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July 31, 2008

Why Investing Should Be Moral

Last night, a recent finance graduate introduced himself to me, telling me he had attended my presentation at the Colorado Renewable Energy Society on July 24th. (the whole presentation is available after the link, scroll down to Jul 24.)  He said he wasn't invested in clean energy because "Investing is about making money... there's nothing moral about it."  

I'm sure I was quite sarcastic when I replied, "That sounds like a finance major."

I believe that finance and economics, as they are currently taught, make people less moral.  I'm not talking about God.  I'm personally agnostic with tendencies towards atheism... for me, morality and religion need not be linked.  Morals, as I define them (and I'm no philosopher), are all our reasons for action which are not purely self-interested.  With this definition, amorality is pure self-interest.  

How Economics Teaches Us to be Amoral

Classical economics assumes that people are self-interested utility maximizers.  In essence, Classical Economics is utilitarian and contains the implicit belief that the collective greatest good for society is achieved when each individual pursues his own personal utility.  This tendency for students of Economics to be more selfish has been shown in multiple studies and widely commented on, although not everyone agrees.  My conviction arises from my own experience.  I remember feeling in college that the economics classes I was taking helped to justify amoral behavior.  This is an attitude I have since come to reject.

While the thesis that everyone pursuing their own self interest would likely lead to the optimal societal result in an efficient market, efficient markets were always a gross oversimplification. The existence of market externalities and non-monetary market barriers in virtually every aspect of life make the case for pure utilitarianism very weak.

Despite popular belief, there is no contradiction to being both a successful investor and strongly devoted to the common good.  Examples abound, from the late John Templeton to George Soros and even Warren Buffett.  Each of these investors have markedly different morals, but without a moral compass, life, and money, both lack meaning.  This is probably why so many wealthy individuals end up giving away a large portion of their fortunes at the ends of their lives.

Investing Should be Moral

The statement that investing should be moral is in a sense a tautology.  The verb "should" always implies a moral judgment, be that moral pure utilitarianism, inspired by a higher power, or simply a judgment of what would lead to the greatest good based on some other moral principle.  We're all moral creatures, and even a pure utilitarian would not invest in a factory which would spew pollution into his own back yard.  In other words, maximizing our wealth is not the same thing as pursuing our own self interest. 

If we cannot accept pure wealth maximization as the goal of investing, we must choose another goal to pursue.  What do you choose?

Tom Konrad

July 30, 2008

Vote on What I Should Research Next

I'll pick 2-3 from this list, based on reader response to this poll, for future articles. You can vote for more than one company. - tom

July 28, 2008

Batteries for HEVs, Batteries for EVs

I'm a longtime fan of electric vehicles (EVs) as well as Plug in Hybrid Electric Vehicles (PHEVs), in all their variations.  When it comes to investing, I think the best way to invest  in on the growth of electric transportation is batteries, partly because pure play battery companies exist (although my top battery pick, Electro Energy (EEEID) , has been one of my poorest performers, in a classic case of a cheaply priced company getting even cheaper.

Given these interests, I was speaking to the President of Porous Power Technologies, a private battery components firm a couple weeks ago about the difference between batteries for EVs and batteries for HEVs.  Counter-intuitively, HEVs are much more demanding on batteries than are EVs.  

This is because most batteries cannot release much of the stored electricity in a short time.  In fact, the same fully charged battery will produce more electricity if discharged slowly than if it is discharged quickly.

Capacity vs Rate
Image source: MPowerUK

An HEV will typically have a much smaller battery pack than a pure electric vehicle, and so each cell will have to discharge faster to produce the same acceleration from the electric motor.  The same is true for charging times, so an EV's batteries will be able to absorb more energy from regenerative braking than an HEV's, all else being equal.  This is the reason Trinity was able to get better performance by adding ultracapacitors top their "Extreme Hybrid" drivetrain.

Where does this leave investors?  It depends on where you stand on Hybrids vs. Electric Vehicles.  If you think that Hybrid vehicles are going to continue to gain market share, and EVs will remain a niche market, you should focus on battery technologies with higher discharge rates, and on ultracapacitor investments.  If you believe that electric vehicles are going to take off and start taking market share away from hybrids, the slower (and less expensive) technologies will likely be better investments.

DISCLOSURE: Tom Konrad has an investment Porous Power Technologies. (Note: Porous Power is no longer taking investments from non-accredited investors.)
DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

July 27, 2008

Equus: A Solar Inverter Play For Free!

Equus Total Return (NYSE: EQS) is a closed-end fund that trades at a 42% discount to its net asset value (NAV). The fund invests primarily in both debt and equity instruments of small-caps and private companies. Each quarter, management must report the fair value of its net assets, but the stock market value of Equus is much lower than that of its net assets. Here's a chart showing Equus' discount to its net assets for the last five years:

As we can see, Equus is used to trading at a discount to its NAV, but recent negativity across the US market has taken it to even newer lows relative to what it owns.

One of Equus' key holdings (in fact, it makes up almost one third of its portfolio) is an equity position in Infinia Corporation. Infinia is a company aspiring to mass produce a low-cost solar power converter. The fair value of one of Equus' investments in Infinia (based on follow-up venture capital investments) recently jumped from $3 million to over $20 million, as the company demonstrated a prototype late last year that converts solar energy into electricity at twice the efficiency and at a lower cost than existing products.

One way to look at a purchase of Equus' stock at this discount level is that for the price of one share at $6.90, you're getting all of its other assets (which are worth about $8.30/sh) for a slight discount, and on top of that you're getting the investment in Infinia (valued at $3.50/sh) for free! Of course, before jumping in blindly you'll want to make sure you read Equus' latest reports along with its financial statements and their notes, as we've discussed here.

In reading these reports, I found that Equus does carry some debt on its balance sheet, which is somewhat rare for a fund. This has the effect of amplifying any changes in the values of their investments, both to the upside and the downside (the effect of leverage).

Furthermore, most of the investments are in companies that aren't public, and therefore Equus is not as liquid as those funds that invest only in the stock market (undoubtedly, this liquidity premium contributes to the larger than average historical discount we see in the chart above). The lack of market quotations also makes it more difficult for management to value each of it's holdings. Infinia is one such example, as it doesn't trade on the stock market and so it's not available for an individual investor to buy. Although the drawback is that Equus' investments are illiquid, it provides an investor the opportunity to get into a company like Infinia when it would otherwise be limited to venture capital firms.

The discount is a bonus that makes this an intriguing play from a value investing point of view.

Saj Karsan is a guest contributor on AltEnergyStocks.com. Saj is a value investor at Barel-Karsan, and can be regularly found writing for Barel-Karsan's blog.

DISCLOSURE: The author does not have a position in EQS

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

July 26, 2008

The Week In Cleantech (Jul 20 to Jul 26) - Will The US Solar PV Market Disappoint?

On Sunday, Edgar A. Gunther at Gunther Portfolio provided some silicon updates from Intesolar North America 2008. Solar investors never get enough silicon updates, so here's another one!

On Monday, Stacy Feldman at Solve Climate told us that China was now making increasingly more wind power parts. Actually, she is reporting on an article that was written last week and that I missed because I took a break from the Week In Cleantech last weekend. With regards to Chinese companies active in wind, we already list some in our Cleantech Stocks section, and will be sure to keep on top of it.

On Tuesday, CNN Money reported that fundamentals were to responsible for the run in the price of oil. That's great news! This should ensure alt energy doesn't fall out of favor anytime soon.

On Wednesday, Ucilian Wang at Greentech Media informed us that the electric car market could race for materials. Commodity traders take heed!

On Thursday, Heath Aston at the Times reported that Ford was pinning hopes on small cars. Who needs McKinsey when you have AltEnergyStocks.com.

On Friday, Notable Calls reported on a bearish call on the US PV market. Apparently, the utilities ain't having it with PV, and prefer its cousin CSP. Needless to say, my favorite wind is and will stay on a tear, although that's not in the report...

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.

July 24, 2008

Readers' Choice

I get a large number of emails asking "What do you think of Company X?"  Unlike Jim Cramer, I don't have a lot to say about companies I have not been following, so all I usually do is point the reader to the most recent related article (something they could have found with the search feature in the right nav bar), if I have written one.   However, this spring I decided to research a couple companies solely based on reader's requests, and the articles have proven very popular, especially the one on Petrosun's Algae Farms.

The recent surge of email I've gotten has convinced me that it's time to do it again.  As I did last time, I'll collect suggestions in the comments on this entry, and when I have five or more, I'll put together a poll to see which companies most readers are interested in.  Note that even if you've sent me an email request in the past, I want to favor the suggestions of regular readers, so please take the time to leave a comment.  If you like, you can also make the case as to why this particular company is interesting... I'll make reference to any such comments when I do the poll.

I know it's a lot more complicated than shooting me off an email, but this way, you might actually get a useful answer.

Tom Konrad

July 22, 2008

Alternative Energy & Conventional Energy: Is An Image Worth A Thousand Words?

It wasn't long ago that people still believed the price of energy commodities - and crude oil in particular - had a greater impact on alt energy stocks than did general movements in equity markets or even fundamental factors.

The logic went something like this: even though oil and most of the sub-sectors that make up the broad alt energy space (e.g. solar) are not in direct competition with one-another, expensive oil is the number one driver behind governments searching for alternatives to the way we currently meet our energy needs. For a time, this theory may have held true as far as short-term movements in the prices of alt energy stocks went - but is it still the case?

About a quarter of the way through the book Technical Analysis for Dummies, there were no doubts left in my mind that technical analysis wasn't my cup of tea. Nevertheless, I do like data and enjoy looking at charts as far as general trends are concerned. I therefore thought I'd take a look at a few basic charts to see if, at least visually, there appeared to be any relationship between movements in energy markets and movements in alt energy equities.

The analysis I did was not especially sophisticated, but interesting nonetheless. For the market as a whole, I took the S&P 500 as a general indicator of performance for US equities, and the Russell 2000 for small-cap equities. For alt energy, I used the ECO index and the CELS index, both of which underlie popular alt energy ETFs. I picked these two indices because: (a) they are focused on energy technologies and not cleantech more broadly, and (b) they both track US equities.

For energy, I used the Dow Jones-AIG Commodities Index (DJ-AIGCI), which is far from a perfect proxy for energy prices. The DJ-AIGCI tracks a broad basket of commodities, which tends to tame the impact of any one component. I used this index nonetheless because I wasn't trying to achieve anything too fancy, and because the data was readily available and usable in the way I needed it, which isn't the case for an energy-focused index like the DJ-AIG Energy sub-index (DJ-AIGEN) (made up of crude oil, heating oil, natural gas and unleaded gasoline).

The first chart I looked at is a three-year chart. For one year and under, the DJ-AIG tracks the DJ-AIGEN fairly closely, but for three years the picture is a little different. The main thing missing from this graph is a big spike in the energy sub-index in late 2005 followed by a large fall throughout 2006 and until the begging of 2007. The ECO peaked in mid-2006, months after the energy sub-index had begun to fall, and seemed to track the S&P 500 and Russell 2000 fairly closely until mid-2007, when it began to pull apart and seemed to be trending up with energy as broader equity markets were flattening out and begging to fall.

The thing that struck me most about this chart is the ability of a deep-seated correction to wipe months of gains. Take the S&P 500. If your portfolio had been tracking the index perfectly starting in early July, 2005, you would've been up about 25% by the same time two years later, which isn't bad for taking no more risk than the market as a whole and not having spent any time or resources picking stocks. However, hang on for another year and you'd be almost right back to where you started. This comes back to the concept of managing risk, which I discussed in a previous article. Without attempting to actively time the market, which can be challenging at best and futile at worst, it is probably reasonable to occasionally take some money off the table to protect gains.

The second chart I looked at is a one-year chart. As mentioned above, the DJ-AIGCI index followed the DJ-AIGEN fairly closely within a one-year timeframe, so I am more confident in this one. From this chart we see that ECO and CELS pulled away from the equity indices and seemed to follow energy prices during November '07, even peaking in December as the credit crisis was begging to take its toll on equity markets. But soon after, movements in ECO and CELS began following the equity indices fairly closely, dipping as energy prices peaked in early March and again in late June.

The final chart is a three-month chart. This chart makes it relatively clear that ECO and CELS are more in line in equity markets than with energy, as evidenced by the fact that they joined in to the small rally of the past few days as oil prices fell.

Of course, nothing conclusive can be drawn from this small exercise, and since I am a bottom-up stock picker I only partially care about what makes the market move in the near-term. My primary interest in doing this was to see if, should we enter into a period of energy price correction, I should keep my eyes open for promising companies that may trade at a discount due to non-fundamental factors (i.e. supply and demand in the market).

From this brief analysis it seems as though I might be better off with continued troubles in equity markets as a whole for finding alt energy bargains.

DISCLOSURE: The author does have not a position in any financial products tracking the indices discussed here

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.

July 20, 2008

Clean Energy Mutual Funds and ETFs

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

by Tom Konrad

For new investors looking to green their portfolios with clean energy, the first thought is usually mutual funds.  The following three are available in North America:

Mutual Funds


New Alternatives Fund (NALFX)

0.95% + Sales load

Guinness Atkinson Alternative Energy Fund  (GAAEX)


Calvert Global Alternative Energy Fund (CGAEX)


Each of these funds has expenses which would be considered high by industry standards, although they have all dropped noticeably since I covered mutual funds in 2007.  High expense ratios are a considerable drag on long term performance.  To avoid high expense ratios, knowledgeable investors usually turn to index mutual funds and exchange traded funds (ETFs). 

There are no clean energy index mutual funds currently available, but recent years have seen a rapid proliferation of new exchange traded funds.  At current count, there are four ETFs focusing on clean energy,  as well as three sub-sector ETFs for the Solar and Wind sub-sectors.

Exchange Traded Funds (ETFs)

Expense ratio


Powershares Wilderhill Clean Energy Portfolio (PBW)


The oldest ETF in the sector, this fund holds only US-traded companies.

Powershares Global Clean Energy (PBD)


A better diversification alternative than PBW

Van Eck Global Alternative Energy Fund (GEX)


This is my current favorite for a single investment in Clean Energy, due to the combination of a low expense ratio and a global focus.

First Trust NASDAQ US Liquid (QCLN)


The advantage of the low expense ratio is offset by the disadvantage of a US-only focus.

Sub-sector ETFs

Expense ratio


Claymore/Mac Global Solar Index ETF (TAN)


Global Solar companies

Market Vectors/Van Eck Global Solar Energy ETF (KWT)


Global Solar companies.

First Trust Global Wind Energy Index (FAN)


Global Wind Power companies.

I recently wrote in depth about the Solar and Wind ETFs, including how I might (and might not) use them as part of a larger portfolio.  For people looking for a single investment in clean energy, I prefer the diversification of the global ETFs.  Many leading renewable energy companies (especially in the wind sector) are not traded on North American exchanges.  Hence, for a person wanting a single investment in the sector, the Van Eck Global Alternative ETF (GEX) is currently the best option, followed closely by Powershares’ Global Clean Energy fund (PBD), because of its slightly higher expense ratio.  

DISCLOSURE: The Guinness Atkinson Alternative Energy fund is an advertiser on  Alternative Energy Stocks.

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

July 17, 2008

Cleantech Investing For EcoGeeks

by Tom Konrad.  This story is cross-posted on EcoGeek.org

As lovers of green gadgets, EcoGeeks probably know as much about what's new in clean technology (a.k.a Cleantech) as anyone on the web.  So if you're an EcoGeek thinking about investing in companies which make the technology you know and love, you will probably take comfort in the old adage that you should invest in what you know.  An EcoGeek investing in clean technology companies will have an advantage understanding how a company makes money, and what is a needed innovation with a large  market,  and what is simply a bizarre curiosity.  More importantly, an EcoGeek knows that any maker of EVs will have to cope with endless competitors, and they're the first to know when LED bulbs are bright enough for general use.

While knowledge of cleantech is the great strength of the EcoGeek investor, this knowledge most likely arises from a love of clean technology.  Just as "geek" implies technology expertise, it also connotes an obsession with technology which might interfere with the geek's social life.  Unfortunately, an obsession with cleantech has the potential to blind the unwary EcoGeek investor to the pitfalls of investing in a cool technology which might not turn out to be such a great investment.

Investing in what you know is not the same as investing in what you admire.  People who invest in something just because they admire the brand often find themselves buying at the top.  Our aspirations and wants are in large part cultural, and others will be excited about the same things we are, at the same time.  When many investors are all buying at once, none are likely to get a good price.

To the extent that EcoGeeks are ahead of the curve with fashion, we can get in ahead of the crowd.  The rising popularity which follows can work in our favor, driving the price higher as other investors pile in.  To the extent that we live up to the geek stereotype, and what we think is great turns out to be hopelessly un-cool, we'll find ourselves investing in things which never catch on.  Many innovations which help the environment are also quite unpopular, so it is very difficult to know if we're blazing a path for others to follow (as turned out to be the case with hybrid cars), or simply lost in the woods (think Segway.)

That said, the EcoGeek who decides to invest in cleantech need not end up going EcoBroke. The trick lies in distinguishing between when we're on the environmental cutting edge, and when we're on the environmental lunatic fringe.  Most people on the lunatic fringe think that they're the only sane ones, and the rest of the world is confused.  That may well be the case.  After all, those of us who were worried about Climate Change before 2003 or so were on the lunatic fringe, even though most people now accept that we were right.  But if we were investing in cleantech companies back then, we probably had a lot more losers than winners.  Anyone remember Astropower?  Or, if you're impressed by the recent successes of Capstone Microturbine (CPST), you probably didn't buy it in 2001.

The key to EcoGeeky investing is to know that we're investing out of knowledge, rather than just buying a stock because we're excited about the company's green technology.  In the end, the key to all successful investing is to know ourselves at least as well as we know the companies we're investing in.

DISCLOSURE: Tom Konrad owns CPST.

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

July 16, 2008

The Dawn of the Alternative Energy Age Report

The following is a Special Information Supplement by our Featured Company sponsor Guinness Atkinson Funds.

Excerpt from The Dawn of the Alternative Energy Age Report:

Written by Guinness Atkinson Alternative Energy Fund Managers

“In the 20th century, mankind's massive material and financial progress were only made possible by the exploitation of oil. Oil was a main force in global geopolitics and the driving force behind unprecedented industrialization. Oil has been such a powerful lynch pin that it is hard to believe that its days of prominence may be waning. But as demand for oil steadily increases and reserves are consumed, oil is in the autumn of its life. In its place will increasingly emerge an array of alternative— non-fossil-fuel —energy technologies, both high tech and old tech. This is the dawn of the alternative energy age...”

Click here to access the entire report (PDF)

The information provided herein represents the opinion of Guinness Atkinson Alternative Energy Fund Managers and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing.

Click here for a current prospectus.

The Fund invests in foreign securities which will involve political, economic and currency risks, greater volatility and differences in accounting methods. The Fund is non-diversified meaning its assets may be concentrated in fewer individual holdings than diversified funds. Therefore, the Fund is more exposed to individual stock volatility than diversified funds. The Fund also invests in smaller companies, which will involve additional risks such as limited liquidity and greater volatility.

Distributed by Quasar Distributors, LLC, (07/08).

July 15, 2008

Hammond Power Solutions: A Cheap Power Regulation Play?

We have discussed on several occasions the investment opportunities related to power regulation and renewable energy. I have also recently written about the value approach to investing.

I came across a stock today that I believed fell into both categories: power regulation (transformers) and value. The stock is Hammond Power Solutions (HPS-A.TO or HMDPF.PK), a firm that makes transformers for a number of applications, including wind turbines.

While revenue and earnings have been ramping up quite nicely over the past four years, the stock price has been trending mostly laterally (albeit in a volatile manner) over the past 12 months, with the result that Hammond currently trades at about 9.7x 2007 earnings. A PE of below 10 almost always draws my attention, especially for a company with exposure to one of my favorite areas of alt energy.

Interestingly enough, one of my former classmates who runs his own value investing blog had come across the same stock earlier. Here is his take on Hammond Power Solutions. I thought it was an interesting analysis and provides insight into how the balance sheet can be used to spot a value stock. Enjoy!

In Hammond's case, the question therefore is: does the company have a unique competitive advantage that will lead investors to multiply its earnings beyond 10x in the future? If so, this could be a value play.

DISCLOSURE: The author does have not a position in Hammond

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.

July 14, 2008

A Geospatial Wind Power Supply Curve

by Tom Konrad

David Kline, and his team at the National Renewable Energy Lab, wants to help China exceed its target of 30 GW of installed capacity by 2020 by miles.   How is he helping?  By developing a methodology to help the central planners find the "Geospatial Supply Curves"[.pdf] for wind within China's regions.  By a geospatial supply curve, he means the available sites for wind farms at each levelized cost of energy (LCOE,) associated with the geographical data as to where that capacity would be installed.

The team's technique combines geographical wind speed data with turbine performance data, any excluded zones, and potential turbine densities.  Steeper terrain forces down turbine densities. This is unfortunate because the best winds are usually found on ridges and mountainous regions.  The resulting supply curves will allow a central planner to see where wind farms will need to be built (and at what cost) in order to reach any target capacity for the region studied.  This will aid in the planning of roads, transmission, and other planning necessary in order to get the farms built.

Zhangbei Province Wind Supply Curve

Dr. Kline's NREL team demonstrated (with help from Chinese partners) their methodology by using it on a region of China's Heibei province, Zhangbei.  The picture below is one geographic representation of their results.

Lowest cost 2.4 GW of wind farms in Zhangbei region of Heibei provence.  Source: "A GIS Method of Developing Wind Supply Curves" David Kline, Donna Heimiller, and Shannon Cowlin, NREL.

Most striking to me was not the analysis itself, or its results, but the many weaknesses of the analysis caused by limited budgets and lack of basic information.  Dr. Kline cheerfully admits all these weaknesses, saying that he'd love to do the work in the detail it deserves... as soon as someone comes up with funding.  All of the following came up during a recent  presentation (pdf, 168 kb), or during the Q&A which followed.

  1. The team was unable to include transmission costs because they were unable to obtain Chinese transmission construction cost estimates.
  2. Only average wind speed data was used, resulting in the use of approximate wind speed profiles.
  3. No grid capacity or load data were available.
  4. The Chinese planners expressed a desire to include pumped storage an expanded model.
  5. No sensitivity analysis was done, either on uncertainties in wind regimes, construction costs, or other factors.

Model Limitations, but No Reason to be Smug

To me, the lack of fine transmission, load, and wind data are most troubling.  There is a complex interplay between the timing of wind supplies in different locations with the load which I expect would have a great impact on the value of different potential wind farms... planning without this analysis would be like building a house without first knowing what sort of ground lies under the foundation. 

China's drive for more renewable energy is commendable, and the NREL team's methodology will undoubtedly help in the placement of all those new wind farms, but even detailed wind and grid loading data are likely to remain unavailable even to the Chinese planners, which means that some wind power will not be able to get where it's needed, and not all the most useful wind turbines will be built first; some efforts will be wasted.  Nevertheless, the Chinese will likely forge ahead, which, in the end, is a lot better than analysis paralysis.

Before we Westerners chuckle at the lack of data (the Chinese grid does not even have a wholesale power market for price discovery) we should ask ourselves... how likely are we to reach 15% grid penetration of wind power by 2020?  If you live in the U.S., as I do, the answer is "low to nil, and a lot less than China's chance of getting there."

July 12, 2008

The Week In Cleantech (Jul 6 to Jul 12) - GE A Real Play On Cleantech?

On Monday, GreenBiz informed us that new cars in California would have to display a global warming score. This is interesting, and it would be good to see data on whether it actually impacts consumer behavior.

On Tuesday, David Ehrlich at the Cleantech Group reported that cleantech investments had hit a record high. Interesting results, though I suspect that if problems in capital markets persist and VCs can't find acceptable exits things could change.

On Wednesday, Katie Fehrenbacher at earth2tech outlined ten things we should know about nat gas vehicles. An ambitious proposal by Pickens, but I question the logic of substituting a finite energy source for another finite energy source. This seems to me like it would leave customers just as exposed to commodity price risks as they are now.

On Thursday, Keith Johnson at the WSJ's Environmental Capital wondered whether GE was becoming a cleantech play. GE has been a cleantech heavyweight for years, but the point is well taken that as it sheds units, the effect of its environmental businesses on overall results will become clearer.

On Friday, Matthew McDermott at TreeHugger mapped the alternative energy potential of the US. Well, Forbes did and he reported on it. But what drives alt energy development? Physical conditions or the generosity of local incentives? A bit of both I guess, but the latter certainly weighs a lot more than the former in developers' models.

July 08, 2008

Performance Update: Sell and Short Recommendations

Investors are getting  bearish these days, which comes as a surprise to me, since I'm used to being in the minority.  I was a bear when I first took the leap from mutual funds and started trading stocks in 1999, and am a bear still.  I wish I'd turned bullish for a couple of years at what I consider to be the large bear market recovery of 2003-2006, but I didn't.  However, since I was (and still am) bullish on commodities since around the same time frame, I can't complain about my returns over the period.

This spring, I was more bearish than usual, which is why I brought you my ideas for stocks to buy when you think we've hit bottom, and some very un-green stocks to consider shorting.  With it becoming clearer and clearer that GM, Ford, and Chrysler are in serious trouble from high oil prices, while the Airlines are going from bad to worse, I only wish I had been less cautious about advocating shorting these industries than I was, and also that I'd been willing to take bigger risks myself.

I've already covered by proposed short of First Solar (FLSR) in a previous performance update, but I'll also throw in the various stocks I've warned people to stay away from here.

Stocks We Love To Hate

My April 20 article on un-green stocks had the following suggestions for shorting, which I will benchmark against the 7.5% decline of the S&P 500 since then (as of the close on July 1.)

Short idea What I said  Performance
Tyson (TSN) "the vegan investor might consider shorting"  24.6% decline
China Fund (CHN) "shorting China scares me"  11.2% decline
Trucking Industry (I chose JB Hunt (JBHT), because I see their trucks all the time-- I'm no trucking expert) "take a look at shorting long haul truckers" up 5.1%
Airlines -  NWA, DAL, and LUV "we may have missed the plane on this one" - I changed my mind about airlines a week later and shorted the three stocks listed 32% decline; 36% decline; up  4%
Housing Developers - KBH (I'm also no housing expert, but KB Home sticks in my mind as a builder who slaps them up fast and cheap. "strike a blow against urban sprawl" 29% decline
Coal ACI  "Don't do it." up 24%
Oil  XOM "Don't do it." 6% decline
SUVs Ford (F), General Motors (GM) "I feel strongly enough to actually dabble in this" 33% decline, 29% decline

As you see from the chart above, the sector I said I was shorting myself was down about 30%, and the sectors I said people should consider shorting were down and average of 13.3%, slightly more than the 7.5% decline of the S&P, although there was a wide variation between the different companies chosen.   The three I suggested were bad ideas to short (China, Coal, and Oil) included the biggest gainer I talked about (Coal) and the other two roughly matched the index, so I'm pleased with the performance of these ideas as a whole, and not to mention my auto and airline shorts.

Pink Sheet Stocks to Avoid

I've also come out against a few pink sheet stocks which caught my attention (usually because a PR person sent me one-too-many press releases.)  I'll benchmark these against the iShares Russell Microcap Index ETF (IWC) from the dates of the original stories.  IWC is not a great benchmark, because even microcaps are considerably larger than these tiddlers, and there is no energy emphasis, but I know of no existing index of tiny, non-listed energy companies for comparison.  Click on the company names for the original articles.

Company Date Stock Performance Benchmark
US Sustainable Energy (USSE) 7/2/2007 -72% -27%
Global Resource Corp (GRBC); October 2007 Follow-up 7/20/2007 -56% -28%
PetroSun Drilling (PSUD) 3/15/08 -22% -4.2%

All in all, it's been a good time to be short, and I'm certainly happy with my performance (although I've lost plenty of money by shorting in the past, most of it during the 2003-2006 recovery.)  As I learned in studying for the level III CFA exam, it is often easier to find good ideas for shorting than it is to find good long ideas.   There are fewer analysts looking for overvalued stocks than for undervalued ones, so there are more overvalued stocks to go around.  If only my broker would let me short those pink sheet companies!

The End, For Now

With this article, I have covered most of the stocks I've written about in 2008, and some from 2007.  (See also 10 Speculations for 2008 and 10 Stocks to Buy on the Cheap.)  I plan to revisit these in 6 months or so, but if you have suggestions for other "performance update" themes, please leave a comment.

DISCLOSURE: Tom Konrad has short positions in NWA, DAL, LUV, F, and GM.

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

July 06, 2008

Investment Ideas From the One-House Grid

In June, I wrote how intermittent power sources such as photovoltaics and wind would have to compete with baseload technologies such as IGCC "Clean Coal" and nuclear for capacity on the grid.  The key problem is that neither baseload technologies nor intermittent technologies are able to match themselves to the fluctuations of demand.  This creates a need for technologies which can fill the varying gaps between supply from these sources, and normal energy use.  From the comments, it seems like I was not completely clear how intermittent and baseload power cause problems for each other, so I will start with a simplified example, which I will use to illustrate the various strategies for dealing with the problem.  I see investment potential in all of these strategies.

The One-House Grid: An Illustration

Suppose that the entire grid were just one house, and it was the utility's job to make sure that there was always enough power to run all the gadgets that anyone in the house was using.  Even in the middle of the night when everyone is asleep, there will still be some power usage: running clocks, the VCR, charging cell phones for use the next day, and maybe the porch light.  That is the minimum load of the house, and traditionally utilities have met this demand with baseload power.  In contrast, there will probably also be a moment on hot summer afternoon when the air conditioner is running full blast, the refrigerator kicks on, dad is watching football on his 60" plasma TV, dinner is cooking in the electric oven, and 15 other appliances are on somewhere or other.  This is peak load, and the difference between the minimum load and peak would traditionally be met with dispatchable generation, which, until recently, mostly means gas turbines.  

In addition, some dispatchable generation will always be kept running below full capacity in order to maintain power quality and availability as appliances are turned on and off throughout the day.  These ancillary services [pdf] are called load-following reserves (maintaining availability) and voltage and frequency regulation (power quality,) and both require fuel, even if the actual energy provided is negligible.  Ancillary services are like your car's engine idling at a stop light so that you can start quickly when the light changes.  They're necessary to keep the system running, and they use fuel, but they don't actually get you anywhere.  Also like idling engines, options like hybrids exist which can save much of the energy cost (see below.)

Add a Solar Panel

Suppose we now add a photovoltaic system and a wind turbine on the roof.  Most people with solar systems know, that if you want to spin your meter backwards (i.e. produce more energy than you are using) the best time to do it will be in the late morning, while it is still cool, but it's bright enough that the panels (which actually produce more power from the same amount of light when they are cool) are producing near their peak output.  

With grid-connected solar, spinning your meter backwards may be fun, or at least get you bragging rights.  However, in my fictional one-house grid, we now have a new minimum demand: demand will be negative (we're going to have to find something to do with the excess electricity) because there is no other grid to sell it back to.  Peak demand will also be reduced, because on the hot summer day, the PV will also be producing power.  The result is that the one-house gird with a PV system will no longer need any baseload generation (since minimum demand is now negative), and it will probably also need less dispatchable generation, because peak demand will also have been reduced, most likely by more than minimum load. Not only will peak demand have been reduced, but it will also have shifted to the early evening when the PV is producing little electricity, but cooling, cooking, and football watching needs are still high.

Adding a wind turbine to the roof has a similar effect.  Now, the meter will also be spinning backwards on windy nights, and demand is reduced whenever it's windy, which will in turn save fuel and reduce the need to run the remaining dispatchable generation..  However, if the climate is similar to that here in Denver, on the hottest days of the year, the wind will typically be minimal, so there will be little further reduction in peak load, so nearly the same total amount of dispatchable generation will be needed, although it will not be in use as often.


As the above illustration shows, the oft-repeated shibboleth that we "need" baseload generation is not only misleading, but also counter-productive.  Adding baseload generation will simply increase the number of hours per year that intermittent sources of power exceed net demand.  I too, formerly believed we needed baseload.  I no longer do, although some level of baseload power in the grid is no doubt inevitable, at the very least produced by renewable sources such as geothermal and electricity generation from industrial waste heat.


Returning to our one-house grid thought experiment, a number of options present themselves.

  1. Storage.   In the real world, if you build a house off the grid, you will add batteries so that you can still run your lights when the sun isn't shining and the wind isn't blowing.  
  2. Transmission.  Suppose our one-house grid has a neighbor, running his own one-house grid.  While generation from their PV and wind systems will be similar (but not identical), demand at the two houses is likely to be different.  By diversifying the electric demand, average demand will double, but peak load will increase by somewhat less, and minimum load will more than double.   This reduced volatility of electrical load brought by connecting two homes is analogous to the reduced volatility of a portfolio of two securities, rather than just one.  Unless the electrical load of the two homes is perfectly correlated, there will be benefits in terms of a reduction in the overall amount of dispatchable generation needed to service the same total load.  Our knowledge of the principles of diversification will correctly lead us to the intuition that connecting dissimilar users of electricity will lead to greater diversification benefits than similar users.  If residential, commercial, and industrial users are all on the same grid, the same average electric demand will be easier to serve than if only residential or only industrial customers were connected, because a residential user will have lower correlation of demand with most industrial users than with other residential users.
  3. Demand-Response.  My sister lives in an old house, and the kitchen is on an old, low amperage circuit breaker.  If she ran both the microwave and the toaster at the same time, it would trip the breaker and she would have to trudge outside to turn it back on.  Needless to say, she quickly stopped using the toaster and the microwave at the same time, and thereby reduced the peak load in her kitchen.  Demand response involves getting electric customers to agree ahead of time to refrain from using high-wattage appliances during times of high electric demand.  In the one-house grid example above, dad might choose to record the football game and watch it later in that evening.
  4. Energy Efficiency.  Another way to reduce volatility of demand is simply to reduce overall demand.  If dad had decided to buy an LCD TV rather than a Plasma TV, the demand from his 60" TV might have been reduced by as much as 200-300 watts, depending on the models, and this in turn would have reduced peak load.


Each of the above solutions leads to an investment, and as intermittent power sources grow as a percentage of total generation, the needs for these solutions will increase.  Below is a selection of companies working to provide each of the above solutions to the overall problem of matching electrical supply and demand.

Electricity Storage

Electricity storage can serve several related needs of the grid.  First, it can absorb excess supply of power at times of otherwise low demand, which means that intermittent and baseload sources of power do not need to be curtailed, even though they are producing power at near zero marginal cost.  Second, when charged, energy storage can provide ancillary services to the grid, by supplying power to meet short term spikes in demand or drops in supply, and absorbing power if intermittent generation ramps up unexpectedly, or demand suddenly drops.  According to Paul Denholm of the National Renewable Energy Lab, the revenues from these ancillary services are significant, and should not be discounted in any economic assessment of an energy storage technology.  Finally, storage can help to shave peak load by supplying power from off-peak charging.

I have previously written about investments in large scale batteries for the electric grid, but when I did so I neglected to consider the value of ancillary services.  Since I wrote that article, both VRB Power (VRBPF.PK) and NGK Insulators have continued to sell their respective solutions to utilities, telecoms, and other consortia.  However, these technologies are still searching for general market acceptance.  Beacon Power (BCON) recently commissioned a 20 MW flywheel based plant to supply frequency regulation services to the New York grid, which will primarily be used for frequency regulation.  Given the enormous potential of demand response and electricity transmission to improve long-term electricity price volatility, I am currently much more bullish about companies using energy storage primarily to provide ancillary services over large scale storage.  Because of that, I have recently increased my investments in Beacon, Maxwell Technologies (MXWL) and Active Power (ACPW).  

Maxwell's ultracapacitors can be used in various power quality applications, as well as a high power, low energy supplement to batteries in hybrid electric vehicles. (As a side note, high power is more of a concern in hybrids than pure electric vehicles, because the smaller battery pack has difficulty producing enough power for rapid acceleration.)

Active Power, like Beacon, uses flywheel technology, selling mostly into the customer side, rather than utility side of the market.  However, as the market for ancillary services grows and becomes more sophisticated, I could see Active Power's UPS systems selling ancillary services to the grid, in addition to their primary function of protecting data centers and other sensitive equipment from temporary power outages.


I've written extensively about investments in electricity transmission and distribution.  My top picks are ABB Group (ABB) and Siemens (SI), Composite Technology Corporation (CPTC.OB), ITC Holdings Corp (ITC), Quanta Services (PWR), General Cable (BGC), and National Grid (NGG).  Geographic diversification of electric supply and demand is as essential as financial diversification in your portfolio.


I haven't written about demand-response aggregator EnerNOC (ENOC) since before its IPO in March 2007, but that doesn't mean I'm no longer interested.  EnerNOC, along with Demand-Response/Smartgrid companies Comverge (COMV) and Echelon (ELON) all became quite expensive on a wave of investor euphoria in 2007, which is why I was not buying or writing about them much at the time.  That has now changed, with all three losing about 70% from their peaks, and making them look relatively valuable.  I have been taking positions in all three over the last few months.

Energy Efficiency

Unfortunately, few pure-play energy efficiency companies exist.  The recently named Waterfurnace Renewable Energy (WFIFF.PK) is one I've recently been adding to my portfolios.  I've previously written about Flir, Inc (FLIR), a thermal imaging company which I do not currently own due to valuation concerns, a pair of LED companies, Cree (CREE) and Lighting Science Group (LSCG.OB) , and a number of energy efficiency related conglomerates.

DISCLOSURE: Tom Konrad and/or his clients have long positions in VRBPF, BCON, ACPW, ABB, SI, CPTC, ITC, PWR, BGC, NGG, ENCO, COMV, ELON, WFIFF, CREE, LSCG.

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

July 03, 2008

Large-scale Energy Storage In Focus

I recently came across an interesting report released in June by the Pembina Institute, an Alberta-based environmental think-tank, on large-scale electricity storage. The ability (or lack thereof) of the grid to take in all that new renewable power ranks as one of the main near-term risks to the growth of the alt energy sector, and cost-effective storage could go a long way in alleviating grid concerns.

The report outlines the main technological options for storage along with their strengths and weaknesses. Although I wish there was more information on the costs of these technologies, as this is currently the main barrier to their deployment, I found the technological overview useful.

Some of you may remember an article I wrote about Beacon Power over a year and a half ago. I have since exited my position in Beacon (on October 16, 2008, at $2.02) because (a) I wanted to put the money to work elsewhere and (b) I was happy with my gain. This is somewhat unfortunate as I had claimed in the original article that I intended on holding this stock for a long period of time. However, my belief in the eventual emergence of the storage sector remains as strong as ever.

The main difference now with the time I wrote this article is that things are starting to move on the regulatory front with large-scale storage, and we could soon see incentive programs directed at this industry. This is, in my view, a sector to keep a close eye on. Last August, Tom wrote about investment opportunities related to large-scale storage, and we will address this topic further in future times.

DISCLOSURE: The author does not have a position in the stock discussed in this article

July 01, 2008

Is There Any Hope For The Big Three?

Two related pieces of news yesterday, one that was the day's headline and the other that drew a little less attention.

First, the big news: auto makers, especially US-based ones, got hammered by their product mixes. As expected, Americans are responding to a rise in gasoline prices by turning away from trucks and demanding cars, especially small ones. Of course, this spells nothing but hard times for the likes of Ford, GM and Chrysler, who are still hungover from a decade-long party fueled by high-margin pick-up trucks and SUVs. Economic incentives, whether state-imposed or market-driven, work after all.

Second, the International Energy Agency, the OECD's energy body, put out yet another gloomy forecast on the medium-term oil supply situation. By 2013, when a good bit of energy demand in the West will have been destroyed by high prices, the emerging world will have more than picked up the torch from us. Throughout this period, the physical reality that consuming ever-growing amounts of a finite resource leads to..well...its eventual exhaustion should become clear through price signals.

There are two forces at play here pointing toward sustained increases in the price of gasoline. First, the oil supply-demand balance will continue to be skewed as (a) incremental demand from the emerging world will outstrip demand destruction in the West and (b) there are no viable alternatives to oil in the near and medium terms. Second, investors will continue to want the same returns no matter what happens to the marginal cost of oil , which will grow as more marginal reserves are brought into production. Given growing operating and resource costs and the lack of alternatives, prices will naturally trend up so that earnings stay unaffected and shareholder returns maintained, allowing firms to keep capital costs under control.

What does this mean for the so-called "Big Three" - GM, Ford and Chrysler? This means that the gasoline price picture will not drastically change on them, at least in the long run. They can thus safely turn their attention and capital away from gas-guzzlers and get real about small and next-gen cars like hybrids and plug-in hybrids. GM is already doing it.

This also means that they have a chance to start afresh in emerging markets, where their production and value chains aren`t burdened by a long legacy of manufacturing primarily large vehicles. And I'm also talking about image here. When the average American car buyer thinks efficiency, the first corporate logos to pop in his/her mind are T- or H-shaped, and as long as Ford keeps pushing the F Series through primetime TV adds its place in consumers' mental landscapes will stay right where it is (along with its sales).

I therefore think that, gloomy as they may look, the next few years will offer some interesting opportunities, at least for GM and Ford. In the car sector, companies take a few years to respond to demand shifts, so there may yet be more pain on the way. However, the pain and all the media noise around it could mask smart strategic moves. What would I look for as signs that things are headed in the right direction? Here's three items for starters:

a) Announcements of North American factories being retooled to accommodate car (vs. truck) production. I`m not even talking new models here - just churn out sufficient quantities of existing car models to meet consumer demand

b) Announcements of next-gen car models to be rolled-out within reasonable time frames, and, even better, proof of execution on these announcements

c) Growing sales of small cars in key emerging markets like Russia, China, India and Brazil

Let us hope that 2008 is the year the Big Three wake up to the world Toyota has been living in for the better part of this decade, and that their capital and other resources are mobilized to meet the challenges $200 oil will bring their way.

As for investors, look for the indicators above, and for other signs the market may be ignoring (e.g. a growing ratio of small car ads to pick-up ads on TV). Many market participants still refuse to see something secular at play here, and this may provide an opportunity to pick up on promising developments early on.

Update (July 3): Interesting GM should announce today, on a backdrop of analysts claiming the company could go bankrupt, that it is thinking of launching its Chevy Beat here in North America. The Beat is a much smaller model that is popular in other parts of the world, namely Asia and Latin America. This car does 40 mpg, compared with the Hummer at 16.

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

« June 2008 | Main | August 2008 »

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