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March 30, 2008

When to Sell: Five Rules of Thumb

A common complaint about investment writers is that we are always willing to tell you the next stock to buy, but we don't always get around to telling you when to sell.  I'm as guilty of this as most: generally, I write about the stocks I'm interested in... which are the ones I'm buying, not selling.  And, although I write the occasional negative article (Petrosun Drilling most recently, but also US Sustainable Energy and Global Resource Corporation), these were more stocks to avoid, rather than stocks which had seen their run.

This is unlikely to change.  For a start, I'm not selling many alternative energy stocks... I'm using the downturn to add to my holdings, and intend to continue doing so even if the downturn becomes a full-blown bear market, as it well may.  What I am selling are stocks I bought in 2001-2004, mostly precious metals mining stocks, and I have not researched any of them for 3 years.  I don't have a lot to say about them, nor would an article fit the Alternative Energy Stocks theme.

In the absence of specific "sell" articles, I thought I'd outline a few rules of thumb I use to know when to sell.

Rule #1: Rebalancing

I have target percentages for both stocks and asset classes, above which I will sell part of my holdings.   For the mining stocks mentioned above, whenever they appreciate to more than 11% of my total portfolio, I sell some to bring the percentage back down.  For individual stocks, the target depends on how risky I believe the stock is.  For large, stable companies this is around 3-5% of my portfolio each, while for more speculative companies, this is less than 1% of my portfolio for any single stock.

Rule #2: Sell Half on a Double

For particularly speculative companies, especially one with negative earnings, I'll typically sell half of my holdings if the stock doubles from where I bought it.  This rule served me well last year with Composite Technology Corporation (CPTC), allowing me to take some gains, but then buy more recently when the stock fell back.  I failed to follow this rule with Electro Energy (EEEI) this January, and optimistically put in an order to sell 40% of my holdings at 2.5 times my purchase price ($1.30), but the stock peaked in intraday trading at almost exactly twice my purchase ($1.05.)

Both these tocks have since fallen back, but I was able to buy more of CPTC with part of the gains from my sale, while I have my original position in EEEI.

Rule #3: Capture Short Term Losses

Come tax time, I want all my capital gains to be long term ones, taxed at only 15%.  To that end, if I'm sitting on a good sized loss in a stock I bought 9-11 months earlier, I seriously consider selling so that I can use the loss to offset short term capital gains in the coming year.  If I'm very bullish about the stock, I will usually buy more, wait a month to avoid a wash sale, and sell the original position.  If I'm just neutral on the stock, I sell without buying more first.

Rule #4: Get Paid for Your Decisions

If I plan to sell some of my holdings because of one of the above rules, I often do so using covered calls.  For instance, if 4% of my portfolio is currently General Electric (GE) at $37, it would be over 5% if the stock goes to $50, and I would want to sell some because of Rule #1.  I can currently sell GE Jan 2010 $50 Calls for around $1.  If I sell calls covering half of my position, I make an immediate 1.3% (=1/37 x 1/2) gain on my holdings, and only if the stock goes up to $50 before January 2010 do I have to sell half my holdings... something would do anyway because of Rule #1.

This strategy is very similar to how I often buy stocks, using cash covered puts.

Rule #5: If You Need the Money

If you need the money for something else, it's quite likely that you will be forced to sell something at precisely the wrong time.   Because of that, I always try to keep enough cash around to cover several months of normal or anticipated expenses, and I never buy stocks on margin (because of margin calls).  If I need small amounts of cash anyway, I often sell covered calls or cash covered puts, as described in rule #4.  Try to plan ahead as far as possible in advance, and keep enough cash that you never have to sell on short notice..  

Conclusion

I often think that knowing when to buy and sell is often more important than knowing what to buy and sell.  All these rules are simple, but it's easy to lose track of them chasing the next hot stock tip.  These rules are especially valuable in the volatile world of alternative energy stocks, as the examples in Rule #2 show.  If you normally come to this blog for stock tips, remember that knowing when as what to sell is at least as important as knowing when and what to buy.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC, EEEI, and GE.

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.

March 28, 2008

The Week in Cleantech, March 24 to March 28, 2008: Truckers Slow Down, Algae and EVs Power Ahead

On Sunday,

Maria Manka at the Green Options Blog asked if branding will be blowing in the wind farms.

On Monday,

Utility analyst Daniel Scotto warned of increasing power outages in an interview with EnergyTechStocks.

On Tuesday,

Will Dunham at Reuters broke the news of another large chuck of the Antarctic ice shelf disintegrating.

On Wednesday,

Marianne Lavelle of Beyond the Barrel rolled out the news of truckers backing a national 65 mph speed limit to save gas (and money.) 

On Thursday,

Katie Fehrenbacher at Earth2Tech listed 15 algae startups attempting to commercialize pond scum.  Algae startups are all the rage, with an in-depth article by Jennifer Kho at Greentech Media about GreenFuel's "well under way" initial commercial algae production plant.  Unlike the Petrosun Drilling algae farms I wrote about two weeks ago, the GreenFuel CEO is admirably low-key about the immediate prospects about for this facility. Hank Green at EcoGeek is feeling inundated under the green wave, but feels that Algae may have come of age.

On Friday,

Jim Kingsdale's Energy Investment Strategies plugged us in to a Danish plan to prepare the nation for electric vehicles (EVs.)  EVs were also on our minds when Craig Rubens at Earth2Tech wheeled out the news from my personal favorite EV maker (Aptera) that "Manufacturing Starts Now."

Preston at Jetson Green surprised us with the gigantic margins by which green buildings financially outperform their conventional counterparts.

March 25, 2008

Behavioural Transit

Investors act in irrational, but predictably irrational, ways.    That is the basic tenet of Behavioral Economics.  (Looking for references, I came across an interesting book by that title, by the Alfred P. Sloan Professor of Behavioral Economics at MIT’s Sloan School of Management.)  

For me, these predictable irrationalities provide ways to profit from the mistakes of others in the market, so long as I do not fall into the same (or other) cognitive traps which cause the market opportunities in the first place.  I describe one such technique in this article.

Applications to Policy Design

In addition to those of us who use it to make a slow buck (it's the people trying to make a quick buck who are often most responsible for many of the opportunities) in the stock market, Behavioural Economics also has useful application to policy.  Richard Thaler and Shlomo Benartzi, two of the foremost researchers of Behavioural Finance (Behavioural Economics as applied to investment decisions) used insights into why people procrastinate to design the Save More Tomorrow (SMarT) design for 401(k) defined contribution schemes to help employees who want to save more but lack the willpower to do so.  This design is now incorporated into commercial products, such as Vanguard's Autopilot 401(k) program.

In the researchers' words (links mine):

[Save More Tomorrow] has the following ingredients: First, employees are approached about increasing their contribution rates a considerable time before their scheduled pay increase.  Because of hyperbolic discounting, the lag between the sign-up and the start-up date should be as long as feasible. Second, if employees join, their contribution to the plan is increased beginning with the first paycheck after a raise.  This feature mitigates the perceived loss aversion of a cut in take-home pay.  Third, the contribution rate continues to increase on each scheduled raise until the contribution rate reaches a preset maximum. In this way, inertia and status quo bias work toward keeping people in the plan. Fourth, the employee can opt out of the plan at any time.  Although we expect few employees to be unhappy with the plan, it is important that they can always opt out.  Knowledge of this feature will also make employees more comfortable about joining.

Behavioral Gas Tax

Fellow energy blogger Jeff Vail at rhizome inadvertently reminded me of Save More Tomorrow by his assertion that "assuming rational consumer behavior is pretty silly, but any other basis of assumption is even more silly."  

This begs the question, "How can a policy to reduce gas use be based on the fact that consumers are irrational?"  Classical economics teaches us that we need to raise the marginal cost of behaviors which we don't like, but behavioral economics tells us that we'll get a lot more bang for our buck if we work with people's irrational tendencies rather than against them. 

Jeff has a clever idea for making a gas tax work better.  If it were implemented, I expect it would be effective.  However, the most important feature of any policy to reduce gas use is implementation.  Voters must be willing to accept the policy, and while voters generally think that it's a great idea to punish others for harming the environment, they're still unwilling to actually make changes themselves... especially if it will effect their pocketbook.

Since it's more effective to reduce driving than to attempt to increase the efficiency of the cars on the road, I used SMarT as a model to help people make the decision to use their cars less:

The Department of Motor Vehicles could offer drivers a discount on their annual auto registration if they agreed to buy an annual transit pass within the next 6 months.  The instant incentive of savings would lure people to buy the more expensive pass, and because it's the Department of Motor Vehicles, the car owner could be charged and the pass mailed to them on the date they specified at vehicle registration.

Some of the money from the transit pass would go to make up for the discount to the Vehicle Registration Fee, but since all these pass holders would by definition own cars, they would likely be relatively light transit users, meaning that the transit authority would still be getting enough money to cover their costs.

This scheme might not do much to reduce driving.  Nothing is forcing anyone to opt in, and those who do might not end up using their passes... just like all the people who buy annual gym memberships and only show up once.  But just like those "wasted" gym memberships, the extra funds could be used to improve the city's transit system, over time making it more attractive and usable, and thus improving ridership.

On the other hand, because the scheme is voluntary, there would likely be little political opposition to enacting it, and the best way to reduce gas consumption is the method that actually gets passed.

Room for Improvement

I note that I'm not the only one thinking about behavioral economics and energy use.  My idea is far from perfect... mainly because it would likely not do too much to reduce driving.  If you have a suggestion, the comments are open.

March 23, 2008

Neutralizing Your Peak Oil Risk

by Tom Konrad

Lifestyle Risks from Peak Oil

In the US, we all have a large exposure to the risk of rising energy prices.  In addition to the cost of gasoline, the whole US economy runs on oil, so a rise in the oil price is likely to affect our jobs, and the prices of all our assets, including our homes.  If other people have less money to spend and invest because of high oil prices, there will be a fall in demand for anything they were buying or investing in.

House prices in exurbs and suburbs where the car is the only available transport option are likely to be most affected because living there entails relatively high car use.  If you live far from where you work, your expenses will not only go up with the price of oil, but the value of your home is likely to fall, leaving you doubly exposed.  In contrast, real estate which is centrally located or which is well-served by mass transit may show positive correlation with the price of gas, and hence serve as a against the gas price.  

This oil price exposure can be (imperfectly) hedged with investments in clean energy or oil price futures, but a more effective way to reduce your risk is to live close to your work.  If you already live far away from most jobs and own your home, you can reduce your personal expenses by finding ways to telecommute or use mass transit, but the value of your home is still linked to the oil price.  Since this is a long term trend, you may be able to protect the value of your home by advocating for better public transit in your area, but given the time and effort this entails, a large allocation of your portfolio to clean energy stocks or oil futures is probably the best you can do.  In addition to my own blog, Jim Kingsdale's Energy Investment Strategies is an excellent place to learn about investments available to the retail investor.

However, you should not underestimate the magnitude of oil's direct impact on your expenses.  If you drive 30 miles round trip, five days a week, that's about 300 gallons a year, even in a 30 MPG vehicle.  Each $1 increase in the price of gas requires $300 of extra income a year to hedge your exposure.  

Driving an alternative fuel vehicle is not a hedge for oil price risk, since the prices of alternative fuels are highly correlated with the prices of petroleum based fuels, although a more efficient vehicle is a partial hedge.

Investments as a Peak Oil Hedge

For investments to hedge that expense, you will need investments that increase $6,000 to $8,000 for each $1 increase in the price of gasoline to produce $300 of extra income annually.  Assuming you have found a portfolio which increases 10% for every $1 increase in the price of gas, you will need approximately $70,000 invested to hedge your commuting costs, and possibly as much again to hedge the price of your home.

Even with $70,000 to invest, most stocks or portfolios of stocks are an imperfect hedge against the price of gas.  The best hedge in terms of correlation with gas prices are oil or gasoline futures, but trading futures is considerably less accessible than trading stocks, and does not produce income.  Trading oil futures is a zero-sum game: for everyone who makes money, a counterparty loses money.  In stockmarket investing, the internal profits of companies can provide a basis for a positive net return for all investors.  That extra benefit and the opportunity to invest with my beliefs, make me willing to accept the much weaker correlation clean energy stocks have with energy prices.

Better Than a Hedge, Reduce Your Risk

If you don't have $70,000 in your portfolio to neutralize your gas-price risk, or are uncertain of your portfolio's correlation to the gas price (most stocks will actually fall as the price of gas goes up,) it makes sense to find less gas-intensive options to your normal commute.  Then, if fuel rises to a painful level, it will be easier for you to switch quickly to less fuel-intensive options. 

Even though I live near my work, I've been doing just that, ever since I became convinced that better cars are not an effective solution (or investment response) to peak oil.

An EV You Can Carry in One Hand

A couple weeks ago I mentioned that I was cutting my driving with a Motorboard.  The motorboard is an electric scooter which is so compact that you can fold it up in a few seconds and carry it in one hand (it weighs about 16 lbs.)  I think of it as a much cheaper and cooler Segway which I can carry.  Since it has a low range, it is best seen as a supplement to mass transit, not a stand-alone transit option.  The combination of motorboard plus transit allows distance travel without the limitation of start and end points within walking distance of transit stops.

I wrote a review of the Motorboard for Carectomy.com, which you can read here.

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.

March 22, 2008

The Week in Cleantech, March 16 to March 21, 2008: Solar is Booming, But So is China's Coal Hunger

On Tuesday,

Michael Hoexter at RenewableEnergyWorld covered the increasing number of companies constructing Concentrating Solar Power plants around the world.

Dave Room at EcoLocalizer reported on a new model for residential solar purchasing: 24 neighbors banded together to put out their own Request For Proposals (RFP.)

On Wednesday,

Big Gav at Peak Energy rounded up stories on a less talked about biofuel, biogas, which I prefer to ethanol and biodiesel because of the superior crop yields in terms of miles per acre.  Miles per acre was big on the blogs this week, with both me and Philip Proefrock at EcoGeek quoting a study which highlights the potential of solar using this measure.

Jacques Leslie at The Christian Science Monitor warned that China's pollution nightmare will become everyone's pollution nightmare.  Disquieting news, given that China's CO2 emissions are likely to grow 11% per year until 2010, according to researchers in California. 

On Thursday,

Steven Mufson and Blaine Harden at The Washington Post, showed us how China's ravenous appetite for coal was leading to booming exports and profits for coal miners in the US.  Should we really be exporting coal to China at the same time we complain about the global warming caused by their coal fired power plants.  China can ban coal exports, but so can the United States (or at least slap a gigantic carbon tax on them)

Environmental Leader told us how we ("green tech leaders") can open up a $104 Billion market in green technology products.

On Friday,

Hank Green at EcoGeek let us in on the details (and sponsor) of the $10M Automotive X-Prize competition.

The markets took a break.  Happy environmentally conscious egg dyeing!

March 18, 2008

Geothermal, Battery, and Solar LED articles in TQ

There were three excellent alternative energy articles in last week's Technology Quarterly from the Economist.

Readers know I'm an avid battery investor, and the Economist's in depth History of the Battery is well worth reading for anyone who wants to gain insight into the promises and challenges awaiting developers and investors. My favorite battery investment, Electro Energy, last profiled here has seen considerable selling, having lost half its price since its peak in early January.  I still like the and own the stock.

There is also a short article about the prospects for Enhanced Geothermal, one of my favorite not-yet-commercial technologies.  I'm also a fan of conventional geothermal, and you can find my geothermal investment ideas here.

Finally, there is a profile of a company with an innovative bag combining solar and LEDs for lighting in emerging countries.  When used in portable and off-grid applications, the high per kWh price of solar is much less important than having any power at all.  One company pursuing this approach to solar in my portfolio is  Carmanah Technologies (CMHXF.pk or CMH.to).

DISCLOSURE: Tom Konrad and/or his clients have positions in all the stocks mentioned here: EEEI, CMHXF.
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.

March 15, 2008

Will Petrosun's Algae Biodiesel Grow on Investors?

by Tom Konrad

Celluslosic Ethanol is all the rage.  A less noticed, but significant "Biofuel 2.0" is biofuel based on algae.

Follow the Biomass

As I have consistently argued (see these recent articles on John Deere, Biogas, Cellulosic Ethanol vs Biomass Electricity, and Renewable or Green Diesel)  the people most likely to make money from biofuel are not the processors and distributors (who compete directly with petroleum or other fossil fuel-based products, and so have little pricing power), but the producers of feedstock, which, like oil, is in very limited supply, and so they will have pricing power.

When it comes to converting sunlight into biomass, algae is the most productive type of plant.  According to this chart from Five Star Consultantsfivestar.bmp , Biodiesel from algae has the potential to produce enough fuel to drive a Prius-type car 370,000 miles per acre per year (MAY), compared to 2,000 to 31,000 MAY for conventional biodiesel crops, while ethanol from switchgrass could produce 32,500 MAY.  Furthermore, some strains of algae are as much as 40% oil by weight, leading to the hope of a large supply of oil which is much easier to convert into biodiesel than it is to ferment even corn (let alone cellulosic biomass) into ethanol.

With an order-of magnitude advantage, it would seem that algae is the green wave of the future, and actually so productive that it could produce enough biomass feedstock for us to continue to drive our SUVs with our current reckless abandon. 

Theoretically, biodiesel produced from algae appears to be the only feasible solution today for replacing petro-diesel completely... In practice however, biodiesel has not yet been produced on a wide scale from algae, though large scale algae cultivation and biodiesel production appear likely in the near future (4-5 years). - Oilgae.com.

Ponds or Reactors?

There are two basic approaches to growing algae: open pond and closed reactor.  The open pond method, which is what Petrosun Drilling (OTC:PSUD) recently announced they are pursuing, involves growing the algae in open ponds of water, much like it grows in nature.  Open ponds are clearly quite cheap, but they require a reliable supply of water to replenish that lost from evaporation (making them impractical in all but the wettest parts of the country (Petrosun's first farm will be on the Texas coast, and use saltwater, which helps with this problem.)  The lack of temperature and weather control can further decrease yields from the theoretical potential.

The other problem with open ponds is that it is impossible to keep other types of algae (a.k.a. weeds) out, meaning that high percentages of oil in the final crop will be impossible to attain. This means that biofuel produced from pond algae will require much more extensive processing to be turned into fuel.  It's easy to grow pond scum, but turning it into something useful is harder.

The other option is the algae bioreactor, one type of which (from Solix biofuels) was referenced in the chart above.  The Solix technology uses closed plastic bags agitated by rollers, has climate control with the use of controlled radiative cooling, and uses concentrated carbon dioxide emissions to enhance algal growth.  (The best description of the technology is at Algae @ Work, a company which was started by Solix's former CTO seeking to apply the technology to carbon capture.)  

To me the bioreactor approach (Solix's technology is only one version) seems most likely to achieve the promise of extremely high yields, and even that is not without problems.  Large scale bioreactors are complex systems.  As such, they will be expensive and take great efforts to move from the lab to commercial scale.

Ken Regelson, the author of the chart above, and he believes that Solix does not have "a prayer of achieving their expected yields per acre" but that he used the number from Solix because he has yet to get authoritative numbers from anyone else.  

What about Petrosun?

I wrote this article because readers wanted to know about Petrosun Drilling (OTC:PSUD), an oil exploration company that has been promoting their algae biodiesel efforts since September.  Other than Petrosun, the only public companies I know of which are seriously looking into algae based biodiesel are large conglomerates: Boeing (BA), Chevron (CVX), Royal Dutch Shell (RDS-A) and Honeywell (HON), which can take the long view and have large research budgets to finance their efforts for as long as it takes.  If you click through the company names to the news stories, you will note the common theme: These are all research stage projects.  

Petrosun has not filed even an unaudited quarterly report since March 2007.  Given that it is also promoting exciting technology, I detect the whiff of snake oil salesmen.  Although readers are clearly interested in this company, until they begin to file current information, I don't consider it worth my time to investigate further.  Petrosun's main product is much more likely to be snake oil than algae oil.

Even if Petrosun does execute on its algae farms, will there be any first mover advantage?  It seems unlikely to me; growing algae in open saltwater ponds will depend on access to suitable land near coastlines... later entrants who can acquire suitable land should be able to produce algae just as efficiently as Petrosun, since they do not seem to have any special technology or expertise.  After all, the company is simply an unsuccessful oil exploration company with a algae farm division.

DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: HON.

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 Week in Cleantech, March 9 to March 15, 2008: CARB may Kill Your DIY PHEV, so Dude, Get a Bike

jcwinnie at After Gutenberg detailed the Mcgyan process which promises to convert a much array of oil feedstocks into biodiesel with a reusable catalyst and less waste.

AutoblogGreen plugged us in to Zap's new Prius PHEV conversion kit, but Green Car Congress brought us a study that warned we might need to do some serious water planning before such too many people start using them.

On Monday,

Craig Rubens at Earth-to-Tech painted a picture of a new photovoltaic coating from Corus Colors.

On Wednesday,

David Erlich at Cleantech.com rolled out the story of GE's new organic light-emitting diode (OLED) printing process.

On Thursday,

Tom Whipple at EnergyBulletin took at look at a largely unrecognized driver for the current financial turmoil: Peak Oil.

Earl K., at Climate Progress, warned that the California Air Resources Board (CARB) is about the kill the electric car, again, and asked us to take action before the March 27 meeting.

On Friday,

Kevin Bullis at Technology Review gave us the skinny on Solaria's photovoltaic panels made with thin strips of silicon.

On Pi-Day,

Warren McLaren at Treehugger reminded us that there's a greener transportation option that water-guzzling PHEVs which is taking off in Britian, and Jasmin Chua found us a cartoon to cheer us up about the whole mess.

March 13, 2008

Edison International Says Solar is the Great Untapped Resource

Cleantech Blog had a conversation last year with Stuart Hemphill, now the newly appointed Vice President for Renewables and Alternative Energy at Southern California Edison, a subsidiary of Edison International (NYSE:EIX), one of the largest purchasers of renewable power in the US. We caught up with him again today in a lively discussion around his predictions for the renewable sector.

Today they are announcing their sixth competitive solicitation for renewable energy. On peak delivery from the Tehachapi region is preferred, as they are currently building a massive transmission line to tap into the 4,500 MW of wind potential. But wind produces only 35% of the time. This major pipeline needs to be balanced. So they are looking for creative proposals from developers to fill up the rest of that transmission line with on peak power deliveries.

Renewable and alternative energy are still top goals for Edison. Stuart says his promotion is part a reflection of the business’ expanding interest in leadership in renewables in the US.

Prediction Number 1 - The next 10 years are going to be a wild, wild west in the solar industry. Companies around the globe are exploring new solar technologies of every variety. Stuart thinks it’s way too early to tell which ones are going to be successful. But he considers solar to be the great untapped resource in California and elsewhere.

So I asked him if by that he meant solar thermal or photovoltaics. The answer is “Yes”. Stuart responded that in the past couple of years we have seen incredible amounts of venture capital investment going into solar firms, and PV is only part of that equation.

When I pushed Stuart to predict a winner between conventional solar parabolic trough and other types of solar thermal technologies, Stuart refused, suggesting that it is still too early to tell which technologies will be the winners. That’s what makes it exciting to watch, in his opinion. As an example, he stated that we are now seeing renewed interest power tower technologies with pretty high efficiencies. The challenge is to see which ones get done.

When it comes to what’s important to SoCal Edison itself, it is really important that they sign PPA contracts with viable companies and viable technologies. He sees a wide spectrum of proposals in terms of viability, and is always looking for at least some sort of demonstration plant to prove it up and a significant level of backing for the companies before they can get involved.

Prediction Number 2 - I did ask him what his take on run of river hydro is. He responded that he hopes to be wrong, as he likes run of river hydro, but doesn’t see any major increases in the resource coming in California. Hydro in California in general has a very a limited resource potential left to be developed and lots of stakeholder concerns to be addressed in each case, so while he is hopeful, he is not predicting any great increases.

Prediction Number 3 - US Offshore Wind – We will not see much from offshore wind in California, as the limitations both from physical layout of shoreline as well as policy and consumer concerns.

We then switched to what the industry challenges are. Stuart nailed two big ones, transmission and interconnection.

He believes that transmission is getting even more challenging than last time we spoke. What’s interesting to Stuart is that most people agree and are in support of renewables in California, but very few people support the way that the goals need to be attained, ie, significantly increase transmission infrastructure. There tends to be lots of local opposition, or federal agencies that aren’t always in support of particular local goals. This makes sense, as transmission by its nature always touches a lot of different land and communities in its path, meaning lots of different stakeholders need to be involved.

Interconnection queue bottlenecks are the real next challenge in California and in the Midwest according to Stuart. This is a challenge that is addressable and there are proposals into FERC to do so. But currently it is a first come first serve system, and easy to get into the queue. Getting in the queue starts a study process based on FERC rules, including a feasibility study, then a system impact study and a facility study. The bottleneck arises because according to the current rules, if your facility is further back in the queue, your studies assume that the facilities ahead of you are up and running, but if at any point in time someone ahead of you drops out, your studies need to be effectively redone. Because it is relatively easy to get into the queue, nonviable projects that do not end up coming online as planned have been upsetting the applecart, causing all the projects behind them to go back to the drawing board as far as the study process is concerned. Since 2002, we’ve seen a steep ramp up to a level that is just unmanageable given that dynamic. CAL ISO has a proposal in with FERC to change this, so Stuart believes a solution is coming, just not here yet.

As usual, SoCal Edison is pushing forward aggressively on renewables, and we were excited to see the new solicitation and changes they are making. As we have said before, let’s just get it done.

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 Editor to Alt Energy Stocks, Chairman of Cleantech.org, and a blogger for CNET's Cleantech blog.

March 11, 2008

Are Solar Incentives a Subsidy for the Rich?

by Tom Konrad

One of the most common arguments against incentives to help people buy solar panels for their homes are that they are a subsidy for the rich, paid for by everyone.  The argument goes: only the rich can buy a photovoltaic system, which, even with subsidies, costs thousands of dollars.  Why should everyone chip in to help rich people buy new toys?

On the face of it, this argument is persuasive.  Why should everyone pay, if only the rich get the benefit?  

Basic fairness dictates that society should only subsidize activities which create societal (rather than individual benefit.)  On closer reflection, however, we see that the bulk of the benefit for solar goes to society, rather than the homeowner-installer.

Let's look at the benefits of a photovoltaic system (numbers are for a 4kW system, installed for $8 per peak watt, with the rebates currently available in to me in Colorado, plus the Federal tax credit.

The owner gets:

  1. Electricity for free (approximately 7,000 kWh/yr, worth $630 annually at current prices, but rising in value with inflation.  Production is subject to 1% per year annual degradation.)
  2. Cost of $12,000 after rebate and tax credit.
  3. An increase in property value, depending on the market.  I'll assume 1/2 the net cost of the system (I've seen estimates as high as the full cost of the system (from solar installers) and as low as zero or even negative for unsightly installations.  So I'll say this is worth about $6,000, but only if the home is sold.
  4. Maintenance costs, which I'll assume to be 0.5% per year of the installation cost after the first year (at the very least the inverter needs to be replaced after 10-15 years, and the panels need to be kept clean.)
  5. If the homeowner sells his home in 10 years, electricity prices go up 10% per year,  the cost of funds is 7%, the present value of the panels is $8,457, which includes the present value of the $6,000 property value increase.  Many people do this calculation assuming no maintenance.  I consider that unrealistic, but for the sake of argument, the net present value of these cash flows would be $9,431 if there were no maintenance cost. 
  6. The feel-good factor, and bragging rights.  For the homeowner to break even on the deal, these bragging rights and feel good factor would have to be worth over $3,500 to him.

Society gets:

  1. Lower peak electricity demand, allowing delayed construction of new power plants.  Solar typically produces well on sunny summer days, which is precisely when the power is needed most to run air conditioning.
  2. Reduced need to build new transmission and distribution.
  3. Local industry and job growth, because the money is spent locally.  The value of this will depend on how much of the system is manufactured locally, but installation (about 50% of the cost) is almost certain to be local.
  4. Advances in PV manufacture, lowering future prices for everyone else.
  5. Less water use in power generation.  Natural gas fired generation uses up to 180 g/MWh of generation, with coal generation using 300-500 gal/MWh, and Nuclear using between 400 and 720 gal/MWh (EPRI, .pdf).  Using 400 gallons/MWh, our sample system will save 2,600 gallons of water per year (assuming 200 gallons are used for cleaning.)
  6. Lower emissions of global warming pollution (about 4.2 tons CO2 per year, worth about $2,000 at $20/ton, a 10% annual price inflation, and a 7% discount rate for the life of the system.)
  7. Lower conventional pollution: SOx, NOx, Mercury, and particulates.
  8. Lower fossil fuel  prices due to lower demand for electricity generation (a tiny incremental change, but spread over everyone's fuel purchases.)  I estimate this to be approximately 1/3 of the saved fuel costs, as it was for the New York Energy $mart Program, or a present value of $2,100 over the system life, using the same assumptions as above, except that society retains the benefits so long as the system is producing.
  9. A household becoming more aware of how they use energy.
  10. A bill for $20,000.

The calculations for the net benefit to society are much more difficult than the net benefit to the system owner.  But as you can see, the system owner is not getting a bargain.  

The question for society is not "Is the system owner living it up at our expense?"  Paying $3,500 for bragging rights and feel-good factor seems far from a bargain to me (but then I like bragging about how much money I save, not how much I spend.)  The question we need to ask ourselves regarding these sorts of subsidies is, are we getting $20,000 worth of value for our part of the bargain?

Solar Consciousness Raising

The $20,000 cost is spread over large numbers of people, as are the benefits.  I used to think that the $20,000 price tag for society wasn't worth it.  While all the factors listed are worth something, I found it hard to believe that they were worth $20,000, especially if that $20,000 could have been used to subsidize energy efficiency measures which could easily save ten times as much energy as the PV system, and hence produce ten times the environmental benefit.

That was before I understood the implications of societal benefit #9: a greater awareness of energy.   Unfortunately, most energy efficiency measures lack the visceral impact to get people excited about energy (although real-time, indoor smart meters have the potential to do so.)  I personally became interested in energy when my stepfather installed a (subsidized) solar hot water system on our house in the early 80s.  Now, my job is advancing the cause of clean energy by increasing the knowledge of investors.

With cost-effective energy efficiency measures, a subsidy can easily be justified based on societal benefits.  For solar PV, environmental and economic benefits may or may not be sufficient justification.  But people who generate their own electricity become much more aware of how they use it.  Awareness of how we use energy is the first step to using it wisely, and helping others to use energy wisely.  Better yet, the rich are more influential than the poor in our political process, which means that raising the awareness of the rich can have a multiplier effect through political impact.

Photovoltaics may not yet be a great investment for homeowners, but homeowners' awareness of how they use energy is a great investment for the rest of us.

March 09, 2008

Is Composite Technology Corporation Still a Buy?

by Tom Konrad

When I asked, Alternative Energy Stocks readers overwhelmingly wanted me to take another look at Composite Technology Corp. (OTC BB:CPTC.OB)  I've discussed CPTC several times over the last year, and consider it my most speculative pick in electricity transmission and distribution.  True to the nature of a speculative stock with no current earnings which is still trying to establish markets for its products, the stock price has been all over the map.cptc.png

The reader interest is doubtless due to the recent sharp decline since mid January.  I personally sold a portion of my and client positions when the stock was in the $1.75-$2.00 range, and repurchased it for some accounts around $1.30 (including my own.)  These accounts are currently showing a loss of around 30-35%, not counting the gains taken last year.

I actually have not been watching the recent decline, but seeing the stock at $0.82 today makes me wonder: should I buy more?  Should I take a tax loss for those accounts that could use one?  Has something happened to make the stock look worse, or is the current decline just the effect of falling markets on what has always been a very speculative stock?

Those Pesky Banks

Two weeks ago, I was talking to a friend who acts as a CFO for small wind developers.  Unprompted, he mentioned that banks would not finance CPTC's DeWind turbines because of their lack of track record, which is a gigantic barrier to incorporating them in a US windfarm.  My friend made the same comment about  AAER Inc [TSE:AAE], a company which AltEnergyStocks Editor Charles Morand bought last year (He still owns it, and says he bought if for other reasons, but is not overly concerned about turbine financing.)  In general, I have not been paying nearly as much attention to CPTC's wind division, because I'm more interested in the transmission play, and I had assumed that, given the long backlog for turbine orders from major manufacturers, DeWind would find places to sell as many turbines as Westinghouse can manufacture for them.  This financing difficulty is not news to investors who have been following DeWind, but it raised the question of how many turbines they will be able to sell until they build more of a track record in such places as the Czech Republic.

However, since this is not news, it can't account for the stock's decline.  CPTC does seem to be making accepted progress towards getting these turbines tested and certified, which should do something to ameliorate banks' reluctance to finance DeWind turbines.  They are currently waiting on two reports from the National Renewable Energy Laboratory and the Department of Energy, as well as negotiating with insurance companies which would insure the turbines to allow bank financing.   

Uncertainty among investors as to the results of the DOE and NREL certifications are likely to be the cause of some of the decline.  This sort of uncertainty can feed on itself in down markets like the one we are currently experiencing, but that leads to buying opportunities for brave investors.

Latest Earnings Release

The Feb 11 December quarter earnings release certainly provides no explanation for the recent decline (although the decline began a full month before the release, so it would require the leak of insider information if it had.)  With revenues having doubled from the 2006 December quarter, and up 40% from the previous quarter, the expectation would be that the stock would also be up.  Both the DeWind and ACCC Cable divisions seem to be making headway towards broader market acceptance.

In contrast, operating cash flow for that quarter was almost $14 million in spending, mostly due to a large increase in inventory.  With cash on the books of only $11.5 million, their balance sheet looks weak, so failure to convert those inventories to cash could lead to a liquidity crunch in the coming quarters.  This might lead to a dilutive stock offering, which would probably be bad for current shareholders, unless it were in order to finance an increase in orders.

The company currently does not anticipate needing new cash until June, but seems determined to avoid further dilution if at all possible, mostly by relying on customer payments to fund inventory growth.  This adds both uncertainty, but also means that any gains are likely to be much more profound.

Conclusion

I like what I see.  The company has made considerable progress over the last year, and the stock is staying at the same price.  As the ACCC conductor begins to make a significant contribution to the bottom line, and its turbine certification continues as expected, the company seems likely to maintain current revenue growth rates.  At some point, barring too many unforeseen hiccups, investor greed sparked by rapid revenue growth should overcome uncertainty.

UPDATE: Shortly after publication, two readers pointed out that I'd missed the most likely cause of the sell off: selling by Millenium Partners, to pay an SEC fine.  All the more reason to buy, if the reason for selling has nothing to do with the company.  One of these readers gave the following detailed reasoning:

One issue that I noticed you did not cover is the selling by Merriman (Englander) of Twelve million shares to cover a 148 million fine by the SEC.  This can explain the dropoff in share price.  The market maker that handled the sale of the shares is ARCA, I believe.  If you notice, when ARCA appears to be off the ask, the stock has a tendency to go up.

Good enough for me.  I just bought some more.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC.  Charles Morand owns AAE.

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.

March 08, 2008

The Week in Cleantech (Mar. 2 to Mar. 8) - King Coal Not Plentiful And Cheap? Nooooo....

On Wednesday, David Strahan at The Guardian calculated some lump sums for us. A couple of years ago, when it became clear that we were running into serious supply problems with oil, one pundit after another told us that we would never have to worry about coal. After all, in the US alone, there was 250 years' worth of supply at current consumption rates. Well, that was then, and this is now. And if skyrocketing feedstock costs aren't enough to deter you from building a coal plant, maybe rising capital costs will. Is King Coal's reign looking shaky? It might be time to re-visit Tom's article on constructing a peak coal portfolio.

On Wednesday, Keith Johnson at the WSJ's Environmental Capital wondered whether TXU was in too much debt to go green. The question is framed wrongly - it's not about whether TXU is too leveraged to go green, but rather about whether looming climate regulation will upset the economics of the power generation industry to a degree where the firm's new capital structure won't be optimal anymore. But the point is well made; while KKR and TPG were hoping that the cancellation of coal plants would reduce risk, it turns out that too much leverage may still put them in an environmentally-driven bind. Damned if you lever up to your eyeballs and cancel coal projects, damned if you don't.

On Wednesday, Jennifer Kho at Greentech Media wondered whether there would be competition for First Solar. Judging by the firm's trailing and forward PE ratios, you definitely wouldn't guess there's competition on the way. Whether the challenger discussed in the article makes it or not, it is somewhat dumbfounding that no one had gone after First Solar in any meaningful until now. But I for one certainly don't think that that will remain the case forever, and until I have a clearer picture of what the competitive landscape will look like once the industry has matured a bit, I wouldn't touch that stock at this level with a ten-foot pole.

On Friday, Robert Rapier at R-Squared Energy Blog argued that cellulosic ethanol was dead. This is an interesting take on the ethanol debate, and not a new point of view from the author. Of course, political leaders have invested much political capital in both corn-based and cellulosic ethanol, and this could ensure that many hurdles are surmounted at whatever the cost. Path dependency in policy-making can be an incredibly powerful force, and the US is showing no sign of veering off the ethanol path. Although I do like gasification technology, I'm definitely not ready to write-off cellulosic ethanol just yet.

On Saturday, Neal Dikeman at Cleantech Blog told us about doing cleantech the right way. I've discussed GE's cleatech moves on a number of occasions in the past. There's no doubt that by applying its notorious corporate culture and discipline to the emerging fields of cleantech and alt energy, GE has been able to achieve great successes, fast. As pointed out by Neal, this flies in the face of VC folks who often believe that large conglomerates are not nimble enough to play in high growth spaces like cleantech. In fact, in these times of uncertain equity markets, larger and more stable firms are a safer way to play cleantech than emergent pure-plays. Where's GE headed to next? Looks like electric cars and batteries.

March 06, 2008

Calling for a Marshall Plan, not a Manhattan Project

Electricity too cheap to meter.  For many renewable energy advocates, that is the holy grail… new technology which will not only solve the problem of carbon emissions, but be so transformative that we no longer have to worry about turning off the lights when we leave the room.

We could argue for days about the viability of any such technology, be it cold fusion, hydrogen, or photovoltaic nanodots.  I personally have strong opinions about the likelihood of any technology to produce energy so cheaply that it would not make sense to use some mechanism like price to ensure that it is used productively.

We could argue about that, but it would be the wrong argument.  The time we have to act to confront Climate Change is much shorter than the time it takes to develop and implement new technologies.  Even if photovoltaic nanodots achieve their early promise, they will take decades to reach large scale availability.

New technology will be too late to save us from Climate Change.  The longer we wait to make real reductions in carbon emissions, the more drastic those cuts will have to be.

Marshalling our Energy

Much more (and sooner) than we need new technology, we need to implement the technology we have today.  The good news for all of us is it is much easier to pick well-run companies in established industries than it is to decide which new technology will produce the promised manna from heaven.  Rather than politicians and investors trying to pick which hot new technology we should back, we should look at existing technology 

If we're truly serious about tackling Climate Change today, we will let next year's technology take care of itself, and spend our efforts implementing the very effective technologies we have today.

Many Renewable Energy advocates and scientists are calling for a new energy Manhattan Project.  That's the wrong metaphor.  Instead, we need a Marshall Plan for Energy.  Much more than new scientific resources, we need to leverage our financial and organizational resources to get the needed projects on the ground today.

Here is what we can do with current technology in North America today to fight climate change: 

  1. Build a continent-wide High Voltage DC grid along the interstate corridors to bring Concentrating Solar Power from the Southwest and Wind Power from the Great Plains to the rest of the country, and balance demand across the continent, lowering the need for new peak capacity.

  2. Never build another building that does not include all economic energy efficiency upgrades.

  3. Change the incentive structure to reward everyone for driving less, not more.

  4. Invest in our public transit systems.

  5. Implement continent-wide smart grid and metering to better manage the fluctuations of renewable energy sources, give people information about the energy they are using, and time-based pricing to better align supply and demand.

  6. Never build another exurb.  Encourage infill and denser growth that allow people more travel options.

That's my Marshall Plan.  Every one of those items will save more money for society than it will cost.  Some are complete win-wins, others will produce more winners than losers.

When we've done those six things, we'll have technology which can take us the rest of the way.  Those technologies (Wind Power, CSP, PV, Biomass electricity, Plug-in hybrids or Electric vehicles) already exist, and require only incremental improvement and deployment.  We'll have a lot less far to go, and the improved infrastructure will make any new technology easier to implement.

March 04, 2008

Gas Price Demand Elasticity

Here is an interesting article on the Carbon Tax Blog about dropping gas usage in the US due to sustained high prices.  As I've said before, now that peaking oil supply has made gasoline supply inelastic, price will have to be set by marginal demand... we're beginning to get a look at what the demand elasticity for gasoline is.

But gas prices are not dropping.  US demand may actually be elastic, but world demand is not yet showing elasticity.  In large part, this is because most emerging economies and oil producing company consumers enjoy fixed price oil, courtesy of subsidies.  Those subsidies may turn out to be elastic, when it breaks the bank, but it will take a long time.

My new Wheels

I've personally been cutting my driving with a Motorboard, which I tried for the first time on Saturday (after which it snowed... weather may be a factor for a month or two.)  I'll write something about it after I've had a chance to use it more.

March 02, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #1 Johnson Controls, Inc. (JCI)

Johnson Controls (NYSE:JCI) has long been one of my favorite energy efficiency picks, with an added bonus coming from their joint venture with Saft to produce batteries for hybrid and electric vehicles.  They have also shown some energy saving innovation making parts for auto interiors. jci.gif

Building Efficiency

Efficient buildings are much more complex than simply replacing inefficient HVAC and lighting with more efficient versions.  Quite often, the most cost effective measures come from using systems more efficiently.  As an analogy to the home, look at any list of quick tips for energy saving around the home.  This list of ten steps on Squidoo includes five tips for using existing equipment more wisely (programming your thermostat, cleaning air filters, loading your dishwasher fully, and only using the dryer when you can't air-dry.) Considering Squidoo is quite clearly trying to make money by referring people to Amazon to buy products, it's all the more significant that half of the steps need not involve buying anything.

In commercial and industrial buildings, the most economical gains also involve using existing equipment more wisely.  They offer a full suite of products focused on automation and integration to businesses and residential (with the recent York acquisition) customers alike. 

Building efficiency systems comprise about one third of 2007 revenues.

Batteries and Automotive Power Systems

Johnson Controls' joint venture with Saft has been making headlines recently, no doubt in large part due to Johnson Controls automotive industry network.  The partnership has won contracts to supply batteries to Chinese auto manufacturers Chery and SIAC for their Hybrid electric vehicles, and a battery development contract from GM to develop Li-ion batteries for GM's Saturn Vue Green Line Plug-in Hybrid.

I'm extremely enthusiastic about the growth prospects of the automotive battery industry, the reasons for which I detailed in this article about another battery company, and this one about the long term prospects for cellulosic biofuels.  The power systems division comprises about one third of 2007 revenues.

JCI also supplies automotive battery management systems and power systems, with a focus on energy savings, as part of their automotive division described below.

Auto interiors

Energy savings can come from unexpected places... like car seats.  Johnson Controls' EcoClimate seat provides much higher heat absorption and moisture absorption than conventional seating, which in turn provides for passenger comfort with less use of the vehicle's air conditioner.  New bio based materials may also appeal to automotive consumers concerned about environmental health effects and fossil fuel usage.  About half of JCI's 2007 sales were in this division, but most of the company's growth comes from the other two divisions.

Conclusions

With half of the companies 2007 revenues coming from two of my favorite alternative energy sectors (efficient buildings and automotive batteries), and these parts of the company growing much more rapidly than the auto parts division (which is likely to be a great competitive advantage in selling batteries and power systems to automakers,) JCI is a must for alternative energy investors attracted by the superior economics of energy efficiency.  

The stock has declined significantly since the start of the year, but it currently seems only fairly valued to me at the current price of around $34.  However, a decline in auto sales caused by a slowing economy, along with an increased debt burden due to recent acquisitions could easily hurt short-term profits.  With continued stock market weakness, patient investors could easily see some excellent buying opportunities in the next 6-12 months.  If we do, I will be buying more.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in JCI.

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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