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June 29, 2008

New Wind ETF FAN Cools Off Sunburned Portfolios

Update:You can find a comparison of FAN with PWND. a more recent wind ETF here.

Since I last covered clean energy mutual funds and ETFs, the sector has seen the launch of two solar ETFs (KWT the Market Vectors Solar Energy ETF from VanEck,  and TAN, the Claymore/MAC Global Solar Energy ETF.)   Continuing in the tradition of cute ticker symbols, First Trust's new global wind energy ETF is FAN.

I recommend that investors stay away from the (very expensive) green energy mutual funds, and invest either in one of the ETFs, or if they have a few tens of thousands of dollars to invest and are willing to roll up their sleeves a little, they buy a representative sample of the stocks (a "tracking portfolio") held by the mutual funds and ETFs, and save further on expenses.

The Problem with Tracking

The difficulty of tracking portfolios in clean energy for North American investors is that the wind sector is dominated by European companies, which can require considerable knowledge and cost to purchase.  This is why, in the past, I preferred GEX, the Market Vectors Global Alternative Energy ETF.  With the introduction of FAN, that problem is now solved.  The Fund's top three holdings, Vestas, REPower, and Gamesa are the world's leading wind turbine manufacturers, and between them control approximately half of the worldwide market for turbines.  Vestas alone has 23 percent of the worldwide market for wind turbines.  Wind power is the largest source of renewable electricity after hydropower, and also the fastest growing renewable electricity source.  It is also one of the most economical, producing power at a price comparable to the cost of generation from a newly built coal plant or natural gas turbine, and even cheaper in some locations.

The only major wind manufacturers in which a North American investor can easily buy are General Electric (GE) and Siemens (SI).  Since these are large conglomerates, wind turbines are only a small fraction of their business.  Both also have extensive exposure to other clean energy sectors, which is why they are included in the example portfolio below. 

Bright Contrast

In marked contrast, the new Solar ETFs do not greatly add to a retail investor's ability to invest in the solar space.  There are more public solar companies than I keep track of, so aside from speculating on short term movements of the solar sector, I see little reason to use the Solar ETFs.  Exposure to solar can be easily accomplished through individual stocks, or as part of the broader clean energy ETFs.  

I personally tend to underweight solar most of the time.  While I believe the solar sector will be a tremendous growth story, I also feel solar's potential is already well appreciated by investors.  This makes it difficult to find well valued solar companies.

A Model Portfolio

How would FAN be used as part of a larger clean energy portfolio?  If I had $20,000 to invest in clean energy companies today, for an investor with an above average risk tolerance, here's what it would look like (note, this portfolio is intended only as an educational example, not individual investment advice.  The particular companies chosen for each sector would also change due to changes in valuation, and a smaller (larger) portfolio or higher (lower) commissions would lead to fewer (more) companies being included.  

Transport $7,000
  Bus - New Flyer (NFYIF) $3,000
  Rail - Portec Rail Products (PRPX) $1,500
  Rail - Greenbreier (GBX) $1,500
  Batteries - Electro Energy (EEEI) $1,000
Power $8,000
  Wind - FAN $2,000
  Transmission&Wind - Composite Tech Corp (CPTC) $1,000
  Geothermal - Ormat (ORA) $1,000
  Inverters - SatCon (SATC) or Xantrex (XARXF) $1,000
  Storage - Active Power (ACPW) or Maxwell (MXWL) $1,000
  Efficiency - Cree, Inc (CREE) $1,000
  Efficiency - Waterfurnace (WFIFF) $1,000
Diversified (see note *) $5,000*
  Diversified - General Electric (GE) $1,000*
  Diversified - Sharp (SHCAY) $1,000*
  Diversified - ABB (ABB $1,000*
  Diversified - Johnson Controls (JCI) $1,000*
  Diversified - Owen Corning (OC) $1,000*

*Note: if I were investing as part of a larger portfolio, I would actually invest about $4,000 in each of the "diversified" companies (a total of $20,000 rather than $5,000), and reduce the broader portfolio's allocation to general large cap stocks by $15,000 to compensate for the limited exposure of these companies to clean energy.

This portfolio is not similar in composition to the existing ETFs... instead it heavily over weights my favorite sectors - efficient transport, and grid infrastructure, while almost ignoring popular sectors such as solar.  I do like wind, on the other hand, so FAN is a useful part of the portfolio, in addition to the wind exposures from CPTC, the inverter stock, and the diversified conglomerates.

DISCLOSURE: Tom Konrad and/or his clients have long positions in Gamesa, GE, SI, NFYIF, PRPX, GBX, EEEI, CPTC, ORA, STAC, XARXF, ACPW, MXWL, CREE, WFIFF, GE, SHCAY, ABB, JCI, OC.

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.

June 28, 2008

The Week In Cleantech (Jun 22 to Jun 28) - More Oil Sands, Please...

On Sunday, Ed Pilkington at The Guardian informed us that a leading climate scientist was going to push for oil company leaders to be tried. I'm not sure one will ever be able to draw exact parallels between fossil energy and cigarettes, seeing as the latter had no bearing on industrialization and economic growth. Nevertheless, alt energy investors would benefit greatly if fossil fuels were given the same treatment as cigarettes by local policy-makers. Are potential bans on drive-thrus a sign that such times are upon us?

On Monday, Martin LaMonica at CNET News told us that VC and PE investors saw no bubble in cleantech. Of course, toward the very end, it is acknowledged that some sectors exhibit bubblish behavior (i.e. solar and biofuels). In my view, the way this issue was addressed by the investors as reported in the article is inappropriate. A bubble isn't about the long-term capital needs of an industry; it's what happens in the near term when too much capital is chasing too few opportunities, leading to a mispricing of risk. Arguing that there is no bubble in cleantech based on the fact that the industry will have important long-term capital needs if it is to deliver on its promises is, in my view, akin to saying there was never a bubble in housing because over a 20-year period the US housing stock will need significant capital infusions to keep up with demographic growth.

On Tuesday, Shawn McCarthy at the Globe & Mail informed us that the oil sands were trying an image makeover. I certainly hope they succeed, and that America sources a growing portion of its energy needs from there. Since this is already some of the costliest crude to extract and since the marginal cost of a barrel of tar sand oil continues to mount, an energy strategy based on this resource will do wonders for the price of gasoline, thus bolstering the case for alt energy as an investment theme. Mine on!

On Wednesday, Research Recap alerted us to the world's first ever credit rating agency for carbon offsets. Of course it was only a matter of time before something like this emerged. Interesting idea but not sure what the prospects are.

On Thursday, Cleantech.com informed us that Duke was buying a wind power developer. Further sign of the rapid maturation of this sector, which in my view holds better near-term prospects than solar. Tune in on Monday for a post by Tom on a new way for US investors to play wind.

On Friday, Craig Rubens at earth2tech told about Gordon Brown's plans for a GPB100 billion green revolution. Seeing as the UK has lagged most of its Western European counterparts in the deployment of alternative energy, the potential certainly exists for plenty of growth there. The question is: is this for real or is it a desperate attempt by an unpopular politician to build credibility with its electorate? Nevertheless, should the UK go Germany's way, it could present interesting opportunities.

On Saturday, Matt Richtel at the New York Times told us that venture investors were wrapping up in an unusually bleak quarter. Small cap investors - such as yours truly - beware! This also means that things are tough for small public firms trying to raise funds. Interesting point made about the fact that VCs may be focusing too much on ventures that Wall Street doesn't care for, compounding cyclical issues.

The Week In Cleantech is a collection of our favorite stories from the past week generated by our Cleantech News service. Register your site with us if you want your articles to appear here.

June 26, 2008

Energy Efficiency Policy Recommendations for State Legislators

On Monday, I had one of my favorite sorts of opportunities, which was a chance to influence future energy legislation.  The National Conference of State Legislators invited me to give a short presentation as part of a two-day energy efficiency workshop for interested legislators from across the country.  

Given the short time frame, I couldn't say everything I would have wanted, but fortunately, I was part of a large group of excellent presenters, so what I didn't hit, they did.  I focused on my ideas for transforming markets and tackling the many barriers to energy efficiency [PowerPoint presentation, 12MB].

Tom Konrad

June 24, 2008

Why The McCain Proposal Will Do Nothing For Battery Technology

On Monday, John McCain, in a drive to build his environmental credentials, pledged that if he were elected he would initiate a contest to come up with a car battery design that leapfrogs current technology and makes electric car and plug-in hybrids a reality. The winner would get a $300 million prize, or about $1 per American, which according to McCain is a small price to pay for the benefits this technology would yield.

A politician would only make such a pledge for one of two reasons: (a) he has no insight into how innovation occurs in an economy or (b) he is looking to regain ground with environmentalists following a controversial turn-around on drilling for oil in protected areas. In this case, I have my money on B.

If McCain truly intended to inject a strong dose of steroids into the US battery sector, he would take that $300 million, triple it, and pledge it as research grants and other research incentives. See the problem with ventures based on scientific research and breakthroughs - and folks who follow the pharma sector know this all too well - isn't the end prize if your technology pans out. The problem is to fund your research until you get there, because labs and other required fixtures are incredibly costly to run. This proposal misses the point on the 500-lb gorilla in the room: this game isn't about the payout at the back end, it's about risk mitigation at the front end.

If you came up with the kind of battery McCain has in mind, the $300 million would barely be enough to pay for your IPO roadshow as every single investor in the nation would try to throw money at you. Of course, I'm exaggerating, but you get the point. Promising a $300 million cash prize will do little to at the margin to incent entrepreneurs and small labs to get involved. What they need is a break on their start-up and initial operating costs, so that they can get to a level where they're actually in a position to innovate and even commercialize.

June 22, 2008

Is There Any Value In Stella Jones?

Value Investing

A few months ago, I discussed my encounter with Warren Buffett, and promised that I would eventually analyze a stock using the value investing (VI) approach.

While I can`t say that I qualify as a hardcore value investor, there are many things about the VI approach that have influenced my thinking. For instance, I tend to stay away from very high PE stocks and momentum plays. While I take positions in firms with no earnings, they are generally relatively "unknown" or are past star stocks that investors have moved on from. I like the idea of investing in companies that have fallen below the radar, but that I believe have the potential to get back on it, either because they are fundamentally undervalued or because I believe they can execute on their business strategies and have a unique value proposition. However, I can't say that I have the discipline of a hardcore value investor, and will sometimes be swayed by a good story even though quantitative analysis dictates I perhaps shouldn't.

The value analysis I will conduct today is based on the methodology outlined in the book Value Investing: From Graham to Buffett and Beyond. If you are interested in finding out more about value investing, this is the perfect guide. It explains the philosophical approach to value investing, and provides enough information for you to build your own value analysis model in a spreadsheet. I will not go into a huge deal of methodological detail here, as this article is long enough as it is. I instead encourage you to buy the book (or any similar book) and read it.

Value Investing: The Three Sources Of Value

There are three key components to value to the VI approach: Net Asset Value (NAV), Earnings Power Value (EPV), and Growth.

Net Asset Value

NAV is the replacement value of the firm's assets minus its liabilities - this is therefore a balance sheet analysis. The way the value investor looks at the balance sheet and a firm's assets is in terms of what it would cost a competitor to come in and reproduce the firm's business. The firm is looked at as a going concern, and the balance sheet is therefore not a measure what one could fetch if they liquidated the assets, but rather the cost of matching the firm's position in a market. Certain adjustments must therefore be made to the balance sheet:

1) The gross value of capital assets (e.g. PP&E) is employed instead of their net value, and in certain cases such as land, those values are actually grossed up to reflect the fact that acquiring land today would be more expensive than at some time in the past. What assets are grossed up and by how much requires knowledge of the industry. For instance, machinery may be less expensive to acquire today for similar levels of economic output than it was 10 years ago because of technological improvements. In this case, the gross value would actually be brought down by an appropriate factor (eg. gross value x 0.8 or 0.7).

2) New assets are created for the product portfolio and customer relations. This is a way to account for the competitive edge represented by technological leadership and well-established relationships with key customers. The quick and dirty way to create those items is to take a realistic percentage of SG&A, and multiply it by the number of years it would take to reproduce the asset. For instance, assuming a company with a large market share spends half of its SG&A on sales and marketing, one could take 50% of SG&A and multiply that figure by 3, reflecting the fact that it would take about 3 years at this level of marketing and sales expenditure to match the level of customer loyalty.

3) Creating a liability for stock options outstanding in cases where this is material for companies

Now remember, this is just a rough guide to approaching replacement value analysis, and requires a good deal of judgment and knowledge. There are more things one could do, but those are the major items. Again, this approach comes from the book, and an analyst with plenty of experience in one industry could tinker more or differently.

Earnings Power Value

EPV essentially measures the cash generation potential of a firm's assets via an income statement analysis. Earnings are adjusted to come up with something akin to a free cash flow, which is then discounted and compared to the adjusted value of assets, or NAV.

In a situation of market equilibrium with ample competition, EPV should equal NAV for all market participants - the adjusted earnings of companies are just sufficient to replace assets, and revenue growth doesn't create any incremental value as the asset base grows by a proportional amount. In such a situation, the return on invested capital (ROIC) equals the weighted average cost of capital (WACC). I will expand on this later.

Just like for NAV, adjustments are made to the income statement. Changes are:

1) Take at a 5-year avg EBIT margin

2) Apply that margin to current year revenue to smooth out any unusual events

4) Take out taxes

5) There a couple more adjustments needed that are discussed in the Growth section below, but that I will leave out for now

You then take this number as a numerator and, using the firm's WACC, do a straight perpetuity assuming no growth. From the resulting figure you subtract debt and excess cash (i.e. greater than 1% of sales), and this gives you the firm's earnings power.

If this figure is equal to NAV, the cashflows from the firm`s assets after investors are paid at the rate they require are just sufficient to replace those assets, and no incremental value is created. If EPV is smaller than NAV, then managers are actually destroying value, and the asset base needs to shrink to meet EPV.

If EPV is greater then NAV, then the firm is able to replace its assets and create an additional return for investors over and above what is already captured in the discount rate - ROIC is greater than WACC and return on equity (ROE) is greater than the cost of equity. In end, equity holders are really the prime beneficiaries from this situation, as debt holders`returns are capped.


Value investors typically don't like to include growth assumptions in their models, because they believe that in most cases firms whose EPVs are larger than NAVs won`t be able to sustain that position because of competition, and therefore that the long-term equilibrium lays with EPV = NAV. Remember, in this case, ROIC = WACC, and sales growth does not create any incremental value as it just goes to pay for more assets.

The only time value investors actually compute growth is when a firm's EPV is greater than its NAV and they believe that the firm has a so-called moat, or a competitive advantage that can't be undone (think of Microsoft and its position in the operating systems market). Only in such a case would value investors actually pay for growth, and include it in their valuation (more on this later). Barring the existence of a moat, competitors will eventually notice the value creation potential of a given industry, will enter, and will force equilibrium through competition - all EPVs will equal NAVs.

In #5 above, the other two adjustments needed when computing EPV are to account for maintenance SG&A and maintenance capex. In other words, some of the SG&A expenditures and some of the capital expenditures are made to maintain and replace the existing assets, while some are made to grow sales. Since we are only interested in what it costs a going concern to maintain its existing asset base, we add back a percentage of depreciation and SG&A (between 25% and 50% - again, this is a matter of judgment and industry knowledge) to make up for the fact that some of this expenditure went to fund growth and shouldn't be accounted for.

Closing Remarks On The Value Approach

There are thus two main types of value plays (excluding growth, to be discussed later):

1) Asset-based --> If NAV/shr is larger than share price, is there a high probability that investors will eventually wake up to that fact and that the two will converge, creating a capital gain? If so, you have a value play on your hands and are paying for undervalued assets.

2) Earnings Power-based --> If EPV > NAV, does the company have the means to prevent competition from eating away at its margins – in other words, is there a moat around its market position? If so, is EPV/shr lower than share price? If you can answer yes to both questions, you also have a value play on your hands but you are paying for sustainable earnings power.

There are more adjustments to the financial statements and more nuances to those adjustments than I’ve presented here. However, in the interest of length, there is only so much I can get into. I just wanted to provide a high-level picture of how value investors approaches valuation and security analysis. As I mentioned earlier, I would strongly encourage those interested to read more about it on their own. In the end, what your VI valuation yields is a result of your particular assumptions, which by the way holds true for any type of valuation.

The Search Process

In theory, VI is a bottom-up approach, meaning that one typically starts the search for stocks by looking at fundamental ratios, and only worries about the industry and qualitative factors if the investment makes sense quantitatively. The two preferred ratios are the price-to-earnings (PE) ratio and the price-to-book-value-per-share (P/BVPS) ratio, and the preferred valuation levels are typically around 15x for PE and 1 to 1.3x for P/BVPS.

However, I’m not entirely sure how it is actually done in practice. For my part, I start at the industry level and then work my way down to valuation, and I don’t let a PE above 15x or a P/BVPS of over 1.3x discourage me from pushing on.

Stella Jones

The company I chose to analyze for this article is Stella Jones (STLJF.PK or SJ.TO), which is a treated wood product manufacturer. The company’s main business segments are railway ties (35% of 2007 sales) and utility poles (48%). The remainder is made up of other treated wood products, but those are the two key segments. SJ thus has significant exposure to two sectors I believe are very well-positioned to benefit from the transition to a green economy: rail transport and the electricity grid.

Both the railway ties and the utility poles industries are fragmented in North America…or at least in the US. In Canada, SJ has been an aggressive buyer, consolidating the market. It now has a roughly 70% market share in both industries in Canada, and following a recent acquisition in the US now holds upwards of a 20% market share in railway ties, which places it second there in terms of market share. As you will see below, SJ has done a great job of integrating acquisitions so far, and is considered by analysts to be in a strong position to consolidate the US market, starting in the east and southeast. As can be noted from the share price performance over the past five years, this expansion hasn’t gone unnoticed, and this has been a great ride for shareholders who were there early.

The company currently trades in the FY2007 17x PE ($2.04/shr) and 3.4x P/BVPS ($10.35) ranges, so on the latter metric it certainly seems rich for a value investor. The reason why this company drew my attention is that the stock has seemingly halted a largely uninterrupted 4-year run over the past 12 months. The reason is simple: the company is based in Canada but has operations in the US, and it has been hit hard by a rapid increase in the value of the Canadian dollar. While SJ has some natural hedges in the form of facilities in the US, and uses derivatives to control its forex exposure, this hasn’t proven enough and SJ missed it targets in Q4 ’07.

Value Investors will typically like a stock whose underlying business is intact but in which, for one reason or another, the market has lost interest. This qualifies as one of those. Already liking the sector and the company’s positioning in it, the pullback in share price led me to want take my analysis further.

Despite completing five acquisitions in five years, SJ has managed to steadily improve margins as well as a key profitability ratios.

The capacity of Stella-Jones to acquire and successfully integrate businesses at this rate while continuing to improve returns for capital providers is a signal that the management team is likely very strong. While margins and other ratios will certainly not continue to improve at this rate indefinitely, SJ’s track record speaks volume as to its ability to be a successful consolidator in the US treated wood market.

Value Investing Valuation


Through my NAV adjustments, I ended up adding about $29 million in net assets, mostly as a result of adjustments to capital assets and the addition of a $15 million customer relations asset. As explained above, I took two years of 50% of 2007 SG&A (or full 2007 SG&A) as what it would cost a competitor in terms of marketing and sales expenditures to come and establish the market position SJ has achieved, especially in the Canadian market.

I did not push too much on this analysis because I knew that, at a non-adjusted BVPS of $10.35, no realistic adjustments would bring NAV anywhere close to the $35 figure the stock is trading at. Looking at the company’s margin and profitability ratio improvements over the past five years, I knew this was an earnings-power story and not an undervalued asset story.


My income statement analysis yielded more interesting results. Following the earnings adjustment approach above, I got an EPV of about $24 per share.

I discounted the company’s adjusted earnings at 11.15%, using a before-tax cost of debt of 8% and a cost of equity of 16%. The target capital structure for this firm likely lays at around 45% debt-to-total cap. About 60% of the stock is held by one shareholder, so I added a percentage point of liquidity premium to the 15% cost of equity I had originally come up with. The choice of a discount rate, however, varies widely from person to person, so this is by no means the only "right" discount rate.

Still, at $24/shr, we are still far from the ~$35 the stock is currently trading at, indicating that much of Stella Jones' potential is already priced in.


I believe Stella Jones has a moat, in the form of a high market share in Canada and the ability to consolidate at least a part of the US market on a back of a successful integration strategy to date. Moreover, my understanding is that wood is not about to be displaced as the primary material for railway ties and utility poles, because the cost of alternatives is plain too high.

As you can see if you compare SJ's profitability ratios to the cost of capital I came up with, the company is creating additional value for its stockholders, and there is a good bit of room to absorb any error on my part in computing that cost of capital. It would therefore seem reasonable to want to price in some growth, as discussed above.

In order to value growth, value investors (at least the ones who wrote the book :) use a matrix called the Growth Value Multiplier matrix. The GVM matrix outputs a number by which EPV is multiplied to get the value of growth for the firm.

The two axes on the matrix are the expected long-term sustainable growth rate over the cost of capital (g/K), and the ROIC over your cost of capital (ROIC/K). How does this all make sense? Believe me, the algebra works, and if you are familiar with the Gordon Growth Model the vertical axis should make sense. I'm not going to lay out the algebra here however, both because that would take too long and because this isn't my model, and I doubt the authors would be happy with me giving away too much.

So how does one use this matrix? First, a reasonable long-term growth rate must be determined, which can't be too much greater than the economy as a whole given that the underlying algebra assumes a perpetuity formula. In this case, I picked 4%, which places SJ between 0.25 and 0.5 on the vertical axis. I used a 16% ROIC as the long-term figure to reflect further marginal improvements on 2007 but not much more, which divided by the WACC at 11.17% lends SJ on 1.43, close enough to 1.5. Given the position on both axes, it would be reasonable to assume a multiplier of 1.2.

Multiplying the EPV/shr by 1.2 yields an intrinsic value of about $28.60/shr, still short of $35. And I haven't even worked in a margin of safety, which is a way to hedge risk in case the valuation is off or if one misses a major qualitative factor. Typically, the intrinsic value arrived at is multiplied by something like 66%, and if the share price is still below the resulting figure, it's a buy. Needless to say, we're not even close here.

Where Do We Go From Here

Any way you slice it using the VI approach, SJ's past achievements and future potential are fully priced in...and then some. The story remains pretty attractive, and although I didn't delve too much into the qualitative side, it's hard not to see a gem of a company here. The sell-side analyst notes I read on SJ are all positive with 12-month targets implying pretty respectable returns, all based on forward multiples (I didn't see a DCF, and I suspect it's partly because with reasonable assumptions you couldn't justify very elevated share price levels).

For the time being, however, I'm going to be disciplined and hold off on this one. SJ has essentially flat-lined over the past year, and it could be that some of the hype is gone - as I pointed out earlier, it wouldn't be realistic to assume a doubling of margins every five years in perpetuity.

Value Investing as a philosophy provides a good way of thinking about a business and its potential. However, I'm told by practitioners that you sometimes have to sit on the sidelines for long periods of time in hot markets, as you just can't find securities that meet the stringent value criteria. For my part, as stated initially, I can't claim to have the discipline of a true value investor, and maybe I'll end up owning SJ sooner than I think...

DISCLOSURE: The author does not a position in any of 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.

June 21, 2008

The Week In Cleantech (Jun 15 to Jun 21) - Incentive Instability Rears Its Head Again In America

On Sunday, Andrew Williams at Red, Green and Blue told us about one senator's attacks on the solar industry. Surprising for someone from a state with such a vast solar potential, but in line my claim that politics remains one of the biggest risks facing the sector.

On Monday, Lou Schwartz & Ryan Hodum at Renewable Energy World informed us that China's wind power industry was blowing past expectations. An interesting discussion of the hot wind regions within China.

On Tuesday, Neal at Cleantech Blog told us all about SpectraWatt, Intel's new solar play. Just when you thought the sector was headed for a shakeout, in comes a player that promises to slash costs and focus on efficiency...oh yeah, and whose parent dominates the semiconductor industry.

On Wednesday, David Ehrlich at Cleantech.com told us that GE was fighting to keep its tax credits alive. And the PTC saga continues, and the US wind industry once again will have to hold off on making investments until this is reintroduced at the 11th hour.

On Thursday, Jennifer Kho at Greentech Media reported on a plug-in hybrid that caught fire. As as pointed out in the article, it won't take too many incidents like this to tarnish the brand. Could there ever be short opportunities here?

On Friday, Green Data Center Blog informed us that Microsoft had launched a new blog for energy efficiency best practices. Given the importance of software and the tech space in general to implementing smart grid and other efficiency measures, this could be an interesting resource for finding out new trends.

The Week In Cleantech is a collection of our favorite stories from the past week generated by our Cleantech News service. Register your site with us if you want your articles to appear here.

June 19, 2008

Solar Investing: Where Politics & Finance Come Together

Most solar sector watchers will remember the second half of May 2008, when the solar world collective held its breath awaiting to find out what German policy-makers were going to decide about solar subsidies in that country. All this commotion was caused by the fact that Germany, despite lacking favorable physical conditions in the form of ample sunshine, had become the world's largest solar market on the back of a very aggressive incentive program. Germany alone is in fact so critical to sales growth in the solar sector that the mere announcement of a review of the subsidy caused solar stocks to fall and analysts to issue rating cuts. In the end, German politicians decided to take it easy on subsidy cutting, to the delight of investors.

This episode brought home the fact that, while debates among pundits about when solar will reach grid parity are often very informative, this very much remains a sector that survives - and even thrives - on government support. Even when solar does reach grid parity in jurisdictions where electricity prices are elevated, large-scale deployment must still be supported by some form of state policy (e.g. net metering, transmission facilitation, coordination with dispachable supply, etc.)

The Policy Dimension: Key to Understanding Risk

Having a thorough understanding of the policy dimension for solar investors can therefore be very useful in assessing market potential, as none of the much-touted potential of this sector will occur without government intervention over least the next five years. More importantly, however, understanding the political and policy-making processes can be key to managing risk.

One good example of policy-induced volatility is the infamous US Production Tax Credit (PTC) for renewable power. The volatile "on again-off again" nature of this policy, and the fact that the situation was allowed to endure for years, is the principal reason why a healthy wind turbine manufacturing sector never emerged in the US as it did in Europe.

The Ontario Example

Besides Germany, the most recent embodiment of this risk is the province of Ontario, one of North America's largest electricity markets with an output of around 140 TWh in 2007. In November 2006, the province unveiled its Standard Offer Program (SOP), a feed-in tariff offering C$0.42/kWh ($0.41/kWh) for solar, and C$0.11/kWh ($0.108/kWh) for wind, biomass and hydro. With such as generous subsidy, the reaction to the announcement was almost immediate with a number of commercial solar developers rushing in to Ontario. Although the program's rules limited individual project sizes to 10MW, developers found a way around this by submitting several adjacent 10MW projects as different bids.

But there was a rub. Buried somewhere on some website is a document called the Integrated Power System Plan (IPSP), which lays out the province's target long-term electricity supply mix. Reading through this document, one finds out that policy-makers only ever expected there to be about 88MW of solar feeding into the Ontario grid, with another roughly 130MW as distributed generation to offset peak demand. Moreover, provincial officials expected that 218 MW target to be realized over a period of 10 years. Contracts for large-scale (ie. >10MW) renewable generation were to be awarded through a different competitive bidding process favoring wind over solar.

One and 1/2 year into the program, there were already 420MW of solar contracts awarded. Between January, 2007, when the first contracts at C$0.42/kWh were handed out, and the end of April, 2008, committed solar capacity in Ontario grew at a compound monthly growth rate of around 45%. Moreover, while the Standard Offer Program was initially intended to foster small, community-based projects, commercial developers ended up owning the vast majority of committed MWs, seizing all available transmission capacity in the process.

On May 13, 2008, the province abruptly put an end to the program in its current form (PDF document), citing transmission bottlenecks in certain areas (wind also grew very rapidly under the SOP, adding to the problem). Things are currently under review, but from the look of it it seems as though loopholes will be closed so that commercial solar developers and large projects are completely excluded. Needless to say, this will slow down installations dramatically.

Besides transmission problems, it's probably logical to speculate that cost was becoming an issue. The weighted average cost of the power contracted under the SOP (weighted by installed capacity and not production, so likely an overestimate) is around C0.22/kWh. Cut that to $0.15/kWh to make up for the solar capacity factor in actual production, and this electricity is still costing roughly 194% more than the weighted average spot electricity price in Ontario in 2007, which was C$0.051/kWh.

Some Lessons

Luckily for solar panel makers and their shareholders, Ontario never got the chance to become a global solar heavyweight, although with the growth rates it was registering the potential was certainly there This was evidenced by announcements of major panel makers opening offices in Toronto. I say luckily because the effects of this policy turnaround could have been much more pronounced had Ontario established itself as an important solar growth center like Germany.

But the main lesson here is that the project developers who spent money on bids and were later caught empty-handed when the program shut down quite clearly never bothered to read the policy fine print, because if they had they would have realized that the power market regulatory authorities never intended for Ontario to become a global solar hotspot (no pun intended). They would have realized that the SOP was being far too successful for its own good and that something was going to give.

The same could happen elsewhere. Electricity remains one of the most politicized commodities there is because, unlike food and fuel, every day citizens believe politicians have the power to reign in soaring prices through regulation. When a new hot solar market emerges through policy, as is the case with Spain at the moment, investors have to be sure they understand not only the incentive part of the policy, but also how the incentive fits in the jurisdiction's overall long-term energy plans. The last thing one wants to do is invest in a stock as a play on a particular region, only to have that region change its mind.

Another thing to watch out for are residential electricity rates. Bringing a large amount of solar into the grid raises electricity prices, and it's really the percentage increase, rather then the absolute, that matters. In places where power is cheap and abundant, forget too much solar in the near-term - the rate-payer won't go for it, especially when gas prices are rising the way they are at the moment.

Finally, transmission, transmission, transmission. We've said it before, and will repeat it again - the power grid needs massive capacity upgrades and additions if all that renewable energy is to come on stream. Aggressive incentive programs without the transmission capacity to accommodate growth will lend you where it did Ontario, namely nowhere.

June 17, 2008

Performance Update: 10 Solid Clean Energy Companies to Buy on the Cheap

Unlike my Ten Speculations for 2008, my Solid Clean Energy Companies series will be much more difficult to benchmark.  The intent of the series was to list some "stocks to buy when you think we've hit bottom."  Since I obviously don't know when you think we've hit bottom (My opinion: not yet), I don't know what prices you'd have paid.

Instead, I'll look at what would have happened if you bought only those stocks which dropped 10% since I wrote about them, and you bought them at the close that day, in equal dollar amounts.  Here's what happened (click on the company name for the original article.)  Performance is as of the close on June 13, 2008 .

Company Published Close Bought Since then
General Electric Jan 31 $35.36 Mar 10 @ $31.70  -8%
Siemens Jan 31 $130.05 Mar 17 @ $106.63 +9%
ABB Group Jan 31 $25.02 Feb 15 @ $22.93 +31%
United Technologies Feb 3 $74.05 Mar 10 @ $66.23 +4%
Philips Feb 5 $37.30 N/A  
Quanta Services Feb 7 $20.24 N/A  
John Deere Feb 10 $84.34 N/A  
Sharp Feb 12 $18.44 May 9 @ $16.71 -4%
Trinity Industries Feb 17 $30.13 Mar 7 @ $27.19 +43%
Applied Materials Feb 19 $18.48 N/A  
General Cable Feb 21 $62.12 Mar 7 @ $56.64 +19%
Greenbrier Feb 21 $27.60 Mar 6 @ $24.74 -12%
Owens Corning Feb 21 $18.75 Mar 10 @ $16.93 +41%
Honeywell Feb 21 $55.51 N/A  
Waste Management Feb 24 $34.25 N/A  
National Grid Feb 25 $76.39 Apr 23 @ $69.70 -2%
Johnson Controls Mar 2 $33.42 N/A  

Overall, if you bought the 10 stocks which fell 10% since I wrote about them in equal amounts, you'd be looking at a 12% gain (not counting dividends) since then.  You would have bought six out of the ten between Thursday, March 6 and Monday Mar 10, so I'll use the close of business on Friday March 7 to benchmark this portfolio.  

Using the same benchmarks that I used for the 10 speculations update, I note the Nasdaq Clean Edge Liquid Series QCLN is up 20%, and the S&P 500 is up 5% since then.  These are generally large capitalization companies, many of which only have a small exposure to clean energy, so I feel the S&P is the better benchmark of the two.  (I would, wouldn't I?)

In any case, it's much too early to tell how these ideas will perform.  Most importantly, I don't think we've yet hit bottom on the market this year, so by the original criteria I gave, no one should have bought any of these yet.  If you have, it does not look like you are crying about it.  (Someone I know told me she had bought several because she had some money to invest, and has lost money so far.  I felt bad about that.  Timing can be everything.)

In terms of the particular companies, I don't have a lot to say because I don't watch large cap companies closely... this is the "fire and forget" part of my portfolio.  That's what's nice about owning these companies... I don't lose sleep over them.

DISCLOSURE: Tom Konrad and/or his clients have long positions in GE, SI, ABB, UTX, PHG, PWR, DE, SHCAY, TRN, AMAT, BGC, GBX, OC, HON, WMI, NGG, and 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.

June 15, 2008

Are Solar PV and Wind Incompatible with Nuclear and IGCC?

Paul Denholm, a Senior Analyst at the National Renewable Energy Lab (NREL), sees an upcoming struggle between renewable sources of electricity such as photovoltaics (PV) and wind with low-carbon baseload alternatives for space on the low carbon grid of the future.  These baseload alternatives are nuclear and Internal Gasification Combined Cycle coal plants with Carbon Capture and Sequestration (IGCC w/ CCS, refereed to by advocates as "Clean Coal).

This may come as a shock to advocates of the idea that Global Warming is such a big problem that we will need all forms of low carbon electricity, because the heart of that argument is that the choice between nuclear and IGCC w/CCS (if and when it's available) is that the decision is not one of "either-or" but "and."

PV Curtailment

In his seminar at NREL's Strategic Energy Analysis and Applications Center, Dr. Denholm showed what could happen with only an 11% penetration of photovoltaics on a cool, sunny Spring day.

PV Coincidence With Load - Spring

Source: The Role of Energy Storage in the Modern Low-Carbon Grid - .PPT 7MB

Electricity demand in the Spring is typically low, and likely to be lower on weekends, because there is no need for air conditioning, nor much lighting on a sunny day.  The graph above shows a day where PV (even at only 11% penetration) would actually be producing more energy than the total demand on the grid.  While worries about the cost of integration  and even curtailment are well known and studied [pdf] in the context of wind power, integration has typically not been considered a problem with photovoltaics.  In fact, PV is generally considered to bring integration benefits, given the good correlation of PV output with summer peak loads.

The above chart is just a simulation, and PV is a long way from 11% penetration anywhere, but PV curtailment lurks in our future.  A combination of wind and photovoltaics will simply reach that limit sooner (as wind already has.)

The Problem With Baseload

If PV curtailment is not yet a problem because of low penetration, the more baseload power we have, the more difficult it will be to integrate intermittent power sources into the grid.  Unlike Natural Gas Combined Cycle plants, IGCC and Nuclear, like current coal plants, have very little flexibility in how much power they generate.  This means that the more baseload generation there is on the grid, the less "room" there will be between baseload power and current demand for electricity from intermittent sources.  So while higher penetrations of dispatchable power such as natural gas aid the profitability of wind and solar, higher penetrations of coal and nuclear power reduce their profitability.  And vice-versa: a grid with high penetration of intermittent sources will make proposals for new baseload power less attractive, since intermittent power lowers the minimum electricity demand on the grid, effectively reducing the market for baseload power.

Why IGCC is Baseload

I was a bit surprised that Dr. Denholm spoke of IGCC woth CCS as a baseload technology.  Although I consider "Clean Coal" an expensive distraction, I had thought that one advantage of the technology would be to make coal dispatchable.  My thought was that, since IGCC first involves producing syngas (a mix of carbon monoxide and hydrogen) by gasifying coal, and then burning the syngas in a turbine very similar to the natural gas turbines used today (which are dispatchable), it would not be too difficult to separate the steps, and store the syngas for later combustion.  When I asked, he replied that adding storage is an "extremely tricky" problem, because the current technology relies on hot gas cleanup to achieve high efficiencies.  

Squaring the Circle

It's not surprising that we hear about the baseload-intermittent power conflict from Dr. Denholm: his expertise is energy storage.  Energy storage has the potential to mediate between the fluctuations of load and intermittent power, and difficulty of shutting down baseload power plants for short periods.  I've discussed investments in large scale energy storage, but there are also opportunities for smaller scale and shorter time span operations which I will explore in later articles.

UPDATE: As promised: Investments to mediate between intermittent loads, and intermittent power.

Tom Konrad

June 14, 2008

The Week In Cleantech (June 8 - June 14) - Are Large Industrials Going to Consolidate Solar?

On Tuesday, Eize de Vries at Renewable Energy World described the challenges of growth for us. A very detailed article on where the main tension points are in the global wind value chain.

On Tuesday, Tate Dwinnell at Self Investors told us that wind ETFs were coming. At last North American can play wind directly.

On Wednesday, Energy Tech Stocks informed us that a new FERC forecast indicates U.S. demand response firms should do well this summer. An interesting piece of insight from FERC, and noteworthy that demand response is increasingly seen as an effective peak load management strategy.

On Thursday, David Appleyard at Renewable Energy World explained how inverters were continuing to push efficiency. A thorough article on an important piece of hardware for solar investors.

ON Thursday, Katie Fehrenbacher at earth2tech told us that GE was becoming a prime investor in PrimeStar. Earlier this week, Richard Asplund discussed how large industrials were moving into solar. Many analysts predict a shakedown in solar, and big industrials are well positioned to consolidate the space.

June 12, 2008

Six Tips for CFA Candidates

I just finished the third (of three) Chartered Financial Analyst (CFA) exams.  I believe I passed, (results will not be available until September.)  I've taken more than my share of tests in my life, and these three exams have been the three hardest.  I decided to publish my advice for others becoming CFA Candidates because 1) my partner at Alternative Energy Stocks, Charles Morand has just become a CFA Candidate (he'll take the first exam in December), and 2) there is little advice available online.

VI. Buy two of your chosen model of calculator  The reason for this is because, if your battery happens to die in the middle of the test, you don't want to waste precious minutes trying to change it.  I never had a battery die on either of my used calculators, but why take the chance (especially when you may never use the $5 extra battery.)   The two models allowed are the HP 12C and the TI Business Analyst Plus.  The links are to eBay, where I was able to buy my calculators for less than $20 each.  

V. The CFA Institute recommends a minimum of 250 hours to study for each exam.  They are not joking.  I studied around 300 hours for each exam.  If you can only put in 200 hours, you will not pass unless you are considerably smarter than I am.  The candidate sitting next to me on level III told me he had taken off 10 days to go skiing this spring.  He didn't finish two questions on the morning portion of the exam, and I got the impression that he had trouble with the parts he did finish.  He seemed angry about how hard the exam was.

IV. Make sure your job and your family are supportive.  Ideally, you should work someplace that gives you time to study, as well as support.  If you have a wife and kids, don't plan to see them on weekends for several months each year for at least three years.  Make sure they understand that, and are supportive.  I had a study partner for level I who had kids, and frequently would miss study dates because of family obligations.  This was his third attempt to study for level one, and he was so unprepared in June that he did not even bother to take the test.

III. Do all the problems in the coursework.  If you just read the material without doing the problems, you will have no idea what they'll be asking for on many of the questions on the exam.  

II. Practice exams are also a must.  I've found that the online exams available from the CFA Institute are harder than the actual test, so I do not bother with anything but the one they give away for free.  On level III, however, the last three years of essay questions are available.  I found these extremely useful.  Exam prep providers Schweser and Stalla also offer practice exams.  For level II and III, I used the Schweser practice exam book from the previous year, which I bought on eBay, and found it very helpful.  I spoke to another candidate between sessions on level III who had used both.  He had switched providers because he was taking level III for the third time, and needed to try something different.  He thought Schweser exams are at about the same level as the real thing, while the Stalla exams are too easy.

I. Exam Prep courses and videos.  I never took an exam prep course from one of the providers, since they are quite expensive and I was paying my own way.  However, I did use year-old videos (at level one two-year old) from Schweser, and found them an excellent way to review the material over the last month of prep.  I also bought these on eBay.  Exam prep providers also offer condensed versions of the curriculum.  I never used these, so I can't recommend one over the other.  The same candidate referenced in II above said that Stalla was better at explaining the concepts than Schweser.

In short, eBay is your friend.  Practice questions are your friends. Your current friends (and possibly family) may have to be reminded of your name, you will have seen so little of them while you were studying.  

The CFA program is an incredible amount of work, but you can get a lot more out of it than just better pay or job prospects.  It has made me a better analyst.  And having missed the last three, I'll appreciate Spring more for years to come.

Tom Konrad

UPDATE 5/19/2011: There are six more useful tips here.

June 10, 2008

Performance Update: Ten Speculations for 2008

This is the first of a short series of articles I plan, reviewing how my stock recommendations have been doing this year.  I started the year bringing you 10 Alternative Energy Stocks I thought were worth speculating on for 2008, and I'll start this review with those articles, and also give you updates on what's been happening (or not) with the stocks.  Click on the company name a link to the original article where I wrote about the stock.

Overall, a portfolio with equal dollar positions in these ten stocks is up 11.4% for the year, compared to the S&P 500 which is down 4.2% and the NASDAQ Clean Edge US Index, which is down approximately 14.3% (I took the number from CELS, the ETF which tracks the index, since I could not find up-to-date index values) since the start of the year.

#10  Cree, Inc. (NasdaqGS:CREE) Dec 27, 2007: $23.50; June 9, 2008: $25.85 (up 10%).

Cree shot up as high as $35 early in the year, on buy-out speculation.  There was also a quick bump when their transistors were used as part of a record breaking solar inverter. While a quick profit on a buy-out might be nice, the fundamentals and growing consumer interest in LEDs mean that I'm happy I didn't sell at the peak.  

#9:Lighting Science Group (LSGP.OB) Dec 27, 2007: $6.40 (split-adjusted), June 9, 2008: $5.90 (down 7.8%).

Another LED stock, Lighting Science saw a spectacular rise right after I recommended it, but was badly hurt by a patent infringement suit from Philips (NYSE: (PHG) in February.   I found this personally very annoying, since I'm long both companies.  I have no idea how the lawsuit will turn out, but I'm holding both stocks for now.

#8 Maxwell Technologies (NasdaqGM: MXWL) Dec 27, 2007: $8.10, June 9, 2008: $13.26 (up 64%)

Ultracapacitors have been much in the news this year as an enabling technology for hybrid vehicles.  Since that's one of the reasons I picked the company, I'm naturally very pleased.

#7 Electro Energy, Inc. (NasdaqCM:EEEI) Dec 30, 2007: $0.68, June 9, 2008: $.65 (down 4.4%)

Electro-Energy has been up and down since I wrote about it, but still has not caught the attention of the investors piling in to battery stocks.  I'm waiting patiently.

#6 Capstone Microturbine (NasdaqGM:CPST) Dec 30, 2007: $1.62, June 9, 2008: $3.41 (up 110%)

Although I recommended this one, I've been totally shocked at how quickly it has run up.  Mostly, this seems to be due to a large, high-profile sale into the hybrid bus market.  I've taken the opportunity to take some profits (see my selling rule of thumb #2), but I'm still long.

#5 FuelCell Energy Inc. (NasdaqGM:FCEL) Dec 30, 2007: $10.30, June 9, 2008: $8.66 (down 16%)

Although this one is down, I still like it for the same reasons.  The out of the money puts I wrote on it look likely to expire unexercised, and I just wrote some more today. 

#4 Composite Technology Corp. (OTC BB:CPTC) Dec 30, 2007: $1.37, June 9, 2008: $0.99 (down 28%)

Like Electro Energy, Composite Technology still has not caught the attention of investors.  I bought some more when I revisited the stock in March, and it's starting to look cheap again.

#3 Nevada Geothermal Power (OTCBB:NGLPF or Toronto:NGP.V) Dec 31, 2007: $1.29, June 9, 2008: $1.25 (down 3.1%)

Another one requiring patience.  I expect the big gains for this stock to come before their Pumpernickel project [Correction: it's the Blue Mountain Project which is scheduled to come online first... Pumpernickel is less advanced] begins to produce electricity (assuming there aren't any unforeseen hitches), similar to what happened with US Geothermal (AMEX: HTM) last year.

#2 Finavera Renewables (TSX:FVR or FNVRF.PK Dec 31, 2007: $0.3371, June 9, 2008: $0.19 (down 43%)

I sold my position at a loss when I heard their wave energy license was subject to rehearing in late January.  Since then, Finavera was issued a preliminary 3 year permit, but I've continued to stay away.  My hopes for this one had been based on an expectation of investor euphoria for wave energy, not fundamentals, and given the down-trending markets, I don't expect that sort of irrational exuberance again in 2008.

#1 SHORT First Solar (Nasdaq:FSLR) Dec 31, 2007: $267, June 9, 2008: $245 (8.3% profit)

Since I wrote the article, a reader challenged my math on the impact of Te prices on their bottom line.  Although I've made a profit on this one, I question my original analysis, but have not re-run the numbers.  The slight decline can be completely attributed to the declining overall market, and FSLR has outperformed the clean energy sector as a whole.  I am still short a June $300 call, but do not plan to write another when it expires in a week and a half.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE, LSGP, MXWL, EEEI, CPST, FCEL, CPTC, NGLPF, PHG, HTM and a short position in FSLR.

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.

June 08, 2008

Bosch Acquires Ersol Solar, Large Industrials Moving Into Solar Sector

Subject line

The recent announcement on June 2, 2008 , that Robert Bosche GmbH (privately-held) plans to buy German-based Ersol Solar Energy AG (FRA:ES6) provides another example of how global industrial conglomerates are carefully watching for opportunities in the fast-growing solar sector. 

 Bosch bought a majority stake in Ersol for 546 million euros from Ventizz Capital Partners at a 63% premium to Ersol’s closing price on May 30.  Bosch plans to make a public tender offer for the remaining 50.45% of the company, according to Bloomberg News.  Ersol’s stock rallied 63% on June 2 in response to the takeover news and has since remained near that level, indicating market confidence that the takeover will be completed.

 Ersol Solar Energy AG is a diversified solar player that has a scrap silicon recycling operation and produces polysilicon, silicon wafers, silicon solar cells, and thin-film solar cells and modules.  Ersol has about 1,000 employees.  Revenues in Q1-2008 roughly doubled year-on-year to 52.4 million euros and net income was 3.2 million euros.  Ersol’s management expects to have 180 megawatts of wafer production capacity and 220 megawatts of crystalline solar cell production capacity by the end of 2008.  Ersol has provided guidance for 300-320 million euros of revenue in 2008 and 70-80 million euros of operating profit.  Ersol said that its production output for 2008 is already completely sold out.

 What is one of the world’s largest automotive component part maker, with 46 billion euros in sales, doing buying into the solar sector?  The simple answer is diversification into the promising solar sector and away from the low-margin automotive components industry.

 The solar industry has grown at a 47% average annual rate in the past six years and is poised to grow at an annual rate of about 40% for at least the next several years.  The solar industry has reached mass production stage with about $30 billion in sales in 2007, according to Photon International.  The upside for solar is truly massive since solar power accounts for only 0.06% of world electricity generation at present (according to Photon Consulting), meaning the sector has room to grow at double-digit rates for literally decades without hitting saturation levels.

 There are a handful of large industrial conglomerates that have already been in the solar business for years.  Several Japanese-based conglomerates were pioneers in the industry and have long ranked in the top 20 global solar cell/module producers.  In 2007, Sharp (SHCAY (ADR), TSE:6753) ranked as the second largest solar cell/module producer (behind Q-Cells FRA:QCE in first place), Kyocera (NYSE:KYO ) as fourth, Sanyo (SANYY.PK,TYO:6764) as seventh, and Mitsubishi Electric Corp (TYO:6503) as twelfth, according to PV News’s 2007 rankings (www.prometheus.org). 

 Other global conglomerates have also been players in solar for years including BP, General Electric and Boeing’s Spectrolab.  Two large companies, Swiss-based OC Oerlikon AG (VTX:OERL) and U.S.-based Applied Materials (NASDAQ: AMAT ) have quickly become the two leading players in producing turn-key thin-film solar module fabrication lines that other companies can buy to produce solar modules in their own factories.  Large utilities and construction companies have also entered into the business of developing solar photovoltaic or solar thermal projects, including (among others) Spain-based Acciona (MCE: ANA , ACXIF.PK), Spain-based Iberdrola SA (MCE:IBE) and its recent spin-off off its Iberdrola Renovables unit (MCE:IBR), and FPL Group (NYSE: FPL ).

In another example of large companies moving into solar, Moser Baer India Limited (BOM:517140), the world’s second largest manufacturer of optical storage media, has entered the solar sector in a big way with both crystalline silicon cell technology and thin-film technology.  Moser Baer plans to use its world-class manufacturing know-how to drive down the costs of solar cell production and become a major global player.

 What’s going on here?  Simply put, the solar industry is growing up.  The solar industry is simply following the tried-and-true industry model where small, specialized players blaze the way with revolutionary technology and a big dose of risk-taking and fortitude.  Then the large players in the sector snap up the winners after they prove their technology and sales traction.  This is akin to the old adage of letting the pioneers in the industry get shot in the back with arrows and then buying up the ones that are ultimately successful.  The solar industry has now reached a level of maturity where there are likely to be more cases of large industrial companies buying up mid- to larger-tier solar companies.


By Richard Asplund, investment analyst and author of Profiting From Clean Energy: A Complete Guide to Trading Green in the Solar, Wind, Ethanol, Fuel Cell, Carbon Credit Industries, and more.

Disclosure: Richard Asplund does not have positions in any of the stocks mentioned in this report.


June 07, 2008

Good Luck Tom (and everyone else)!

A quick note to wish AltEnergyStocks.com Analyst Tom Konrad the best of luck with his CFA Level III exam today. We also want to wish good luck to all of our readers who are also taking one of the CFA exams today, break a leg!

We will be taking a break from The Week In Cleantech this week and will be back on Monday with a special feature.

June 05, 2008

A New Player In The North American Emissions Trading Sector

Over the past two weeks, a couple of announcements were made that went mostly unnoticed despite their importance to the North American carbon marketplace.

Firstly, on May 30, the Montreal Exchange, a derivatives exchange, announced that it was launching an emissions trading market for CO2. The Montreal Exchange is now a unit of the TSX Group (TSXPF.PK or X.TO), the firm that runs all of Canada's exchanges.

The second announcement came last week, when the premiers of Quebec and Ontario, Canada's two largest provinces and the heart of its industrial base, announced that they were moving ahead with a cap-and-trade scheme to cut their greenhouse gas emissions. Together, these two jurisdictions form North America's fourth largest economy, so needless to say this is a market with some potential.

Now once this scheme gets underway - and it's unclear when that will be - the TSX group through the Montreal Exchange will be the platform of choice for the exchange-based portion of the market. While that's unlikely to be a material event for the company initially, the potential size of that market in Canada alone is nothing to frown at, and this could prove a lucrative niche in the future as Alberta continues to expand production in the dirty oil sands.

June 03, 2008

Book Review: Profiting From Clean Energy

I received, about a month ago, a complimentary copy of Profiting From Clean Energy, a recent book on investing in alternative energy by investment analyst Richard W Asplund. I will do a short review of the book here, as it may be of interest to some of our readers.

Just so that there are no doubts lingering in your minds as you read through my review, neither AltEnergyStocks.com nor I is receiving any compensation for doing this other than a free book. Should you want your book reviewed here, feel free to contact us and make a request.

General Impressions

Profiting From Clean Energy covers 13 sub-sectors of the clean energy space: solar (PV and thermal); wind; fuel cells; geothermal; cleaner utilities; power efficiency; smart meters; power storage and backup; clean transportation; ethanol and biofuels; trading in biofuel feedstocks; coal; and carbon trading. The book also discusses macro-drivers for alternative energy (e.g. concerns about climate change, energy security, government incentive programs, etc.) and provides growth forecasts. Profiting From Clean Energy opens with a review of the various forms of investments one can make in alternative energy (e.g. individual stocks, mutual funds, etc).

The author takes a largely top-down approach to his analysis. He begins at the economy or even the global level, and works his way down to industry dynamics, how the technology works and who the key players are. For each sub-sector, the book provides a comprehensive list of stocks with some basic analysis. Technology discussions are at a level where individuals without engineering training can easily follow, while still providing enough depth to be well-informed when doing further research on a stock or sector.

The core audience for this book is, in my view, investors with limited knowledge of alt energy but who want to get started and need an effective way to learn a lot rapidly. That's not to say more knowledgeable folks won't get any value out of this book. For my part, I learned a fair bit in the geothermal, energy efficiency and net metering sections, as they were sectors I had not, until recently, examined very closely. But I believe this book can provide the most value if you have limited knowledge of clean energy as an industry but have a strong interest in investing in it, and are not sure where to start.

At a broad level, Profiting From Clean Energy is therefore a good resource to get you thinking about what to look for when seeking out investment opportunities in clean energy. The book does not, however, provide tools for fundamental stock analysis. Whereas certain investment books outline detailed models for analysis based on fundamentals and financials, Profiting From Clean Energy is very much about the macro-picture and does not delve deeply into technical financial concepts.

The Good

- A very good general overview of the key dynamics driving each sector and clean energy in general. Can therefore provide a good base for stock-specific analysis when assessing a company's competitive positioning.

- A comprehensive list of stocks broken down by sector, along with a wealth of external resources to help push one's research beyond the book. The accompanying website, http://www.profitingfromcleanenergy.com/ (currently under development), will soon provide a list of 50 stocks with profiles, and already has features such as a news service and a free newsletter.

- Easy to read and not overly detailed or technical, yet provides a good level of depth.

The Less Good

- Reading a book about investing in internet technology written in 1997 today would likely not be immensely useful. Similarly, because alt energy is going through a phase of rapid evolution and profound changes, this book is not timeless. Read it now and it can provide a lot of value; wait two years and things will have changed too drastically in certain sectors like solar and clean transportation (unless of course multiple editions are planned).

- In the clean transportation section, I would have liked to see a discussion of rail transportation and opportunities associated with it.

- An close follower of the alt energy space will likely not come across a great deal of new information in the book, although the website is a useful resource. I don't, however, believe that this is unique to Profiting From Clean Energy, but is rather a consequence of the choice an author makes about going for breadth (covering multiple sectors) instead depth (covering only one).

June 02, 2008

Canadian AltE Stocks; Presentation Up; A Favor to Ask

I spent most of May studying for the third CFA Exam, and did little writing.  I now feel prepared for the exam (which is this Saturday.) I expect to be posting regularly again the following week.  Until then, here are a few items I would have mentioned if I had not been focusing on studying.

  • An Article: BC Business writer Jeannie Mitchell interviewed me early this spring for an in-depth article looking at Canadian Cleantech firms, published here. I own stock in three of the companies profiled: Xantrex (TSX:XTX or XARXF.PK), VRB Power (TSE:VRB.V or VRBPF.PK), and Carmanah Technologies (CMHXF.pk or TSE:CMH).
  • A Presentation: I've uploaded my presentation from the NREL seminarIt's available here.
  • A Favor: I'm looking for a CFA Institute member from Colorado to sponsor me to join the CFA Institute as a regular member (this is separate from passing the exams.)  Since you'll need to say that my work has direct application to investment management, I thought a reader would be a good person to ask. My email is available on the AltEnergyStocks About page (sorry no direct email link... too much spam) or you can call me at 303 748 0209.

I'm looking forward to getting back to writing next week.  Thanks to Charles (who just entered the CFA program himself.) for all his great posts in May.  I expect I'll be filling in for him this November.

Tom Konrad

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