October 31, 2014

Hoping Tesla Will Fail

By Jeff Siegel

If you don't believe that folks are waiting impatiently for Tesla Motors (NASDAQ: TSLA) to slip up, look no further than today's action on the stock.

After the Wall Street Journal reported that the company was selling fewer cars and offering new incentives, the stock tanked 6 percent.

Of course, as it turned out, the decline in sales was only in the U.S. And it didn't take long for super genius Elon Musk to tweet the following message:

musktweet[1].png
Credit Suisse analyst Daniel Galves followed up on the piece, noting that the article was “too misleading to ignore.”

No doubt!

The Wall Street Journal piece also suggested the company was offering two new sales incentives. The incentives to which they referred were regarding the company's new lease offer.

Galves clarified this, stating that the U.S. Bancorp lease is not an incentive and is 25 percent lower because the bank has a lower cost of funding and is likely taking a less conservative view on residual value.

I tell ya, I've never seen so many people so eager to see a company fail.

From its very inception, Tesla has been a punching bag for every ignorant bureaucrat and knuckle-dragging media whore that wants to believe nothing more than the illusion that electric cars are glorified golf cars designed for wealthy eccentrics and overzealous treehuggers.

Nothing can be further from the truth. But rest assured, if there's blood in the water (or reports of blood in the water), the sharks will circle.

In the meantime, Tesla continues to lead the way, showing the old guard automakers how cars will be made in the future. Just ask Ford CEO Mark Fields who last week announced that Ford has the expertise and ability to build a Tesla-style full-size, high-tech, high-performance, long-range electric vehicle.

I guess they only decided they had the expertise and ability to do this after Tesla came along and disrupted a market that was in desperate need of disruption.

Regardless, Tesla has built a better mousetrap. And while I'm not rushing out to buy the stock right now, rest assured, my next car will be a Tesla. Just like so many other Americans who value quality and performance over mediocrity and complacency.

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Jeff Siegel is Editor of Energy and Capital, where this article was first published.

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October 30, 2014

Power REIT: Light At The End Of The Tunnel?

Tom Konrad CFA

It Could Have Been The First Yieldco

bigstock-Light-At-The-End-Of-Tunnel-3470269.jpg
Light at the End of the Tunnel photo via BigStock
I first became interested in Power REIT (NYSE MKT:PW) in 2012 because of the company's plans to become what would have been the first US-listed "yieldco," i.e. a clean energy power producer paying a high level of reliable dividends to investors.  The company was an infrastructure Real Estate Investment Trust (REIT) with a single asset: its subsidiary, Pittsburgh & West Virginia Railway (P&WV) which owned 122 miles of track leased to Norfolk Southern Corp. (NYSE:NSC), which had in turn subleased the track to Wheeling & Lake Erie (WLE.)

The rent on the rail asset was fixed at $915,000 per year with no adjustment for inflation, meaning that the expenses of remaining a public company had been taking a larger and larger share of income. 

In 2011, David Lesser was an executive with experience running REITs and a passion for renewable energy looking for his next opportunity. He realized that solar and wind farms produce reliable, long term cash flows, but at the time, there were no publicly traded vehicles for income oriented investors to benefit from these cash flows.  He saw the opportunity for a REIT to buy the land underlying wind and solar development, lease it back to the wind and solar operators, and deliver the payments to investors in the form of a sustainable yield.  Lesser and his allies saw P&WV as an appropriate vehicle for this, and began buying its stock.  In 2011, he became Chairman and CEO, and formed the holding company Power REIT to own P&WV and future renewable energy real estate assets as a publicly listed holding company.

The immense appetite that investors have shown for the yeildcos launched by renewable energy developers in 2013 and 2014 has amply demonstrated Lesser's business plan to be a good one, but P&WV's railroad asset has side tracked its execution.  The company has only done two smallish solar deals because of the distraction.

Side Tracked On West End Branch

The side track started with a minor dispute over legal fees.  The lease is somewhat unusual, in that (according to the court filings of the lessees) it was designed to give the lessees as much control of the property as possible without taking legal ownership under US tax laws.  Since P&WV retained ownership of the property, but ceased to be an operating company when the lease was signed, the lease provides for the lessees to pay any of P&WV's expenses which are "necessary or desirable" to protect its interest in the property, unless those expenses were "solely" for the benefit of its shareholders.

When Lesser received notification in 2011 that WLE intended to sell a part of the property known as "West End Branch" he consulted with his attorneys to understand P&WV's rights and obligations under the lease. While WLE does have the right under the lease to sell parts of the property it does not need as long as it follows the appropriate procedures, it refused to pay the resulting attorney's fees.  Since the lease seemed to be clear to Lesser and his attorneys in this regard, after several attempts to get WLE to pay, this refusal became an incurable default under the lease.   Since the default was incurable, P&WV's only recourse was to foreclose.

WLE and NSC wanted to maintain what had become a very attractive agreement in their favor over the fifty years since it had initially been signed, and so they filed a civil action against P&WV and Power REIT to prevent the foreclosure in early 2012.  Over the last two years, increasing amounts of PW management and resources have been required in the litigation against two larger and much better funded companies, but Lesser feels firmly that the time and expense will eventually prove to be very attractive investments.  Not only does a reasonable interpretation of the lease provide for WLE and NSC to pay all the expenses (which seem to be a clear example of expenses which are "necessary or desirable" to maintain P&WV's interest in its property), but numerous other violations of the letter of lease have come to light since the initial dispute about West End Branch legal fees. 

If PW is able to foreclose, a bookkeeping "settlement account" under the lease worth at least $16 million and as much as $68 million will be due, and it (or part of it) may be due even if the court finds the lease not in default. 

The State Of Litigation

The current litigation is complex, with multiple accusations in both directions.  Power REIT has posted an archive of most of the court documents on its website.  The most recently filed documents are each party's opposition to the other's Motion for Summary Judgement, and these documents do an excellent job of summarizing each party's position in a very complex case.

Perhaps the most remarkable feature is just how far apart the two sides are.  Power REIT spells out several counts on which WLE and NSC have violated the wording of the lease.  WLE and NSC deny them all, and say that Lesser is a money-grabbing capitalist whose intention has all along been to manufacture defaults under the lease to extract money out of them.  Their main argument is that the parties had been doing everything their way all along, and so that should not change, even if the lease says otherwise.  They also claim, somewhat hypocritically considering the above argument, that Lesser is trying to change the terms of the lease, and that should constitute a default.

I'm not a legal expert, and I have no way of knowing which side is in the right when it comes to the legal issues.  How much does the intent behind the lease count compared to the words of the lease itself?  How important are the previous actions of the parties?

All that said, my layman's reading of the lease tends to support PW's side in almost all cases. I am also repeatedly shocked that WLE and NSC repeatedly say things in their testimony that I find impossible to believe.  For instance, I know from my many interactions with Lesser that his business plan for Power REIT was always been to turn the company into a yieldco: The lease is a distraction, even if it may turn out to be a very lucrative one. 

The evidence in the case also seems to directly contradict some of their testimony.  For example, on page 4 of Document 210 "Plaintiff Opposition to PWV Motion for Summary Judgement", they state that the West End Branch invoice I discussed above "did not relate to the West End Branch sale," and that the attorney's testimony supported this statement.  Yet the attorney said that he recalled reviewing the lease with Lesser for "the general purpose of determining [P&WV's] rights under the lease" relating to the sale of such property (Document 211-4, pp.49-50.)

I found this contradiction because the opposing side's motions seemed to directly contradict each other when it came to the evidence in the exhibits.  Having found one such contradiction, I expect there are more.

Likely Outcome and Timing

With the opposition documents filed, the parties have two more weeks to file another round of attempts to refute each other, after which the judge will decide on each of the motions for summary judgement.  Given that the parties are so far apart, it seems unlikely that many (if any) of the issues will be decided in summary judgment.   At the judge's behest, the parties have also agreed to attempt mediation and have agreed on a mediator.  This seems even less likely to lead anywhere, given the complete lack of common ground, although if the judge were to rule mostly in one party's favor in summary judgment, the other party might be spurred to compromise on the remaining points rather than to go to trial before a clearly unsympathetic judge.

The most likely course seems unsuccessful mediation leading to a trial in early 2015.  I have no idea how long a trial will take, but with three years having past since the dispute began, the judge has been pushing for the speediest possible resolution. 

If WLE and NSC get their way on every count, the lease will continue as it was before PW's attempt to foreclose.  The company will be out its substantial legal fees, but will be able to write off the $16 million at which the "settlement account" is carried on its tax records as an asset.  This will cause future distributions to PW common and preferred shareholders to be characterized as return of capital rather than income, increasing their value to taxable shareholders.

If PW is able to foreclose, the settlement account will be due, as well as the likely reimbursement of its legal costs.  It will be able to re-lease or sell the track at market rates.   All this could be quite substantial: $16 million is $9.25 per share of common stock, which is currently trading around $10/share.  The company does have liabilities, but it also has other assets such as its solar land and leases and the railroad property itself.

Conclusion

I first bought Power REIT stock because I saw a very promising yieldco in the making.  After this legal case is resolved, the company will be able to get back on track to becoming a promising if minor yieldco which takes advantage of the REIT tax structure.  (The only other REIT yieldco is Hannon Armstrong Sustainable Infrastructure (NYSE:HASI.))  The long litigation caused Power REIT to lose its first mover advantage, but it also offers the potential of a substantial upside and limited downside for shareholders.  Three years have passed since the dispute began, but it will likely reach a conclusion before the end of a fourth.

Disclosure: Long PW, PW-PA, HASI

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

October 29, 2014

Hydrogenics: Powering Up

by Debra Fiakas CFA

In the last post on Hydrogenics, Inc. (HYGS:  Nasdaq) in April 2014, the stock seemed to be languishing on news of a potentially dilutive common stock offering.  At the time profits still seem illusive.  However, over the last few months circumstances have improved.  Shares of Hydrogenics have moved higher on the company’s recent introduction of a fuel cell power system for medium and heavy duty vehicles.  Additionally, in July this year Hydrogenics was chosen by Ontario as one of five grid storage projects.  This has turned HYGS into an interesting stock to watch.

What sets Hydrogenis apart from the rest of the fuel cell developers is the company’s innovation of low pressure, dry air stack technology.  There is no need for air compressors or humidification equipment, offering a compelling value proposition.  Hydrogenics management is confident the manufacturers of large vehicles such as buses or heavy duty trucks find its fuel cell system easy to integrate.

The company is in a good position to move on the market opportunity for fuel cell cell systems.  Hydrogenics raised approximately $14 million in new capital in May 2014, through a common stock offering.  Cash balance at the end of June 2014, was $16.7 million.  Operations still require cash support, but we expect the cash burn rate to decline in the coming quarters.

The clutch of analysts following Hydrogenics have projected the company will report its first profits in the final quarter of 2014.  In the full year 2014, the consensus estimate is for earnings per share of $0.07 on $71.9 million in total sales.  Hydrogenics is scheduled to release third quarter 2014, financial results in early November.    It is worthwhile tuning in for that report.  Management should be able to provide some clues as to whether the consensus estimate is achievable.      

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

October 27, 2014

Will Investors Flock to SunEdison’s Emerging-Market YieldCo?

by Tom Konrad CFA

SunEdison is proposing something entirely new: a YieldCo with a focus on projects in Africa and Asia, but it's a long way between an S-1 filing with the SEC and and IPO.

The June launch of SunEdison's (SUNE) first YieldCo, TerraForm Power (NASD:TERP), transformed the parent company's prospects. Now it wants to repeat the performance with a first-of-its kind YieldCo that will focus on investment in Africa and Asia.

A YieldCo is a publicly traded company that is formed to own operating clean energy assets that produce a steady cash flow, most of which is returned to shareholders in the form of dividends. Like many other renewable energy developers, SunEdison formed TerraForm Power in order to appeal to a pool of income-oriented investors who would never consider owning the company's common stock. Such investors look for reliable income streams generated by existing businesses, and often won't even consider buying stock in a company that does not pay a regular dividend. 

The low interest rate climate over the past few years has made income-oriented investors, many of who rely on dividend payments to support current expenditures, increasingly desperate for yield and much more willing to enter new asset classes in order to find it. YieldCos and the renewable energy developers that formed them have been direct beneficiaries. 

Arguably, no energy developer has benefited more from forming a YieldCo than SunEdison. Unlike large utilities that have formed YieldCos, includng NRG Energy, NextEra, Abengoa SA and TransAlta Corp., SunEdison does not have a history of profits and dividendimg

These utilities' YieldCos, NRG Yield (NYSE:NYLD), NextEra Energy Partners (NYSE:NEP), Abengoa Yield (NASD:ABY), and TransAlta Renewables (TSX:RNW), appeal to investors who might have been interested in the parent companies' stock, but like the higher yield and relatively greener assets offered by the YieldCo subsidiaries.

YeildCo Sponsor earnings.png

In contrast, SunEdison has never paid a dividend, and has not been profitable under generally accepted accounting principals (GAAP) since before 2011. On an adjusted basis (in which items deemed to be one-off by management are eliminated), the small profits in 2011 and 2012 were more than wiped out in 2013, and analysts expect losses to continue at least through 2015 (see the chart above).

While the lack of earnings and dividends makes SunEdison's stock unattractive to income investors, they have rushed to buy the stock of TerraForm Power. According to one estimate, investors are effectively paying $5 per watt for TerraForm's projects when they buy the stock. When such projects are sold in private transactions, they typically fetch only $3 per watt, so TerraForm investors are willing to pay a 67 percent premium over the going market price.

SunEdison has a huge appetite for investor capital.  According to its cash flow statements, the company has raised an average of $1.2 billion in debt and equity in each of the last three years. So it's not surprising that after seeing the appetite of income investors for the mostly developed-market assets owned by TerraForm Power, SunEdison is hoping income investors will also be interested in projects in Asia and Africa.

To date, YieldCos hold a majority of their assets in the developed world, especially the U.S., Canada, and Europe. The reasons for this are simple: income investors consider the safety of a company's income stream to be extremely important, and developed electricity markets offer long-term contracted power-purchase agreements.

In contrast, electricity markets and grids in Asia and Africa range from the state-controlled to the unreliable and even the nonexistent. The lack of reliable grid infrastructure in some Asian and African countries means that renewable power is often competing with electricity from diesel generators on price. The following slide is from a 2012 presentation by Christian Breyer of the Reiner Lemoine Institut. The green and yellow areas on the map denote places where the economics of displacing some diesel power generation with solar during the daytime is highly economical, even without subsidies. These areas have expanded as solar prices have fallen over the last two years.

PV displacing diesel.png

 

Clearly, sub-Saharan Africa and Asia's interior are both excellent prospects for solar from a purely economic standpoint, without any subsidies whatsoever. Indeed, the slide above shows that diesel subsidies serve to limit the number of countries in which replacing diesel with solar generation makes economic sense.

One problem is that these parts of Asia and Africa are better known for outbreaks of disease and terrorism than for the stable political and economic conditions that usually give rise to businesses producing reliable long-term dividends.

Perhaps SunEdison intends to focus on more stable parts of Asia and Africa, but that will make its projects more dependent on local political support to produce the reliable returns that income investors expect. 

Either way, SunEdison is proposing something entirely new. From the perspective of using the power of markets to fight climate change, it's entirely welcome. What remains unclear is if income investors are ready for the idea. If the new YieldCo can pay a dividend high enough to attract such investors despite the risks, it will be a big win for the planet -- and for SunEdison's current shareholders.

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Disclosure: Long RNW, Short NYLD.

This article was first published on GreenTech Media, and is republished with permission.

October 26, 2014

Solar Bonds and Other Green Income Investments Compared

by Tom Konrad CFA

Clean-energy stocks’ performance over the last couple of years proves that it’s possible to do well – sometimes very well – while doing good. Unfortunately, it’s also possible to lose a lot of money.

Case in point: solar installer SolarCity’s stock (SCTY) price has more than quintupled since its 2012 IPO, but has fallen 40% since the start of the year. Swings like these are just too wild for many investors to stomach.

So the news that California-based SolarCity launched the first public offering of solar bonds last week likely piqued the interest of sustainability-minded investors seeking more stability. But how do these bonds really stack up against other sustainable investment options?

SolarCity’s bonds, which are available to retail investors in all 50 states, represent energy projects across the country. They start at $1,000, mature in one to seven years, and pay up to 4% interest. Buyers face no price risk – unlike volatile stock values, the bonds pay a fixed amount – but the bonds are backed only by the company’s ability to pay.

This could be a problem for skittish investors: as the bonds are not currently traded on any market, investors will not be able to redeem or sell them if they suspect the company will have financial difficulties before the bonds mature. And given that SolarCity is itself only eight years old, investing in a seven-year bond could be a little unnerving.

While SolarCity’s bonds are a significant innovation, they are hardly the first green investment on the market. Aside from directly investing in companies via stock, there are clean-energy mutual funds, certificates of deposit (CDs) and even home improvements. As with all investments, these options involve tradeoffs between risk, liquidity and income.

With that in mind, here’s a look at the costs and benefits of five of the most promising green investment options:

Solar bonds

While SolarCity’s bonds are the first such product to be nationally registered, Mosaic has been offering very similar state-registered bonds in California and New York since April 2013. Like SolarCity’s bonds, Mosaic’s are not traded and must be held to maturity. However, they are available in smaller increments – the least expensive cost as little as $25 – and often offer higher interest rates. Most offerings have been priced to yield 4.5%, although they often have longer maturities as well.

Asked to comment on the differences between SolarCity and Mosaic’s offerings, Tim Newell, SolarCity’s vice president for financial products, highlighted the advantages of his product’s diversification: SolarCity’s bonds are being backed by the cash flows from its solar leases around the country.

In reality, this is both an advantage and a disadvantage. While SolarCity can draw on the income from a large number of solar leases to repay its bonds, none of these leases are specifically dedicated to repaying the retail bonds. For example, there is nothing to prevent SolarCity from using the cash flows from its existing leases to back new issues of commercial asset-backed bonds. The company has issued $327.1m of such bonds since November 2013.

For Mosaic’s bonds, on the other hand, the greatest weakness is their lack of availability. Currently, the site is not funding any projects or offering any new bonds, which means that interested investors are – currently, at least – out of luck. When Mosaic does have investments available, they sell out quickly. The new bonds from SolarCity may help fill the demand by providing an alternative.

Green CDs

The safest sustainable income investment remains a CD from a sustainable bank. Some of these banks are Certified B Corporations, which shows a commitment to the environment and promoting social good. Beneficial State Bank, Capital Pacific Bank, New Resource Bank and Virginia Community Capital Bank all offer FDIC-insured CDs.

But while CDs are safe, they come with a trade-off: income. As the chart below shows, the interest rates on CDs are anemic when compared to SolarCity bonds with similar maturities.solar bond and CD rates.pngSolar power systems

One of the most reliable, consistent and non-volatile sustainable investments is a home solar power system. Like a more traditional income investment, a solar power system produces a monthly cash flow; of course, rather than putting money into your account, it works the opposite way – cutting expenses by reducing the cost of your utility bills. Even better, these savings don’t count as income, so they aren’t taxable.

To give a concrete example, I recently installed solar on my house in New York. Even assuming that electric rate increases are only enough to compensate for maintenance, the equivalent tax-free interest rate for the investment comes to approximately 11%. Improving a home’s energy efficiency can produce even higher returns, although those returns can be much harder to measure.

New York has excellent solar incentives and high electricity prices, but a solar installation in any state is likely to be a much better investment than SolarCity’s bonds. When Newell was asked to compare the interest rate on MyPower, the company’s solar loan program, he avoided the question, saying the two products were like “apples and oranges”.

His reluctance is understandable: SolarCity’s profits come from the difference between the rates at which it lends (or the embedded rates in its power purchase agreements) and the rates at which it borrows. It’s not diplomatic to highlight the large gap between them, especially when talking to small investors or potential customers.

Admittedly, the economic benefits of home solar are largely limited to homeowners. For renters and homeowners without suitable roofs, however, some states have passed legislation to enable community solar, also known as Solar Gardens. These are commercial scale solar farms in which local individuals can invest and get benefits similar to those of a solar system.

Preferred stock

Buying stock in green companies is one of the most common types of sustainable income investments. But while these investments have recently produced very attractive returns, they’re highly volatile. To make matters worse, few clean energy stocks produce any income at all.

Preferred stocks, a hybrid between stocks and bonds, offer a bit more security. Holders have rights to a “preferred” dividend before common shareholders, but have fewer rights than bondholders in a bankruptcy.

One example of this is Power REIT (PW), a real estate investment trust that owns railway track and invests in the land under solar farms. The company’s Series A Preferred shares (PW-PA) yield 7.75% at $25 and trade on the NYSE MKT. Although they have a higher risk of loss than bonds, they also have a much higher yield – and can be held in an IRA. Perhaps best of all, they offer a much greater deal of freedom. Unlike bonds, which lock in purchasers, Power REIT’s preferred shares can be bought and sold on a daily basis.

Yieldcos

Yield-oriented companies, or “yieldcos” are designed to produce a stable cash flow by separating a company’s volatile day-to-day activities from its operating assets. Put another way, a company that is involved in generating energy could partially insulate its investors from risks caused by regulatory changes by sequestering its stable assets in a separate, income-generating business.

Over the last two years, seven yieldcos owning renewable energy and energy efficiency projects have listed on US markets. All can be traded and held in IRAs, but they’re more volatile than any of the investments listed above. Given the nature of their assets, most have lower risk of bankruptcy than SolarCity or Power REIT. The following chart shows 14 yieldcos and similar companies listed on US, Canadian, and UK stock exchanges.

Unlike other income investments, yieldcos have the potential to increase their dividends over time. All things being equal, this would also result in a higher stock price.  The yieldco with the highest yield is currently Hannon Armstrong Sustainable Infrastructure (HASI) at 7.3%, followed by Brookfield Renewable Energy Partners (BEP), Pattern Energy Group (PEGI), Terraform Power (TERP), NRG Yield (NYLD), Abengoa Yield (ABY) and NextEra Energy Partners (NEP).

Ultimately, SolarCity’s new solar bonds fill an important niche in the sustainable investment market. They are easy to buy and have much higher interest rates than similar bank CDs; at the same time, they are also riskier and cannot yet be sold or held in self-directed retirement accounts.

On the other hand, they are safer (but have a lower yield) than preferred stocks and yieldcos. In this context, they’re ideal for small investors who cannot invest in clean energy for their own homes, or who want more solar income investments.

Tom Konrad is a freelance writer and portfolio manager specializing in clean energy and income investments.

Disclosure: Tom Konrad and his clients own shares of Power REIT (both common and preferred) as well as Hannon Armstrong, Brookfield Renewable Energy, Pattern Energy Group. He also has a short position in the shares of NRG Yield.

Disclosure: Tom Konrad and/or his clients have long positions in HASI, BEP, PW, PW-PA, and short positions in NYLD.

This article was first published on The Guardian, and is republished with permission. Further reprints require permission from The Guardian.

October 22, 2014

Five Solar Stocks For 2015

By Jeff Siegel

Times sure have changed!

In 2006, I attended my first Solar Power International (SPI) conference in D.C.

It was a no-frills event but loaded with valuable information I used to help Energy and Capital readers get a jump on the solar bull market that ran from 2006 to 2008.

Truth be told, we cleaned up. But nothing lasts forever. And when the market nosedived in 2008, solar stocks were not exempt from the ravenous bears that mauled everything in their path.

Of course, as the broader market began to inch back up in 2010, solar stocks didn’t miss a beat... at least the handful that were still viable.

Since 2010, solar stocks have enjoyed a fantastic ride. First Solar (NASDAQ: FSLR), SunPower (NASDAQ: SPWR), and JA Solar (NASDAQ: JASO), just to name a few, showed non-believers that the solar industry was no longer a niche market catering only to tree huggers and wealthy eccentrics. And when I arrived at this year’s solar conference, I expected to hear more cheering and chest pounding from the gatekeepers of this industry.

What I heard instead was something every energy investor should know about — because there’s a very real possibility that the solar industry could soon be heading face-first into another meltdown.

A Solar Nightmare

I should preface this section by telling you that despite some ominous news, the solar industry has still put up some pretty impressive numbers. Consider the following:

  • Annual solar installations in 2014 will be 70 times higher than they were in 2006.
  • By the end of 2014, there will be nearly 30 times more solar capacity online than in 2006.
  • Solar has gone from being an $800 million industry in 2006 to a $15 billion industry today.
  • The price to install a solar rooftop system has been cut in half, while utility systems have dropped by 70%.
  • It took the U.S. solar industry 40 years to install the first 20 gigawatts (GW) of solar. It’ll install the next 20 GW in the next two years.
  • During every week of 2014, the solar industry installed more capacity than it did in the entire year of 2006.

Now, the reason I focused on 2006 in this list is because this is when the solar Investment Tax Credit (ITC) kicked in.

The solar ITC is a 30% tax credit for solar systems on residential and commercial properties. And it is the ITC that, without a doubt, has been one of the most important federal policy mechanisms supporting the deployment of solar energy in the U.S.

It’s also scheduled to expire in 2016.

Now, if you’re a regular reader of these pages, you know I’m not a fan of energy subsidies. There is no greater threat to a free market than government intervention. And in the case of energy, it’s these subsidies that push lawmakers to pick and choose winners in the energy industry. This goes for everything from solar and wind to fossil fuels and nuclear.

That being said, I completely understand why Rhone Resch, president and CEO of the Solar Energy Industries Association, said the following at the opening session of SPI:

It’s absolutely imperative... job #1... that we extend the 30 percent solar Investment Tax Credit past 2016.

 2015: The Year of Solar

The truth is, no one actually knows whether or not the ITC will be extended beyond 2016.

If I had to put money on it, I’d say it’ll get extended for at least another four years, taking us into 2020. But when it comes to policy, nothing’s certain until all the votes are counted.

So as a result, many in the solar industry are now operating at a capacity that suggests 2015 will be the last year for that 30% tax credit. In other words, they’re kicking it up a notch in 2015 in an effort to take full advantage of the ITC before it expires.

I suppose it’s a bit of an uncomfortable indicator for solar supporters, but for energy investors, it is a call to action: Ride the wave of aggressive integration in 2015.

There’s no doubt that the big dogs in the solar sector are treating 2015 as if it’s the last year for the ITC. Although that may not be the case, it’s still a precautionary measure that’rsquo;ll help these companies hedge against uncertainty as 2016 approaches.

No solar company will take it slow in 2015, but there are five solar companies (or companies with skin in the solar game) in particular that I believe will intensify marketing, acquisition, and development efforts so much that they’re going to blow the doors off and deliver record revenues before 2016 arrives.

Not surprisingly, these are the companies that are currently well capitalized and already have competitive and first-mover advantages. And for the sake of full disclosure, the success of these companies does put money in my pocket:

  1. SunPower (NASDAQ: SPWR)
  2. First Solar (NASDAQ: FSLR)
  3. SolarCity (NASDAQ: SCTY)
  4. SunEdison (NYSE: SUNE)
  5. Hannon Armstrong Sustainable Infrastructure (NASDAQ: HASI)

Of course, if the solar ITC is extended, then 2015 will just be icing on the cake. And while I certainly won’t vocally support any subsidy for energy, as long as fossil fuels and nuclear continue benefitting from direct and indirect subsidies — just as they have been for decades — then it should not come as a surprise when the solar industry gets the go-ahead to wet its beak from the government trough, too.

So invest accordingly.

To a new way of life and a new generation of wealth...

 signature

Jeff Siegel is Editor of Energy and Capital, where this article was first published.  follow basic@JeffSiegel on Twitter

October 17, 2014

Solar Bonds For Small Investors

By Beate Sonerud

SolarCity (NASD:SCTY) is issuing US$200m of asset-linked retail bonds, with maturities ranging from 1-7 years and interest rates from 2-4%. Wells Fargo is the banking partner. While the bonds are registered,SolarCity expects the bonds to be buy and hold, and not traded in the secondary markets.

The bond is issued for small-scale investors, with investment starting at US$1000, giving this bond issuance a crowdfunding aspect. Choosing such a different structure allows SolarCity to diversify their investor base – the company stresses that small-scale investors are a complement, not substitute, for large-scale institutional investors. While this is the first public offering of solar bonds in the US, in the UK, such small-scale retail and mini-bonds in the solar and wind sectors have been popular for some time.

SolarCity is the largest installer of residential solar in the US, and this is not the first time they are pioneering in the green bond space. In November last year, SolarCity was the first US company to issue asset-backed securities for solar. Since then, it has issued another two rounds of ABS backed by power-purchase agreements from their customers. All of these issuances have been private placement offerings.

SolarCity’s securitisation offerings have shown a steady decline in coupon, providing the company with cheaper funding. The company’s first issuance was rated BBB+ with coupon at 4.80% - right off the bat achieving investment grade rating with no credit enhancement. In April this year, the second issuance, US$70.2m, was also rated BBB+, but achieved a better coupon at 4.60%. In July 2014, the third issuance, for US$201.5m, achieved a lower coupon still. The upper tranche of this issuance achieved rating of BBB+, and a coupon of 4.026%, with the lower BB tranche getting 5.45%, providing an overall coupon of 4.32%.

In September, SolarCity also issued US$500m of 5-year convertible bonds, with a 1.625% coupon. We like the wide range of different structures of green bonds they are using.

In terms of the green credentials, we consider SolarCity a pure-play company aligned with a climate economy, although it’s worth noting that their bonds are not labelled green bonds. We do think there is room for labelling also for solar companies like SolarCity, mostly because it would make it easier for investors to identify the company’s bond issuances as green. Although easy investor identification is less relevant for this specific retail bond, it is something to consider for future issuances. It is also a much simpler process to label solar than non-pure play companies - check out our solar standards for details of what we’d expect from a labelled solar bond.

We look forward to see what SolarCity will do next as a green bonds pioneer. The company seems to just be getting started, as SolarCity states that: “(…) this is the first of fairly continuous offerings”. Great stuff!

———  Beate Sonerud is a policy analyst at the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

October 16, 2014

Fuel Cell Follies: Off-Roading

by Debra Fiakas CFA

Consumer adoption of hydrogen-fueled vehicles could have quite a catalytic impact on the entire fuel cell industry.  Two of the public fuel cell technology companies come to mind first:  Plug Power, Inc. (PLUG:  Nasdaq), FuelCell Energy, Inc. (FCEL:  Nasdaq) and Ballard Power Systems, Inc. (BLDP:  Nasdaq).  These companies have been toiling away for years on fuel cell technologies, finding success on the periphery with industrial, campus and power generation solutions.  All three companies trade at modest prices and could look like great bargains for investors with an extended investment horizon. 

Forklift Fuel Cells

Plug Power has found considerable success by focusing on commercial and industrial users with campus or warehouse applications.  The company has packaged its flagship hydrogen fueled membrane fuel cell with central refueling stations, winning high-profile customers like Walmart in Canada, Kroger, FedEx and even Volkswagen that have fleets of materials handling vehicles.  Sales have been growing and Plug Power was able to post $35.6 million in total sales for the twelve months ending June 2014.  However, the company has yet to produce an operating profit and required $35.9 million in cash to support operations during that twelve month period.  The company reported near $168 million in cash resources at the end of June 2014.

As was noted in the article “Investor Unplugging from  Plug Power” in April 2014, the stock has been under considerable selling pressure over the last several months.  The company’s sometimes erratic investor communications could be part of the problem.  More recently the stock has been among the victims of the correction in the U.S. equity markets.  In September 2014, the stock formed what is called a ‘double bottom breakdown’ in technical parlance, signaling a bearish sentiment pervades trading in the stock.  Momentum oscillators for the stock suggest there is little to turn around the free fall in the stock price that began in early August.  There might good reason to take a long position in PLUG if your investment horizon is far off, but there could be opportunities yet to acquire PLUG at even lower prices than today.

Fuel Cell Power Plants

The stock of FuelCell Energy has been looking oversold and the slide downward that began in early September and shows little sign of stopping. Last week FCEL completed an especially bearish formation called a ‘descending triple bottom breakdown’ by technicians who use point and figure charts.  The measure was so strong it suggests the stock could fall as low as $0.25 per share.

If FCEL trades that low, it might be considered a good value. The company’s technology transforms various fuels such as natural gas or methanol or biogas to power through its proprietary fuel cell power plants.  The company has gained some traction in the market and has over 50 installations in the power generation industry, waste water treatment plants, healthcare facilities and other locations that require always-on power sources.  FuelCell reported $181.0 million in total revenue in the six months ending July 2014, and posted a net loss of $46.3 million.

FuelCell Energy’s technology successes appear to have been enough to convince a player in the energy industry to commission a study of direct fuel cell power plants.  FuelCell Energy did not release its customers name or the value of the contract.  The development revenue will be added to $3.2 million awarded by the U.S. Energy Department to study advanced materials.

Power Stronghold in the Caribbean

Ballard Power Systems is giving FuelCell Energy some competition.  Ballard has developed technology for proton exchange membrane (PEM) fuel cells that has been commercialized for mobile and stationary power plant applications.  Ballard reported $66.8 million in total sales in the most recently reported twelve months, resulting in a net loss of $15.2 million.  Cash usage in the same period was $15.0 million.  At that cash burn rate, Ballard could last another two years or so just by relying on its cash resources that totaled $36.4 million at the end of June 2014.

Management at Ballard might not be so worried about their bank account balance.  Ballard has been supplying Plug Power with fuel cell stacks for Plug Power’s GenDrive systems deployed in forklift trucks.  A new agreement extends the supply arrangement to 2017.  Wait, there is more!  Digicell Group, a communications provider in the Caribbean and Central America, recently placed the second tranche of an order for Ballard’s ElectraGen methanol-fuel cells to be deployed around Jamaica for back-up power.  After selling these thirteen additional systems to Digicell, Ballard can boast 161 ElectraGen systems deployed and operating in the Caribbean.

The wild card in the Ballard story is new leadership.  Ballard’s chief executive officer of eight years is retiring, making room for Randy MacEwan as the new CEO.  MacEwan has industrial gas supply knowhow and extensive executive level experience in the clean energy industry.  Even with a long list of credentials there MacEwan will still have a learning curve and it is not clear if he has the ability to sketch out a road map to profitability.

It should be no surprise that Ballard shares has the same negative sentiment permeating in its trading as we have observed in PLUG and FCEL.  There appears to be little support at any price level to keep the stock from trading to below buck.  The bearish price target for BLDP is $0.75.

Summary

Three companies with recent positive fundamental developments that indicate market acceptance of their technologies and products.  Skies above these fuel cell producers are getting blue as recent developments in the automotive industry suggest a growing interest in fuel cell technologies for consumer on-road vehicle as well as commercial off-road vehicles and stationary solutions.   Three undervalued stocks with weakening trading patterns that suggest things could get worse before they get better.  For me that adds up to three stocks that should be on a watch list until the equity market finds its bottom.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

October 15, 2014

Beijing Calls Taxis For Stalled Chinese EV Firms

Doug Young

Beijing is turning to an old trick in its bid to boost new energy vehicles, with word of a major new program requiring local governments to buy huge volumes of electric taxis and buses to jump-start the struggling sector. I have to slightly commend China’s government leaders for their determination to boost clean energy vehicles with this kind of program that’s likely to produce a major jump in new sales. But at the same time this kind of program also looks quite ominous, as it will result in a flood of immature technology coming onto China’s roads as local governments rush to meet centrally-set quotas without regard for the commercial viability of what they’re buying. That could result in huge wasted government spending that could ultimately hinder the sector’s development due to lack of pressure to innovate.

This kind of program is far too common in China, where the central government is obsessed with setting targets and then doing everything it can to achieve those goals. In this case, Beijing has taken numerous steps to try and entice Chinese consumers to buy new energy vehicles, realizing that consumers make their decisions based on commercial factors and thus will force manufacturers to make good products. What’s more, only the consumer market can really supply the volume of sales needed to make the sector succeed.

Yet despite all the efforts, which include an infrastructure building campaign and numerous financial incentives, Chinese consumers haven’t embraced the technology yet and sales remain anemic. New energy vehicle sales totaled just 5,000 in August, up 11 times from a year earlier but still well short of the volume needed to reach Beijing’s ambitious target of having 5 million electric vehicles (EVs) on the road by 2020.

Despite consumer reluctance to buy new energy vehicles, one group that has shown much more enthusiasm for the technology is local governments, most notably in big cities like Shenzhen and Shanghai. Such governments are not only relatively cash rich, but also are often home to EV car and bus makers like Shenzhen-based BYD (HKEx: 1211; Shenzhen: 002594; OTC: BYDDF), and Shanghai-based SAIC (Shanghai: 600104). Thus those governments often formulate big plans to buy such taxis and buses, and then do most of their purchasing from local manufacturers to help meet their centrally set economic growth targets.

Realizing that local governments are far more responsive to these kind of target-setting games, Beijing has just rolled out a major new program that requires 30 percent of public transport and publicly owned logistics vehicles to use new energy technology by 2020. (English article) The directive was released by the Ministry of Transport earlier this month, and calls for new energy technology to power 200,000 buses, 50,000 taxis and 50,000 government delivery vehicles by 2020.

Some quick math will show those figures add up to 300,000, or about 6 percent of the 5 million new energy vehicle target for all of China by 2020. The new plan is specifically targeted at cities with well-developed infrastructure, meaning smaller, less affluent cities won’t have to plow their scarce financial resources into this target-driven charade.

As I’ve said above, Beijing should be at least slightly commended for this new approach, which will instantly provide a major boost for new energy vehicle makers. But as I’ve also said, this kind of new demand is largely artificial and based on government directives rather than commercial factors. Western governments seldom resort to these kinds of directives, for the simple reason that they don’t have the desired effect of building long-term viable industries. That’s likely to be the case with this newest Beijing program, which will put thousands of clean but problematic new vehicles on China’s roads.

Bottom line: China’s latest program to sharply boost clean energy vehicles through government buying looks well intentioned but misguided, and is ultimately likely to fail.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

October 14, 2014

China Plans Aggressive Renewables Deployment But Falling Incentives

Doug Young

Lofty targets contained in a new report show that China intends to push ahead with ambitious plans to build up its renewable energy sector. But perhaps the most interesting thing about this new report is word that Beijing finally intends to sharply reduce the inflated state-set fees now paid for solar and wind-produced power, in one of the sharpest indicators that it expects the industry to stop depending on government support and become commercially viable on its own. Such state support through a wide array of measures, which also include export credits and low-interest loans, have become a huge sticking point that has led to a series of trade wars between China and the west.

All that said, let’s jump right in and look at the latest aggressive targets now being finalized by Beijing under its upcoming 5 year plan for the sector between 2016 and 2020. China makes such 5 year plans for all major sectors, a relic of a Soviet-era practice for centrally planned economies. Under revised figures for its current 5-year plan, Beijing announced late last year it was aiming for national solar power-generating capacity of 35 gigawatts by the end of 2015, a very ambitious target for a country that had virtually no such capacity just 3 years earlier. (previous post)

Anyone who thought that figure looked ambitious will probably think the newest plan looks even more aggressive, aiming to build up solar generating capacity to 100 gigawatts by 2020. (English article) The country has even more ambitious plans for the wind power industry, with a target of 200 gigawatts of capacity by 2020.

At the same time, officials who are leaking details of the upcoming plan are also making it clear that state support will be phased out over the next 6 years for makers of solar panels and wind generation equipment. One of the biggest forms of support comes via artificially high state-set prices for renewable energy, which force big power companies to buy such clean energy at rates that are well above the cost of power from more conventional fossil fuels. The use of such high, state-set fees is also common in the west, used as a policy tool to promote the clean energy sector’s development.

Under the new 5 year plan, China’s tariffs for solar generated power will be reduced by a hefty 50 percent by 2020, falling from the current 0.9 yuan per kilowatt-hour to 0.6 yuan, according to an unnamed government energy official. Wind power tariffs will also be cut sharply, falling to 0.4 yuan per kilowatt-hour from the current 0.6 yuan. Equally interesting is a more general quote from the official saying the solar panel and wind equipment makers should improve the efficiency of their products “instead of depending on government subsidies.”

This is one of the first times I’ve seen a government official openly acknowledge what western governments have been saying all along, namely that Chinese solar panel makers like Trina (NYSE: TSL), Yingli (NYSE: YGE) and Canadian Solar (Nasdaq: CSIQ) get a big advantage over their western rivals due to extremely strong state support through a wide range of favorable policies from Beijing. Such support led Washington to slap anti-dumping tariffs on Chinese solar panels last year, and the European Union has also considered taking similar action.

So what does this flood of new information mean for the Chinese panel industry? The ambitious construction target means that Beijing will continue to push for construction of new solar power plants, even if such plants aren’t economically viable. That problem could become worse as solar power prices are lowered, leading to a bumper crop of unusable solar and wind power plants by 2020. That means that the big Chinese solar panel makers could see strong business over the next 5 years from a domestic building boom, but could then see a sharp slowdown if many new projects prove to be economically unviable.

Bottom line: China’s aggressive new energy power goals and determination to reduce state support could result in a building boom of economically unviable solar and wind power generation plants.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

October 13, 2014

Earth to Cellulosic Ethanol: Glad You’re Here, What Took So Long?

Jim Lane 

Part I of II

Cellulosic ethanol arrives at scale — “The five years away forever” put to rest — but are there troubling waters still ahead? For whom, and why?

There’s a gigantic disconnect between two sections in the country as to whether the United States should be celebrating the success or the failure of cellulosic biofuels — biofuels made from crop residues, energy crops, and other feedstocks including municipal solid waste, and which feature a 60 percent or greater full-lifecycle reduction of greenhouse gas emissions compared to conventional gasoline.

The supporters

On the one hand are the supporters — including project developers, growers, the US Department of Energy, Department of Agriculture, several foreign governments (particularly in the EU) and supporters of renewable fuels.

They point to the growing number of commercial-scale biorefineries, and the reaching of cost-competitiveness with $100 oil, as signature achievements of the renewable fuels movement.

Many of the supporters will be gathered in Hugoton, Kansas next week for the official opening of Abengoa (ABGB) Bioenergy’s commercial-scale cellulosic biorefinery, which at 25 millions gallons of capacity will (for a period of a few months) be the world’s largest of its type.

Typical of supporter enthusiasm is this report from the Department of Energy:

In September 2012, conversion technologies were demonstrated at the National Renewable Energy Laboratory…where scientists led pilot-scale projects for two cellulosic ethanol production processes: biochemical conversion and thermochemical conversion. Both…demonstrated process yield and operating cost…At the biochemical pilot plant, cellulosic ethanol was produced at a modeled commercial-scale cost of $2.15 per gallon—a process that was approximately $9 per gallon just a decade ago. For the thermochemical pilot plant, cellulosic ethanol was produced at a modeled commercial-scale cost of $2.05 per gallon.

Beta Renewables

The detractors

On the other hand are ranged a number of detractors — oil companies, some environmentalists, skeptics of government R&D for renewables, and mandate-hating conservatives.

Typical of their critique is a report from Jonathan Fahey of the Associated Press that ran last November:

“As refineries churn out this so-called cellulosic fuel, it has become clear, even to the industry’s allies, that the benefits remain, as ever, years away…The failure so far of cellulosic fuel is central to the debate over corn-based ethanol…Ethanol from corn has proven far more damaging to the environment than the government predicted, and cellulosic fuel hasn’t emerged as a replacement…Cellulosic makers are expected to turn out at most 6 million gallons of fuel this year, the government says. That’s enough fuel to meet U.S. demand for 11 minutes…Corn ethanol…has limited environmental benefits and some drastic side effects…Despite the mandate and government subsidies, cellulosic fuels haven’t performed. This year will be the fourth in a row the biofuels industry failed by large margins to meet required targets for cellulosic biofuels….

“The Obama administration’s annual estimates of cellulosic fuel production have proven wildly inaccurate…supporters acknowledge there is almost no chance to meet the law’s original yearly targets that top out at 16 billion gallons by 2022…expectations were simply set too high. To attract support from Washington and money from investors, the industry underestimated and understated the difficulty of turning cellulose into fuel…

Fahey continues, “The industry was also dealt a setback by the global financial crisis, which all but stopped commercial lending soon after the biofuel mandates were established in 2007…Hundreds of companies failed that had attracted hundreds of millions of dollars from venture capitalists and government financing.”

You’ve come a long ways, baby

Part of the excitement around competitive-cost cellulosic biofuels is the magnitude of the effort and the achievement. Just a few years ago, the projected cost per gallon was $9.00. Just a few years ago, a kilogram was a tough quantity to find produced in the United States.

A problem of targets and language

One of the biggest confusions over the Renewable Fuel Standard is the language of the “cellulosic mandate”. It’s not much of a mandate, at the end of the day. Congress set a maximum target of 21 billion gallons of advanced (that is, no-corn ethanol) fuel by 2022, which included biodiesel, all other forms of advanced fuels that EPA qualified, and cellulosic fuels.

DuPont's Nevada cellulosic biofuels plant, as of August.
The core technology and fermenter units can be seen at center;
at left center, biomass intake; at left, storage and
distillation

DuPont’s Nevada cellulosic biofuels plant, as of earlier this year. The core technology and fermenter units can be seen at center; at left center, biomass intake; at left, storage and distillation

The maximum target for cellulosic was 16 billion gallons by 2022 — but it was specifically tied back to actual capacity levels, given that the fuel was, in 2007, only available in labs. EPA was required to reset the mandate each year to actual production volumes.

In other words, no production, no mandate. It’s not exactly right to say that the Congress “mandated” the blending of 16 billion gallons of cellulosic biofuels in 2022. It is true to say that Congress intended to mandate that, if the industry produced the volumes, Congress would require obligated parties (such as oil refiners and marketers) to blend the (competing) fuels into their petroleum fuels, or pay for waiver credits. Which is to say, if the detractors could come up with some way of frightening the heck out of investors and otherwise frustrate efforts to build capacity, the mandate would disappear.

Imagine an EPA mandate that says, in effect, “we mandate lower levels of arsenic and mercury in groundwater if someone comes up with a product to substitute for the one causing the arsenic and mercury problem. If no one produces a substitute, you can go on polluting.” Well, imagine the galvanizing impact on polluters. They could take the hard road of developing cost-effective alternatives, or the easier road of demonizing all the substitutes and thereby keeping them out of the market.

The Projection Problem

POET-DSM's Project LIBERTY under construction last winter.
The project opened to great fanfare this summer.

POET-DSM’s Project LIBERTY under construction last winter. The project opened to great fanfare this summer.

One of the difficulties relates back to the difference between capacity and production. What happens if someone builds a 10 million gallon integrated biorefinery that can make fuels or chemicals — and market conditions change radically mid-year to make either fuels or chemicals wildly more profitable or unprofitable?

A normal industrial response to changing commodity demand is to alter production – shift to a higher-value market, and tune up or down the volumes. At some times, it makes sense to idle or limit a plant’s production capacity — and definitely, industry will make $5 chemicals over $3 fuels every time, if the input costs are the same.

INEOS Bio New Planet Energy's 8 million gallon cellulosic
ethanol plant in Vero Beach, FL — also producing a healthy
stream of renewable power.

INEOS Bio New Planet Energy’s 8 million gallon cellulosic ethanol plant in Vero Beach, FL — also producing a healthy stream of renewable power.

Another problem. When is a plant market-ready, as opposed to mechanically complete? No plant operates at full capacity until it has gone through a commissioning period — and that can range from moths to several years as bottlenecks in a design are worked out.

Take for example Gevo (GEVO). It has four production lines, which can a) produce ethanol b) produce isobutanol for the fuel markets c) produce isobutanol for the chemical markets or d) be idled individually or in total because of input/output commodity price imbalances, commissioning troubles, or technology upgrades.

Cópia de GranBio_1_Crédito_Divulgação

The 21.6 million gallon per year GranBio project which just opened in Alagoas, Brazil.

So, EPA has the tricky job of projecting production volumes, as opposed to “mechanically-complete production capacity”. In the short-term, it will have troubles projecting production volumes from new plants that may intend to be in full production with, say, 6 months, but encounter more bottlenecks than expected. In the long-term, it has the problem of deciding how much fuel will be made for a domestic market, how much may be exported, and how much production capacity might be devoted to making higher-value specialty chemicals.

Industry’s optimistic timelines

The cellulosic fuels movement and industry probably didn’t help itself much back in 2007 when the first commercial-scale DOE grants were awarded to six projects.

The project and promise. “Abengoa Bioenergy Biomass of Kansas LLC received $76 million for a proposed plant in Colwich, Kan. The facility will thermochemically and biochemically produce 11.4 MMgy of ethanol from 700 tons per day of corn stover, wheat straw, milo stubble, switchgrass and other feedstocks. The project is expected to start construction in late 2008. Abengoa is also building a pilot-scale cellulose facility in York, Neb.”

The actual outcome. The project grew to 25 million gallons, shifted to Hugoton, Kansas from Colwich — and is opening this year after starting construction in late 2011.

The project and promise. “ALICO Inc. received $33 million for a 13.9 MMgy project in LaBelle, Fla. The project is also proposed to produce electric power, hydrogen and ammonia from 770 tons per day of yard, wood and vegetative wastes. Construction is slated to begin in 2008 with start-up in 2010.”

The actual outcome. ALICO backed out, their partners New Planet Energy stayed in and ultimately partnered with INEOS Bio. The partners shifted the project to 8 million gallons of ethanol and 4MW of renewable power in Vero Beach, FL, started construction in 2011, completed in 2012. The project remains in a commissioning period — which may possibly finish up by year end when equipment upgrading is complete.

The project and promise. “BlueFire Ethanol Inc. received up to $40 million for a proposed facility in southern California. The facility will be sited on an existing landfill and produce about 19 MMgy of ethanol from 700 tons per day of sorted green waste and wood waste from landfills. Construction is slated to begin in 2008.”

The actual outcome. The company (now known as Bluefire Renewables (BFRE)) has struggled to complete financing, and is still intending to build but has not yet commenced construction although site-prep work has been done and designs are in place. Ultimately, BlueFire shifted the project to Natchez, Mississippi and attracted a total of $87 million in grants when this project was re-awarded out of Recovery Act funds.

The project and promise. “Broin Companies received up to $80 million for its Project Liberty proposal. The company plans to add cellulosic ethanol production to its existing corn dry mill in Emmetsburg, Iowa. Construction is expected to begin later this year.” At the time Ethanol Producer observed, “The company plans to convert the company’s existing 50 MMgy Emmetsburg, Iowa, corn dry mill plant to also handle cellulosic feedstocks, mainly corn stover. The expansion is slated to take approximately 30 months and increase the facility’s capacity to 125 MMgy of ethanol.”

The actual outcome. The company, now known as POET, formed POET-DSM Advanced Biofuels in a JV with DSM, and opened the 20 million gallon Project Liberty this year in Emmetsburg,

The project and promise. “Iogen Biorefinery Partners received up to $80 million to build its proposed 18 MMgy facility in Shelley, Idaho. Iogen already operates a demonstration-scale wheat straw-to-ethanol facility in Canada.”

The actual outcome. The company ultimately abandoned the project. The Shell-Cosan JV Raizen broke ground last November on a $100 million, 10 million gallons first commercial facility in Piricicaba, Brazil that was expected to open by the end of this year.

The project and promise. Range Fuels was awarded up to $76 million for a proposed project near Soperton, Ga. The 40 MMgy ethanol plant would also produce 9 MMgy of methanol from 1,200 tons per day of wood residues and wood-based energy crops. Construction on the Khosla Ventures-backed project is expected to begin this year.

The actual outcome. The company and project ultimately failed, and the site was sold to LanzaTech, which maintains a pilot facility there to this day — although LanzaTech is focused at this point on developing its first commercial-scale capacity in China.

Some unexpected big wins along the way

The project and promise. Beta Renewables was not formed in time to compete for the 2007 DOE grants, or the round of grants announced under the Recovery Act in late 2009. Chemtex was developing a technology at the time, and ultimately formed Beta with investors Texas Pacific Group and Novozymes (NVZMY).

The actual outcome. The company opened a 20 million gallon commercial-scale facility in Crescentino, Italy in 2012, which is now operating at full capacity. The company has signed firm deals for new plants in China and Slovakia, and is developing a project on its own balance sheet for North Carolina. More licenses are expected over the next 12 months.

The project and promise. GranBio was not formed in time to compete for the 2007 DOE grants, or the round of grants announced under the Recovery Act in late 2009.

The actual outcome. The company opened a 21.6 million gallon commercial-scale facility in Alagoas state in Brazil this past month, which is currently the world’s largest. The company has announced plans to invest $724.5 million in five cellulosic ethanol plants during the next few years.

The project and promise. DuPont (DD) Industrial Biosciences (operating than as the JV DuPont Danisco Cellulosic Ethanol) either did not compete or did not win a 2007 DOE grant, or in the round of grants announced under the Recovery Act in late 2009.

The actual outcome. The company is expected to open what will become the world’s largest cellulosic ethanol facility in the world when its 30 million gallon, $200M Nevada, Iowa plant is completed by the end of December.

The project and promise. Enerkem’s Edmonton project was not legible for a DOE grant because it is in Canada — but it did pick up a grant for a future project in Pontotoc, Mississippi.

The actual outcome. The company just opened its first commercial 10 million gallon facility — which owing to trends in commodity prices, is currently producing methanol instead of ethanol. All of it, though, from Edmonton’s supply of municipal solid waste.

The tale of the tape

Six commercial-scale projects were originally envisioned by the DOE in 2007. Ultimately, we have four open, one more this week, two more by the end of the year, four in development, and ultimately a whole generation of new technology competitors with at-scale capabliities. One failed.

The timelines were not pretty. We’re seeing the real wave hit the beach in 2014, something like 5 years late.

Were the targets “juiced”?

According to a Digest source employed in a senior role at Iogen during 2007, when the EISA Act established the cellulosic targets:

“There was no way those targets were going to get met. We were the only company at the time that had reached demonstration scale, and we did not believe that we would be ready with a first commercial facility by that timetable. Knowing how long it takes to get to pilot and demonstration scale, a first commercial and then a fleet of new plants.

“Most experts agreed that we need until the mid-decade to really start ramping up capacity. And this was before the 2008-09 financial crisis and other factors causing slowdowns. We told everyone this, and originally the timetables and targets were much more conservative. But one prominent investor in the sector was far more bullish, called the more conservative targets “a joke”, and at some stage Congress became convinced that a more aggressive timetable was the right way to go.”

[Editor's note: The DOE timetables for first commercials in the 2007 grants indicated that 159 million gallons in capacity would have reached mechanical completion by 2010, with Iogen's 18 million gallons coming on-line after that — but only if all projects were financed and all were successful technologically. At the time, one of the six had reached demonstration-scale, and another one or two had reached pilot-scale. It is virtually impossible to imagine how the projects would have reached steady-state operations in 2011 without skipping a minimum-scale full demonstration step altogether. The absence of a proven demonstration at scale of the technologies would prove to be, in some cases — fatal to projects which proceeding to jump to scale prematurely — and a delaying factor in financing for the rest.]

How realistic were the targets and timelines given the state of technical readiness?

It’s easy to answer this one. Given the outcomes, the projects were real, the timelines were not.

For example, POET’s 2007 projections indicated a construction start in 2007 and and opening as soon as 2010. But the company only reached pilot-scale at Scotland, South Dakota in the 4th quarter of 2008 and began producing cellulosic ethanol in Q1 2009. Commercial biomass harvesting began in Q3 2010.

Now, realistic timelines and realistic projects are two different things. The United State originally hoped to invade France in 1943, 19 months after Pearl Harbor, and ended up staging Operation Overlord in June 1944, 12 months and 63% later than the original targets. The winning of the war was vastly more important than the timeline. And in the case of POET-DSM — the opening of the plant in 2014 is proof that the journey had a successful ending.

Which brings us to the problem of financing. As we’ll continue in PART II of this special report, which you can find here.


Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

Earth to Cellulosic Ethanol: Glad You’re Here, What Took So Long?

Jim Lane 

Part II of II

Cellulosic ethanol arrives at scale — “The five years away forever” put to rest — but are there troubling waters still ahead? For whom, and why?

There’s a gigantic disconnect between two sections in the country as to whether the United States should be celebrating the success or the failure of cellulosic biofuels. Supporters and detractors alike saying that the wave of commercial-scale cellulosic ethanol refineries is a new wave in technology or the latest round in a wave of unimportant hype.

We looked at the supporters, the detractors, the problems of targets, the Projection Problem, optimistic timelines — and the question of whether targets were “juiced” - in part I, here.

Which brings us to the problem of financing. As we’ll continue in PART II of this special report.

The smoking gun: the failed loan guarantee program for cellulosics

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No one ever, ever thought that cellulosic fuels would get off the ground without a loan guarantee program. First-of-kind technologies are simply too risky for conventional project finance lenders and costs — and credit-card interest rates made the projects not economically viable.

So, DOE-backed projects — into which DOE would have extraordinary oversight and insight — weresupposed to have access to DOE-backed loan guarantees for their first commercial projects — which theoretically would allow them to zero out the project risk to the lender and allow them to tap conventional project finance at conventional interest rates — something like 4-7 percent. After the first commercial, the technology risk would be eliminated, and the companies could tap conventional project finance on their own — so went the theory.

Did DOE get a start on the program? Sure, In fact, it was not authorized under the 2007 EISA Act, one was originally established under the 2005 Energy Policy Act. By 2007, Ethanol Producer was reporting, “The DOE is also developing a loan guarantee program for cellulosic projects as authorized in the Energy Policy Act of 2005.”

As of today, the DOE has only two loan guarantees in its portfolio for this 1703 program — both for nuclear energy.

What happened?

Bottom line, of the 11 projects we outlined, only one received one of those DOE loan guarantees, and that one was not finalized until September 2011 — $132.4M for the Abengoa Bioenergy project. The INEOS New Planet Energy project and Range Fuels (ironically) received USDA loan guarantees. BlueFire has a conditional USDA loan guarantee commitment, but no lender of record yet. The rest of them had to find wealthy corporate backers.

Numerous projects attempted to attract DOE loan guarantees, and no dice.

A house oversight committee found that:

“DOE invested a disproportionate amount of its funds into solar technology leaving taxpayers vulnerable by overemphasizing a single technology. 16 of the 27 1705-backed projects employed solar technology – that represented 80 percent of DOE’s funds.”

And noted that:

“DOE has engaged in a disturbing pattern of suspending the approval of a credible project that adheres to all stated standards, only to later approve massive funding for a project proven to be nowhere nearly as far along in the process as DOE purported. DOE’s favoritism significantly harmed numerous companies that had relied on the promise of 1705 financing. The perception is that DOE actively misleads applicants about the status of their loan application, thereby encouraging these firms to misallocate capital, which has led to financial harm.”

Bottom line, financing woes have been the biggest cause of delay — primarily, the government’s inability to construct the loan guarantee program it knew would be needed for first commercials.

The Abengoa project that received funding was, in fact, the lowest-rated project in the DOE’s entire technology loan portfolio — receiving a CCC rating, which is rated as a “highly-speculative investment”. In fact., Abengoa was exposed to criticism in the House Oversight Report because of the Abengoa Bioenergy loan:

A single Spanish firm, Abengoa, received an aggregate $2.45 billion in loans and loan guarantees plus $818 million in Treasury cash grants.54 This reveals excessive risk and subsidies provided to a single firm via multiple subsidiaries. Abengoa has a credit rating of BB, which is considered Junk, thus making this concentration of investment in one company speculative and highly questionable. Exemplifying the risk DOE took in the case of Abengoa, the company managed to obtain a DOE loan commitment for the lowest rated project across the entire DOE Junk portfolio; Abengoa Bioenergy Biomass of Kansas received an extraordinarily low CCC rating and yet the DOE approved a direct loan to the project.

In a 2011 independent review of loan guarantees ordered by the White House, former Assistant Secretary of the Treasury, Herbert Allison, found:

” A lack of clarity in the lines of authority within the loan program office; A lack of clear guidance regarding DOE’s standard of “reasonable prospect of repayment;” and “A lack of clarity with regard to DOE’s goals and tradeoffs with respect to financial goals versus policy goals”

The crisis of innovative technology financing

The problem of the Loan Guarantee program is that it simultaneously required a “reasonable prospect of repayment” while at the same time focusing, in the language of the Energy Policy Act:

The Secretary may only make loan guarantees under §1703 for projects that employ “new or significantly improved technologies.” DOE’s implementing regulation defines this as an energy technology “that is not a Commercial Technology, and that has either (1) Only recently been developed, discovered, or learned; or (2) Involves or constitutes one or more meaningful and important improvements in productivity and value, in comparison to Commercial Technologies in use in the United States. . . .”

Common-sense tells us that energy technology “that is not a Commercial Technology” and has “Only recently been developed, discovered, or learned” or “Involves or constitutes one or more meaningful and important improvements in productivity and value, in comparison to Commercial Technologies” is by definition a first-of-kind project.

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Common-sense also tells us that first-of-kind projects are not going to have “investment-grade” project ratings.

Fitch, the project finance rating agency, in commenting on the DOE’s newest round of loan guarantee funds, noted:

“The DOE will favor projects that may be unable to obtain full commercial financing due to perceived risks accompanying newer technologies. Eligible projects offering a catalytic effect on subsequent projects, which replicate or extend the innovative features of eligible projects, may also be favored. In determining which applicants advance, the DOE will assess whether a project provides a reasonable prospect of repaying all project debt, and whether available capital from all sources will be sufficient to carry out a project. No minimum credit rating is specified for this solicitation.”

‘Projects seeking funding must use new or significantly improved technology,” said Gregory Remec, Senior Director with Fitch’s Global Infrastructure Group.

The repayment problem in the face of feedstock and product price risk

What we are left with is this, that borrowers must provide:

“An analysis demonstrating that, at the time of the Application, there is a reasonable prospect that Borrower will be able to repay the Guaranteed Obligations (including interest) according to their terms, and a complete description of the operational and financial assumptions and methodologies on which this demonstration is based.”

Which isn’t much. The definition of “reasonability” is critical in the case of first-of-kind technologies, and was left so entirely vague that a DOE Loan Programs officer could rightly determine that repayment prospects could and should be entirely based on a Fitch rating where feedstock and commodity market risk would be heaped on biofuels — vs, say wind or solar that have free feedstock and fixed power contracts with utilities — and that left the financing of cellulosic biofuels in the lurch.

The First Lien Problem

Another critical failure in the Loan Guarantee program. Despite no specific language requiring this in the Energy Policy Act of 2005, the DOE Loan Program rules specified that:

‘‘[t]he [guaranteed] obligation shall be subject to the condition that the obligation is not subordinate to other financing.’ and that ‘‘[t]he rights of the Secretary, with respect to any property acquired pursuant to a guarantee or related agreements, shall be superior to the rights of any other person with respect to the property.’’

What does that mean, exactly? Comes down to interpretation. In this case, in 2007 DOE issued a final rule implementing Title XVII, and issued regulations which requiring a first lien security interest in all project assets as an incident to making a guarantee.

Now, if you’ve tried to get a home loan, and had a parent or relative guarantee the loan, you know that the guarantor is not going to wrest the first lien away from the bank. The bank remains first in line with a right to foreclose. It was a non-starter for many projects, all across the energy spectrum.

It was bad news for energy projects. As DOE itself reflected in late 2009, “nowhere does section 1702 itself require that the Secretary receive a first lien on all project assets as a condition of his ability to make a loan guarantee. Instead the statute requires only that the Secretary’s guaranteed obligation ‘‘not be subordinate to other financing.’’ In fact, section 1702 does not require that the lender or the Secretary receive any collateral as a statutory requirement for making a loan guarantee.

DOE reexamined the statute, particularly its text and structure, and now concludes that “A first lien on all project assets is better understood as one element that the Secretary may require for a particular project, but is not compelled by the statute to require,” and amended its rules. Pushing back the start date for many projects by almost four years.

Now, keep in mind that cellulosic targets were set to commence in 2011, just 13 months after the clarifications on the 1703 loan guarantee program. And the rules for the cellulosic provisions of RFS2 itself — the critical rules that would underpin any efforts commercially to build capacity to meet of those targets — were finalized by EPA in early 2010.

The impact of the rule problems

All this unsophisticated hoo-hah about “missed targets”. And, also, companies put the extra time to good use in developing more cost-effective technology and logistic operations. So, in the long-term the delay produced better technologies and more of them.

So — that’s the technology — but what about market access?

E10 saturation

One thing that supporters and detractors can agree on is that, in the United States, E10 (10 percent ethanol blends) have reached a saturation point, with around 13.5 billion gallons of ethanol blended into roughly 135 billion gallons of gasoline. The overwhelming majority of that fuel is corn ethanol — which has advantages in cost and availability over cellulosic fuels.

Ethanol vs gasoline, which costs less?

Today, in fact, on an energy basis, ethanol is so cheap that what was once a subsidized fuel — and criticized as such in some quarters — is right at parity with gasoline on an energy basis. As GasBuddy.com pointed out here, ethanol-free gasoline costs 10-15 cents more per gallon than E10 unleaded.

And there’s good reason for that. November ethanol futures were trading at $1.59 on the Chicago Board of trade, while the November RBOB gasoline contract was trading at $2.30. RBOB is blended with 10% ethanol content to make 87-octane regular unleaded fuel — with ethanol supplying an extra boost of octane.

What’s the market access debate over now?

Most of the debate focuses on where fuels go, past the E10 saturation point. That’s not the base for biodiesel or drop-in fuels — but for first-generation and cellulosic ethanol, and for obligated blenders, it’s the big issue on the table.

One option is E15 blending, which is now EPA-approved for vehicles made in 2001 or later. But adoption rates have been cruelly slow — a handful of outlets offer E15. Opinions differ on whether that reflects petroleum industry influence or retailer resistance.

Another option is E85, which is very cost effective for consumers, but it is only available at fewer than 3,000 fuel stations (out of 150,000 nationally), mostly in the Midwest. Retailers balk at the cost of retrofitting for E85 without government help — and in general E85 is marked up way higher at retail than the market will bear. We reported on that here.

Bottom line, there’s no clear path for added ethanol capacity to reach a market at the moment. And corn ethanol is going to be more cost competitive right now. With corn trading at $3.41 per bushel for the December contract, there’s a notional cost of $0.78 per gallon for the corn feedstock right now (even without considering renewable fuel credit values – RINs) — and that’s impossible for cellulosic fuel to compete with right now.

Which puts a brake on financing until the market access picture clears up.

E85 vs gasoline, which costs less?

On a wholesale basis, E85 wins. It’s priced as low as $1.39, wholesale, if you avoid buying it from petroleum companies. That’s a savings of 32 cents per gallon, vs RBOB gasoline, after allowing for differences in energy density.

The Bottom Line

The technologies were hamstrung by a combination of:

1. Overly optimistic views of construction and development timelines from pilot to demonstration, to first commercial, to steady-state operations at scale, to the multiple facility scale. The project developers point out that they are creating several new industries, from scratch (e.g. in many cases, biomass harvesting, pre-treatment, cellulosic hydrolysis, and fermentation) and there is much to be considered in the fact that they did what they said they’d do, in greater numbers, only later.

2. Unlucky timing in terms of the 2008-09 financing crisis and the shutdown of project finance markets.

3. No emergence of consensus on how to deal with the E10 saturation point — which accelerated in the face of falling gasoline demand.

4. Poor structure of loan guarantee program, in a way that virtually shut out liquid transportation fuels, even though they were the primary focus of “ending the oil addiction” and the 2005 and 2007 energy policy legislation.

In the short-term, much of the excitement of their arrival, in the general public view — has been dampened by the exhaustive timeline of the journey. Many in the public have moved on, to electrics, cheap natural gas, or to taking more selfies.

In the long-term, the market access problem looms large. Unless that is solved — perhaps through confrontation, perhaps through confrontation — this wave of cellulosic ethanol technologies will not be joined by a second wave, at least in the United States. Asia and Latin America have become the most likely candidates for deployment now.


Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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