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April 29, 2007

Preparing for Catastrophe: Is your global warming portfolio ready for rising sea levels?

A Worse[sic]-Case Scenario

I believe that a large part of global warming denial is fear: fear that if we acknowledge that global warming is happening, we will be morally obligated to do something about it, and that the problem is too large for us to do anything effective.  I also believe that denying the problem is certain to render us all ineffective in dealing with it.

But getting over our global warming denial is not the only obstacle in our way to dealing with it.  Global warming is already happening, and  future temperature rises are already inevitable given the continuing effects of global warming gasses already released in the atmosphere.  Depending upon our actions today and over the next decade, we will effectively choose between a planet that is uncomfortably warmer than it is today, and one which is much too toasty for even the Russians (who some economists predict will be net beneficiaries of global warming) to be happy about it.

That's my belief.  If it makes me sound like a raving lunatic, so be it.  As an investor and investment advisor, I see my job as having an opinion that differs from the consensus, being correct in that opinion, and investing in such a way that I will make money for myself and my clients if I am correct.  As long as I am correct more often than not (or realize my mistake before I've lost too much money), I'll actually make more money the fewer other market participants agree with me.

I gave an example of this when I discussed how to prepare your portfolio for Peak Coal, on the assumption that while the production of coal may not peak in the next decade or two, rising demand may nevertheless drive price spikes that create investment opportunities.  I'm personally not certain when peak coal will happen, but I'm fairly confident that most investors are too complacent about it, and that is reason enough change the allocations of a diversified portfolio.

Investors Believe What they Want to Believe

Since people tend to deny ideas that are just too scary, a consequence of global climate change that I expect most investors are under-prepared for is a massive (15+ foot rise) in sea level rise due to the melting of either the Greenland or West Antarctic ice sheet.  From casual conversations, I note that Al Gore got a lot of flack for even bringing up this possibility in "An Inconvenient Truth"... despite the fact that he was careful not to do more than raise the possibility, as opposed to predicting it.

We don't know if those ice caps will melt suddenly, or, if they do, when it will happen.  We do know that their melting has accelerated in recent years, and I believe that society has massively underestimated the danger, because a 15 foot sea level rise (let alone a 20 or 40 foot rise) is just too horrific for most people to think about.  Given our propensity towards psychological denial, I feel confident that the markets are underestimating the chances sea level rises large enough to seriously disrupt large coastal cities.  Note that I'm not saying we will see such a sea level rise in my lifetime; rather that the probability of such a rise is currently underestimated by most market participants, and that this complacency is likely to be reflected by a relative overvaluation of investments which stand to lose from such a rise, and an undervaluation of investments that might gain.

If we can identify the exposure of individual securities to the risk/opportunities of sea level rise, we should then underweight our portfolio to investments which stand to lose, and overweight towards investments which stand to gain. This begs the question: Other than coastal real estate, which investments are which?

One environmental activist friend of mine asked me about using the Chicago Mercantile Exchange's new housing futures or options to effectively short real estate prices in coastal cities.   While this may be a good strategy to hedge against further implosion of the current housing bubble, these derivatives all expire within one year, which even I feel is much too short a horizon to hedge the risk of rising sea levels.  In addition, given mass flooding from a rise of sea levels, there is no guarantee that the very indices that the futures are based on would not be changed to only reflect the values of real estate in higher lying areas, which would probably increase in value as people moved to higher ground.

Holding back the Flood

On Earth Day, Marc Gunther reported on an idea to come out of  a Goldman Sachs conference on the business of climate change: dikes.  If sea levels were to rise even a foot over the next couple years, that would require massive new barriers to protect existing structures from the ravages of the sea.  The companies who build those dikes are likely to profit handsomely as soon as the need is recognized.  I'm not an expert on the construction industry, but my impression is that it is fragmented and most of the companies are privately held.  However, makers of the equipment and materials necessary for shoreline reinforcement may be easier to find, such as companies in the cement industry such as Cemex (NYSE:CX.)  Another likely beneficiary a dike building boom would be Caterpillar (NYSE:CAT), given their leadership in earth-moving equipment.  CAT has the added benefit of being a company which is actively lobbying for meaningful greenhouse gas regulation, which I pointed out in my article on blue chip companies involved in alternative energy.

On the downside, one loser would be any owner or operator of seaside resorts, such as Club Med (CLBXF.PK.)  When considering an investment in any REIT, I would make sure to check their portfolio of properties, and avoid ones that have excess exposure to oceanfront or low-lying properties.  On the other hand, REITs and other real estate firms focused on areas where people are likely to flee (my own Denver, for instance) might stand to gain.

Conclusion

Given the massive uncertainties in predicting the probability and timing of large sea level rises due to melting ice caps, I don't advocate buying or selling any company solely because of the risks or rewards which would be a consequence of rapid sea level rise.  I do, however, advocate considering the possible effects of sea level rise on any investments you currently own or are considering buying.  Managing risk is essential to long term superior results, and ignoring a risks in the hope that that they will go away is an excellent way to lose your shirt.

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: CAT.
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.

April 28, 2007

The Week in Cleantech: Apr. 23 to Apr. 27 - An Ethanol Conspiracy Theory?

The Week in Cleantech is a weekly roundup of our favorite cleantech and alt energy blog posts and stories from across the web. If you know of a good piece that you think should be included here, don't hesitate to let us know!

This week, we particularly liked...

On Tuesday, Tyler Hamilton at Clean Break informed us that solar growth was expected to shine strong. The numbers are very impressive indeed, but it could be argued that a lot of that future growth is already priced in many of the more high-profile solar plays.

On Wednesday, Mike Millikin at the Green Car Congress told us that California would sue if the EPA was too slow on awarding it the waiver it needs to implement its climate change bill. Suffices to say that the precedent in this case is not in the EPA's favor.

On Thursday, Rob Day at Cleantech Investing (for the record, this is hands down one of my favorite blogs in the cleantech space) went over the Q1 2007 numbers for cleantech investing. Very interesting yet concise comparison of the various organizations that compile data on VC and cleantech.

On Friday, Sebastian Blanco at AutoBlog Green discussed the latest ethanol conspiracy theory in the cleantech world. While I have no doubt that Big Oil will fight tooth-and-nail to preserve its monopoly over liquid fuels, especially in the automotive market, I'm always reluctant to label academics 'corrupt' unless I see hard evidence...but I may be naive. See also this post by Mike Millikin at the Green Car Congress for further criticisms of the Stanford study.

On Friday, Simon Robinson at The Big Biofuel Blog informed us that CBOT was launching small corn contracts suitable for smaller players who want to trade electronically. This is an interesting step and may provide retail investors with a good opportunity to play this very interesting angle of the ethanol story.

On Friday, the Clean Slate Report told us all about the new economics of the smart grid. We at AltEnergyStocks.com are big believers in the future of energy efficiency and believe that there will be good investment opportunities in this space. See the recent piece on the Comverge IPO by The Motley Fool for an idea of the opportunities related to energy efficiency and smart grid.

April 27, 2007

Portfolio For A GHG-Regulated World

Investment opportunities connected to climate change and greenhouse gas (GHG) regulation are a popular topic of discussion on this blog. Most of the time, however, the companies we discuss are relatively small, often unknown to most investors and overall pretty speculative.

Yesterday, I came across an interesting article on Seeking Alpha entitled "Investing In a Greenhouse Gas-Regulated World" - the title says it all.

The article looks at the question of investing in a GHG-constrained world from a conventional portfolio management perspective, and therefore argues for a low weighting in pure-play cleantech or carbon finance stocks, and a greater focus on blue-chip companies with proactive approaches to issues related to climate change and GHG.

The author admits to having borrowed some of picks from an article by our very own Tom Konrad.

April 26, 2007

Links & Blogrolls

Altenergystocks.com frequently receives requests to provide links to other websites and/or to join services where several blogs are featured together in one platform (see an example here). As our regular readers have probably noted, our blog rolls (Tom's and mine) are not especially extensive. We thought at this point that it might make sense to let our readers know how we go about selecting sites for inclusion in our blog rolls and what our policy is with regards to giving out links to other sites.

Blog Roll

Our approach to adding links to our blog rolls is very simple. Blogs/sites must:

(a) Be of enough interest to us that we follow them regularly

(b) Post often

(c) Provide real value-added for our readership

Of course there are plenty of blogs/websites out there that meet these criteria, but we also believe that blog rolls should not be so long as to make them overwhelming for site users. Our blog rolls are also not static - for instance, I recently made certain changes to mine to reflect what I've been paying attention to lately.

Yes, this may all sound very subjective, but devising a truly "objective" way of populating our blog rolls would negate the true intent of a blog roll, which is to indirectly give you our opinion on what is worth reading.

You may have also noticed that our blog roll is broken down into 3 sections: (a) Charles' favorites, (b) Tom's favorites and (c) Two thumbs up. The last category contains sites/blogs that we both think are worth your while.

Blog Aggregation Services

Blog aggregation and other types of social sites often ask us if we are interested in being featured as part of their services. We do not mind, as long as it requires no commitment and no extra work on our part.

Altenergystocks.com is not interested, at this point in time, in becoming affiliated with other services. In short, if you wish to add us to your service, you may do so after having notified us and received approval. We are not, however, interested in relationships that: (a) require exclusivity agreements, (b) require us to link over to you, (c) require us to alter our content in any way, (d) entail an appreciable amount of extra work on our part.

Charles' shared items: A New Feature!

Some of you may have noticed a new feature called "Charles' shared items" on the right side navigation bar, above the Archives.

The items shown in this window are blog posts and media stories that I flag as worthy of your attention as I go through my RSS reader (Goolge Reader) daily. Unlike the Week in Cleantech, this feature is dynamic and I add new links to it a few times each day. We therefore encourage you to use this if you want up-to-date info on what is going on in the world of cleantech.

Happy alt energy investing everyone!

April 24, 2007

New York, New York!

While New York's Mayor Michael Bloomberg was busy unveiling a package of measures aimed at making NYC green (including reducing CO2 emissions by 30% by 2030), the state's Governor, Eliot Spitzer, was making his reservations about corn ethanol known, as reported in the Globe & Mail.

This adds yet one more (powerful) voice to the chorus of those skeptical about the viability of the corn ethanol industry.

The article also notes that Dr. Dan Kammen, an influential Berkeley academic and advisor on climate change to California Governor Arnold Schwarzenegger, is also among those who doubt that corn ethanol is the best route to follow to deal with climate change. This likely means that at least one of Arnie's advisors on the politically-sensitive issue of climate change is advising caution on corn ethanol.

Finally, the article recognizes that even powerful foes in high places might not be able to curtail the progression of the "ethanol juggernaut".

Corn ethanol is a classic case of an investment story where one could be labeled as preferring "to be right rather than rich". As far as I go, I see enough red flags to convince me that there is something fundamentally flawed here. But I would definitely be interested to hear more from the "other side". In the meanwhile, I prefer to put my limited supply of money behind things that look fundamentally stronger.


April 22, 2007

Alternative Energy Mutual Funds and Exchange Traded Funds (ETFs)

UPDATE 3/4/2011: An up-to date article on selecting green mutual funds and ETFs can be found here.

Mutual funds are often touted as an inexpensive way to achieve diversification.  With declining brokerage commissions, this is often no longer true.  If you are interested in investing in alternative energy, is a mutual fund or ETF right for you?

Here are the currently available mutual funds and ETFs of which I'm aware with alternative energy type themes:

Fund Name Emphasis Mgmt Style Load?
Turnover
Ticker Expense Ratio
Guinness Atkinson Alternative Energy Alternative Energy & Energy technology; International Active No-load
22%
GAAEX 1.98%
New Alternatives Fund Renewable Energy & environment Active  4.75% under $25K
40%
NALFX 1.25%
Powershares Cleantech Portfolio CleanTech Index ETF
low*
PZD 0.70%
Powershares Wilderhill Clean Energy Greener and Renewable Energy Index ETF
6%
PBW 0.71%
Powershares Wilderhill Progressive Energy Portfolio Nuclear and Advanced Fossil Fuels Index ETF
low*
PUW 0.70%

* These funds are too new to have published turnover ratios, but I anticipate that they will have low turnover (<10% annual) because they are index funds.

 

Diversification reduces the company-specific risk of a portfolio, but leaves market and sector risk.  Most of these benefits can be captured with a 30 stock portfolio, with greater benefit accruing to investors who make a conscious effort to choose dissimilar companies.  So to determine if a mutual fund, ETF, or stock portfolio is the most cost-efficient way to achieve diversification I will compare the costs across portfolio sizes and time horizons.

The following chart shows the amount of money you will have after the given time period, assuming that the underlying stocks return 10% per year, and dividends are reinvested (which can be accomplished commission-free via DRIPs in a stock or ETF portfolio.)  The 10% return is simply a guesstimate included for demonstration purposes and is in no way to intended to be an actual prediction of returns.  There is never any guarantee of future results.

Values in bold indicate the best investment option (given these assumptions) for any time period/initial investment combination.

Initial Investment 1 year 3 years 5 years 10 years
$1,000 in GAAEX (only available for IRAs) $1082 $1266 $1463 $2119
$1,000 in NALFX N/A N/A N/A N/A
$1,000 in Powershares $1076 $1282 $1536 $2397
$1,000 in 30 stocks $605 $732 $886 $1427
$2,500 in GAAEX (only available for IRAs) $2700 $3151 $3677 $5407
$2,500 in NALFX $2590 $3063 $3622 $5509
$2,500 in Powershares $2716 $3245 $3876 $6047
$2,500 in 30 stocks $2255 $2729 $3301 $5317
$5,000 in Powershares $5449 $6509 $7776 $12,130
$5,000 in 30 stocks $5005 $6056 $7328 $11,801
$10,000 in Powershares $10,914 $13,038 $15,576 $24,297
$10,000 in 30 stocks $10,505 $12,711 $15,380 $24,770
$20,000 in Powershares $21,843 $26,095 $31,175 $48,630
$20,000 in 30 stocks $21,505 $26,021 $31,486 $50,707

An examination of the chart reveals that, at the minimum investments ($2,500 for non-retirement accounts) for NALFX and GAAEX, it is always cheaper to buy one of the Powershares ETFs for a $15 brokerage commission than to pay the high expense ratios and possible load for the traditional mutual funds.  Even the $1000 minimum for retirement accounts allowed by the GAAEX is only a bargain for holding periods less than three years, after which the nearly 2% expense ratio eats too much into the gains.

This demonstrates the well known advantages of using low-cost index funds (in this case index-ETFs) over traditional mutual funds, but as we move to accounts in the tens of thousands of dollars with longer holding periods, even the low 0.7% expense ratios of the Powershares ETFs start adding up, and paying $15 a trade to buy a portfolio of 30 stocks begins to look better.  If you consider that $15 a trade is fairly costly for most online discount brokers these days, and many offer free trades for qualifying accounts.

This leads to the question, if your alternative energy portfolio is in the sweet spot to use the Powershares ETFs, which one(s) should you choose?  The answer will depend mainly on what motivates you to invest in Alternative Energy in the first place.  If you're most interested in Global Warming, you will gravitate towards PBW.  PUW caters to investors concerned about energy security, and PZD companies focus most strongly on traditional environmental issues such as pollution.  For a $3000+ portfolio, the extra commissions involved in splitting your portfolio between two or three will not have a significant impact on your returns.  Or you could buy one, and when then buy a different one when you have more money to invest.

Finally, if you have $20,000 or more to invest, and and can leave it there for a few years, what stocks should you choose? If you don't have time to educate yourself about alternative energy stocks, the simplest way to go about it is look at the holdings of the mutual funds or ETFs you would have bought, if they were not too expensive. PBW, PZD, and PUW have lists of holdings that are particularly easy to use.  It may strike you as strange, to buy a basket of stocks with so little research into the actual companies, but that is exactly what you are doing when you buy any index fund... this technique just lowers the fees if your account is the right size.

Caveats

I have ignored some oft-cited advantages of mutual funds in this analysis, most importantly the ability to make small, regular investments for dollar cost averaging.  I consider this more a matter of self-discipline than good investment strategy.  The point of dollar cost averaging is to discipline ourselves into buying more of a fund when it is relatively inexpensive, and less when it is more expensive (even when we don't really know what expensive or inexpensive is.) Nevertheless, if automatic payments are the only way to force yourself to invest, you can always set up automatic payments into a money market mutual fund, and whenever that fund reaches some fixed amount over something like $1000, you can invest the money in an ETF, or add a stock to your portfolio.  These investments can be used to maintain a balanced portfolio by always investing in underperforming sectors.

None of the investment options I have discussed are truly diversified portfolios; a diversified portfolio will contain investments in a broad range of industries and asset classes.  For most investors, alternative energy should account for only a fraction of the entire portfolio.  If investment in alternative energy is taken as part of a broadly diversified overall portfolio, there is less need to own as many individual stocks for diversification, so long as no one stock comprises more than 2-4% of the entire portfolio.  This makes the individual stock method of investing more attractive, as it will require relatively fewer transactions.

Finally, when investing in a taxable account, owning individual stocks or low turnover ETFs allows the investor to tax-manage the account more effectively.

Shiller on Mutual Funds

In summary, I'll leave the last word to Robert J. Shiller, who noted in his prescient book Irrational Exuberance [p.202],

It is often said that people have learned about the importance of portfolio diversification and are using mutual funds to acheive this.  Given well-managed funds with low management fees, this argument makes some sense.  But many funds charge such high fees that investors might be better off trying to achieve diversification themselves, if diversification is the primary investment motive.  Moreover, when they are investing outside of a tax-free environment, by holding stocks directly investors can avoid capital gains taxes on the gains the mutual fund managers realize when they sell stocks in the funds' portfolios, an important issue with higher turnover funds.  Investors can instead realize, for tax purposes, the losses on the stocks that go down.  Mutual funds clearly have their limitations.

DISCLOSURE: Tom Konrad and his clients do not have positions in any of the securities mentioned here, although they do have positions in many of the stocks owned by these funds.

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.

April 21, 2007

The Week in Cleantech: Apr. 16 to Apr. 20 - Happy Earth Day Everyone!

The Week in Cleantech is a weekly roundup of our favorite cleantech and alt energy blog posts and stories from across the web. If you know of a good piece that you think should be included here, don't hesitate to let us know!

This week, we particularly liked...

Writing in the May edition of Scientific American, economist Jeffrey Sachs showed us the road to clean energy.

On Tuesday, Himanshu Pandya at Financial Nirvana told us about a shorting opportunity in First Solar. More on overpriced solar stocks below!

On Wednesday, Shruti Basavaraj and Katrina Chan at The Motley Fool informed us that the Motley Fool was going green. Not to be outdone, Annika Mengisen at TheStreet.com let us know, on Friday, that green was good. Happy Earth Day everyone!

On Thursday, Katherine Bourzac at Technology Review told us about a new biofuel: propane. She also told us about a new company: C3 BioEnergy.

On Thursday, Neal Dikeman at Cleantech Blog warned us that an old Nigerian scam was moving into solar. Unsuspecting internet users beware!

On Friday, Jennifer Openshaw at TheStreet.com urged us to save money by going solar. But the title is a bit misleading - she's actually telling us to go solar to make money!

On Friday, Dan Lewis at AEI made the bear case for China. With the valuations of certain unnamed Chinese solar companies being driven to impressive heights, this is a warning you are likely to hear more and more in the next few weeks. For those who have a subscription, the WSJ ran a piece on that exact topic today.

April 18, 2007

Greenhouse Gas Management Stocks: Key To A Real Climate Change Portfolio?

There has been a lot written lately about how to turn climate change into an investment opportunity, including on this site. Not all of it is, however, especially useful or relevant. In the worst cases, commentators have ascribed the 'climate change investment opportunity' label to just about any industry out there, indiscriminate of whether or not there really is a strong and direct connection.

If you are seriously interested in playing the climate story, you should stay focused on near and medium term opportunities with real and tangible links to what is currently going on with the climate file. In plain English, this means that if you invest your money in a boat maker tomorrow because you expect sea levels to rise at some point in the future, you may not be putting your money to its best possible use.

Regulation: Where Real Climate Opportunities Lay

The most immediate investment opportunities related to climate change are connected to regulatory developments such as the EU Emissions Trading Scheme (ETS), the Regional Greenhouse Gas Initiative (RGGI) and California's AB 32 (PDF document). These regulatory initiatives all have the same intent: to cap emissions of greenhouse gases (GHG) across a range of industrial sectors. As such, they will create demand for certain technologies and solutions for which there would otherwise be no market.

We have discussed opportunities linked to carbon finance on several occasions in the past. Today, I want to speak about another area that is sure to get a boost for climate change legislation: end-of-pipe technologies to control emissions of GHG.

There are 2 main approaches to end-of-pipe GHG control: (1) carbon capture and storage (CCS) and (2) technologies seeking to transform the CO2 contained in flue gas into an innocuous - or even useful - commodity. The former has been in the news a lot over the past few months but the latter has pretty much fallen below the radar, mostly because these technologies are only just emerging and investing in them at this stage can be considered speculative. This is what I want to discuss today, and will leave CCS for another post.

Managing GHG Emissions: No Need to Re-invent the Wheel

Most of our readers will no doubt be familiar with just how prevalent coal is in power generation today, and how this role is not forecasted to diminish over the next 2 decades (see also Tom's excellent article on investing in peak coal published a few days ago). Coal is the 'dirtiest' of fossil fuels and burning it to make electricity is often blamed for contributing significantly to global GHG emissions.

A number of companies are now working to find ways to make coal 'cleaner' by removing carbon dioxide from flue gas and transforming it into something either neutral or useful, rather than burying underground as is the case with CCS. Such solutions can be applied to any industrial process that entails a pipe spewing out GHG, but the most immediate opportunities are definitely related to coal-based power generation.

The primary appeal of end-of-pipe solutions is that they don't entail 're-inventing the wheel', meaning that they can be appended to existing technologies relatively painlessly without the need to overhaul entire operations. End-of-pipe solutions for environmental control typically form a bridge between existing and emerging technologies that might be too risky for more conservative players such as utilities to get involved with.

While these GHG management solutions are sure to add to the cost of producing power and might not get uptake under a business-as-usual scenario, the economics will be different once coal-intensive power producers are forced to internalize the costs of emitting carbon dioxide.

Four Stocks With Exposure to This Space

I know of 4 companies currently active in this area:

NRG Energy Inc (NYSE:NRG)

NRG is primarily engaged in wholesale power generation and in the development, construction, and operation of power generation facilities. The company has significant exposure (PDF document) to coal as a generation fuel, and so could be a prime beneficiary of technological developments in this area.

NRG is currently involved, with a privately-held partner called GreenFuel Technologies Corporation, in testing a process that entails turning carbon dioxide from flue gas into algae, which can then be turned into biofuel or high-value animal feed supplements. Both can be commercialized and turned into revenue streams.

While this is unlikely to represent a material development for NRG in the very near term, successful testing could provide the company with an important competitive advantage should strict CO2 caps be imposed at the federal level. This could thus be a safer way to play this space, especially if you're also looking for exposure to utilities.


CO2 Solutions (TSE: CST.V)

According to its website, CO2 Solutions "has developed a biological process allowing for the transformation of carbon dioxide (CO2) into bicarbonate, which is an environmentally safe product. This process takes place inside a bioreactor with the help of an enzyme that accelerates the transformation of CO2 into bicarbonate in an aqueous environment.". The company was recently profiled in Technology Review.

CO2 Solutions signed, in mid-March, a licensing option and R&D cost-sharing agreement with Babcock & Wilcox, a large provider of boilers and other components for coal-fired power plants. This agreement will, in effect, allow CO2 Solutions to 'move out' of the lab and test the scalability of its technology. The exclusive license part could, however, limit the company's ability to commercialize its technology as fast as it might want to should tests prove successful.

Babcock & Wilcox is a unit of McDermott International, Inc. (NYSE:MDR), and this technology can be considered a direct competitor to NRG's.



Greenshift Corporation (OTC BB:GSHF.OB)

The angle here is Greenshift's recent merger with GS Carbon Corporation. GS Carbon Corporation currently has patents pending for what it calls "decarbonization technologies".

From rapidly skimming over its website, it does not appear that GS Carbon Corporation is anywhere near ready to commercialize any of its technologies, and I couldn't find anything on strategic partnerships with large players. This is very much a spec play.


CO2 Tech Ltd. (OTC:CTTD.PK)

In its own words: "CO2Tech engineers, manufactures, installs and services the optimum system for its clients' needs implementing a total systems approach to anti-global warming. The company integrates the most precise, sophisticated testing equipment for performance evaluation and monitoring, allowing its customers to comply with ever-changing, stringent environmental regulations."

The company offers a range of pollution control solutions. CO2 Tech was recently hired to provide environmental assessment services for the Sakhalin II project in Siberia, to help Romania devise a Kyoto compliance program, and to provide environmental assessment services for a conservancy project in Guyana.

It does not appear that CO2 Tech has, so far, been able to generate much interest with its GHG management technologies. Moreover, while based in London, CO2 Tech only has a Pink Sheets listing in the US. Given the popularity of London's AIM with emerging environmental tech companies because of its very lax listing requirements, it is somewhat worrying that CO2 Tech would choose to go with the Pink Sheets. This is definitely one that I would not touch.

To Conclude

Quite clearly, the GHG management technology space is in its infancy, and is thus very much in a speculative phase of its evolution. Nevertheless, this is an industry worth keeping an eye on, in my view, for 2 main reasons:

(a) Coal and other fossil fuels will not be phased out of power production overnight, simply because there are no cost-effective alternatives in the near and medium terms

(b) Regulatory developments in industrialized countries in the near term and in certain dominant emerging markets such as India and China in the medium term will 'create' demand for end-of-pipe solutions to GHG emissions

If our readers know of other players involved in this industry, or have any insight on the companies discussed above, we would very interested to hear about it.


DISCLOSURE: The author does not have any position in any of the stocks discussed above.

April 15, 2007

The Peak Coal Portfolio

Last week, we alerted you to a report from Germany's Energy Watch Group called “Coal: Resources and Future Production,��? which predicts peak coal by 2025.  Readers of AltEnergyStocks are doubtless familiar with peak oil, the inevitable fact that as we consume a finite resource (oil reserves) at some point the rate of that consumption must peak, and taper off.  Serious arguments about peak oil center around "when" oil production (and consumption) will peak, not "if."  

The same it true for other finite natural resources, such as natural gas, uranium, and even coal.  The difference with coal is the received wisdom: that the US has two centuries of remaining coal reserves, with the (often unspoken) implication that there is no need to worry about it in our lifetimes.  Other reports have drawn attention to peaking coal supplies before this, and I have no doubt that more will follow.  

How to beat the market

As an advisor seeking superior returns for my clients, I take reports like this seriously.  Dismissing them out of hand because it disagrees with the consensus view is not only close-minded, but a massive missed opportunity.  That's because, in order to achieve superior returns, I must accomplish four things:

  1. Have hypotheses that differ from the consensus view.
  2. Act (i.e. make investment decisions based) on those hypotheses.
  3. Be correct as often as not.
  4. Have a mechanism for testing the hypotheses, to enable a change of tactic when a hypothesis is proven wrong.

The first two are easy... but without  numbers 3 and 4, I'd be just another whack-job in the blogosphere losing my own and my client's money.  Here's how my hypothesis looks for peak coal:

1. A hypothesis.  The consensus is too complacent about the supply of coal.  Note that I don't need to pin down a precise date for the peak in coal production (worldwide or in the US), I simply have to identify something I believe the majority of investors have gotten wrong and the direction of the error.  My hypotheses are normally of this form: how the consensus view is incorrect.

2. See "How to prepare your portfolio for Peak Coal" below.

3. You don't have to be right all the time.  One of the great benefits of diversification is that it allows an investor to make mistakes.  None of us is right all the time.  For example, I've been bearish on the market as a whole since 1998... which means I was wrong in 1998 and 1999, right in 2000, 2001, and 2002, and wrong since then.  However, despite the fact that I was wrong about the market for six out of the last nine years, over that time period, I put a large chunk of the money which I otherwise might have allocated to US stocks into foreign currency denominated bonds mostly through close-end funds such as the Aberdeen Global Income Fund (AMEX: FCO), because I expected a general decline in the dollar. Note that is is a vast oversimplification of one choice taken within my managed portfolios over the period, and should be considered educational, not taken as an example of past returns.  Looking at this chart comparing SPY and FCO (I'm using SPY as a simple proxy for the US stock market as a whole) for the last nine years,  you will note that SPY outperformed FCO over the period by about 25%.  However, over that time SPY has had an average yield of around 1.5%, while the yield on FCO has averaged around 7%, over 9 years, that difference amounts to a 35-50% advantage for FCO (depending on the investor's tax rate), for an advantage in total returns for FCO of between 10% and 25%, or 1 to 2% compounded annually.  

Also note that risk (measured in terms of volatility) for FCO has been much lower than that of the market over that time period.  So while I was wrong about the market 2/3 of the time over that period, I was correct about the general decline in the dollar a bit more than half of the time, and the extra income I earned with my risk adverse strategy of investing in bonds rather than stocks left me with a slight advantage over the period.   Through these slight advantages, amounting to only 1-2% per year, a successful investor can dramatically increase his returns over the long term.  Once again, these returns are only an example, showing the long term advantage of acting on the hypothesis that both the US market and the dollar would under perform over the last 9 years.  I still believe both these to be true, and as a result, I and my clients continue to be over-allocated to foreign bonds, and under-allocated to US Stocks (with the exception of alternative energy.)  Nevertheless, past returns are no guarantee of future results, which is why it's important to...

4. Quickly recongnize when you're wrong. Thinking again about my hypothesis the market is overly complacent about coal supplies, how can I know when it is incorrect, either because I was wrong to begin with, or because conditions have changed?  That could happen because coal will continue to be as easy to mine as most investors think, or because they become as worried about coal supplies as the situation warrants.  China, where the most rapid coal depletion is taking place, may indeed recognize the severity of coming shortages, but my hypothesis is primarily about investor in US markets.  Until recently, the Chinese have mostly confined themselves to buying huge chucks of our Treasury and other agency debt, but we see them rushing to secure long term coal contracts in Africa and elsewhere.  Since China is a net coal importer, it is much harder for them to be as complacent about coal reserves as we are in the US.  At the moment, I don't see any worrying at all about coal reserves in the popular press, and reporters typically accept the "200 years of coal" line without question.  When that changes, it will be time to re-evaluate.  As to my simply being wrong in my pessimism, even the normally Pollyanna-ish EIA estimates, coal production in the US will peak in 2060, which implies a peak in world production much sooner, because the US has the lion's share of remaining reserves.  I don't believe that a world peak in coal production even as late as 2050 has yet been acknowledged.  When it is, it will again be time to reevaluate this hypothesis.

What to expect from Peak Coal. 

While I usually only make investments that I expect to pay off in 5-10 years time, and even the earliest predicted peak for world coal production is still 18 years off, the precise date of the peak is not at all important for the purposes of investing.  What is important is when we will see unexpected price rises as demand adjusts to constrained supply.  As an example, the first effects of peak oil are not happening today; instead they happened in the early 70's, when United States production peaked, and Texas could no longer act as the swing producer of oil, leading to a shift of production in the Middle East.  Because of the new investment required, that shift took a number of years, during which time oil stayed at historically high levels, until new production caught up with demand.

Could something similar happen with coal?  If any country is likely to be a driving force for world demand, sending prices up for everyone, that country is likely to be China, which is by far the largest producer of coal, but has only half the reserves of the US (according to the EWG report.)  How many times have we heard that the US is the "Saudi Arabia of Coal"?  If it is, the China is the "United States of Coal."  I think a price spike in coal available for worldwide trade is the most likely investable event for peak coal in the near future.

Here are some effects I would expect from such a price spike.

  1. Coal prices in current coal importers would skyrocket.
  2. Coal prices in areas with easy access to ports would also rise dramatically.
  3. Transportation links such as rail from coal producing regions to ports, ports, and bulk shipping would also benefit.
  4. The price of electricity in regions relying on coal fired power (other than mine-mouth plants) would increase several cents per kWh.

How to prepare your portfolio for Peak Coal.

  1. Companies owning or discovering new coal reserves in coal importing regions will benefit dramatically.  (I'm far from an expert on coal companies, so I have no specific recommendations here.  I also avoid investment in coal because of the effects of mountaintop removal and global warming.)
  2. Coal mining companies with easy access to ports will also benefit dramatically. 
  3. Rail lines with connections to large port facilities would benefit, as well as the port operators.  (Again, I'm no expert.)
  4. Construction companies able to quickly build rail lines and expand port facilities will also benefit. (I don't know much, do I?)
  5. Shipping companies who own large ore/coal carriers will benefit.  Shipyards which produce these ships likewise. 
  6. Companies that use coal for purposes other than electricity generation will be hurt.  Avoid coal-to-liquids companies such as Sasol [NYSE:SSL], Rentech [NYSE:RTK] and Syntroleum [NASDAQ:SYNM].  I wouldn't advise shorting these, unless you are a lot better than I am at anticipating price changes in energy markets: they'll all profit from Peak Oil, perhaps long before they are clobbered by Peak Coal.
  7. Alternatives to coal based electricity will also benefit.  Because coal plants supply base-load power, the first beneficiaries will be Nuclear power and Geothermal, both of which are also inherently base-load power sources.  The easiest way to invest in Nuclear today is by buying uranium miners an processors.  I'm personally not a big fan of this approach, but you'll find a lot of other people's uranium picks over at Seeking Alpha.  Warning: there is a lot of talk about Peak Uranium as well.  Since I have decided to stay away from Nuclear because of the proliferation and hazardous waste effects, I have not made an attempt to figure out how serious this will be for miners.  This brings up another general point about investing: you don't have to have a hypothesis about everything... nor should you.  It is much better to have a few good ideas than a stack of half-thought out ideas.
  8. Geothermal is an under-appreciated renewable form of electricity generation.  Ormat Technologies (NYSE:ORA) is the premier geothermal company, and should be the centerpiece of a geothermal portfolio.
  9. Concentrating Solar Power CSP can be combined with thermal storage to produce base load power (or even peaking power.)  North American companies are only now starting to discover CSP, wit the exception of FPL (NYSE:FPL), which owns most of the original CSP plants built in the United States in the 1970s and '80s.  European Conergy AG (an engineering firm) and Iberdrola SA (a utility) are actively pursuing CSP.   I'm also watching an Australian company called Enviromission (EVOMY.PK), which is developing Solar Chimney projects, which can easily be a source of base load power, and are remarkably low-tech (which leads to very low running costs.)
  10. Biomass, such as wood waste and trash incineration  is a good source of small amounts of base load power.  Boralex (TSX: BLX)) and The Boralex Power Income Fund (TSX: BPT.UN) have experience with biomass.  Another option I like are forestry and paper companies, especially ones committed to sustainability such as Catalyst (TSX: CTL) and Domtar (NYSE:UFS.)  Waste Management, Inc. (NYSE: WMI) has a variety of power generation projects fueled by the trash it collects.
  11. Power storage technologies such as Compressed Air Energy Storage and Flow Batteries which can allow intermittent sources of energy such as wind to meet base load power needs. One flow battery company I like is VRB Power (Toronto Venture: VRB.)
  12. Hydropower based utilities, such as Idacorp (NYSE:IDA) will increase their cost advantage over coal, and their dispatchable nature will become even more valuable as a balance for intermittent wind.  Some may also have valuable opportunities to take advantage of pumped hydro power storage.

Given the uncertainties about the timing and effects of the early stages of peak coal, I find it fortunate that a lot of the things I'm doing to prepare my managed portfolios for carbon regulation are the precise things I should be doing to prepare for rising coal prices.  I have little doubt that serious regulation of CO2 emissions is on its way, and quite likely sooner and much more comprehensively than most investors are prepared for.  But that's a hypothesis for another day.

Links:

Energy Watch Group report

Discussion at The Oil Drum

EIA Coal data

Discussion of the EIA's most recent Energy Outlook at The Cost of Energy

DISCLOSURE: Tom Konrad and/or his clients have positions in FCO, ORA, FPL, Iberdrola, BPT.UN, CTL, UFS, WMI, VRB, and IDA.

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.

 

April 11, 2007

Current Structure of the US Ethanol Industry "Problematic", Says the IMF

The International Monetary Fund released its Spring 2007 World Economic Forecast today.

Fuel Vs. Food

There is a short sub-section in Appendix 1.1 ("Recent Developments in Commodity Markets") that I thought might be worth sharing with you. If you download the PDF version of the report and scroll down to page 44, you will find the said sub-section under the heading "Food and Biofuels".

In it, the IMF notes that food prices (as measured by its own food price index) rose by 10% in 2006, driven partly by a poor wheat crop in certain countries but also by (mandated) demand for biofuels in the US and Europe (see graph below).


The report notes that, looking ahead, the prices of crops like corn and soybeans, which are the main feedstocks for ethanol (US) and biodiesel (Europe), respectively, should: (a) continue to rise and (b) begin moving in line with the price of crude oil, which is currently the case with sugar because of its role in the Brazilian ethanol industry.

About the recent news that US farmers are planning to plant more corn acreage next year, the IMF has this to say:

"For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton. Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise."

IMF economists also point out that the price of "partial substitutes" such as wheat and rice, as well as the price of meat and poultry, should trend upwards as a result of higher corn and soybean prices. Finally, high crude prices could place further upwards pressure on the price of corn because corn farming in the US is highly energy intensive.

The IMF - Not Especially Bullish on Corn Ethanol

It is the sub-section's final paragraph, in my view, that best captures IMF's view of current US and European biofuels policy. It reads as follows:

"While on a small scale biofuels may be beneficial by supplementing fuel supply, promoting their use to unsustainable levels under current technology is problematic, and long-term prospects for biofuels depend heavily on how quickly and efficiently second-generation substitutes (such as plant waste) can be adopted. Many energy market analysts also question the rationality of large subsidies that benefit farmers more than the environment.

While new technology is being developed, a more efficient solution from a global perspective would be to reduce tariffs on imports from developing countries (for example, Brazil) where biofuels production is cheaper and more energy efficient."

This reaffirms some of the contentions that were made on this site in the past:

(a) The way the US is proceeding with its approach to ethanol will inevitably place inflationary pressures on domestic and global food prices, which will result in tensions at home and abroad.

(b) The main reasons for pursuing ethanol in the manner in which it is being pursued in the US right now are, in order: (a) placate the farming lobby and earn valuable political support in America's hinterland; (b) placate the wean-America-off-foreign-oil lobby; (c) placate the soft environmentalist lobby; (d) combat climate change...oh, wait a minute...I guess no one's settled that thorny energy balance question yet, have they?

(c) Not letting emerging markets export ethanol tariff-free to the US is bad economically for a lot of people, from poor Brazilians to middle-class Americans

(d) Cellulosic ethanol is the only way forward if biofuels are ever to displace oil in a sustainable manner

To Conclude...

"Old news!", you might say...well you're right, except for this: it's one thing when I or some other insignificant blogger bashes (or celebrates) corn ethanol; it's quite another when the top economic think-tank in the world tells you that it sees real long-term viability problems with the way that this industry is currently structured.

To be sure, it's not like the IMF dedicated a large amount of space to this issue, and I'm quite certain that most of the economists who participated in producing this report don't loose sleep over it at night. But the strong terms used in that little sub-section further reinforce what the corn ethanol bears have been saying: enjoy it while it last, because it's not structured to be sustainable in its current form for much longer...and I'm not talking about environmental sustainability here.

DISCLOSURE: The author does not hold a position in any company involved in biofuels

April 10, 2007

Trading Alert: CPTC.OB

In my article about electrical transmission, I mentioned that I liked Composite Technology Corp. (CPTC.OB). I became increasingly bullish on this stock as a result of my changing understanding while I was researching the article. The article then initiated an email conversation with a long-time investor, where I learned more about the company's business. As a result, I just purchased more of the stock (at $1.33, using a limit order), quadrupling my initial position (acquired in February at $.91. My current average cost basis is $1.23.) Several of my clients also own this stock, which most of them bought below $1.

I've asked the investor to do a write-up on CPTC to share with AltEnergyStocks readers. It will probably be available later this week.

DISCLOSURE: Tom Konrad and/or his clients have positions in CPTC.OB.

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.

April 08, 2007

Transmission Stocks: Bringing Wind Power to Where it's Needed

Last week, Charles told us to expect wind power industry suppliers to benefit from shortages in wind turbine components. Owens Corning (NYSE:OC) which I mentioned in my Blue Chip Alternative Energy Portfolio fits nicely into this category with their composites for turbine blades, as do the power converter stocks I mentioned two weeks ago.

As essential to wind power as any of these is improved power transmission. The National Wind Coordinating Collaborative states,

Electrical transmission facilities connecting windy areas and load centers are sometimes non-existent or minimal. Even in cases where a good wind resource has nearby transmission, that transmission often has limited capacity to transport additional energy. In fact, transmission facilities throughout much of the country are strained, and this problem is acute at specific points of congestion. The expansion of wind power is hampered by this situation, but the associated problem is not confined to wind. Instead, it is a general problem of concern to many in the electric power sector.

While the need for long distance transmission often holds up the construction of wind farms for logistical reasons (there is no incentive to erect wind turbines if you cannot get the power to market), it is unlikely to prevent investment in renewables for financial reasons. The ERCOT Competitive Renewable Energy Zones Study found that the necessary investment in transmission for the high resource zones they identified in Texas ranged from a low of 1.5% to about 12% of the cost of the generation, which will only change the overall economics of any project in marginal cases. Some of these transmission improvements will also be likely to improve system reliability, and so the full cost is unlikely to be considered totally attributable to the wind projects.

As a less expensive but unavoidable investment for new renewable energy projects, transmission improvements are well positioned to be profitable investments in our energy infrastructure as the US shifts to more sustainable electrical supplies.

The FERC opens up Transmission

Politicians and regulators are beginning recognize the necessity of new transmission. This started with the Energy Policy Act of 1992 (EPAct), which opened access to the transmission grid to allow power to be delivered from one generator to another utility.  The Federal Energy Regulatory Commission (FERC) Order 888 laid out laid out the terms under which this was implemented. Order 888 fell short of providing the necessary incentives for investment in transmission and access for renewables, and in December of 2000, the FERC issued order 2000 and 2000-A which require transmission-owning companies under FERC's jurisdiction to file either proposals to form Regional Transmission Organizations (RTOs) or progress reports on the development of RTO proposals. RTOs will have sole responsibility for operation and expansion of the transmission system, maintaining short-term reliability, establishing and managing tariffs, and responding to requests for service.

The credible threat of RTOs in competitive bidding for projects acts as an incentive for utilities to stop delaying necessary investment in transmission, and make such investments quickly at the lowest possible costs.  This should benefit investors in the companies best able to build transmission efficiently and quickly.

Action at the State Level

My own Governor, Bill Ritter recently signed Colorado Senate Bill 100, which requires electric utilities subject to rate regulation to identify high-potential wind-energy locations by undertaking biennial reviews to designate “Energy Resource Zones��? where transmission constraints hinder the delivery of electricity. Texas passed a similar law in 2005, and, as a result, there are several competing proposals for transmission to bring wind power from Texas' remote, windy areas to where it is needed, such as the proposed "Panhandle Loop".

Transmission is not only necessary for large scale wind installation, it also goes a long way (pun intended) towards dealing with wind power's most oft-cited drawback: the wind seldom blows when you need it. Typically, the wind blows at night, and the overall capacity factor for most wind turbines is around 30%. But long distance transmission allows wind from different areas to be combined, allowing benefits similar to the diversification that we investment advisors are always pushing for our client's portfolios. The more wind farms that are built over a wider geographical location, the more reliable wind energy is, and it is transmission that ties it all together.

In the Great Plains, wind typically blows at night in the winter... but winter peak load in California is typically in the evening: due to the time difference, midwest winter wind is on-peak; a more robust transmission system will bring the power from where and when it is cheap to where and when it is needed. Minnesota has also passed enabling legislation to study and develop plans for transmission network enhancement to support Renewable Energy Standards.

In the United States, the grid is characterized by decades of under-investment, with the established operators having insufficient incentives to invest, and as a consequence, having until recently rested on their laurels, treating their existing transmission assets as a sinecure. Therefore, I expect the best investments to be those transmission owners who have shown the ability to upgrade their networks quickly and effectively, with the rest likely to lose out to upstart RTOs which will increasingly be able to win projects from incumbent utilities. There will also be a political aspect to these potential returns: states still have fairly broad authority to implement FERC rules, and the actions of state legislators in utilities commissions will undoubtedly have significant impacts on the decisions and profitability of building new transmission.

States which seem particularly supportive of new transmission include the perennial leader, California, along with New Mexico, and the states mentioned above. Ohio, Virginia and Washington are have long been leaders.

The Best Companies

I see three distinct ways to invest in the coming transmission building boom. We can invest in owners who have shown a willingness and ability to invest effectively in transmission; we can invest in the contractors who do the actual building of new transmission, or we can invest in suppliers of pieces of the transmission puzzle.

Among owners, the undisputed US leader is ITC Holdings Corp. (NYSE: ITC). ITC was created three years ago when DTE Energy decided to spin off their transmission assets (2600 miles of lines.) ITC CEO Joseph Welch has run the company since, and has since acquired the transmission properties of Michigan Electric (6800 miles), and is expected to close a deal for 6800 miles of lines from Intrastate Power and Light late this year. Welch recognizes that ITC's assets have suffered from over two decades of neglect, and expects to spend in excess of $1 billion in upgrades over the next 5 to six years. Given that transmission qualifies for a regulated rate of return, a high rate of investment is a good thing in a transmission organization.  ITC seems committed to acquiring more assets and upgrading what it has, which I believe will be good for investors.  It's current territory (in Michigan, Iowa, and Minnesota) also has lots of potential for wind development, which creates the need for even more transmission development. I'd love to see the acquire or develop assets in northern Illinois and Indiana to tie the system together and connect windy Iowa with power-hungry Chicago. The downside: ITC is up 50% since the Michigan Electric deal last summer. In situations like this, I usually sell put options to generate income if the stock does not pull back, or to pick the company up on the cheap if it does.

The company known for their ability to build new transmission rapidly and inexpensively is InfraSource Services (NYSE: IFS). It has recently agreed to be acquired by Quanta Services Inc. (NYSE: PWR) in an all-stock transaction. Given that both companies are up over 80% since last summer, and acquiring companies often have earnings hiccups as they struggle to integrate the acquisition, most investors would probably do well to wait for a pullback, and buy stock in the merged company after a disappointing earnings report or two.

Among suppliers, I like bulletin board traded Composite Technology Corp (OTC BB: CPTC), which is also up about 90% since last summer, but that is less worrying to me in a microcap company... that sort of volatility comes with the territory. CTC makes an Aluminum Conductor Composite Core cable which they claim can double the current carrying capacity of existing lines, or significantly lower costs for new lines. As a bonus for renewable energy investors, their DeWind subsidiary also manufactures support structures for wind turbines. They recently announced their first contract to supply turbines to XRG in Minnesota. A larger cable supplier is General Cable Corp (NYSE:BGC) which sells not only high voltage cable for electricity transmission as well as telecommunication applications. It has had a similar run-up in the stock price and trades at a rather high multiple for an industrial business.
[UPDATE: I said that DeWind "manufactures support structures for wind turbines." This is not strictly true, and it's a lot more complex than that... see comments.]

Conclusion

All in all, an investor looking to get into transmission today is confronted by rather high multiples for industrial businesses.  Given the good potential growth in the industry, these companies may not turn out to be overvalued, even at current prices, but I prefer to wait for a pull-back on most of them. For those concerned about missing a continued rise, I would advise putting in only a fraction of the amount you hope to invest now, and slowly buying more whenever one of the stock pulls back to a level you are more comfortable with (or using my naked puts strategy, if you understand the risks involved with options and can get sufficient options trading approval from your broker.)

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: CPTC.OB.

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.

Thanks to Lynn Greene for her help with the research for this article.

The Week in Cleantech: Apr. 2 to Apr. 6

The Week in Cleantech is a weekly roundup of our favorite cleantech and alt energy blog posts and stories from across the web. If you know of a good piece that you think should be included here, don't hesitate to let us know!

This week, we particularly liked...

On Monday, the Intergovernmental Panel On Climate Change issued its Fourth Assessment Report (AR4). Here's an overview by the Green Car Congress.

On Tuesday, Himanshu Pandya at Financial Nirvana informed us that certain Chinese solar companies believe that the silicon shortage is easing up. He shorted MEMC electronics [NYSE:WFR] because the shortage may be ending.

On Tuesday, Emily Singer at Technology Review told us how a company was working to make biofuels better. Five years from now, the biofuels industry will be very different from today's.

On Tuesday, James Fraser at the Energy Blog reported on "the world's first commercial solar tower power plant." Pretty impressive!

On Tuesday, Jack Brynaur at Quite Contrarian gave us a few options for profiting from blue gold. Water is a very interesting sector to watch and one which has largely fallen below the investor radar so far. Thanks to Seeking Alpha for this one.

On Wednesday, James Fraser at the Energy Blog told us about Vinod Khosla's venture investments. Always interesting to know what Khosla is up to.

On Wednesday, Tom Whipple at The Energy Bulletin reported on the Government Accountability Office's study on peak oil. In the article's words: "[t]his report is clearly a milestone on our journey through the oil age for it is the first time the staff of a major government agency has looked at the issue and concluded that peak oil is real"

On Wednesday, Mike Millikin at the Green Car Congress told us about a study on the outlook for biofuels in the Americas through 2020. Greater involvement in the biofuels business Latin American players is a near certainty, and essential if the US is to meet its aggressive targets.

On Thursday, Worth Civils at WSJ's Energy Roundup reported on a recent study on peak coal. That's right, not peak oil - peak coal.

April 04, 2007

Watch For Shortages In the Wind Sector

The polysilicon shortage in the solar industry is, by now, a well-known fact, and most investors are aware of the scale and probable duration of that shortage, as well as of what companies are positioned to benefit from a tight polysilicon market.

A similar situation is currently unfolding in the wind industry. We have discussed the very bright prospects for the wind sector here before. In the US, the American Wind Energy Association forecasts that installed capacity could grow from 11,603 MW today to around 100,000 MW by 2020. In Canada, Emerging Energy Research predicts that installed wind capacity will expand from around 1,500 MW today to around 14,000 MW by 2015.

We have also noted how the seeming lack of attention wind receives from retail investors, despite the fact that wind is a proven technology nearly competitive with conventional grid power, likely stems from the fact that there just aren't a great deal of 'exciting', headlines-grabbing wind stories in North America. Wind just keeps on growing quietly (albeit very rapidly), and North American investors are paying that growth next to no attention. The same definitely cannot be said of solar, with its plethora of exotic Chinese plays and its engrossing contest for technological supremacy. At the end of the day, though, wind is a proven and well-understood business with a good track record...which cannot always be said of solar.

The New Kid On The Shortage Block?

One of the key factors limiting growth in wind right now is a shortage in the various components needed to make wind turbines, from gearboxes all the way down to bearings. Someone alerted me yesterday to an interesting article in last week's Economist discussing feedstock shortage problems in the solar and wind industries. While the solar polysilicon story is well-known, the shortfall in wind turbine components supply will probably come as news to many folks. The article notes:

"Wind turbines are giant machines that require lots of parts. Several firms are building new factories: Vestas has just announced its first American plant, which will make blades in Colorado. But new factories will take several years to get up to speed. In the meantime, buyers are putting down deposits to reserve their turbines. GE Energy, the largest turbine installer in America, is already booked up until the end of next year."

A Stock That Could Benefit

This is somewhat timely given that in the latest Week In Cleantech we recommended a post by Notable Calls discussing exactly that topic, and providing a stock pick.

The pick is Zoltek [NASDAQ:ZOLT], a carbon fiber manufacturer said by RBC Capital Markets to be, because of the projected growth in wind, in a "commodity cycle position" similar to that MEMC Electronic Materials [NYSE:WFR] was in two years ago.




Shortages, Shortages...

Feedstock shortages related to alternative energy are currently responsible for some of the biggest gains generated in this bull market, both through direct commodity exposure and through exposure to companies involved in providing the feedstock. Just think of uranium, corn and sugar, to name a few.

This is merely an extension of that phenomenon - the growth in alternative energy has been so rapid over the past two years that players in various positions along supply chains just haven't had time to ramp up production enough to meet demand.

While this is bad news for downstream players, it is worth keeping an eye on up- and mid-stream companies who typically hold an appreciable degree of pricing power in tight markets.

The polysilicon, uranium and corn stories are well-known - might it be time to start paying more attention to wind?


DISCLOSURE: I do not hold a position in any of the stocks discussed above but I do have exposure to wind

April 02, 2007

When The Supreme Court Weighs In, Investors Better Pay Attention

Things got a little tougher for the Bush White House yesterday, when the Supreme Court effectively slapped it on the wrist for its position on climate change by ordering the EPA to justify its lack of action on the climate file with substantive arguments (i.e. the Court buys the IPCC's story rather than Bush's).

Things Just Keep On Piling

This ruling adds to a long list of recent events that render it increasingly difficult for climate nay-sayers to hold the fort.

The most significant such events are:

(a) one of the top Republican politicians in the land signing into law one of the most stringent set of greenhouse gas reduction targets in the world;

(b) a group of large and well-respected American companies banding together to demand action on climate change;

(c) Wall Street writing report after report on how to capitalize on climate-driven opportunities and protect from climate risks;

(d) the top climate scientists in the world effectively settling the scientific debate for most folks outside of the conspiracy theory community;

(e) a record private equity deal in the utilities industry being made partially contingent on abandoning plans to build a whole slew of coal power plants on grounds that the potential regulatory risk is too great.

These are only a few of the items to have hit the North American climate change newswire in the recent past. I would be remiss if I didn't also mention new and ongoing regulatory initiatives at the state and regional levels in the East and in the West.

Tobacco All Over Again?

Besides their successes on the political side, those in favor of action on climate change got, with this ruling, the biggest push they could have ever hoped for to forge ahead with their battle on the legal side - a battle some have compared to the infamous tobacco lawsuits.

While I wouldn't go as far as to say that successful tobacco-style lawsuits (and payouts) are right around the corner for climate change, this certainly sets an interesting precedent as the Court pretty much sided with most of the scientific community on the causes and potential impacts - a slap in the face of the so-called "skeptics" (of whom the Bush White House can be said to be a part of) who were basing their arguments on purported scientific uncertainties.

What's The Big Deal For Investors?

If the TXU deal was no wake-up call for you as an investor, hopefully this triggers some red lights. Climate change is no longer some abstract debate between environmentalists and conservative ideologues - it has now spread from the realms of science and politics into that of investing, and certain companies (and their stocks) could get hit hard in the medium term.

As I've argued here before, those with sufficient foresight to position themselves appropriately for this should do well. I think it is also becoming increasingly evident that those who choose the old ostrich approach could receive unpleasant news in the not-too-distant-future.

Away Last Week

I was away on holidays last week with self-imposed lack of access to email - thanks to Tom for holding the Alt Energy fort alone!

Several of you sent me emails to which I haven't gotten around to responding yet. I apologize for that. I will get on that tonight and you can expect a response in the next few days at the latest.

Best,

Charles

April 01, 2007

Increasing Risk in Renewable Energy Investing

Garey Vasey, Ph.D. at Risk Center brings us a cautionary warning from the U.K. Financial Services Authority about the increasing risks of commodity investing, largely due to greater investor interest (at all levels from individuals to banks to hedgefunds) without enough true experience in this sector.

I feel this same lesson applies to Renewable Energy investing. The higher these stocks rise on a tide of investor enthusiasm (as opposed to earnings fundamentals), the greater the potential for a fall.

Among his other points, he says:

The best and most knowledgeable energy trading talent was picked off early in this cycle and unfortunately this expertise was always thin. It is a serious issue that many investors are totally unaware of this lack of experience and more importantly perhaps, would not know what energy experience is if they saw it on display because they don't really understand what they are investing in!

This is even more true in Renewable Energy, with its typically higher fixed costs. We can see the lack of understanding among investors in renewable energy in the rapid run-ups (and crashes) of Renewable sectors such as corn-based ethanol, while economical renewables such as geothermal and wind get relatively little attention.

Dr. Vasey's article is here. It's worth a read, and emphasizes the need to understand the what you are investing in.  As a reader of Alt Energy Stocks, you've made a good start!

The Week in Cleantech: Mar. 26 to Mar. 30

The Week in Cleantech is a weekly roundup of our favorite cleantech and alt energy blog posts and stories from across the web. If you know of a good piece that you think should be included here, don't hesitate to let us know!

This week, we particularly liked...

On Sunday, Marc Gunther told us all about the greening of Goldman Sachs. As our regular readers know, Wall Street's involvement in environmental finance is one of our preferred topic of discussion.

On Monday, Dana Childs at Inside Greentech told us that there might be some good investment action at the pump. In cleantech/alt energy, it's always a good idea to keep the whole value chain in mind!

On Tuesday, EDP 24 reported on an English study that dispels the NIMBY belief that wind farms kill property values. Thanks to Renewable Post for this one.

On Wednesday, the Green Car Congress informed us that the efficiency gains associated with hybrid vehicles might be nullified by North Americans' insatiable appetite for large and fast cars. Tougher fuel efficiency standards, anyone?

On Thursday, Notable Calls reported on a call of note by RBC Capital. The stock discussed is Zoltek [NASDAQ:ZOLT], but the article is mostly interesting for the parallel it draws between silicon for solar and carbon fiber for wind. This is a thesis worth exploring, especially if you're bullish on wind. Thanks to Seeking Alpha for this one.

On Friday, the WSJ's Energy Roundup discussed alternative energy's cover moment. Call me biased, but I think the momentum behind alternative energy is so powerful and multi-faceted that the future can be nothing but bright for the sector. That's not to say, however, that there aren't oodles of alt energy stocks there that I wouldn't touch with a 10-ft pole.

On Friday, the Clean Slate Report gave us the low-down on a cool China cleantech site. It goes without saying that every serious cleantech investor out there should keep a very close eye on China.



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