Smart Grid’s Expected 250% 5-Yr Growth Rate is Great News for Cisco, IBM, Accenture, EnerNOC
Bill Paul
Lux Research forecast last week that the global smart grid market will
grow some 250% over the next five years, reaching nearly $16 billion by
2015 compared with today’s $4.5 billion. Interestingly, Lux further
forecast that only a few select firms will take full advantage of this
looming largesse.
It’s understandable why the payoff won’t be widely shared. As regulated
entities (on the transmission and distribution side), electric
utilities have an obligation (specifically, the time-honored
“obligation to serve”) that effectively requires that they be
conservative when partnering with IT firms that can provide the
money-saving, blackout-avoiding technologies which are at the heart of
the smart grid. In other words, big is better.
This is why most of the more than $11 billion of new smart-grid-related
revenue that Lux expects to be generated over the next five years will
be pocketed by the IT beasts that already are pocketing the yeoman’s
share of the $4.5 billion currently being spent.
For at least one firm – demand response leader EnerNOC
(ENOC) — the potential payoff is life-changing, and only further
adds to my purely personal suspicion that EnerNOC is going to be
acquired at some point by a much larger firm.
Two logical buyers of EnerNOC would be Accenture
(ACN) and IBM (IBM).
The two are jockeying for leadership in the rapidly-developing
smart-grid analysis and services market, which Lux Research believes is
“poised for explosive growth” led by demand response applications.
Still another IT behemoth in line to gobble up billions of new
smart-grid revenue is Cisco
Systems (CSCO). Think of Cisco as the smart grid’s Mr. Goodwrench.
Whether it’s routers, switches or other equipment, Cisco’s goal is to
provide the IT components that utilities (with the help of consultants
led by Accenture and IBM) will fashion into a system that automates the
power industry from end to end – from generation to transmission to
distribution to consumption.
DISCLOSURE: No position.
DISCLAIMER: This is a news article. Please read
terms
and policy.
Given the small size of its economy and rather lackluster approach to
climate change, Canada has many of the Cleantech stocks with the best
prospects. Canadian listed firms come from a broad range of
sustainable sectors, and a lack of attention from United States investors means
that many trade at very attractive valuations. Corporate
Knights' has picked ten of the best.
The number of stocks on Canadian exchanges is key to the number of
great Cleantech stocks listed there. While Canada's relative market
capitalization parallels the relative size of the economy, the number of
Canadian listed stocks is about 2/3 of the number of stocks listed in the United
States. Small companies often find that listing on the TSX is faster and
easier, and often comes with less burdensome reporting rules than a NASDAQ
listing [powerpoint
pdf.] This means that American Cleantech investors interested in the
many new companies going public find ourselves with relatively few options on US
exchanges, while a bumper
crop of Cleantech IPOs heads towards Canada.
However, the less burdensome listing requirements for Toronto listed firms
are a two-edged sword: investors looking at these companies not only have to
sift through more of them, but they need to be more careful with the ones they
choose to consider in more detail. Many investors decide the extra work is
not worth the bother, and stick to the relatively few US listed firms.
Their reluctance is good for those of us willing to venture across the Northern
border and do our homework: a smaller pool of investors means we can often buy
these companies at much better valuations.
Companies in indexes have garnered enough shareholder attention that there
will decent liquidity. This can be surprisingly important, even for a
small investor. I became interested in a TSX-traded energy efficiency firm
over the holidays, did hours of due diligence, and even wrote an article.
The stock typically trades 1,000 to 2,000 shares a day, and I have only been
able to buy 1700 shares at what I consider to be an attractive price. I'm
waiting to publish the article until I've made my purchase. Given that the
stock has risen since I bought it, I may never get the chance to buy more at the
prices that prevailed when I did my research. Researching higher-liquidity
stocks means that you can get in when you want without greatly moving the
market.
The Cleantech 10TM
Corporate Knights calls
itself "The Canadian Magazine for Responsible Business," and they
publish (in collaboration with The Cleantech
Group) an annual list of ten "technology-driven growth companies that have big impacts on resource efficiency and the environment—not simply those re-branding themselves as ‘green.’"
By starting with a list like this one, I know I'm only looking at companies with
businesses I would like to own. What I don't know is if the stocks are
good values, if they strong financially, or if management has the skills
necessary to have them succeed against the competition. These latter three
questions are the ones I try to answer during due diligence. In
2009, their list outperformed
the TSX/S&P Composite by 38%.
They published the most recent Cleantech 10TM list in October
2009. With one replacement because of the buyout of Canadian
Hydro Developers, here is their list, along with a few of my observations
about each company. The first ticker is the Canadian ticker (in Canadian
dollars,) and the second ticker is the US ticker, denominated in US$.
Vancouver-based Westport trades on the
NASDAQ as well as the Toronto Stock Exchange. This means the company may
be less interesting to investors looking for less-noticed stocks. The
company's alternative engines and drive trains will probably do well if oil
prices continue to rise. Although the company can fund about two year's
worth of operating cash losses from the balance sheet, I prefer profitable
companies which are actively paying down their debt.
I took a close look
at Smart Grid company Ruggedcom in November, and I concluded that, although
I liked the business and had a generally good feeling about management, I felt
it was overvalued at US$16.60. Since it's currently trading around $20,
I'm in no hurry to buy.
Waterfunace is a long-time
favorite of mine, having appeared in both my own top stock lists in 2009
and 2010.
In fact, I first learned about the Cleantech 10 list because it showed up in a
news story about Waterfunace.
The company also provided me with some extra confirmation that US based
investors tend to ignore Toronto listed companies: A contributing writer for the
Motley Fool called me to ask about the company in January, after a relative had recommended
one of their heat pumps for his home. He was researching it for his own
portfolio, and when I asked him if he was likely to write about it, he said that
he probably wouldn't. The Motley Fool pays him to write articles that are likely
to be popular, and, he said, that companies without US tickers don't interest
many of their readers.
Vancouver based Magma
Energy Corpwent
public in July last year, with the intention of buying up interests in
geothermal electricity projects. Geothermal is one of my favorite
renewable energy sectors, since the electricity it produces is competitive with
wind, but the power is much more reliable, but I have not yet taken the time to
analyze Magma and decide if it's a good value.
Montreal based 5N Plus
provides purified metals, and is probably most interesting to investors because
it supplies pure metals used in the Solar photovoltaic panels.
Victoria based Carmanah
manufactures LED lighting with integrated solar panels and batteries which allow
for use in remote locations without a grid connection. Not having to lay
wires for a grid connection means that Carmanah's products are often the most
cost effective lighting solution, despite the high cost of both the batteries
and solar. I owned the stock from late 2005 until I sold
it in September 2008 in response to the financial crisis, because I did not
think that the company had the financial muscle to weather the
storm.
The company last traded at $0.80, still below the $0.95 at which I sold
despite almost doubling since March 2009, but I have not looked at the company
again to see if they have done what I consider to be sufficient work repairing
their balance sheet and cash flows.
Toronto based NEO Material Technologies
is one of the companies that made this whole exercise of going through the list
worth doing. I was not previously aware of this manufacturer of rare-earth
and Zirconium based batteries, which are used in high-performance electric
motors (Recall John
Petersen's recent Storm Warning about the availability of rare earths for hybrid
and electric vehicles.) Despite worries about rare earth supply, if NEO
Materials is able to pass higher supply costs on to its customers, the company
could be very profitable. Will it? Finding out is where the work
comes in.
Also new to me is Edmonton based Stantec,
a design firm geared towards sustainability. Stantec is worth further
research because energy efficiency is more often about design than about
products. In other words, design firms can often do more to reduce energy
use than can be accomplished by simply slotting more efficient products into the
same systems.
Calgary based Hemisphere GPS
manufactures GPS equipment for farming equipment which allows farmers to better
gauge the amount of fertilizer or pesticide applied to a specific part of the
field to the needs of the crop there. This more efficient use of resources
not only improves the economics for the farmer, but is less wasteful and
polluting to the environment.
NEO Materials, Stantec, Magma, and Innergex all are interesting enough to me
that I may do further research. With interesting prospects like these, my
next step is to start monitoring the news for these companies, and perhaps do a
preliminary valuation based on simple metrics such as P/E, cash on hand, current
ratio, and cash flow from operations. If the stock price falls to a point
where the valuation looks good, and the news does not account for the change, it
will be time to do the real work of reading through annual and quarterly
reports.
DISCLOSURE: The author and/or
his clients own WFI.
DISCLAIMER: The information and trades
provided here are for informational purposes only and are not a solicitation to
buy or sell any of these securities. Investing involves substantial risk and you
should evaluate your own risk levels before you make any investment. Past
results are not an indication of future performance. Please take the time to
read the full disclaimer here.
DOE Reports That Lithium-ion Batteries Are Still Not Ready For Prime Time
John Petersen
Last month the DOE released the 2009
Annual
Progress Report for its Energy Storage Research and
Development Vehicle Technologies Program. Like the 2008
Annual
Progress Report I discussed in a February 2009 article
titled DOE
Reports
That Lithium-ion Batteries Are Not Ready For Prime Time,
this new report is a relatively upbeat assessment of lithium-ion
battery research and development that once again provides a stark
reality check for investors in energy storage stocks. In Section III of
the Report, which focuses primarily on meat and potatoes issues like
R&D objectives, technical barriers, technical targets and recent
accomplishments; the DOE summarized the objectives and technical
barriers as follows:
Objectives
By 2010, develop an electric drive train energy storage device
with a 15-year life at 300 Wh with a discharge power of 25 kW for 18
seconds and a cost of $20/kw.
By 2014, develop a PHEV battery that enables a 40 mile
all-electric range and costs $3,400.
Technical Barriers
Cost – The current cost
of Li-based batteries (the most promising chemistry) is approximately a
factor of three-five too high on a kWh basis for PHEVs and
approximately a factor of two too high on a kW basis for HEVs. The main
cost drivers being addressed are the high costs of raw materials and
materials processing, cell and module packaging, and manufacturing.
Performance – The
performance advancements required include the need for much higher
energy densities to meet the volume and weight requirements, especially
for the 40 mile PHEV system, and to reduce the number of cells in the
battery (thus reducing system cost).
Abuse Tolerance –
Many Li batteries are not intrinsically tolerant to abusive
conditions such as a short circuit (including an internal short
circuit), overcharge, over-discharge, crush, or exposure to fire and/or
other high temperature environments. The use of Li chemistry in the larger
(PHEV) batteries increases the urgency to address these issues.
Life – The ability to
attain a 15-year life with 300,000 HEV cycles or 5,000 EV cycles is
unproven and is anticipated to be difficult.
The recent accomplishments section includes about 85 pages of
discussion on 25 pending research, development, analysis and testing
projects that are nowhere near complete. It's clear from the Report
that the DOE is coordinating a massively complex and expensive drive to
improve lithium-ion batteries to a point where they will be
cost-effective in transportation applications. It's equally clear that
the effort has a long-way to go before anybody will be able to
accurately assess the likelihood that all or any of the pending R&D
projects will result in innovations that can survive the
often-difficult transition from the laboratory bench to the factory
floor. The R&D is critically important, but favorable results are
not guaranteed, costs are likely to exceed budgets by a wide margin and
timing is anybody's guess. The only certainties are it won't be soon
and it won't be cheap.
When I started writing this blog, my central thesis was that
energy storage is the beating heart of cleantech and is destined to
become a major investment theme that will endure for decades. Storage
is an
essential enabling technology for wind and solar power, an efficient
smart grid and emerging transportation applications. It's also a
difficult industry that's constrained by laws of chemistry, requires
massive volumes of commodity raw materials and can only be described as
capital intensive heavy manufacturing. That means we can reasonably
expect steady incremental progress over a the long-term, but the game
changing 'Moore's Law' type advances we've come to expect from
information and communications technology are simply not going to
happen in energy storage. To borrow a concept from John
Mauldin, my favorite Seeking Alpha contributor, energy storage is a
'muddle through' industry that will progress in baby steps that take
years, instead of quantum leaps that happen overnight.
When you cut through the happy talk and issue advocacy, energy storage
is all about minimizing waste and making inherently variable energy
sources more reliable. If waste is cheaper than storage, waste will be
the rational choice for over 95% of the population who believe the
green in their wallet is more important than the green in their
cocktail party conversation. Given the nature of the industry, the law
of economic gravity will prevail and the cheapest solution that can do
the work will earn the lion's share of the market. The future of energy
storage is bright, but it's going to be a long hard slog through the
swamp and I can comfortably guarantee that we'll never see teenagers on
Sunset Boulevard popping the hood to show off and compare their battery
packs.
One of the most difficult parts of blogging on the energy storage
sector is explaining that when it comes to investing, entry price and
timing are the only things that matter. My favorite example is one
everybody knows. I've been a Macintosh user since 1988 and had
countless arguments over the years about the technical superiority and
ease of use of the Mac OS. The contrary argument, of course, was that
products from Apple (AAPL)
were too expensive compared to budget priced products that used
Microsoft's (MSFT)
operating system. Over the last few years Apple products have surged to
the forefront as they pared prices to more competitive levels and
continued their tradition of technical excellence. The following chart
from Yahoo! Finance shows the 25 year comparative stock market
performance of the two companies.
As a computer user, I've always insisted on owning Apple. As an
investor, the better path would have been to own Microsoft for the
first 19 years and then shift to Apple for the last six.
In the long-term, I expect every company that brings a cost-effective
energy storage product to market to have more business than it can
handle. For the next five to ten years, I expect the biggest gains to
accrue in companies like Enersys (ENS),
Exide Technologies (XIDE),
C&D Technologies (CHP), ZBB
Energy (ZBB),
and Axion Power (AXPW.OB)
that make objectively cheap products today to satisfy immediate needs.
When and if advanced battery developers like A123 Systems (AONE),
Ener1 (HEV),
Altair Nanotechnologies (ALTI)
and Valence Technologies (VLNC)
succeed in their individual and collective efforts to make objectively
expensive products affordable, portfolio adjustments to reflect the new
realities will be essential. But if Apple vs. Microsoft teaches
anything, it's that cheap beats cool until cool becomes cheap. Promises
don't matter. Price tags do.
Last year I said that I'm a simple-minded creature and believe that
little things like costs and benefits matter. When the brand new annual
progress report from the DOE concludes that:
Lithium-ion batteries will not be cost-effective in HEVs unless
somebody finds a way to slash costs by 50%; and
Lithium-ion batteries will not be cost-effective in PHEVs unless
somebody finds a way to slash costs by 67% to 80%;
I believe them. When I combine the DOE's conclusions with a recent
opinion from the National
Research Council that the DOE's price objectives "beyond 2012 are
extremely aggressive and are unlikely to be reached by the target date
or even for a significant time beyond" cruel reality seems obvious:
lithium-ion batteries are still not ready for prime time and the
plug-in vehicle frenzy is leading investors and the public down a
garden path that can only end in disaster like most technology du jour
schemes that are conceived in the halls of government and then sold to
the public as the next big thing, including:
25 years ago
Methanol
15 years ago
Electric Vehicles
10 years ago
HEVs and Electric Vehicles
5 years ago
Hydrogen Fuel Cells
3 years ago
Ethanol and Biofuels
Today
PHEVs and Electric Vehicles
2012
Here Be Dragons
Will Rogers said, "There
are three kinds of men. The one that learns by reading. The few who
learn by observation. The rest of them have to pee on the electric
fence for themselves." Albert Einstein
reportedly defined insanity as doing the same thing over and over
again and expecting different results. When will investors learn that
technical hype originating from government with a chorus of support
from heavily subsidized companies rarely works out well?
Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and owns a substantial long position in its stock. He also owns small
long positions in Exide Technologies (XIDE),
C&D Technologies (CHP) and
ZBB Energy (ZBB).
On January 28th the DOE
announced the closing of a $1.4 billion ATVM loan to Nissan North
America, a unit of Nissan Motors (NSANY), for the
purpose of retooling a factory in Smyrna, Tennessee to produce the Leaf, a
zero emission electric car that will be released later this year.
Nissan will use the loan proceeds to create "up to 1,300 American jobs"
at a cost of about $1.3 million each and the 200,000 Leafs it hopes to
produce and sell each year will "conserve up to 65.4 million gallons"
of gas, a whopping 327 gallons per car per year. Secretary Chu said, "This is an investment in our clean energy
future. It will bring the United States closer to reducing our
dependence on foreign oil and help lower carbon pollution." I
don't know whether to laugh or cry.
With due respect to Nissan and its PR team, no electric car can
honestly claim zero emissions because unless they're sold in a bundle
with a wind turbine or solar panel, the best any electric car can do is
take distributed CO2 emissions from the roads and
centralize them in a coal or gas fired power plant. Even under the most
optimistic of renewable energy scenarios, American
EVs
will be plugging into a lump of coal for decades. I'm the first
to point out that the Leaf will be responsible for a little less than
half the CO2 a comparably sized car with an internal
combustion engine would produce, but calling the Leaf 'zero emission'
has all the intellectual integrity of a no-peeing section in the public
swimming pool.
Nissan's alliance with France's Renault (RNSDF.PK) makes it
a major player in the global automotive industry with combined sales of
roughly 6
million
vehicles in 2009. While Nissan and Renault both make
marketable products, neither company has a sterling reputation as an
automotive trendsetter, particularly when it comes to electric drive
technologies. Nissan was fighting for survival while Toyota (TM) was developing its
highly successful Hybrid
Synergy Drive. As a result, the best Nissan could do was license
the
synergy drive from Toyota for use in the Altima. As recently as
2006, Renault
was
snubbing HEV technology in favor of fuel-efficient diesel
engines. Now it seems that they've both found religion and want to
leap-frog a decade of real-world electric drive experience by
introducing an audacious, expensive and unproven electric car that will
be underwritten by taxpayers and sold to customers (a/k/a lab-rats) as
part of the grandest science fair project in history.
The best part is, Nissan wins no matter what happens. If the Leaf is a
successful product, Nissan will have a taken a clear lead in the field
with taxpayer money. If the Leaf is a failure, Nissan will be able to
look regulators and EV advocates in the eye and say, "we spent billions
to throw your stupid EV party and nobody came." No wonder Nissan CEO
Carlos Ghosn is happy. Heck, even P.T. Barnum and W.C. Fields would
have been proud.
To date Nissan's pricing plans for the Leaf have been cloaked in
mystery, resulting in a plethora of conflicting press reports. Most
seem to agree that Nissan will copy the 'batteries not included'
section from Mattel's (MAT)
business
plan and lease the batteries to consumers under a separate
contract. This strategy has the dual benefit of concealing the true
cost of the Leaf while deflecting customer backlash from battery pack
failures or service life issues.
I hate going back to unpleasant realities, but the Smyrna plant will
need roughly 4.8 million kWh of lithium-ion batteries per year to build
200,000 Leafs. If Nissan-Renault had taken the time and spent the money
to develop a competitive HEV technology of their own, those same
batteries would be enough to upgrade more than half of their global
auto production to HEVs and save 500 million gallons of gasoline per
year in the process.
Last October a White House advisor called it 'calculator
abuse' when ABC News had the temerity to suggest that stimulus jobs
cost taxpayers an average of $160,000 each. I would love to hear a
cogent explanation of how it makes sense to:
Put taxpayers on the hook to the tune of $1 million for each new
job created in Smyrna;
Save 64.5 million gallons of gas with a small fleet of Leafs
instead of saving 500 million gallons of gas by upgrading half of
Nissan-Renault's global production to HEVs; and
Reduce total CO2 emissions by 335,000 tons with a
small fleet of Leafs instead of reducing CO2 emissions
by 5 million tons with a larger and more affordable fleet of HEVs.
As things presently stand, I have to wonder whether the inmates aren't
running the asylum.