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July 30, 2007

A Modest Proposal: Cellulosic Beef

The Future is Cellulosic

It is now widely accepted that the future of ethanol is cellulosic: Rather than distilling corn for ethanol to fuel our cars, accepted wisdom is now that we will be able to replace a large fraction of our current fuel consumption with ethanol distilled from agricultural and forestry waste, as well as dedicated energy crops, such as switchgrass and hybrid poplar.  Cellulosic ethanol also has the potential to alleviate the greatest stumbling block of corn ethanol as a potential replacement of gasoline: that there is simply not enough of it.  Corn ethanol will only be able to displace a small percentage of total US gas consumption.  If the entire current US corn crop were converted into ethanol, it could replace less than 20% of current gasoline consumption.  More realistically, the National Renewable Energy Laboratory (NREL) projects that 4% of gasoline could be replaced without overly affecting corn prices. 

Recently, cellulosic ethanol has been much in the news.  POET recently announced that they were producing cellulosic ethanol from corn cobs and the fiber in corn kernels, while FPL Energy LLC signed a deal with Citrus Energy to develop a biorefinery to make ethanol from citrus waste.  Both of these plants avoid one of the biggest hurdles that cellulosic ethanol still has to overcome: the distributed and varied nature of potential cellulosic feedstocks.   POET will be working with waste that would otherwise have to be disposed of, while the FPL/Citrus Energy plant uses a citrus processing waste which "is available at the plant at no cost [and] with no transportation costs."  

In addition to cellulosic's transportation Achilles Heel, these two projects also show how far we are from tackling the true scale of the problem: POET's plant will deliver 27% more ethanol from an acre of corn, while the "ethanol from citrus peel could... replace about 1% of Florida's gasoline production."  So if these two technologies were to be scaled up to use the entire US corn crop and all available citrus processing waste, we still could replace less than 6% of US gasoline usage with ethanol from these sources.


The Size of the Problem. Source: National Renewable Energy Laboratory

The limited supply of agricultural and forestry waste is why cellulosic visionaries often look farther a field, to other sources of agricultural waste in addition to corn cobs and citrus, as well as to dedicated energy crops.  NREL estimates that while we can produce about 0.3 billion barrels (oil equivalent) of ethanol from corn, the biochemical conversion of inedible carbohydrate would be able to supply 1.1 billion barrels of oil equivalent, or about 17% of current oil consumption.

Using Non-food crops 

This leads inevitably to talk of switchgrass, and other "energy crops."  If land which is not currently considered suitable for conventional agriculture can be used to produce high-energy content feedstock for our ethanol plants, we will have a source of supply of fuel for our vehicles that does not impinge on our food supply.  One much discussed option is using Conservation Reserve Parcel (CRP) land to grow highly productive perennial  grasses such as switchgrass and miscanthus.   While miscanthus seems to be more productive than switchgrass, switchgrass has the benefit of incumbency: many of the existing CRP parcels are already planted with swithgrass, a North American native.  Another contender is a diverse mix of native prairie plants, which has more than twice the energy yield of any native monoculture.   

Before we can move to a system of growing energy crops, and transporting those crops to cellulosic ethanol plants, we first have to find a process of breaking down cellulose into something that can be easily fermented into fuel.  We can already accomplish this, but the sticking point remains cost.

 cellulosic cost.PNG

DOE Cellulosic cost goals.  When I first saw this slide, I asked an NREL spokesman why they assume that the price of feed will drop to $34 per ton.  He replied that they had to in order to achieve DOE's cost targets.

There has been considerable progress in reducing the cost of conversion and enzymes.  One interesting pathway being explored is to adapt natural systems, such as enzymes from the guts of termites, or to use fungi to help break down resistant cellulosic material.   

Let Cows Eat Grass

Cows evolved to eat grass, including proposed energy crops such as switchgrass, which is already used as forage for livestock, and the more productive mixed prairie plants (including grasses.)   We don't have to wait until the technology for converting grass into ethanol becomes economic to use grass to increase ethanol production: Instead, all we need to do is to supply the grass to the cattle, and use the corn that they would have eaten instead to produce ethanol.

Feedlot operators will doubtless protest at the massive logistical problems of bringing hay, rather than corn, to feedlots where cattle are fattened. However, these logistical problems seem to me to be on the same order of magnitude as supplying that same grass to cellulosic ethanol plants, if it is too much to ask of the cattle industry to let the cattle "harvest" the grass themselves by grazing.

How much ethanol could we gain by shifting cattle feed to ethanol production?  In the 2005/6 season, 6.1 billion bushels of corn was used for animal feed, about 1.8 billion bushels of which went to feed cattle, compared to 1.6 billion bushels used to make ethanol.  Hence, we could double ethanol production by using corn currently fed to cattle.  And, since distiller's grains, a byproduct of ethanol production is usually fed to cattle, not all of the current feed corn would have to be replaced with hay to do so.

In addition to the logistical problems of getting hay to feedlots, beef producers have other objections to "finishing" cattle on grass.  First, corn-fed cattle can be fattened much more quickly than grass fed cattle (by as much as a year.)  In addition, corn feeding produces a juicer steak with more marbling than grass feeding.  Offsetting these advantages of grain fed cattle are the health advantages of grass fed cattle.  Grass fed cattle have much higher concentrations of CLA and Omega-3 fatty acids.   While the health benefits of CLA have only been demonstrated in animals to date, the American Heart Association says Omega-3 fatty acids benefit the heart of healthy people, and those at high risk of — or who have — cardiovascular disease.  These are the fatty acids for which wild fish are prized, and which some believe may be able to cure a wide variety of ills.

Finally, the same arguments that are made against corn based ethanol apply equally well to corn-fed beef, because they are essentially arguments against using corn, rather than against making ethanol.  For instance, the fossil energy used to grow corn is the same, regardless of use, and so this fossil energy is consumed equally if it goes into our cars or into our cows.  I have not done the calculations, but I expect that much of the benefit in terms of our personal carbon footprint which might be gained by giving up beef altogether might also be gained by eating grass-fed beef.  According to a recent Japanese study, over two-thirds of the energy in beef production goes towards producing and transporting the animals' feed.   Just as the feedstock for ethanol has a large effect on its energy balance, so does the feed of the cattle we eat.  

There may be other benefits as well, such as fewer dangerous E-Coli outbreaks.  The strain of E-Coli which put most of us off spinach last year only grows in the guts of grain-fed cattle, not grass fed ones.  

How it Might Happen

Rising corn prices are already making it less economical to feed corn to cattle.  Clearly, we are not going to see 1.8 billion bushels of corn a year diverted from cattle feed to ethanol overnight, but the changing economics are likely already having an effect.  As it becomes more expensive to feed cattle, a rational owner will look for alternatives, and grass will surely be one of these alternatives.  Over time, I expect to see cattle spending more of their lives grazing, and less at the feedlot.  I would not be surprised if this trend has already begun, and recent statistics show that new cattle placed in feedlots are down 15% from 2006 and 6% from 2005 for the month of June.  

Over the longer term, some feedlots and dairies will close as they are used less intensively, while others will shift to feeds which contain more distiller's grains and, eventually, hay.   Other potential substitutes for corn in feed include some of the other options which are being considered for cellulosic ethanol, such as corn cobs (which have long been fed to cattle) and stover.  All this will come at the price of more expensive beef and milk, but it will be less expensive than it would have been if methods remained unchanged, as well as healthier to eat.  We will probably eat less beef overall, and be healthier for it.


Companies hoping to use grasses as a feedstock for cellulosic ethanol plants may find themselves in unexpected competition with cattle, and so excitement around companies such as BlueFire Ethanol Inc. (OTCPK: BFRE) may be overblown.  However, to the extent that they plan to use feedstock which cannot be fed to cattle, a shift in cattle feeding should not effect them much.  BlueFire is currently focusing on urban landfill waste, something I hope no one is contemplating feeding to cows.  I do not know of any public companies that are currently focusing on grasses as a feedstock.

Conversely, the opportunity to double the amount of corn available to ethanol production may confound analysts who expect the ethanol boom to end due to rising corn prices.  I admit that I have also worried publicly about a commodity squeeze in corn (here and here).  Considering the recent gloom about ethanol producers due to rising corn prices, now may be a good time to make a contrarian bet on conventional ethanol producers such as Archers Daniels Midland (ADM), Green Plains Renewable Energy, Inc. (Nasdaq: GPRE), US BioEnergy Corporation (NASDAQ:USBE), VeraSun Energy Corp (NYSE: VSE), and Pacific Ethanol (PEIX).   

Corn ethanol is certainly not going to bring the United States anywhere near energy independence, and it does little or nothing for the fight against global warming.  It has, however, provided a relatively harmless use for the massive glut of corn created by US agricultural policy, at least in comparison to feeding ever greater amounts of corn to cattle and high-fructose corn syrup to humans.

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

July 29, 2007

The Week in Cleantech (Jul. 22 to Jul. 28) - Are Ethanol Stocks About To Come Out Of Their Funk?

On Tuesday, Himanshu Pandya at Financial Nirvana informed us that alternative energy companies were taking advantage of the recent run with stock offerings. As pointed out by Himanshu, shareholders don't currently seem to care too much about value dilution, so companies may as well take advantage of this to raise cheap capital.

On Thursday, Angela Barnes at Report on Business argued that cool ethanol stocks could be expected to heat up. While we are no fans of corn-ethanol, the slew of generous support schemes put in place by North American governments to support ethanol growth should eventually positively affect fundamentals.

On Thursday, Jim Fraser at The Energy Blog told us that Japan had certified a new Toyota plug-in car for use on public roads. Toyota continues to raise the bar while the Big Three continue to hemorrhage North America market share - what's new?

On Thursday, Environmental Finance informed us that Banc of America was buying into carbon trading. Upwards and onwards for emissions trading in North America and for Climate Exchange PLC (CXCHF.PK).

On Thursday, The Economist showed us where the wind blew. Remember that we've often told you to keep an eye on grid-related plays.

On Friday, Peter Fairley at Technology Review argued that thin film's time in the sun may be upon us. By looking at First Solar's (NASDAQ:FSLR) share price has done over the past year, it certainly seems as though shareholders agree.

July 27, 2007

Interview with Dr. Mike Gallagher, President & COO of Westport Innovations

One of the companies I have followed for some time is Westport Innovations, Inc., (TSX:WPT or WPIVF.PK) out of Vancouver. The technology and product suite allows large diesel trucks to run standard diesels on a 95% natural gas mix, enabling fuel switching as well as significantly improved NOx and PM, as well as CO2 emissions. The company's rapid expansions date from a late 1990s joint venture with Cummins (NYSE:CMI), and Westport has led this market sector since then.

I had the opportunity at the recent Greenvest 2007 Conference I chaired in San Francisco to hear the talk of my friend Dr. Mike Gallagher, President & COO of Westport, and asked him to share a few thoughts for Cleantech Blog based on his conference presentation.

A few quick quotes from their website on the technology (you'll see why I like it so much):

“Westport™ HPDI (High Pressure Direct Injection) natural gas engines on the road are producing approximately 50% less nitrogen oxides (NOx), 80% less particulate matter (PM), and 20-25% less carbon dioxide (CO2) emissions than equivalent diesel engines.” - These are the regular diesels running on 95% natural gas.

Westport has also been developing a Compressed Natural Gas Direct Ignition technology that basically similarly enables a straight natural gas engine to run direct injection like a diesel. The benefits include:

"- near-zero emissions of particulate matter
- 20% less greenhouse gas emissions (mainly carbon dioxide) than equivalent diesel engines
- 25% increased fuel efficiency over current spark-ignited natural gas engines"

Mike, before we go into your thoughts on Westport, let me lay out some of your background in energy engineering. Mike was previously Senior Vice-President, Americas, for Fluor Corp, and held executive officer positions with the Bechtel Group in San Francisco and London-based Kvaerner Group. He also has PhD from Stanford in Mechanical-Nuclear Engineering. So Mike, thanks for the time today.

Mike, I know Westport makes products to run diesel engines on natural gas – how exactly does this work?

Westport’s LNG System for Heavy-Duty trucks uses a small amount of diesel pilot fuel for robust ignition and then allows the truck engine – we’ve based our technology on the Cummins ISX diesel engine platform – to operate using approximately 95% natural gas for high duty cycle applications. The combustion approach uses a high pressure direction injection of natural gas into the diesel combustion chamber.

Can you tell us about the greenhouse gas impact of your products? That’s such a hot topic these days.

Emissions regulations are the norm now, particularly in California where we are actively pursuing opportunities for the use of our heavy-duty product. The Westport LNG system truck produces 15-20% less greenhouse gas emissions, compared to an equivalent diesel engine.

Our joint venture company, Cummins Westport Inc., offers mid-range products for medium-duty truck and bus applications. CWI’s advanced ISL G engine produces 7-13% less greenhouse gas than the equivalent diesel.

As you just alluded to, and for those who haven’t followed the company, Westport has a major joint venture with engine company Cummins. How does this arrangement work and what’s in it for Westport?

Cummins Westport Inc., or CWI as we call it, is a 50:50 joint venture between Westport and Cummins Inc. The JV company is headquartered right here in Vancouver with us, it has a dedicated management team and a dedicated Board of directors.

Profits (and losses) are shared equally by the two parent companies. CWI Cummins Westport Inc., a joint venture of Cummins Inc. (NYSE:CMI) and Westport Innovations Inc. (TSX:WPT), manufactures and sells the world's widest range of low-emissions alternative fuel engines for commercial transportation applications such as trucks and buses. Cummins is a global power leader in engines, electrical power generation systems and related technologies. Westport Innovations is the leading developer of technologies that allow engines to operate on clean-burning fuels such as natural gas, hydrogen, and hydrogen-enriched natural gas (HCNG).

Revenues grew approximately 40% from 2006 to 2007, to $60 million Canadian, what were the major drivers – and is that growth expected to continue? Where should investors expect the growth from?

The 39% increase in annual revenues was driven by increased CWI engine shipments (up 50%) and the delivery of our first Westport LNG systems for heavy-duty trucks. Product sales growth which we measure in Canadian dollars was actually offset by a 5% decrease in the US dollar exchange rate. In US dollar terms, revenue growth was 44%. Growth for the next couple of years is expected both from CWI global sales growth around the launch of its new ISL G, and from sales of Westport’s new LNG systems for heavy duty trucks.

And the company turned a profit for, I believe, the first quarter ever in this last quarter. Does this mean Westport has turned the corner? The company has a fairly large retained deficit – and I know investors have been looking for profits to begin erasing it.

We are pleased about this last quarter’s results for sure. We have a solid history with CWI and a new HD product now and the markets are responding. The profitability for this recent quarter was driven by a number of fortuitous events that occurred during the quarter on a one time basis. So we will continue to push for improved profitability on a recurring basis.

Perseus, one of your major shareholders (who has had two seats on the board) recently sold a large amount ($50 million worth) of shares. What was the story there? Didn’t Perseus loan money to the company just last year? Should existing or prospective investors be worried?

No, certainly no cause for worry, quite the reverse actually. In fact, the sale erased planned interest payments by Westport to Perseus which is a positive for us, and Perseus elected to capitalize on a a very attractive financial opportunity available to them based on our significant share price increase in recent months.

The stock price has tripled in the last year – what were the drivers and are you worried the run up was too steep?

It’s always hard to know exactly what is going on out there in the marketplace, but we think the market has responded primarily to two things: our CWI business is demonstrating strong and growing profitability, and our heavy duty LNG truck business has launched with some early sales and big opportunities at the Port of LA and others.

We think we are now being valued more broadly for our expertise, we are meeting expectations, and the regulatory system is catching up with our technologies, opening the door for more sales. CWI has an engine offering available now that is certified to 2010 emissions standards – that’s 3 years ahead of schedule! And Westport is positioned to provide LNG systems in trucks in California now, where they have approved a five year Clean Air Action Plan at the Ports of Los Angeles and Long Beach to replace up to 5,300 older diesel trucks with LNG trucks in five years

Do you have any plans to list on Nasdaq in the future to make it easier for US investors to buy in?

We are always looking at listing alternatives and have expanded our communications with US institutions and investors. But we don’t have any immediate plans to do a US listing.

You personally came to Westport from big corporate engineering - what had attracted you to the company?

That’s true, I had spent 25 years and grew into senior executive positions with the pre-eminent engineering and project management companies in the world- well known names like the Bechtel Group and the Fluor Corporation. Within those companies though I had dedicated a fair piece of my career to development of alternative energy technologies- particularly alternatives to oil- and to environmental cleanup technologies. And to the entrepreneurial creation and growth of new businesses. And of course I had my Stanford and MIT engineering and technology roots to draw from. So when the Westport opportunity came along almost five years ago, I felt it was a great way to take everything I had learned and apply it to a fast-growing technology company. A place where I could work with some of the brightest young talent around to transform Westport from an R&D company to a full commercial company, making a serious contribution to solving some of the world’s oil, energy, and environmental challenges.

If you had to give an investor three reasons to like Westport – what would you pick?

Real and growing sales, short term commercialization opportunities, and a technology right in the wheelhouse of current world needs around oil, energy, environment, and climate change.

For more information, you can visit the Westport website.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, a Contributing Author for Inside Greentech, and a Contributing Editor to Alt Energy Stocks.

Sprott's Peak Oil Watch

While browsing the web this morning, I came across a very interesting section on Peak Oil on Sprott Asset Management's website (best viewed with Explorer). Sprott Asset Management is a Toronto-based boutique investment management company that I consider, for lack of a better term, pretty cool. They have taken some relatively unorthodox commodities bets in the past and have often won them. For instance, they spotted the bull market in uranium very early on and did well as a result (PDF document).

There are many web-based Peak Oil resources out there, so you may wonder why I decided to profile this one in particular. At AltEnergyStocks.com, we view the growing trend toward greater environmental responsibility, the rise of alternative energy and peaks in the production of various fossil fuels not so much as fodder for discussion around the dinner table, but rather as solid bases on which to erect a viable investment thesis. Sprott's Peak Oil page not only features a relevant news section, but also a number of documents outlining their thinking on this issue as well as how they are playing the Peak Oil piece.

Sprott takes a different view than we typically would: they see Peak Oil primarily as a good reason to be long oil, gas, uranium and coal (PDF document). We see it as a good reason to be long alternatives to fossil fuels. To be fair, Sprott has alternative energy on its radar to a greater extent than most conventional fund managers do, but that does not appear to be their main angle at the moment.

This is a great resource for the Peakist who wants to turn Peakism into an investment strategy. My main complaint: they should set up an RSS feed!

July 25, 2007

4th Annual Energy Tech Investor Forum on October 3 to 4, 2007 in San Jose, CA

The following is a Special Information Supplement from our Featured Company sponsor Energy Tech Investor Forum

Alternative Energy is not only changing your world, but also the venture investment landscape as we know it and could be the largest economic opportunity of the 21st century.The demand for efficient, clean and reliable energy in its many forms is responsible for creating opportunities across a variety of global economic sectors. The innovation and automation of the Energy industry have given rise to an important area of venture capital investment - the Energy Technology sector.

Did you know?

  • Cleantech Venture Network reported that North American venture capital investment in the cleantech category totaled $2.9 billion for 2006, representing a 78% increase over 2005 cleantech investment of $1.6 billion, and a 140% increase over 2004 investment of $1.2 billion.
  • The surge in investments come from energy technologies related to energy generation, storage, recycling and waste, and transportation.
  • By 2009, the Cleantech Venture Network estimates that clean technology companies will need abut $3.4 billion in capital investment.
  • Mainstream venture capitalists, strategic and corporate investors have joined specialized energy funds and strategic investors that are placing increasingly bigger bets on energy technology companies Notable investors include Bill Gates, Steve Case, Paul Allen, John Doer, and some of the world’s largest companies, such as General Electric, Goldman Sachs, J.P. Morgan Chase, Sharp, Toyota, BP, Shell Oil, and CalPERS.

Now in its fourth annual year, this premier event will once again bring together an illustrious faculty of leading corporate and strategic buyers from the energy technology community to share their perspective on investment opportunities, challenges and critical issues facing the industry today!

Program Highlights Include:

  • Market outlook - identifying the next wave of alternative energy tech deals
  • Clean technology – What does all the hype mean to the sector?
  • Energy efficiency & reliability – balancing environment and business requirements
  • Investing in clean tech fund: The LP’s perspective
  • Fossil and nuclear based fuels
  • Clean tech, nano-materials & bio tech convergence
  • Energy tech in the labs: getting breakthrough technologies out
  • Liquidity, returns and exits in the renewable and alternative energy space
  • Green tech investments – where is it today, what is the reality and where is it going?
  • Sector focus: distributed energy, wind, solar & water, fuel Cells, biofuels, energy storage

Join us in San Jose this October, and learn what’s on the horizon for the next 12 months! Attending this conference will enable you to network with some of the most highly regarded names in the industry. It will be a unique opportunity to spend time with the industry’s key decision-makers, thought leaders, investors, and innovator.
For more information, please visit: Energy Tech Investor Forum

Performance Contracting Stocks

This is the final article in a series on the WGA Energy Efficient Buildings Workshop.

On the morning of day two of the Western Governor's Association Energy Efficient Buildings Workshop, the topic was performance contracting: a way of unlocking the power of a government entity's utility budget to make energy improvements that pay for themselves, but might otherwise never receive the necessary capital.  

Despite the dryness of the subject, the room seemed alive with active interest of the participants.  Many of the workshop participants were government officials who are enthusiastic about energy efficiency, but also beaten down by the tyranny of the budget.  For them, performance contracting must seem like the Holy Grail: a chance to make an improvement that not only improves their department's bottom line, but a way to do it without having to fight for any precious new allocation from the overall budget.

In concept, performance contracting is a deal by which the government body contracts for a certain level of service (such as a level of building temperature and lighting) instead of buying the energy needed to run their building directly from the utility.  The Energy Service Company, or ESCO, takes the money that would have gone to paying utility bills, and uses it to finance a loan which they use to make efficiency improvements to the facility.  Part of the energy savings pay for the loan, and the rest are split between the ESCO and the government body as profit.  As one presenter put it, it's not a free lunch, it's a lunch that you get paid to eat!

While the presentations focused on performance contracting for government entities, it's also applicable in other situations (although many government entities enjoy the advantage of being able to borrow at municipal bond interest rates of 3-4%, there are many projects that can be profitably financed at much higher rates.)  The presenters were also careful to emphasize that a performance contract can include renewable energy and other green or sustainable aspects, as well as energy efficiency improvements... the key is to find enough energy efficiency improvements to fund the more expensive parts of the package.

This area also has investment potential.  While many ESCOs are private companies, quite a few ESCOs, as well as their financiers and suppliers are divisions of public firms.  These companies are well placed to benefit from the raft of initiatives to improve the energy efficiency of government operations that is blossoming at the local level (some of which I discuss in the Political Developments article in this series.)  A good place to look for companies involved in performance contracting is the membership of NAESCO, the National Association of Energy Service Companies.  Prominent publicly-traded NAESCO members include:

Johnson Controls (NYSE:JCI), a company I included in my Blue Chip Alternative Energy Portfolio, in large part because of their activities in efficient buildings, and presenter at the conference.

Honeywell International (NYSE: HON)

Siemens Buildings Technologies, a division of Siemens AG (NYSE:SI), a company I also like for their presence in electricity transmission.

Trane, a leading A/C manufacturer and division of American Standard (NYSE: ASD)

Roger Flud TAC Energy Solutions (a private ESCO) of gave one of the more interesting presentations.  His presentation was on the economic impact of energy efficiency in general and performance contracting in particular, with much of the information drawn from Saving Energy, Growing Jobs, by David Goldstein (you can read an excerpt here.)  Goldstein debunks the myth that there must always be a choice between environmental protection and economic development; instead, the two can, with intelligent regulation, go hand in hand.  A sample statistic: Saving $200 a month in electricity can fund a $2M project, which would create 83.5 man-years of work, plus potential manufacturing jobs if the equipment is manufactured locally.

I'm optimistic the other attendees learned many of the same things out of the workshop that I did, and that those who represent governments will do their parts to bring us intelligent regulation, which will allow better energy efficiency, lower greenhouse gas emissions, improved energy security, and enhanced economic development.


WGA Energy Efficient Buildings Workshop series overview.

Political Developments for Energy Efficiency in Western States

Investing in Efficient Homes

Energy Efficient Buildings workshop presentations.

Attendee List

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: JCI, SI.

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.

July 23, 2007

Investing in Efficient Homes: Energy Star, Built Green, and Beyond

This article is part of a series on the WGA Energy Efficient Buildings Workshop.

Sam Rashkin

One highlight of the conference was Sam Raskin's (the National Director a.k.a. "Scary Man" of the US EPA Energy Star program.)  I recommend his presentation for graphic infrared images of poorly sealed homes, showing how little the insulation is doing to retain heat or cold if the building envelope is not tight.  It will make you think twice about buying a home that hasn't been checked to be tightly sealed.

Rashkin believes that the growing affordability of infrared cameras will allow home inspectors to use them so that builders will no longer be able to hide shoddy insulation and sealing of building envelopes, giving a strong competitive advantage (over both "used homes" and other builders) to builders who can get these things right.

Along the way, he commented that wide-scale adoption of Plug-in Hybrids (PHEVs) may lead to $.40/kWh electricity.  While I wish he were correct about this, because of the investments in energy efficiency that such a scenario would catalyze, I doubt that PHEVs alone would lead to such an escalation of electricity prices.  In fact, some studies show that PHEVs may lower per kWh cost of electricity by allowing us to use our grid more efficiently, and spreading fixed costs of generation to more electricity sold.

While current energy Star standards focus on right-sizing HVAC equipment and the building envelope, he expects future versions to include

  1. Better solar orientation (long, south-facing walls keep a building cool in the summer and warm it in the winter, with proper overhangs and window sizing.)
  2. A move to avoid solid areas of wood support members, where there isn't room for insulation.
  3. Making sure that air ducts remain in the conditioned parts of the house.
  4. Structured plumbing, which can improve the efficiency of water heating by 25% by reducing the amount of water that cools off in pipes when not in use.
  5. Advanced lighting... his presentation also contained a series of pictures effectively debunking the myth that fluorescent lighting has to be harsh.
  6. He also expects a move to the "not so big house."  I'm more cynical about that, but it could happen when much higher energy prices really begin to start hitting consumers in the wallet.

Eric Borsting, of the National Association of Home Builders (NAHB)

Mr. Borsting began his presentation by emphasizing that he was there representing NAHB, and I don't blame him from trying to dissociate himself as much as possible from the canned, finger-pointing speech he read to us in a dull monotone.  The NAHB's position (in my words) is that lack of energy efficiency in new homes is not their fault, we should look instead to energy-inefficient occupants, and do something about old homes first. They completely avoid the fact that every inefficient old home was once a badly constructed new home.  They're terrified of mandates for energy efficiency, arguing instead that they should be given incentives to build homes responsibly. 

The NAHB says that every $1000 added on to the price of a new home, "prices out" 240,000 households from the market.   What this study completely ignores is that energy efficiency improvements are extremely cost effective, and actually lower the cost of ownership of the home (when including both mortgage costs and utility bills.)  Recognizing this, the Energy Efficient Mortgage program allows buyers of energy efficient homes to increase the size of the mortgage they qualify for or to lower the interest rate they are charged.  Thus, energy efficiency improvements can actually price in hundreds of households into the home ownership market, in direct contradiction with the NAHB's party line.  Like many entrenched interest groups, they are so afraid of changing the way they do things that they work against their own self interest as home builders by resisting energy efficient building techniques.

Kim CalominoBuilt Green Colorado

Kim Calomino, director of the Built Green Colorado program of Home Builder's Association of Metro Denver, stuck a little less tightly to the Home Builder Association's line, arguing that much could be accomplished by voluntary "above code" programs.  While she was persuasive that voluntary programs such as Built Green can do a lot to improve energy efficiency, this argument also presents a false dichotomy between more stringent energy codes and voluntary programs.  There is indeed an effective place for voluntary codes, but that does not mean that they cannot be in addition to mandatory rules that all buildings must include economic efficiency measures.

She did provide a rare example (including actual costs and savings) of the benefits of Built Green improvements, from McStain Neighborhoods.  She listed the itemized costs associated with meeting the Built Green standard (not all of which are energy efficiency improvements), with a total of $555 in annual utility savings for a $4600 premium on a Built Green home.  Her presentation is available here (see slide 9).

I calculate the internal rate of return (IRR) on McStain's investment in a Green Built Home to be a 10%.   That means that the additional cost of this home can be profitably financed at any interest rate below 10%.  My IRR calculation assumes that the improvements continue to produce savings for 20 years, but also that energy prices do not rise over that same period, so the likely errors in the calculation will be in opposite directions (giving a lower IRR for shorter-lived improvements, but a higher IRR if energy prices rise.)

Taking into account the fact (repeatedly stressed by Ms. Calomino) that there are many other benefits to Built Green homes in terms of comfort, air quality, and durability, it seems insane to me that inexpensive improvements such as those required by Built Green should not be required by code so long as the internal rate of return on the investment in energy efficiency is greater than the interest rate on the mortgage used to finance it, because the air quality, comfort, and durability benefits she points to would still be, essentially free.

Gil Rossmiller

Link to Mr Rossmiller's presentation.

Gil Rossmiller, the Chief Building Official of southeast Denver exurb Parker, CO gave us all a reality check, by bringing home the fact that if 12% of new homes meet Energy Star standards, then 88% don't meet these not-too stringent standards.  For that 88%, Energy Star standards are irrelevant, and a focus on proper enforcement of the existing building code for the vast majority of homes will do a lot more for energy efficiency than adding a couple of percent to the number of homes that qualify.  The sad fact is, that even the weak energy codes we do have are only as good as their enforcement... and he showed how he was able to greatly improve builder's standards simply by rigorously enforcing just the existing, much derided code.

Stories like this tempt me to despair because they show just how bad things are, but they can also lend hope.  We don't have to pass a raft of new laws to make progress tackling our energy problems; a lot of progress can be made by just enforcing the code that we already have. 

Investment ideas

All speakers constantly emphasized that bringing up energy efficiency requires extensive education and outreach, not just higher standards.  Because of that, we can expect that there will be an increase in government contracts for that purpose.  Advertising and education are not a sectors I'm familiar with, but if you know of a public company you feel can profit from this trend, I suggest you think seriously about investing.  On a more whimsical note, you might take Sam Rashkin's thoughts to heart, and invest in makers of infrared cameras.

Among homebuilders, Lennar Corporation (NYSE:LEN) was mentioned at least twice as a pioneer in energy efficient building practices.  

When it comes to energy efficient homes, the two big issues will be insulation and sealing.  I had the opportunity to speak with two industry insiders about this, and they felt that proper sealing depends much more on proper installation than the particular product used.  This agrees closely with what most of the speakers were saying during the presentations.  Unfortunately, this means that it will be difficult for any particular product to gain market share unless it is easier to install than rival products.  There isn't currently any product on the market with a real competitive edge in this regard, but a homebuilder with a rigorous training program for installers might be able to capture value, if they were also able to retain staff.

The big public players in the insulation industry are Owens Corning (NYSE: OC), which one of my informants (a research engineer at a rival  firm) says has a quality research department, and Johns Manville (JM), which is owned by Berkshire Hathaway (NYSE:BRKa).  However,JM is too small a part of Berkshire to warrant investment in Berkshire for an investor looking for exposure to the insulation industry.  The final major insulation manufacturer is CertainTeed, but they are a private German firm.  Dow Chemical (NYSE: DOW) also has exposure to the air sealing space, as does DuPont (NYSE:DD) with their household name Tyvek weather resistant barrier.

Unfortunately for investors, I felt that the take away message was that no insulation manufacturer has a strong technical edge, although Owens Corning may be the default investment in this space simply because they provide the purest exposure to the insulation industry.

The largest potential market for insulation in this industry is blow-in insulation in attics, because it is something that is easy to do in an existing home, and you get a lot of energy savings for a very small outlay.  Blow-in fiberglass insulation (which often includes significant recycled glass content) has the best thermal performance, followed by cellulose (usually made from recycled newspaper).  All the major manufacturers have blow-in fiberglass product.

Extremely high R-values can not be achieved with current practices (filling the gaps between studs with insulation).  If forced to much higher standards, builders will most likely move to rigid foam external sheathing, versions of which are made by Johns-Manville, Owens Corning, and Dow Chemical.  While these products may currently be practical for custom homes, production builders don't like to use them, and these three companies might gain a competitive edge from a large increase in home energy standards.  However, I feel such a scenario is improbable within the next five years.


WGA Energy Efficient Buildings Workshop series overview.

Political Developments for Energy Efficiency in Western States

You can find links to future installments by clicking here.

Energy Efficient Buildings workshop presentations.

Attendee List

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: OC, DD.

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.


July 22, 2007

Political Developments in Energy Efficiency

This article is part of a series on the WGA Energy Efficient Buildings Workshop.

Governor Ritter

After arriving slightly late (a gunman had been shot by state troopers outside his office the day before.)   Bill Ritter kicked off the workshop with his thoughts on energy efficiency.  Other than the Governator, I don't know of any other state governor in the US who understands renewable energy as well as Governor Ritter.  And he's dedicated to learning more; when I attended a fundraiser early in his campaign last year, he had not yet heard about plug-in hybrids, but in a more recent interview (podcast download), it's clear that he has learned the ins and outs of the industry.  Here are some highlights from his speech.

  • Has committed to achieving the goal of 20% improved efficiency in Colorado by 2020.
  • The United States wastes more energy in production and transmission than Japan uses. (See my articles on ABB and transmission for investment opportunities.)
  • If China and India are to embrace Renewable Energy and Energy Efficiency, the United States must lead the way.

Ritter Q&A

Q (Howard Geller): Are you planning to issue an executive order on Energy Efficiency, like Governor Hunstman of Utah?

Ritter: He is not planning an executive order, but he would instead be tacking the problem on multiple fronts, including using the Governor's Energy Office to promote energy efficiency and Demand Side Management (something I plan to be personally involved in), and that, if we achieve our goal early, he plans to move the goalposts and aim for even more efficiency, as was done with the doubling of Colorado's RPS.

Q: What can other states do to get legislators on board?

A: (I thought this was particularly insightful.  Activists and politicians take note! -TK)

  1.  Education of legislators is essential; 
  2. Get Rural Electric Co-ops (RECs) on board. 
  3. Make sure there are benefits for rural areas.  In Colorado, we signed law allowing RECs to take out debt to fund transmission, and allowed some accelerated cost recovery. 

Howard Geller (I've mentioned him before)

Dr. Geller gave a summary of the progress on energy efficiency in each of the western States, and his presentation was followed by presentations of other speakers from the individual states.  I'm including some information from individual state presentations here.

  • In addition to Governor Ritter's commitment to increase energy efficiency by 20% by 2020, Governor Huntsman of Utah has gone even farther, signing an executive order to achieve a 20% increase in energy efficiency by 2015.  Other governors are considering this commitment, Governor Richardson of New Mexico, in particular.
  • Energy Efficiency is a key part of all state Climate Action Plans.
  • Western states are leading in the construction of new Energy Star labeled homes, with Arizona, Nevada, and Texas alone accounting for half of the nation's total last year, and Energy Star accounting for 71% of all new home construction in Arizona.  More than 15% of new homes were Energy Star in California and Utah.
  • Arizona calculates that the net economic benefits of it's Climate Action Plan, which includes both renewable energy and energy efficiency, at $5.6 Billion from 2007-2020.  To me, this is important because it shows that the "choice" between addressing climate change and increasing economic growth is a false one.  Energy Efficiency allows us to do both.

Rep. Tonya Pullin, Kentucky Energy Committee Chair.Tanya Pullin

Link to Rep. Pullin's presentation, (PowerPoint)

Despite Kentucky not having been a "Western" state since the 1800s, Rep. Pullin was invited to the workshop to tell us about a bill she had championed to make a simple change with the potential to produce great results at very little cost.  I've written about the potential of giving people better feedback about their energy usage before, and I was very pleased to see that politicians are starting to do something about it.  A simple $100 indoor electric meter that's the size of a credit card can allow users to cut their electricity usage significantly by simply letting them know where it is being wasted.

It's hard to overestimate the giant potential of human behavior to either make well designed systems run awry if they are not designed with real human behaviors in mind, or to make any system perform well above its design if we are just given the right feedback about the effects of our actions.  As Rep. Pullin put it, people want to be empowered with information.  

During the Q&A, a representative from Seattle Power and light asked her how the indoor electric meter could be justified by a utility that not only had to pay for the meter, but then had to spend another $150 to verify the savings.  She responded that her program was just the enabling legislation to allow a utility to do a voluntary trial (which ended up being massively oversubscribed.)

This highlights a problem with utility regulation: by requiring meter-by-meter verification of something which is inherently hard to measure (the effects of human behavior), we prevent implementation of a  program that customers not only want (in Rep. Pullin's experience,) but that is likely to be radically effective because it is nearly impossible to quantify just how effective it will be.  At some point, we simply need to decide that there is likely a large benefit to society, and make the (small) investment.  When it comes to indoor meters, we have a bad case of analysis paralysis.


WGA Energy Efficient Buildings Workshop series overview.

You can find links to future installments by clicking here.

Investment opportunities in Smart Metering

Energy Efficient Buildings workshop presentations.

Attendee List

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.

The WGA Energy Efficient Buildings Workshop

The WGA Energy Efficient Buildings Workshop: Overview

The Western Governor's Association (WGA)  held a two day workshop in Denver on July 17 and 18.  Colorado's Governor Bill Ritter kicked off the workshop (with a slightly late start due to the shooting of a deranged gunman outside his office on July 16.)  The workshop was a step towards achieving the WGA Clean and Diversified Energy resolution which includes a call for a 20% increase in Energy Efficiency in their states by 2020

I attended because I believe:

  1. Energy Efficiency can and will do more to meet the challenges of Global Warming, Peak Oil, Environmental Degradation, and Energy Security than any other form of Alternative Energy.
  2. The speed and choice of energy efficiency measures that are adopted will be strongly influenced by governmental policy.
  3. In the United States, it is the states that will become the models for future national policy.
  4. Keeping a close eye on these trends will give me an edge in picking companies that are well placed to profit from them.  I'll include some investment ideas in each article.
  5. The workshop gave me an opportunity to influence the direction of future policy, which will benefit my managed portfolios.  I also hope to help, in a small way, to guide policy in directions that allow us to deal with our energy challenges more effectively and without as much disruption to the economy.

The first day was mostly presentations from government officials and industry experts, while the second day started with a couple short presentation followed by two brainstorming workshops. Over the next few days, I'll be publishing my thoughts on the highlights of the workshop.  You can also download my notes.


You can find links to future installments in this series by clicking here.

WGA Energy Efficient Buildings workshop presentations.

Attendee List

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.

July 21, 2007

The Week in Cleantech (Jul. 16 to Jul. 20) - Are Fuel Cells About To Explode?

On Monday, the Boston Globe told us about a new report that sheds some doubt on contentions that cleantech is the new darling of venture capitalists. Thanks to the WSJ's Energy Roundup for this one. Red Herring also published an article on this report last week.

On Monday, Eli Hoffman at Seeking Alpha told us about Barron's latest five cleantech stock picks. Of those, I am particularly familiar with SunPower (NASDAQ:SPWR) and Fuel Tech (NASDAQ:FTEK). Both are a bit rich at the moment but I like Fuel Tech's exposure to China, especially at a time when the country trying hard to clean up its act.

On Monday, Stockerblog at Seeking Alpha provided us with an extensive list of fuel cell stocks. I remain skeptical as to whether fuel cells will ever be a technology of significance in the transportation or large-scale energy storage industries. Nevertheless, some interesting opportunities exist in certain niche applications such as forklifts.

On Thursday, Neal Dikeman reported on an interview he recently conducted with with Stuart Hemphill, the Director of Renewable and Alternative Power for Southern California Edison (NYSE:EIX). This is a very interesting piece. Hemphill and us are in agreement about where some of the biggest growth area - and, incidentally, challenges - in alt energy lay: transmission and efficiency. The article also indirectly identifies another major opportunity area: independent power producers focused on renewables.

On Thursday, the WSJ's Energy Roundup informed us that T. Boone Pickens was traveling to China to explore opportunities related to natural gas as a transportation fuel. Natural gas does seem to hold great promises as a bridge solution between gasoline and whatever will be powering our cars in a few decades. Energy Tech Stocks, however, warns us to keep a cool head when appraising the desirability of switching from oil to natural gas - the outcome of such a shift could be politically undesirable.

On Friday, Dallas Kachan at Inside Greentech gave us an overview of a new report claiming that the market for fuel cells should grow substantially in the next nine years. The list of fuel cell stocks discussed above may come in handy after all.

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!

July 20, 2007

Global Resource Corporation: Needed Technology; Unanswered Questions About Management

On July 3, The Energy Blog told us about a process of turning old tires back into valuable oil and gasses.  Given the problems of Peak Oil and plastic waste which can mimic almost anything in the environment, I was intrigued, and I had the feeling that other watchers of the alternative energy space would be, too.  After a quick review to make sure that the technology was based on sound science (I believe it is, although that is no guarantee that it can be commercialized), and a search for information about their governance policies and a board list (which I did not find), I noted that they have all their SEC filings available on their website, which I took to be a good sign.  I bought small amounts of the Global Resource Corporation (GBRC.pk) stock for several of my more speculative clients (at prices between $2.20 and $2.35), based on the intuition that I would not be the only one to see the potential for this technology, and that others would write about it.  I expected that the favorable press would drive up the price of the stock.   

Phone Tag

I then began more in-depth research.  If the company turned out to have a quality management team, who I felt would be able to realize the true potential of the technology, I fully intended to take substantial positions in all my managed accounts for which the company would be appropriate.  I began reading through their SEC filings, and sent an email to their general inquiry line, asking for management bios and any governance documents they had adopted.

Two days later, I heard back from Jeff Andrews, Global Resource's CFO, but not with the list of the Board of Directors and bios I had requested, but rather with a request to call him "next week."  "Next week" passed with a game of phone tag, and eventually I set up (by email) a phone appointment with him the following Tuesday, the 17th.

Cause for Concern

In the meantime, I had had a chance to review the SEC filings (the most interesting reading is their most recent 10K), and gleaned the following information:

  1. Global Resource was the product of a reverse merger between blank-check company Advance Medical Technologies Inc. (formerly Email Mortgage.com Inc.) and Carbon Recovery Corporation, a company which inventor and current CEO Frank Pringle had created in the hope of commercializing the technology he had invented while at Mobilstream Oil.  
  2. The only members of the board of directors of GBRC were Frank Pringle, the CEO; Jeff Andrews, the CFO, and Frederick A. Clark.  Since Mr. Clark is "representing the company in Pennsylvania for matters with respect to the proposed tire disposal facility," there are no independent board members.
  3. The list of related party transactions is quite long, with a complex web of interrelationships between GBRC, Molbilstream Oil, and Careful Sell / PSO Enterprises, all of which seem to be controlled at least in part by Mr. Pringle.
  4. The company had been negotiating an acquisition of some unknown company, but the deal had fallen through, and GBRC had terminated a private offering (at some expense to themselves) with which they had been planning to fund the acquisition.  This deal could possibly have been the reason I had been having so much difficulty speaking with Mr. Andrews.
  5. GBRC had retained the services of QualityStocks.net, a somewhat spammy internet promoter and purveyor of stock newsletters.  While this may be a smart move for a company hoping to pump up its stock price in anticipation of a secondary offering, it is not something I would expect of a company planning to preserve its long term reputation.

Missed Appointments

On Tuesday, I called Mr. Andrews at the appointed time, and was put directly through to him by Global Resource's front desk without having to identify myself.  He claimed to be pressed for time, and asked if we could reschedule for the next day.  Due to my calendar constraints, we settled on Thursday.

His continued unavailability, along with the unaddressed concerns raised by my research made me decide to sell GBRC in all accounts.  Fortunately, my prediction of a small flurry of interest in the blogosphere had been accurate, and I was able to sell at prices near $5.  I reasoned that if Mr. Andrews were able to adequately address my concerns, I would be able to buy the stock at lower prices when interest inevitably shifted to the next hot technology.  If he could not, there was no reason to hold the stock now that it had already received the expected media attention.

On Thursday, I again called at the appointed time, and was again passed through to Mr. Andrews without difficulty.  He asked if I could call back in two hours when he "had more time."  I asked, "How much time do you have now?" to which he replied, "Two seconds, I'm with my accountants, and trying to get them out of here."  The line then went dead, as did any remaining interest I had in the company.  I decided to write this article without speaking to management.

Further Concerns

Later, when I had time to read through Global Resource's most recent 10K more thoroughly, I found several other worrysome items.

  1. The company dismissed its accountants in November 2006.  The auditors had questioned the company's ability to continue as a going concern.
  2. In their Sarbanes-Oxley compliance statement, Mr. Pringle and Mr. Andrews had raised concerns over the lack of sufficient written
    policies and procedures to insure the correct application of accounting and financial reporting requirements, as well as a deficiency in internal controls relating to a lack of segregation of duties.  While they have hired an accounting firm to help them remedy these weaknesses, Mr. Andrews had not provided me with any information in this regard in response to my initial request asking for governance documents.
  3. The company does not currently have a code of ethics.
  4. The company is the subject of a lawsuit arising from its former incarnation as Advanced Healthcare Technologies, alleging the company "fraudulently induced the plaintiffs to convert certain debt to equity in the Company, which equity has subsequently become valueless."  While this lawsuit does not concern the actions of current management, it raises concerns about the level of diligence of current management in their planning for the reverse merger.  There are also obviously concerns that the lawsuit might be successful, although management "does not believe that any judgment, or any settlement of the litigation, will have a material effect on the profit or loss of the Company."

Perhaps, if I had spoken with Mr. Andrews at length, he could have allayed my concerns.  However, I am also concerned about his lack of availability in itself.  

On Friday, I tried to short the stock at $5.10, but was unable to do so.  It has not been above $5 long enough to be marginable.

UPDATE: I recently received an email from a UK citizen who feels his family has been the victim of a boiler-room scheme involving Mobilestream Oil and Global Resource Corp.

DISCLOSURE: Tom Konrad and/or his clients do not currently have positions in GBRC.

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.

July 19, 2007

The Alternative Energy Stocks Paper Portfolio

Here at AltEnergyStocks we try to give the best advice to help our readers sort quality alternative energy investments from the simply overvalued and the dangerous poseurs.   How well are we doing?

Putting Play Money Where our Mouth Is.

As regular readers know, both Charles and I invest in many of the same stocks we recommend. I take a broad portfolio approach, with small stakes in almost everything I think is interesting, and larger stakes in companies I'm more bullish about, while Charles has a highly focused portfolio consisting of a small number of companies he expects to perform well.  But our own returns will not be the same as our readers' returns, since we both typically own the stocks before we write about them.

Past performance is no guarantee of future results, but few people want to follow a strategy without some idea of its track record.   Our newly revised Portfolio page is designed to give our readers' some idea of our track record... as well as a one-stop shop for a list of companies that we're interested in for one reason or another.

We seldom give unequivocal "Buy" or "Sell" ratings, so a considerable amount of judgment is needed in deciding exactly what "following our advice" really means.  Returns will undoubtedly vary widely depending on the investor, so we wanted to come up with an objective criterion for deciding what constitutes a "recommendation" and what does not.  Here are the rules we're using.

  1. The stock is mentioned in an article written by Charles or myself.
  2. We said something positive about it (this could be as little as "here's a stock in an interesting sector"), and didn't say to avoid it.
  3. Mutual funds and ETFs are excluded.
  4. Stocks are removed from the portfolio if we said to avoid/sell them at a later date.  (So far, this has only happened with coal to liquids stocks, which Charles profiled in December, but I said to sell if you're worried about Peak Coal.)
  5. We omitted stocks for which Yahoo! Finance does not have historical price data.  This was primarily an issue for stocks which trade on London's AIM, and a few pink-sheet stocks.

No intelligent investor would follow these rules (we hope you have done better by exercising more judgment), but in order to avoid hindsight bias, we designed rules which we hope will take the guesswork out of which stocks belong in the portfolio, and which do not.

We hope you will find our Portfolio Page educational, and we plan to keep it updated as we add new picks.  As always, we welcome discussion and feedback.

DISCLOSURE: Tom Konrad  and/or his clients have positions in many of the companies mentioned on the Portfolio page.

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.

July 18, 2007

Alternative Energy ETFs - A Good Way To Invest in a Booming Sector

UPDATE 2/23/09: Here are in depth looks at available Clean Energy ETFs and Clean Energy Mutual Funds.

Alternative energy is undoubtedly the future and we are just entering the early phases of what will be the next booming industry.

Even if the growing consensus over global warming isn’t enough to change human behavior, we really don’t have much choice in the matter. Fossil fuels are becoming more difficult and expensive to find and extract from the earth. Couple lower supply levels with rapidly increasing demand from nations such as China and India and you have the perfect recipe for much higher oil prices. Many experts believe we have reached or will soon reach “Peak Oil.”

Peak oil is the date when the peak of the world’s conventional petroleum (crude oil) production rate is reached. After this date the rate of production is predicted to enter terminal decline, following the bell-shaped curve predicted by the theory. Some observers such as Kenneth S. Deffeyes, Matthew Simmons, and James Howard Kunstler believe that because of the high dependence of most modern industrial transport, agricultural and industrial systems on inexpensive oil, the post-peak production decline and possible resulting severe price increases will have negative implications for the future outlook of the global economy.

With oil prices over $60 per barrel, alternative energy is suddenly receiving an unprecedented amount of attention and funding. The rate of technological advancement is increasing and clean energy systems that were once price prohibitive are becoming more and more feasible.

Investing in the Future

The number of publicly listed companies involved in the clean energy sector has skyrocket in recent years as private equity firms and individual investors are attempting to position themselves in what will be the next big thing. But similar to the dotcom days, there is plenty of hype mixed in with the companies offering substance. With the technology difficult to understand or envision, the average investor should be cautious when picking individual alternative energy stocks. We have made a few recommendations in previous articles, but these stocks are very volatile and only suitable for investors that are very risk tolerant. A safer, more diversified vehicle for investing in alternative energy exists, so let’s take a closer look inside our favorite Clean Energy ETF.


Green ETFs have been performing very strongly lately, driven mainly by the solar sector. Market Vectors Global Alternative Energy (NYSE:GEX) started trading in May of this year at $40 and hit a high today of $48. That is a 20% return in just over two months.

But our favorite alternative energy play, the PowerShares WilderHill Clean Energy ETF (AMEX:PBW) recently shot up to nearly $23, after starting the year at $17. That is a gain of nearly 35% in just six months. Take a look at the chart below, which may encounter some resistance at the previous high, forming a bullish cup and handle pattern.

The PowerShares WilderHill Clean Energy Portfolio (Fund) seeks to replicate, before fees and expenses, the WilderHill Clean Energy Index, which is designed to deliver capital appreciation through the selection of companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.

Over 50% of the allocation is small-cap growth, with the top 10 holdings heavily weighted heavily toward the solar sector and consisting of:

Yingli Green Energy Holding Co. Ltd. (ADS) 3.83%
Trina Solar Ltd. (ADS) 3.68%
JA Solar Holdings Co. Ltd. (ADS) 3.61%
Echelon Corp. 3.57%
First Solar Inc. 3.46%
Suntech Power Holdings Co. Ltd. (ADS) 3.43%
Zoltek Cos. 3.33%
American Superconductor Corp. 3.27%
Evergreen Solar Inc. 3.15%
Ormat Technologies Inc. 3.10%

Much of PBW’s recent action came from surges in First Solar (FSLR), JA Solar Holdings (JASO), Trina Solar (TSL) and Yingli Green Energy (YGE ), which all spiked 15% or more on news of inking deals worth over $1 billion dollars, doubling earning or beating analysts’ profit expectations by significant margins. The solar sector is hot (pun intended) and we expect PBW to continue its climb and make a record high above $24 in the coming weeks. After breaking this resistance, we think the ETF could reach towards $30 by the close of 2007.

UPDATE: Click for an article on Wind and Solar Exchange Traded Funds.

Disclosure: The author owns PBW

Jason Hamlin is Founder of Gold Stock Bull, a site that has been tracking the secular bull market in gold and silver since its inception, back in early 2002, as well as the emerging bull market in energy since it took off in early 2004.

July 16, 2007

ABB: Improving Transmission and Distribution Efficiency

Diamond in the Rough

Alternative energy stocks are usually exciting, development stage companies with break-through technology which just might to totally transform the way we live.  Unfortunately, that's a better description of a speculative lottery ticket style company than a solid investment which will provide solid, long-term capital gains.  So it's always a pleasure to find a company whose products are so commonplace that we don't even notice them, even when we see them every day, and yet is involved in essential work to reduce our dependence on fossil fuels. 

A Diamond in the Rough

I took this picture in a new subdivision near me.  They are scattered unobtrusively in back alleys, and painted a dark green to fade into the background.  This is a transformer, which takes high voltage electricity and converts it into the lower voltage that runs your refrigerator and lights your compact fluorescent bulbs.  It's also made by The ABB Group, a glaring omission from my article on transmission stocks as a way to invest in wind energy.  That omission was due to the fact that, while I knew they are heavily involved in electricity Transmission and Distribution (T&D), I had no idea that they were anything other than what you might expect when looking at all those boring green boxes with the scary warning labels.

T&D Technologies

That changed when I read last weeks Renewable Energy Insider column about improving T&D efficiency by Bob Fesmire, an ABB spokesman, and listened to an interview with him on the Inside Renewable Energy podcast.  He mentioned ABB's FACTS (Flexible A/C Transmission Systems - also supplied by Blue Chip Alternative Energy Portfolio pick Siemens (NYSE:SI)) which improve the carrying capacity of existing transmission lines (which is very important because of the difficulty and expense of expanding existing lines in urban areas, and of building new transmission lines anywhere), as well as Gas-Insulated Substations (GIS) which allow utilities to upgrade substations in dense urban areas with a smaller footprint and less noise than the original (also supplied by Toshiba (TOSBF.PK) and Mitsubishi Electric, among others.)  Finally, they also have a strong presence in High Voltage DC transmission, which many energy advocates are arguing will be essential for a modern grid which will allow us to bring concentrating solar power from the US Southwest to the rest of the country as well as bringing North African Concentrating Solar power to Europe.

Efficiency High-flyer

ABB clearly does not have the T&D efficiency space to itself, but it is hard to imagine a future in which it wouldn't be a player in upgrading our T&D infrastructure.

 ABB Chart

As you see from the chart, ABB has been on a tear.  With a P/E ratio of 32 and a dividend yield of just 0.8%, this is not a value pick.  Nevertheless, it has the same P/E as its larger and more diversified competitor Siemens (but without the cloud of the bribery scandal, which Siemens is trying to put behind itself).  

Transmission Investment vs. Retail Electricity Sales
Source: IEEE

T&D investment has been lagging in the United States for decades, and politicians and public utilities commissions are starting to take this long-term underinvestment seriously.  Hence, it is not unreasonable to assume that annual transmission spending in the US will increase to at least 1975 levels, and possibly much higher in the next couple of years, with ABB's US revenues doubling as well.  European T&D spending is also increasing in order to ease the adoption of renewable electricity generation, but is unlikely to increase as much, as they have not neglected their grid to the same extent as has the United States.  To me, this implies annual revenue and earnings growth even in in excess of the 25% currently predicted by analysts, making the 32 P/E look reasonable.

Given that most alternative energy picks don't have earnings at all, and those that do have even higher valuations, ABB deserves a look.  I expect to buy more for my clients and myself on any decent pullback.

Speculative investors interested in T&D might also consider American Superconductor (NasdaqGM:AMSC.)  As the name implies, they hope to use high temperature superconductors to increase the capacity and efficiency of the grid, as well as providing enabling power electronics for wind farms.  Earnings are negative, but revenue is growing at 30-50% a year, and the stock has been on a tear since they secured Department of Homeland Security money for a superconducting cable to help shore up New York City's grid.  In other words, they're an exciting, early stage company with break-through technology which just might totally transform the way we get electricity. 

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: ABB, SI.

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.

July 15, 2007

The Week In Cleantech, July 9 to July 15

Last week, Paul Davidson at USA Today told us about how Sodium-sulfur (NaS) batteries can increase the reliability and efficiency of the grid.

On Monday, Keith Johnson of The Wall Street Journal told us that Wind Turbine Makers can't keep up with demand. [Subscription only.]  Investment tip: this should be good for 2nd and 3rd-teir turbine makers who otherwise would not be able to sell their products.  I've noticed this in a flurry of turbine sales by Composite Technology Corp.  (CPTC.ob), a company I own not for their turbine business, but instead because I see great potential for their transmission business. 

On Tuesday, Fred Fuld of Stockerblog listed nine geothermal stocks to consider.

On Wednesday, 

On Thursday, 

On Sunday, Kevin Cameron of the New York Times told us how Electric cars are nearly ready, but batteries are less so.

  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!

DISCLOSURE: Tom Konrad (sitting in for Editor-in-Cheif Charles Morand on The Week In Cleantech) and/or his clients have positions in these companies mentioned here: CPTC.)

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.

July 12, 2007

On The Economics Of Wind Power

What is a good indicator of whether something is "hot"? When the top weekly in the world runs at least one article about it in every edition it publishes. That is what has been happening with The Economist and alternative energy over the past few months.

This week's piece was dedicated to the economics of wind power. Citing studies conducted in the Netherlands and Denmark, two wind power markets that are comparatively more developed than most North American markets (barring maybe Texas), the piece argues that, once a significant part of its initial costs have been paid off, wind power can reduce average power prices significantly because the marginal cost of producing it is close to 0 (the fuel is free).

This is consistent with a report released in January by Emerging Energy Research that found that, under a scenario where carbon emissions are priced at €30 ($41) per metric tonne, "the cost of energy production from land-based wind turbines would be well below the cost of natural gas and coal plants at today's levels" in Europe. Contracts for one metric ton of carbon for phase 2 of the EU ETS (Europe's emissions trading program) are currently trading at around €21. I need not remind you that cap-and-trade for greenhouse gases may be here soon.

As our regular readers know, I have been a wind enthusiast for some time now, and I continue to believe that wind has some of the strongest fundamentals of all forms of renewable generation. In the context of rising fuel costs and the imminent pricing of carbon emissions in the US, the ability of wind to create savings for customers may one day prove to be the strongest argument in its favor.

Investment Ideas

Of course there are the issues of grid stability and transmission bottlenecks which could slow growth in the wind sector. However, as we have pointed out in the past, we believe that both of these apparent limitations may actually provide good investment opportunities. On the topic of frequency regulation, two stocks in particular are worth watching: Beacon Power (NASDAQ:BCON) and VRB Power Systems (TSE:VRB.V or VRBPF.PK). We have written in the past about opportunities in transmission and inverters.

The other major problem facing the wind industry is chronic shortages of wind turbines. Here again, however, this means that turbine manufacturers should do very well in the next few years. Some of the top stocks in this space are:Vestas (VWSYF.PK), Gamesa (GCTAF.PK), GE (NYSE:GE) and Suzlon (SZEYF.PK). The Pink Sheets listings are ADRs - all of these firms have proper listings in their home countries.

DISCLOSURE: The author is long Beacon Power.

Gas Consumption - An Image Is Worth A Thousand Words

So goes the old adage. We thought the following, recently published in The Economist of gas consumption in 2003, fully embodied the true essence of that phrase. Have a good day!

July 10, 2007

Interview with Tom Konrad on the CleanTech Show

An interview with our analyst, Tom Konrad, with Nick Bruse of The Cleantech Show is now available. In it, they discuss various strategies and the outlook for the Cleantech investment space, as well as some of Tom's ideas on industry regulation.

You can download or listen to a podcast of the interview here.

July 09, 2007

IEA wakes up and smells the Peak Oil

 That Polyanna of energy price prediction, the International Energy Agency
(IEA), issued a new report today which, while it still does not acknowledge peak oil, predicts a supply crunch in the 2010-12 time range.

    Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2012,'' the IEA said in its Medium-Term Oil Market Report, which is published every six months. ``Low OPEC spare capacity and slow non-OPEC production growth are of significant concern
I was blown away... as were most energy stocks today. Big movers among stocks I've mentioned recently:

Beacon Power (BCON) up 24%

Lighting Science (LSGP) up 28%

M~Wave (Blue Sun Biodiesel) (MWAV) up 13%

Satcon (SATC) up 18%

As usual, moves in Renewable Energy companies are driven by changes in oil price sentiment, even if they are involved in electricity, which is not (yet) a substitute for oil.  If investors were truly rational (they're far from it), only M~Wave would have seen a big move today.  Although true rationality would have seen none of these moves, because most of us know that the IEA won't see peak oil coming until it's about five years in the rear view mirror.


Article from Bloomberg


and/or his clients have positions in these companies mentioned here: BCON, LSGP,

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.

July 08, 2007

Will We Have Too Much Generation for Renewables?

Too Many Brownies Before Dinner

"When you feed your kid six brownies before dinner, you can't expect him to eat the salad, no matter how good it is."  So says Leslie Glustrom, a long term renewable energy advocate.  This is her metaphor for why Xcel Energy (NYSE: XEL) has been reluctant to pursue Demand Side Management (DSM) and renewable energy projects in Colorado as they have been in Minnesota.  Because Xcel is currently constructing 500 MW of new coal-fired generation, and they are also interested in a 300-350 MW IGCC plant by 2013, they may have little demand for new renewable generation.

A Gusher of Energy Efficiency

I heard a similar comment from Amory Lovins of the Rocky Mountain Institute last year.  His point was that high prices for energy resulted from both the construction of new generation as well as investments in energy efficiency.   He expects that the new generation resources will come online shortly after what he terms a "gusher of energy efficiency," causing energy prices to collapse.  This echoes the pattern he saw in the 1986 oil price crash, where "It took nine years for President Carter's fuel-efficiency standards to work their way into the fleet, but they were largely responsible for an 87% cut in imports from the Persian Gulf. Then President Reagan came in, right after the second and more severe oil price shock in '79, and started pushing supply again. The combination produced a gusher of efficiency, a glut of energy, and bankrupted many of the energy suppliers the Administration had been trying to help."

Could a similar scenario unfold in today's electric grid?  I have no doubt that the energy efficiency potential is there.  While most electric utilities in the United States project continued growth in demand, in line with population growth, we currently use electricity so inefficiently that there are still many energy efficiency measures available with paybacks measured in months, as opposed to years.  

For instance, 8.8% of US household electricity consumption was used  for lighting in 2001, most of which is used by traditional incandescent bulbs, which use about four times as much electricity as compact fluorescent bulbs (CFLs) and Light Emitting Diodes (LEDs) with similar output.  If inefficient bulbs were to be banned (a move already being pursued in California and elsewhere), it is not unreasonable to think that US household electricity usage would drop by half within a year as old incandescent bulbs wear out, and US total usage could easily fall by 2%.  (US household electricity usage was 43% of total usage in 2005.)  So this one measure, which produces a large net savings, could negate one year's worth of projected demand growth.  Another example would be giving people real-time feedback about their energy usage, which has the potential to reduce household usage by 10-20%, a measure that could probably also pay for itself within a year, depending on how it is implemented, which could in turn reduce total usage by 4-8%.   Both these measures concentrate on household usage, but commercial businesses typically have even greater potential for energy savings (just think of the effect of supermarkets not leaving their doors open constantly on summer days.)

No Room for Renewable Energy?

With all this cheap and easy energy efficiency potential, there should be little need to build new power plants despite increasing population growth.  Yet utilities continue to project strong electricity growth so that they can justify large capital outlays on new coal fired and nuclear generation (on which they can earn a nearly guaranteed return on equity, regardless of whether the power is needed.)

This could potentially be very bad news for renewable energy investors.  If electric demand does not grow, new generation will only be needed to replace old plants as they are retired, and planning and construction of a traditional coal or nuclear plant can take the better part of a decade (a sharp contrast to utility scale wind and solar farms, which can be planned and built in 1-2 years.)

Plugging in to Renewables

If energy efficiency keeps new electricity demand to a minimum, or even reduces it, and our utilities are building new fossil or nuclear generation anyway, it seems like there will be little room for new renewable generation.  Nothing will be gained by not pursuing energy efficiency which is almost always much cleaner and greener than even renewable electricity.  Yet this seems to leave renewable energy locked into a zero-sum game fighting for limited electrical demand with coal and nuclear, which already have a head start in the permitting process.  Unlike renewable generation, which can be built quickly in small increments to match shorter-term, more accurate demand projections, large coal and nuclear plants must be built years ahead of time to meet longer term (and inherently less accurate) demand projections, a fact with the perverse consequence that planning for coal and nuclear often starts sooner, leaving renewable sources of generation squabbling for the crumbs if demand, if any such crumbs are left.

Fortunately, there is a big source of new electricity demand on the horizon.  Energy Security, Peak Oil, and Global Warming concerns are driving the development of electric cars and plug-in hybrids (PHEVs).  GM says that they expect to be selling their plug-in hybrid Chevy Volt as early as 2010 (although this is not yet a clear commitment), while Toyota and Ford may get there soonerTesla has shown that an electric car can be fun, if too pricey for an ordinary Joe.  The most serious worries about large-scale deployment of plug-in hybrids I have read are 1) Battery technology is not quite ready and 2) the electric infrastructure in residential neighborhoods does not have enough capacity to cope with a large number of hybrids plugging in to recharge at night (although they may also be able to help stabilize the grid).  

Investments and Actions

The "Too many brownies before dinner" scenario need not be an all-or-none possibility.  Some parts of the grid will end up having more generation than they can use, while others will have too little.  If you believe excess generation will be more prevalent than not, you would be well advised to avoid investing in renewable electricity companies.  If, on the other hand, you think that we will fail to bring on enough energy efficiency improvements, or less conventional generation will be built than utilities are planning, or Plug-in hybrids will become prevalent within the next decade, your renewable energy investments may still pay off.

Finally, you can also chose investments which will help promote your preferred scenario.  As I mentioned above, one missing piece of the plug-in hybrid puzzle is the batteries.  Advanced Lithium-Ion (Li+) batteries are widely expected to be adopted in future PHEVs.  (The current generation of the Prius uses (Nickel-Metal Hydride) NiMH batteries.)  Not all Li+ batteries have the unfortunate tendency to catch fire, but the added safety currently comes at the price of reduced energy capacity.  Nevertheless, many companies are working diligently for a better battery, among them publicly traded Electro-Energy (EEEI) and Valence Technologies (VLNC).  The largest public manufacturers of Lithium ion batteries are Sony (SNE) and Sanyo (SANYY.PK), who brought us the aforementioned  burning batteries.  Nevertheless, it would be foolish to rule them out of the race to produce batteries suitable for PHEVs.

You can also invest in companies involved in upgrading the electricity grid, which is a necessity even without the widespread adoption of renewables or PHEVs, if only to enhance our security from terrorism.

Finally, you can also reduce your own energy usage today, making it harder for your utility to justify high demand growth projections by reducing electricity demand growth.  Your utility may already have programs you can participate in which will reduce your contribution to their demand projections.  Personally, I have signed up for 100% of my electricity from Wind, and am also signed up for Xcel's dispatchable demand program, Saver's Switch, which gives them the ability to prevent my A/C from cycling on for short periods during peak demand.  In a graphic example of how energy efficiency can pay for renewable energy, the $25 Xcel pays me annually for participating in Saver's Switch pays for 1/3 of the current extra cost of wind power (until electricity rates rise again, at which point I may end up making money while reducing greenhouse emissions... a true win-win.

DISCLOSURE: Tom Konrad and/or his clients have positions in these companies mentioned here: XEL, EEEI, VLNC.

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.

July 07, 2007

The Week in Cleantech (July 2 to July 6) - Is The Grid The Next Alt Energy Fontier?

On Tuesday, Dallas Kachan at Inside Greentech gave us the scoop on a recent GE move (NYSE:GE) to gain greater access to the European wind market. Interesting how GE is leveraging its capacity in the finance realm to complement its Ecomagination efforts.

On Tuesday, Chris Coad at Seeking Alpha wondered whether high gas prices where increasing demand for hybrids. The reverse begs asking: would a collapse in gas prices lead to a material drop in demand for hybrid cars?

On Wednesday, Dan Lewis at AEI directed us to an interesting article on vanadium redox-flow batteries (VRBs) (PDF document). While this piece focuses primarily on the potential of VRB technology and on VRB Power Systems (TSE:VRB.V or VRBPF.PK), a leader in this field, the main take-away is the growing need to develop medium- and large-scale power storage solutions. This is so because wind and solar are variable power sources and this variability can threaten the stability of power grids. Competitor technologies to VRBs include flywheels, which we have discussed in the past. Given the projected growth for wind and solar over the next decade, this is an ancillary market that investors should keep an eye on.

On Thursday, Tyler Hamilton at Clean Break told us about the new kid on the cleantech media block - Greentech Media. The more competition, the better!

On Thursday, Rob Hsiung at Clean Times told us about South Korea's plans for solar growth. That feed-in tariff is indeed absurd - might be interesting to find out which solar companies have exposure to South Korea.

On Friday, Dana Childs at Inside Greentech told us how Canadians had just invested another $149M in cleantech. As stated in the article: "these funding announcements are keenly watched by North American venture capitalists as a source of high-quality investment opportunities." This is also interesting for public market investors wishing identify some potentially interesting future opportunities.

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!

July 05, 2007

Will Climate Advocacy Pay for Shareholders?

On Monday, we learned about big coal companies pushing back against the major US corporations of the US Climate Action Partnership (USCAP,) which advocates for mandatory regulation of greenhouse gas with their own lobbyists.  

Since I have advocated buying companies that take a proactive stance on climate change, I thought it might be instructive to compare the returns of the original ten members of US-CAP with the returns of the big coal coal companies (more companies have since joined,) over the six months since the Climate Action Partnership issued their Call for Action on Climate Change.  

The Payoff

Coal Price, July 3  YTD Dividends  Price, January 1 YTD  Return
ACI  $              35.62  $                0.13  $              29.90 19.6%
BTU  $              48.85  $                0.12  $              40.02 22.4%
CNX  $              47.17  $                0.14  $              31.80 48.8%
MEE  $              24.95  $                0.08  $              23.15 8.1%
Average     24.7%
US-CAP Price, July 3  YTD Dividends  Price, January 1 YTD Return
AA  $              41.50  $                0.34  $              30.05 39.2%
DUK  $              18.52  $                0.42  $              20.00 -5.3%
FPL  $              56.80  $                0.82  $              54.42 5.9%
BP  $              73.50  $                1.44  $              67.27 11.4%
CAT  $              77.99  $                0.60  $              61.71 27.4%
GE  $              38.70  $                0.56  $              37.41 4.9%
PNM  $              28.12  $                0.45  $              31.30 -8.7%
LEH  $              74.60  $                0.30  $              78.13 -4.1%
PCG  $              45.75  $                0.72  $              47.30 -1.8%
DD  $              52.13  $                0.74  $              48.70 8.6%
Average     7.7%
  Price, July 3  Appx YTD div  Price, January 1 YTD Return
S&P500  $          1,525  $              21.70  $          1,418 9.1%
XLE  $              70.75  $                0.39  $              58.31 22.0%

So far, shareholders of the big coal companies have done much better than shareholders of the US Climate Action Partnership companies.  The former have received a year to date total return (including dividends) of 24.7%, which easily exceeds not only the return on the market as a whole, but also is slightly higher than my proxy for the energy sector, XLE, the iShares energy sector SPDR, which returned 22%.  In marked contrast, the original partnership companies returned only 7.7%, which was below the total return on the S&P500 for the same period.  

On a more optimistic note, the four companies that I have actually been buying for my own and client accounts (shown in gray) have returned a much more respectable 11.7% over the period, although naturally our returns varied from this because we did not purchase an equal-weighted portfolio of these 4 companies on January first.   These selections are based on my subjective analysis of how much these companies actually stand to benefit from climate change, as well as traditional valuation and governance factors.


Despite the record of the last six months, we should not conclude that climate advocacy is bad for a company's share price.  Political action on climate change is a process that has only begun.  If there is a payoff for climate advocacy, it will be seen over a period of years or decades, not months.  

In addition, the coal companies must think that carbon regulation will hurt their bottom lines, or they would be unlikely to fight it.  An investor who thinks mandatory carbon regulation is coming will therefore want to avoid owning those companies when such regulation comes to pass.  Likewise, companies which self-select by joining the partnership probably expect to gain from carbon regulation.

Finally, most of us want not only to achieve our financial goals, but also to live in a world where we can enjoy them.  Several recent studies have shown that the costs of dealing with climate change are far smaller than the costs of doing nothing.  While we may have to give up a fraction of a percent of GDP growth in the near term , we have to balance that sacrifice against losing a large fraction of our GDP if we are confronted with the droughts, flooding and erratic weather predicted as a consequences of climate change.  These effects will also be felt by your whole portfolio, including by companies that have stayed out of the debate entirely.

In the end, we want not only a nice income in retirement, we want a nice planet to retire on.

DISCLOSURE: Tom Konrad and/or his clients have positions in these companies mentioned here: FPL, CAT, GE, and DD.

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.

July 04, 2007

Beware The Vagaries Of Government

I just came across this article on potential problems with the emerging trade in carbon credits. The piece is not technical and I wouldn't say that it is particularly well-researched, but it does raise a key point - as the market for carbon emissions grows, the need for standardization and collaboration between governments and regulators will become ever more pressing. This could create problems.

The carbon market is unique in that the commodity traded derives its value primarily from its ability to meet the requirements set by an environmental regulator. There is also a market for voluntary offsets to emissions, but this market is small and unlikely to ever represent a significant piece of the total carbon trading pie (the World Bank estimates (PDF document) that the EU ETS, the only regulations-based emissions trading market in the world, accounted for 99% of total market value in 2006).

The problem with this is that governments have a long history of messing things up when they get involved in any industry. For instance, in Europe, the market for phase one emission allowances took a massive hit after it became clear that EU governments had over-allocated emissions to shield their national industries from the full effects of strict emissions caps. Besides effectively neutralizing the economic incentive to innovate and reduce emissions, this seriously shook the market's confidence in the ability of governments to uphold the necessary conditions for an effective and efficient carbon market to develop.

As the hype around emissions trading and global carbon markets engulfs you, be sure to always keep in the back of your mind the fact that one of the largest risks this market faces is governments and their regulatory agencies. Like any market, it won't take much of a faux pas for investor confidence to be severely shook and for millions or even billions of dollars in market value to be wiped out overnight. This would be bad for the market and the environment.

July 02, 2007

The Energy Balance of Snake Oil

It's no secret that money is flooding into the alternative energy sector, but not all of this money comes from sophisticated, investors. Unsophisticated investment is a lighting rod for the scam artists. Because there is both an urgent need to deal with the the problems posed by global warming, energy security, and resource depletion, and the new money is rapidly accelerating the advance of technology in renewable energy, new innovations are very plausible.

There are many ways to lose money in alternative energy, even without being taken by a scam. The current emotional climate in the industry makes even the most solid companies' shares gyrate wildly. Even mildly profitable, relatively unexciting picks like LED-maker CREE go on wild rides from $35 in April 06 to $15.25 at the start of February this year, only to shoot back up to over $25 today. A speculative technology startup such as Beacon Power Corp. (NASDAQ:BCON) , on the other hand, is likely to be even more volatile, having dropped almost 80% in a little over a year, and now looking as if it is headed into an upswing (as our own Charles Morand hopes.)

With all the risk already inherent in investing in a booming (or is it bubbling?) emerging industry, shell companies founded just to raise money from unsophisticated investors are at least one risk we can protect ourselves against. Below are a few basic precautions. I plan to illustrate them and how they apply to U.S. Sustainable Energy Corp. (OTCBB:USSE), a company that recently announced a "revolutionary new process" for creating biofuel from soybeans, which was brought to my attention by a comment on an article I had written on Green Diesel.

1. Stick to the exchanges. With a stock market listing comes regulation and oversight. A stock market listing is not a guarantee that a company is for real, but the extra oversight of the exchange means that if you stick to companies listed on the NYSE, the NASDAQ, and the AMEX, you're very unlikely to be buying into a scam. Even stocks which don't trade on an exchange in the United States often trade on exchanges abroad, but not all exchanges are equal. You're much safer with stocks on the London Stock Exchange than on London's Alternative Investment Market. Another quick screen is to check to see if any legitimate mutual funds or ETFs own the company you are interested in (in fact, for new investors looking to create their own alternative energy portfolios, a good starting point is the holdings of the industry mutual funds and ETFs.)

If you use one of these strategies, essentially trusting the regulator or the investment company (mutual fund) to weed out the scams for you, you don't need to worry much more about scams (unless you've ventured onto some of the wilder and woollier exchanges.) But the cautious approach may preclude investing in a technology that you just have to have in your portfolio. In that case, all is not lost, there are several other ways to sniff out scams. You may end up rejecting a few legitimate companies, but given the risks, why take a chance?

USSE: Traded on the bulletin board, with little or no oversight. Even worse, they got their stock market listing as the result of a reverse merger with a shell company, Laforza Automobiles, which means they also avoided the scrutiny that comes as part of an IPO. Recently, legitimate companies have chosen to use reverse mergers simply to avoid the headache of going public under Sarbanes -Oxley, but it is not a good sign, especially with a Bulletin Board stock.

2. Technology. It may sound obvious, but when picking an investment advisor, an investor will be better served by trying to understand how that advisor manages money,and if she/he is any good, rather than just picking the most likeable person who wants to put them in a "balanced portfolio of mutual funds." Unfortunately, many people do exactly the opposite. This same trap lurks in assessing technology, and scammers know that the typical American has a dismal understanding of basic science. Checking the science with an expert in the field, or even a blog/bulletin board search can go a long way to protect you from hoaxes. Countless startups with sound technology have failed because of bad management, soif there is any doubt about the plausibility of a company's technology, it's just not worth the risk.

USSE: Since their technology sounds somewhat akin to Pyrolysis followed by Fischer-Tropsch conversion, I asked Tom McKinnon, professor at the Colorado School of Mines, because I know he does research on pyrolysis chemistry. He responded:

  1. The stated feedstock is corn and/or soy which makes it sound like an oil crop process, but the rest of the text doesn't make any reference to vegetable oils.

  2. The three products (char, pyrolysis oil, and gas) are more consistent with a pyrolysis processso why did they mention corn and soy. It would be a waste to use oil crops for pyrolysis when you can use low grade biomass as a pyrolysis feed.

  3. The pyrolysis gas is not suitable for FT synthesis without a lot of effort (at least that is my recollection, I haven’t gone back and dug into this.)

  4. The high energy content of the fuel indicates that it contains very little, if any, oxygen. Typical pyrolysis oils contain phenols and a whole witches' brew of nasty reactive oxygenates.

  5. Pyrolysis oils are generally quite unstable and degrade fairly quickly (time scale of weeks). I don't think anyone in their right mind would put pyrolysis oil into an expensive diesel engine, so maybe these guys have some other process.

Clearly, their technology is either revolutionary or a hoax. I also had a hunch that their claim of producing over 3x more energy in their output than biodiesel from the same feedstock seemed very high, and perhaps that there was actually more energy in their output than in their input. This would make their process another variant on a perpetual motion machine, and as such, violate the laws of physics. To do my calculations, I needed to know the BTU content of a bushel of soybeans (their stated feedstock), so I did a web search, and came across a discussion of none other than USSE. It turns out I was not the only skeptic thinking along these lines. If it's not perpetual motion, it's darn close.

It's also interesting to note that their "letter of validation" is from a Ph.D. wildlife ecologist and Biologist with an M.S. from a State University. I guess that all the engineers and chemists had something else to do that day, rather than tour the facilities of a company with a revolutionary new process that will help solve both peak oil and global warming.

3. Management. It's worth looking at management's background. Often shysters wrap up one scam, only to start another. Make sure you get biographical data from sources other than the company's website. You will want to make sure that the board of directors includes outside members with both the ability and motivation to oversee management and make sure that they do not make off with the firm's money.

USSE: Checking the company's management and board of directors , we note that the two lists are almost identical, with the exception of an extra member of the board, David Crow, a former (according to the site) senior vice president of "Pratt and Whitney." As the only person who has any chance of resembling an independent director, I looked him up and found him under the emeritus faculty at the University of Connecticut. He does seem to be an expert on gas turbine engineering, which would be useful for the power plant that USSE is planning, but he seems to have no experience which would help him in his duties of overseeing management.

4. Conservatism. Scammers have the incentive to boast about their company's future, solutions to big problems draw more suckers than fixing mundane, everyday problems. They will also gravitate towards business plans that are easy for everyone to understand and that people can see in their everyday lives. Not constrained by actually needing a real product to sell, they will almost invariably come up with a product that will make most people think "Wow, that'd be great." Conversely, you don't have to worry too much about the company that is trying to sell its widget that will make sewage treatment plants 5% more efficient.

USSE: Quote: "Our patent-pending liquid biofuel provides clean, renewable energy at a fraction of the cost of traditional biodiesel. It's also a superior fuel: it produces more energy and doesn't degrade engine performance, among other benefits."

I'm hardly the first person to point out that something smells in the state of Mississippi, but I hope this example will help give my readers the tools to avoid the next revolutionary new technology to teleport in.

DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: CREE, BCON. He is neither long nor short USSE (his broker does not let him short penny stocks.)

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.

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