October 01, 2014

Geothermal Should Ride The Duck Curve

Meg Cichon

As the geothermal industry limps along year after year, a utility insider strongly suggests that it changes its tactics.

For years the geothermal industry has relentlessly boasted that it is a baseload resource, meaning it provides stable power similar to a coal or natural gas plant, except without all of those pesky carbon emissions. While upfront costs to develop a plant are higher than other renewable sources, geothermal leaders say that this baseload aspect makes it a more attractive resource in the long run since the grid needs more stable power as increasing amounts of intermittent renewables enter the landscape.

Though this may sound like bankable reasoning, Dave Olsen of the California Independent System Operator Corporation (CAISO) said geothermal needs to change its strategy to make any sort of progress in the energy market. During the opening session of the 2014 Geothermal Resources Council (GRC) Annual Meeting & Geothermal Energy Association (GEA) Geothermal Energy Expo in Portland, Oregon, Olsen warned the crowded room that they might not like what he had to say.

“Geothermal can add significant value to the portfolios of most utility companies in the western U.S., but you guys are not getting it done,” said Olsen. “You are not going to win a levelized cost competition with wind and solar. When you can’t win with the rules as they are, then you have to change the game.”

Stop Spinning the Same Record

In order to be a successful competitor in the energy market, Olsen said the geothermal industry must stop selling itself as a baseload power because baseloads are actually becoming a problem. (Note: See the GRC 2014 conference signage above, which highlights geothermal's baseload advantage.) Using California as an example, Olsen said that the closure of big resources like the San Onofre Nuclear Generation Station (SONGS) is actually making the grid much more stable and allows for the use of more solar and wind.

“Baseload has gone from being valuable to being problematic as we add more wind and solar,” said Olsen. “When we shut down other fossil plants we will avoid curtailing thousands of megawatts of wind and solar.”

California faces severe midday energy over-generation, as evidenced by the famous “duck curve” chart below. In 2013 alone, California was forced to curtail more than 19 GWh of pre-purchased renewable energy in order to run its inflexible baseload sources, and this number will likely rise in the coming years. Adding more of these resources will only make this situation worse, said Olsen.

duck curve

This "duck curve" shows the increased overgeneration risk and peak ramping needs (potentially 13 GW within three hours) that occur as more solar is added to the grid. Credit: CAISO

“This is the reality in California today — even if we modernize the grid and add storage we are going to have too much solar midday,” he said. “In the next 10 years this is going to be situation everywhere. Geothermal needs to get ahead and not contribute to this problem.”

Flexible Is the New Baseload

To address this problem, the grid actually needs more ancillary services — flexible power that can be ramped up and down as needed. While utilities look to decarbonize their systems and abide by EPA rules, geothermal needs to step up and market itself as the solution. Developers must design projects to operate flexibly with a wider range of services — a good example of this is Ormat’s (NYSE:ORA) Puna geothermal project in Hawaii. Local utility Hawaii Electric Light Company (NYSE:HE) uses the plant for auxiliary power and is able to increase or decrease services when necessary.

The geothermal industry must educate decision makers so that they recognize this benefit, which will takes years of work, said Olsen. To make real progress, geothermal players need to work hand-in-hand with other renewable technologies.

“The good news is that wind and solar are in similar situations. Other renewable technologies are your allies, not your enemies — you are all vying for a diverse, complimentary energy portfolio. You have much more to gain by marketing and lobbying with them,” said Olsen. “If you don't believe me, count the geothermal megawatts that have come online in last 20 years and compare.”

Spoiler alert: It's much less than wind or solar.

Meg Cichon is an Associate Editor at RenewableEnergyWorld.com, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for RenewableEnergyWorld.com and REW magazine, and manages REW.com social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on RenewableEnergyWorld.com, and is republished with permission.

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September 29, 2014

Casella Back In The Dumps, But Ready To Pick Up?

by Debra Fiakas CFA

Casella Plants Flag in Waste-to-Energy

The solid waste collection and disposal industry has been transformed by the building enthusiasm for waste recycling.  Founded in 1975, Casella Waste Systems (CWST:  Nasdaq) has been around to experience a lot of change and has been quick to get on the bandwagon.  The company is a self-described recycler and resource manager as well as a solid waste collector.

Granted the company is still heavily focused on its conventional solid waste business.  Casella management has outlined a four-point plan to grow the company and increase profits.  Top on their ‘to do’ list is to find incremental landfill capacity.  They are also trying to create new efficiencies at each of the company’s thirty-five solid waste collection operations.  That is just the usually blocking and tackling tactics of an incumbent solid waste handler.

Casella[1].jpgHowever, Casella has become much more than an ‘old school’ garbage hauler.  Some years back, Casella added metals recovery and plastics recycling to its menu of services, at the same time establishing a new revenue stream from the sale of recovered materials.    The company operates sixteen recycling facilities in its home region in the northeastern U.S.   Additionally, Casella operates nine landfills, four of which have been outfitted with methane gas recovery facilities.  The company actually produces 25 megawatts of power for local users.

Casella has also stepped into the organics-to-energy business.  Operating as Casella Organics, the company has established an anaerobic co-digester at a dairy farm in Massachusetts.  The plant co-digests dairy manure and food residuals from nearby sources.

A little over a year ago in April 2013, I wrote about Casella’s financial performance here.  Although operating cash flows have been at times ample, the company has had trouble delivering profits to its bottom line.  At the time I did not have a great deal of confidence in the stock to deliver returns in the near-term.  The stock actually took off a few months later, rising by as much as 50% after management provided guidance for sales growth in a range of 2.1% to 4.3% in the fiscal year ending April 2014.  Earnings before interest, taxes, depreciation and amortization (EBITDA) were guided in a range of $91.0 million to $95.0 million.

Alas, the stock lost all of its gains as the year progressed.  Casella was able to make good on its plans to grow revenue.  Sales in the fiscal year ending April 2014, were 9.3% higher than the previous year.  However, the company stubbed its collective Big Toe on profitability.  EBITDA was reported as $86.4 million, well below the guided range.  Since EBITDA is a critical factor in CWST valuation, disappointment increased with each passing quarter.

CWST is now trading near its 52-week low.  A review of historic trading patterns suggests the stock is oversold.  There has been a very strong bearish trend building in CWST since June, after the company reported fiscal year 2014 financial results.  It seems implausible that the stock could decline from its present level just under $4.00 per share.  Then again, shareholder equity has been eroded to a deficit and long-term debt levels have been rising.  Coupled with persistent net losses and shrinking profit margins, the weakened balance sheet does not provide a great deal of encouragement for investors who might be tempted take advantage of the cheap price for CWST.
 
That said, we note that the stock has been at the current price level four times in the last five years, rising each time by an average of 75%.  The company has a well established customer base and has been able to convert 11% of its sales dollar to operating cash.  If an investor has confidence in Casella’s regional stronghold in waste collection and hauling as well as the new flag the company has planted in the waste-to-energy business, then it is time to take a long position in CWST wait patiently.

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.

September 28, 2014

SolarCity or Vivint Solar?

By Jeff Siegel

In as soon as five years, you could be living right next door to a power plant.

Actually, even closer. The power plant could be operating from right inside your home.

I'm serious. Take a look...

batt

This is a backup battery system installed in a home that's powered by domestically generated electrons, courtesy of the biggest nuclear reactor known to humans: the sun.

And according to super genius Elon Musk, within five to 10 years, every set of solar panels installed by SolarCity (NASDAQ: SCTY) will come with a battery pack.

Nighttime Solar

Musk's cousin and SolarCity CEO Lyndon Rive recently spoke at a private meeting in New York, where he announced that due to the economies of scale that will soon come from Tesla's (NASDAQ: TSLA) new battery manufacturing complex, SolarCity's solar power systems, with the new battery system installed, will be able to produce energy cheaper than the local utility company.

This means powering your home with solar day and night, and at a price lower than what your utility charges.

That's a pretty bold claim, but it's one I wouldn't sleep on. Musk and his ilk are not the type to fall short, nor are they the type of folks you should bet against.

The truth is, beyond the battery system, SolarCity is taking the appropriate steps to drastically slash the cost of solar altogether.

A few months ago, I told you about the company's acquisition of solar manufacturer Silevo. This deal will allow the company to lock in a steady supply of low-cost, high-efficiency panels that'll enable it to stay competitive against a rise in new U.S. start-ups as well as low-cost producers from China.

Then, just last week, the company unveiled a new solar mounting product called ZS Peak. It basically allows installers to install systems on flat roofs in half the time it takes today. And according to company reps, this new product can increase generation capacity on flat-roof buildings by 20% to 50% per building.

This technology now makes it possible for far more businesses, schools, and other organizations to install solar power on their buildings and immediately pay less for solar electricity than they pay for utility power. It will also help the company expand its reach into the commercial solar market.

The Best Part

Now here's the best part...

SolarCity has been getting knocked down a few pegs over the past week or so. Some believe the new Vivint Solar IPO, which is a competitor to SCTY, is luring SCTY investors away with a cheaper share price.

But while I'm also looking forward to picking up a few shares of Vivint, this isn't a reliable comparison. If anything, I would caution investors against picking one over the other and instead recommend maintaining positions in both — especially now that SolarCity fell below the $60 mark. That's a bargain compared to Deutsche Bank's $90 price target and Credit Suisse' $97 price target.

Point is, there's plenty of room for more than one company to grow and profit. And there's no reason you can't ride both.

Full Disclosure: I currently own shares of SCTY.

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

Jeff Siegel Signature

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

September 27, 2014

Covanta: The Big Player In Waste-to-Energy

by Debra Fiakas CFA

Covanta Holding Corp. (CVA:  NYSE) is among the largest waste-to-energy developers and producers in the U.S.  The company couples waste collection services for local government and industry with power generation for local municipal or commercial customers.  Covanta’s waste handling and ‘mass-burn’ process also allows for metal recovery and sales.  The company operates forty-six waste-to-energy facilities mostly in North America supported by eighteen waste transfer stations and four ash landfills. 

Covanta is a big player in the waste-to-energy industry, but what kind of yield does it's stock offer investors?

Covanta’s management team knows the pain of failure as well as the pride of success.  A decade ago Covanta was struggling to emerge from bankruptcy, but in the most recently reported twelve months the company reported a net profit of $47.0 million on $1.7 billion in total sales.  Granted Covanta is highly leveraged, carrying $2.3 billion in debt on its balance sheet that generates a 265.0 debt-to-equity ratio.  However, the debt-laden balance sheet is supported by strong cash flow generation.  Covanta turned 21.6% of sales in the last twelve month period into operating cash flow.  That helped bring cash on the balance sheet to $175 million at the end of June 2014.  Additionally, a new cost saving program initiated in June 2014, is expected to bring an incremental $30 million to the profit line.

One of the reasons Covanta has been able to crank up cash flow generation is by offering a mix of business models for its municipal partners.  Most of its projects follow a design-build-operate model wherein Covanta gets paid for waste collection and then shares in revenue from the sales of power.  Covanta is even gets guarantees of minimum waste streams by its municipal partner.  Alternatively, Covanta assumes ownership of the waste-to-energy plant and keeps all power revenue for itself.   

Besides the municipal waste-to-energy model Covanta has interests in seven wood-fired generation facilities in California and Maine.  The company also has partial interests in two hydroelectric power plants in Washington and is the owner/operator of a landfill gas to energy plant in Massachusetts.

The Company projects its portfolio of power plants could generate 6.5 megawatt hours of electricity in 2014.  The waste-to-energy group represents 88% of the total.

Earnings, Growth and Yield

As mentioned above the portfolio generates fairly strong cash flows that can be used reinvested or used for debt-pay down.  Covanta recently announced an increase in its dividend to $1.00 per year.  At the current stock price near $21.00 that dividend represents a yield of 4.8%.  Even with this payout to common stockholders, analysts watching the company are expecting about 13% earnings growth over the next five years.

Investors looking at Covanta’s cash flows and dividend yield might be impressed until they look at the stock’s price/earnings ratio of 35.8 times projected 2015 earnings.  The ‘PEG’ or price-earnings to growth ratio is 2.75 ($21.50/$0.60).  The stock looks just ‘flat out expensive.’ 

In my view, the fundamental analysis should not stop there.  Since the stock pays a good dividend, the current yield should be considered.  The ratio of price-earnings to growth-plus-yield or ‘PEGY’ is a bit more palatable at 2.01 [35.8/(13 + 4.8)].  Even this is not a full analysis of the investment picture for Covanta.  CVA shares represent a well-season security with deep trading volumes, strong institutional ownership and low price volatility.  So I argue that the PEGY ratio should be adjusted for risk as measured by beta, which for CVA is a relatively low 0.32.  On a risk adjusted basis the price-earnings to growth-plus-yield ratio or ‘PERGY’ is 0.64 (2.01 x 0.32)  -  well below the 1.00 maximum  for this popular benchmark.

Strategy

This is no argument for investors to run to their computers and place buy orders for CVA.  A review of historic trading patterns in CVA suggests the stock is over-bought in the near-term.  The trend for CVA shares has been decidedly bullish since early May 2014, when the stock formed a particularly bullish trading pattern called a ‘double top breakout’ by stock chartists using point and figure analysis.  The chart suggests the stock has developed sufficient momentum to rise to the $39.00 price level.  That is a price that is not being bandied about by any of the fundamental analysts who watch CVA and have published price targets.  The highest published price target is $26.00 and the mean target is $24.00.

At the mean price target, fundamental analysts suggest there is 14% upside in the stock.  Technical analysis says there is room for 86% upside.  There is probably good reason to take note of both views.

Negative news could likely trigger a retreat in the stock price, but there is a noticeable level of support at the $20.50 price level.  Of course, an extreme set back could send the stock back to retrace levels in the price gap between $19.25 and $19.75, which was formed in early June 2014, after the company announced its cost saving plan and dividends increase.
 
The cost savings does not appear to have been registered analysts’ estimates for 2015 as the consensus estimate for next year has not budged for over four months.  If the cost saving program is at all successful, it  is more likely than not that Covanta could meet or beat expectations for earnings in the coming quarters.  Short interest in CVA is near 13.7 million shares or about 14% of the float.   Under current present trading volumes, it would take at least twelve days to liquidate short interests in CVA.  Strong fundamental news from Covanta could send traders with short positions looking for an exit point and, that could push the stock price higher.

With mixed signals coming from fundamental analysis and technical analysis, investors would be well advised to watch both earnings and the stock chart in taking any position in CVA.


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.

September 26, 2014

Big Money Looking For Green Investments

Sean Kidney

Climate Finance session at UN Summit is electric.  Insurers go wild with promises; investors plead for green investments; Jim Kim almost breaks out in song about green bonds.

It's the day after the UN Climate Summit party in New York. Yes I do feel as if I'm hungover; but it was a gas. If you're one of those who worry about the world, there is something magical in being inside the totemic General Assembly, with it's embodiment of one world idealism.

Ban Ki Moon's audacious Summit convening (that's really the only power we allow him) made for a really useful event: it bought out marchers around the world to ask their governments for action; and it extracted some useful new commitments, such as:

  • Germany and France each announced $1bn for the Green Climate Fund.
  • China said it will reduce carbon emissions (per unit of GDP) by 45% by 2020 compared with 2005 levels.​
  • The International Development Finance Club (IDFC) announced that it's on track to increase direct climate financing to $100bn a year by the end of 2015.

But above all there was an awful lot of talk about green bonds (and no, it wasn't just me being noisy). UN Secretary-General Ban Ki Moon talked about the opportunities of green bonds in his speech, World Bank President Jim Yong Kim spoke about scaling up - in fact he spoke rhapsodically on the topic - and the CEOs of Credit Agricole and Bank of America waxed lyrical on their application. And that was just the start of it.

Best of all, the Summit elicited some pretty cool commitments from institutional investors, those folks who now own half the planet on our behalfs (after all, we're the pension fund or insurance beneficiaries). We got:

  • A new Portfolio Decarbonization Coalition (PDC) made up of coalition of institutional investors, coordinated by our friends at CDP. They committed to decarbonizing $100bn of their investments by end 2015 and to measure and disclose the carbon footprint of $500 billion in investments. In fact spokesperson Mats Anderson, the CEO of Swedish pension fund AP4, said his fund would fully decabornize by 2020.
  • Three big pension funds announced they would grow their investments in low-carbon assets to more than $31 billion by 2020.
  • The media statement we put out yesterday listed more, like Barclay's new $1bn green bonds fund, ACTIAM's promise to have invested $1bn in green bonds by end 2015, and Zurich Insurance Group's $2bn commitment.

​Then the two insurance industry associations, ICMIF and the IIS, representing the majority of insurance companies globally, put out a humdinger. This is an industry that manages a third of the world’s investment capital - approximately $30 trillion. That gets attention. But only $42 billion can be called climate related investment (what have they been doing!). So they announced they would double the industry investment in climate investments to $84 billion by end of 2015. That's good.

Then they went further and announced then would multiply current investment in climate investments by 10 times by 2020 = $420 billion. A that point I was in love - that's a big kicker for climate change related investments. Of course the majority of their investments are in the form of bonds - which will mean increased demand for climate bonds and green bonds. Yes, that's increased demand in the already hot market.

But wait, there's more! Then, Angelien Kemna, CEO of the $400bn+ APG Asset Management came on, representing a coalition of investors with $24 trillion of assets under management - coordinated by the the Global Investor Council on Climate Change, the Principles for Responsible Investment and UNEP Finance Initiative. She effectively said "we stand ready to invest; please get us some deals" and called on policymakers to take action that supports greater investments in clean energy and climate solutions. That was also the theme of the Investor Statement we published yesterday.

So there's the theme. "The capital is ready, bring on the investments to be made! And green bonds."

——— Sean Kidney is Chair of 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. 

September 25, 2014

RDX: Waste Water-to-Energy

by Debra Fiakas CFA

Last week RDX Technologies, Inc. (RGDEF:  OTCQX or RDX: TSXV) announced an agreement to supply renewable diesel to the Tyson Farms’ Temperanceville Facility in Virginia.  The Energy Division of RDX sells three grades of methyl ester fuels that can be used in boilers and small generators.  RDX did not disclose the value or size of the Tyson Farms contract.  However, the contract apparently is for one year with a second year option.

RDX operates renewable fuel plants in Missouri and California.  Waste streams are aggregated at the two plants by truck and processed using technology developed by RDX CEO Dennis Danzik and his colleague Vincent Meli.  The company describes its process as ‘water mining’ wherein contaminants are separated from the water with electrochemical and photochemical techniques.  Waste polymers from the water have energy value and are converted to methyl ester fuels.

Selling fuel is not the only way RDX Technologies plans to generate revenue.  The company also wants to franchise its technology and sell water treatment equipment to aspiring fuel producers.  Called the RDX BlueDot system, the company recently announced a contract with Pontus Energy, LLC. to set up sixteen franchise locations in Ohio, Michigan and Kentucky. The contract was valued at $19.2 million

The company recently signed the Environmental Engineering and Science Department of Stanford University to use the RDX BlueDot system for further development of water treatment solutions.  RDX management expects the Stanford deployment to support subsequent franchising efforts in commercial markets where water treatment is an important or even more important than renewable fuel sources.

In the twelve months ending June 2014, RDX Technologies reported a loss of $10.0 million on sales of $36.7 million in sales.  That seems like a dangerous loss, but cash used to support operations was a significantly smaller amount $176,620.  The company has approximately $4.9 million on its balance sheet, which should support operations for a while longer if cash usage is kept under control.

The wisdom of a distributed power generation solution appears to be catching on and local communities are anxious to find smart ways to upgrade waste.  Of course, water is in short supply everywhere.  Technologies to clean up water are becoming even more critical.

RDX Technologies is still a developing company, but some of the technological risks appear to have been eliminated with the first commercial deployments.  There does appear to be a fair amount of execution risk left, but the stock is still worth watching for all investors interested in a stake in the waste-to-energy market.

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.

September 24, 2014

Signs Of Trouble For Chinese Solar Stocks

Doug Young

Regular readers will know I’m a bit bearish lately on the solar panel manufacturing sector, largely because I believe its recent rebound is being fueled as much by hype as real business after a prolonged downturn. A new report on some of the sector’s so called “growth engines”, coupled with a separate report on a dispute at one of the top surviving players, are adding fuel to my skepticism that the sector’s recent sharp rebound isn’t really happening. At the very least, the recent reports indicate the rebound isn’t nearly as strong as many are claiming, and solar panel makers and their shares could soon be set for far slower growth than many were hoping for.

A number of factors are behind this looming slowdown, most notably financial bottlenecks and related issues in China and other emerging markets that the Chinese panel makers hope will fuel their rebound. They’re being forced to rely on such markets after the US and EU imposed tariffs and took other punitive measures against the Chinese manufacturers for receiving unfair state support from Beijing.

Let’s start off our solar round-up with the worrisome report on Shunfeng Photovoltaic (HKEx: 1165), which emerged as a player to watch last year when it won the bidding to buy most of the assets of bankrupt former solar pioneer Suntech. The new media report is saying that a 500 million yuan ($81 million), 130 megawatt solar farm being built with panels from Shunfeng in China’s interior Ningxia province has run into trouble. (Chinese article)

The report is quite detailed about the issue, but apparently the dispute is purely financial and involves Shunfeng’s failure to pay funds that it promised to help to build the plant. I wrote about this kind of self-financing issue just last week, which has seen most of China’s major solar panel makers partner with other companies to build new power plants, and then provide some or all of the money for such construction. The solar panel makers win new business by selling their panels to such projects, but then end up with big risk if they can’t sell the plants to long-term owners on completion. (previous post)

Shareholders got a bit spooked by the report, with Shunfeng’s shares droping 8 percent after the news came out. The stock was on a steady upward trajectory after the Suntech deal was announced last year, but have now lost about a third of their value since peaking in late May. The decline follows a roughly similar trend for many other solar panel stocks, which have seen bumpy trading this year after a surge in 2013 over optimism for their rebound.

Meantime, another new report on the wider industry trends also hints that the current rebound may be overly optimistic. That report begins with upbeat numbers showing that shipments from China’s major solar panel makers jumped 26 percent in the second quarter of this year, reaching 5.2 gigwatts of capacity, according to data tracking firm NPD Solarbuzz. (English article) But then the same report goes on to cite a range of factors for the rise, many of which don’t look too encouraging.

One of those is the rise in demand from China, which I’ve already explained looks troublesome due to the self-financed nature of many new projects. The report also cites a surge in shipments to the US, as many panel makers raced to beat a new round of punitive tariffs set to take effect. Lastly the report also credits the jump to growing shipments to emerging markets, many of which include financing and protectionist obstacles similar to the ones I’ve already discussed. On the whole, I can’t find any causes for optimism in either of these 2 new reports, and suspect we’ll see the panel makers’ sales and share prices start to come under growing pressure over the next 1-2 years.

Bottom line: A new financing squabble involving Shunfeng and a report on factors fueling a solar panel rebound point to slowing growth for the sector, which will put pressure on both sales and stock prices.


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.

September 22, 2014

5 Clean Energy Yieldcos Flying Under The Radar

by Tom Konrad CFA

The launch last year of NRG Energy's YieldCo, NRG Yield (NYSE:NYLD), and the subsequent near-doubling of its price, set off a feeding frenzy on Wall Street. 

YieldCos are companies which own clean energy assets and use the reliable cash flows from those assets to pay dividends to investors. Investors like YieldCos because many offer yields well above that available from most other stocks, including the fossil fuel-based master limited partnerships, upon which many YieldCos are modeled. Developers of clean energy projects find YieldCos attractive because the stock market provides capital for clean energy projects at a much lower cost than they have historically been able to obtain.

Since its listing, NRG Yield has been joined in U.S. markets by Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), Brookfield Renewable Energy (NYSE:BEP), Pattern Energy Group (NASD:PEGI), NextEra Energy Partners (NYSE:NEP), and TerraForm Power (NASD:TERP). In Canada, YieldCo TransAlta Renewables (TSX:RNW) joined a number of established clean energy producers like Innergex Renewable Energy (TSX:INE), Capstone Infrastructure Corp (TSX:CSE) and Brookfield and Patten, which are listed in both New York and Toronto.

The flood has not stopped there. Analysts are now habitually asking large solar companies and other clean energy developers if they are considering forming a YieldCo. SunPower (NASD:SPWR) has been retaining more of its own solar farms in preparation for a possible YieldCo launch in 2015 or 2016. First Solar (NASD:FSLR), German developer PNE Wind, and Sempra Energy (NYSE:SRE) are all contemplating launching YieldCos as a home for some of their power generation assets. 

Not all of these projects will come to fruition. First Solar's management has commented that they can benefit from the YieldCo phenomenon without going to the trouble and expense of listing by selling assets to existing YieldCos.

Although not every clean energy developer needs to form its own YieldCo, U.S. investors cannot seem to get enough of the IPOs and secondary offerings. This can be seen in the low yields of U.S.-listed YieldCos, since yields fall as investor buying causes the stocks to rise. Most U.S.-listed YieldCos have annual dividend yields below 4 percent, while Canadian-listed YieldCos offer yields in the 5 percent to 6 percent range.

Because the cash flows from clean energy projects are still well above the amount YieldCos need to pay to attract investors, many project developers and aggregators of clean energy assets are currently working to develop their own YieldCos, sometimes at a much smaller scale than the ones listed above. Below are five that have come to my attention, listed in order of approximate invested capital.

Securities laws mean most only take investments from accredited (i.e., rich) investors, but recent changes in securities laws are allowing some to relax that requirement.

Joule Energy Reduction Assets (ERA)

Joule ERA is a private equity fund investing in energy efficiency and demand response assets; anything that saves energy is fair game. After management expenses, the ERA fund offers a very attractive 11 percent to 14 percent target yield, the first 6 percent of which is secured with reserve funds, and the balance comes from less reliable sources of yield. That said, even the base 6 percent yield makes the Joule ERA fund competitive with the most attractive publicly traded YieldCos, and the 5 percent to 8 percent upside above that seems like excellent compensation for the liquidity of a private equity fund. 

Mike Gordon, Joule ERA's fund manager, told me that ERA has significant opportunities for additional investments, so they are raising money from accredited investors and institutions. Unfortunately for most readers of this article, they have a $1 million minimum investment. Although Gordon says this minimum is flexible, it seems unlikely that Joule ERA would accept an investment in even the low-six-figure range.

You can find a presentation about the fund here. Note that the returns mentioned in that presentation are higher (8 percent secured yield plus 7 percent to 10 percent additional yield) than the ones outlined above. This is because they are presented before Joule's management fees, and the numbers above are net of fees.

Grid Essence

Grid Essence is an independent power producer which owns 38.2 megawatts of operating solar farms in the United Kingdom and is currently developing another 21 megawatts. The company has been financing its development with a combination of bank debt from Deutsche Bank and convertible bonds, which it has been selling to accredited investors. The company is working on listing stock on the Toronto Stock Exchange, which it expects before the end of the year. At that point, the bonds will convert to common stock at a discount. The company's target distribution after listing is 7 percent.

Because the offering is ongoing, the company was unwilling to answer questions at this time. If they did, their lawyers were concerned this article might be interpreted as a public solicitation by securities regulators. Other companies were willing to talk to me, but none of these have to deal with both U.S. and Canadian regulators.

Greenbacker

Greenbacker Group is a management company that has organized a YieldCo, Greenbacker Renewable Energy Company (GREC), to fund, own and operate a wide variety of renewable, energy efficiency and sustainability projects. 

Greenbacker's senior managing director initially agreed to talk to more about the details of the fund, but was not able to get to my questions in time for publication because of work on a prospectus supplement. I expect the supplement was necessitated by Greenbacker's acquisition of a solar portfolio on September 2.

According to the company's website and prospectus, GREC is a publicly registered but non-traded limited liability corporation that allows individual investors to participate for as little as $2,000. Although the YieldCo is able to offer its shares to non-accredited investors under the JOBS Act, it does not plan to take advantage of the JOBS Act's reduced reporting requirements. The fund targets a high level of current income, currently 6 percent per annum, payable monthly.

Greenbacker intends to provide investors with an exit by either selling assets, listing the company on an exchange, or merging with another company in exchange for cash or publicly traded shares within five years. Investors also may redeem up to 5 percent of outstanding shares annually at the fund's net asset value minus some associated fees.

Power REIT Preferred Series A

Power REIT (NYSE:PW) is a tiny infrastructure REIT with a legacy asset in rail. The company has been diversifying into the real estate underlying renewable energy farms for the last two years. The small size ($1M to $2M) of its investments, along with uncertainty due to an ongoing civil case, has meant that financing for these investments was harder to come by than originally anticipated, so the company turned to a YieldCo-like structure of issuing preferred stock with a 7.75 percent coupon, now listed as PW.PA on the New York stock exchange. The offering size was $4.3 million.

While the yield of 7.75 percent is much more attractive than all other listed alternatives I am aware of, Power REIT's legal situation adds significant uncertainty to the mix. I have written extensively about both Power REIT and its preferred shares elsewhere, and I believe that the upsides from the civil action far outweigh the possible downsides. But investors should make sure they are familiar with the situation before investing.

Juhl Renewable Assets

Pink-sheet-listed Juhl Energy (OTCBB:JUHL) is a wind and solar developer focused on community and behind-the-meter corporate projects. Its subsidiary, Juhl Renewable Assets (JRA), has been selling unlisted preferred stock with a 9 percent coupon to finance (alongside bank debt) the acquisition of community wind projects. Juhl plans to list both the JRA Preferred and Juhl common stock on the NYSE MKT exchange “as soon as possible,” which could be before the end of 2014.

The JRA Preferred offering is open to accredited investors with a modest $25,000 minimum investment. To date, the company has raised $4 million and hopes to offer additional tranches in the future at a rate of $30 million per year to fund future investments. JRA owns a handful of small wind projects with capacities of between 1 megawatt and 11 megawatts, including the recent purchase of two operating 1.62-megawatt, single-turbine wind projects for $4 million.

If the listing is successful, I would expect JRA Preferred stock to appreciate, since its closest comparable, Power REIT Preferred, has been trading at par with a lower coupon.

The Outlook for YieldCos

YieldCos are already transforming the clean energy development landscape by providing a new, low-cost source of capital. The flip side of this low cost of capital is unimpressive yields on the best-known U.S.-listed YieldCos. But the underlying economics of clean energy development still allow a wide variety of players -- listed, unlisted and in the process of planning IPOs -- to offer yields in the high single digits and beyond to investors who are willing to venture into the corners of U.S. exchanges (Power REIT Preferred) or to Canadian exchanges. 

Accredited investors have a wide variety of potential high-yield investments to choose from, some of which are likely to be listed on exchanges in a matter of months, which will likely provide them with significant capital appreciation in addition to the underlying yield. The five listed above are not an exclusive list. Securities laws limiting advertising of unlisted securities mean that most such companies operate quietly, far from the public eye.

While the wealthiest and best-informed investors may be able to make the most profits from this transition of clean energy project financing from private hands to the public markets, in the end, everyone will benefit. YieldCos provide lower-cost capital which allows quicker and wider deployment of the technology we need to slow the growth of the harmful greenhouse gases which are already causing climate change.

Disclosure: Tom Konrad and/or his clients have long positions in JUHL, HASI, BEP, PEGI, RNW, INE, CSE, PW, PW.PA, and Grid Essence, and short positions in NRG Yield.

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

September 20, 2014

Chinese Solar Development Funds: Recipe For Disaster?

Doug Young

Canadian Solar Logo

Canadian Solar (Nasdaq: CSIQ) has joined a growing field of Chinese solar panel makers entering the risky business of speculative development in China, with its launch of a new locally-based fund for solar power construction. The move follows the establishment of self-financed vehicles for similar speculative construction by rivals Trina (NYSE: TSL), Yingli (NYSE: YGE) and wind power equipment maker Ming Yang (NYSE: MY), as they try to create more demand for their products.
Under such a strategy, solar panel makers typically provide some or all of the money for new plant construction, and then sell their panels to the project. They later recoup their money by selling off the plants upon completion to long-term institutional buyers.

Such a model often works well in the west, where power station developers are very familiar with their industries and know they can easily sell completed projects to a sophisticated long-term institutional buyers that understand the business. But such speculative development could be much riskier in China, where most solar panel makers have limited experience with plant construction, and few experienced institutional buyers can step in to own and operate such facilities over the long term.

That mix could become a recipe for disaster over the longer term, potentially leaving solar panel makers with huge debt if they can’t find buyers for projects that may have design flaws and other logistical problems. Accordingly, Beijing should take steps to cool such speculative construction, or at least offer guarantees and guidelines that could lower the risk.

Canadian Solar made headlines last week when it announced it would launch a new solar power investment fund with Sichuan Development Investment Management. (company announcement) The fund would have 5 billion yuan ($810 million) in investment, making it one of the largest to date to focus on solar power development in China under Beijing’s ambitious plans to clean up the nation’s air.

Canadian Solar and Sichuan Development would each contribute equal, unspecified amounts to the new fund, with the remainder coming from other investors. That means Canadian Solar could probably expect to provide at least $200 million and possibly more, equaling more than a quarter of its current cash reserves.

Canadian Solar’s plan follows a similar move by rival Yingli, which in April announced its own new fund in partnership with local partner Shanghai Sailing Capital. (previous post) That fund had an initial target of 1 billion yuan, a more modest figure than the Canadian Solar plan but still sizable for a company like Yingli that had just $150 million in cash reserves at the end of June.

Trina also embarked on a similar plan earlier this month when it announced a partnership with 3 local partners to build the largest solar power plant in southwestern Yunnan province, with a massive capacity of 300 megawatts. (previous post) Under that deal, Trina is providing 90 percent of the project’s financing, again stretching its own limited cash resources. Wind power equipment maker Ming Yang also joined the speculative development team in June, when it announced its own plans to build and co-finance a massive 300 megawatt wind farm project in eastern Jiangsu province. (previous post)

This kind of short-term self-financing for new projects works well under healthy economic conditions in mature markets. It has served Canadian Solar well in Canada, where the company frequently finances and builds new plants using its own solar panels, and then sells the projects after completion to local institutional buyers who understand the business and the returns they will get.

But such speculative development proved ruinous 2 years ago for former industry pioneer Suntech, which launched its own such fund for speculative development in Europe. Conflicts involving that fund set off a downward spiral that ultimately led to Suntech’s bankruptcy last year.

Beijing is eager to foster more clean power generation under its plans for building 35 gigawatts of capacity by the end of next year, in its bid to clean up the country’s air and support the development of companies like Trina, Yingli and Canadian Solar. Thus it’s likely to support the establishment of these new funds, and perhaps even provide them with some money.

But central policymakers also need to take steps to ensure these speculative new projects are economically viable and can find long-term buyers once they are complete. Failure to do so could spark a new crisis for the sector if these projects turn out to be lemons and can’t find long-term buyers, creating new financial woes for manufacturers just as they start to recover from the recent downturn.

Bottom line: Beijing should step in to offer guidelines or guarantees to ensure a new generation of solar farms being built by panel makers are economically viable and can find long term buyers upon completion.

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.

September 19, 2014

One Solar Installation, Five Stocks

Tom Konrad CFA
2014-09-08 08.56.59.jpg

Invest In What You Know

"Invest in what you know" is an old stock market adage.  The idea is that, if you have some personal knowledge of the real economy, you can use that to make better investments. 

How useful this adage is depends on how you apply it.  If you know more about a stock market sector than other investors because of "what you know," it's possible to make better investments because you may be better at spotting future trends.  If, on the other hand, you feel you know a sector because you buy its products, you may get caught up in a herd mentality and end up buying a company (along with a bunch of its other customers) just when the popularity of its products peaks along with its stock price.

I'm a recent customer of the solar industry.  Last week, my solar installer flipped the switch on my new solar PV system, and my meter started spinning backwards.  Like many new solar owners, I'm a bit obsessed the system.  Here, I'm channeling that obsession into an article about the companies that supplied parts of the system, and what we can learn about their prospects.

The System

Solar systems are far from uniform, and vary significantly depending on energy usage, location, available space, and local incentives.  My system is a little larger than average, at 6.6kW. I have a fairly high load because last year I installed air source heat pumps to supplement my oil-fired boiler.  My 2 person, 2000 square foot house in New York's Hudson River Valley uses an average of 13 kWh a day outside the heating season, but and another 10-20 kWh a day during the four month heating season, for an average annual usage of 21 kWh/day.

According to my calculations using PVWatts, my 6.6kW system should produce just about that much in an average year, but my solar installer used more conservative numbers, and expects it to produce about 20kWh a day.  Below is a monthly production and usage chart based on my calculations.

Solar Production and Usage.png

Because my usage is highest in the winter, and my production is highest in the summer, I will be relying on net metering rules to "bank" kWh produced from April to October to be used for heating from November to March.  My utility requires that this kWh bank be trued up once a year, which I will set in March or April.  I've shown the true-up here in March, where I'm "billed for" negative kWh (i.e. paid by the utility.) 

This "banking" is actually to the utility's advantage because, not only do they effectively get an interest-free loan of electricity for an average of 6 months, but New York electricity prices tend to be a little higher in the summer than in winter.  Since 2005, only 2014 had a higher peak winter price than the previous summer peak.  Last year's exceptionally high winter prices were caused by locally high natural gas prices, in turn fueled by the polar vortex.  The utility also benefits from daily production swings: solar production is highest when hourly prices are highest in New York.

Although the utility receives significant benefits from my solar system, it is also a good deal for me, mostly due to Federal and State incentives. If I assume electricity price increases completely offset system maintenance costs (I expect them to more than pay for any maintenance), my expected internal rate of return over 30 years will be 9.7% (or 8.3% over 20 years.)  The payback of my initial investment will take about 9 years. Without subsidies, the 30 year return would have been a paltry 1.9%, with a 22 year payback.

I expect that many New York solar systems have even better returns than mine, because I made a number of decisions which raised cost without increasing electric production.  First, I wanted to reserve part of my roof for a future solar hot water system, so I chose somewhat more expensive monocrystalline panels in order to make the most of the roof space I was willing to use.  Second, I decided to go with SMA TL-US strong inverters rather than microinverters because TL-US inverters can provide some back-up power when the grid goes down.  Third, I had to do some upgrades to the frame of my garage and attic of my old (1930) house to support the extra weight of the panels.  Finally, I wanted an awning to protect a third floor balcony from rain, and so I had my installer project the edge of the panels past the edge of the roof to serve this function, making the installation more difficult.

The Stocks

I don't follow any of these stocks closely, so I decided to ask my panel of professional green money managers. 

SMA SB 3800TL-US-22 and SB 3000TL-US-22 Inverters

SMA Solar Technology (S92.DE, SMTGF)

My inverters were from SMA Solar Technology AG (S92.DE, SMTGF), a Sunny Boy 3000TL-US-22 and a Sunny Boy 3800TL-US-22. These cost about $0.50/W and account for about 13% of the total system cost.

There was some real disagreement about SMA.  Shawn Kravetz manages a solar focused hedge fund at Esplanade Capital LLC in Boston, so I pay attention to his thoughts on solar related stocks.  He notes that SMA Solar Technology's string inverters have been losing market share to suppliers of micro-inverters and optimizers. 

These competing technologies make better use of the power produced when power production from panels is not uniform, such as when the panels are partially shaded.  Fortunately for me, I have very little shading, and living in a rural area, I wanted to be prepared for long-term power outages.  To the right, you will see an image of me testing the inverter's ability to power my furnace on a cloudy day (it was raining at the time.)  The furnace draws 340W, which is about 8% of the rated capacity of the larger of my two solar arrays. I expect that I should have enough power to run the furnace for an hour or two even on cloudy winter days, as long as I keep them clear of snow.SMA TL-US Power backup

Frank Morris, the former portfolio manager of the Global Ecological mutual fund (EPENX) describes the technology as a dramatic innovation:
With the flip of the switch, SMA's TL-US inverter will send up to 15A of 110V power to your home outlet even during a power outage.  This feature is unique to the SMA TL-US line of inverters.

When there is a power outage, a solar roof with SMA TL-US line of inverters can provide electricity to your home, independent of the grid.  During hurricane Sandy, millions lost electricity-and the thousands of solar roofs in Sandy's wake were useless: most inverters lose function when the grid is down.  The SMA TL-US line of inverters represent a dramatic innovation for the world solar market.  The convergence of resilient distributed affordable solar electricity generation, affordable electricity storage, and breakthroughs like the SMA TL-US line of inverters, should have a dramatic effect on the global utility industry.

Thomas Moser, CFP® of High Impact Investments® in Tucson, Arizona likes SMA most of the companies listed from a buying viewpoint, also because of its applications to backup power.  He says, "Energy storage will be needed as individuals and companies look to disconnect from utilities.  The level of concern regarding energy backup systems in case of total utility shutdown will rise, especially with worldwide threats capable of shutting down the grid.  SMA's R&D is well ahead of the curve on energy storage."  That said, he sees many more attractive clean energy buying opportunities right now, and says SMA's stock price would need to decline from the current €22 and change to around €15 before he'd buy it.

2014-09-05 13.12.11.jpgLG Electronics (066570.KS) 

My panels are 22 LG 300W Mono X® NeON Modules.  These are fairly high-end modules using 60 monocrystalline silicon cells with a total module efficiency of 18.3%.  The panels can be bought retail for approximately $1.50/W, and account for approximately 40% of the total system cost.  LG Electronics is a listed Korean conglomerate with symbol 066570 on the Korea SE. 

LG is a large conglomerate.  My experts did not feel that its solar segment was a large enough part of its overall business to make an investment case.  That's not to say they don't know anything about the company: Kravetz knew mine were from LG's MonoX® line just from of the power rating. 

DSC05294.JPG Schneider Electric SE (SU.F, SBGSF)

Schneider Electric SE (SU.F,SBGSF.) supplied five Square D brand Solar DC disconnects and a circuit breaker box for combining the current from the two inverters.   I'm guessing these amount to between 10¢ and 30¢ per Watt, or about 5% of the total system cost.

Schneider makes a number of clean energy related products, but the experts I consulted were not familiar with the company or did not think clean energy is a significant enough part of its business to make an investment case.

ABB Group Ltd. (ABB)

ABB meter

My installer included an analogue "dumb" meter from ABB Group (ABB) to keep track of total system output (the SMA inverters each keep track of their own energy production.) The system also required 200 to 300 feet of conduit and electrical boxes from Carlon, a brand owned by ABB. These components likely cost between 10¢ and 15¢ per Watt, or about 3% of the total system cost.

Although ABB is another conglomerate, it has enough cleantech to get the attention of my panel. Jan Schalkwijk, CFA® of JPS Global Investments in Portland, OR says,

ABB touches on renewables and energy efficiency in various ways, with offerings such as solar inverters, HVDC [high voltage direct current] links that connect renewables power sources to the grid (ABB has installed 13 of the 14 HVDC projects commissioned worldwide to date), offshore wind power projects, and high efficiency motors, among other power products. In the most recent quarter, orders were up 13% year-over-year, half of which came from a HVDC ink project in Canada to connect renewable power sources to the North American grid. Another large project in progress is the 900MW DolWin2 offshore wind converter platform that will be installed in the German North Sea. Recently the company has faced industry headwinds related to offshore wind in Europe, unprofitable EPC projects [engineering, procurement, & construction, i.e. projects for which ABB was primarily responsible for construction] for solar (which it is discontinuing), and contracts that did not have equitable risk sharing with partners. The company is aware of these issues and is changing its strategy to de-risk and improve profitability of the Power Systems business. With a dividend yield of 3.6% vs 3% for the peer group, a strong competitive position, and a relative valuation 5-10% below peers (averaging relative P/E, EV/EBITDA, P/B, EV/Sales, P/CF) ABB looks like a decent bet. Risks include unfavorable currency movements (Swiss Franc), further trouble in offshore wind, and failure to deliver on strategic refocus of the Power Systems business.

Jim Hansen at Ravenna Capital Management in Seattle, Washington also owns ABB, and "will be buying again if the price drops." Moser is more skeptical, and comments that its recently announced $4 billion stock buyback looks like "putting a fresh coat of paint on an old truck."

Itron reversing smartmeter Itron, Inc. (ITRI)

Although not directly involved in the project, my utility replaced my meter with a new I-210+c SmartMeter from Itron, Inc. (ITRI) to support net metering.  I don't know what this cost the utility, but it was probably not significant as a percentage of system cost, likely only a few pennies per watt.

Itron makes a full range of electric meters, and was more popular with clean energy investors when residential smart grid was a greater focus of attention than it is today.  Hansen has owned it in the past, but does not currently.  Moser says the stock does not interest him because its stock performance is "as lumpy as its sales."

Installer, Balance of System

The remaining approximately 40% or $1.60/W of the system cost was overhead, labor, equipment rental, permitting, and components such as racking (Unirac). wiring, and flashings (QuickMount) which are made by privately held companies.  My installer is a local privately held company, Solar Generation.

Conclusion

If you have a strong opinion about the advantages of microinverters vs. string inverters, or think that the growing interest in grid resilience may allow SMA to reverse some of its recent losses, there will likely be stock market profits to be made by betting on one of these trends, but I don't have the confidence to put my own money on one or the other.  While my own strong preference is the added resilience, companies selling solar leases or power purchase agreements are only paid for producing energy, not for the resilience SMA's products bring.  But the recent trend away from leases and towards other forms of solar financing may allow more homeowners to opt for resilience over maximizing production, as I did.

Of the others, only ABB is in my own portfolio, as it has been for years.  Like Schalkwijk, I like the valuation, dividend stream and solid position in many aspects of the electric grid.

Even ABB's dividend stream does not come close to matching the income stream (in the form of lower electricity bills) of my solar system itself.  Sometimes an industry's products are far better investments than the industry itself. For me, the lesson of this whole exercise is that companies which invest in solar installations are likely to be better investments than the companies that provide the parts.

Disclosure: Long ABB.

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.

September 18, 2014

Future Fuel's Enticing Earnings

by Debra Fiakas CFA

Who doesn’t like a bargain?  FutureFuel Corporation (FF:  NYSE) is trading near $13.15 per share, below nine times net earnings.  Yet, the enticing earnings multiple might be only part of the story.

The stock has gapped down in price twice in the last six months, trailing off after each leg down.  The stock now appears oversold.

Based in Missouri, FutureFuel produces biodiesel and biobased speciality chemical products.  In the twelve months ending June 2014, the company reported $396.9 million in sales, providing $53.5 million in net income or $1.52 per share.  The company converted 9% of sales to operating cash.   That might seem impressive, but what has investors in a funk is that sales are shrinking.  In the June 2014 quarter the company reported a weak $68.0 million in total sales, compared to $106.0 million in the same quarter in the prior year.

Thus FutureFuel probably is not the bargain that the low earnings multiple suggests.  A review of recent trading patterns suggests the stock has so much negative sentiment that it could trade as low as $5.00.

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.

September 17, 2014

Cellulosic Feedstock: The Gap Between Switchgrass And High Yield Corn

Jim Lane 

As the first wave of cellulosic biorefineries launch — is there really enough affordable feedstock for the next wave? Can growers make enough money to justify the switch…and risk?

For several years, the questions that have perplexed actors in the advanced bioeconomy have revolved around policy stability and the effectiveness of the new technology: can new advanced fuels be affordably produced and will there be a market for them?

Years ago, these were the same questions that were asked about petroleum. Today, when people talk about petroleum and long-term availability (when they choose not to focus on carbon or on energy security issues), it all relates back to feedstock cost and availability. $80 oil (good), $120 oil (bad), $200 oil (aprés moi, le deluge).

It’s not all that different with the first advanced biorefineries — being built by in this first wave by the technology developers like Beta Renewables, DuPont, Abengoa and Poet-DSM. With the first locations they have chosen — in places like Crescentino, Italy; Nevada, IA; Hugoton, KS and Emmetsburg, IA — the feedstock supply and economics look good. Grower relations look excellent.

According to Deputy Under-Secretary for Science and Energy Dr. Michael Knotek, “we need 1000 of these”. And, true, one thousand of the POET-DSM-sized facilities would generate 20 billion gallons of cellulosic biofuels, and cover the spread between production today and Renewable Fuel Standard targets for 2022. That’s a lot of feedstock. IS there enough?

DuPont-stover-3

 

The DOE has assessed feedstock availability in The Billion Ton Study and Son of Billion Ton — bottom line conclusion, not much to worry about in terms of land availability, as a billion tons would cover 1000 biorefineries three times over, or more.

So, why are we even talking about it? Little secret in Billion Ton — the authors found 328 million tons of feedstock currently available. 767 million dry tons (in the baseline scenario) come from “potential resources” by 2030. And that “potential resource” drops to 46 million dry tons by 2017, if the price is $50 per ton — and POET is targeting closer to $50 than $60.

Whoops. So let’s look closer at the data.

Stover economics.

According to DuPont’s analysis, stover economics look pretty good for growers in and around their Nevada, Iowa project. Bottom line, growers can realize $36 per acre in increased profit by removing 2 tons per acre of corn stover. The increased cost of fertilizer replacement is more than offset by yield gains and stover income. And the yield gains have been confirmed in 93% of field trials.

DuPont-stover-4

DuPont-stover-2

DuPont-stover-1

Here’s the catch, though. Nevada, Iowa is among the most feedstock-replete areas of the country, when it comes to corn stover. What about the rest of the country?

Some data to consider:

1. National corn yields are 5% lower, at 171 bushels per acre (projected for this year by USDA)

2. 80% of farmland is in corn-soy rotation rather than continuous corn, according to USDA.

3. Roughly one-third of farmers practice no-till techniques, according to USDA.

Going back to the DuPont data, let’s note.

1. Without no-till, stover yields drop by 1.1 tons per acre for continuous corn, and 1.2 tons for corn-soy rotation.

2. Without continuous corn, stover yields drop by 1.2 tons per acre for no-till, and drop to zero with tilling.

So, let’s re-do that last DuPont chart, to show how this maps out against the nation’s supply of corn stover. The average is 0.379 tons per acre.

Stover-economics-1

The stover income would fall from $36 per acre to $6.82 per acre, for the average acre.

Energy Crop economics

Let’s look at a leading energy crop candidate, switchgrass, which Genera Energy described as “likely the most studied biomass crop in the US and is one that Genera has had success with as a sustainable and economical feedstock”

In an article published this summer at extension.org, authors Susan Harlow and Richard Perrin suggested that switchgrass may well produce animal feed instead of a biofuels feedstock.

Rationale? A production cost of $65 per ton in the Upper Midwest based on yields of 3.5 tons per acre— including a $200 per acre establishment cost. More importantly, the authors point out that “refineries…will have to pay at least its value as livestock feed, which is expected to be about $95 per ton of DM (equivalent to $83 per ton of 15%-moisture hay).”

And establishment opportunities may be limited, for the authors note that “marginal cropland that can produce corn at yields higher than 60 to 70 bushels per acre, corn is likely to be more profitable [than switchgrass].”

The Bottom Line

Stover economics work well in selected areas like Iowa — but it’s far from universal. Roughly 6 million acres have the optimal economics (7 percent of 93 million acres) — enough for 25 biorefineries of the current standard size, or about 500 million gallons. And that’s assuming that all of the optimized growers are within 30 miles of one of these biorefineries. As it happens, areas with high corn yields such as the Midwest have lagging rates of no-till farming, according to USDA.

Where corn yields drop below 70 bushels per acre, switchgrass economics are fine, says Genera. For high-yielding land using continuous corn, and no-till — stover pick-up looks great. But there’s a lot of acreage in the middle where corn is going to continue to be the crop of coice, but stover is less likely to work.

For the rest, it is going to be about producing energy crops — and we are looking at several years to establish those at sufficient scale to support a biorefinery.

All of which suggests that building out cellulosic biofuels is going to be a lengthy process, stretching well into the 2020s if these numbers hold up.

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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