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December 29, 2006

Ending 2006 on a Cautionary Note But Looking Forward to a Great 2007

Firstly, apologies to our readers for the lack of posting over the past week; like those of you who celebrate Christmas, we have been busy spending time with loved ones, eating plenty of food and catching up on things we had been putting off for a while. We will be back to our normal posting schedule next week.

Now, on with it. I want to dedicate this final post for 2006 to caution and cool-headedness. While 2006 certainly was one of the most prolific years yet for alternative energy and clean tech enthusiasts, investing in this asset class remains an overall very risky enterprise, and it is paramount that our readers be reminded of this.

A Few Outside Perspectives

Consider this passage from an email I received from one of our readers about a week ago: “I think some of the best of these companies will be very profitable in the years ahead, particularly considering "peak-oil" and global warming. One thing you could do that would be beneficial is to differentiate between those companies that are profitable and those that are not, because frankly there are a lot of hype-only companies in the alt energy space.?

And therein lies the rub. Besides a few token examples like Suntech Power [NYSE:STP], most alt energy and clean tech companies have no earnings and high cash burn rates, making them questionable propositions when subjected to conventional valuation approaches. Most of these investments thus range from risky to highly speculative, and it is still too early in the game, in many cases, to separate the great prospects form the mediocre ones (though you should be able to spot the real stinkers).

Scott Rothbort over at TheStreet.com, in a December 13 article entitled When 'Buy What You Know' Doesn't Pay, goes as far saying: “This entire asset class gets the great-product, bad-investment nod. We can use light, water, wind, steam or bovine excrement to generate energy for all I care. But even if Earth, Wind and Fire were to sing for us, it is highly unlikely that a stand-alone company is going to make you a dime in the alternative energy sector.? While I couldn’t disagree more with Rothbort, his commentary on this topic is one of those bluntly-worded hype killers that are sometimes necessary to bring folks back to reality.

One of my favorite websites, The Motley Fool, has published a number of pieces over the past 12 months that, as 2006 comes to a close, serve as good reminders that investing in alt energy and clean tech is a risky business. On December 20, FuelCell Energy [NASDAQ: FCEL]. On November 15, Ballard Power [NASDAQ: BLDP or TSE:BLD] . On October 27, Plug Power [NASDAQ: PLUG]. And on January 17, Hoku Scientific [NASDAQ: HOKU].

Why Alt Energy Pessimists Are Wrong

The main reason why clean tech and alt energy bashers are dead wrong is that, for this asset class, the past is no indication of the future. Anyone who bothers to read the news on a daily basis knows that a big trend is afoot, and that this trend will only intensify in the years ahead. Natural resources and ecological services such as clean air are getting scarcer, and this scarcity will soon prove more of a break on economic growth and societal development than any other set of constraints we face.

Let’s forget about peak oil – let’s just say that it’s too contentious a concept and let’s leave it out for now. Think about the looming global water shortage, air pollution in Chinese cities, climate change, loss of forest cover in many parts of the world, and the decline in global fish stocks, to name a few.

Think also of non-environmental trends impacting demand for alt energy, and ask yourself whether you see these trends softening or hardening in the years ahead. Think of terrorism and the impact that it has had and will continue to have on the geopolitics of energy. Any signs of this ameliorating? Think of the emergence of India and China and of their effect on commodity prices.

You would have to be a heck of an optimist to believe that alt energy and clean tech companies won’t ever make you a dime. Demand for the solutions they offer will only grow moving forward because: (a) the problems enumerated above will have to be solved sooner rather than later and (b) people are not, overall, in favor of giving up economic growth and setting the clock back on 4 centuries of economic and social development. Most realistic folks out there are buying the clean tech argument because it’s grounded in common sense. But that certainly doesn’t mean you should be careless with your money!

The Future Will Be Bright For Alternative Energy And Clean Technology Stocks

Need proof that investors are picking up on these trends? Consider these numbers from specialist alt energy information provider New Energy Finance. If you’ve never done so before, you should also browse through recent press releases by the Cleantech Venture Network, an outfit that tracks VC investments in the broad clean tech space.

The Motley Fool also had nice things to say about alt energy on a number of occasions this past year, and published a piece entitled Searching for an Energy Revolution that contains some very useful material.

Is there an unhealthy amount of hype surrounding clean tech and alt energy? Sometimes. Is the whole asset class going to make you piles of cash? No way! Is investing in clean tech and alt energy risky? You bet! Will there be many companies that go belly-up? Certainly! If you do your homework, and, as a result, pick your investment choices wisely, will you make money? Not a doubt in my mind! Is this asset class, at this stage of its evolution, suitable for more cautious investors? Probably not…although keep in mind that many non-pure plays have material exposure to this space. Just think of GE [NYSE:GE], Sasol [NYSE:SSL], FPL [NYSE:FPL], ADM [NYSE:ADM], and Iberdrola [MCE:IBE], to name a few.

The alt energy investor must be patient and keep a cool head. At the end of the day, it’s up to you to determine your own risk profile, do your homework and hedge your bets somehow. But it is my humble opinion that those who decide to ignore alt energy and clean tech companies altogether will, on day, be wishing they hadn’t.

Happy New Year and see you in 2007!

(DISCLOSURE: I am long Suntech Power. I have no affiliation with any of the organizations discussed above.)

December 19, 2006

The Future Should Be Bright for Coal-to-Liquids

You are at a cocktail party somewhere, and, after joining a random group of revelers, you utter the following words: “If I say alternative fuel, what’s the very first thing that comes to mind…don’t even think about it, just answer!? If this fiesta was taking place last night, 9 folks out of 10 would have answered “ethanol?. The remaining 10% would have probably made-up a mix-bag of “biodiesel?, “hydrogen?, and, in extremely rare cases, “synthetic fuels?, also known as synfuels. Ten years from now, I bet you anything that far more than 10% of the general public will be thinking synfuel when they hear the words "alternative fuel".

Synfuels are liquid fuels made from coal, natural gas or biomass. They can be used to power the same kind of applications that currently utilize gasoline or diesel, most notably cars. Today I want to focus on one particular sub-type of synfuel - namely coal-based synfuel or coal-to-liquids (CTL). An article on CTL hit the mainstream newswire on Monday, casting some light on this little-known-yet-promising fuel source.

Investing in CTL: 4 Things You Should Know

The aim of this post is not to go over the whole process behind making CTL, thus me providing some links above for those who are curious about the science behind CTL. What I want to do here is to give you nuggets of useful information that will provide a good starting point should you decide to look at this seriously as an investment option. Here are 4 main things you should know:

A) There’s lots of coal around. The Energy Information Agency (EIA) estimates that, at the 2002 production rate, there’s about 200 years worth of coal left in the global ground; 26% is in the US, 23% in the Former Soviet Union and 12% in China. Like oil, recoverable reserves will likely increase as new extraction processes are brought on stream. However, like oil, production rates are going to increase massively as demand from booming economies like China and India picks up.

B) I’ve come across a couple of different estimates of crude oil price floors required to make CTL operations in the US profitable. Estimates typically range from $40/barrel to $45/barrel. You thus have to be an energy bull to want to invest in CTL in the US. Apparently, the Chinese are running operations that are economical at $25/barrel.

On a related note, I recently came across an interesting article in the September 2006 edition of Chadbourne & Parke’s Project Finance Newswire (PDF, see article on p. 24) discussing, among other things, the energy price risk associated with investing in CTL from a project finance standpoint.

C) CTL fuel burns much cleaner than conventional fuels, as a lot of the dirty stuff is removed during the production process. This means that, under certain favorable regulatory scenarios, CTL could hold some form of a ‘clean’ premium over gasoline at the pump (e.g. lower taxes). However, producing synfuel from coal generates large amounts of carbon dioxide, and carbon dioxide could become regulated at the federal level before most proposed US CTL operations are fully up-and-running. This could add certain costs at the front end of the production process that would nullify back end benefits.

D) Politicians and the military like CTL. I won’t discuss the military as I don' know too much about it, other than the fact they have been running some tests and seem to like the idea of not having to rely on hostile countries to power their fighter jets.

Politicians like CTL for the same reasons they like ethanol: (a) there’s a rural job-creation angle in an industry otherwise seen as on the wane, (b) it’s an easy sell to voters concerned about the security implications of sourcing a large part of America’s energy from unfriendly nations, and (c) soft environmentalists, under the right conditions (e.g. carbon capture at CTL plants), will embrace CTL because of its overall cleaner profile. If you want specifics on the existing and proposed government incentives for CTL, go to the EIA’s most recent Coal News and Markets page and scroll down to the section called “Coal Technology? towards the end. Under the sub-heading “Coal-to-Liquids Project Financing?, there is a short discussion on this topic (sorry for not being able to provide a direct link to the section, the page doesn’t allow for it).

3 CTL Stocks

The article on CTL discussed initially lists 3 companies who are banking on a bright future for coal-based synfuel: Headwaters [NYSE:HW], Syntroleum Corp [NASDAQ:SYNM], and Rentech [AMEX:RTK].

Of the 3 companies, Headwaters is the only 1 with positive earnings, although I suspect it’s not from its CTL operations. The stock has had a terrible year, and it is currently trading down about 40% from its 52-week high of $40.19. Earnings year-on-year are down nearly 38%. Nevertheless, analysts covering the stock seem confident that 2007 EPS will be markedly higher than 2006 EPS.

Syntroleum Corp hasn’t exactly had a great year either, and analysts don’t expect the firm to become profitable for a few more years. Syntroleum is the company with the most important exposure to the military.

Rentech is the company I am most familiar with, as I seriously investigated it as a potential investment last summer. In the end, I decided not to buy at and I’m happy I made that choice. Rentech has a very interesting project pipeline, and is probably the closest thing to a CTL pureplay there is. I might look it again in the near future.

After deciding not to purchase Rentech, synfuels fell off my radar screen, and with good reason. There hasn't been an exciting synfuel story yet, and investor attention (but not mine!) has been squarely on ethanol. I must say that reading that article has rekindled my interest, and CTL is definitely something that I'm going to start paying more attention to.

To conclude, if you want a good, safe way to get some exposure to CTL, have a quick look at the South African company Sasol [NYSE:SSL]. When South Africa was under a trade embargo because of its apartheid regime, Sasol perfected CTL technology to keep South African cars running, and the company is now busy developing that side of their business in places like China.

December 15, 2006

Solar Stocks and the Tax Credit Extension

The US Congress voted on Monday December 11 to extend, by 1 year, a 30% tax credit for the solar industry. This federal incentive is essential in allowing solar to be competitive with conventional energy sources.

How have investors reacted to this announcement so far? Let’s have a quick look at 5 high-profile solar stocks to see whether this news has impacted the trading patterns of solar investors. The stocks are: Suntech Power [NYSE:STP], Energy Conversion Devices [NASDAQ:ENER], DayStar Tech [NASDAQ:DSTI], Evergreen

The results are not especially conclusive, to say the least. SunPower and Energy Conversion Devices both had nice pops on the news but, by the end of Thursday, both stocks had shed some of the gain. Evergreen has effectively gone nowhere since mid-August and this did nothing rectify the situation. SunTech actually began correcting half-way through Monday after enjoying a 23% run to the upside over the previous 30 days, probably on profit taking. By the end of Tuesday, Suntech was down 8% on its Friday closing price – its steepest 2-day slump in over a month. Finally, DayStar Tech, unhindered by the announcement, continued its long journey south from its 52-week high of $15.75 to close at $4.27 on Thursday, flirting with its 52-week low of $4.25.

The announcement likely had no lasting effect on solar stocks because the extension is for 1 year. The only 2 companies turning a profit so far are Suntech Power and SunPower, and this is the 1st year SunPower does so. Most investors and project financiers’ time horizons are longer than 1 year, especially for capital-intensive endeavors like solar farms, and it is thus far from clear whether this decision on its own will spur any significant investment in the solar space if there is a risk that the tax credit isn’t renewed in 2007.

To be sure, the prospects for solar being able to compete with other energy sources without government support are improving rapidly. Too many uncertainties, however, remain, and it is highly improbable that this industry will be able to thrive on its own in the next couple of years, thus calls by industry insiders for 5 or even 10-year tax credits.

(DISCLOSURE: The author owns Suntech Power)

December 13, 2006

EDF Sets Up Carbon Fund

The French electric utility EDF [CAC:EDF] announced today that it is setting up a €300 million ($396 million) carbon fund to help meet its regulatory requirements under the EU ETS, Europe’s regulatory framework to control CO2 emissions.

Carbon funds allow companies to make investments that create CO2 emissions reductions in emerging markets, such as upgrades to industrial operations or renewable energy projects, and use the credits generated thus to meet regulatory requirements in their home jurisdictions. This is a good way to concurrently reduce compliance costs at home and foster environmentally-friendly investments in emerging economies. I have discussed recent development in this mechanism of the Kyoto protocol, called the Clean Development Mechanism, in a previous post.

Carbon Funds are nothing new – the World Bank has been running carbon funds for some time now. What is interesting is that a growing numbers of companies and financial institutions are going at it without the support of governments and the World Bank, indicating a certain level of maturing in that market.

As discussed in a previous post on carbon finance, certain players in the North American financial services industry, most notably Goldman Sachs [NYSE:GS] and Morgan Stanley [NYSE:MS], have begun positioning themselves in anticipation of climate change regulations on this side of the pond. Opportunities tied to emissions trading exist in a number of areas such as brokerage, investment banking, information provision and strategic consulting.

December 10, 2006

Trading Alert: Purchased Beacon Power Corp (NASDAQ:BCON)

I purchased some more Beacon Power Corp. (NASDAQ:BCON) on Friday after watching the stock slowly dwindle over the past 2 weeks back toward its 3-month low. I purchased it at $1.07

Beacon Power makes flywheel-based, environmentally-friendly energy storage devices that can help smooth out supply-demand swings in electricity grids, notably by storing base-load power and releasing it during peak-load periods. More on Beacon Power’s flywheel technology.

Beacon is not a company that looks particularly attractive fundamentally at the moment. For Q3 2006, the company reported a net loss of $3,165,000, or -$0.06 per share, on sales of $277,000. Sales were down around 9% and net loss grew by nearly 48% when compared to Q3 ‘05. The main culprit for this wider loss was R&D expenses of $1,314,000, up from $358,000 in Q3 ’05. Overall, operating expenses for the three months ended September 30, 2006, were $3,333,000 compared to $2,228,000 for the same period in 2005, up about 50%.

From a technical point of view, Beacon is nothing to write home about either. The stock decisively broke its 200-day moving average to the downside some time ago, and volumes have been drying up. We’re not seeing good signs of support either, so it could go lower yet.

The problem with Beacon is that it got engulfed in the general euphoria that drove a lot of the alternative energy stocks to unjustifiable heights last fall/winter. Those who had positions in stocks like Energy Conversion Devices (NASDAQ: ENER) and Suntech Power (NYSE:STP) at the time will remember what I’m talking about. Anyone who took a long position in Beacon Power between August 2005 and May 2006 either: (a) was looking to ride the speculation wave or (b) didn’t know what he/she was doing. Beacon hit a 4-year high on August 26, 2005, at $4.13, while ‘06 EPS estimates called for -0.20 and ’07 EPS estimates for -0.12.

What, then, do I like about Beacon? Beacon currently meets most of the requirements that I look for when I build a ‘buy-and-hold’ position in a development-stage clean tech company: (a) a technology for which I can see applications not only 20 years down the road but now (I’ve made this point here before); (b) research and development partnerships with one or a couple of reputable entities out of which a steady flow of good news streams out (in this case the US Department of Energy and the states of California and New York); (c) low trading volumes and no upside momentum, which provides plenty of attractive entry points. I like Beacon at around $1 although I am guilty of having bought it at $1.20 in the past on good news about its tests.

On occasion, stocks like Beacon will get nice pops on good news – I don’t pay attention to that. Something like this could be a 5-year story, maybe even longer. Beacon has one of the best exposures to California in the utility-scale energy storage space, and California has one of the most ambitious renewables program in the world. Beacon’s technology could be key in helping the deployment of renewable energy, as it would help to mitigate worries around reliability.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

December 08, 2006

Event Alert: State and Federal Green House Gas Regulation

The American Council On Renewable Energy (ACORE), the Renewable Energy Resources Committee of the American Bar Association (SEER Section) and the Renewable Energy Committee of the Energy Bar Association are organizing a teleconference on the state of play with climate change regulations across the US.

The teleconference is entitled State and Federal Green House Gas Regulation: Current Status, Outlook, and Implications for Renewable Energy (click on the link for details). The good thing about it is that it's only $20 to participate and free if you are a student.

(DISCLOSURE: We are not affiliated with, or otherwise have financial interests in, any of the organizations mentioned above)

December 06, 2006

The EIA's Annual Energy Outlook 2007 (Early Release) is Out

A quick post to inform our readers that the Energy Information Administration has just published an 'early release' version of its 2007 Annual Energy Outlook.

Topics covered include:

Energy Trends to 2030
Economic Growth
Energy Prices
Energy Consumption
Energy Intensity
Electricity Generation
Energy Production and Imports
Carbon Dioxide Emissions

Along with this table outlining a range of energy-related projections to 2030 (PDF document), including revisions from 2006 projections.

December 02, 2006

A Conversation with Ambassador Sklar on Solar in San Francisco

By Neal Dikeman, Partner, Jane Capital Partners LLC, Founding Contributor, Cleantechblog.com, and Contributing Editor, AltEnergyStocks.com.

This week I had an opportunity to have a conversation with Ambassador Richard Sklar, the President of the San Francisco Public Utilities Commission, on renewables and solar power in San Francisco. This is his second stint at the SF PUC, and besides a time in politics, Ambassador Sklar has served as an executive in and advisor to private manufacturing and engineering firms. I had met him and several of the top SF PUC team at Solar 2006 in San Jose, and had been extremely impressed with the SF PUC, both in their commitment of senior people to a solar initiative, and the diligence with which they were approaching the issues. So I was certainly curious to hear what he had to say.

For those of you that do not know, the SF PUC is the San Francisco owned power, water, and sewage provider for much of the municipal facilities in San Francisco.

From their website: "The San Francisco Public Utilities Commission (SFPUC) is a department of the City and County of San Francisco that provides water, wastewater, and municipal power services to San Francisco. Under contractual agreement with 28 wholesale water agencies, the SFPUC also supplies water to 1.6 million additional customers within three Bay Area counties. The SFPUC system provides four distinct services: Regional Water, Local Water, Wastewater (collection, treatment and disposal), and Power. "

I asked Ambassador Sklar about the SF PUC sustainability plan, found here, and what that meant for San Francisco power.

He asked me to consider that the SF PUC does 3 things - supplies water, cleans dirty water, and supplies power to San Francisco. As far as sustainability? According to Ambassador Sklar, San Francisco makes a concerted attempt to do the job with no more harm than necessary, and to be as clean as possible while doing it. After all, this is San Francisco.

On the power side, the SF PUC definitely thinks sustainable and green, and if Ambassador Sklar and his team are any indication, very, very big. They actually have established a network of solar monitoring stations around the city to measure our solar resource. Their primary source of power is the Hetch Hetchy hydroelectic power system. The SFPUC also owns a number of photovoltaic solar installations around the city, the largest of these is the marquee 675 kW system on Moscone Center. They also have 255 kW of solar and operate a waste gas cogen facility at the Southeast Waste Water Treatment Plant, and have a 283 kW solar project going in at Pier 96.

Ambassador Sklar shared that they are expecting to shortly launch solicitations to buy solar power from private producers (unlike private parties, the SF PUC has been unable to take advantage of state and federal rebates and tax incentives) - which is quite exciting, and like Moscone Center will be a marquee event for solar in California.

I did ask about the Moscone Center project, after all solar is not exactly a low cost resource, and 675 kW is not much of a power plant to get excited about in the grand scheme of things. But it seems the SF PUC certainly understands this, and is thinking much longer term. Ambassador Sklar was quick to answer that Moscone Center is just a demonstration project - nothing more, simply a first step in turning San Francisco power greener. The quote I liked, "we'll be serious about solar in San Francisco when we cover the airport and all of our reservoirs in solar cells." According to Ambassador Sklar the Moscone Center and other solar PV installations are just toys, demonstrations to say, in San Francisco we believe in green power, and we're here to stay in solar, so pay attention. That being said, they are also serious about delivering economic power to our city, and have no intention of igorning the cost side of solar - hence the intensive efforts by the SF PUC team in demonstration projects and analysis to understand what it will cost before they make a big plunge.

[I do find it mildly humorous that while the SF PUC may understand that their solar install is just a demonstration - the solar industry considered the Moscone RFP the biggest thing to hit it in years. Obviously the industry still has a lot of maturing to do.]

We also had a chance to talk about what the end game might be for San Francisco solar and renewable power - where exactly this first step was taking us. I have to say, these guys have much bigger ideas longer term; they are not sitting still. Throughout the discussion Ambassador Sklar described his vision of green power in San Francisco, and I left the meeting thinking seriously about the series of "What ifs" that he posed in our conversation?

What if we mandated that every new building in San Francisco must include solar panels?
What if we cover the aiport and our physical city owned infrastructure in solar panels?
What if we build our own wind farms in Northern California, and expand Hetch Hetchy hydro power?
What if we do put tidal power under the Golden Gate (San Francisco already announced in September that it is going to explore tidal power potential under the Golden Gate).
What if we just make ourselves go green?
But I'm not sure that Richard Sklar and San Francisco consider these to be "what-ifs", but more like "whens". They've got millions invested into green power already, and show no signs of stopping.

Note: If you want to hear it for yourself, Ambassador Sklar is scheduled to speak at the upcoming GreenVest 2007 Conference in San Francisco.

« November 2006 | Main | January 2007 »

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