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October 31, 2006

Hydrogen is a long-term story... and that's exactly why I like QuestAir Tech

Ballard Power Systems (NASDAQ:BLDP or TSE:BLD) was arguably the first high-profile alternative energy story to hit North American markets since the oil shock of the 1970s, at a time when investors knew much less about the promises and pitfalls of fuel cells and the so-called “hydrogen economy� than they do today. It was also an era of general euphoria about anything tech and Ballard got caught into it all. But today I will not focus on Ballard - I’m only giving this example to highlight the fact that the idea of hydrogen powering our whole economy cleanly and renewably has been with us for some time now. Ballard’s rapid rise, especially on the Toronto Exchange, followed by its equally rapid fall and its complete lack of a recovery since, is a sobering reminder that a full-scale hydrogen-powered economy is still years away, at best.

The Hydrogen Economy Will Happen... Slowly
Last week, someone sent me an article titled The Truth About Hydrogen which was published in the November issue of Popular Mechanics, but I sat on the article for a while. I shouldn’t have. It’s a nice and concise, no-nonsense piece about what hydrogen can and can’t do (yet) for our energy-hungry economy. It confirms what most experts think – that while there will be (and has already been) good progress made on overcoming the wealth of barriers, technical and otherwise, that stand in the way of widespread adoption of hydrogen as a primary fuel source for a number of applications, we still have a long way to go before Jeremy Rifkin’s hydrogen economy vision comes to be. Nevertheless, there is a lot of interest in hydrogen from the tech community, policy-makers, investors, and, increasingly, the public at large, and hydrogen undoubtedly holds great promises in the long run.

Seek out the bridge technologies
My view, and that of many of our readers, is that the economy will eventually shift into clean mode, driven in part by a push for greater efficiency, tightening regulations, and changing customer demand. That won't, however, happen overnight, especially with the much touted "hydrogen revolution". That's why I'm a big believer in transition, or bridge, technologies. Companies that position themselves to make money along the whole spectrum of phases that will take us from where we are today to a cleaner economy will be the big winners, and so will their shareholders.

There are a number of hydrogen and fuel-cell players out there that, while undeniably sitting on promising ideas, really have no way to generate positive cash flow until their core technology is fully commercialized. That is, in principle, how most firms start out, but the caveat here is that some companies are at best a few years away from generating sustainable and healthy profits (Ballard, anyone?). This is exactly why I like QuestAir Technologies (TSE:QAR or LSE:QAR). QuestAir’s main technology is used to purify gases, mostly hydrogen, utilizing a process known as pressure swing adsorption (PSA). What I like about QuestAir is that the company’s technology has some very real applications in a range of existing industrial processes, chief among them oil refining. But what is also interesting is that it is positioning itself for the eventual setting up "hydrogen highways", or routes along which gas stations would offer hydrogen fuelling facilities. The company is also in a partnership with a leading fuel cell developer and recently got exposure to the US coal-to-liquids market through the sale of one of its units to a leading player in that space.

QuestAir finished 102nd on Deloitte's 2006 Technology Fast 500, which ranks the fastest-growing North American tech companies based on percentage revenue growth over a five-year period. The company's revenue growth over that period of time was around 2,085%.

Now the usual caveats apply here: (a) it's an emerging company that is heavily reliant on one large strategic partner for sales growth, (b) it's got negative EBITDA that exceed revenues, and (c) I only gave you a very brief snapshot of the firm, so you should definitely do your homework if I've poked your interest.

DISCLOSURE: The author is long Questair Tech.

October 29, 2006

Carbon Finance…The Next Bonanza

Few investors outside of Europe have ever heard of the term carbon finance. What some investors might have heard, however, is that Goldman Sachs took, on September 20, 2006, a 10.1% stake in a little outfit known as Climate Exchange plc (LSE:CLE) for approximately $23 million. Admittedly, by Goldman Sachs standards, that’s peanuts. Not to be outdone, Morgan Stanley unveiled a plan on Thursday October 26 to invest a whopping $3 billion in global carbon markets over the next few years…now that’s the kind of money that gets folks talking at the water cooler, especially when it’s in something they’ve never heard of.

What is carbon trading and how does it work?

Emissions trading is an innovative concept that was first used in the US to reduce emissions of the acid rain-forming gases NOx and SO2. It entails placing a cap on the total emissions of a given pollutant within an imaginary ‘bubble’ (e.g. an industrial district, a city, a state, or, in the case of carbon dioxide (CO2), the whole planet), and allowing emitters of that pollutant to sort out, among themselves, who should emit how much of that limit based on factors such as the nature of their industries, the efficiency of their operations, periodic requirements for higher commercial output, etc.

Lets look at an example. Imagine an industrial district with 3 plants operating in it. Local regulators determine that a maximum of 5 units of pollutant X can go into the atmosphere for any one year. Plant A purchases emissions rights for 3 units, Plant B for 1 and Plant C for 1. Plant A later decides to invest in a new technology and only emits 2 units per year as a result. At the same time, Plant B receives a big order and must scale up production, causing it to increase its output of pollutant X to 2 units. Plant A sells its spare unit to Plant B, and nothing changes for Plant C – there are still no more than 5 units of pollutant X going into the atmosphere, but the allocation of those 5 units has changed. The environmentally-optimal emission level thus never gets exceeded but the market, rather than regulators, decide on the most efficient way to divide up that limit among participating entities.

The Global Carbon Market

An interesting thing about CO2 and other greenhouse gases (GHGs) is that they are global pollutants, meaning that the end result of their presence in the atmosphere in large quantities will be the same whether they came from a Chinese power plant or an American SUV. This spells great possibilities for coordination between national regulatory bodies and the eventual setting up of a global marketplace for CO2 emissions rights.

The market for CO2 emissions currently exists in 2 forms: (a) in jurisdictions where there are legislative frameworks with formal targets in place to control GHGs, such as in the EU, carbon markets, as they are called, form the cornerstone of regulatory implementation, and (b) in areas where there are no regulations but certain market players adopt voluntary emissions targets, such as in the US, carbon trading is one tool used to meet those targets. The actual exchanges used to carry out carbon trades are known as climate exchanges, although many trades also occur in OTC markets.

In the EU, the Emissions Trading Scheme (ETS) came into force on January 1, 2005. That year, the first one during which selected facilities were subjected enforceable regulatory limits, the value of the market reached $8.2 billion. By half-year 2006, carbon finance information provider Point Carbon reported that the ETS’ value already stood at $12.5 billion. Point Carbon estimates that the global carbon market, including both the ETS and voluntary initiatives such as the Chicago Climate Exchange (CCX), will be worth upwards of $27 billion by the end of 2006, up from around $12 billion in 2005 and $377 million in 2004. Now the ETS will continue to account for the bulk of this until other jurisdictions adopt mandatory GHG targets, and that’s where it gets interesting.

Most folks outside of environmental or political punditry circles probably didn’t pay too much attention to the signing into law of Assembly Bill 32 in California just a few weeks back. AB 32 will impose firm caps on GHG emissions in that state, the 6th largest economy in the world, starting in 2012, and will in all likelihood rely on carbon trading to achieve its targets. The Regional Greenhouse Gas Initiative (RGGI) is another interesting development that has been in the works for some time. RGGI will cap GHG emissions from power producers in Northeastern and Mid-Atlantic states and establish a trading system starting in 2009. Even more interesting is the growing number of commentators that now predict federally-imposed GHG emissions targets sometime in the near- to medium-term.

Seeing as the US (a) accounts for about 25% of global GHG emissions and (b) houses the most liquid financial markets in the world, we could be talking about some pretty big money here. A recent Financial Times article estimates that, should consensus be attained on a plan to fight global climate change between the largest emitting jurisdictions, expenditures could top $1,000 billion within 5 years. Seen under this light, those recent announcements by Morgan Stanley and Goldman Sachs look increasingly less like a means to placate environmentalists and earn a little goodwill, and increasingly more like pretty sound strategic positioning to cash in on a pretty significant business opportunity.

How Do I Play This?

Admittedly, this is mostly institutional stuff and that’s probably where a lot of the action will be. But retail investors can definitely get a piece of the pie, too. One good way to play this is to be on the lookout for companies with promising technologies that are sure to get big uptake under the right regulatory scenario. Citigroup Investment Research, in collaboration with the World Resource Institute, a highly respected DC-based environmental think-thank, released this study a few months ago discussing 12 large-cap companies they believe are well positioned to cash in.

The most significant potential upside probably rests, however, with small-cap clean tech pure plays discussed daily on of blogs such as this one. There is an increasing amount of those companies out there, both publicly-listed or at various stages of the VC funding process, and, if you pick wisely, have sufficient nerve and the right amount of patience, you will probably do pretty well. For the more cautious folks out there, a growing number of large industrial concerns like GE, DuPont, Siemens, BP, etc are looking at this and investing big money in R&D to position themselves and their technologies.

But today I want to discuss a pretty unique way to play the climate bonanza: buying directly into climate exchanges. Climate Exchange plc (disclosure: I don’t own it, but am definitely looking at it), the company in which Goldman took a 10.1% stake back in September, has had a pretty nice run since the entry into force of the ETS (see 3 charts below). The company owns both the European Climate Exchange (ECX), the entity with the biggest share of the European exchange-traded carbon market (~80% of volume), and the Chicago Climate Exchange, the only outfit with a functioning carbon trading platform in the US. Volumes traded on both exchanges are growing, fast.

In the 8 months ended 31 August 2006, CCX traded approximately 8 million metric tonnes of carbon in comparison with 0.53 million metric tonnes traded over the same period in 2005. ECX saw trading volumes of 257 million tonnes in the first eight months of 2006 compared with volumes traded from April 2005 (commencement of trading) to December of 95 million tonnes. Now that’s all nice and well. But imagine what would happen to the stock of the only (so far) owner of a carbon trading platform in the US if the Feds were to announce a climate change plan. Even without that, AB 32 and the RGGI should provide plenty of volume in the next few years even before they enter into force, as targeted companies will surely want to hone their carbon trading skills before they’re faced with enforceable targets.

Closing Thoughts on Carbon Finance

To those who kick and scream every time they hear the words climate change or Kyoto, keep these two things in mind. First, there is far more scientific consensus on this then Fox News would have you believe - GHG's will one day be regulated . Second, it’s not all downside. You need to see this as Goldman is seeing this - as a big opportunity.

Is there going to be a massive transfer of wealth away from inefficient and dirty companies towards cunning investors who understand carbon trading? That remains to be seen but I, and some big institutions, strongly believe that to be the case. I see a great opportunity in carbon finance for those who can navigate the waters ahead.

October 18, 2006

Google and Solar Power

Yesterday, I came across an article about Google planning to intsall the largest corporate solar project.

Here is a summary:

  • 9,200 solar panels will be placed on six buildings at its Mountain View headquarters by next spring
  • this will produce up to 1.6 megawatts of electricity - enough to supply 30 percent of the campus' electricity on a hot summer day
  • a company spokesman said that concern about the environment as well as the rising price of electricity motivated the company to go solar
  • company spokesman also made the comment: "'If we can dispel the myth along the way that you can't be green and profitable at the same time, that's another benefit.'
  • The company has also installed motion sensors in rooms to turn lights on and off; serves only organic foods in its cafeterias and provides a commuter shuttle that removes hundreds of cars from the road each day

    I applaud this move and think this is great. I believe Google is doing this to help the enviroment and of course, the perception that they are doing something on this front never hurts. The article ends on an intersting note:

    "Radcliffe declined to say how much the solar installation would cost, but added that the energy would pay for itself after 10 years"

    I am glad they are doing this but a 10 year pay-back period suggests to me this is more about doing the right thing than the economical thing.

  • October 16, 2006

    Ammonia-Fueled Combustion Engines are Coming

    A while back, Jeff, one of our readers pointed me to an announcement on ammonia fuelled irrigation pumps. Late last week, Jeff sent me another link to Market Watch's coverage of the Ammonia Conference in Algona, Iowa.

    In the article, Ted Hollinger, President of Hydrogen Energy Center (HYEG.OB), outlines the company's efforts to produce ammonia fueled engines. From the article:

    HEC projects their ammonia-fueled engines will produce 2.33 times more horsepower than a gasoline-fueled engine and plan to have finalized systems ready for sale in 2008.

    "Ted Hollinger's presentation was one of the highlights of the conference. If the Hydrogen Engine Center ammonia fueled commercial internal combustion engines are as high in efficiency (50%) as Ted Hollinger indicates, it will be difficult for fuel cells to compete," commented Norm Olsen, P.E., Manager of Iowa State University's BECON (Biomass Energy Conversion) Facility in Nevada, IA.

    That certainly is very interesting and presents a great opportunity for the company if his projections are correct.

    I had a look at 1-year performance of the stock and it has just been hammered since June of this year with a precipitous drop since late August. Does anyone have an explanation to that recent performance?

    October 03, 2006

    A Round-Up of Alternative Energy News

    Here is a round-up of some news and information I have come across in my readings:

    Venture Capital in Alternative Energy
    Rob May at CleanTechVC made a great post about venture capital investments in energy technologies.Here are some excerpts from his post:

    • US energy technology VC investments are at $1.7B so far in 2006 -- compare this with $0.9B for all of 2005
    • solar tech has received more than 10% of all energy technology VC investments so far this year. Interestingly, while investments in fuel cell technology have been generally flat or dropping over the past year, battery-related investments have been growing very quickly.
    • ethanol-related VC investments have received more than $400mm, or just about one quarter of all energy tech investment
    • other fuels-related investment areas -- biodiesel, fuels-related biotech, and new drive train technologies have collectively received less than $100mm so far this year. Such investments clearly are not receiving the same level of attention in the rush to invest in ethanol-related opportunities.

    New Materials in the Solar Industry
    Tyler Hamilton at Clean Break points us to an article at News.com about change in materials in solar industry. Today, 90% of solar panels today are made from crystalline silicon. A group of new companies, (NanoSolar, HelioVolt, and Miasoleccount) believe that CIGS-based (copper indium gallium selenide) thin film cells cost less to produce and are easier to install. I could not find any of the companies mentioned as being publicly traded yet but they certainly deserve being watched.

    Texas Invests 10 Billion in Wind Power
    Clean Edge has a press release of 10 Billion Wind Energy Partnership. Very interesting and encouraging but I must say the press release was thin on details of how the money would be spent. There was a statement in there that reads "over the next 20 years". By averaging this out , this would be approximately 500 million a year. No small amount.

    A couple of interesting tidbits from that release:

    • Texas has abundant wind energy, particularly in West Texas and along the gulf cost.
    • earlier this summer Texas surpassed California as the nation’s leader in wind generation capacity

    Energy Conversion Devices Review at Motley Fool
    A couple of weeks back, The Motley Fool did had a critical article about Energy Conversion Devices, ENER. Stehpen Ellis, the author gives Energy Conversion devices a 1 out of 6 for execution in market areas outlined in 2001. He backs up his view with revenue and income numbers which is always a plus.

    Battery-Powered Harley
    TreeHugger has short piece on an electric Harley. The bike goes up to 60 miles powered by a huge, 560 pound battery and has a side car which holds a battery-recharging biodiesel generator. Yeah, it's big but technology has to start somewhere. Getting the size of the battery and side car down will certainly improve efficiency. Carl Vogel of Vogelbilt has said he would like to start producing electric motorcycles by 2007.

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