December 21, 2014

Ten Clean Energy Stocks For 2014: Out With The Old

Tom Konrad CFA

Plummeting oil prices, global economic weakness, and the Republicans' win in the US midterms have delivered a triple-whammy to clean energy stocks over the last few months.  Many of the stock declines are justified more by headlines than fundamentals.  My 10 Clean Energy Stocks for 2014 model portfolio has suffered, especially the riskier growth stocks.  The strong dollar has been a further drag on the six foreign stocks.

Since the last update at the start of October, the model portfolio is down 4.6%, for a loss since its December 27th, 2013 inception of 3.8%. In local currency terms, it would have returned a slight gain of 0.5% since inception.  For comparison, the most widely held clean energy ETF, PBW, lost 12% since the start of November, and is down 14.9% since the portfolio inception. My broad market benchmark, IWM, is up 2% and 4.2%, respectively.  Individual stock performance is shown in the chart below.

10 for 14 Dec 19 2014.png

Because I believe the declines of most clean energy stocks are not justified by fundamentals, I personally will not be selling any of these stocks at current prices.  That said, many clean energy stocks have declined even more drastically than these and now present better values than some in my 2014 list.  To keep my 2015 model portfolio manageable, I have to drop some to make room.  In this article, I will discuss the four stocks I am considering dropping from next year's model portfolio, and why. 

Individual Stock Notes: Sad To See Them Go

(Current prices as of December 19th, 2014.  The "High Target" and "Low Target" represent my December predictions of the ranges within which these stocks would end the year, barring extraordinary events.)

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
12/26/2013 Price: C$4.85.   Low Target: C$4.  High Target: C$6. 
Annualized Dividend: C$0.24.
Current Price: C$4.44. YTD Total C$ Return: -3.5%.  YTD Total US$ Return:
-10.9%

While I'm very optimistic that green building company PFB Corp continue the recovery it has staged from its mid-October low, I'm dropping the company from the model portfolio because its low liquidity and Toronto listing makes it difficult for many US investors to buy.  If you already own it, I suggest you keep it.  Although PFB may face headwinds from a slowing housing market, the company benefits from low oil prices, which drive the price of the chemicals used to make the expanded polystyrene in its building products.  If oil prices rebound, that should benefit the Canadian dollar, which should provide a tailwind for US based investors.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
12/26/2013 Price: C$4.93.  
Low Target: C$4.  High Target: C$7. 
Annualized Dividend: US$0.28 (suspended after buyout announcement.)
Current Price: C$6.27.  YTD Total C$ Return: 31.4% .  YTD Total US$ Return: 21.3%

On December 19th, a consortium led by Fortistar completed the acquisition of waste heat recovery firm Primary Energy Recycling for US$5.40 per share (approximately C$6.27).  It was partly because I thought such a buyout was likely that I included Primary Energy in this year's list. 

8. Power REIT (NYSE:PW)
12/26/2013 Price:
$8.42.  Low Target: $7.  High Target: $20.  Dividend currently suspended.
Current Price: $8.65 YTD Total US$ Return: 2.7%

The fate of solar and rail real estate investment trust Power REIT still hinges on the outcome of litigation with the lessees of its rail asset.  This case will likely go to trial in the first quarter of 2015.  While I believe both that the facts of the case favor Power REIT, and that, even if the case goes entirely against the company after a lengthy and expensive trial and appeals process, it will not be catastrophic for Power REIT.  The lessee's goal in the case is to maintain the status quo when Power REIT attempted to foreclose. 

Power REIT's CEO tells me that the judge was hard to gauge during the most recent hearing, and I have no reason to change the rough valuation I gave for Power REIT during the last update.  That conservatively gave PW an expected value per share of about $10.75.

I was thinking about dropping Power REIT from the 2015 list mostly because of illiquidity, which causes large swings such as the recent decline for very little reason.  Since the last couple months have seen such a decline, I'll probably keep it in the 2015 list unless a Santa Claus rally brings it closer to my valuation.

10. Alterra Power Corp. (TSX:AXY, OTC:MGMXF).
12/26/2013 Price: C$0.28. Low Target: C$0.20.  High Target: C$0.60.
No Dividend.
Current Price: C$0.33   YTD Total C$ Return: 17.9% .  YTD Total US$ Return: 8.8%.

Renewable energy developer and operator Alterra Power has delivered well in 2014, despite the weak Canadian dollar.  Although I think it is still considerably undervalued, I am considering dropping it from the list simply because its advance and other stocks' declines make it relatively less attractive, but I'll keep it in my own portfolio because I think it has farther to run.

Conclusion

With the recent sharp declines by many big name clean energy stocks, now is a great time for people with money to invest in the sector.  Although it's always nice to see bargains, it can be a bit painful to sell other stocks which may have also fallen to invest in the new opportunities.  Fortunately, followers of my annual model portfolio will have at least some cash from the buyout of Primary Energy to deploy next year.

As for the other three stocks I may drop from the 2015 list, I plan to hold them and will probably write about them again, even if I'm no longer covering them in my monthly updates.

Disclosure: Long HASI, PFB/PFBOF, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, AXY/MGMXF.  

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.

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Oil and Gas




December 20, 2014

Commerce Department Finalizes Tariffs on Chinese and Taiwanese Solar Panels

Jennifer Runyon

Yesterday the U.S. Department of Commerce announced its final findings in the 3-year long trade war between the U.S. and China. Additional tariffs will be imposed on modules from China and Taiwan. Although this is good news for SolarWorld and other American solar PV manufacturers, many in the U.S. solar industry are not celebrating and the decision is expected to further divide an already shaken solar industry.

Specifically, Commerce determined that imports of certain crystalline silicon PV products from China have been sold in the U.S. at dumping margins ranging from 26.71 percent to 165.04 percent and that imports of certain crystalline silicon PV products from Taiwan have been sold in the U.S. at dumping margins ranging from 11.45 percent to 27.55 percent.  Finally, Commerce determined that imports of certain crystalline silicon PV products from China have received countervailable subsidies ranging from 27.64 percent to 49.79 percent.  Named in the suit, Trina Solar (TSL) and Renesola (SOL)/Jinko (JKS) received final dumping margins of 26.71 percent and 78.42 percent, respectively. Commerce also found that 43 other exporters qualified for a separate rate of 52.13 percent (PDF of fact sheet here lists all 43 exporters beginning on page 7.)

The China-wide entity received a whopping final dumping margin of 165.04 percent — this is for companies that did not cooperate with the investigation.

In the Taiwan AD (anti-dumping) investigation, mandatory respondents Gintech and Motech received final dumping margins of 27.55 percent and 11.45 percent, respectively. All other producers/exporters in Taiwan received a final dumping margin of 19.50 percent.

In the CVD (countervailing duty) investigation, Commerce calculated a final subsidy rate of 49.79 percent for mandatory respondent Trina Solar. Mandatory respondent Suntech and five of its affiliates (see final subsidy rates chart at the bottom of this article) received a final subsidy rate of 27.64 percent. All other producers/exporters in China have been assigned a final subsidy rate of 38.72 percent.

Next, U.S. Department of Commerce will investigate if the dumping injured U.S. manufacturing. If injury is found to have occurred, the tariffs will stay.  If no injury is determined, the investigation will be terminated. That decision will be made on or about January 29, 2015. However, U.S. Customs and Border Protection will immediately begin to collect cash deposits equal to the applicable weighted-average dumping margins. If injury is not found, the money collected will be refunded.

Industry Divided

The solar petitioner in the case, SolarWorld (SRWRF), applauded the decision. The company said that by comprehensively addressing the unfair trade practices of China and Taiwan, Commerce has paved the way for expansion of solar manufacturing in U.S. market.  Makesh Dulani, U.S. President of SolarWorld Americas believes the tariffs set the stage for companies to create new jobs and build or expand factories in the U.S. Last month, SolarWorld announced that it was expanding its Oregon factory and adding about 200 jobs.

Rhone Resch, president and CEO of the Solar Energy Industries Association (SEIA), said the ruling is “ill-advised” and feels that it will harm many and benefit few. “We remain steadfast in our opposition because of the adverse impact punitive tariffs will have on the future progress of America’s solar energy industry.  It’s time to end this costly dispute, and we’ll continue to do our part to help find a win-win solution,” he said.

SEIA held a webinar for its members on December 18 at noon EST to discuss the ruling.

SEIA’s non-neutral stance has raised some eyebrows in the industry.  Yesterday, PetersenDean, a privately-held roofing and solar company, called for Resch’s resignation as well as that of the full SEIA board because of its position in the case. According to PetersenDean Roofing & Solar President Erin Clark, the trade association’s support for China and Taiwan in these matters is a clear conflict with its own stated purpose to keep America competitive.

“SEIA has become nothing more than a tool used by Chinese companies to try and bankrupt and destroy American solar manufacturing. Thanks to some of these actions, thousands of American workers have lost their jobs in the past three years due to the closure of solar manufacturing plants in America. All of this at a time when our domestic economy and employment are struggling to recover from the devastating recession,” said Clark.

The Coalition for Affordable Solar Energy (CASE) thinks the decision will raise prices and kill jobs and believes the decision is in direct opposition to the pledges recently made by the U.S. and China to work together to curb global warming. “Hundreds of megawatts of solar projects remain unrealized due to deleterious solar trade barriers in the U.S., China, Europe and globally. Eliminating taxes in cleantech trade represents the lowest-hanging fruit in the global fight against climate change,” said Jigar Shah, President of CASM.

All of this contention comes at the heels of a recent announcement that the U.S. solar industry is on track to install 41 percent more solar in Q4 2014 than it did in 2013.  In total, the U.S. is expected to install 6.5 gigawatts of solar in 2014, a 36 percent increase over last year.

Jennifer Runyon is chief editor of RenewableEnergyWorld.com and Renewable Energy World magazine, coordinating, writing and/or editing columns, features, news stories and blogs for the publications. She also serves as conference chair of Renewable Energy World Conference and Expo, North America. She holds a Master's Degree in English Education from Boston University and a BA in English from the University of Virginia.

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

December 19, 2014

Casting Off The Electric Company Cord

By Jeff Siegel

Billy Adams doesn't get an electric bill.

Perched along a hillside in the mountains of Western Maryland, Billy's home gets all its electricity from the sun.

He has a small battery pack that stores about five hours worth of electricity, and he heats his home with a very powerful 100,000 BTU wood stove.

Of course, Billy isn't your typical American.

He's never been a fan of living in the suburbs. He enjoys the peace and quiet of mountain living, rarely eats anything he hasn't hunted or grown himself, and doesn't have a single penny of debt.

For the most part, Billy's head is on straight. He doesn't seem to want for much and doesn't really seem to need much of anything. That being said, he can be a bit delusional at times when it comes to how he sees himself.

For instance, the last time I saw Billy, he was building a walipini. If you don't know, a walipini is basically an underground greenhouse. Tired of eating little more than canned vegetables throughout the winter, he decided he was going to use a walipini so he could grow fresh vegetables year-round.

He told me that once it was finished, he'd never have to leave his house again.

Then I reminded him that no one's going to deliver his diesel for his truck, and until he learned how to make his own toothpaste, he would have to venture out into the world at some point.

Still, Billy's doing pretty well for himself. He told me the electric companies fear people like him because more and more folks are realizing they don't need to be connected to the grid to live comfortably.

Most People

Truth is, while he may be right about not having to be grid-connected to live comfortably, most people aren't going to follow in his footsteps.

Most people don't want to chop wood for heat. Most people don't want to be limited to only five hours of electricity per night. Most people don't want to use propane to cook their meals.

The bottom line is that Americans have it pretty easy when it comes to energy.

We flip a switch, and there's light.

We turn the knob, and the stove burner lights up.

We set a dial, and the heat or air conditioning fires up.

Given the very comfortable way of life we all enjoy, why would anyone give that up?

Most won't.

Energy Independence

As much as I love the idea of being energy independent, I don't think most people realize just how reliant they are upon the grid.

Sure, you can slap some solar up on your roof. But chances are, you're still going to be connected to the grid. And despite the fact that the nation's electric grid is severely flawed in terms of efficiency and safety, it still works well enough that you live a lot more comfortably than most folks on this planet. No amount of yearning for energy independence will change that.

Don't get me wrong — one day these huge towers and thousands and thousands of miles of copper and rubber won't be necessary. And the truth is, that day could come sooner than many would like to admit. But the fact is U.S. utilities are not these weak entities that are going to be brought down by dreams of energy independence and really cool software.

Although we have the technology right now to make the grid superfluous, there's a lot of money at stake for the utilities. And mark my words: They're not going to roll and over and die just because they are inferior to distributed generation.

Where the Profits Are

According to a new report published by Accenture, as solar power and energy conservation initiatives grow, U.S. energy utilities could lose as much as $48 billion a year.

That's a lot of scratch!

But the utilities have at least another three to five years before this really starts to become a thorn in their sides. And by then, I suspect they'll be doing major deals with solar finance companies and installers to make sure they can still get a piece of the action.

Sure, there are some, like the Salt River Project (SRP) in Arizona that's been doing the equivalent of CIA-styled enhanced interrogation techniques on the solar industry there. The utility for the Phoenix area has gone out of its way to penalize anyone wishing to use the state's amazing solar resource to generate homegrown electrons — including new fees and rate hikes for solar providers.

Interestingly, I've found that most of the folks who dictate energy policy in the Grand Canyon state are bitter, hostile shut-in types who still think solar is some kind of socialist plot designed to destroy America. It's the Luddites in Arizona responsible for solar struggles — not the economics.

But aside from the knuckle-draggers over at the SRP, most utilities are waking up to the reality that they will either be part of the transition to a new energy economy or wither away and die under a cloud of mediocrity and denial.

As an investor, I haven't touched a utility in three years. And I have no intention of chasing these shaky institutions in 2015, either.

Instead, I remain focused on the disruptors — the companies that are bringing solar and other new energy technologies to the masses. SolarCity (NASDAQ: SCTY), Vivint Solar (NYSE: VSLR), SunPower (NASDAQ; SPWR), First Solar (NASDAQ: FSLR), SunEdison (NASDAQ: SUNE). These represent the new face of distributed energy.

No, distributed energy will not replace the grid anytime soon. The utilities and their massive control will not go gently into that good night. But they're also not going to experience the meteoric growth that you're going to see in new distributed energy developments.

And that's where the action is. That's where the opportunity is. That's where the profits are.

 signature

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

December 16, 2014

Energy Recovery Offers Savings to Gas Industry

by Debra Fiakas CFA

In early December 2014, Energy Recovery (ERII:  Nasdaq) staged an analyst and investor event in New York City principally to introduce its most recent technology innovation, VorTeq.  The product is a hydraulic fracturing solution for the gas industry.  Unlike its other products, the VorTeq is a colossal apparatus requiring a semi-tractor to transport it into place as a replacement for the ‘missiles’ now found at natural gas well sites. 


VorTeq Animation

In the current configuration, high pressure pumps are used to drive a blend of fracturing sand, water and chemicals down into the well hole.  Pump components, including somewhat fragile valves, are at risk of damage when exposed to the highly corrosive fracturing mix.  To avoid costly down time for pump repair, fracturing service providers keep a bank of replacement pumps at hand.
 
Energy Recovery proposes to lease its VorTeq solution as a replacement for the standard missiles.  The VorTeq is an energy exchanger, which of course is Energy Recovery’s signature technology and knowhow.  Using the VorTeq  instead of the standard missile allows the energy from water driven by the high pressure pumps to be transferred to the fracturing mixture without letting the fracturing mixture come in contact with  fragile pump components.  The point of energy exchange is made in a cylinder-shaped device composed of a few components, all machined from high performance tungsten carbide.  Importantly, using the VorTeq instead of the conventional missile requires no other equipment modification.

Essentially Energy Recovery is transferring the point of risk from the fracturing service provider’s pumps to the VorTeq.  When queried about the risk of damage to the VorTeq components, the Company’s engineers expressed high confidence that the VorTeq is better able to withstand contact with the abrasive fracturing mixtures.  Tungsten carbide is among the most durable materials available.  Furthermore, the components of the VorTeq are machined to nanoscale, making it impossible for grains of fracturing sands to slip between the few moving parts in the VorTeq device.  If this proves out in the field, Energy Recovery will have brought a vital new technology to the gas industry.

Management spent much of the meeting with analysts explaining the economic proposition for its potential new customers of VorTeq.  On average a fracturing pump fleet costs about $4.1 million to maintain each each.  This is based on an average 2,000 pump hours per year.  Instead of buying a missile, the fracturing services company would lease a VorTeq from Energy Recovery for $1.6 million per year.  Pump maintenance costs are expected to immediately decline to about $1.5 million per year, bringing total costs down to $3.1 million.  Savings for the year to the fracturing operations would be $1.0 million, arising from maintenance cost reduction.

The Company believes that the $1.0 million in savings for this hypothetical pump fleet will be compelling enough to get fracturing service companies to make the change.  Additional savings could be realized from the reduction in total pumps required to performance the same work.  Energy Recovery is apparently not relying on this economic benefit in its sales pitch as this is a reduction in capital cost rather than an operating cost savings.  Nonetheless, it does not appear that Energy Recovery is ignoring interest among their potential customers in reducing capital costs.  The Company intends to offer the VorTeq to fracturing service providers through an operating lease rather than a direct sale.  This would replace the usual capital requirement for the purchase of missiles that typically cost $750,000 each.

Energy Recovery estimates the market opportunity for the VorTeq worldwide is near $1.3 billion, of which about $849 million originates in the U.S.  The natural gas fields using slick water and hybrid chemistries for fracturing are considered the optimum initial markets.   Thus the Company is looking for entrance opportunities in the Permain, Eagle Ford, Anadarko Woodford and Haynesville basins.  Management characterized its conversations with fracturing service companies as ‘loose and high level.'
 
Addressable Markets

During the analyst meeting the Company announced a relationship with Liberty Oilfield Services, which will help with the first field tests of the VorTeq.   Liberty is not among the largest oil field services companies, but for what it lacks in size Liberty offers a willingness to work conjointly with Energy Recovery engineers to achieve operational success.  For their efforts Liberty will get pricing concessions for the first VorTeq units it leases.  The field tests are expected to require at least four and as many as nine months to complete.  Energy Recovery engineers anticipate making changes to the VorTeq based on operating experiences during the trial and even referred to at least three different generations.  Under the current schedule VorTeq Gen-3 is expected to be available for commercial introduction by the third quarter 2016.

Energy Recovery offered an update on its other products, including the flagship PX pressure exchange devices sold to the desalination market.  The Company has not given up on selling PX devices, but now estimates the market is only $50 million in annual value, a significant decrease from previous guidance of a $100 million market size.  Apparently, the desalination sector is expected to be even more unreliable and uneven than even in recent years.  However, Energy Recovery management appeared quite bullish on opportunities in the oil, gas and chemical processing and distribution sectors for its ISO Boost and ISO Gen systems.  ISO Boost reduces the need for conventional pumps along gas distribution lines and ISO Gen capture's energy from pumping activity to augment conventional electricity sources.   The Company is particularly bullish on ammonia and urea processing as particularly promising markets and makes a well thought out value proposition for both the ISO Boost and ISO Gen products.  The Company quantified the addressable market in gas processing and pipelines and chemical processing at $3.6 billion.

Sales and Marketing

In our view, the real concern for Energy Recovery is not necessarily the size of its addressable markets.  Instead investors should be concerned about the ability of Energy Recovery to capture market share.  The Company claims $100 million in value in its business pipeline for the ISO Boost product alone and at the analyst meeting revealed a key order from Conoco-Phillips Canada.   Apparently, there is additional interest from Saudi Aramco and SinoPec.  In our view, the sale to Conoco-Phillips is particularly encouraging as we have long had more concern about Energy Recovery’s ability to penetrate the oil and gas market than we have had for their ability to perfect a technology solution to the industry’s operational problems.

Still the Company’s engineers held sway at the analyst meeting and sales executives were only introduced during the question and answer period to field some of the more pointed questions about marketing plans for the VorTeq product.  Despite having three products on the market already, the Company does not seem to have a clear marketing and sales strategy for any of them  -  at least none that is well articulated to the public.  The new leadership in the sales and marketing department has hired sales personnel with experience in the target industries.  In our view, that demonstrates progress in the case of Energy Recovery after a very public dismissal of sales leadership some months ago.  Attendees of the analyst event were provided examples of sales literature prepared for VorTeq, ISO Boost and ISO Gen.  Clearly, that suggest more progress.  However, we will be looking for more evidence of the ability to grab market share from competitors peddling conventional energy solutions or otherwise convince potential customers that Energy Recovery's solutions are worthwhile.
 
Valuation

While we do not maintain formal estimates for Energy Recovery, we would not have been moved to change sales or cost assumptions based on information imparted at the analyst event.  The Company appears to have made progress in its strategy to expand beyond supplying energy saving devices to the desalination market and we applaud that success.  However, earnings potential from the new products is still uncertain.  Thus it is difficult to pinpoint the timing of breakeven or profits.  Such uncertainly typically leaves a stock interesting only at nominal prices that resemble more options on the technology than a value pinned to earnings.

Investors cannot use the Company’s financial condition as an excuse to discount share value.  The Company has no debt and held $31.2 million in cash on its balance sheet at the end of September 2014.  Total cash usage to support operations during the most recently reported twelve months was $2.3 million, which was considerable lower than the reported net loss of $7.1 million in the same period.  We believe current cash resources are more than sufficient to support operations to the point of breakeven and profitability as well as finance the completion of field trials for the new VorTeq solution.

While financial condition is not a great concern, we listened with some reservation to management’s discussion of its VorTeq solution for the fracturing service market.  Company engineers were responsive to our concerns about the transfer of risk of damage from pumps owned by the service provider to the VorTeq, which will remain the property of Energy Recovery.  They were steadfast in their confidence that their components would be better able to withstand contact from corrosive materials than comparatively more flimsy pumps used at the gas wellhead.  However, we note that Energy Recovery plans to retain ownership of the VorTeq systems and will be responsible for maintenance.  During the analyst event the Company was a bit vague on the manufacturing cost for VorTeq and had no estimates for the cost of such maintenance.  Accordingly, we are concerned that the proposed lease price of $1.6 million per year that has been proposed may not be adequate to ensure a profit for Energy Recovery.  We are concerned that in their zeal to create a marketable proposition,  the Company will leave too much ‘on the table’ with its gas field services customers.
 
Rating and Trading Strategy

We continue to rate ERII at Hold.  There are no strong near-term trends up or down for ERII shares.  We cannot characterize the stock as either oversold or overbought.  That said, we note the stock registered a particularly bullish formation in a point and figure chart in the third week in November.  The ‘triple top breakout’ formation suggested new upward momentum in the stock to a price of $7.25.  We believe that formation was fueled in part on information that was filtering to the market ahead of the analyst meeting.  Subsequent to the event, the stock has weakened albeit under diminishing volume.  We view Energy Recovery as a strong technology play, but look for reform in the sales and marketing functions before we can call it an all-round strong operation.  Even as a technology play we have an interest in the stock and would add to positions in periods of trading weakness.  There is a level of price support at $4.00.  Should the stock fall below this level but still possess intact opportunities and product viability, we would be more aggressive buyers of ERII.

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.

December 15, 2014

Tesla Hits Another Chinese Speed Bump

Doug Young

Tesla Logo
Tesla's China
head resigns.

Bottom line: The resignation of Tesla’s China president hints the company is getting off to a slow China start.

US new energy superstar Tesla (Nasdaq: TSLA) suffered a setback with the departure of its China president. The news will disappoint the company’s overseas boosters and electric vehicle (EV) fans in general, and hints that this new energy superstar’s drive into China isn’t going as smoothly as hoped.

Tesla had extremely high hopes for China created by its charismatic chief Elon Musk. The latest headlines say Tesla’s China President Veronica Wu, or Wu Bixuan, has resigned after just 9 months on the job. (English article; Chinese article) Tesla declined to comment further on Wu’s departure, but one analyst said the move may reflect slower than expected progress in developing the China market.

That shouldn’t come as a surprise to anyone if it’s true, as Musk has built up huge expectations for his company in China since Tesla delivered its first vehicle in the market back in April. That sale came after Tesla cleared up a messy trademark dispute, which was just one of the many problems it will face likely face in the huge but difficult China market.

The other bigger problem it’s facing is infrastructure, which is one of the few points that the company addressed in its most recent quarterly report. Tesla has announced a steady string of tie-ups to build new charging stations in China with various local partners, but only had 23 supercharging stations in the country at the end of the third quarter, according to its report. (company announcement)

Tesla is undoubtedly working hard to build many more such fast-charging stations in China, and most of the partnerships announced so far are for hundreds of slower-charging stations. Still, the latest quarterly report contains no mention of China sales, hinting there’s not much good news to tell. Previous reports had indicated Tesla hoped it could sell up to 8,000 vehicles in China this year, and back at the beginning of this year Musk was saying Chinese sales could match US levels as soon as 2015.

This abrupt resignation of its China president after such a short period certainly hints that none of those plans are progressing as quickly as Musk would like. Finding a new China president to execute his vision will probably take at least a few months, meaning Musk is unlikely to see his China dream realized until 2016 at the earliest.

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.

December 14, 2014

Biofuels' Upside From $60 Oil

Jim Lane

Boom times for two-product strategies? Can feed markets offer relief for the challenges on the fuel side?
$60 Oil

The energy industry continues to feel the impact of falling energy prices. In Wednesday’s Top Story, we noted that the industry conversation has shifted from long-term fundamentals to a form of “oil price watching” — not even the short-term fundamentals, but the kind of paralyzed ticker watching, waiting for the bottom, that comes during stock market crashes.

“Barron’s says oil is going to $35bbl,” writes a trusted Digesterati. “The same guy who predicted the 2004 and 2009 lows.”

Well, we haven’t seen the argument made for that low-point — perhaps there’s evidence in the options market — but it’s evidence that we’re seeing ticker-watching.

Besides behavioral change, we’ve seen three types of fallout in the hard data:

a. Layoffs and assets sales announced by major energy companies, including BP, Shell and Chevron.

b. ConocoPhillips just issued its 2015 capital budget of $13.5 billion, “a decrease of approximately 20 percent compared to 2014″. ConocoPhillips notes that the cuts strongly reflect ” the deferral of spending on North American unconventional plays…In 2015, the Lower 48 development program capital will continue to target the Eagle Ford and Bakken, and will defer significant investment in the emerging North American unconventional plays, including the Permian, Niobrara, Montney and Duvernay.”

CEO Ryan Lance said “We are setting our 2015 capital budget at a level that we believe is prudent given the current environment.”

c. Rising gasoline sales. Low prices have stimulated a modest but trackable rise in consumption, despite increases in vehicle fuel economy. EIA said in September that the “short-term forecast of gasoline consumption” has risen to “8.82 million barrels per day (135.2 billion gallons), 0.13 million barrels per day (2 billion gallons) higher than last November’s forecast.”

In the December short term forecast released this week, the 2014 forecast was revised to 8.88 million barrels per day, while actual November consumption rose to 9.04 MBD, up from 8.94 MBD in 2013 and 8.48 MBD in 2012. Overall, gasoline consumption grew 1.9 percent in 2013 and 0.5% in 2014.

The uncertainty in prices going forward.

In Wednesday’s Top Story, we discussed at length the fundamentals driving uncertainty in forward oil prices, but we’ll add here that the EIA, in the December Short-Term Energy Outlook released Tuesday, forecast “$68-per-barrel average Brent crude price in 2015 (and $63 for West Texas Intermediate) while recognizing high price uncertainty,” which you can contrast with:

BD-TS-121214-2

EIA Forecast from December 2014

a) The $35 Barron’s forecast for the new low; or b) The EIA’s previous forecast of $102 for Brent and $95 for WTI just 3 short months ago, which as of this morning was still proudly displayed on the agency’s website front page.

BD-TS-121214-1

EIA Forecast from September 2014

We continue to point attention to what we described as a “competition between storylines,” for those who wish to divine the oil price for 2015 at this time.

The opportunities in $60 oil

In looking at the fundamentals driving oil prices (amidst other factors), one of the Digesterati writes this week with a good reminder to focus in on the opportunities that comes with low-priced oil. Namely, in a world where unconventional plays become unprofitable, the opportunities for technologies that make a feed and a fuel product. A friend writes:

I’ve attached an index graphs [comparing the crude oil, soymeal and fish meal price] which makes crude look better than it would be if the data were through November/December 2014 (the data from indexmundi.com stopped at October 2014 at $83/bbl crude oil).

BD-TS-121214-10

What this helps me see is that, as the price of crude oil / energy further uncouples from the price of fishmeal and soymeal, the opportunity for those companies whose primary products are feed/food/protein is great and getting even better with every dollar reduction in the price for crude oil.

Soymeal seems to trade in more sympathy with crude oil, even now, but fishmeal hasn’t for some time, as the data indicate to me.

So this obviously plays into the strategies that focus on making Omega-3s and, later, protein/feed the primary product, but with strains that make meaningful volumes of crude oil that can be refined into biofuels.

This strategy, in particular, plays into the algae market — where proteins are aiming to compete with fishmeal. In the case of algae, the opportunity to use algae oil for the biofuels market gives the volume by which an algae operation can reach meaningful economies of scale — omega-3s and other products just can’t make the enterprise big enough to capture the potential rewards seen in the fishmeal market.

Over in the ethanol markets

The same logic applies. Although fuel ethanol prices have dropped fast, in keeping with the overall drop in petroleum prices, we are seeing RIN prices on the rise — as rising gasoline consumption obviously doesn’t square with the kind of production slow-down that low ethanol prices generally result in. At the same time, ethanol producers (and biodiesel producers) have a secondary product (dried distillers grains and glycerine, respectively) to take some of the sting out of low energy prices.

The hard data?

Here’s a chart of commodity prices, contrasting September 10, 2014 with December 10, 2014: BD-TS-121214-9 As you can see, a massive drop in gasoline futures, nearly 35 percent. But we don’t see the same fall in ethanol future, which are off, but by a comparatively minor 6 percent. Interestingly, ethanol spot prices are up nearly 7 percent in the same period. Though, in bad news for ethanol producers, corn prices have spiked 14 percent since the fall — though still below $4.

At the same time, some other ethanol fundamentals have modestly improved over the past few months. For one, natural gas prices have dropped 5 percent, making it less expensive to run ethanol plants and in particular to dry out distillers grains. Meanwhile, corn oil and distillers grains spot prices have risen, by 10 and 7 percent, respectively.

A two-product strategy looks pretty good — in fact, overall prices for ethanol producers would be up something around 7 percent in this period — compared to a catastrophic fall in gasoline futures. Challenges in fuel prices can be partly mitigated by prices for co-products.

Note on methodology — state data is averaged but not weighted for DDGs— so, for example, Iowa’s prices are given the same importance that Michigan’s are, which could lift DDG prices a percent or two above a true weighted average. Ethanol, corn oil, corn prices, ethanol futures, natgas futures and RBOB gasoline futures are not affected in this way.

The Bottom Line

Our friend writes:

“It would obviously be good to see crude oil prices higher, but, to the extent that fishmeal & soymeal and other protein sources continue their march upward asymmetrically to crude oil, it’s not necessarily a bad thing for the price of crude oil to stay persistently under $100/bbl. One could still get to energy scale and be competitive with the going price of crude oil (no premium to the market price), and make profits, all without a subsidy.”

A two-product strategy is no guarantee of good times during period of rapidly falling energy prices. But it is a hedge, and a solid one based on the data we’re seeing. And unexpected good news, perhaps, for those watching the falling ticker and the tumble in oil prices.

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.

December 11, 2014

REG Buying European Biodiesel From Used Cooking Oil Producer

Jim Lane REG logo

US biodiesel leader heads for the EU – what’s up with used cooking oil, and what is REG’s path forward with the German-based biodiesel producer?

In Iowa, Renewable Energy Group [REGI] and IC Green Energy announced that REG will acquire ICG’s majority equity ownership position in German biodiesel producer Petrotec AG (XETRA: PT8). Closing of the transaction is expected before year end.

Dan Oh
REG CEO Dan Oh
Last month, REG CEO Dan Oh told The Digest, “We’re not done growing, that’s for sure! We’ve done something of consequence every quarter. We tend to be product and logistics focused when looking at a new market — right now we are long biomass based diesel, and the two biggest markets are the US and EU, and our strength in lipids might feed into a number of products there.

“But it’s not just a case of looking for a good market, there are lot of good technologies developed overseas, too. We look far and wide, we’ve not done anything but we do state that “we are actively looking”, and we will lead with things we do well, and we want to retain a fantastic group of people that we have built up.”

Deal terms

ICG, Israel Corporation’s vehicle for investing in the alternative energy market, accepted an offer from REG European Holdings B.V. to purchase ICG’s 69 percent equity ownership in Petrotec AG for US $20.9 million, or US $1.235 per share, to be paid in newly issued REG shares valued at the 30 trading day volume-weighted average for the day prior to signing. The REG subsidiary will also purchase ICG’s loan to Petrotec AG in the amount of approximately US $15.4 million.

Next steps

In the next several weeks, REG European Holdings B.V. intends to make a cash tender offer for all other Petrotec shares at a price no less than the value per share to be received by ICG.

More about Petrotec

Petrotec is a fully-integrated company utilizing more than 15,000 collection points to gather used cooking oil (UCO) and other waste feedstocks to produce biodiesel at its two biorefineries in Emden and Oeding, Germany. Petrotec’s nameplate production capacity is 55.5 million gallons (185,000 MT) per year, produced predominantly from UCO. Petrotec’s collection service, treatment processes, and biorefineries, are certified by both German and European regulators. Its biodiesel is compliant with EU standard EN 14214 and is one of the most sustainable biofuels marketed in Europe.

The company has been benefitting of late from premiums awarded for using waste-based biodiesel that count towards renewable fuel obligations under the EU’s Renewable Energy Directive. Last year, we reported that with the Renewable Energy Directive’s double-counting feature for waste-based biofuels and the proposed quadruple counting for second generation biofuels in the RED reform proposals, Petrotec saw Q2 2013 production rise by 22%.

Back in 2012, we reported that Petrotec had moved into the Spanish market via a local office in Barcelona, after concluding there was existing market for the production of biodiesel from used cooking oil, especially now with the market gap left by policy prohibiting Argentine biodiesel. The company had started collecting used cooking oil and producing biodiesel on a tolling basis.

The company found itself mixed up in a bizarre dioxin scare back in 2011 when Petrotec sold dioxin contaminated fatty acids to an unnamed Dutch company for use as an industrial lubricant. Then, the Dutch intermediary sold the product to Harles and Jentzsh for use in animal feed. H&J mixed the biodiesel waste products into animal feed, leading to the destruction of “thousands of chickens” and instructions to “a thousand farms” to refrain from selling contaminated feed.

About ICG

ICG is best known in the sector as the lead investor in Primus Green Energy, which last year commissioned its 100,000 gallon-per-year natural gas-to-gasoline pre-commercial demonstration plant at its Hillsborough facility.

The demonstration plant utilizes Primus’ proprietary STG+ technology, which is a four-reactor catalytic process that converts syngas derived from natural gas or other feedstocks to gasoline, jet fuel, diesel or aromatic chemicals directly, without the need for further treatment. The process produces drop-in fuels that are ready for immediate distribution, sale and consumption using the existing fuel distribution infrastructure.

Reaction from REG

“REG’s investment in Petrotec is a natural extension of our business strategy which should enable us to better capture value from international trade flows and to participate in European biofuel markets,” said Daniel J. Oh, REG President and CEO.

“Petrotec’s people, culture, business model and technology are similar to ours at REG. We look forward to working with the Petrotec team as REG expands its business into Europe and further delivers the key benefits of our international industry: energy security and diversity, environmental stewardship and food security.”


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.

December 10, 2014

What $60 Oil Means For Biofuels

Jim Lane

$60 Oil As if tough financing conditions and policy instability weren’t worrying enough for many observers, along comes a crash in global oil prices. One of the US-based Digesterati writes:

“Most of the biofuels projects that I have worked on in the last 5 years have based their proformas on an $80/barrel oil price. With the recent dip and worldwide “power play,” I feel that investors as well as Boards of Directors will be really re-evaluating their business models, with most going overseas to markets that do not have the abundant reserves that we do.

“If we can make biofuels at a competitive price at $60-$70/barrel, they will be the big winners but I don’t see that happening. I feel that chemicals will be the big winners right now. I am working on a couple of feasibility studies around biofuels and it is hard for me to come up with an independent conclusion that will be credible, too much US political risk, economic risk, and international political risk.”

Another of the Digesterati forwarded this summary of an MIT Review article:

“According to Wallace Tyner, an agriculture and energy economist at Purdue University, all cellulosic ethanol plants were planned for oil above $100 a barrel, and since now it’s at US$70, they are no longer profitable and new plants simply won’t get built. Updated requirements are expected from the EPA early next year. If the mandates are repealed, says Tyner, “then cellulosic biofuels and biodiesel would cease to exist.”

Many are asking — why are oil prices so low? Is this the new normal — an extended period of months, or years, at these levels? Will they return to $100 or so any time soon, when, and what will be the trigger?

Let’s look at the data, and look behind the data, also towards the world of market sentiment and behavior.

Why are oil prices so low?

According to those who believe in orderly, rational markets based on broad and deep consideration of available public information, generally we are seeing commentary around three converging factors:

a. Currency and monetary policy. Succinctly put, the dollar is appreciating fast against world currencies, oil prices are dollarized, meaning that energy prices are rising quickly in local currencies, which softens demand. While, at the same time, producers of energy have costs in (devaluing) local currencies, but see revenues in (revaluing) dollars — meaning that they are not always economically incentivized to cut production as fast as you think, as margins can be altered by currency moves.

b. Global growth. China’s growth is slowing, the EU is in rough shape, and the US is somewhere between sluggish and fine — put together, the three trigger promoting a downward revision in a number of commodity prices.

c. Supply/demand. While demand drops with a slackening in growth, we’re seeing no cutback in OPEC production, and US production from shale oil has been continuing to accelerate, creating an oil glut.

The “rational market” turnaround timeline? Nothing soon, if you watch futures prices as an indicator of when tightness might return to the oil markets and boost prices.

Today, the WTI Jan 2015 contract is trading at $65.17 and the Jan 2017 contract is trading at $70.88 — that’s roughly the impact of inflation. The Jan 2015 Brent contract is trading at $69.07 and the Jan 2017 contract trades at $78.79 — not much more than inflation.

What’s the impact for biofuels? 5 Factors to Consider for the Long and Short Term

A. The sweet spot problem. Generally speaking, biofuels work best in a sweet spot that’s somewhere around $80-$95 right now. Much lower — as our Digesterati friends expressed, the projects don’t pencil out, can’t compete against oil prices, and it is just tough to get bankers excited . Much higher? Capital heads for unconventional oil plays. But in the $85-$90 range there aren’t quite so many great US shale options, and many biofuels projects can compete on price. That’s the sweet spot argument. Right now, biofuels have been falling off the lower end — but, according to this line of thinking, the market doesn’t have to return to the days of $120 Brent for the biofuels outlook to improve.

B. The long-term outlook. The long-range energy outlooks have been less excited about the capability of existing oil technology to meet growing global energy demand, without a robust alternative fuels component. The IEA, for example, sees around 11 million barrels per day in total oil production growth — not enough to prevent sharp price increases given the likely global growth over the next 20 years.

Last year, the IEA opined:

The capacity of technologies to unlock new types of resources, such as light tight oil (LTO) and ultra-deepwater fields, and to improve recovery rates in existing fields is pushing up estimates of the amount of oil that remains to be produced. But this does not mean that the world is on the cusp of a new era of oil abundance. An oil price that rises steadily to $128 per barrel (in year-2012 dollars) in 2035 supports the development of these new resources, though no country replicates the level of success with LTO that is making the United States the largest global oil producer…by the mid-2020s, non-OPEC production starts to fall back and countries in the Middle East provide most of the increase in global supply. Overall, national oil companies and their host governments control some 80% of the world’s proven-plus-probable oil reserves.

IEA-2013-growth

C. The feedstock problem. Will biofuels feedstocks track the oil market and keep biofuels competitive? Within a limited range of price shift, oil prices and (for example) corn prices are reasonably well correlated — but when you have a $30 drop in oil in a short period, there’s a disconnect, and right now biofuels feedstocks such as corn have fundamental food-supply price support that is keeping corn prices near $4.00 and soybean oil prices near $0.32 per pound. So, there’s a fundamental gap between biofuels prices and petroleum prices that is tough to close. And, feedstocks such as MSW which are available at negative cost based on social concerns (e.g. “no more landfills!”), don’t generally track with short-term oil prices.

D. The long-term project challenge. As Abengoa CEO Manuel Sánchez Ortega opined in Kansas in September, Abengoa isn’t looking at short-term prices and demand factors to make decisions about 30-year projects. They are looking at long-term prices and demand.

E. The increasingly short-term nature of RFS targets in the US, and EU 2020 targets. The RFS offered a conceptual 15-year time window for project developers back in 2007 as to market size and growth. Leaving aside the short-term problem that it is December and the EPA has not issued its volume obligations for 2014 yet, we only have a 7 year timeline going forward for advanced biofuels projects. That begins now to seriously impact the ability of companies to see long-term price and demand signals. Shell has been emphatic on the need for longer-range biofuels mandates.

The Conventional Wisdom

So, where are we, in terms of understanding a “rational market” for biofuels? We can see two Storylines — the short-term and the long-term. And, one more that lies beyond “rational markets’ that we’ll get to in a minute.

The short-term Storyline was well summed up by our Digesterati friend: the projects don’t pencil out, can’t compete against oil prices, and it is just tough to get bankers excited, and not much will turn around here until at least 2017.

The long-term Storyline is well summed up by Abengoa and Shell. The long-range outlooks show tremendous opportunities across the fuels spectrum — demand and price outlooks are strong, particularly in diesel and jet fuel. Unconventional oil growth rates are uncertainties, and RFS2 targets too — but overall, the projects will likely be financeable so long as feedstock prices stay in line.

So, what’s the third option? The third option is that what we are seeing is a competition between multiple Storylines — not only short-term and long-term outlook, but food vs fuel, indirect land use change, will carbon outcomes be incorporated into energy prices, and the proper risk tolerance for government in commercializing alternative energy, to name a few.

According to that way of thinking, what is far more important to discover is not what the market fundamentals are all about, but how that battle between Storylines will shake out, and when.

For example, you could not have bought a $65 contract for Jan 2015 West Texas Intermediate two years ago — conventional wisdom was wrong about late-2014 energy prices, but decisions about projects today are being made on the basis of conventional wisdom about energy prices in 2017-18, and beyond, not the reality. So, we are not looking necessarily at hard markets in commodities; when it comes to project decisions, we are actually looking more at markets in “Conventional Wisdom”.

And Conventional Wisdom has the considerable power to move prices and markets, but it also has the power to be completely wrong, too.

For example, the market did not price in the Global Financial Crisis of 08/09 into energy futures, until the crisis was apparent. Neither did the markets forecast 9/11. Markets do not have to be right about the future to hold power over it.

Game Theory and Biofuels

“In mathematics you don’t understand things. You just get used to them.” ― John von Neumann

Let’s look at the nature and dynamics of Conventional Wisdom via a quick game.

Let’s say that, next year, here at The Digest we offer a prize to all the readers who correctly select the #1 Hottest Company in Biofuels, as voted in our annual rankings. Note, this is not the price for selecting “the best “company, but “the #1 ranked” company

There’s a couple of ways to play the game. First, you could simply make selections based on your perception of merit. A more sophisticated way to maximize your chance of winning a prize would, instead, be to focus your attention of figuring out what most people believe constitutes merit, and base your selection on what most others would believe.

But, then, consider that other voters might be thinking the same thing you are — that they are all, at the same time, trying to figure out how to win a prize based on (simultaneously) guessing at everyone’s perceptions.

You may have recognized game theory, here, and in particular Keynes’s “Beauty Contest”. As Keynes wrote in 1936:

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.”

In his online journal Epsilon Theory, Ben Hunt has applied game theory in general to market behavior and recently to oil prices — and here is a recent example of his line of thinking to consider. It’s the best read we’ve had in a month of Sundays. Really fine work, on a number of levels. Where does game theory take us in considering oil prices? Hunt writes:

“When you’re not sure of yourself and you’re trying to figure out what consensus view to adopt, as likely as not everyone else is trying to do the same thing. In these situations it’s Common Knowledge – public signals that we all believe that we all heard, aka Narratives – that largely determines each of our individual behavioral decisions.

“My personal, entirely subjective view is that oil prices over the past 3+ months have been driven by 3 parts monetary policy to 1 part fundamentals…For at least this week and next my personal, entirely subjective view of the ratio of explanatory factors is going to flip to 3 parts fundamentals to 1 part monetary policy.

“That doesn’t mean that I don’t have strong ideas about how the world works, about how both monetary policy and fundamentals impact the price of oil. What it means is that it doesn’t matter what I think about the way the world works. The only thing that matters is what the market thinks about the way the world works, and in times like these the market will think whatever Common Knowledge says it should think. “

Applying this back to advanced biofuels, and recent oil prices.

Right now, the dominant Storyline is oil prices — not the fundamentals driving oil prices, but oil prices themselves. The Common Knowledge is that oil prices are low, and that no one exactly knows how low they will go, and so long as that Storyline dominates, it is going to be tough sledding for financing advanced biofuels.

But, take for example the $60M investment by the NZ Superannuation Fund into LanzaTech that was announced on Monday morning.

Clearly, not an investment decision driven by short-term oil prices. The decision was, as likely as not, driven by the very factors that NZ Super gave in their public statements:

a. Expansion capital, while a small part of their investment pie, is a good accelerator of returns for their superannuation fund, and they are committed to it.

b. LanzaTech, being within 24 months of a first commercial, with a global set of committed partners and investors and a good track run in the lab and at the demo plant level , is an appropriate candidate for expansion capital. While keeping in mind that not every Starbucks or Sears ever built with expansion capital was still around 10 years later.

c. The long-term outlook in energy is strong — the fundamentals are driven by industrialization in the developing world, and global growth everywhere.

d. Sufficient evidence for a market for alternative fuels — a combination of national agendas on security, social agendas on carbon, and the line-up of supply and demand on oil has led experts to conclude that there a long term opportunity for projects that can demonstrate they are competitive with $80-$90 oil in today’s prices.

The Battle of Storyline

At this point, you may find your mind rebelling against the idea that markets are driven by competitions between Storylines. Surely, you say, markets are driven by fundamentals. And you might prove your point by sending to me an elegant explanation of why oil prices have dropped $30+ in recent months, based on currency movements. Or, based on supply and demand fundamentals.

As Ben Hunt explained in his Storyline on oil prices, you’d both be right. There is a Storyline for each, all the way down to $65 oil. In fact, if you added up all the impacts from all the available (and cogently argued) Storylines to explain the drop in oil prices — you’d get easily all the way down to $0 oil.

Free energy! Energy is free! Free Gas! Spread the word!

Whoops. Oil isn’t free, and gasoline isn’t either.

Despite the Reduction in Ukrainian Tension Storyline, the Saudis Killing Off Shale Oil Storyline, the Good Nuclear News from Iran Storyline, the Finally Doing Something About ISIS Storyline, the China Hard Landing Storyline, the EU not Getting Better Anytime Soon Storyline, the Drill Baby Drill Storyline, and the Fracking is Energy Liberation for Everyone Forever Storyline. Not to mention the Ethanol Made it Happen by Capping US Demand Storyline.

Not that there’s anything wrong with any of those Storylines, or the sound economic analysis that often goes with them. They just add up to more than $35.

Which tells you that the oil price isn’t being driven by a Monster Storyline, or the Sum of All Storylines — but by the Market in Storylines, where one story dominates the trading sentiment as traders try desperately to understand what the market is thinking.

It is not the Storylines that are changing, but the mix has suddenly shifted from being dominated by the long-term to the short term Storyline.

And we see it here in Digest email.

We are definitely not being inundated with email from traders along the lines of “my thinking has changed to a short-term Storyline.” But we are seeing, as we have shared at the beginning of this column, that we are getting a bunch of communications along the lines of “we think that other people are thinking that other people think that the Storyline has changed to the short-term.”

Generally they replace “what other people are thinking that other people think” with “the market is obsessed with” or a link to a review article about what “the market is saying”— and they replace “the Storyline has changed to the short-term” with “the challenges of biofuels in a world of $70 oil”.

So, we get emails roughly saying “the market is obsessed with the challenges of biofuels in a world of $70 oil”.

Who do these shifts occur, and so suddenly?

First ingredient: The mathematics of group realignment. Well, consider how birds communicate — in mobbing attacks out of “The Birds” or in flying south for the winter — a change in circumstances that can be perceived as a threat, generates an openness to changes in thinking. Two or three birds start flying around, then five or six, then a couple of hundred. Finally a giant flock heads south. What you are seeing is the phenomenon of group thinking and realignment.

Second ingredient: the failure of “business as usual” to explain a new market fact. Example: 1993 Al-Queda bombing of the World Trade Center – explained quickly within the Big Story of Terrorism as understood at the time. Bad people do bad things. Buildings get bombed. But The World Trade Center Does Not Fall Down. That’s Business as Usual.

Then, there’s 9/11. And the dialogue changes, forever.

The Big Story Around Monetary Policy.

Consider this: Easy Money leads to Bad Mortgages Leads to Systemic Collapse of Too Big To Fail Banks, Which Tanks Global Demand, and Commodity Prices Collapse. That’s one way to explain the Storyline of 2008/09 – if not the actual events, and it’s one of the reasons that we didn’t fret over the collapse of oil prices in 2008/09 with respect to biofuels, nearly as much as now. The GFC was seen as the outcome of bad monetary policy – Easy Money.

Believe me, the drop in 2008/09 commodity prices was far more dire than today’s, and tanked a lot of biofuels companies right into bankruptcy. But not so many people fretted about “the end of cellulosic biofuels” then, as now.

Why the Change?

So, let’s turn to the problem of the Storyline of Global Monetary Policy.

Right now, no one can figure out the Fed. The US dollar is rising, despite US long-term focus on a weak dollar, and the interest of the rest of the world in maintain stable energy prices. And maybe you can explain to me the Big Storyline that explains the Downshift in Central Bank Liquidity Operations in the US, vs the Uptick in Central Bank Liquidity Operations in the EU and China.

And, when there’s an uncertainty in the Fed Storyline just as material changes in markets happen, that’s when traders start to think that maybe everyone else’s thinking has shifted. So, are we seeing commodity markets move because there isn’t a dominant way to understand Global Monetary policy at the moment – that the Fed has been struggling to maintain a storyline?

We think so.

Ultimately, the Fed will make its move, and we’ll see the dollar head down, and with that, we’d expect to see pressure on oil prices to rise. And you may find at that point that energy markets get re-focused on the long-term Storyline. Those long-term fundamentals are still out there.

When? Could be a while. A tool for predicting shifts in market sentiment, timing and intensity, doesn’t yet exist. That Might well be the 12th Nobel from a game theorist, when we get that. Between now and then, there’s an arbitrage between the values seen in the marketplace today, and those we will see when the market re-focuses on the long-term energy scenarios. An arb that groups investing for the long-term might well be capturing 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.

December 09, 2014

Two Clean Energy Speculations For 2014: Wrap-Up

Tom Konrad CFA

I included two "Clean Energy Speculations" along with my annual model portfolio of ten clean energy stocks this year.  It's been a tough year for clean energy stocks in general, with my industry benchmark (Powershares Wilderhill Clean Energy ETF (PBW)) down about 15% since I initiated the portfolios on December 27th 2013.  Despite this, both the main portfolio and the speculations look likely to end the year with small gains. 

The two speculations were Ram Power Corp (TSX:RPG, OTC:RAMPF) and Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). Both are clean energy project developers trading for a tiny fraction of the amount of money they'd invested in their projects.  My speculative thesis was that most investors had given up hope that the projects would amount to anything, and so were willing to sell the stocks for considerably less than the remaining underlying value.  Both trade in Toronto, and the prices discussed below will also be Canadian dollars unless otherwise specified.

Ram Power is a geothermal developer.  Like many geothermal developers before it (Remember Nevada Geothermal?), the company had been overly optimistic about the potential of its geothermal resources.  In particular, the company had been unable to produce enough geothermal steam at its San Jacinto-Tizate project in Nicaragua to produce enough electricity and sales to meet the covenants its lenders had required to finance the project. At the end of 2013, Ram had negotiated one last chance to remediate the site's wells in the hope of increasing output.  The stock's recovery from its 8¢ level at the time of inclusion rested on the success of the remediation project.

To make a long story short, Ram Power reported the results of the remediation program on May 27th.  The results were insufficient to satisfy the loan agreements, putting the project back in default.  Since most of Ram's value lay in San Jacinto-Tizate, I told readers to sell on June 3rd in my monthly update.  Ram continued to trade in the 3¢ to 4¢ range for the month of June, so readers should have been able to sell their shares for a loss of between 50% and 60%; I have been using a loss of 57% for performance tracking purposes.  The stock has since fallen to 1¢.

Finavera Wind Energy was a wind developer in the process of selling two wind projects (Miekle and Cloosh) to companies which would take them on to the construction phase.  Finavera expected to bring both projects to financial close and would receive payments which would more than cover its substantial debts by the end of 2014.  When I included Finavera as a speculation, I placed the residual value to Finavera shareholders at between 17¢ and 42¢ Canadian per share, with my best guess being 22¢.  Since the stock was trading at 7.5¢, it seemed reasonable to include the stock as a speculative pick.

In some ways, 2014 was a repeat of 2013 for Finavera, with continued delays eroding the value of the stock.  Despite this, the company eventually reached final agreements on payment for both the wind farms which will net the company approximately $6 million after expenses and payment of liabilities.  Finavera has further negotiated a purchase agreement with a San Diego, CA based residential solar marketing firm, Solar Alliance of America for $4 million in cash an additional 9.5 million shares of stock (about 20% of the combined company.) 

I'm not an expert on the residential solar market, and find the future combined Finavera/Solar Alliance company difficult to value.  Nevertheless, I think it's likely that, once the deal is consummated, other investors will see value in the opportunity to invest in their rapidly growing industry.  Hence, I am holding on to my shares (which have recently been trading for 11¢ to 13¢) for a future selling opportunity. 

If we were to sell at 12¢ Canadian, the 60% gain on Finavera shares would neatly cover the 50% to 60% loss on Ram.  The merger with Solar Alliance values Finavera shares at 21¢, which would result in a 180% gain if we can realize it, but somewhat less if converted to US dollars, since the currency has fallen almost 7% this year compared to the US dollar. 

I do not know how high the stock might go, so I plan to sell my stake in portions as it advances.

Disclosure: Long FVR/FNVRF.

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.

December 05, 2014

Top 10 PV Module Suppliers for 2014

The 2014 rankings for solar module suppliers have been released from the newly combined Solarbuzz and IHS Technology solar research team. The team predicts that the global top 10 PV module suppliers will stay the same, although some reshuffling will occur. The rankings are based on full year shipment estimates.

The group is forecasting Trina Solar (TSL) to be the largest module supplier in 2014 in terms of global shipments. IHS said that Trina is expected to break industry records for both quarterly and annual PV module shipments in Q4’14. Yingli Green Energy (YGE), the holder of these previous records, is expected to be come in as the 2nd largest supplier having adopted a new strategy to prioritize profitability.

JA Solar (JASO) is forecast to gain most ranking places amongst the top 10 and should come in as the fifth largest supplier in 2014, said IHS. JA Solar’s module shipments are expected to double from 2013 level, outpacing all of the other top 10 suppliers. IHS attribute this growth to JA’s successful transformation from a major cell manufacturer into a leading module supplier.

China, Japan, and the U.S. have been the largest three PV markets in 2014, and unsurprisingly were the key markets for all of the leading PV module suppliers. Japanese suppliers, Sharp Solar and Kyocera leveraged high brand awareness and acceptance in their domestic market to retain positions in the top 10 rankings in 2014.

The 2014 top 10 PV module suppliers are almost the same group of companies as one year ago. SunPower (SPWR) entered the top 10 in 2014 and was ranked joint 10th largest suppliers alongside Kyocera (KYO) according to IHS estimates.

Many of the top 10 suppliers also accelerated the use of a large quantity of PV modules for internal solar projects in 2014, especially Trina Solar, Yingli, JinkoSolar (JKS), and JA Solar. Total unrecognized module shipments that will be used in internal projects will reach 1.4 GW in 2014 for these four companies combined, reflecting these companies efforts to shift towards PV project development, which was pioneered by Canadian Solar (CSIQ), First Solar (FSLR), and SunPower, said IHS.

This article is by the editors of RenewableEnergyWorld.com, where it was first published. It is republished with permission.

December 04, 2014

Biodiesel Christmas Caroling: FFA La La

Jim Lane

“On the way” forever, talked up by all, deployed by some – technologies that handle high free fatty acid feedstocks like used cooking oil are coming into their hey-day, via players like REG, Novozymes, Pacific Biodiesel, Blue Sun, Piedmont, COMAC and more.

Christmas come early for advanced biofuels?

One of the most alluring targets in advanced biofuels — although cruelly mis-named — is in the world of free fatty acids. Most of the oils currently used for biodiesel are sourced from soybeans, palm or rapeseed, and precisely because they contain less than 0.5% free fatty acid (FFA) content. Traditional biodiesel process designs have difficulty handling oils containing more than 0.5% FFA, meaning that, for many, waste oils with high FFAs have not been a viable feedstock option.

For example, used cooking oil, or “gutter oil” as it is known in China. At one time a few years back, restaurants would pay to have it picked up. These days, used cooking oil is sold, but at a considerable discount to virgin oils like soy or rapeseed — and that spells opportunity for those who have the technology to address conversion of high free fatty acid feedstocks.

For some time, Renewable Energy Group (REGI) has been translating its technical abilities with FFAs into an advantaged position in feedstock costs, and that had fueled in many ways its acquisition and expansion program.

The race for FFAs heated up this week with news from Denmark of the launch of Novozymes (NVZMY) Eversa, the first commercially available enzymatic solution to make biodiesel from waste oils. The enzymatic process converts used cooking oil or other lower grade oils into biodiesel. The resulting biodiesel is sold to the same trade specification as biodiesel created through traditional chemical processing. Piedmont Biofuels and Blue Sun Biodiesel have been using a Novozymes process — now, it’s poised for a break-out.

A solution that loves free fatty acids

“The idea of enzymatic biodiesel is not new, but the costs involved have been too high for commercial viability,” says Frederik Mejlby, marketing director for Novozymes’ Grain Processing division. “Eversa changes this and enables biodiesel producers to finally work with waste oils and enjoy feedstock flexibility to avoid the pinch of volatile pricing.” Eversa can work with a broad range of fatty materials as feedstock, but initial focus has been on used cooking oil, DDGS corn oil and fatty acid distillates. The enzymatic process eliminates the need for sodium methoxide, one of the most hazardous chemicals in traditional biodiesel plants. The radical reduction of harsh chemicals and by-products ensures safety for both personnel and the environment.

“Switching to Eversa can lead to a safer working environment for plant operators. The enzymatic process does not use high pressure or high temperature,” says Frederik Mejlby. “And when it comes to the actual enzymes, their organic nature and mild process conditions do not generate toxic components as in some chemical biodiesel processes.”

Better process economy

Making the change from a chemical catalyst to the enzymatic process requires retrofitting in existing plants. Biodiesel producers looking to utilize Eversa will therefore have to invest time and resources to make the switch to the enzymatic process. Novozymes pointed to Desmet Ballestra for the plant conversion tech. In spite what Desmet described as “the sizable task involved in modifying existing plants,” which are currently operating using the chemical conversion processes, they predict that enzymatic processing “will prove popular” with biodiesel producers.

“The enzymatic process is simple and does not need much pre-treatment. It is the best alternative for modifying existing plants to enable them to incorporate difficult-to-convert oils,” says Marc Kellens, Group Technical Director at Desmet Ballestra. “In conventional plants, 80 to 85% of the costs of biodiesel are linked to feedstock cost. So the more you are able to convert a cheaper feedstock into biodiesel, the more profitable the business is. The enzymatic process makes it possible to convert waste oils into biodiesel with relatively low capital expenditure by retrofitting a plant.”

Over at Pacific Biodiesel

The impact for biodiesel producers in being able to handle used cooking oil was demonstrated this week in Hawaii when Hawaiian Electric and Pacific Biodiesel Technologies signed a contract for the Maui-based biofuel company to supply biodiesel processed from waste cooking oil and other local feedstocks, primarily for use at the 110-megawatt Campbell Industrial Park generation facility with the capability for use at other O`ahu power plants as needed.

“The new technology installed at Big Island Biodiesel enables us to process the most degraded feedstock into the highest quality biodiesel available in the United States,” said Robert King, president of Pacific Biodiesel. “With this new contract, Hawaiian Electric will be purchasing approximately half our production volume, ensuring the continuous operation of the Kea`au facility. We are hopeful the PUC will agree that this contract for locally produced renewable fuel at a lower cost is a good thing for Hawai`i.

The two-year contract for a minimum of two million and up to three million gallons per year will go into effect in November 2015, subject to review and approval by the Hawai`i Public Utilities Commission. Pacific Biodiesel is currently under contract to supply biodiesel for the State of Hawai`i-owned Honolulu Airport Emergency Generation Facility scheduled to be in service by mid-2015. That 10-MW facility will provide electricity to Hawaiian Electric’s grid to supply all O`ahu customers under normal operations with the ability to isolate itself from the grid to power only the vital needs of the Honolulu International Airport in an emergency. The Campbell Industrial Park plant now uses biodiesel processed from waste fats and oils by Iowa-based Renewable Energy Group, Inc., a leading North American advanced biofuels producer, under a contract that will end in November 2015.

“This new contract accomplishes our goal of using locally produced biofuel to the greatest extent possible,” said Alan Oshima, Hawaiian Electric president and CEO. “Biodiesel for the Campbell Industrial Park plant will come from Pacific Biodiesel’s recently commissioned Hawai`i Island refinery at a lower price than we now pay for mainland supplied biodiesel.”

Recent research advances in used cooking oil

In the Emirates, the Masdar Institute of Science and Technology and Tadweer, the Center of Waste Management – Abu Dhabi have inked a two-year R&D pact to explore improvements in technologies for the conversion of waste cooking oil to biodiesel. The groups will be joined in the project by Australia’s Laboratory for Turbulence Research in Aerospace and Combustion, Department of Mechanical and Aerospace Engineering, University of Sydney. Principal investigator for the two-year effort will be Dr. Isam Janajreh, Associate Professor of Mechanical Engineering and Head of the Waste to Energy (W2E) Laboratory at Masdar Institute.

Dr. Fred Moavenzadeh, President, Masdar Institute commented: “The research agreement with CWM illustrates the UAE’s commitment to facilitating the production of clean energy and minimization of waste. With the support of the country’s leadership, we will continue our contribution to the development of clean energy technologies and ensure faster adoption of sustainable measures. We are confident that the outcome of this collaboration will encourage the community to support such green technologies.”

Boeing and COMAC

In China, Boeing and Commercial Aircraft Corp. of China opened a demonstration facility that will turn waste cooking oil, commonly referred to as “gutter oil” in China, into sustainable aviation biofuel. The two companies estimate that 500 million gallons (1.8 billion liters) of biofuel could be made annually in China from used cooking oil.

“Strong and continuing teamwork between Boeing and COMAC is helping our industry make progress on environmental challenges that no single company or country can solve alone,” said Ian Thomas, President, Boeing China. “By working together for mutual benefit, we’re finding innovative ways to support China’s aviation industry and build a sustainable future.”

Boeing and COMAC are sponsoring the facility, which is called the China-U.S. Aviation Biofuel Pilot Project. It will use a technology developed by Hangzhou Energy & Engineering Technology Co., Ltd. (HEET) to clean contaminants from waste oils and convert it into jet fuel at a rate of 160 gallons (650 liters) per day. The project’s goal is to assess the technical feasibility and cost of producing higher volumes of biofuel.

Biofuel produced by the China-U.S. Aviation Biofuel Pilot Project will meet international specifications approved in 2011 for jet fuel made from plant oils and animal fats. This type of biofuel has already been used for more than 1,600 commercial flights.

Deploying used cooking oil elsewhere for aviation fuels

Last month, SAS Airlines and Norwegian Air flew their first flights on biofuels, with a 48% blend with 52% fossil aviation fuel. The companies’ intention is to promote demand so fuel will be produced from Norwegian forests, rather than the used cooking oil feedstock used in the launch. Norwegian flew from Trondheim to Oslo while SAS flew from Bergen to Oslo.

Back in September, Finnair flew a A330 from Helsinki to New York partially on used cooking fuel-based jet fuel to highlight the opening of the UN Climate Summit. The fuel was supplied by SkyNRG Nordic, a JV between SkyNRG and Statoil Aviation. The airline says it is hoping to set up a biofuel fueling hub along with partners to help reduce the cost of aviation biofuels and strengthen the supply chain.

Earlier this year, the (Chinese) Civil Aviation Administration of China granted Sinopec Chinese Technical Standard Order Authorization (CTSOA) for aviation biofuels, certifying that the fuel has met all required industry standards. An April 2013 test flight using hydrotreated palm oil and recycled cooking oil feedstock on an Airbus 320 owned by China Eastern Airlines was the test case for the certification. Sinopec said it will now work on expanding the feedstocks it uses to produce aviation biofuel.

In June, UOP (a division of Honeywell (HON) announced that Honeywell Green Jet Fuel produced from its UOP Renewable Jet Fuel process will power 200 commercial flights on GOL Airlines during the 2014 FIFA World Cup™ in Brazil. The Honeywell Green Jet Fuel was made from inedible corn oil and used cooking oil. Each flight will use a blend of Honeywell Green Jet Fuel with petroleum-based jet fuel. UOP supplied nearly 92,000 liters of Honeywell Green Jet Fuel for the flights. Compared with petroleum-based jet fuel, this renewable fuel will reduce greenhouse gas emissions by 185 metric tons of CO2 over the course of the event based on life cycle analysis.

Used cooking oil, recent adoption for ground transport

In October, Lootah Biofuels has signed an agreement with Emirates Transguard, a leading security provider, to provide biodiesel for a B5 blend for the fleet. Lootah uses old cooking oil as their feedstock. The agreement aims at taking up the initiative for greener fuel option as well as reduction of UCO waste, thereby creating value for the green economy and environment. The UAE is making strides in incorporating biodiesel into their public transit system, as well. The Roads and Transport Authority plans to expand to 60 biodiesel-based buses in the fleet in the next three years.

Last month, Greasecycle added the University of British Columbia to its list of used cooking oil suppliers for its biodiesel supply chain, but the university will also get to send its students—already working on biodiesel—to work with the company first hand on research projects. The company already collaborates with three other universities in the province as well as hotels, restaurants and 30 Burger Kings.

In September, Recoleo said that it will begin collecting used cooking oil from more than 800 McDonalds around the country for processing into biodiesel. Before this new contract, the company was already collecting 400,000 liters of used oil per month from 1,500 households and 3,500 businesses while selling biodiesel to 5,000 clients.

The Bottom Line

It may be second-hand, cooking oil that is, but recycling is hot — allowing biofuels to serve as a backstop to the food industry and extending its sustainability and translating its waste into energy, rather than competing on the front end for virgin oil feedstocks. Virgin oils are going to dominate for a long time, but cooking oil and other high FFA feedstocks allow companies to increase production without necessarily driving up the feedstock costs — and that’s good news for advanced biofuels — and cooking, too.

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.

December 01, 2014

Solar Stocks Slide On Oil Slick

Doug Young 

Bottom line: The recent plunge in solar stocks is the result of panic selling due to falling oil prices, meaning the shares could rebound sharply once the sell-off subsides.

US investors were showing signs of new energy indigestion in the shortened trading day after Thanksgiving, dumping stocks of all the major solar panel makers in a messy post-holiday sell-off. With no major news from any of the companies, the driving force behind the sell-off appears to be the recent plunge in oil prices, which hit new 4 years lows late last week after OPEC declined to cut its daily output quotas.

Investors appear to be worrying that falling oil prices will dampen enthusiasm for building new solar plants, since lower oil prices mean solar power will be less competitive with more traditional power sources derived from fossil fuels. The only problem with that logic is that solar power was never competitive with fossil fuels to begin with, meaning solar stocks could be getting punished for no good reason.

All that said, let’s look first at what’s been happening to oil prices, which were in the spotlight last week after Saudi Arabia vetoed a plan by other OPEC members to cut oil output in a bid to boost sagging global prices. That move fueled fears that oil prices will continue to fall from current lows not seen since 2010 when the world was still suffering from the effects of the global economic downturn.

Following the drop last week, oil prices are now down by about a third since June. The plunge has understandably hit major oil companies, which will get far less revenue even though their costs will remain fixed. But suppliers of equipment used to make alternate energy are also getting hammered and took an especially big beating last Friday.

Leading the post-Thanksgiving sell-off was high-flyer Canadian Solar (Nasdaq: CSIQ), whose shares plunged 11.6 percent on Friday and are now down 40 percent from a September peak. The picture looked similar for most other solar panel makers, with Yingli (NYSE: YGE), Trina (NYSE: TSL) and JA Solar (Nasdaq: JASO) all dropping 7-8 percent on Friday. Wind power also got caught in the selling frenzy, with wind turbine maker Ming Yang (NYSE: MY) down 7 percent on Friday and off 24 percent since September.

One of the worst hit was ReneSola (NYSE: SOL), which tumbled nearly 9 percent on Friday and whose shares have lost nearly half of their value since September. The company may have looked especially vulnerable since it is one of the few that relies completely on exports, unlike its peers which have positioned themselves to take advantage of a major solar power building program in China.

So the big question now becomes: Is all of this selling justified, and is the industry headed into a new downturn just as it starts to emerge from its previous slump? I’m not a major expert on solar energy policy, but my answer to both of these questions would be a fairly confident “no”. The reason is simple, namely that solar and wind were never economically competitive power sources using current technology, even when oil prices were still high. The only reason solar and wind energy plants are being built at all is due to government policies that subsidize their development. [Ed. note: There's also the much more relevant fact that solar and wind compete with other sources of electricty, such as coal, natural gas, and nuclear.  Even at current prices, oil (diesel) is too expensive to compete with solar and wind without subsidies.]

Those policies typically see governments set prices for solar and wind power at artificially high levels, and then force utilities to buy that power at those inflated prices. Thus even if a power company can make its own power at much cheaper costs, it still has to buy all the output from solar energy plants at the government-set prices. That reality means that solar plant construction shouldn’t see any major shifts despite the big drop in oil prices, and that solar stocks are likely to rebound strongly once the current round of panic selling subsides.

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.

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