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August 31, 2008

Climate Change Will Hurt The Poor Most But the Solutions Don't Have To

The International Center for Appropriate and Sustainable Technology (iCAST) helps communities use local resources to solve their own problems.  I've been a fan of iCAST's approach of teaching people how to fish (or, in this case, how to apply sustainable technologies) rather than giving away fish since I first encountered them at a conference in 2006.  Last week, they took advantage of some of their own local resources (namely the fact that the DNC was in Denver) to organize a luncheon with a panel of nationally recognized speakers, any one of whom would have been enough to draw a crowd alone, and asked them to speak about how coping with Climate Change will impact the poor.

The speakers were Daniel Esty, co-author of Green to Gold, the bestselling book on how companies turn environmental innovation into profit opportunities, Aimée Christensen, a consultant to organizations addressing the issues of climate change including the Clinton Global Initiative and Richard Branson, and Jim Lyons, VP of Policy and Communication at Oxfam America.  The talk was moderated by Vijay Vaitheeswaran, award winning correspondent for The Economist, and author of Power to the People, and Zoom.

Should Investors Worry About the Poor?

Stereotypically, business and investors do not care about the plight on the poor.  Like most stereotypes, it only has to be true if we choose to live down to it.  Many argue that socially responsible investing can lead to superior returns, and have studies to support this conclusion, but the mutual fund track record shows mixed results.  I personally ascribe underperformance of socially responsible mutual funds to high fees and unsuccessful active management.  Moral responsibility does not absolve the investor from the need of doing good research, but my anecdotal experience leads me to the belief that at least among individual investors, many act as if moral investing is a substitute for due diligence.  Addressing Climate Change need not come at the cost of profit (Walmart came to energy efficiency from the profit motive, not an environmental ethic, as Ms. Christensen pointed out.)

That said, it's an equal fallacy to assume that financial due diligence absolves us of moral obligation.  I'm not here to tell you what your moral obligations are, but for many it will probably include making sure that the most vulnerable people do not bear the bulk of the cost of decarbonizing our energy supply.  On a more cynical note, it's a lot easier for people to accept large profits if more people are helped than harmed in the process of making them.  I attended the luncheon with the hope that I would gain some ideas on specific types of companies which are both addressing both the problem of Climate Change and of poverty.  

Climate Change and the Poor

The good news is that there is considerable potential for leapfrogging, with off grid or microgirds powered by solar or wind often being the cheapest way to bring electricity to remote locations which never had it before.  The bad news is that although such projects often bring tremendous benefits to the people in need, and carbon emissions are reduced as electric light displaces oil lamps or candles, the small scale of such projects and the limited financial resources of their users mean that such projects can seldom be completely self-financing.

Yet the rural poor are not the only ones who will benefit from switching to renewable sources of energy.  Since these projects bring reductions in carbon dioxide and other pollutants, a carbon trading system could help to bridge the gap between need and ability to pay. According to Ms. Christensen, current carbon prices are still too low to bridge the gap, in large part due to uncertainty in the quality of offsets on offer.  If the buyer is uncertain that the project producing the offsets purchased would have happened without the sale of offsets, he will be less willing to pay as much for each offset.  This is the much discussed problem of additionality.

Another problem is moral hazard.  In an unregulated environment where there are buyers of carbon offsets, a company will have an incentive to plan a new factory using less efficient processes, or even intentionally emit more of a potent greenhouse gas such as HFC-23, than they might on purely economic grounds, in order to receive a payment to later upgrade the factory to use the more efficient process they might have used anyway.  

Raising the Price of Carbon, and Enabling the Poor to Sell

There are many efforts underway to improve and certify the quality of carbon offsets on the market.  Organizations such as Green-e certify offsets to high standards, and allow retailers to place their logo on certified offsets and Renewable Energy Credits, but the very proliferation of such efforts speaks to the difficulty of the combined certifying additionally without providing perverse incentives.  

A much better solution would be global carbon emissions regulation.  By providing a mandatory cap (even a rising one) for all countries, the total number of offsets sold would be limited to the amount by which emissions were below that cap.  This would provide certainty of additionality, and also remove the perverse incentive to emit more in order to receive later payments to cut emissions.

The prospects for a truly global treaty to reduce greenhouse gas emissions, referred to by Mr. Esty as "Kyoto II", are mixed. He believes that China would be willing to sign up to a truly global agreement (although they would definitely negotiate hard to get a relatively forgiving emissions quota,) but that India does not yet feel the necessary urgency which would induce it to join such a regime.  Given the size and growth of these two emerging economies' emissions, both would be necessary signers to persuade smaller emerging economies to join.

A global treaty, by both creating demand for carbon offsets, and by providing more certainty as to the quality of those offsets, would go a long way towards increasing prices and making combined poverty reduction/carbon reduction projects economically viable.  It's my hope that the benefits of self-sustaining poverty reduction schemes run by for-profit businesses, and made economic by carbon offsets could be enough to induce large, poor, but rapidly industrializing countries like India and China to join a global carbon regulatory treaty.

Climate Change and Poverty Reducing Investments

Until we have strong, global carbon markets, we should look for investments which help bring them about.  North American investors can now buy an American Depository Receipt for Climate Exchange PLC (CXCHY.PK) the parent of the Chicago Climate Exchange (CCX).  However, the carbon contracts traded by CCX have been frequently criticized on the basis of lack of additionality.  On the other hand, the CCX already allows different sorts of offsets to be traded, and the offsets most criticized for additionality are those for the carbon sequestered by low till farming, since there are documented instances of farmers who already follow this helpful practice being paid for what they had already been doing.  An even more serious criticism of no-till farming is that the science behind the measurement of carbon sequestration is in doubt.  If our priority is solving Climate Change, the additionality and certainty of carbon sequesteration is of great concern, but if we are pursuing the dual goals of poverty reduction and carbon sequestration, then the lack of additionality is a minor concern, since there is always uncertainty in what is truly "additional."  After all, even if a farmer had been practicing no-till for years and only now is receiving payments, those payments may be enough to keep him in business and keep his land from being plowed by a less progressive farmer.  

But how will Climate Exchange PLC fare when a global carbon trading system is finally established?  The signs do not seem good.  At the moment, CCX's advantage in the carbon market seems to be that they both define the contract and provide a platform for trading it.  If governments step in to define carbon contracts by regulatory fiat, CCX will only have the advantage of incumbency, something of dubious value when the trading is in a new contract. 

A better investment would be a company which is alredy in the business of developing high-quality carbon offsets, that is, starting projects which reduce greenhouse gas emissions, and would not have happened without offset payments.  Such companies would likely be able to focus their efforts on developing contracts which could be sold into any well thought out regulatory regime. One I did find was Veolia Environmental Services (NYSE:VE), which sells offsets from landfill gas projects.  This is admittedly a small part of their business, yet their other businesses, focused on water, waste, energy efficiency, and transit are all sectors likely to do well as we confront the reality of Climate Change, and also sectors of concern to the world's poor.


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.

August 30, 2008

The Week In Cleantech (Aug. 24 to Aug. 30) - And The Tax Credit Drama Continues...

On Sunday, Technology Review showed us the first tidal power generator. Harnessing the ocean's power is the next frontier in utility-scale alternative power generation, but this has so far proven difficult given all that the sea can throw at what humans try to put in it. This installation produces power at a hefty 0.30 to 0.40/kWh, but scale can bring this down to 0.20/kWh. Cut that in half again and now you're talking.

On Monday, Clean Edge told us that Schott was planning a partial spin-off of its PV unit through an IPO. Given the headwinds the Eurozone economies are facing, and the impact this is having on equity markets, this will be a real test of solar investors' will.

On Tuesday, Ernest Scheyder at Forbes informed us that new efforts to store wind power were underway. This is great news for wind aficionados such as myself, and the direct involvement of a large integrated utility is testament to the potential of large-scale storage technologies. Of course, don't expect these technologies to come in cheap.

On Wednesday, Paul Davidson at USA Today informed us that wind and solar projects were in a race to finish before tax credits expired. This rush to get projects in the ground is no-doubt creating a tremendous amount of inflationary pressure across the supply chain, meaning that the costs of that solar and wind energy will be higher than would have been the case had the industry been operating under a predictable, long-term policy framework.

On Thursday, David Ehrlich at Cleantech.com told us that thin-film was getting fat on cash. The big winner: Nanosolar.

On Friday, The Master Resource Report showed us a graphical depiction of why electric transportation makes more sense from an energy balance perspective than ethanol-powered vehicles. After you click on the link and download the PDF, scroll down to the last page. You can access the full presentation on Tesla`s website.

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.

August 28, 2008

Playing The BC Hydro Clean Power Call

At a time when many people see clouds on the horizon for US wind, one Canadian jurisdiction is moving full-swing ahead with a procurement for renewable power. British Columbia (BC), Canada's westernmost province, announced in June the launch of its Clean Power Call, an initiative aimed at sourcing 5,000 GWh of clean power.

The structure of this process is distinctly Canadian and similar to what has occurred in the provinces of Quebec and Ontario. Like a US RPS, the government sets a target for renewable or clean power that the utility meets through procuring the electricity from private developers. The utility initiates a call for tenders and the most competitive projects are retained. Unlike the US, Canadian utilities are generally government-owned, so politicians tend to be more involved in the process than is the case for an RPS-based round of tendering.

Although the Clean Power Call calls for "clean and renewable resources" in general, wind is likely to feature prominently in the final mix of PPAs awarded.

This initiative is interesting for investors because, unlike in the US, the Canadian market features a number of publicly-listed pure-play wind developers, several of which are active in British Columbia. You can think of them as you would junior mining or oil & gas exploration plays: they go around acquiring rights to promising wind areas and if they can't develop the projects on their own, they sell their rights to a bigger player at a nice premium. A number of such firms are currently participating in the BC Clean Power Call, and stand a decent chance of getting a power purchase agreement (PPA) from the provincial utility, BC Hydro. These companies are:

Finavera Renewables (FNVRF.PK) - We've discussed Finavera and its travails in the past. The company is bidding five projects for a total of 300 MW (PDF). Should Finavera be awarded contracts by BC Hydro, this could lift the stock substantially.

EarthFirst Canada Inc (EF.TO) - I'm not sure if a US listing exists for this one, which is unfortunate for people whose brokers don't allow them to trade Canadian stocks because this is one of the cheaper plays on this. The company already holds a PPA for 144 MW of wind in BC, and has a good project portfolio in the province as well as in other parts of Canada. The stock was recently battered by investors following an announcement that development costs for one project had increased substantially, although it rebounded somewhat when the firm announced it had engaged a couple of investment banks to figure out what to do about this (people are speculating the project might be sold, unlocking some near-term shareholder value).

Naikun Wind Energy (NKWFF.PK) - Naikun specializes in developing offshore wind, and the BC coast is thought to have great offshore wind resources. The company is currently bidding 320 MW into the Clean Power Call.

Sea Breeze Power Corp. (SBEZF.PK) - This company is involved in wind and run-of-river hydro. I quickly glanced at the website and could not find anything about the Clean Power Call, although I would be surprised if they were not participating.

In all cases, we're talking about companies without earnings and whose stock price may have experienced a fair bit of volatility over the past few months. The biggest risk these firms face at the moment is the spiraling out of control of capital costs for new wind projects. This is especially acute in certain parts of British Columbia where a boom in gas exploration is pushing up the price of labor. You therefore want to go through the latest financial statements to ascertain what the cash and financing situations look like.

DISCLOSURE: The author is long Finavera Renewables

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.

August 26, 2008

Why Clean Energy Investors Need to Care About Politics

Tom Konrad

I believe that investments in clean energy should outperform the market as a whole for two reasons.  First, the inability of fossil fuel supplies to keep up with demand will raise prices and improve the environment for alternatives.  Second, growing awareness of the seriousness of Climate Change will lead to increased regulation of greenhouse gas pollution, which should benefit clean energy relative to conventional energy.

While I am certain that at some point reality will galvanize public opinion and political action on climate change, the sooner the politicians take action, the better for the planet, and the better for our investments.  This is why I and every clean energy/cleantech/greentech investor should care about politics.  Unfortunately, Green is still a partisan issue, with the typical Republican (with a few welcome exceptions) opposing the legislation we need, and strongest leaders on this subject being Democrats, with the party as a whole being supportive.

With the Democratic National Convention in my home town of Denver this week, you can expect a series of articles on Clean Energy and Politics.  After the break, you will find my take-away from a recent hearing help by Colorado state Republicans on the subject of Energy and the Economy. [Note if you're reading this on the feed or email, you'll have to click through to the site to see the full story]

As I attend several convention-related Cleantech events this week, you can expect several short articles on how politics affects the future of Alternative Energy. And, I hope, vice-versa.

Those Crazy Colorado Republicans

The Economist recently published an article about my adoptive home state, Colorado.  Having arrived here in 2005, the discussion of how the Colorado Republican "House Crazies" demolished both the state Democrats and the moderate wing of their own party finally enlightened me on why Colorado Republicans seem so, well, crazy.  

Before I moved here, I had several nice things to say about Republicans.  As opposed to Democrats, they are more likely to understand that free trade tends to bring net benefits, and that for every worker who loses his job in America, another American probably gets a job in another sector, and probably two poor workers in third world countries get jobs they would not have as well.  I also think that more Republicans than Democrats understand that you can't borrow your way out of financial trouble, although recently it seems that that fact has been lost on almost everyone in both parties.

Anyway, I came to Colorado thinking that Republicans, in general, were more likely to understand financial issues, but too bad about their social and moral stances.  At the same time, I was also becoming increasingly concerned about global climate and energy issues, and that has since led me to be involved in regulatory hearings at the politically appointed Public Utilities Commission, and more recently to testify before our state legislature.  This personal experience has led be to conclude (1) Colorado Republicans are nuts, and (2) Colorado Democrats are a bit less squishy and namby-pamby that I'd expected (although not much... I have run into some populist Democrats who totally fit the stereotype of believing all the worlds problems would be solved if we just outlaw everything bad.) Nevertheless, I have yet to encounter a state elected Republican who I could agree with about practically anything, while there are several elected Democrats whom I greatly admire.

The "No Energy Economy"

That said, when I heard through the environmental activist network that the Republican Study Committee of Colorado (RSCC) was going to have an Energy study committee meeting which was open to the public, and that it was titled "New Energy Economy, or just No Energy Economy?" I had to attend.  (The "New Energy Economy" is the catch-phrase of Colorado Governor Bill Ritter, one of those Colorado Democrats I admire.  (You can see him in a video advocating saving energy here.  Can you imagine our President in a video like this?  Or even John McCain?)

Every name I recognized on the list of speakers was someone I consider to be opposed to what I think needs to be done about energy.  They ranged from Stan Lewandowski, the General Manager of a local electric cooperative who was exposed donating his members' money to a global warming denier by ABC News in 2006, to someone from the oxymoronic Environmentally Conscious Consumers for Oil Shale, to Frank McNulty, the State Representative about whom a reader chided me last week for calling a "know-nothing from suburbia."  The only exception to the general nuttiness of the line-up was the speaker from Range Fuels, a cellulosic ethanol startup which seems to be the farthest along in commercializing the technology.  Not that I think the best thing to do with biomass is to create ethanol, but at least it's a start.  I have some hope that he may speak some sense.

So, I attended the meeting with open ears, and as open a mind as I could muster.  At the very least, it's worth knowing how the opposition thinks, and if they have any interests which might lead them to compromise on important issues. 

When the Public Utilities Commission (PUC) had held a hearing on Global Warming a few weeks earlier, the room was packed.  At the RSCC hearing, attendance was sparse, with less than 30 people in the room, including the legislators and speakers.  Since about 10 of those were the RSSC members, and I counted between at least 8 members of the opposition (such as myself) attending, there were no more than a dozen members of the public there for the entirety of the morning session.  I draw some comfort that these people are not drawing the crowds.

Of the speakers, they ranged from a good sized list of climate deniers, to people in the energy business (two natural gas drillers, and one cellulosic ethanol company, a uranium miner, and a representative of the Colorado Asphalt Association.)

The Deniers

The Deniers (James Taylor, of the Heartland institute, Bob Ferguson of the Science and Public Policy Institute, Howard Hayden author of "A Primer on CO2 and Climate" rolled out the usual tripe about "the climate is not getting warmer" and attacked various strawmen (people who claim that we can get hydrogen by doing a "Soft landing on the Sun at night," for instance.)  Needless to say, these strawmen did not stand up.  Neither do the deniers' arguments, but many other people have debunked their arguments many times over; they're in the business of providing an "alternative view" on climate science, and no amount of real science will make them go away.  If you want the blow by blow (at least until I got fed up), you can read my notes here

Stan Lewandowski, referenced above as a funding source for the deniers, gave his usual line about how the only way to ensure cheap, reliable electricity is coal.  However, the last time I heard him speak, two years before in Steamboat Springs, he had seemed to make his case a bit more coherently.  This time, he not only blamed the recent movement towards renewables for his Co-ops recent rate increases, he also blamed it on investments in gas-fired generation (the true culprit) which, he said, had been the lowest-cost resource at the time those investments were made. What's striking to me is that he seemed to have no clue that the same reasoning which lead to the investment in natural gas fired generation  was the same as that he puts forth in favor of more coal fired generation.

The Businessmen

The energy industry representatives also did a lot of spinning of facts in order to make their case.  However, unlike the deniers, they were generally quite intelligent and had done their research with some rigor.  I got several useful pieces of information from them, which led me to remark to an activist at lunch that "I never know why I'm coming to these things until after the fact."

The two natural gas drillers (John Harpole, of Mercator Energy, and Scott Moore, of Anadarko Energy Services) were at the meeting in force because they are trying to preserve a tax credit.  There will be an initiative on the Colorado ballot in November which will repeal a 30 year old tax break for gas drilling.  (The money would be spent on education, Renewable Energy, and to offset the impacts of drilling.)   Not wanting to give up the tax break, they are spreading the horror story that the gas industry will up and leave Colorado.

While of course it's true that removing a tax break will cause some marginal drilling projects to leave Colorado... but the gas reserves are not going anywhere.  In other words, drilling will slow (and it is currently massively straining the infrastructure in rural Colorado,) but when the wells are eventually drilled, Colorado will take a larger share.  This will be a net gain for the state, since much natural gas is exported.

Aside from the industry lobbying, they were fairly convincing that they would be able to keep up production of natural gas in North America, at least for the next few years.  Considering that production has increased over the last few months, we may even see a price decline this fall.  They also mentioned a company I should probably have included in my article on how to invest in the Pickens Plan.  That is Cheniere Energy (LNG), a company which owns liquefied natural gas terminals in the US.  Because these terminals are for the most part unused, the stock is badly beaten up.  I would not buy it however.  A cursory look at their financials makes me think that the company will not survive the few years until we actually need those terminals.  On the other hand, if a public company manages to purchase those terminals for a fraction of what they cost to build, that purchaser might be sitting pretty in a few years' time.

The representative of Range Fuels simply gave an overview of how his company's cellulosic ethanol is produced.  Since this can be had directly on their website, I refer readers who are curious to there.  

Of everyone, I learned the most from Tom Peterson of the Colorado Asphalt Pavement Association.  Asphalt is made from bitumen, the junk that is left over after oil refining.  As oil becomes pricier, refiners are increasingly using cokers, which turn a larger percentage of the bitumen into fuel oil.  Because of this, and the bankruptcy of a supplier of an asphalt additive, there is currently an asphalt shortage in Colorado.  The major problem for now is the lack of the additive, which should be a short term problem.  However, as long term oil prices continue to rise, the asphalt industry should be under increasing pressure from reduced supply of their primary feedstock, which will be falling both because crude refining will fall will crude production, and because a smaller percentage of each barrel of oil will end up as bitumen.  Because of this, I would expect leaders in asphalt recycling to benefit relative to asphalt companies who rely on virgin feedstock.

Another significant user of bitumen is composite roofing.  Here, there are a lot more options for alternative materials for roofing, so continued oil price rises seem more likely to benefit alternative roofing materials, despite composite's widely recognized durability. (Solar shingles, anyone?) 


Overall, it was a rather frustrating day.  I had hoped to gain some understanding into the thought processes which might give me ideas about how this generally obstructionist part of the Colorado Legislature might be persuaded of the necessity for new ways of thinking about and managing our energy.  I came away with the disappointing impression that they are too committed to their viewpoint (Their slogan is "Committed to the Core") to want to hear contrary opinions.  For instance, the testimony of several of the business representatives directly contradicted the statements made by the Global Warming deniers (for instance that climate change is a reality and that renewable energy is needed)... but while the representatives were very interested in questioning these men about the price and job impacts of various proposed changes to Colorado law, they never asked about these blatant contradictions regarding the big picture.

In many cases, the Representatives were as guilty of setting up strawmen to knock down as were their "experts."  To me, this is a sign of people insecure in their convictions, more likely to react with anger to any questioning of their beliefs than with consideration.  I came away with the sad conviction that, in the RSCC at least, their only real goal is to be able to perpetuate the fantasy world in which they live.


August 25, 2008

Five Alternative Energy Stocks I'll Research "One of These Days"

I have more ideas than I have time to explore them, and it's getting out of hand.  I still need to write the promised articles on Evergreen Solar (ESLR) and Lithium Technology Corp (LTHU), but there are many others that have caught my attention over the last six months or so.  Since the list keeps getting longer, I thought I'd just give you a taste of some of the companies in my inbox, and why they seem interesting.  Since I may or may not ever write articles about any of these, I thought I'd give people the opportunity to evaluate the companies for themselves.

  1. AECOM (NYSE:ACM).  Astute readers of my recent Hydropower overview will have noticed I said: "AECOM Technology Corporation (NYSE:ACM) [is] a global provider of professional technical and management support services to a broad range of markets, including transportation, facilities, environmental and energy," and also that the most promising opportunities were in "suppliers of parts and services to hydropower projects."  Not only is ACM a prominent provider of services to hydro projects, they also get much of their revenue from, and, as one ACM employee described it to me, energy projects which don't involve burning something.  This includes some of my longtime favorite sectors, such as transmission and public transit.  So ACM is on my short list.  I might have already bought some, if the stock price had not been going up since I discovered the company.
  2. Kaydon (NYSE:KDN). As a wind industry supplier, I've had Kaydon as part of my portfolio for about a year.   When the company had disappointing earnings last month due to their non-wind business, my instinct was that it was time to buy more, but I wanted to dig a little deeper to make up my mind.  I still have not done that digging.
  3. Power Efficiency Corp (OTC BB:PEFF).  This company, which makes software to save energy in industrial motors and such as escalators and rock crushers caught my eye last year by advertising with us for a few months.  After an interesting conversation with the CFO, BJ Lackland, I decided to make a small investment.  It's a niche technology, yet has the potential to save a tremendous amount of energy even so, and it is already working in the marketplace.  If they can get the technology accepted by OEMs, the growth potential (from a tiny base) is enormous, nevertheless, I have not done the deeper digging I require of myself to make a larger investment than I already have.
  4. Orion Energy Systems (NasdaqGM:OESX).  Another energy efficiency company that caught my attention a couple months ago, Orion provides a suite of efficient lighting solutions to commercial businesses.  Since I expect the sector to boom in coming years, Orion seems well placed to take advantage of utility Demand Side Management programs.
  5. Texas Pacific Land Trust (NYSE:TPL).   A reader sent me this suggestion in response to my comment in my Invest in the Pickens Plan article "I'd prefer a REIT with a rural focus, but have been unable to find one."  According to the company's profile, they "owned the surface estate in 964,813 acres of land located in 20 counties in the western part of Texas" as well as some oil and gas royalties.   West Texas is typically fairly windy, but to really know if this stock would benefit from a rural resurgence driven by massive wind investment, we'd have to know how their lands line up with both wind resources and available transmission capacity... and how management feels about wind... would they sell out as soon as they saw a small price rise due to interest in wind, or would they wait for enhanced economic growth to produce long term superior returns?

DISCLOSURE: Tom Konrad and/or his clients own KDN, PEFF.

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.

August 23, 2008

The Week In Cleantech (Aug. 17 to Aug. 23) - Do We Need An Energy Revolution Or Evolution?

The Economist is currently running an interesting poll on whether we can solve our energy problems with existing technologies or whether we will need breakthrough innovations. Add your vote!

On Sunday, Domenick Yoney at AutoBlog Green told us that electric bike sales were soaring world-wide. I'm not sure what's a good play on this, but an interesting trend to note nonetheless.

On Monday, Matthew McDermott at TreeHugger told us about another biofuel feedstock we may not have considered. Earlier this summer, David Pauly at Bloomberg was telling us about yet another such potential feedstock, which apparently is the craze with commodity speculators.

On Tuesday, Jennifer Kho informed us that New Energy Finance was predicting a 43% solar silicon price drop.

On Wednesday, Cleantech.com reported that Nexus India Capital had closed a $220 million fund. India is not as flamboyant a growth story as China, but anyone who's been to Bangalore can attest to the fact that this is country with the ability to be a dominant player on the technology front. Add to this major problems with the nation's power infrastructure, and you can see why this quiet giant might one day be a major player in alt energy technologies.

On Thursday, Reuters informed us that carbon funds were to grow in 2008, albeit at a slower pace because of uncertainty. If there is one sector that's exposed to the whims of politicians in the broad environmental investing space, it is this one. I like emissions trading; my grad work was in the area of market-based policy tools. But the contrarian in me can't help but feel a little uneasy at so much capital flowing into something that's so closely tied to the political mood du jours.

On Friday, TheStreet.com let us know all that we needed to know about wind energy. The Title says it all!

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.

August 21, 2008

Wind Energy ETFs: A Comparison

Three weeks ago, I wrote on the year ahead for the US wind sector and said I would analyze the two new wind ETFs now available to US investors: the First Trust ISE Global Wind Energy Index Fund (FAN) and the PowerShares Global Wind Energy Portfolio (PWND).

While I don't currently have a position in either ETF as I expect headwinds in the US (no pun intended) to place downward pressure on some of the global wind stocks in the next few months (the US accounted for 27% of global installed capacity in '07), I still intend to get in post-November elections when things get brighter on the policy side.

While these two ETFs cover the same sector, they offer two distinct options for investors and are therefore worth exploring in more detail.

Basic Valuation Metrics

The table above features a few basic valuation metrics. The expense ratio is what it costs you to invest in the funds, and many active investors shun mutual funds on grounds that high expense ratios eat away at returns. One of the benefits of ETFs is that they offer expense ratios that are lower than those of mutual funds, and this holds true for alternative energy. In this case, the 0.15% difference between the two really isn't material and probably wouldn't weigh very heavily in my decision.

The PE and Price-to-book-value are where things get more interesting from my perspective. Based on these metrics - especially PE - PWND has a higher weighting in stocks that are considered pricey than does FAN. A PE of above 76 is considered very high (the long-term average for the S&P 500 is around 15, and it peaked at around 35 in the late 90s), although it's not unusual in the alternative energy industry. This data is a bit dated so this likely is lower now, albeit it probably remains above the long-term average for the market. Depending on what your position is on growth stocks, this may or may not matter much. If you have a value leaning and believe low-PE stocks outperform in the long run, then this may be a red flag.

With regards to the share price premium over net asset value at yesterday's close, this isn't an especially useful metric on its own, and would probably be more useful if examined as a trend over a longer period of time. Nevertheless, this is something worth keeping an eye on - an ETF trading at an important discount to its NAV could present an interesting buying opportunity, while the opposite could spell downside risk.

Finally, PWND holds 32 securities, whereas FAN holds 67. This implies that PWND's positions are on average larger than FAN's - the average security in PWND makes up 3% of the portfolio, whereas that figure is 1.67% for FAN.


FAN's top ten holdings are somewhat more focused on the wind supply chain, whereas PWND has a more exposure to wind park operators. Again, as can be noted, PWND's positions are appreciably more concentrated than FAN's, with the top ten holdings making up about 65% of the portfolio Vs. 57% for FAN. Overall, I expect the supply chain to be less impacted by tightness in credit markets than park operators.

The following two graphs are based on categories I created. While both ETFs disclose their industry exposures on their respective websites (here for PWND and here for FAN), I wanted to dig a bit deeper to know what those exposures really meant in terms of the wind power value chain. I didn't know all of the companies so my superficial search might not have landed everything where it truly belongs, but by-and-large I believe this is a good approximation.

My categories are fairly self-explanatory, save perhaps the distinction between "Park ownership" and "Power gen". "Park ownership" refers to pure-play wind park and/or renewable power generation asset owners, whereas "Power gen" refers to larger electric utilities with exposure to a wide range of generation fuels.

We can note that, by market value of holdings, both funds are mostly focused on turbine makers and wind park owners - no big surprise here. One of the big differences is undoubtedly the fact FAN has three times the exposure to the Power gen sector than PWND does - this probably accounts in part for the PE differences between the two funds. Another notable difference is the comparatively smaller exposure to Blades FAN has relative to PWND, although I don't have an opinion one way or another on this.

Finally, country exposure. You will notice that in neither case does the final count come up to 100 - that's because in both cases only the top ten countries were provided. I'm not sure how much of a difference this makes, seeing as most of the top holdings are global businesses. This breakdown says nothing about the exposure of the underlying businesses to different geographical markets, which is arguably what matters most if you intent to hold the ETF for the medium or long term. Nevertheless, to some, this may be useful info in trying to time an entry point if you have an opinion on where each of these equity markets is headed.


These two ETFs offer distinct choices to investors, although the performance chart above tells a pretty similar story so far (and not a great one at that...). I view the recent downward pressure on the wind sector mostly positively because I like the space long-term and periodic hiccups provide good entry points.

PWND, with its more concentrated positions and greater focus on pure plays, probably offers a more direct way to play the space. If global wind stocks take off, you will experience greater capital appreciation with this one. However, those rich PEs and concentrated positions might be a red flag for more conservative investors.

FAN offers more diversification, and its larger exposure to the Power gen space might make it a tad less volatile. The top ten holdings have a greater concentration on the supply chain, which I believe will remain strong.

I am leaning towards FAN. I already have exposure to speculative wind in my portfolio, and would look to buying an ETF as a means of reducing my risks on a portfolio basis. I will provide an update on this after (and if!) I end up pulling the trigger.

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

August 20, 2008

How to Invest in the Pickens Plan

A friend recently asked me how to invest in the Pickens Plan.  I named a stock (see below).

He then surprised me by saying "You are the fifth person I've asked, and no one else knew how.  Several said it could not be done."

You can invest in T. Boone Pickens's plan.  Here's how:

The Plan

T. Boone's plan is both simple and audacious.  

  1. We will build wind farms all over the Great Plains.
  2. Build the necessary transmission to get that electricity to cities, displacing natural gas used in electricity generation for the use in automobiles.  
  3. This will give us an alternative, clean transportation fuel, to replace oil, which has peaked.  
  4. It will also cause an economic revival for rural America.

There are investments available for you to profit from all of these steps (so long as they are more successful than is currently expected by the market.)  Most of the links below are to articles about how the company fits into the clean energy picture.

1. Wind Farm Investments

To profit from the massive build out of wind farms, look no further than wind turbine manufacturers, and other wind related stocks. 

2. Transmission Investments

We've been pushing transmission investments at this blog for a long time.  It's nice to have an oilman hop on our bandwagon.  Here are some of our top picks.

3. Natural Gas

  • The most direct investment in the Plan is natural gas fueling stations.  Clean Energy Fuels (NASD:CLNE), operates fueling stations for natural gas fleets, as well as providing fueling stations to the public.  T. Boone owns about 37% of the company personally, serves on the board, and founded the predecessor company in 1997.   His wife owns another 7%.  Although he just recently hit the media with it, T Boone has been thinking about peak oil for a long time. (This is the stock I told my friend about.)

4. Rural Resurgence

  • Massive wind investment should be good for real estate values in rural towns in windy areas, mainly the great plains.  You don't have to buy the land that the wind farm is on to benefit; the economic revival should help land values in towns nearby, too.  The workers have to live, eat, shop, and sleep somewhere, and county tax rolls will benefit, leading to improved public services.
  • Another way to play the same trend would be to invest in a Midwestern REIT, such as Investors Real Estate Trust (NASD:IRET).  While this should profit by an improving Midwestern economy, I'd prefer a REIT with a rural focus, but have been unable to find one.


DISCLOSURE: Tom Konrad and/or his clients own ZOLT, GE, ABB, SI, CPTC, ITC, NGG, PWR, CLNE, OC, WFIFF, .

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.

August 19, 2008

Three Years After Katrina and Rita, New Orleans’ Grassroots Effort Brightens Environment, Community

The following is a Special Information Supplement by our Featured Company Green Light New Orleans.

Fundamental Concerns of Some Local Residents Addressed by Non-Profit

New Orleans, Louisiana - Green Light New Orleans, an energy efficiency program, is still helping to rebuild New Orleans. Equal parts environmental and social aid, the non-profit's solution to mitigate carbon emissions while helping low-income residents has demonstrated once again that simple ideas can result in remarkable impact. Green Light New Orleans sends volunteers to area homes to install free compact fluorescent light bulbs, educate homeowners on the energy saving and environmental advantages of CFLs, and discuss the importance of recycling used bulbs and take other energy efficient measures in their homes.

Executive Director and Founder, Andreas Hoffmann, started the program in response to the 2005 storm. A Swiss-born roots rock musician, Hoffmann’s idea began in his own home, expanded to his band’s tour, and has since become one of New Orleans’ most effective energy-efficiency programs.

“After Katrina I had to do something to help the city of New Orleans and it had to be connected to the cause of the storm: global climate change. When I returned to New Orleans I changed the light bulbs in my home and after experiencing the reduction on my energy bill first hand, I decided to use CFLs as a means to offset the tour pollution of my band. After we installed a few thousand CFLs to meet the tour goal, I quickly realized that there was a need for this kind of energy efficiency program, and founded Green Light New Orleans in October 2006,” said Hoffmann.

The simple premise has net unmistakable results. In two years, the organization has installed 120,000 CFL light bulbs in New Orleans, enough to offset nearly 60 million pounds of carbon. The estimated 5 to 8 year savings is approximately $5.5 million for the city's residents; an average household will save about $1400 in energy costs during the period. What's more, Green Light New Orleans’ growth has been monumental. Over 3,000 households are currently on the organization's waiting list for installation. This means that the organization currently has as many households waiting for immediate installation as it has completed throughout its entire history. The installation is free of charge to every resident.

Perhaps what makes Green Light New Orleans most effective is its unique organization. Led by Hoffmann, three staff members organize packs of volunteers that descend on the non-profit's base every week. Operating out of a brightly painted, shotgun-style row house close to Tulane University, Green Light New Orleans plans and prepares seemingly impossible logistics as routine: small windows of time in which residents will be home to receive volunteers; the appropriate quantity, size, and wattage of light bulb for each household; directions; maps; confirmations; names; and safety assessments. The three staff train and pair teams of volunteers with households while teaching them about the environmental and economic impact of the program.

To date, over 1,600 volunteers have worked with Green Light New Orleans. Many volunteers are attracted to the program because of its unique combination of environmental and social agendas. The intimacy of working directly with homeowners – most affected in one way or another by the hurricanes – coupled with the opportunity to discuss climate change and energy costs with the immediacy of offering a solution is powerful.

“The people we met and helped out were amazing. They were so friendly and excited about what was going on that it made it very enjoyable and worthwhile to change their light bulbs. Today we got to make a difference for people economically and environmentally. That alone is spectacular,” said a volunteer from Succasunna, New Jersey.

Green Light New Orleans receives thirty or more applications for the program each day. Residents not only save money on their energy bills, but they also realize that there are several simple steps that can be taken to reduce energy usage and mitigate global warming. In a follow up survey conducted in June 2008, 57% of Green Light New Orleans program participants reported that Green Light’s service encouraged them to take other energy efficiency measures and almost all of the participants claimed that they are prepared to purchase CFLs when their current ones burn out.

“I am elderly and just got back into my home after hurricane Katrina. I am on a fixed income and I would really appreciate all the help that your organization can give with energy efficient light bulbs and in return it would lower my light bill,” described one resident in her application to Green Light New Orleans.

About one-third of the funding for Green Light New Orleans is through a carbon trading agreement with EcoSecurities, the largest carbon trader in the United States. Green Light New Orleans sells the carbon reduction generated by installing CFLs to EcoSecurities in order to offset pollution in other areas of the world. The rest of the program is funded by corporate sponsors such as Entergy New Orleans and Coca-Cola, as well as private donations.

“We support Green Light New Orleans in their efforts to mitigate climate change at a grassroots, community level,” said James Heath, Head of U.S. Origination for EcoSecurities. “Citizens of New Orleans have experienced firsthand the effects of climate change and it is important to incorporate forward-thinking, energy efficiency measures in the rebuilding efforts. We are excited to be part of this partnership, and hope it will serve as a model for future projects.”

The model for Green Light New Orleans has proven such a success that it has begun to expand to other communities. Hoffmann estimates that Green Light New Orleans will install over 3 million CFL light bulbs over the next 5 years. Should that goal be met, Hoffmann's simple idea of changing light bulbs will result in the reduction of a whopping one billion 422 million pounds (1,422,000,000) of carbon from the earth's atmosphere.

About Green Light New Orleans:

By helping households make the switch from incandescent light bulbs to energy efficient CFLs, Green Light New Orleans helps residents reduce their household energy consumption, save money on their energy bills, and encourages individuals to rebuild in a more affordable and environmentally conscious way. Green Light New Orleans focuses on changing awareness as they change bulbs, planting a seed that teaches participants that small changes can make a difference in combating the effects of global warming and rebuilding in a more efficient and sustainable manner.

For more information please contact executive director Andreas Hoffmann or Lauren Tucker at 504.324.2429 or andreashoffmann@greenlightneworleans.org


August 17, 2008

U.S. Geothermal, Inc (AMEX: HTM)

US Geothermal, Inc. (AMEX:HTM) ) is one of only two pure-play geothermal power companies traded on US exchanges.  The other is Ormat (NYSE:ORA), a vertically integrated company widely considered to be the industry leader.  As baseload, extremely reliable power, Geothermal fits easily into utilities existing grids, making it a popular source of green power, especially with utilities uncomfortable with the intermittent and difficult to predict nature of wind and solar.  

Unlike wind and solar, the potential resource for geothermal power is quite small relative to electricity demand. At least until Enhanced Geothermal Systems (EGS) technology is commercialized, geothermal will remain a boutique form of electricity generation, producing less than 1% of our electricity supply.  In many ways, the prospects are like those for new hydropower development in the US: new large resources are unlikely to be developed, but there is a lot of potential for small projects.  Until last year, the relatively small potential for geothermal led the technology to be mostly ignored by investors.  Now geothermal is getting more of the attention it deserves as a rapidly growing (if still tiny) source of clean power.

The Portfolio Approach

I bought US Geothermal last year as part of a small portfolio of Geothermal exploration companies.  Others I bought around the same time were Sierra Geothermal (OTC: SRAGF, SRA.V), Raser Technologies (RZ), and Western GeoPower Corp (WGPWF.PK, WGP.V), which I added to previous holdings of Nevada Geothermal (OTC BB: NGLPF.OB, NGP.V) and Ormat.  The group as a whole has performed well, although I have small losses in Sierra Geothermal and Western Geopower.   In general, I have not evaluated these companies in depth.  Understanding a geothermal exploration company is a lot like understanding other mining exploration companies.  To gain insight into their likely success or failure, one would have to delve into the underlying geology of their leases, something I lack the skills to do.  This is why I prefer to take a portfolio approach to the sector, which has so far been effective at protecting me from company specific risks.

US Geothermal

That said, I agreed I would look into HTM in more detail, and since their annual meeting is coming up, the annual report for the fiscal year ended March 31, 2008 was conveniently sitting in my inbox.  I find reading the annual report from cover to cover an excellent place to start when researching a company.  Here are my impressions:

  1. The company has a handful of leases, at many stages of development, from Gerlach and Granite Creek, exploration prospects, to Raft River, which began producing power this year, but which they are continuing to expand.  In between are Neal Hot Springs, where they have what sounds like very promising test results from their first well, and San Emidio, a recently acquired older geothermal plant which they have plans to upgrade and greatly expand (they recently received drilling permits to start the expansion.)
  2. The company seems to be following their stated strategy of acquiring only leases where there is strong evidence of good geothermal prospects.  Although all natural resource exploration is risky, this should help to ameliorate the risks of exploration and development.
  3. The company will need a substantial amount of cash to follow their chosen strategy.  This will probably come in the form of additional private placements, and joint ventures to develop specific projects.  The need to do additional private placements (where large blocks of stock are sold at a discount to the market price) will likely keep downward pressure on the stock price, which makes it likely that the share price will not see the quick tripling it had last year.
  4. The interest among utilities in geothermal power is remarkably strong, so much so that they felt comfortable starting over from scratch on the Power Purchase Agreement (PPA) for the second stage of their Raft River project.  Management exudes confidence in their ability to negotiate favorable PPAs for future generation.  This is a marked contrast to other renewable electricity producers.  From my personal experience talking to wind, solar and hydro developers, they typically feel mistreated by utilities which often have the upper hand in negotiations for PPAs.

Overall, HTM seems as solid a company as could be expected from an early stage resource development company.  If you do want to venture beyond Ormat to buy a few geothermal exploration companies, HTM should be on your short list.  While it may not have the price growth potential of companies which do not yet have US listings, it is also relatively less risky due to the relatively high quality of the projects the company is pursuing.

Tom Konrad

DISCLOSURE: Tom Konrad and/or his clients have long positions in ORA, HTM, RZ, SRAGF, NGPLF, and WGPWF.

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.

August 16, 2008

The Week In Cleantech (Aug. 10 to Aug. 16) - Big Solar Getting Ready To Rival Big Wind

On Sunday, Tom Philpott at Peak Energy told us about The End of Food. The book, that is. While food is neither alt energy not cleantech, it is a key environmental theme in my view and will grow in importance as the effects of climate change are felt across the globe.

On Monday, David McClellan at Solve Climate argued that the costs of nuclear energy were rising out of reach. A good attempt at coming up with a comparison of wind and nuclear prices, and interesting in the context of my earlier article on power plant costs.

On Tuesday, Matthew McDermott at TreeHugger told us about a new software that allows windfarms to predict output to four days in advance. Whenever I cheer wind on, and I do that a lot, I get comments to the effect that wind won`t ever count for much because of predictability and dispachability problems. To that I answer: if you`re paying no attention to technological developments on the storage and predictability fronts, you`re missing the boat.

On Wednesday, Andy Hoffman and Derek DeCloet at the Globe & Mail informed us that Timminco had faded under market glare. And so it goes for Timminco (TIMNF.PK), arguably the biggest solar story of 2007 because no one saw it coming. Moral of the story? Solar remains marred in technology risks. This is an industry that is in flux and not unlike the internet in the 1990s; it'll be game-changing one day but there is no way to tell today what the industry will look like once it's reached maturity. In such volatile times as these, handle with care...

On Thursday, Matthew L. Wald at the NYT told us about two large solar plants planned for California. Now that's the kind of news we like to get out of the solar sector! This is the sort of scale that rivals wind, and declining costs should make more of these of possible.

On Friday, David Ehrlich at Cleantech.com reported on the future of the US wind market. Potentially bright indeed, although keep on eye on headwinds over the next few months in the form of an expiring PTC, higher financing costs and higher capital costs.

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.

August 14, 2008

When the Wind Blows

In the past, readers have challenged my assertion that wind in the Great Plains blows mostly in the winter.  In fact, I was once taken to task for it by a Colorado State Representative (a know-nothing Republican from suburbia) when I was testifying as to the advantages of Solar in Colorado in terms of timing.  In the past, I've only had secondary references to "NREL data," and ERCOT's Analysis of Transmission Alternatives for Competitive Renewable Energy Zones in Texas (pdf, 8MB), where wind in the Texas panhandle also conforms to this pattern.

However, I was just browsing NREL's Wind Energy Resource Atlas of the United States, and was able to see it quite dramatically from the maps.  As the Atlas says: "Because there is considerable seasonal variation in the wind energy resource, with maxima in winter and spring and minima in summer and autumn throughout most of the contiguous United States, assessments of the wind energy resource have also been produced for each season."  Here are the maps all on one page so you can see the difference (white/orange wind is weak; blue/magenta is strong.)

Map 2-12 Winter wind resource estimates in the contiguous United States


Map 2-14 Summer wind resource estimates in the contiguous United States


Map 2-13 Spring wind resource estimates in the contiguous United States


Map 2-15 Autumn wind resource estimates in the contiguous United States

Quite dramatic, isn't it?  It's also clear why T. Boone is building his wind farm in the Texas panhandle.

Tom Konrad

August 13, 2008


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August 11, 2008

Power Plant Costs & The Case For Energy Efficiency

A few weeks ago, I stumbled upon a presentation that was given by FERC officials on the phenomenon of rapidly rising costs in US power generation (presentation link at the end of this post). The FERC, or Federal Energy Regulatory Commission, is America's energy watchdog.

The presentation begins by noting that across America's major electricity hubs, power prices are up significantly on last year (between 62% in the Midwest and 123% in NYC) and that, unfortunately, this probably isn't an anomaly. In fact, the presentation argues, there may be something secular at play. Two main trends are noted.

Energy Costs

Because of gas' prevalence in US power generation, the cost of generating a unit of electricity through gas often sets the unit price in the marketplace across fuels - gas is said to be the marginal fuel. Commodity market watchers and anyone who needs to buy gas on spot or futures markets will have noticed a sharp increase in the price of gas over the past five years. This increase is what is responsible for the vast majority of power price increases currently being experienced by US electricity customers.

Of course, it hasn't helped that the price of coal has been rising as well on the back of a weak US currency and an explosion in demand from India and China. In some parts of the US, such as in the Midwest, coal is the marginal fuel. Tom wrote an interesting piece last year on how to play coal shortages.

Capital Costs

The second factor impacting the cost of power generation is a rapid rise in the cost of many key inputs needed to build a power generation facility. Increases in the price of steel and cement, for instance, have appreciably outpaced inflation as whole over the past few years, as have those for other commodities and even labor (albeit to a much lesser extent).

The result is the chart below, which shows the capital costs of building generation capacity in 2008 as compared to 2003-2004. The caveat with this graph is that accurate data on power plant capital costs is hard to come by given the sensitivity of this information. Nevertheless, the results from these estimates show that while the inflationary environment in power generation capital costs has impacted all fuel sources, wind has been impacted to a lesser extent than competing fuels like coal. While combined cycle and combustion turbine gas remains cheaper than wind, wind has made up some ground on the 2003-2004 period.

The effects of this phenomenon on power prices, however, may not be fully felt for a few more years.

Connecting The Dots

Throw these two factors together (rising capital and fuel costs), and the weighted-average levelized cost of electricity across the system - the levelized cost is the present value of the costs of building and operating a power plant and are used to set prices over the plant's economic life - looks like it could favor wind a few short years down the road.

There are two forces at play improving the economics of wind relative to conventional power generation: (a) growing wind manufacturing capacity currently under construction (this is not apparent at the moment because of the inflationary environment discussed above, but once new manufacturing capacity comes on line and the supply chain loosens up wind costs will decrease) and (b) worsening economics for fossil-fired generation due to increases in capital costs but mostly fuel costs.

Add to this regulation to force fossil generators to internalize the cost of carbon and a growing number state mandates for renewable power, and the picture looks even more positive.

But The Real Winner Is...

Unsurprisingly, the FERC expects there to be a response to rising electricity prices - in other words, demand for power is elastic.

What's the main response likely to be initially? An increase in demand-response (technologies that adjust power consumption based on prices). The FERC estimates that the first round of demand-response (the low-hanging fruit) could come in at about $165/kW, which compares rather favorably to the capital costs of the cheapest option on to the graph above, combustion turbine gas, at between $500 and $1,000/kW. And, like renewable energy, there are no fuel costs.

Somewhat paradoxically, one of the main impediments to demand-response growth could be energy efficiency measures more broadly, or reducing power use at any time instead of only at peak times, which is what demand-response does. Available energy efficiency measures would cost in the order of $0.03/kWh, compared to $0.09/kWh for the fuel alone for a combined cycle gas plant.

Demand-response is likely to be more popular in states where most customers have some exposure to fluctuating daily power prices, whereas energy efficiency measures may gain more ground in states where the pricing is more static for most customers.

It's The Economics, Stupid!

One of the biggest beefs alt energy detractors have with the industry is that "the economics don't make sense without state support." (Of course such detractors generally like to avoid conversing about the mammoth tax breaks the fossil industry receives) This could very well change in the years ahead as the burden of fuel costs on the levelized cost of fossil electricity boosts wind and solar's competitiveness.

However, as shown above, the cheapest kW is the kW saved, and regulators are aware of this. Unlike cars, where the entire vehicle has to be changed to gain access to more efficient technologies, energy efficiency measures in commercial, industrial and residential buildings can be implemented fairly painlessly. Now that the "economics make sense", expect such installations to grow in popularity

Access the FERC presentation here (PDF document).

August 10, 2008

Hydropower: The Renewable Energy Elephant in Room

There is a form of renewable energy which accounts for approximately one sixth of world electrical generation, and unlike wind and solar has a natural form of storage which costs a fraction of any other form of electricity storage, and has black start capability.  Given all these positive characteristics, it may seem surprising that we have not yet written about it.  The renewable energy in question is Hydropower, and the reason we've not covered it before is that the facilities are typically owned and run by governments or diversified utilities.  

Until now, the only Hydropower investments I have been aware of were utilities which produce a high proportion of hydroelectric power, such as Idacorp (NYSE:IDA.)   Just as regulated utilities do not bear the full risk of escalating fossil fuel prices, utility owners are unlikely to reap the full benefits of Hydropower as we transition to a clean energy economy.  Both these risks and benefits tend to accrue to the customers of regulated utilities.  The Economist had an article on what is probably the largest publicly traded hydropower utility, Russia's partly state owned RusHydro.  Unfortunately, as we have seen from the examples of Yukos, and more recently Mechel, Russia is a very risky place for investors.

As a investor, I am interested in participating in the upside of hydropower, but am not interested in letting Putin dictate my investment returns.  To learn more about the industry in the hope of finding investment ideas, I recently attended Hydropower in Colorado, a technical seminar put on by AECOM Technology Corporation (NYSE:ACM), a global provider of professional technical and management support services to a broad range of markets, including transportation, facilities, environmental and energy.   TCB AECOM and Boyle AECOM, the divisions putting on the seminar provides planning and engineering services to dam hydropower projects, which was why they were putting on the conference, where the typical attendee was a civil or mechanical engineer working for a water utility.  I found the presentations of AECOM employees to be very informative, especially those on the real world challenges of getting a new hydropower project up and running.

Pumped Hydro storage

I've often written about aspects of electricity storage.  Among storage technologies, the 800 pound gorilla is pumped hydropower (alternatively "pump hydro") storage.  Pumped storage was built for spinning reserves (available power to meet short term surges in demand), and we have tens of gigawatts of capacity in the United States.  Despite recent breakthroughs in storage for solar, and recent small-scale demonstrations of utility scale batteries, pumped hydropower storage is an existing technology which was first deployed in the 1890s in Italy and Switzerland, and has seen worldwide deployment since the second world war.

However, the US has not seen the construction of a new pumped storage facility since the 1980s.  According to Blaine Dwyer of Boyle AECOM, there have been eleven permits for pumped storage issued by FERC since then, but none of the projects have been built, and the permits have since been rescinded.  Issues which have prevented the construction of new pumped storage most likely include the lower differentials in peak and off peak power prices due to the rapid expansion of natural gas generation, as well as an increasingly organized and active opposition to any sort of new hydro by environmental groups.

With rapidly rising natural gas prices, as well as increasing penetration of intermittent renewables, we should see rising daily price differentials, which should greatly improve the economics of new pumped hydropower projects.  According to Karl Kumli, a leading Colorado utilities and water lawyer who gave the presentation on the legal aspects of permitting, new pumped hydro projects (at least in Colorado) are likely to be limited to off-channel facilities by environmental concerns and existing water rights holders. 


I went to the seminar to learn about hydropower, a technology I had not previously investigated.  While these have not yet become investment ideas, below are the observations I found more surprising or interesting.

  1. Hydro engineers seem surprised at the unpopularity of hydro in general, and there was a strong interest from most attendees in pumped hydro storage.
  2. There are many opportunities to add hydro generation to existing water facilities.  Even wastewater flows and agricultural ditches can be opportunities.  However, many of these opportunities will be non-dispatchable (if not intermittent), because the flows are managed for other purposes.  
  3. Monthly data are not fine enough to fully determine the feasibility of a power project; the smoothing of flows significantly overstates expected power generation.
  4. There is a wide variety of different turbines available, with varying costs and efficiencies, suited to different flow profiles.  The Francis turbine is the current workhorse of the industry, but the expected trend towards new hydro projects with smaller and less predictable/controllable flows will, in my opinion, lead to an increase in the use of Bulb turbines for fitting into existing pipes or channels, and cross-flow turbines for their low cost and ability to handle a broad range of flows.   
  5. The industry's bespoke model has left a gap for a cheap and simple low-efficiency turbine which could be mass produced for a wide variety of situations.  It's my guess that the legal challenges of permitting hydropower have led to this market situation; only projects which the government is behind and are likely to be very profitable are pursued, because only those are valuable enough to defray the legal costs.  Put another way, given high legal costs, savings from a cheaper installation can make less difference on the overall economics of a project, leading the industry to pursue efficiency of power generation with more expensive turbines.
  6. Although a single large turbine is most efficient for any given flow, Multi-unit projects can help with feasibility in situations with significant flow variations over time.
  7. Legal: Exemptions are the way to go for licensing.  Last forever, does not have to be renewed.  This will likely lead to new projects being relatively small and designed to capture wasted energy in existing channels and pipes, rather than the construction of new dams.
  8. At least in Colorado, there is a large and growing amount of money available for hydropower projects within government entities.  To date, this money is largely untapped, despite the fact that it's available at very low interest rates (2-4.5% for 20-30 yr loans.)


I am still pursuing my research into hydropower investments.  The underlying theme has not changed.  Since most new hydropower will be built by government entities, direct investment is not likely to be the most profitable option.  This leaves investment opportunities in the suppliers of parts and services to hydropower projects.  I do expect an increase in such projects, both small hydro and pumped hydro, so such suppliers should be able to ride the trend.  As I investigate and invest in individual companies, I will write about them further.

Tom Konrad


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.

August 08, 2008

Some Thoughts on Water, Electricity and Climate Change

Most forms of electricity generation use water.  Thermal generation (coal, natural gas, nuclear, biomass, and Concentrating Solar Power (CSP)) evaporate water for cooling, although they can substitute air cooling, but only by sacrificing efficiency.  Moving in the other direction, many dry coastal regions use desalinization to essentially convert electricity into clean drinking water.   A plant  was recently approved in Southern California, despite environmental concerns. Lack of water use is one of the less recognized advantages of wind and solar photovoltaic generation, but is a significant advantage in the arid West. 

Next week, I will be publishing an article which came out of a recent Hydroelectric power seminar I attended on Tuesday.   When a hydroelectric project requires a new dam, water will be lost due to increased evaporation, but even new hydro projects in existing channels will require consistent flows to be economic. Hydropower projects become more cost-effective with more consistent water flows, so expectations of future water flows are extremely important for planning new projects.  

The effects of Climate Change on water availability are much less predictable than the effects on temperature, and these effects are not limited to just changes in rainfall patterns, changes in evaporation, and changes in snowmelt.  According to Ken Knox, a water resources engineer at URS Corp (NYSE:URS), and former Colorado Chief Deputy State Engineer,  the largest driver of decreased water availability in Colorado (and the rest of the arid West) is not changes in precipitation, snowmelt, or evaporation, but a longer growing season due to warming.  Farmers, many of whom hold very senior water rights, are taking advantage of a longer growing season to plant more crops.  They then irrigate for much more of the year, using more of the finite water supply for longer periods.

For prospective hydropower projects, this means that new projects installed in existing irrigation ditches with senior water rights are likely to be able to generate power for longer from more consistent flows.  On the other hand, any project relying on less senior water rights is likely to see decreasing and less predictable flows, which will reduce the viability of such projects compared to how they would have performed under historical conditions.

For other decisions between renewables and conventional generation, and even when choosing between types of renewable generation, I expect availability and cost of water to be an increasingly important factor.  Nuclear generation for baseload power becomes significantly less advantageous when it must be shut down due to insufficiently cool water for cooling.  Similarly, there was local consternation in the Colorado activist community when our utility, Xcel Energy (XEL), chose to meet an Renewable Portfolio Standard requirement with a photovoltaic rather than CSP plant in the San Luis Valley.  From reviewing the regulatory filings, I became convinced that the lack of availability of water on the site made the choice of photovoltaics a forgone conclusion.  The number of  projects where the availability of water plays a large role in determining the final outcome can only increase as available supplies decrease or become less predictable.

Tom Konrad


August 07, 2008

And the Winners Are...

The results of last week's poll:

Answer Text Votes %
Lithium Technology Corp (LTHU) - Batteries 64 14%
Evergreen Solar (ESLR) - Solar PV 62 13%
US Geothermal (HTM) - Geothermal 61 13%
Ocean Power Tech (OPTT) - Wave Power 49 11%
Electro Energy (EEEID) - Batteries 49 11%
China Wind Systems (CWSI.OB) - Wind Turbine Parts 47 10%
AAER Inc. (AAERF) - Wind 30 6%
Carmanah Technologies (CMHXF) - Off Grid Solar/LED 30 6%
SolarFun Power Holdings (SOLF) - Solar PV 29 6%
Satcon Technologies (SATC) - Power Conversion 25 5%
OM Group (OMG) - Hydrogen Catalysts 19 4%

Stay tuned for articles on Lithium Technology Corp, Evergreen Solar, and US Geothermal.  I have not previously researched any of these in depth, so I'm as curious as the rest of you.

August 05, 2008

Linamar: A Bright Spot In A Sea Of Doom & Gloom

Linamar (LNR.TO or LIMAF.PK) is a Canadian auto parts designer and manufacturer whose primary customers include GM, Chrysler and Ford. Before you rush to the exits because of their exposure to the North American auto industry, consider the following. Often, cyclical downturns beat a stock down far more than is deserved. We've seen it over the years with home builders, as discussed here, and we've discussed here how cyclical downturns offer opportunities for value investors to buy companies while they're cheap.

Many will argue that this is in fact a secular downturn for a company like Linamar. However, Linamar is showing some signs of being able to emerge from this storm as strong as ever. The company's focus on technologies that improve fuel efficiency has led to market share gains, with Linamar's North American content per vehicle rising from $94 last year to $105 this year. Although Scotia Capital analyst David Tyerman is bearish on the industry, he sees a bright spot with Linamar: "Linamar remains our favorite, given its exposure to new technologies."

The company also recently acquired a plant in Mexico to help keep costs down. They have also been increasing sales into Asia, and continue to make market share gains in Europe. As a result, sales, margins and earnings were actually up this quarter, both year-over-year as well as incrementally, despite a weak North American economy.

Nevertheless, its stock price has been brought down along with its sector peers, leaving it with a P/E of 7.5 and a price to book value of less than 1. This has prompted its chairman, Frank Hasenfratz, to acquire shares on the open market, stating in a press release that he believes they are undervalued.

No one knows how long this downturn in the US auto sector will last, but Linamar is showing signs that it can do just fine navigating through it.

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.

Interested in writing for AltEnergyStocks.com? Please contact us

DISCLOSURE: The author does not have a position in Linamar

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.

August 04, 2008

Getting in on Early-Stage Companies

Question from a Reader: (links mine, in case you have not read the articles I think he's referring to)

Hi, I'm a very small time investor and I have a strong longterm belief in the alt energy sector. I have one gripe with the sector, though - the fact that it's hard to get in all the way at the bottom, ie: from the birth of companies. I have a feeling that much more growth will happen at that level, and investing in something like ICLN gets me into mature companies that have much less growth potential.
Would you be able to write about what a small time investor like me can do to get a better coverage of the market (especially the bottom end of the market) with limited funds. Ex: VC's if there are any publicly traded, or any other instruments I can't think of.
Really appreciate it. Oh, and congratulations on an awesome website! It's one of my favorites, and my one stop shop for alt energy news!


This problem is not unique to the energy sector.  In general, early stage companies are very risky, and sometimes dodgy.  Unlike more mature, listed companies, it's difficult to find good analysis, meaning that you have to do most of your own research.  If you're investing just a couple thousand dollars in a company, the work necessary can make it very difficult to earn enough on the ones that do well (and gains can be as spectacular as the losses) to pay for your time.

However, if you have time on your hands, the place to look for spectacular potential gainers is in penny stocks.  There are especially large gains to be had when a company gets a listing on an exchange, which means that they are now subject to a lot more oversight, and hence many other investors are willing to invest.  One of my most spectacular gainers last year was US Geothermal (HTM), which I bought at $.85 before it got a listing, and it's now trading over $2 (it has been higher.)  Other penny stock investors (I do very little investing in these companies) will doubtless regale you with stories of much more spectacular gains... but they seldom tell you about the losers.  Part of the reason I do so little pink sheet investing is I find that for every US Geothermal, I end up with one or two dogs, so, on average, my pink sheet returns are no better than my returns on listed companies.

For those willing to brave the odds, however, I put together some tips last year about how to start your research on penny stocks by listing some common warning signs.  Also, because these companies are very volatile, you are likely to be able to greatly increase your returns by knowing when to sell.

DISCLOSURE: Tom Konrad owns HTM.

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.

August 03, 2008

The Production Tax Credit & The Year Ahead For US Wind

Even though solar - and especially solar PV - has managed to capture the lion's share of public equity investors' attention over the past three years, wind remains far more competitive with with fossil-fired power generation on a cost basis than solar, and thus presents a fundamentally stronger investment case for the time being (and I emphasize for the time being). What's more, wind as an industry is more mature than solar; for solar, the lack of earnings for many companies and the wildly inflated PEs for others make the sector potentially volatile and risky for investors.

While installing a kW of commercial wind in 2007 in the US would have cost you on average $2,200 according to the DOE's EERE (PDF document), installing the same amount of commercial solar PV would have set you back more than twice that amount. In 2007, the cumulative-capacity-weighted-average wind power price (the amount wind farm owners were paid for their electricity on average) was below the nationwide price band for a flat block of wholesale power.

It is therefore not a surprise that, for 2007, the US installed 27% of all global wind (5,329 MW), 62% more than number two China. In fact, between 2004 and 2007, US wind installations were on a tear with a CAGR of 35%, making the US the number one global wind hotspot for that period.

As can be noted from the graph above (the y-axis is MW), the steepening of the curve has corresponded with a period of uninterrupted Production Tax Credit (PTC) availability. The PTC is a federal incentive for wind power that comes in the form of a tax break per kWh of electricity produced, and has historically been responsible for driving growth in the industry. In fact, the past cycle of PTC expirations and renewals led to a boom-and-bust cycle in US wind, as can be seen from the graph for the period 1999 to 2004.

Is PTC The Whole Story?

The PTC is set to expire again at the end of 2008 for the first time since October 2004, and the Senate currently appears to be in no mood for an early renewal. Needless to say, this is causing headaches in some quarters. Throw on top of that an inflationary environment for power plant capital costs (tune in later this week for a piece on this) and a credit crisis that's raising the cost of capital, and you've got something like a perfect storm brewing for US wind in 2009. Could the party be about to go on hold?

Not so fast. Another phenomenon has been impacting the US wind sector over the past four years that can undoubtedly explain some of the growth: an explosion in state Renewable Portfolio Standards (RPSs). RPSs are state targets for renewable power that are made into legal obligations and often include a penalty for non-compliance - the stick instead of the carrot.

As can be seen from this table, about 58% of US states currently have a formal RPS, and another 8% have a target. Of those, 76% have either enacted or amended (generally to increase it) their RPS or target on or after 2004. The result is that 63% of US installed capacity now sits in a state with an RPS or target, as does 71% of the population.

What Has Really Been Driving Growth?

While keeping the PTC alive all this time certainly accounted for much of the growth since 2004, the proliferation of RPSs cannot be ignored. RPSs enshrine renewable energy targets into law, thereby providing powerful drivers for growth.

Want to know how powerful? You can try come up with your own rough estimate for any state you're interested in. Take the EIA's most recent statistics on installed generation capacity by state (the most recent available year is 2006), grow the state's installed capacity at a rate you find reasonable (e.g. 2% annually or or use an existing forecast if you can find a good one) until the final year of the RPS, and simply apply the RPS target - which is typically expressed as percentage of total installed capacity by a target year - to your final figure. Multiply that amount by a safety margin of something like 0.7 just to be conservative, subtract what's already installed, and you may have a rough idea of how much incremental wind a state will install by it's RPS' deadline. Of course, certain states will favor solar for physical reasons, while others have technology targets (e.g. NJ wants 2.5% of solar as part of its 22.5% 2021 RPS). It's up to you to dig a bit deeper to ascertain the particularities of each RPS and what they mean for wind.

I conducted such a an analysis for all US states, and while I won't share my numbers because they are very rough estimates and I don't want them quoted, I can nonetheless say that some states will experience very solid growth over the next few years. One example is NY, which will install several thousand MW of wind between now and 2015 although it barely registers right now.

What's the takeaway from all this? There was a time during which the PTC drove the vast majority of wind development in the US, and if it went so did the industry. But over the past four years a growing number of states have adopted formal renewable power targets in the form of RPSs, and those will play an increasingly larger role in fostering growth, especially as wind becomes competitive without the PTC.

The Year Ahead

2009 could indeed be a bit rough for wind if the PTC isn't renewed prior to Dec. 31, 2008. Financing costs could become an issue in the midst of ongoing problems in capital markets, so no PTC could compound this. I don't think, however, that a short-lived slowdown would be a bad thing for the industry. The wind supply chain remains as tight as ever, and a slowing of demand while new manufacturing capacity continues to be added across the US could set the stage for a resumption of strong growth in 2010.

In fact, the current uptick in construction of wind manufacturing facilities in many parts of the US can probably be attributed to the proliferation of state RPSs, and is the strongest indicator yet that the industry sees a life for itself beyond the PTC.

Wind For US Investors

One of the main complaints US investors have with regards to wind is the lack of wind plays available on US exchanges. Like the industry's dependence on the PTC, this, too, is changing.

For one thing, two new wind ETFs have launched in the past few weeks: the First Trust ISE Global Wind Energy Index Fund (FAN) and the PowerShares Global Wind Energy Portfolio (PWND). ETFs are a good way to access a broad basket of pure-play stocks, and thus provide both focused exposure and some risk mitigation through diversification.

Moreover, a quick look through our Stocks page will yield several potential picks. A majority of Pink Sheets-listed stocks you will find there under the category Wind are stocks of global wind pure-plays with legitimate listings on exchanges in their home countries (mostly in Europe).

In the US, GE (NYSE:GE) retains the largest market share for wind turbines (although competition is stiffening to be sure), and GE Energy Financial Services is active in wind park ownership. FPL (NYSE:FPL), through its FPL Energy unit, is the second largest wind park owner in the world and another way to get exposure to US wind. In both cases, however, it also means you have to buy the rest of the business, which may or may not be of interest.

On the more speculative side, investor favorite American Superconductor (NASDAQ:AMSC) remains a play of choice for many, although valuation is a definite concern for me. Although top line has been expanding rapidly on the back of strong growth in China, I feel much of the stock's potential is already priced in.

My favorite way to play this would therefore be thorough one of the two ETFs, although I haven't looked at them in enough detail yet to say which I prefer (this is something I intend to write about soon).

Keep an eye out for what is happening on the PTC front, and for signs that the ETFs' prices are trending down as a result. When to pull the trigger is up to you, but based on what I wrote above you can rest assured that, PTC or not, US wind will continue to exhibit strong growth in the decade ahead, and the prices of stocks should follow earnings on the way up.

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

August 02, 2008

The Week In Cleantech (Jul 27 to Aug 2) - The Era Of Economical Large-scale Storage Is Upon Us

On Monday, Michael Graham Richard at TreeHugger told us that Toyota was boosting production of the Prius by 70% next year. This follows on the footsteps of Ford announcing plans to nix production of trucks in North America and retool factories to make smaller cars typically sold in Europe. The thing to note about such commitments is that they have to be anchored in pretty credible forecasts. It's one thing for pundits on CNBC to tell you where they think the price of oil is going based on a 20-day moving average. It's quite another for a global business that's known to need about three years to respond to shifts in consumer tastes to announce it's seriously getting into small and hybrid cars, and putting capital behind it.

On Tuesday, Katie Fehrenbacher at Earth2Tech showed us why cleantech investors love and back Obama. Interesting analysis but cleantech investors should keep one thing in mind: Obama is from a coal state (Illinois) and McCain is from a state that could become a major solar player in America (Arizona).

On Wednesday, Keith Johnson at the WSJ's Environmental Capital reported that Senate had again rejected tax breaks for renewable energy. Check in on Monday to find out why that might not be the end of the world.

On Thursday, MIT News informed us that a major discovery from...well...MIT scientists would unleash a solar revolution. Large-scale energy storage to make renewable power dispachable is undoubtedly the next frontier that, if reached, will allow alt energy to grow to the next level. This is good news indeed.

On Friday, Sam Abuelsamid at AutoBlog Green reported that Ford didn't see plug-in hybrids for another five years. San Francisco certainly wants to make sure it doesn't miss out when this happens. Expect battery technologies to receive a lot of attention in the next few years.

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.

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