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May 31, 2008

The Week In Cleantech (May 24 - May 31) - Who Is Going To Pay For Carbon Capture?

On Wednesday, Cramer at TheStreet.com inherited some wind stocks for us. The article begins by claiming that Cramer is a "longtime bull of the wind power business." I'm not sure what 'long-term' means for Cramer, but in January 2007 the extent of his knowledge on Energy Conversion Devices (NASDAQ:ENER), which is not a wind play but is nonetheless a good proxy for understanding of the alt energy sector overall, was that since oil prices were expected to trend down the stock was a "sell! sell! sell!", presumably because there was nothing more to this company than oil prices...oups...But I digress. This is actually an interesting piece and I like the building of the wind turbine from scratch concept. He's unfortunately missing a key piece of the value chain: the companies that are building and operating wind parks. But as a longtime expert of this market, I'm sure he's got that covered elsewhere.

On Thursday, Kent Croft told us on The Street TV (video) that he was plugging into power for us. A quick discussion on four plays on the US electricity grid.

On Thursday, Ken Schachter at Red Herring told us that energy storage was the next big thing. Notice in the latter part of the article how the biggest thing of the next big thing is bulk storage for utilities, a topic that is right up there with increased grid efficiency.

On Friday, HardAssetInvestor saw the light for us. An interesting piece discussing one area of opportunity related to the grid: direct current/alternating current and electricity transmission. The company discussed in this article, ABB (NYSE:ABB), was recommended by our own Tom Konrad last July and is up 30% since he made that call.

On Friday, Matthew L. Wald at the NYT informed us that mounting costs would slow the push for clean coal. On Wednesday, we reported on a recent study claiming that the costs of building power generation facilities were shooting up. If the capital costs of building conventional power generation are rising, and if operating costs are also growing because of higher fuel prices, then it's not surprising that a technology whose environmental effectiveness is unclear at best but that is certain to raise both capital and operating costs ends up falling by the wayside. I think great gains can be achieved relatively cheaply through efficiency, but by-and-large dealing with the negative externalities created by fossil fuels is going to be a negative -sum game, meaning that having your cake and eating too might not be an option.

May 27, 2008

Peak Oil & Energy Efficiency In The News

A couple of interesting items in the news yesterday on topics dear to alt energy investors' hearts.

Firstly, a new report (PDF document) by CIBC World Markets arguing that globalization could be reversed by high oil prices. The folks at CIBC WM contend that growing shipping costs driven by higher prices for transportation fuels could erase the Asian labor cost advantage, driving a renaissance in North America's manufacturing sector. What's the main culprit? Peak Oil, albeit not called directly Peak Oil. I watched an interview with Jeff Rubin, CIBC WM's Chief Economist, on Bloomberg's In Focus yesterday, and he pin-pointed supply problems as underlying what he saw as a secular upward trend in oil prices. Mr. Rubin certainly didn't appear to be of the opinion that major new supply would come on-stream in the foreseeable future, and believed that the solution to this energy crunch rested with demand-side management. He was therefore opposed to lowering taxes on fuel on grounds that that would do nothing to curtail demand.

The second thing that caught my attention yesterday was an article in the WSJ (subscription required to view the full version) discussing new research by Cambridge Energy Research Associates (CERA) showing a marked increase in the cost of building power plants. Last Thursday, I wrote an article discussing the potential for energy efficiency. As noted in the WSJ article, certain utilities are turning to efficiency measures like smart metering as a way not to have to build new generation capacity because of growing costs. See the WSJ Environmental Capital blog's summary of the article.

Taken together, these two pieces of information are in line with my belief that a significant push toward efficiency and demand-side management across energy-intensive sectors is about to get underway, as it already has in the airline industry.

Keewatin Windpower Proceeds with Acquisition of Sky Harvest Windpower

The following is a Special Information Supplement by our Featured Company sponsor Sky Harvest Windpower Corporation

In connection with its proposed acquisition of Sky Harvest Windpower Corp., Keewatin is pleased to announce that it has engaged Stirling Mercantile Corporation to prepare a fairness opinion concerning the transaction. Sky Harvest holds the land rights to develop a wind power project on approximately 8,500 acres of land located in southwestern Saskatchewan. The company has completed wind resource assessments on the property and is proposing the construction of a 150 megawatt facility.

Keewatin’s Board of Directors anticipates that the fairness opinion will support the terms of the proposed acquisition whereby it will issue 1.5 shares of its common stock for each currently issued share of Sky Harvest, representing an aggregate of 17,343,516 shares. The advanced stage of the Sky Harvest project was considered in management’s valuation. Both companies are prepared to complete the acquisition immediately following the receipt of the fairness opinion and the completion of an audit of Sky Harvest’s financial statements. Current directors of Keewatin own 53% of Sky Harvest’s issued and outstanding shares.

ON BEHALF OF THE BOARD OF Investor Relations 1 877 700 7021
KEEWATIN WINDPOWER CORP. toll free

Chris Craddock, President

For information on Sky Harvest Windpower see www.skyharvestwind.com

Safe harbor for Forward-Looking Statements:

Except for statements of historical fact, the information presented herein constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include general economic and business conditions, the ability to acquire and develop specific projects, the ability to fund operations and other factors over which Keewatin Windpower Corp. has little or no control.

May 26, 2008

Trading Alert: Railpower Tech

I took a small position today in Railpower Tech (RPWRF.PK or P.TO) at C$0.46. Tom briefly discussed Railpower last November in an article on rail stocks. I don't want to dwell too much on how I view the macro picture for rail, but suffices to say that a combination of increasing fuel prices and concerns about climate change is re-kindling interest in this sector in a significant way across North America (in other regions of the world, mainly Europe, the interest never really vanished in the first place). Tack on top of that the potential for material savings in fuel (25-45%) and reductions in harmful emissions (70-90%), and you have a nice value proposition. The company is also expanding its technology into other applications, namely port cranes.

I bought this stock on news that the company was moving ahead with construction of a new manufacturing facility, and had secured financing to pay for the facility (PDF document). Railpower has experienced its share of difficulties in the recent past, as evidenced by the stock's spectacular fall from grace. While the company has been successful in attracting a fair deal of attention to its admittedly innovative technology, execution and liquidity problems have dogged this stock for the better part of the past two years.



Last fall, the Ontario Teachers' Pension Plan (OTPP), one of Canada's largest institutional investors, threw the firm a lifeline in the form of a C$35 million (US$35.4 million) capital injection. Given OTPP's reputation as one of the most sophisticated institutional investors in Canada, I began paying closer attention to the firm. Today, on news that they were building a factory and getting another large cash infusion from OTPP (C$20 million), I decided to dip my toes and take a small position.

Before buying anything, I did a quick and dirty analysis of the firm (see table below). I liked the 274% pop in top line in 2007 over 2006, and gross and operating margins seem to be improving. I liked what I saw with regards to inventory management, which is a good measure of efficiency. Inventory appeared to me to be the major area of working capital weakness for Railpower. Finally, largely due to improved working capital management, Railpower showed a notable improvement in operating cash.



A rough calculation, using the Q1 balance sheet (PDF document) and adding the C$20 million of new financing to assets, yields a price-to-book ratio of around 2.35 at today's closing price of C$0.75. This is therefore not a 'cheap' stock, but also not an outrageously expensive one based on this metric. The real value in this firm, however, may lay with its potential earnings power, which won't be measurable until its starts to actually generate earnings. C$55 million in financing in the space of a few months from the public equity division of OTPP speaks volume, and I doubt OTPP would've provided this cash if it did not believe in Railpower's ability grow earnings substantially. Moreover, operating out of a brand new, state-of-the-art facility should help the firm improve its operating performance.

I can't claim to know this company inside and out, which is why I only took a small position. I intend to do more research over the next few days to decide whether to increase my stake. If momentum takes hold of the stock and it gets pushed beyond levels where I'm comfortable, I'll just have to table this one for the time being.

UPDATE (May 27): P.TO gave back much of yesterday's gain to close at C$0.55. Volume was higher today than it was yesterday at 18.2 million trades (Vs. ~16 million). I'm not surprised this happened as there was almost certainly going to be some profit-taking on a one-day pop of 87%. The major milestone to look for in this company for the remainder of '08 is the ability to fill the order book.

DISCLOSURE: The author is long R.TO

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

May 25, 2008

The Week In Cleantech (May 18 - May 24) - Is AMSC A Dog?

On Monday, Richard T. Stuebi at Cleantech Blog discussed the war for talent in cleatech. An interesting look into personnel recruitment issues in the cleantech/alt energy sectors, and perhaps a sign that the industry is maturing. My own experience in MBA school is that cleantech remains an industry that very few students seriously consider as a career option, even though there is a multitude of ways one can leverage an interest in this industry professionally. Hopefully this will change.

On Tuesday, Tyler Hamilton at Clean Break argued that smart grid represents a new boom opportunity for IT. An interesting piece on how established telcos and and IT companies are getting involved in smart grid, which will present tremendous opportunities in the years ahead. Successful involvement in smart grid programs has the potential to generate rates of return much higher than what telcos are accustomed to, so with their relatively cheap cost of capital this could create real shareholder value. Definitely something to watch given the potential size of this market.

On Tuesday, Steve Gelsi at MarketWatch told us that Jefferies was eying cleantech IPOs later this year. The correction in equity markets experienced earlier this year hit alt energy stocks particularly hard, but things seemed to have improved markedly in the last couple of months, even as the state of the US economy remains a matter of debate. Is this a leading indicator of good things to come for the sector, or is it merely a short-lived bump before another bust?

On Tuesday, Toby Shute at The Motley Fool told us that Pacific Ethanol was not dead yet. An interesting point made about the capacity to switch feedstock as a competitive advantage (which, incidentally, many corn ethanol producers don't have).

On Wednesday, Edward Silver at the LA Times informed us that in the wind-power biz, we needed to beware giving some stocks a whirl. A bearish take on two stocks: one on which investors have been bearish (NASDAQ:ZOLT) and one on which they have been bullish (NASDAQ:AMSC). The latter undoubtedly qualifies as a squarely contrarian call, at least according to what Motley Fool users across categories think of this stock. Thanks to Climateer for this one.

May 22, 2008

It's Energy Efficiency, Stupid!

It's no longer breaking news, Deloitte released earlier this week the results of two surveys, one of state public utility regulators and one of residential electricity consumers (both PDF documents). Deloitte's interpretation of the results can be found here.

The results have also been interpreted by two prominent alt energy/environmental blogs: the WSJ's Environmental Capital and Grist. The former argues that policy-makers and 'smart-money' are out of whack with the little guy, because the little guy simply isn't willing to pay for solutions to climate change out of his electricity bill. The latter, looking at the same data, effectively calls the little guy dumb and selfish. It's true: by-and-large, while respondents (consumers and regulators) express concerns over climate change, neither group is willing to see electricity rates go up to deal with the issue. But as I was reading through the survey slides from the standpoint of an alternative energy investor, different things stood out for me.

Firstly, regulators view transmission as the number 1 impediment to renewables growth (followed closely by cost). We at AltEnergyStocks.com have been on the power grid and transmission stories for quite some time (see our Electric Grid section for investment ideas), so this result is not especially surprising. Nevertheless, the fact that the individuals who have perhaps the best visibility on this issue place transmission above costs speaks volume to the scale of the problem. But while this problem is well understood, it's still unclear how it's going to be resolved. We can all agree that more investment in transmission needs to be made, but who is going to make it and under what model? Governments are increasingly apprehensive to going into massive capital spending sprees, and the incentives for the private sector don't seem to be all there. One thing is clear: something will have give sooner rather than later.

However, the main thing that caught my attention in the survey is the degree of support energy efficiency receives from both consumers and regulators. When asked what approach had the best ability to deal with greenhouse gases (slide 8 for the regulator presentation), more regulators picked efficiency as extremely effective and moderately effective than did for renewables. A resounding 70.8% of residential customers would support their utility boosting profitability on the back of efficiency measures (slide 4 for the consumer presentation), and consumers would prefer energy efficiency to clean coal and nuclear (slide 11). Some 66% percent of regulators believed investment in efficiency should receive similar regulatory treatment as investment in new generation (slide 11).

What does this tell us? What we already know: that efficiency is a win-win. Efficiency can help utilities reduce operating expenses as the cost of generating power goes up (mostly because of fuel), not to mention avoid massive capital outlays as the capital costs of building new generation continue to increase. Efficiency also means flat or decreasing power bills as no or little new electricity needs to be produced to meet growing demand (granted, this is not possible where demand is growing too rapidly).

So why haven't policy-makers embraced efficiency and given it the same incentives as renewables? It's not clear, but I would posit that, for one, efficiency does not have a great job creation angle, quite the contrary. It's also not as sexy and tangible as new renewables project. Lastly, there isn't a well organized efficiency lobby, while wind has some very powerful allies.

No matter the reason, this survey reinforces my belief that the case for efficiency is growing, especially if electricity prices continue to trend up in the near-term as predicted by the regulators. Efficiency measures can be deployed relatively rapidly and have an almost immediate impact on power bills. In many cases, the upfront costs continue to discourage adoption, but that is something that could be remedied through simple fiscal incentives until scale pushes prices down. I expect we'll hear a lot more about efficiency in the months to come, and the investment case is, in my opinion, as strong as ever. Want to know how strong? This recent report by the American Council for an Energy-Efficient Economy provides some interesting numbers.

May 19, 2008

Carbon Offsets Work – Will the Mainstream Media Ever Get It?

The carbon markets are an area of keen interest for me personally and professionally, so it is always frustrating that the mainstream media largely refuses to learn the details.

In general, layman and media who don’t understand the details of the carbon markets attack carbon offsets in two areas, first, questioning whether the credits are for a project that would have occurred anyway (a concept known in carbon as “additionality”), and second questioning whether there are checks and balances to ensure the environmental standards are adhered to and the abatement actually happens (in carbon known as the validation and verification processes). The frustrating part for anyone in the industry is that the entire of the carbon credit process set up under Kyoto is all about ensuring the answers to those two questions. Leading certification firms and carbon project developers have been dealing with the details behind those questions for years.

The biggest weakness of the carbon offset process to date has been that the high level of oversight and protection, while working, has led to higher costs and fewer projects getting done, rather than too many. Bottom line, the carbon markets ARE working, and are pouring billions of dollars into fighting global warming, just like the NOx and SOx trading markets helped reduce air pollution faster and cheaper than anyone expected. Now it's time to figure out how to make them REALLY scale.

I caught up with a friend of mine, Marc Stuart, to give us a little teach in about the real story in carbon offsets, what matters, what does not, what works, and what still needs to be tweaked. Marc should know, he’s one of the founders of EcoSecurities plc (ECGUF.PK or ECO.L), one of the first, and still the leader in generating and monetizing carbon credits. Marc, thanks for joining us, we appreciate the time and the teach in.

1. Even for those who don't know much about carbon offsets, many people have heard about the concept of additionality, and almost everyone intuitively understands it at some level. But it is devilishly complicated in practice. I've always described it to people as "beyond business as usual". Can you explain additionality and give us some insight into the details?

Additionality is the core concept of the project-based emissions market. In a nutshell, it means that a developer cannot receive credits for a project that represents “business as usual” (BAU) practices. A classic and often cited example is that industrial forest companies should not be able to get credits simply for replanting the trees that they harvest from their plantations each year, since that is already part of their business model. A utility changing out a 30 year old, fully depreciated turbine would not be able to claim the efficiency benefits, though a utility that swapped out something only five years old might be able to under certain circumstances.

Additionality is easy to definitively prove in cases where there is zero normal economic reason to make an investment, such as reducing HFC-23 from the refrigeration plants or N2O from fertilizer plants. Such projects easily pass a “financial additionality” test, since it’s clear that as a cost without a benefit, they wouldn’t have been economically feasible under a BAU scenario. It gets far more complex though, with assets that contribute to both normal economic outputs and the development of carbon credits, in particular in renewables and energy efficiency. Sometimes these projects are profitable without carbon finance, but there may be other barriers preventing their execution that make them additional.

The UN has developed a very structured and rigorous process that projects must undergo to prove additionality. It is essentially a regulatory process with multiple levels of oversight, in which a body called the Executive Board to the UN’s Clean Development Mechanism (The CDM is the international system for creating carbon offsets called CERs) ultimately makes a binary decision about whether a project is eligible to participate or not. Anchored in the middle of that oversight is an audit process run by independent, licensed auditors, the largest of which is actually a multi-national nonprofit called Det Norske Veritas (DNV). However, many projects don’t even make it to that decision point before they are dropped in the process.

2. One of the benefits of carbon offsets often touted by those who support them is the idea that they provide compliance flexibility and liquidity in the early years of a compliance cap and trade system. What are your thoughts on how that works?

The simple reality is that many assets that emit carbon have a long lifetimes and that legitimate investment decisions have been taken in the past that rightfully did not take into account the negative impact of carbon emissions. For an easy example, think about somebody who is a couple of years into a six-year auto loan on a gas guzzler—can policy just force that person to immediately switch to a hybrid, especially since the used car market for his guzzler has now completely disappeared? Even if society says yes, how long would it take for the auto industry to ramp up its production of hybrids? Now look at infrastructure—for example, most power plants and heavy industry facilities have lifetimes of thirty years plus. Even if we were economically and politically able to affect a radical changeover, simply put, the physical capacity for building out new technology is limited, even in a highly accelerated scenario. So, like it or not, GHG emissions from the industrial world are going to take quite a while to stabilize and reduce.

The point of offsets is that, in fairly carbon efficient places like California or Japan, availability of low cost reductions within a cap-and-trade system is quite limited, meaning there is an incentive to look beyond the cap for other, credible, quantifiable, emissions reductions. Reductions in GHGs that are uncapped (either by sector, activity, or geography), such as are found in the CDM, are thus a logical way to achieve real GHG reductions and accelerate dissemination of low carbon technologies. In effect, the past helps subsidize changeover to the future as buyers of emission rights subsidize other, cheaper, GHG mitigation activities. As caps get more restrictive over time, capital changeover occurs. Offsets allow this to occur in an orderly and cost-effective manner.

3. There have been a number of studies questioning whether offsets are just "hot air" and whether carbon offset projects actually achieve real emission reductions. What is your response to these accusations?

As noted in the first question, the CDM in particular is a market that is completely regulated by an international body of experts supported by extensive bureaucracy to ensure that real emission reductions and sustainable development are occurring. The first and foremost requirement of that body is to rule on whether each individual project is additional. Each project is reviewed by qualified Operational Entity, the Executive Board Registration and Issuance Team, the UNFCCC CDM Secretariat and the CDM Executive Board itself. Plus, there are multiple occasions for external observers to make specific comments, which are given significant weight. So, while there is always the chance something could get through, there are a lot of checks and balances in the system to prevent that.

That said, determining an individual emission baseline for a project – the metric against which emission reductions are measured – is a challenging process. The system adjusts to those challenges by trying to be as conservative as possible. In other words, I would argue that in most CDM projects, there are fewer emission reductions being credited than are actually occurring. It is impossible for a hypothetical baseline to be absolutely exact, but it is eminently possible to be conservative. Is it inconceivable that the opposite occasionally occurs and that more emission reductions are credited to a project than are real? We’ve never seen it in the more than 117 projects we’ve registered with the CDM, but I suppose it’s possible.

4. What about the voluntary carbon market in the US, where there have been accusations that many projects would have happened anyway? How is this voluntary market different from what EcoSecurities does under the Clean Development Mechanism?

The voluntary market has had more of a “wild west” reputation compared to the compliance market. In some ways, that is deserved, but in some ways it is unfair. For a number of years, the voluntary market was the only outlet for project developers in places like the United States and in sectors like avoided deforestation that were not recognized by the CDM. However, because there were virtually no barriers to entry and no functional regulation other than what providers would voluntarily undertake, it was difficult for consumers and companies to differentiate between legitimate providers and charlatans. For EcoSecurities, while the voluntary market has been a very small part of our overall efforts, we always qualified projects according to vetted additionality standards such as the CDM and the California Climate Action Registry, and always used independent accredited auditors. With the emergence of stand-alone systems like the Voluntary Carbon Standard (Editors note: Marc Stuart sits on the board of the VCS), and the growing demand for offsets from the corporate sector, I believe the “wild west” frontier is drawing to a close. [Editors note: Other voluntary carbon standards we watch closely include Green-e Climate, put out by the people who certify most of the renewable energy credits (RECs) in the US]

It is also important to note that while the voluntary market has recorded very explosive growth, it is still a very small fraction of the regulatory market, comprising a few tens of millions of dollars of transactions, versus the potential tens of billions of dollars of value embedded in the highly regulated and supervised CDM. The fact that many observers still equate the occasional problems in the fringes of the voluntary market (which are increasingly history) with the real benefits being created in the Kyoto compliance market is a misperception we’d like to correct.

5. What about these projects we've heard about in China, where the sale of carbon credits generated from HFC-23 capture is far more valuable than production of the refrigerant gas that leads to its creation in the first place? How is this being addressed in the CDM and how can future systems ensure that there are not perverse incentives created like this?

HFC-23 projects are the epitome of what is often referred to as “low hanging fruit.” In this case, most of the fruit might have actually been sitting on the ground. While there is no doubt in anybody’s mind that the market drove the mitigation of HFC-23 globally, the extreme disparity between the costs of reducing those gases and the market value those reductions commanded invariably led to questions whether there were more socially efficient ways to have reduced those emissions. In all likelihood, there were. But to catalyze an overall market like this, it is probably important to get some easy wins at the outset to create broader investment interest and this certainly accomplished that. Moreover, Kyoto created a mechanism for engaging these kinds of activities. It would have sent a much worse signal to the market to have changed the rules in the middle of the game. The CDM has subsequently adjusted the rules to make sure that no one can put new factories in place simply for the purposes of mitigating their emissions. I don’t see too many other situations like HFCs in the future, simply because there are no other gases where the disparity of mitigation costs and market value is so severe.

6. Given that the majority of CDM projects currently under development are located in China and India, how can we ensure that these countries eventually take on the binding targets we will need to reach the scientifically determined reductions in GHGs? Doesn't the CDM simple create an incentive for these countries to avoid binding targets as long as possible?

It is clearly in the world’s interest to get as much of the global economy into a low carbon trajectory as quickly as possible. However, it is politically unrealistic to expect these countries—whose emissions per capita are between one fifth and one tenth the per capita of the United States—to make an equivalent commitment at this juncture, particularly considering that they are in the midst of an aggressive development trajectory. The CDM provides a way for ongoing engagement with these countries, developing the basic architecture of a lower carbon economy. And there is no doubt that China’s emissions in 2012, 2015 or 2020 will be measurably lower than they otherwise would have been, simply because of the current accomplishments of the CDM. Over time, the use of project based mechanisms will contribute to accelerating the development and dissemination of low carbon technologies, which will make those negotiations for binding caps from all major economies far more tenable.

7. It is widely believed that to address the climate crisis on the scale necessary to avert dangerous global warming, significant infrastructural and paradigm shifts must occur at an unprecedented scale. Some people are concerned that offsets provide a disincentive for making these shifts, since companies can just offset their emissions instead of making the changes themselves. Is this something you saw under the EU ETS at all, and if so, how can it be addressed in a US system?

Virtually all of the macroeconomic analysis that has been done of Phase I of the ETS shows that there were real emission reductions undertaken within the system, despite the fact that many companies were also actively seeking CDM CERs. Clearly the fact that both Kyoto and the EU ETS system place quantifiable limits on the use of CDM and Joint Implementation (JI) credits guarantees that emission reductions will also be made in-country as well, so pure “outsourcing” of emissions compliance is not possible. This also appears to be the model being pursued in most US legislation.

8. Many have complained that the CDM system is too administratively complex, unpredictable, and that the transaction costs of the system are so significant that they could almost negate any possible benefits. What lessons can be learned about structuring an offset system in a simpler, but still environmentally rigorous way? What steps is the CDM EB taking to address these issues?

The CDM treads a very fine line between ensuring environmental integrity of the offsets that it certifies and the need to have some kind of efficient process within an enormous global regulatory enterprise. To date, one has to think that they have gotten it about right, as business has complained about inefficiency and environmentalists have complained about environmental integrity. However, it is becoming increasingly clear that the project by project approval approach is creating logistical challenges as the system graduates from managing dozens, to hundreds, to now, quite literally, thousands of projects in all corners of the world. Ironically, it is the success of the CDM in terms of its very broad uptake by carbon entrepreneurs that is causing problems for the current model.

We believe the benefits of the CDM can be maintained by moving many project types into a more standardized approach, whereby emission reduction coefficients are determined “top-down” by a regulatory body, as opposed to being undertaken individually for every project by project proponents. For example, there are dozens of highly similar wind energy projects in China that all have microscopically different emission baselines. A conservative top down baseline set by the regulator (in this case, the CDM Executive Board) would enable projects to get qualified by the system in an efficient manner with far less bureaucratic overhang. This is how California’s Climate Action Reserve deals with project based reductions and we think that it could work well for many sectors.

9. Is there any difference between a renewable energy certificate (REC) and a carbon offset? Does EcoSecurities support the concept of selling RECs to offset carbon emissions?

While renewable energy clearly helps lower the carbon intensity of the electrical grid, there are a great number of other incentives for development of renewables in the US, including significant Production Tax Credits, and in most states, RECs or Green Tags. For EcoSecurities, this makes it extremely problematic to claim that these assets are additional, despite their obvious benefits to the global environment and decarbonization of the economy. Acknowledging this, EcoSecurities—along with many other companies—has steered clear of developing REC projects for VERs in the voluntary market. There are other firms that have chosen other approaches, which again highlights the need for standardized approaches like the VCS. That said, we are very active in helping create carbon value for RE projects throughout the developing world via the CDM, where incentives such as RECs are almost universally non-existent.

10. There has been a lot of concern about "carbon market millionaires" profiting from selling offsets, and that the only "greening" going on is in the lining of peoples' pockets. As a carbon market millionaire yourself, what do you think about this concern?

Capital markets exist to reward innovation and punish underperformance. EcoSecurities has existed for more than 11 years and the founders – of which I am one – have devoted more than 15 years to building up various aspects of the carbon market. For many of those years, as we watched friends and colleagues flourish in other markets like internet and biotech, our decision to stay in this seemed fairly quixotic. But we understood enough of the science of climate change to recognize that a fundamental policy response had to be forthcoming, or we would be heading to a global catastrophe. Now those policies have come into focus and the overriding recognition is that society will need to mobilize trillions of dollars of capital to decarbonize the global economy. As part of the proverbial “bleeding edge” for many years, we were ironically well positioned to take advantage when early movers in the capital markets recognized the capabilities and brand that we had built up over a decade. As for whether that is the only greening – well, I can tell you that given the very conservative and difficult aspects of qualifying projects for the CDM, I am 100% certain that our activities contribute solidly to that decarbonization trajectory and that real emission reductions have occurred all over the world because of our efforts.

11) What lessons have you learned personally about the market as a cofounder of the leading CDM project developer in the world? You must have some interesting lessons learned for the US as you are probably unique amongst your competitors in having been based here in the US for over 10 years.

Thanks for the compliment but actually, I’m not that unique. I started in the market in the early 1990’s when the US was the epicenter of a future carbon trading regime, and Europe and Japan looked at it with suspicion and distaste. Quite a number of us from that era did not give up, but instead spent a fair bit of time since then getting our US passports stamped regularly to search the world for projects. It’s nice to see that we may finally be getting back to where we thought we would be a decade ago—with the US as a driving force for innovation in decarbonizing the world’s economy (coincidentally in a recent report produced by the UNFCCC, the US along with Germany, the UK and France provided over 70% of the clean technology currently being utilized in CDM projects). The US is in a perfect position to learn from the both the successes and mistakes within the first Kyoto iteration and I am looking forward to being part of that next stage as well.

12) What do you say to popular press who don't seem to believe that Kyoto works?

Honestly, you haven’t seen what I have seen. I’ve traveled all over the world and seen the results of Kyoto, where “carbon entrepreneurs” – ranging from divisions within multinationals to garage inventors on their own—are seeking ways to cost effectively reduce GHG emissions. That simply would not have happened without the market signal that Kyoto created. The fact that the CDM has registered more than 1000 projects and has a backlog of several times that – despite the incredible bureaucratic requirements – shows an uptake several magnitudes beyond what anybody predicted when Kyoto was negotiated. When the managing director of a West African oil refinery is proudly detailing to you the steps he’ll be ordering his engineers to take to help save some 250,000 tonnes of CO2 emissions to the atmosphere, that’s when you realize that you’ve tapped into something significant. And having had the same basic conversation in Mumbai, Jakarta, Sao Paulo and Beijing, you realize that people really want to do something, but that you need a little push from a market. That said, we are still in the first tentative moments of what is probably a century long issue and there are doubtless many improvements that can and will be made. But we have undoubtedly proven that the basic premise works.

Thanks Marc. A pleasure to chat as always. Keep up the good fight.


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 Greentech blog. He is also the founder of Carbonflow, a provider of software solutions for the carbon markets.

May 18, 2008

The Week In Cleantech (May 11 - May 17) - Coal's Clout

On Monday, Chris Baltimore at Reuters discussed how Democratic candidates were playing up "clean coal". It's always interesting to read about politicians courting different audiences. In this case, out of convenience, both candidates are avoiding substantive debate on energy policy, during which it would certainly emerge that clean coal is more dream than reality.

On Monday, Julian Murdoch at Hard Assets Investor told us that it was in the wind. An interesting piece on one of my favorite sectors, wind, with a discussion of a few good plays. Speaking of wind, T Boone Pickens was responsible for the wind announcement of the year to date this week.

On Tuesday, Mike Taylor at Renewable Energy World compared the cost of utility-scale solar: PV vs. CST. Quick article but useful in what to watch for in the solar space in the next few years. Large-scale storage - no surprise here!

On Thursday, Tyler Hamilton at Clean Break informed us that grocery manufacturers were launching a smear campaign against biofuels. These are presumably deep-pocketed opponents, and this campaign won't help corn ethanol's already shaky image. Neal at Cleantech Blog, who is generally in support of corn ethanol, reports on a study that claims that corn ethanol has lowered gasoline prices in the US, and claims that the case for government support is therefore not as weak as is often argued here.

On Friday, Keith Johnson at the WSJ's Environmental Capital wondered about the future of German solar subsidies. I've come across a few pieces over the past while discussing this backlash in Germany. It is unrealistic to expect rate and tax payers to subsidize the renewables industry foreover, especially where customers pay a lot for power. So maybe instead of heavily subsidizing renewables and non-renewables, policy-makers should look into ending subsidies for fossil fuels and forcing the market to fully internalize the costs of pollution and CO2. Germany was the main culprit in handing over too many carbon emission allowances to its utilities in the first phase of the EU ETS, which resulted in huge windfall profits for some of the dirtiest power producers in Europe. Sounds to me like someone wants to have their cake and eat it too, and it's unclear how sustainable that is.


May 15, 2008

US Presidential Election & Carbon Markets: Is The Climate Exchange Story Overdone?

An interesting piece yesterday in POLITICO on how carbon prices on the Chicago Climate Exchange (CCX) have been trending up in recent months, mostly since it's become clear that all three remaining presidential hopefuls will likely regulate CO2 emissions at the federal level.



In fact, as per the chart above, prices for the right to emit a metric ton of CO2 have been on a tear, recovering from a pretty significant slump in the preceding months. Last week, the World Bank Carbon Finance Unit released its annual update on the state of global carbon market (PDF document), and, as expected, that market continued to grow appreciably.

But is the latest hype around the CCX contracts justified? After all, should there be federally-mandated carbon caps, no one yet knows what the rules will be and what will count as a valid carbon credit. The CCX currently has its own rules for certifying a tradable emission reduction, and it's unclear whether these reductions will be worth anything at all in the eyes of US environmental regulators. For instance, the RGGI, the first regulated carbon market in the US, engaged a small firm called World Energy (XWE.TO) to write the auction software that will be used for the trades.

A safer play would therefore be to buy the exchange because ANY contract can be traded on it, so revenue would spike with volumes. It appears as though the marketplace has picked up on that one as well, pushing up the price of Climate Exchange (CXCHF.PK), the CCX' parent company, by upwards of 90% in the last three months. Mind you, this increase is probably due in large part to the fact that Climate Exchange's 2007 annual figures (PDF document) looked strong, with a 1,164% increase in revenue on 2006 and a loss per share of GBP0.0953, up from a loss per share of GBP0.3168 in '06. However, the current stock price certainly includes a significant future growth premium, and a good chunk of that premium is linked to CCX's positioning in US carbon markets.



But is this a reasonable bet? A few months ago, NYMEX, a much bigger rival, announced the creation of The Green Exchange to directly compete in the environmental commodities space. The Green Exchange is currently awaiting regulatory approval to introduce a carbon contract for the RGGI. Regulation-driven carbon trading will dwarf the voluntary market, which is CCX' current stronghold in the US (it is the leader in the regulated market in Europe).

The main question now is: will there be enough room in the US carbon market to accommodate multiple players, or will a dominant exchange outcompete everyone else? Can a pure-play carbon exchange survive in an era of increasing exchange consolidation? There is a lot of growth currently built in Climate Exchange's share price...is it too much?

DISCLOSURE: The author does not have a position in any of the stocks discussed in this article

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

May 14, 2008

Is Timminco For Real?

Timminco (TIMNF.PK or TIM.TO) was, without a doubt, one of the great solar plays of 2007. The Toronto-based company, which has yet to turn a profit, claims it has come up with a process to produce solar-grade metallurgical silicon with cell efficiencies of about 14%. Metallurgical silicon allows for important energy cost savings in the production process (~70%), so being able to approach cell efficiencies reached by conventional solar-grade silicon processes could mean an important cost advantage for metallurgical silicon producers when measured on a per watt basis.


Eventually, certain people began publicly doubting Timminco's claim, partially because no hard evidence had been put forth (besides a few positive client testimonials), and partially because some were eager to cover short positions probably taken while the stock was shooting up. As a result, the stock came under pressure.

Finally, last week, Timminco silenced its critics by announcing that a third-party had verified and lauded its technology, and by upgrading a major contract. The third-party is Photon Consulting, a solar market research agency with a strong reputation.

But, while the Photon folks seem to have nothing but good things to say about the Timminco process, others are doubting whether Photon have sufficient technology and production process expertise to make a call on the veracity of Timminco's claims (from what I could gather, these "others" are mainly competitors). Judging by the stock's moves since the announcement, it seems as though investors are siding with management for now.

The full results of Photon's analysis won't be known until the close of markets tomorrow. Seeing as the Photon principal in charge of this project said that Timminco had the potential to "reshap[e] the silicon industry," it will certainly be interesting to hear the full details of what he has to say. Interested in finding out more about what could be a breakthrough in solar cell manufacturing? Be sure to tune in to the call on Wednesday at EST4:30pm. All details are available here (PDF document).


DISCLOSURE: The author does not have a position in Timminco.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

May 11, 2008

The Week In Cleantech (May 3 - May 10) - Big News For Energy Efficiency

On Sunday, Jim Fraser at Energy Blog reported a claim by Sungri that it can produce 5-7 cents per kWh CSP. This is quite the claim, and if true, would represent nothing short of big bang for the solar space. Nevertheless, I remain wholly unconvinced.

On Sunday, John Laumer at TreeHugger told us that Waste Management was going to fuel Altamont (CA) area trucks with landfill-harvested liquid natural gas. Landfill gas (LFG) can be used for both power generation and for liquid fuel production. I did a bit of research into this a few months ago and, with the right kind of incentive, LFG could become a valuable asset for firms and municipalities with the right to it. This is an area to keep an eye on.

On Tuesday, Jozef Winter at ecogeek discussed Xcel Energy's announcement of a $100 million investment for 'Smart Grid' initiatives. This is good news for the energy efficiency space, especially as smart grid/efficiency stocks have been struggling over the past while (see COMV and ENOC). I see energy efficiency as a low-hanging fruit with plenty of potential, but unfortunately there aren't sufficient incentives yet to drive massive investments in this space. It is therefore encouraging to see a mainstream utility make a large capital commitment to the concept.

On Friday, Keith Johnson at the WSJ's Environmental Capital wondered why pricey oil wasn't helping cleantech stocks more. Sure, alt energy stocks are decoupled from the price of oil on the upside, but it's still unclear whether this decoupling would hold on the downside. The broader point from this story: alt energy earnings remain volatile and so alt energy stock prices are volatile.

On Friday, Eric Savitz at Barron's Tech Trader Daily told us that Citi sees a solar glut in 2009 and 2010. So the solar-cell makers with low cost structures will get a competitive edge in a situation of general oversupply - no big surprise here. But who will have an edge in consolidating the industry?

Presentation from May 10, 2008 NREL Seminar

For those who attened my presentation yesterday, thank you for all the great questions.

I'm having trouble uploading the presentation (it's too large for my server.) However, it should soon appear on NREL's presentation's page. As usual, I own most of the stocks mentioned in the presentation (too many to list,) and the Guiness Atkinson Alternative Energy fund (also mentioned) is an advertiser on AltEnergyStocks.com.

UPDATE: It's still not on NREL's page, but I uploaded it on another server here.

Although I had to cut it off because of time, if you have more followup, please leave a comment here.

Also, a note to the woman who asked me about career development opportunities in Colorado for a financial analyst interested in Energy, there were some openings at the Colorado PUC... "Rate Financial Analyst energy/Demand Side Management" looks especially interesting.

The application deadline was May 9, but I got the feeling that there is a dearth of qualified candidates, so it's probably worth inquiring.

May 06, 2008

AAER & The Hydro-Quebec Tender: A Tale Of The Importance Of Risk Management

Some of you may remember an article I wrote last March about a small Canadian wind turbine maker called AAER Inc (AAERF.PK or AAE.V). In fact, I got a few emails from readers informing me that they'd bought the stock following my article and that they were happy with its performance. The following chart traces the stock's performance between the date of the article (March 7, 2007) and last Friday (May 2, 2008):



Since I wrote this article many things have changed with AAER. The Katabatic contract, which is what attracted my attention initially, is no longer in effect. AAER has nonetheless forged ahead and entered into a number of supply agreements to get its hands on turbine components, not the least of which is with American Superconductor (NASDAQ:AMSC), a stock many wind investors have on their radars (or in their portfolio). SkyPower, a Canadian wind heavyweight and affiliate of Lehman Brothers, bought about 20% of AAER's equity in the fall of '07. In fact, it is formally Lehman Brothers Inc. that owns the stake. Then, only a few weeks ago, the company announced another round of equity financing through a bought deal at C$1.20/shr, for a total of C$7.5m (US$7.82m). Finally, the company managed to sell a few of its turbines in Canada, the US and France.

Overall, AAER looks it is getting the right things done. However, the stock's latest run was tied to one event in particular.

The Hydro-Quebec Bid

AAER's partnership with SkyPower as well as another partnership with TransCanada Energy Ltd appeared to position AAER very well for the much-awaited Hydro-Quebec request for proposal (RFP) for wind power. This RFP, calling for the installation of 2,000 MW of wind power in the Canadian province of Quebec, represents the single largest block of wind power contracts to be awarded anywhere in North America to date. Under these contracts, Hydro-Quebec, the state-controlled power utility, buys the electricity under a 20-year agreement from private sector projects at a rate of C$0.087/kWh. Consortia of developers and turbine makers were invited to bid projects into RFP.The call attracted a fair deal of attention with 66 bids totaling 7722.2 MW - significantly more than the 2,000 needed.

Through its partnerships with SkyPower and TransCanada, both of which submitted bids into the RFP, AAER believed it had a serious shot at jumpstarting its business. AAER is headquartered in the province of Quebec, and local assembly of the turbines as well as local economic development considerations more generally were key criteria in judging the bids (along with factors such as costs, reliability of turbines, ability to manage community relations, etc). Moreover, both partners have strong reputations in the Canadian wind market and SkyPower is already active in Quebec. In both cases, the consortia appeared very well positioned to be selected and AAER (and many of its shareholders) saw this as: a) an opportunity to fill the order book in the near-term and b) a chance to establish its reputation in the North American marketplace for the long run by getting a few hundred MWs of turbines going in the real world. If this was successful, it could bolster AAER's assault on a North American marketplace in dire need of turbines and that is currently being underserved by the incumbents.

The winners were announced on Monday (May 5) at 11:15 am and the AAER consortia were not a part of them. The stock immediately collapsed, so much so that Canadian market regulators suspended trading and expunged a bunch of trades because the news conference was in French only and the info was not disseminated to American and English Canadian investors at the same time as to French Canadian ones. When trading reopened on Tuesday morning, the share price immediately tumbled and found resistance for most of the day at around $0.60.

In the end, two turbine makers were selected to provide all of the 2,000 MW: Enercon and REPower (RPWSF.PK)

What's Next?

As pointed out in the article linked to initially, I entered my positions in AAER at C$0.39 and C$0.38. In early January, I got the majority of the dollar value of my initial investment out at C$1.15. On the morning of the announcement, I wrestled with getting another chunk of my position out at C$1.80, but ultimately decided not to budge - this was a gamble and I lost it. However, at around $0.39 with the information that was available in March 2007, this looked to me more like a high-risk value play than like a gamble.

Reading through an AAER investor discussion board Tuesday afternoon, I came across the usual mix of anger and amazement. One fellow claimed he and his family had lost $70,000 (not sure whether it has been realized or not). Others, who had pulled the trigger right on time after the announcement and had still been able to get out with a fat profit, saw their trades expunged by the regulator and were later forced to accept significantly lower bids.

This episode speaks to the risks of investing based on a story alone. The AAER story sounded too good to pass to many people, and few folks bothered to figure out what the firm was worth without those Hydro-Quebec contracts. Beyond just a story, generally upward movements in this stock in recent weeks were driven by a single high-probability event, and this is where gambling instincts take over rational analysis.

For me, the main lesson from something like this is that it reinforced the importance of risk management. Risk is inherent to investing, and it is important to take at least some steps toward managing it. In this case, I applied the simplest possible form of risk management: I pulled my initial money out. The only cost of doing so, unlike using derivatives, is the opportunity cost of potential future capital gains - so it's in effect free. This was mentally difficult to do in this case, as it often is, and I am actually guilty of not pulling any money out the first time the stock peaked in October and November 2007. Like many other people, when I did a rough mental computation of what I believed to be the probability of AAER getting at least one of the contracts, I felt I would be surrendering a lot of upside by pulling out too early.

Many pure play alt energy stocks are either unprofitable or are profitable but trade at very high multiples. Like AAER, many of them also receive rich valuations based on nothing more than a good story. There is therefore a good chance that pure-play alt energy stocks will add at least some risk to a portfolio. If calls and puts aren't for you, a good idea is to set targets at which to exit part of a position to protect gain. The more something looks like a gamble rather than an investment, the more disciplined one needs to be about this and the lower the threshold should be.

As for AAER, I'm hanging in there for now. I like some of the progress that's been made to date, and I think their strategy of targeting community-based projects under 50MW, which are the projects that are having the toughest time getting any attention at all from the turbine majors, could pay off. There is no doubt that this firm's prospects look a lot less bright than they did a few days ago, and the C$7.5 m financing discussed above could be in jeopardy (or at least may be renegotiated). With the momentum crowd now gone, I don't expect this stock to shoot up again for an appreciable period of time. If you're still holding AAER and are not sure what to do, the question you have to ask yourself is: do I really want to own this business or was I just gambling? In the latter case, better get out.

UPDATE (May 7): As predicted, AAER's financing was re-negotiated and will take place at C$0.50/shr Vs. C$1.20/shr initially...ouch.

UPDATE (May 23): In the latest AMF bulletin (the AMF is Quebec's financial markets regulator), dated May 23rd, it came out that Lehman Brothers had divested about 39% of its position in AAER through 24 transactions between May 5 and 6. Lehman's holding now stands at 8.53 million shares, or ~10% of shares o/s. On the upside, the CEO, Dave Gagnon, purchased an extra 16,000 shares at C$0.45 on May 21. He currently holds about 11% of shares o/s.

DISCLOSURE: The author is long AAER

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.


May 05, 2008

Wind-Rail Convergence?

Taking a study break, I happened to see an article in the Denver Post bringing together two of my favorite clean energy themes: Efficient transport, and wind power. Rail transport has become essential to delivering windpower across the country.

The full article is here: Rolling With the Wind.

May 03, 2008

The Week In Cleantech (Apr. 27 - May 3) - Competition In Thin-film About To Heat Up?

On Tuesday, Jennifer Kho at Greentech Media informed us that LDK's CEO was starting up a thin-film solar firm. Given thin-film's potential and the stock market successes of one thin-film maker in particular, the emergence of competition doesn't come as much of a surprise. And who else to do better than an already-successful solar entrepreneur.

On Wednesday, Craig Rubens at earth2tech featured an interview where the CEO of PG&E painted the future of utilities for us. An interesting interview on the potential and challenges of plug-in hybrids and net metering.

On Wednesday, Scott Krisner at Innovation Economy suggested that battery-maker A123 Systems had signed, sealed but not yet delivered on an IPO. Cleantech investors have been yearning for battery pure-plays for some time, so if this is indeed an accurate report it is sure to draw a lot of attention. The question is, will capital markets be ready for something like this in the fall?

On Thursday, Felicity Barringer and Andrew Ross Sorkin at the NYT told us that a prominent green group was helping an equally-prominent buyout firm becoming greener. KKR certainly raised eyebrows last year when, as part of the TXU deal, it decided to cancel a number of coal power plants on grounds that they represented a potential future liability. This week's announcement will, once again, re-ignite the debate as to whether shareholder value can be created (or at least material risks averted) by managing environmental matters in the same systematic way other areas of the firm such as HR or accounting are handled. PR or good business...what do you think?

In yet another indication that solar is slowly moving toward the mature industry status, Good Clean Tech informed us on Thursday that OptiSolar was planning on building the largest solar farm in the world. 550 MW of PV solar panels is a big deal, and at that scale the economies make the returns on projects like these very attractive.


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