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.

Bill Paul is Managing Editor of EnergyTechStocks.com.

Posted by Bill Paul at 08:57 PM | Smart Grid’s Expected 250% 5-Yr Growth Rate is Great News for Cisco, IBM, Accenture, EnerNOC

Tom Konrad, CFA

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.

I'm often surprised at how many of my favorite green stocks are listed in Canada.  This year, two of my Ten Clean Energy Stocks for 2010 are Canadian listed.  The same was true for my 2008 list, while my 2009 list contained three stocks from Canadian exchanges.  I mostly stick to companies that are traded on North American exchanges, so it's not surprising that more Canadian-listed companies appear than, say, companies listed in Britain (only one over three years.)  It's also surprising that there are so many Canadian listed firms, given that Canada's economy is only about one tenth the size of the United States' economy.  Canada's largest exchange, the TSX, has 3841 companies with a combined market capitalization of about $1.4 trillion, compared to 3615 $10.8 trillion for the NYSE and 2249 at $2.8 trillion for the NASDAQ.

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.

Sorting the Wheat from the Chaff

With many more Cleantech stocks to choose from, it helps to narrow down your focus on a few companies before doing the many hours of due diligence that should accompany any stock market investment.  I often start with companies that are part of third party indexes.  Beyond that, I tend to focus on a few Cleantech sectors such as Energy Efficiency Stocks, Clean Transportation Stocks, and Electric Grid stocks which get less attention than more popular sectors such as solar.  

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 10^TM

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 10^TM 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$.

1. Westport Innovations (WPT.TO, WPRT)

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.

2. RuggedCom (RCM.TO, RUGGF.PK)

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.

3. WaterFurnace Renewable Energy (WFI.TO, WFIFF.PK)

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 Fort Wayne-based company manufactures a broad range of geothermal heat pumps, a clean energy technology that not only saves energy compared to other forms of heating and cooling a building, but also shifts electricity use to seasons during which wind based power is plentiful.

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.

4. Magma Energy Corp. (MXY.TO, MGMXF.PK)

Vancouver based Magma Energy Corp went 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.

5. 5N Plus (VNP.TO, FPLSF.PK)

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.

6. Carmanah Technologies Corp. (CMH.TO, CMHXF.PK)

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.

7. NEO Material Technologies (NEM.TO, NEMFF.PK)

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.

8. Stantec (STN.TO, STN)

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.  

9. Hemisphere GPS (HEM.TO, HEMGF.PK)

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.

10. Innergex Renewable Energy Inc. (INE.TO, INGXF.PK)

Innergex is a developer and operator of hydroelectric and wind projects, with the majority being hydroelectric.  This makes the company an interesting play because the economics of upgrading old hydroelectric plants are far better than even building new coal plants, while new hydropower projects have economics that are comparable with the best other renewables, wind and geothermal.  Like most of these, I have not looked at Innergex's valuation, but I consider it worth a look.

 

The Cleantech 10 List from Corporate Knights on Vimeo.

Next Steps

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.

Posted by Tom Konrad at 11:03 AM | Permalink | Comments (0)

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).

Posted by John Petersen at 01:37 PM | Permalink | Comments (2)

John Petersen

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.

Disclosure: None

Posted by John Petersen at 06:49 PM | Permalink | Comments (2)

The Strongest Strong Grid Stocks

Tom Konrad, CFA

A comparison of the financial strength of transmission (or "Strong Grid") companies.

In Part I of this article I made the case that transmission stocks, or "Strong Grid" might be a clean energy sector that takes off in 2010, as Smart Grid stocks and Battery stocks did in 2009.  If the sector does take off, the rising tide will probably float all boats, but if it doesn't, it will probably be better to be in the strongest such companies, because, as in 2009, the harsh financial climate will probably mean that the strongest companies do best.

Metrics

For a first look at financial strength, I like to look at the following metrics as a first screen:

• Current Ratio: the ratio of current assets to current liabilities - the higher the better
• If Cash Flow from Operations (CFO) is positive, then T = (Total Liabilities (L) - Cash)/ CFO - the time it will take to pay off debt using internal cash flows and cash on hand.   I consider anything less than a few years good.
• Price/Earnings ratio.  In a mature industry such as transmission suppliers, I like to see positive earnings and a P/E ratio below the average for the market, but not so low that it indicates trouble elsewhere. 
• The dividend yield (Y) - I like companies that pay a dividend, since I believe it shows management's confidence in the company's long term profitability.  

Most of these numbers can be calculated directly from the company's "Key Statistics" page on Yahoo! Finance, although I had to calculate them myself using the most recent financial statements for the over the counter and foreign listed companies.  Most statistics are from Q3 2009 financial statements.

Transmission Builders and Suppliers

Company	Current Ratio	T	P/E (trailing)	Yield
ABB Group (ABB)	1.7	instantly	16.7	2.3%
American Superconductor (AMSC)	2.8	instantly	N/A	0
Composite Technology Corp (CPTC.OB)	0.6	N/A	N/A	0
CVTech Group (CVT.TO)	1.5x	7 years	24	0
General Cable (BGC)	2.1x	instantly	12.3	0
Jinpan International (JST)	2.3x	6 months	10.6	0.6%
MasTec (MTZ)	1.7x	2 years	13.9	0
MYR Group (MYRG)	1.6x	instantly	16.7	0
Pike Electric (PIKE)	2.3x	1 year	27	0
Quanta Services (PWR)	3.6x	instantly	19	0
Resin Systems (RSSYF.PK)	I could not find current financial statements.
Siemens (SI)	1.2x	13 years	10	2.6%
Valmont Industries (VMI)	2.6x	instantly	12.8	0.8%
Wesco International (WCC)	2.2x	2 years	9.2	0

In general, the companies in this industry show a good deal of financial strength.  The only ones in my list that I would eliminate from consideration on these measures are:

• Composite Technology and Siemens, because of relatively weak current ratios. I also recently wrote about some other worries I have about Composite.
• CVTech and Siemens because too much debt will constrain their flexibility.
• ABB, MYR, Pike, and Quanta because they are too expensive from the standpoint of price to earnings.  

The other financial strength measures are more important for negative earnings companies such as American Superconductor and Composite Technology.  Since AMSC appears strong, other valuation measures should be considered to determine if it's overpriced before making a decision to purchase.

I won't eliminate a stock from consideration because of a lack of dividend, but I think Valmont and Jinpan are worth another look because they do pay dividends, and their financial statements are both quite strong by my favorite measures.  General Cable, MasTec, and Wesco also look solid and seem reasonably priced.  These are the five I'd be buying currently, if I were not waiting for a general market decline before buying anything.

Stocks in My Top Ten List

The P/E ratio is why MasTec was included in my Ten Clean Energy Stocks for 2010: I wanted a domestic electric transmission contractor, but did not like the price of most of the others. I included General Cable as an equipment supplier with an attractive valuation and rock- solid financials.  If I were to pick a new supplier today, it would probably be Valmont rather than General Cable, but that is only because Valmont has fallen 12% compared to a 2% fall for General Cable in the month since I created the list, making Valmont relatively more attractive.

DISCLOSURE: Long BGC, PWR, WCC.

DISCLAIMER: The information and trades provided here and in the comments 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.

Posted by Tom Konrad at 08:50 PM | 2010: The Year of the Strong Grid? Part II | Comments (0)

Bill Paul

Not every investor wants to be a green investor, but every investor – institutional and individual alike – should be prepared to take advantage of a company’s greenness.

According to a recent study sponsored by Environmental Leader, an online publisher, consumers are willing to spend more on products and services that they consider to be environmentally-friendly. That’s why 82% of respondents said they plan to use more green messaging in their marketing.

But how can an investor tell a genuinely green firm from the phony ones that practice “greenwashing?” One place to look is Portfolio 21.

As we note on EnergyTechStocks.com, Portfolio 21 is a well-established mutual fund that looks for environmentally-friendly business practices by companies in a variety of industries. The fund’s shares are up over 37% from a year ago and the other day it announced its list of “Top 10 Green Companies.” While greenness certainly isn’t the only factor that goes into a company’s share price, the following 10 firms have products and services that figure to have a little extra going for them.

Autodesk (Symbol ADSK) made the list because, according to Portfolio 21, the company makes software that supports sustainable building practices. East Japan Railway (Symbol EJPRY) made the list because rail transportation is inherently more energy efficient than trucking, and because the company keeps reducing its own energy consumption.

Henkel (Symbol HENKY) was recognized for its wide range of bio-based detergents and adhesives. Itron (Symbol ITRI), meanwhile, was cited because its core business is metering and software that serve to reduce energy consumption.

Brazil’s Natura Cosmeticos (Symbol NUACF) was recognized for its sustainable use of natural resources. Similarly, Potlatch (Symbol PCH) was recognized for its sustainable forestry practices.

Red Electrica (Symbol RDEIY), Spain’s leading power transmission company, was cited for its role in facilitating Spain’s rapidly-growing alternative power generation business. Japanese consumer products giant Sharp (Symbol SHCAY) made the list for manufacturing products that incorporate energy and resource efficiency and recyclability.

Belgium’s Umicore (Symbol UMI) was recognized for being the world’s leading recycler of precious metals, while Denmark’s Vestas (Symbol VWDRY) was recognized not just for being a wind power manufacturer but for its own sustainable manufacturing practices.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

Posted by Bill Paul at 08:15 PM | Why Investors Should Pay Attention to Portfolio 21’s Top 10 Green Companies | Comments (0)

Part I: With Smart Grid Brains and Transmission Brawn...

Tom Konrad, CFA

A robust national grid will be essential to achieving high penetration for renewable electricity at reasonable cost, and the companies that can help build it are an essential part of a clean energy portfolio.  

Many renewable energy advocates, especially those enchanted by the gigantic potential for solar, think that we can get by with local renewable energy.  While it's a pretty vision, the timing of wind and solar (the only forms of renewable energy that have the potential to produce 100% of our electricity) mean that this could only be achieved with prohibitively costly investment in grid tied energy storage.  It makes much more sense to invest in a smarter and more robust grid before making large investments in energy storage.

Diversification of Electricity

There are two aspects of this: managing our energy usage better, which is the province of the smart grid, and interconnecting it better, allowing us to take advantage of the natural variations between both supply and demand in different locations with long distance transmission.  In much the same way combining two imperfectly correlated stocks in a portfolio reduces overall risk, connecting two regions with high voltage transmission reduces the overall imbalances between variable supply and variable demand that need to be met with dispatchable generation.  

It's much easier to balance supply and demand over a large area than it is over a small area.  On the smallest scale, this is the reason that almost all net zero electricity homes are grid-tied.  Although such a home has the capacity to produce all the electricity it needs on an annual basis, the cost of the batteries needed to store the extra electricity produced during sunny summer months for use on long, dark winter nights would be prohibitive.  Instead, home owners use the wires connecting them to the local grid as extremely inexpensive virtual storage.  Long distance transmission can serve the same function on a much larger scale at a cost of only a fraction of the comparable real storage.

Time and Space

Transmission shifts electric supply in space, while storage shifts electric supply in time, and smart grid technologies shift electric demand in time.  Both Smart Grid and Transmission can therefore provide virtual storage, and both do it at a low cost compared to real electricity storage.  

Last year saw investors finally take notice of Smart Grid stocks, but transmission has yet to capture their attention (perhaps because many renewable energy aficionados still cling to the dream that we can transition to clean energy sources using just the smart grid and storage.)  While such a transition would be physically possible, it would make no more economic sense than putting solar panels on your roof and racks of batteries in your basement in order to cut your connection to your electric utility.

If 2009 was the year investors woke up to the potential of the Smart Grid, 2010 may be the year they begin to see the strong grid.

Part II of this article will look at which Strong Grid stocks are the strongest financially.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments 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.

Posted by Tom Konrad at 10:57 AM | 2010: The Year of the Strong Grid? | Comments (2)

John Petersen

In one of my first articles, "Battery Technology: A Different Set of Rules," a commenter suggested that I was a bit of a Captain Buzzkill. Eighteen months later it's clear that a lot of readers share that uncharitable view. This morning I had an e-mail exchange with a reader that raised the same basic issues and reminded me that it's been a while since I've discussed the fundamental differences between energy storage and other technology related sectors. Since the subject matter can be very important to investors who want to make sound decisions, I've decided to edit the e-mail exchange and publish it as an article.

Inquiry: I've read your posts and thank you for your insights into the topics you cover. I have to ask this however ... is there not "anything positive" you can say with regards to lithium-ion battery companies? I mean, can't you give credit for anything? It seems to me that in a necessary longer term evolution of technologies they and others DO play a critical role in getting from proverbial A to B for all of us.

Response: I believe several lithium-ion battery developers have the potential to become fine companies and that the world desperately needs all of the lithium-ion, lithium air, sodium sulfur, zinc bromine, lead acid, lead carbon, sodium metal halide and nickel metal hydride batteries we can make. The products are critical to an energy efficient future and so are the companies that make them. The needs are immense beyond imagining but companies that want to survive and thrive in the energy storage sector need to be willing and able to say:

• We can provide batteries for Application A today and earn a reasonable profit;
• With luck we may be able to provide batteries for Application B in X years and earn a reasonable profit; and
• Until the market dynamics change, we won't be able to provide batteries for Application C and earn a reasonable profit.

Any other approach is certain to set up unreasonable expectations in the collective consciouness of the market and over the years I've seen too many examples of disastrous market reactions to unsatisfied expectations. Given my long and sometimes painful experience advising small companies, I have a hard time remaining sanguine when companies start the game by setting their goals too high.

Over the years I've had a number of friends and clients decide that they wanted to sell products to WalMart. The negotiations were long and brutal, but the vendors were always delighted when their products hit the shelf because the sales volumes were immense. Within about six months, they discovered to a man that it was almost impossible to sell anything to WalMart and earn a reasonable profit margin. Within eighteen months they were all out of business.

Selling batteries for electric cars and utility applications is a lot like selling a product to WalMart. Starting negotiations from a position where you're saying "we understand that we won't be able to business with you unless we can slash our costs by at least 50% coming out of the chute" is darned near suicidal. Small companies need to start in markets where they can earn outsized profits while they learn to optimize their activities. Learning to swim in the shark tank is a good way to get eaten.

Right now the lithium-ion battery developers are promising a brave new world of electric cars and grid-based storage. I've shown why electric cars are a horrifically suboptimal use of batteries. I've also seen drafts of a new report from Sandia National Laboratories that shows most grid based applications will require even cheaper batteries than the automotive sector requires. At last fall's EESAT conference in Seattle, Ali Nourai of American Electric Power explained that they're 'technology agnostic" as a company and their current efforts are focused on lithium-ion batteries because they assume that sales into the automotive market will drive lithium-ion battery prices to low enough levels that they'll be attractive for low-value utility applications.

In Joseph Heller's classic novel Catch 22 a character named Milo Minderbinder planned to buy eggs for a dime, sell them for a nickel and make it up on volume. That can't happen in the real world, regardless of what people want to believe.

If the lithium-ion battery developers were all out telling the market that they planned to focus on high value markets that they could serve today and they hoped to expand into other markets as they built experience and improved their technology, I'd be a huge booster. As long as they're promising things that can't happen in the real world, they're either setting the market up for major disappointment or setting themselves up for a string of losses that won't end until a Chapter 11 petition is filed. I can't be a cheerleader for either of those outcomes.

Follow-up: Thanks so much for your kind reply ... Very interesting conclusions is all I can say. This reminds me of none other than solar, and look at where those stocks are this week "as we speak" eh ? Even the "best of the breed" are subject to subsidy cuts as was obvious just the other day, with the announcements out of Germany, proposing to cut more than were the expectations of the market. The only good things that can be said about it is that is causes prices to get cheaper for the end user, and makes the industry far more competitive in the long run I suppose, but it sure does just basically kill positive forward guidance at a time when it sure would be nice to have some, hmmm ?

Reply: Based on the experience of the last 40 years most investors are optimistic about the future of all things alternative energy. In some cases the optimism is warranted. In others, particularly in energy storage, the optimism is dangerous.

Substantially all of the miracles of the information and communications technology revolution were due to advances in the science of physics. Researchers have found ways to use steadily smaller resource inputs to get exponentially larger outputs. It's been true in communications, computing and even solar cells. As a result the idea that it's always possible to do more with less has been burned into our collective psyche and the masses resist any suggestion that another result is even possible.

The biggest problem with energy storage is that it's all based on chemistry, which is limited by an entirely different set of natural laws. On any given atom there are a defined and immutable number of sites where chemical bonds can be formed and reactions can take place. For hydrogen atoms the number is 1; for oxygen atoms the number is 2; for nitrogen atoms the number is 3 and for oxygen atoms the number is 4. I could continue the series but you get the idea. When you put atoms together to make stable molecules, the number of bonds on each side have to match. That's why chemical compounds are express with formula like H20 or CO2 or NH3 or CH4. No matter what we do the ratios can't change, the number of atoms in a gram of material can't change and the number of possible chemical bonding sites in a gram of material can't change.

Most chemical reactions used in battery chemistry are quite efficient to start with, which means that the best researchers can do is work around the margins to maximize the surface area where reactions can occur. There's a lot of talk about nanotechnology in the battery sector but what it all boils down to is grinding materials into extremely fine particles in order to maximize surface area. In the case of some of the carbon compounds used in batteries, surface area has already been optimized to the point where a single gram of material has as much surface area as a football field. About the only advances on the horizon that promise to significantly increase surface area are materials like carbon nanotubes and graphene, but they're terribly difficult to work with and ungodly expensive. Since the materials have been the subjects of intense research and development for the last 10 to 20 years and progress has been extraordinarily slow, I don't expect breakthroughs tomorrow.

The bottom line is that chemistry is grunt manufacturing that requires immense amounts of raw material. The science is progressing every day but you rarely see disruptive changes from companies like Dow, Monsanto, Exxon and the like. The battery industry will be no different.

Because we're dealing with chemistry instead of physics, current lofty expectations of rapid disruptive change are misplaced. There will no doubt be progress, but it will not be rapid or disruptive. The bottom line is progress in the storage sector will mirror progress in the chemical industry in spite of the fact that the the goal is to store electricity.

Conclusion: I'm a huge booster of the energy storage sector and want everybody in the industry to be fabulously successful. The really crazy part is I don't even think about competition between companies because I believe every company that brings a reliable and cost-effective product to market will have more business than it can possibly handle. What I object to are outsized claims of likely technical progress and cost reductions from advances in chemistry in a resource-constrained world. Human beings always want more than they can possibly have because that's the nature of the beast. Promising to satisfy human desires that are beyond the limits of the possible is neither good business nor good public relations.

Posted by John Petersen at 05:44 AM | Why Petersen is Such a Buzzkill | Comments (0)

John Petersen

I'm going to apologize up front for revisiting a topic that inevitably draws furious comment from readers who just don't get it, or who refuse to get it. I understand that it's painful to learn that politicians, environmental advocates and the mainstream media have been lying about critical issues, but that doesn't make exposing the lies less important. So I'm going to endure the slings and arrows of the eco-religious one more time and use a new example to show that plug-in vehicles are a luxury no nation can afford.

Ener1 (HEV) is a pure-play manufacturer of lithium-ion batteries. While I am frequently critical of Ener1's penchant for vague disclosures and EV happy-talk, today I'm going to take a different tack and accept their disclosures as gospel. In the Company section of its website, Ener1 describes its domestic production capacity as follows:

"Current production capacity is 10,000 electric vehicle (EV) packs per year, equivalent to 100,000 hybrid electric vehicle (HEV) packs. Capacity will peak at 30,000 EV packs per year in the current Indiana-based facilities at full utilization.

On receipt of the conditional $118.5 million in federal grants from the U.S. Department of Energy (DOE), EnerDel will double this number by 2012, to give a production capacity of 60,000 EV (600,000 HEV) packs per year, creating an estimated 1,700 new jobs in the State of Indiana. ..."

In a press release dated January 21, 2009, Ener1 disclosed that it planned to spend $237.5 million to expand its domestic battery production capacity to approximately 600,000 HEV or 60,000 EV packs per year. Roughly half of the planned expansion funding will come from a $118.5 million ARRA battery manufacturing grant that Ener1 was awarded in August 2009. Ener1 will have to raise the balance from open market equity sales and other non-government sources to fulfill the requirements of its grant.

HEVs and EVs both use advanced batteries and sophisticated electric drive technologies to capture energy that would have been lost in braking, use the captured energy in subsequent acceleration cycles and minimize the waste of gasoline. While HEVs draw the line at maximizing vehicle efficiency, EVs go a step further and use additional battery capacity to replace the fuel tank, which means an outlet in your garage becomes your fuel source instead of your neighborhood filling station.

The typical American drives about 12,000 miles per year and if he buys a new fuel-efficient car he can expect to pay roughly $18,000 for the vehicle and buy about 400 gallons of gasoline per year. In comparison, a consumer who buys a new HEV for roughly $22,000 can expect to buy 240 gallons of gasoline per year and a consumer who buys a new EV for roughly $40,000 won't buy any gasoline at all.

According to www.fueleconomy.gov burning one gallon of gasoline produces 20 pounds of CO2. While EVs don't burn any gasoline and are widely touted as super-green, the power plants that generate electricity in the U.S. release an average of 9.7 pounds of CO2 for each gallon of gasoline equivalent.

With those numbers firmly in hand, let's do some simple comparisons of what happens when the batteries from the Ener1 expansion leave the plant and are used to manufacture 300,000 additional HEVs or 30,000 additional EVs.

Incremental manufacturing revenue	HEV	EV
Per vehicle	$4,000	$22,000
Plant total	$1.20 billion	$0.66 billion
Annual gasoline savings
Per vehicle (gallons)	160	400
Plant total (gallons)	48 million	12 million
Annual CO2 emission reduction
Per vehicle (tons)	1.60	2.06
Plant total (tons)	480,000	61,800

It's important to note that the table presents the two extremes on the range of possibilities and the likely impact on manufacturing revenue, gasoline consumption and CO2 emissions is somewhere in the middle. Nevertheless, I think it's important for everyone to understand that using the additional battery production from the Ener1 plant to produce 300,000 HEVs instead of 30,000 EVs would be twice as effective at creating jobs, four times as effective at reducing national gasoline consumption and eight times as effective at reducing national CO2 emissions, especially when I consider that the taxpayers are going to pick up half the tab for the plant expansion.

How about you?

This really isn't a rhetorical question. I want to know what my readers think. Please take a few seconds and respond to the following single question poll.



Disclosure: None.

Posted by John Petersen at 04:30 AM | Plug-in Vehicles Are A Luxury No Nation Can Afford | Comments (14)

Maintaining and expanding the world's electric power grids in order to avoid stupendous blackouts, add gigawatts of green power, and bring electricity to a billion additional people, will cost hundreds of billions of dollars over the next 10 years.

Retrofitting just the U.S. power grid will cost $130 billion, estimates the Electric Power Research Institute (EPRI). China has earmarked $135 billion to upgrade and expand its high-voltage grid. India will need to spend billions if it has any hope of reaching its goal of increasing electrical generation capacity to 200 GW by 2012 from roughly 150 GW currently. Among the many planned projects that will cost billions are the super grids that will connect North Sea offshore wind farms to northern Europe and North African desert solar installations to southern Europe.

Of the many players in the "global grid game," two in particular that appear to have strong long-term positions are Japan's NGK Insulators Ltd. (Symbol NGKIF.PK) and Indo Tech Transformers Ltd., an Indian company that trades in Mumbai (Symbol 532717) in which General Electric Co. (Symbol GE) recently acquired a majority stake through a joint venture with a Mexican firm.

As Jesse Berst - whose web site, SmartGridNews, should be required reading - noted last month, "When it comes to the suppliers of grid-scale storage, there's Japan's NGK and its proven product line and then there is everybody else."

Given the growing need to "store" electricity from wind, solar and other so-called intermittent power sources, grid-scale energy storage will be a $4.1 billion market by 2018 compared with just $329 million in 2008, according to Pike Research, and NGK has already "garnered several significant multiyear battery orders," according to Berst.

To be sure, shares of power-storage companies (including NGK) have been performing well for many months. But with governments around the world due to spend upwards of $200 billion in green stimulus money this year and next, NGK's upward climb would logically appear to have a ways to go.

As for Indo Tech, while it's just one of several power transformer manufacturers in India, it's the one that GE appears to be using to spearhead its growth in the fast-growing Indian power market. "As generation ramps up, I think there are going to be a lot of opportunities for growth in the transmission and distribution sector," GE Energy's man in India was recently quoted as saying.

Think of Indo Tech as a purer play that may generate bigger absolute returns than GE itself will in a global market that everyone agrees is, and will continue, growing by leaps and bounds.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

Posted by Bill Paul at 09:03 AM | Playing the 'Global Grid Game' - Japan's NGK, GE Majority-Owned Indo Tech Look Strong | Comments (1)

Tom Konrad, CFA

Why wasn't Aluminum Conductor Composite Core (ACCC) technology mentioned in Colorado's REDI report?

In December, I gave readers a brief summary and a few investing ideas based on Colorado's Renewable Energy Development Infrastructure (REDI) report.  I've now read the entire report, much of which is focused on Colorado's needs in terms of electric infrastructure.  In addition to some useful price data for long distance transmission, there was a short section on "the potential for new transmission technologies" (page 35.)  

The new technologies mentioned were 

1. Aluminum-conductor, steel-supported (ACSS) with ultra-high strength cores.
2. Aluminum-conductor, composite reinforced (ACCR)
3. Superconducting Electricity Pipelines

ACSS is produced by the private company Southwire, while ACCR was developed by 3M, and Southwire is the contract manufacturer.  Superconducting Electricity Pipelines were developed by American Superconductor (AMSC), a company we recently profiled here.  

The Dog that Didn't Bark

What surprised me was what was not in the REDI report: Composite Technology Corp's (CPTC.OB) Aluminum Conductor Composite Core (ACCC) cable. I followed CPTC in 2007 and 2008.  According to most studies I saw, ACCC cable outperforms both ACSS and ACCR on a cost-adjusted basis.  Although I included the company in my Ten Green Energy Gambles for 2009 (one of my less successful picks, the stock was flat that year), I have not been following it closely since the financial crisis began, because I did not think that the company had the financial strength to do well in the new financial climate.  

But I didn't stop following the company out of any doubts about its technology, so I was curious about the absence of ACCC cable from the REDI report.  Since I have several contacts at the Colorado Governor's Energy Office (GEO), I asked around.  Unfortunately, no one was willing to talk on, or off, the record.  

What Can We Conclude?

Since I can't share with you the substance of my conversations with my contacts at GEO, I can only speculate here what the absence from the REDI report might mean. (Note that these speculations are based on my thoughts previous to talking to my contacts at GEO, and are not based on those conversations in any way.)  Knowing that the technology wasn't mentioned, we can only guss that 

1. The drafters of the report were not aware of ACCC's technical superiority to ACSS and ACCR, 
2. ACCC isn't really superior to ACSS and ACCR, or
3. It was a bureaucratic oversight.

In any case, this is not good news for CPTC.  Perhaps a lack of funding or other circumstances has meant that Composite Technology has not been able to effectively communicate the advantages of ACCC to decision makers.  If that does not sound good, it could be worse: Perhaps ACCC really does not have the benefits I thought it did.  

The best-case scenario is #3, a bureaucratic oversight, but even then, why wasn't Composite Technology there making sure such oversights didn't happen?  Superior technology is only one small part of business success.  Another is making sure that people who might make decisions about your technology are aware of it.  The REDI report is intended for legislators 

Prospective investors in Composite Technology Corp. (CPTC.OB) should probably decide for themselves how important this is before investing, and current investors might consider re-evaluating their holdings.  It's all speculation, but if you're on the fence, this might tip you one way or the other.

If readers have any additional insight or guesses, let us know in the comments.

DISCLOSURE: Long AMSC.

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.

Posted by Tom Konrad at 05:48 AM | New Transmission Technologies | Comments (2)

John Petersen

Writing an investment blog on hype-riddled sectors like vehicle electrification and energy storage is tough because the topic is emotionally charged and expectations are often based on political promises, issue advocacy, press releases and mainstream media stories that never tell the complete truth. As a result I spend a huge amount of time debunking popular mythology that's 180 degrees out of sync with business realities and responding to commenters who refuse to believe cars with plugs will be:

• Five to six times less efficient than HEVs when it comes to reducing national gasoline consumption;
• Nine to twelve times less efficient than HEVs when it comes to reducing national CO2 emissions;
• Subject to short-term supply constraints because of their reliance on scarce raw materials;
• Experimental concepts that require years of testing before they're ready for prime time;
• Beyond the price range of all but the most affluent consumers; and
• Wholly unacceptable to consumers that expect a three to five year payback on the cost premium.

The risk and the opportunity for investors is that distorted perceptions of commercialization timelines have led to unreasonably high expectations for lithium-ion battery developers that may experience huge revenue growth in the second half of the decade and unreasonably low expectations for lead-acid battery manufacturers that are certain to experience huge revenue growth over the next five years. As the revenue impact of current automotive production decisions becomes more clear and the wide gulf between expectations and reality narrows, I believe that the equities of objectively cheap lead-acid battery manufacturers will surge while the equities of objectively expensive lithium-ion battery developers underperform.

Press Releases

For better or worse the markets are emotional creatures that can't help but react to press releases and news stories designed to fire the imagination and inspire "wouldn't it be great if ...?" thinking. Some of the more inspirational examples of the unrelenting electric vehicle hype we've seen over the last few months include:

• Tesla Motors' production of its thousandth electric Roadster in time for the 2010 Detroit Auto Show;
• Fisker Automotive's planned production of the Karma plug-in hybrid on the strength of a 1,300 unit order book;
• Th!nk Global's rescue from bankruptcy on the strength of a 2,300 unit order book;
• Toyota Motors' (TM) planned demonstration fleet of 500 plug-in hybrids based on their Prius HEV platform;
• General Motors' planned production of the Volt plug-in hybrid at a rate of 8,000 to 10,000 vehicles annually;
  
• Mitsubishi Motors' (MMTOF.PK) planned production of the MiEV electric car at a rate of 8,500 vehicles annually;
  
• Nissan Motors (NSANY) planned production of the Leaf electric car at a rate of up to 20,000 vehicles annually; and
• President Obama's audacious goal of a million plug-ins on the road by 2015.
  

If one just reads the press releases and news stories, it seems like the whole world is going electric and the days of sunshine, lollipops and roses along Electric Avenue are just around the corner. Perhaps it's my skeptical nature, but plans alone don't impress me because I've seen so many ill-conceived plans fail. I also remember that:

• DeLorean Motor Company produced and sold 9,000 cars in 1981 and 1982 before its CEO decided that he needed to boost revenue by importing agricultural products from South America;
• Ferrari sells approximately 7,000 vehicles per year;
• The Bentley division of Volkswagen sells 8,000 to 10,000 vehicles per year; and
• Toyota Motors (TM) sold its millionth Prius in 2008 and is gearing up to produce 1,000,000 HEVs annually by 2011.

In isolation, the press releases and news stories seem impressive. In the context of an industry that sold 10.5 million vehicles in 2009 during the worst recession since the 1930s, the planned introduction of cars with plugs is inconsequential. These are PR stunts, not credible products. While cars with plugs may become credible by 2020 if they can earn consumer confidence at rates that are comparable to HEVs, I believe their growth potential over the next five years is modest at best.

The following graph comes from www.hybridcars.com and shows annual domestic HEV sales over the last decade. In light of high cost, limited flexibility and unresolved consumer acceptance, performance and safety issues, I have to believe the ramp rate for cars with plugs will be far slower than the ramp rate for HEVs, which took nine years to hit the million vehicle mark.


The eco-religious will strenuously disagree with my admittedly conservative view that a goal of "one million plug-ins by 2015" is sheer presidential fantasy, but differences of opinion are what make horse races and investments interesting.

Production Decisions

Once you back away from the wishful thinking and start looking at automakers' real-time production decisions, a different picture emerges. Instead of trying to leap tall buildings with a single bound, the automakers know that a journey of a thousand miles begins with a single step and they've started on the journey because their customers demand it. The technologies that are going into production, however, are rational incremental steps to improve efficiency without reinventing the industry. The step that is most important for energy storage investors is the rapid implementation of idle elimination technologies, which are typically referred to as either micro-hybrids or stop-start systems.

There are few ideas that are more sensible than idle elimination. Instead of burning gasoline and spewing emissions while you're stuck at a stoplight, turn the engine off until the light turns green. Stop-start systems have little value for a drive in the country, but they can reduce fuel consumption in congested city driving by 6% to 10% for an outlay of a few hundred dollars. After several years of testing, automated stop-start systems have proven themselves to the point where the entire industry is adopting them as standard equipment. A few examples of major stop-start production decisions include:

• Mercedes Benz, which will introduce stop-start systems throughout its entire passenger car line;
• BMW, which has already implemented stop-start systems on all Series 1 and 3 vehicles with manual transmissions;
• Volkswagen, a stop-start pioneer that is implementing the technology throughout its passenger car line;
• Toyota, which has already impemented stop-start systems in its Auris and Yaris lines; and
• Ford, which plans to introduce stop-start systems throughout its entire passenger car line.

In short, the widespread implementation of stop-start technology is not something that might happen on some fine day in the vaguely defined future. It is happening today in factories around the world and while the future of cars with plugs is unclear, it is virtually certain that stop-start technology will be standard equipment within a few years because it's a cheap and proven way to improve fuel economy and reduce emissions. The following graph comes from a 2008 Frost & Sullivan presentation and summarizes their forecast of global hybrid vehicle sales over the next five years, broken down by technology type. The blue sections of each column represent stop-start systems.



Micro hybrids with stop-start technology are already saving about a hundred million gallons of gasoline per year. By 2015 they'll be saving well over a billion gallons of gasoline per year, which compares favorably to the 400 million gallons that could be saved if the presidential goal of a million plug-ins by 2015 was remotely possible. Once again, sensible action by private enterprise has trumped central planning by delivering vastly superior results for far less money.

The major challenge with stop-start technology is that it's very hard on starter batteries because instead of starting the car once per trip, a stop-start system will stop and restart the engine at every stoplight. The current approach is to use premium lead-acid batteries instead of the lower quality batteries the auto-industry historically used as original equipment. The long-term solutions that are currently in final stages of development include:

• Using a combination of batteries and supercapacitors to satisfy the intense demands of stop-start systems, an approach that's being developed by Maxwell Technologies (MXWL) and Continental AG (CON.DE).
• Using lead-carbon batteries that combine battery and supercapacitor characteristics in a single device, an approach that's being developed by Exide Technologies (XIDE), Axion Power International (AXPW.OB) and East Penn Manufacturing.
  

While the numbers were eclipsed by the headline awards to lithium-ion battery developers and largely ignored by investors, President Obama's August 2009 announcement of the recipients of $1.2 billion in ARRA battery manufacturing grants included:

• $34.3 million to Exide Technologies with Axion Power for the production of advanced lead-acid batteries using lead-carbon electrodes for micro and mild hybrid applications; and
• $32.5 million to East Penn Manufacturing for production of the Ultrabattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications.

In other words, these are real technologies that are being built into real production model vehicles and being sold to real customers today. There's no wishful thinking involved. The wave of change has hit the shore and will wash through the entire industry over the next few years.

The Hype Cycle

Professional investors understand that all emerging technologies are subject to a phenomenon the Gartner Group calls "the hype-cycle" and they time their investments accordingly. Venture capital types typically buy before the technology trigger point and sell at the peak of inflated expectations. Value investors frequently wait for the trough of disillusionment before they buy for the long term. The only professional investors that are active during the peak of inflated expectations are traders. TIAX LLC offered the following overview of emerging vehicle technologies and the hype cycle at the Plug-in 2008 Conference.



The big problem with graphs like this one is that they don't provide specific guidance to investors on where individual companies stand. Since I've never been one to avoid controversy and experience has proven that my opinions don't impact the markets I've decided to bite the bullet and offer one man's views of where the pure-play energy storage companies are located on the hype cycle curve.

A123 Systems (AONE) had a tremendously successful IPO in September and is currently trading at 132% of the offering price. It finished 2009 in solid financial condition and has done a great job of managing short-term expectations. All things considered, I'd peg A123 somewhere along the upward slope between the technology trigger and the peak of inflated expectations. While I expect A123's focus on cars with plugs to eventually result in significant disillusionment, the day of reckoning is probably 18 to 24 months off.

Ener1 (HEV) has been a centerfold darling of the cars with plugs set for several years and may well be past its peak of inflated expectations. Ener1 finished 2009 in dreadful financial condition and will require massive capital infusions to stay afloat and provide matching funds for the ARRA battery manufacturing grant it received last August. Ener1 recently filed a Form 8-K to disclose the presentation materials it's currently using in discussions with private investors. Given current market conditions and the huge hits that other companies have taken in recent down-round financings, my sense is that Ener1 is headed into the trough of disillusionment unless management can pull off a major miracle.

Maxwell Technologies (MXWL) has done a very effective job of publicizing its work on stop-start solutions and explaining the potential to investors. As a result, its stock has gone from a low of $4.50 to a closing price of $17.23 on Friday. I've toured Maxwell's supercapacitor plant in Rossens, Switzerland and believe their Boostcap technology has an important role to play as the micro-hybrid market develops. My sense is that Maxwell has already passed through its trough of disillusionment and is now working its way up the slope of enlightenment.

Exide Technologies (XIDE) has done a terrible job of publicizing its work on stop-start solutions because it already sells a couple billion dollars of batteries into the automotive market every year. So unlike the new kids on the block, Exide doesn't need to attract new customers. It just needs to visit existing customers and show how the new lead-carbon product will better serve the customer's needs. The same dynamic exists at East Penn Manufacturing, which couldn't care less about PR because it's privately held and already has a massive customer base. I believe that Exide is out on the plateau of productivity and rapidly approaching a new technology trigger point with the lead-carbon solutions for the micro-hybrid market. With a stock price that only equates to 24% of trailing sales, I think Exide has tremendous potential as customer testing of its new products matures into substantial purchase orders over the next year.

Axion Power International (AXPW.OB) is my old home team and I'm far from unbiased because I've watched the PbC technology mature from laboratory experiment through commercial prototype and am proud of the time I served as board chairman. Axion has always been a public relations oddity because it partnered with East Penn in 2004 and Exide in 2008, which means it's always had to behave like a mature manufacturer instead of taking some of the liberties one would normally expect from a technology start-up. As a result of its existing partnerships with two of the three largest automotive battery manufacturers in the world Axion doesn't need to attract its own customers because its partners already have them. Axion's stock price took a bit of a beating in December when it completed a $26 million down-round financing with some very high quality institutional investors, but when its partners start signing high-volume supply contracts with their existing customers, I expect a technology trigger response that bodes well for Axion's future stock price.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also holds a small long position in Exide Technologies (XIDE).

Posted by John Petersen at 09:57 AM | Vehicle Electrification – Press Releases, Production Decisions and The Hype Cycle | Comments (0)