If you haven’t been following this story, Wanxiang originally had a deal to buy up to 80 percent of A123 Systems for $450 million if A123 met certain conditions. Either those conditions weren’t met — or A123 grew worried that its deal with a Chinese conglomerate might face hurdles — because a few months later that deal fell through and A123 declared bankruptcy. The auction today will determine what happens to A123 post-bankruptcy.

Here’s why the prospect of A123 being sold to a Chinese firm has been raising eyebrows:

A123, once a promising battery maker that held one of the largest cleantech IPOs back in 2009, was awarded a grant from the Department of Energy for $249 million, and A123 drew down on $132 million of that grant. So the U.S. government put substantial money into developing this technology. In addition, A123 has had contracts with the U.S. military.

Both of these aspects have made a sale of A123 to Wanxiang distasteful to some politicians, like U.S. Sens. John Thune (R-S.D.) and Charles E. Grassley (R-Iowa). They’ve written letters on the subject and asked for a sale to Wanxiang be blocked. To add kindling to the fire, electric vehicles — and cleantech in general — have become a politicized issue, with high profile Republican politicians rejecting the support of electric vehicles, and Democratic ones embracing support for the technology.

Meanwhile, electric car startup Fisker Automotive, which has also been the subject of much politically driven criticism, has been a  major customer of A123′s batteries. So it is waiting on the result of the bankruptcy case before it figures out what to with the assembly of its cars. By the way, Fisker deserves a lot of criticism, but not for building its first car in Finland, which is what politicians have been upset about.

Fears of Chinese tech companies swooping in and buying up beleagured U.S. assets is at the heart of this issue. The discussions of the military contracts, and the misplaced grants from the DOE are side notes, which can be addressed independently. The reality is that China using the U.S. as a discount shopping mall is only going to continue to grow. Wanxiang has been — smartly or not — shopping for low valued energy, cleantech and electric car assets in the U.S. That’s how global capitalism works and in recent years has increasingly been working in the U.S. and China.

A123 should be allowed to find the best deal for its assets and shareholders regardless of the country. The potential acquirer that values the technology the highest, and is willing to pay the most, should win the bidding.

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GE, Ford and the University of Michigan are working on developing a tiny sensor system for a battery that when combined with analytics can extend the range of a battery in an electric vehicle. There are already sensors on the market that are trying to do something similar, but current sensors are too big to be able to fit in certain areas of the battery, says GE. GE will develop the wee system and pair it with real-time modelling of a battery’s behavior.

Such a system, which the group recently won a $3.1 million grant from the Department of Energy to build, could provide a substantial boost to electric car batteries. The range of a car battery — which is also chiefly tied to its cost — is the biggest problem for electric cars today. One hundred miles is about the average of the current electric cars on the market. The team has three years to create the first working version.

Sophisticated battery management system technology — which uses software in a car or on the power grid or on a cell phone — can help use batteries efficiently. Electric car companies Coda and Tesla Motors tout their battery management systems as some of their more important intellectual property. Other startups like GELI want to create a sort of operating system for batteries for the power grid.

Then there’s a startup like Pellion, which is using computer modelling to test out 10,000 potential cathode materials to fit with its magnesium anode for its battery. Basically they’re using a computer as a really smart brain to figure out the battery chemistry problem.

Because battery chemistry is such a hard problem, it’s pretty natural that we’re turning to the power of analytics, big data, cloud computing and all those other fun IT buzz words to solve it.

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The CEO of A123 David Vieau called the news “the first step toward solidifying a strategic agreement that we believe would remove the uncertainty regarding A123′s financial situation.” A123 announced earnings today, too, and for the second quarter lost $82.90 million, up from $55.40 million from the second quarter a year earlier.

A123 has been bleeding cash for months. In the first quarter of this year A123 lost $125 million, more than double the loss from the first quarter of 2011. Revenues are also just trickling in: for the second quarter A123 generated just $16.99 million. That’s less than half of the revenues it generated for the second quarter in 2011.

Part of the problem was that in March A123 announced that it would start replacing battery packs with defective cells made at its Livonia, Mich., factory. That mistake cost the company $51.6 million in warranty costs during the first quarter and another estimated $15.2 million for replacing defective batteries that were in its inventory. A123 had to replace these defective batteries in its electric car maker customer Fisker Automotive’s inaugural cars.

A123 built the factory that made the defective batteries in 2010 with a $249.1 million grant from the federal government. The company went public in 2009, with its shares opening at $17 per share and closing at $20.29 per share on the first day of trading. Today A123 is trading at 0.49 per share.

Expect House Republicans to have a field day now that a Chinese firm will own much of the technology that these U.S. governments funds went into building.

Wanxiang is the largest auto tech company in China and has $13 billion in revenue and more than 45,000 employees. The conglomerate has taken a keen interest in investing in and acquiring cleantech, battery and electric car technology. Wanxiang invested $420 million in GreatPoint Energy to build a large-scale plant in China to convert coal into natural gas, and also backed electric car company Smith Electric Vehicles.

Check out: 10 ways Chinese investors are dominating cleantech

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The news isn’t a surprise to anyone that’s been following the company, which has been struggling to survive and sells its batteries to auto makers like startup Fisker Automotive. Earlier this month, A123 posted sharply lower revenues and losses for the first quarter of this year, and about two months ago it launched a program to replace batteries with defective cells. The replacement program cost the company dearly, including $51.6 million in warranty costs and an estimated $15.2 million for replacing defective batteries that were in its inventory.

A123 is far from the only battery maker that has struggled in recent months. Earlier this year, battery maker Ener1 filed for voluntary Chapter 11 bankruptcy, and was delisted from the Nasdaq. One of Ener1′s main customers was electric car maker Think, which also headed into bankruptcy.

As the Wall Street Journal points out in an extended article on Thursday, electric car battery makers were the recipients of significant government incentives, and yet the market for electric cars has moved more slowly than expected. The government funding partly created the over supply — and thus these struggles — because the electric car industry is still in an early stage.

A123 Systems received a $249 million matching grant from the Department of Energy to build factories to make at least 500 megawatt-hours of lithium-ion battery capacity per year — a far greater capacity than current demand for electric cars. Ener1 is the parent company of EnerDel, which back to summer 2009 received a $118 million grant from the DOE.

The Wall Street Journal writes:

Since 2009, the Obama administration has awarded more than $1 billion to American companies to make advanced batteries for electric vehicles. Halfway to a six-year goal of producing one million electric and plug-in hybrid vehicles, auto makers are barely at 50,000 cars.

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Fisker Karmas

Electric car maker Fisker Automotive has boosted its private fund raising plans by $200 million, according to a filing, and has now raised around $1 billion in private funding. The company, which has been fixing problems with batteries made by A123 Systems for its first electric car the Karma, is now aiming to raise a $500 million round, up from a goal of a $300 million round back in February.

Fisker has closed $392.07 million of this round, according to the filing, up from having closed $263.06 million of the round back in February. So it’s closed almost $130 million in private funding over the past two months.

Fisker has been looking to boost its funding to improve its first car the Karma and to restart production work on its second car, Project Nina, Bloomberg reported a couple weeks ago. Fisker was originally planning to use part of a Department of Energy loan to build the Nina, but the DOE stopped Fisker from drawing down on the rest of that loan last year after Fisker didn’t meet milestones of the loan.

Fisker plans to unveil a prototype of Project Nina, which will reportedly be officially called the Fisker Atlantic, on Tuesday at the New York Auto Show. Fisker also plans to announce a “business update” at the event, which I would guess is this funding. At the end of February, Fisker also brought in a new CEO, former Chrysler Chief Executive, Tom Lasorda.

Back in January Fisker actually boosted this current round (I think it’s a D round) from $150 million to $300 million. Fisker has now raised around a billion dollars now in private funding, and there are 92 investors in Fisker. Venture investors in Fisker include Kleiner Perkins and NEA and Advanced Equities is Fisker’s broker.

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A123 said the potentially problematic cells, made at its Livonia, Michigan factory, could cause premature failure of a battery pack of module. Bloomberg reports that this is the flaw that shut down a Fisker electric Karma during testing by Consumer Reports. Back in December Fisker recalled 239 Karmas over faulty batteries made by A123 Systems.

Fisker tells Bloomberg that A123 is replacing battery packs that power the Karma. A123 is a shareholder in Fisker.

Separately Fisker is reportedly in the process of raising $100 million which will go toward improving the Karma and restarting work on Fisker’s second car the Nina. Fisker says that it will unveil a prototype of the Nina on April 3.

Here’s a video drive of the Fisker Karma we did earlier this year:

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As a result of this “dramatic” and “sudden” reduction in Karma volume for A123′s batteries, as A123 execs described it in the call, A123 Systems had to lower its fourth-quarter and year-2011 guidance by $45 million. The entirety of that year-guidance cut seems to be coming from the sliced Fisker deal, and Fisker was A123 System’s largest revenue-generating transportation deal.

A123 Systems even had to cut both temporary workers and cell production for Q4 because of the Fisker volume reduction. A123 Systems quietly released the drop in guidance in the late afternoon last Friday, but it gave more details in its earnings call on Wednesday.

In the third quarter of this year A123 actually ramped up battery production to meet Fisker’s previously set production goals. Update: Fisker had to scale back its work with A123 because of the delay from the federal and state certification process, which Fisker expected to happen earlier, Fisker told me. I’m speculating, but it sounded like other suppliers potentially didn’t meet their production targets for the Karma, which is not so uncommon in the electric auto world. Because electric cars are so new, there are a limited number of suppliers.

Update: Fisker says it is busy ramping up production during Q4 to reach full run rates early next year. “The fact is that we have sufficient inventory of batteries at the plant currently to deal with our production plans, given that we did experience some delays due to regulatory issues. Therefore, we are not in need of more battery stocks at the present time,” says Roger Ormisher, the director of global communications at Fisker.

Fisker received federal and state certification for its Karma just last month and shipped almost 40 Karmas to the U.S. from its partner’s factory in Finland. Some of the first customers have received theirs — like investor Ray Lane and celebrity Leonardo DeCaprio — and the other cars were shipped to dealers as their first demonstration units.

A lot of industry watchers probably aren’t surprised by this. Fisker has delayed the launch of the Karma by months and years. It is a difficult task as a startup to get the first line of cars built — just ask Tesla, which struggled with the launch of the Roadster, too. Battery maker Ener1 placed its bet early on in the all-electric Think City car, and when that company went bankrupt, it practically took down Ener1 with it (the company was just delisted from the Nasdaq).

I’m surprised that with all the previous media attention from right-leaning media on how Fisker is using the Department of Energy loan to build cars in Finland (it’s not, the loan is mainly for its second car to be produced in the U.S.), more people aren’t paying attention to the real numbers and real issues with the company. If you’re just learning about Fisker, here are 10 things to know about it.

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Fisker initially planned to start delivering its plug-in hybrid electric car the Karma in the Summer, but hadn’t yet gotten the car certified by federal and state regulators, and deliveries were pushed back by several months. That was after Fisker delayed launching the car by over a year. A couple weeks ago its first shipment of close to 40 Karmas were shipped to the U.S. from its manufacturer in Finland.

A123 Systems says it expects the the lowered orders to Fisker to be temporary.

“Our relationship with Fisker remains strong, and we expect that this reduction in volume is temporary as we understand the Karma plug-in hybrid electric vehicle has received EPA certification as well as an all-electric range rating of 51.6 miles from the European regulatory body Technischer Ueberwachungs Verein (TUV), clearing the way for vehicles sales.”

Fisker has raised over $1 billion in private capital and loans, including a $529 million loan from the Department of Energy. Fisker’s investors include Kleiner Perkins Caufield & Byers, and Advanced Equities.

Here’s 10 things you should know about Fisker. And a video of the car:

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A few of the stocks I covered yesterday are still down — like EnerNOC, but that’s due to company-specific issues. Most are slightly up, though many didn’t return to the trading levels pre-market sell-off. Here’s a run down on where the stocks I covered yesterday are at this morning:

Solar

• Solar panel maker SunPower up 3.06 percent.
• Chinese solar panel maker Suntech rises 4.13 percent.
• Thin-film solar maker First Solar is still down .40 percent.

Biofuels

• Biofuel maker Gevo is back up 10.87 percent.
• Algae oil company Solazyme is up 3.07 percent.
• Biofuel maker KiOR is down even more: 3.50 percent.
• Biofuel maker Amyris is up 0.75 percent.

Electric car and batteries

• Lithium ion battery maker A123 Systems is up 11.70 percent.
• Electric car maker Tesla Motors is up 5.67 percent.
• Battery maker Ener1 is up 6.75 percent.

Smart grid

• Smart meter and network maker Itron is up 5.14 percent.
• Demand response company Comverge is down even more, by 1.38 percent.
• Demand response leader EnerNOC crashed even more, by 36.98 percent . (Yesterday’s market crash is combined with EnerNOC’s own weak earnings statement and a downgraded position to hold by a prominent analyst).
• Smart meter and network maker Echelon is back up by 5.51 percent.

Random:

• Car sharing company Zipcar is up 2.75 percent. It hasn’t fully recovered from yesterday.
• Clean Energy Fuels, which makes natural gas infrastructure for gas-powered cars, is still down by 5.80 percent.

Image courtesy of dizznbonn.

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That 32 MW li-on battery project could be one of the largest of its kind in the world when built. AES Energy Storage’s VP, Deployment and Operations, John Zahurancik, told me in an interview this week that AES’s 12 MW lithium-ion battery grid storage project in Chile (see photo below) was the largest of its kind when that was built. AES also has a 40 MW lithium-ion battery project in the pipeline in Texas.

Using lithium-ion batteries for grid scale storage, and frequency regulation for utilities, is working and has been proving itself economically at the pilot scale, says Zahurancik. AES’s pilot projects include a one-MW pilot with PJM in Pennsylvania Nebraska (photo above), a two-MW project in Huntington Beach, Calif., a one-MW project in Houston, Texas, an eight-MW project in New York that AES is scaling to 20 MW, and a 12-MW project in Chile.

AES has been running its one-MW pilot project with PJM for a couple of years, and now will be decommissioning that project to make way for its 32-MW project with PJM. Zahurancik tells me that AES learned a lot from the PJM pilot project about how to move to more of a digital and IT architecture in the power industry. “In the IT world, it is assumed that devices are connected in a two-way fashion, making them highly manageable. That’s not so true in the power industry,” said Zahurancik. The batteries are remotely managed with IT.

The one-MW PJM project used Altairnano batteries, but AES hasn’t yet disclosed which company’s batteries it will use for its commercial project — whether those are from A123 Systems, Altairnano, Samsung, Sanyo or BYD. Zahurancik tells me the newer players like A123 and Altairnano have been improving and scaling up production of their grid-scale batteries over the years, while the old-school battery companies in Asia are starting to become more aggressive with their grid products.

Commercializing these types of  lithium-ion battery projects will be important as a way to help power companies integrate more clean power. Batteries can act as an on-demand way to provide power when it’s needed — particularly when the sun doesn’t shine or the wind doesn’t blow — and are being used today as a regulation for the frequency of the grid.

Currently, the biggest problem with lithium-ion batteries for the grid is cost. According to a report issued last week by the Electric Power Research Institute (EPRI) lithium ion batteries are among the most expensive choices for utilities that want storage to help them manage the grid and for industrial/commercial applications.

However, EPRI pegs this year and 2012 as turning points for the grid energy storage market, because by then, companies that have collectively received more than $250 million in federal stimulus funding are expected to complete research and development work and move into field trial stages in the U.S.

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