BY RONALD BAILEY – Indianapolis, Indiana—Last year, President Barack Obama set the goal of putting 1 million plug-in electric hybrid (PHEV) automobiles on American roads by 2015.

A PHEV has both a gasoline and an electric motor and its batteries are rechargeable using a plug to an external electric power source. As part of his $787 billion stimulus package, a tax credit up to $7,500 is available to consumers as a way to encourage them to buy such cars. The tax credit is needed because PHEVs cost up to $10,000 more than comparable conventional vehicles. In addition, the president pledged $2.4 billion of his stimulus package to jumpstart the electric car industry, including $1.5 billion to battery manufacturers, $500 million to other PHEV component makers, and $400 million to build infrastructure for charging the cars.

Intrigued by all the hoopla, I persuaded the folks at the lithium ion battery company Ener1 in Indianapolis to let me tour their factories. The Hoosier State aims to be “the capital of the electric vehicle industry.” At least that’s what Gov. Mitch Daniels (R) asserted recently. Becoming the capital of the electric vehicle industry doesn’t come cheap to taxpayers. In January, the Department of Energy awarded a $118.5 million matching grant to Ener1 to build a gigantic battery factory near Indianapolis. In addition, Ener1 was awarded a state incentive package of $21.3 million and a Hancock County package valued at $48.6 million. Ener1 has also applied for a $300 million low interest loan from the Department of Energy’s Advanced Technology Vehicles Manufacturing Loan Program to build out additional manufacturing capacity.

In the meantime, Michigan’s Gov. Jennifer Granholm (D) is also scheming to make her “state the advanced battery capital of the world.” Ener1 rival, A123 Systems located in the Wolverine State pulled down a $249 million DOE grant, plus $125 million in incentives from the state of Michigan to build their new battery plant near Detroit.

“The age of the electric car is here,” gushes the cover of the latest issue of Wired. As evidence, Wired features Tesla Motors which so far makes a two-seater all-electric sports car, the latest version of which sells for only $159,195, before taking the tax credit. In January, the DOE loaned Tesla $465 million to build its all-electric sedan which reportedly will sell for $57,400 before the tax credit. (By the way, I tried getting into a Tesla roadster at the company’s Manhattan showroom last summer, and as an under-exercised 6 feet 5 inches in height I am simply not flexible enough to fit.)

Ener1 claims to be the first and only domestic manufacturer of commercial-scale automotive-grade lithium-ion battery systems. Up until last week, the battery manufacturing division was named EnerDel, but that has now become the brand name of the batteries the company produces.

The scale of ambition on the part of the company is impressive. David Hahn, senior director of manufacturing gave me a tour of the smaller facility in Fishers, Indiana, where the company is setting up their first domestic manufacturing lines for the battery cells. Just an interesting historical sidebar, a lot of the research for General Motors’ legendary first electric car, the EV1, was done in the Ener1 building.

Enerdel cellBattery cells are thin plastic-covered wafers that are stacked together to form massive battery packs that provide the power to drive a vehicle. Right now the battery cells are made at the Ener1 Korean facility, which the company acquired in 2008. The Korean company is the third largest producer of lithium ion batteries in that country.

While on the tour, we encountered a team from the Japanese capital equipment vendors who were busy installing the first battery cell manufacturing lines. Hahn explained that Ener1 purchased Asian equipment because there are currently no American manufacturers of machinery that can produce lithium ion batteries. While lithium ion technology was invented in the U.S., Asian countries in the 1990s perfected manufacturing the batteries for consumer electronics. However, he did note that some American companies are beginning to develop the capability of producing such equipment. Right now, the Ener1 facility has the hushed feel of a well-run laboratory. Clean, well-lit, and populated by a lot of people wearing smocks. The facility is scheduled to produce its first cells by November 1 of this year.

Next, I was taken over to see the vast 140,000 square foot facility in Mt. Comfort which is being tooled up to become Ener1’s chief factory for assembling the battery cells into battery packs capable of powering all electric vehicles. Ener1 plans to produce 11,000 battery packs in the first quarter of 2011. Eventually the factory will produce enough battery packs to power 60,000 all-electric or 600,000 hybrid vehicles. John Corbett, manager of quality, showed me how the delicate cells are assembled into 66-pound subpacks. It takes eight subpacks to create the battery pack that powers a THINK City all-electric vehicle. One subpack would be enough to supply electricity to run the equivalent of a Prius hybrid today.

Ener1’s main customer is the Norwegian electric car company THINK Global. In 2008, THINK went bankrupt and the Ener1 Group assisted the company through that process and acquired a little over 30 percent of THINK Global’s stock. A complete battery pack weighs a bit over 600 pounds, comprising about a quarter of the THINK City’s 2,400 pounds. The THINK City commuter vehicle has a range of 100 miles and a top speed of 70 miles per hour. The company is developing a 220 volt quick charge system that will enable drivers to charge the car’s batteries from completely depleted to 80 percent in just 15 minutes. Or the car can be recharged at home overnight using 110 volt system in about 8 hours. THINK Global has announced that it is taking over a former RV factory in Elkhart, Indiana, where it plans to produce 20,000 electric cars by 2013. Like the rest of the nascent electric vehicle industry, THINK is seeking taxpayer support, in this case, a loan from the DOE’s Advanced Technology Vehicles Manufacturing Loan Program. Ener1 is also slated to provide batteries for Volvo’s all electric version of its C30 coupe.

After the tour at the Mt. Comfort facility, I went back again to chat with Richard Stanley, who is now the chief operating officer of Ener1. “Cost is still a challenge for the technology,” notes Stanley. He adds, “Many people don’t realize that battery manufacturing doesn’t progress like Moore’s law in electronics.” In 1965, microchip pioneer Gordon Moore predicted [PDF] that the number of transistors on a microchip would double every year. Figuring out how to jigger the chemistry of batteries so that they can store ever more electricity turns out to be a whole lot harder than cramming more transistors onto a silicon chip.

Car batteries now cost somewhere around $1,000 per kilowatt hour. Stanley thinks the price could fall to $500 per kilowatt hour in two years. The U.S. Advanced Battery Consortium has set the goal getting the costs down to $300 per kilowatt hour to become cost competitive with standard internal combustion engine automobiles. To get some idea of the cost that batteries add to an automobile, keep in mind that the capacity of a THINK car’s batteries totals about 24 kilowatt hours.

A recent study by the Boston Consulting Group argues that without a technological breakthrough in battery chemistries, it is unlikely that battery costs will fall to $300 per kilowatt hour by 2020. Nevertheless, the report projects that 26 percent of the new cars sold in 2020 (1.5 million will be fully electric, 1.5 million will be range extenders, and 11 million will be a mix of hybrids) will have electric or hybrid power trains. In 2020, the market for electric-car batteries will reach $25 billion. So what about President Obama’s goal of putting 1 million plug-in hybrids on America’s roads by 2015? Stanley thinks that that goal is a bit “aggressive.”

Stanley believes that one of the electric battery industry’s biggest opportunities will be to supply electric batteries to all-electric fleet vehicles such as UPS and FedEx delivery vans and city buses. While the electric vehicles would initially cost more, they could save such companies a bundle on fuel costs. Delivery vehicles and buses, for instance, don’t travel great distances and return to centralized facilities where they can be easily charged up overnight.

Ener1 is also looking to use lithium ion batteries as a way to supply back-up power to the electric power grid. Gigantic banks of batteries could store power from intermittent renewable sources like wind and solar, making it unnecessary to build back-up fossil fuel facilities. Ener1 is working on a research and development project involving 1 to 5 megawatt hours of battery storage with Chilean electric company AES. In addition, Stanley suggested that used lithium ion car batteries might have a second life by being recycled into grid storage applications. Stanley also looks abroad to China. Ener1 has just teamed up with Wanxiang, China’s largest auto parts supplier to produce batteries for the Chinese market.

“Obviously we think that government support is useful,” says Stanley. Indeed. Free money from the government is always “useful” to its lucky recipients. However, Stanley adds, ”This business would be viable with private funding, but not revving up at the current pace that it is with government support.” But are the government billions revving the industry up for a commercial takeoff?

Stanley notes that the market for electric cars is more favorable in Europe. And surely it is. A gallon of gas goes for over $7 in some European countries and taxes double the price of a car in places like Norway and Denmark. Combining already high taxes on gasoline and diesel with big tax breaks favoring electric vehicles makes them more attractive relative to conventional automobiles. So if showering the electric car industry with cash isn’t enough, the feds may one day try to go the European route and rev up the market for electric cars by downshifting the market for conventional automobiles.

Note: I have finished my journey back to the East Coast from a summer in Montana spent working on a new book. Along the way I visited various energy production facilities. The goal of this circuitous trip is for me to get a better understanding of energy production and to geek out on technological marvels.

Ronald Bailey is Reason‘s science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.