veritas for 2008. He rates NGK ``neutral.''

Competing Technologies

NGK's products face competing technologies including vanadium redox batteries and Kawasaki Heavy Industries Ltd.'s nickel-hydride units that quickly charge and recharge.

In Rokkasho, Japan Wind has installed 34 megawatts of battery capacity, costing 10 billion yen, according to a January Nikkei newspaper report, at the 51-megawatt facility it's building. Ichiyoshi's Sato estimates it will begin selling wholesale power this summer. Sato considers shares of the Tokyo- based wind-farm operator undervalued.

Fund manager Olson says that NGK's success with diesel filters surprised the market, prompting the company to boost its profit forecast four times in 2007. The shares were the second- best performer in the Nikkei 225 Stock Average with a 65 percent return.

``Analysts should be looking at the future and not the present,'' said Timothy Marrable, a director of equity research at KBC Securities Co. in Tokyo, who covers Japan Wind though not NGK. ``Maybe NGK's the stock that everyone will get a wakeup call on.''