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November 26, 2008

Site Changes at AltEnergyStocks.com: New Stocks Page, Stock Category Pages and Company Pages

I'm pleased to announce some significant changes on AltEnergyStocks.com: we have a new stocks page up as well as stock category pages and company pages.

Our new stocks page is a gateway to the new site changes. In addition to our list of stocks, we've added links to the major stock categories at the top of the stocks page to let you navigate to specific categories you're interested in.

Our new solar page is an example of our stock category pages. The solar page contains a list of solar stocks and an abbreviated stock quote for those companies. If you click on a company name in the solar stock list, you will be taken to a page specifically for that company. The solar page also contains solar news headlines pertaining to the solar industry and solar investing. The full list of stock categories can be found on our main stocks page - the more popular stock categories can be found in the top navigation of our site which appears on every page.

The Ascent Solar is an example of a company page. Here you will find a more detailed stock quote for the company and news headlines for Ascent Solar.

We've also given our Cleantech News page a new look and made the headlines easier to scan. On this page, you'll find the news healines pertaining to cleantech as a whole. If you've not signed up by RSS or email to our Cleantech News, this is a great way for the headlines in the cleantech world to be brought to you - you'll find a subscription link at the bottom of the headlines.

Over time, we will be expanding the features of these pages and improving upon their usefulness. As alway, we welcome your feedback and suggestions.

November 23, 2008

Can Solar PV Survive Without 'The Consumer'

It's no mystery by now that the credit crisis has been nothing short of a disaster for solar PV stocks. For one thing, risk has been re-priced on an unprecedented scale, and the solar PV sector is, by most measures, a very risk sector. Rising debt costs in an industry where projects typically use between 50 and 70% leverage were bound to take their toll. It also hasn't helped that most people pre-crisis predicted a significant glut of solar PV supply in 2009 on the back of markedly lower silicon prices. Lastly, concerns over the sustainability of generous subsidy regimes in places like Germany and Spain have been looming over the industry for a few months.  

The net result of all this has been that, over the past three months, solar stocks (represented on this chart by the TAN ETF) have significantly underperformed wind stocks (PWND ETF) and the clean energy space as a whole (GEX ETF). 

At this stage, with all the talk of the a "green" stimulus package from the Obama administration, are there reasons to be cautiously optimistic? With utilities now eligible for the ITC, will utility investors seize the opportunity low module costs will bring in 2009 to get heavy into solar PV?

I believe there are reasons to continue to be more bearish on solar than on the rest of the clean energy space, including wind. Solar PV, unlike other forms of alternative energy, has primarily been a residential story. A 2007 report by RBC Capital Markets estimated that the residential sector would account for 72% of solar PV end demand in 2008, with the balance split between the commercial and industrial sectors. By 2011, although the commercial/industrial sector would make up some ground, residential would still account for 68% of demand.

According to the same report, Germany should make up about 36% of global demand in 2008, California 10% and Japan 18%. For 2009, Germany should account for 26% of global demand, California 12% and Japan 18%. That makes them the three largest markets for both years.

As the financial crisis rapidly morphed into an economic crisis, households have been coming under increasing pressure: in Germany, Japan and California. Moreover, as discussed initially, credit continues to be tight, making it difficult for households to borrow for extravagant initiatives like installing solar panels on rooftops. 

Unlike wind or solar thermal, which are primarily utility plays, solar PV is very much leveraged to the economic health of consumers and households, and it just so happens that those are the segments of the economy that are coming under the greatest pressure right now. I therefore think that solar PV stocks will continue to underperform wind and the clean energy space a a whole for at least the next 12 months.

November 20, 2008

Is There Life After the Bulb?

When incandescent light bulbs are phased out in the United States between 2012 to 2014, managers of utility Demand Side Management (DSM) programs will be between a rock and a hard place.  At the Southwest Energy Efficiency Project's 5th annual Energy Efficiency Workshop, this fact seemed to be the elephant in the room that most of the utility executives in attendance did not want to talk about.

One Trick Pony

It's not for nothing that the compact fluorescent bulb, or CFL, has become the international symbol of energy efficiency.  While it is true that we're not going to stop global warming by changing light bulbs, switching out an incandescent for a CFL is one of the most cost effective and simplest steps we can take along the way.  CFLs are so cost effective that current DSM programs get the bulk of their electricity savings from this single measure.

In 2007, Efficiency Vermont saved over 1.7%[pdf] of the state's electric load while the vast majority of DSM programs save only a fraction of 1%. 78% of these savings came from lighting, meaning that the program's outstanding performance is almost entirely attributable to CFLs.

Larry Holmes, the manager of NV Energy/ Sierra Pacific Resources's (NYSE:SRP) DSM program told me that his programs get about half their electricity savings from CFLs, and that, the company's other DSM programs will not be able to ramp up to replace the savings from CFLs.

These programs are not alone... CFLs are a staple of DSM programs everywhere, so it makes sense for utilities and environmental advocates alike to promote the use of this simple, cost effective measure.

What's Next?

Although it will make the job of DSM programs harder, for a societal perspective, the phase out of incandescent bulbs will be a good thing: more people will use energy efficient lights, and they will no longer need to be bribed with bulb buy-downs and giveaways to do something which is already in their best interest, such as saving money by using CFLs.

The problem comes because regulators have mandated fixed amounts of savings for years into the future, and these savings are measured in comparison to a benchmark of what customers would otherwise be doing.  In the case of lighting, when CFLs or other energy efficient options become the legal default, DSM programs will only be able to achieve savings by encouraging even more efficient options.  

A program manager for residential programs at CEE, the industry association of efficiency programs, told me that she has hopes for solid state lighting, a.k.a. light emitting diodes or LEDs.  I'm intentionally omitting her name from this article because a quick examination of that idea shows that it is mathematically impossible.  The fact that industry insiders hold out these hopes for LEDs shows that the industry has little idea of how to replace the CFL in residential DSM. 

To see why LEDs in 2014 will not produce similar savings to CFLs today, consider the following example.    Replacing a 100 watt which is incandescent used for 1000 hours a year with a 25 watt CFL will save 75 kWh a year.  In contrast, replacing a 25w CFL with an 10 watt LED bulb only saves 15 kWh a year, or 1/5 as much.  Currently an LED bulb powerful enough to replace a 25w CFL or 100w incandescent uses 13 watts (and costs $80), so even these savings assume considerable improvements in LED prices and efficiency.  Note that further technology improvement does not solve the core problem.  

Even if we assume that there will be a lighting solution which uses no energy, the potential savings from residential lighting will drop by a factor of three when CFLs become standard, because only 25 watts can now be saved by any technology, where before the savings potential was 100 watts.  Hence, the savings potential in residential lighting will drop by a factor of  at least four between 2012 and 2014, meaning that most of the savings currently achievable in residential lighting will have to be made up by other programs.  

The Investment Angle

For electric utility investors, this is important because utility regulators usually grant incentives to utilities which meet or exceed their DSM targets.  For large DSM programs, these incentives can have a significant impact on earnings, and this impact will only grow as utilities meet more of their resource needs with DSM.  Yet, because of the loss of one very important measure in DSM programs, many utilities are likely to miss their savings targets during the 2012 to 2015 time period, unless regulators decide to ease the targets.  Investors who are buying utilities now as a safe haven during a recession may want to sell these stocks before the utilities start to miss their DSM targets.

As utilities ramp up other programs in an effort to replace the CFL, other household energy efficiency measures will benefit.   Those measures likely to benefit the most will address the projected large uses of residential electricity.   Measures which address heating and cooling efficiency, such as efficient air conditioners and heat pumps, as well as low cost measures such as duct sealing and air conditioning tune ups.  Companies which can figure out ways to inexpensively tune up air conditioners, or seal household ducts will be in an excellent position.  

Another large (and growing) user of residential electricity which DSM programs are just beginning to address is household electronics, especially televisions and set-top boxes, both when in use and in "off" mode.  Finally, even though LEDs will not be able to replace more than a fraction of the savings from CFLs, they will be part of the mix, especially in high usage lighting.

DISCLOSURE: Tom Konrad does not own any of the securities mentioned.

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

November 18, 2008

What's In Store For Emissions Trading Stocks Under An Obama Administration?

All the recent talk about Barack Obama creating a "Climate Czar" position in his administration begs the following question: will Obama dare to implement a nation-wide cap-and-trade system for greenhouse gases (GHGs) in the midst of an economic collapse? While the recent pullback in energy prices will certainly provide some cost relief to energy-intensive industries, which were getting squeezed by rising energy prices, this pullback pales in comparison to the challenges they face in other areas of their businesses right now, and slapping them with complex and potentially-costly new regulation could create significant political backlash. What's more, continued softness in industrial output should take care of at least some emissions in 2009, lessening the political imperative to act now. So the question is: what's in store for US emissions trading regulation and emissions trading stocks?

In May, I wondered whether the Climate Exchange plc story was overdone. Climate Exchange plc (CXCHF.PK) is the company that runs the Chicago and European climate exchanges. Another Massachusetts-based but Toronto-listed play on carbon emissions trading is World Energy Solutions (XWE.TO), the company that runs the auction platform for the RGGI's carbon dioxide emissions allowances. How have these two stocks done in the past six months? Not extraordinarily well, according to the chart below (the beige line is the S&P 500 - apologies for the unclear legend).

Does this fall from grace represent a great buying opportunity, especially for Climate Exchange plc (it would benefit most from federal-level regulation), or is the sector doomed for the foreseeable future because a new president would never dare to regulated GHGs in this context? Obama, as recently as yesterday, was still hinting that he indented to move full swing ahead with his climate plann. But subsidizing clean technologies and imposing hard emissions caps are two very different things, and they have vastly different political implications.

To be continued...

DISCLOSURE: Charles Morand does not have a position in any of the securities listed here.

November 16, 2008

Demand Planning: The Future of Demand Side Management

Electric utilities have a process by which they project future expected demand for electricity, and then find resources, either new electric generation or energy efficiency (Demand Side Management, or DSM) resources to meet that expected demand, or reduce that demand.  Progressive utilities and utility regulators now include DSM among the mix of resources as a matter of course.  According to Martin Kushler, of the American Council for an Energy Efficient Economy (ACEEE) who spoke at the Southwest Regional Energy Efficiency Workshop about an upcoming report from ACEEE, DSM resources cost an average of 3 cents per kWh of energy saved, much lower than the typical 10 cents per kWh for new supply side resources.  Since saving energy is not only considerably cheaper but also cleaner than new generation, including renewables, DSM resources deserve pride of place in resource planning.

Bringing DSM into resource planning has required that utility regulators change utility incentives to assure that utilities will not be undermining their own profits.  In many states, this has been a slow revolution moving from traditional "least cost" planning, which focused on achieving the lowest possible cost per unit of electricity delivered, to a focus on reducing overall energy bills (either by reducing kWh used, or minimizing the price per kWh.)  This goes against traditional utility instincts, which like most businesses would like to expand by increasing sales, but can be achieved by paying for reliable service, or giving incentives for efficiency.

However, there has always been one aspect of DSM which utilities have little problem with, which are various measures to reduce peak loads, either through Demand Response (payments to customers in return for turning off equipment during peak times) and peak shaving (efficiency measures which reduce peak load by shifting loads to other times of the day.)  Reducing peak load is in the utility's interest because it improves system reliability without significantly reducing total sales or expensive expenditures on peaking plants which are only used for a tiny fraction of the year.


The traditional thinking breaks down demand into a base load piece, which is basically the least amount used at any time during the year, and any demand above that level.  Traditionally, utilities sought to meet this demand with a mixture of base load (which runs nearly all the time) and dispatchable generation (which can be controlled, and is brought on as necessary).  This thinking has run into problems as intermittent generation, such as wind and solar.  

Typically, utilities express these problems as problems with intermittent technologies, calling them "unreliable," which they are if you define "reliable" as only those resources which are on 90% of the time, or which can be called on at will.  That is not the definition of reliability most of us use: most people would call something reliable if it's there when you expect it to be.  With the colloquial definition, the rising and setting of the sun is about as reliable as anything gets, and the reliability of solar and wind power also follow predictable daily and seasonal cycles, limited only by our ability to predict cloudiness and windiness.  

Admittedly, weather prediction is not the most reliable of sciences, especially when attempting to predict weather in small areas or gusts of wind or shadows from clouds in small areas.  However, geographic diversification can smooth the fluctuations in generation from gusts of wind or shadows of clouds in an electric system with multiple solar or wind facilities spread over a broader area.  The remaining unpredictability of generation for such a diversified system should be manageable by a system which has no trouble coping with customers' unpredictable and wildly fluctuating demands for electricity.

A typical "reliable" combined-cycle gas turbine [pdf], takes 3 hours to start from cold, and can ramp up or down only 7% in power output per minute.  On this time scale weathermen tend to be fairly accurate over broad regions and a few hours ahead; weathermen earn their reputation for unreliability due to the surprises which arise in forecasts for a day or two ahead, and even here improvements are on the way.  For minutes ahead, the wind speed around the field should give operators a good idea of the strength of wind approaching it.

Implications for DSM

The same narrow focus on dispatchable and base load generation also leads to a focus on only two types of demand management in electric utility DSM programs.  These programs are almost universally evaluated on (and hence focus on achieving) three things:

  1. Overall energy reduction (kWh savings)
  2. Peak load reduction (usage at peak times)
  3. Demand response (load reduction which can be called upon in times of need.)  

As I argued in my article on Wind Power and Heat Pumps, there are other valuable aspects of managing demand than just these three factors.  While electricity is most expensive to generate at times of peak use, the costs vary greatly throughout the rest of the year as well.  In addition to the load on the system, the cost of natural gas is considerably higher in the winter than the summer, meaning that saving the same kWh of energy at the same level of load is worth more in the winter than in the summer, so long as the kWh would have been generated using the same amount of natural gas at the two times.

To be fair, the cost/benefit tests used to evaluate the effectiveness of DSM measures often do take into account such cost factors as the fuel cost I point to above, but in my experience, it is a very imprecise process, with very little attention given to timing of the savings ("load shape") beyond an attempt to quantify the coincidence with peak.  At a discussion with Xcel Energy (NYSE:XEL) where they were soliciting feedback from stakeholders for the goals of a DSM Potential Study, they did not intend to ask the contractor for load shape information of various measures evaluated until I raised the issue.

Demand Planning

Over the longer term, as more electricity is generated by intermittent sources, load shape information will become increasingly important.  Rather than a focus on reducing peak load, the focus will need to shift to reducing load when it exceeds available intermittent resources, and increasing useful use of electricity when renewable energy is most abundant.  At even relatively small penetrations, solar generation can exceed demand on sunny mornings when the temperature is moderate, while wind can exceed demand on windy nights, especially in the winter.  Even before we add enough renewables to the system that they begin to exceed demand at these times, we need to be thinking about shifting future demand to those times of relative plenty, and from those times of relative scarcity.  

Such shift can easily be accomplished with electricity storage, but such storage can be quite expensive.  A more economic option would be encouraging customer choices today which influence the patterns of future load.  Even if we can't predict how windy it will be a week from now, we know, climate change notwithstanding, the daily and annual patterns of sun and wind five, ten, and twenty years from now.  We also can reasonably expect that both wind and solar electric generation will be much higher than it is today.  That extra generation will be added as part of the utilities normal process of Resource Planning, in which DSM is now finding its place.  The next logical step is Demand Planning, using utility DSM programs and other tools to better meet the available future electric resource with future electric demand, supplying useful electric services to make our lives better.

Tom Konrad

November 12, 2008

Oil Prices & Alternative Energy Stocks

The recent slump in the price of energy commodities that has accompanied slumps in the rest of the market has reignited an old debate: to what extent is the performance of alt energy companies (and their stock prices) linked to fossil energy prices? People who argue that the two are closely connected implicitly believe that policy-makers and other important economic actors view alt energy mainly as a hedge against high energy prices, and therefore believe that a drop in fossil energy costs will result in a fall from grace for alt energy (there is evidence that at least some firms view renewable energy as such, providing credence to this argument). Those who, like myself, believe that the fundamental performance of firms in the sector is not connected to the price of fossil energy (considerations of input costs aside), argue that the policy commitment behind the growth of much of renewable energy for the past few years has had more to do with political positioning on the increasingly-salient environment file.  

In a simpler follow-up to an article I wrote in July, I decided to put together a chart looking at the performances of a few ETFs since early July, when the commodity bubble burst. I included the following: (a) the S&P 500, as a general benchmark of performance for equity markets; (b) the USO ETF, which tracks the price of crude oil; (c) the UNG ETF, which tracks the price of natural gas; (d) the PWND ETF, which I believe provides more direct exposure to the wind sector than does the other wind ETF, FAN; and (e) the KWT ETF for solar, for no particular reason. Tom wrote a useful article on alternative energy and cleantech ETFs and mutual funds in July, for those who missed it. I apologize for the quality and look of the graph - I picked the background that made it easiest to see the lines, and BigCharts doesn't exactly allow you to produce nice, clean charts.


If we accept that current stock prices reflect expectations of future firm performance, looking at this chart certainly seems to indicate that investors believe the outlook for the wind and solar sectors is grim. Indeed, not only have wind and solar stocks fallen much further than the market as a whole (>30% for solar!), but investors have discounted them beyond the fundamental risk they see in falling fossil energy prices. This outcome is broadly in line with the efficient market hypothesis - alt energy outperformed the market as a whole over the past couple of years because alt energy investors took greater risks.   

For the solar sector, this drop can be explained by concerns over a perfect storm brewing over the industry in 2009, coupled with uncertainty over the sustainability of very generous subsidy regimes in key markets like Spain and Germany. For wind, which relies for its deployment on project finance-type of arrangements with high gearing ratios, concerns over rising debt costs have added to anxiety about declining natural gas prices, wind's main economic competitor in the US.

In light of this, what's the answer to the main question posed initially about the relations to fossil energy prices? It's not clear. It is still too early to draw conclusions about any clear relationship between the performance of solar and wind firms and the prices of oil and natural gas. It is also impossible at this stage to disentangle all of the headwinds facing solar and wind and assert that energy prices play a larger role than other factors. In my view, if policy commitments to alternative energy are strengthened rather than weakened during this crisis, which looks like it might be the case, it would represent the clearest evidence yet that policy-makers pay little to no attention to energy prices in deciding on support measures for the sector. In any event, what policy-makers believe may not matter much of the IEA is right about global oil supplies. In either case, alt energy investors win.

DISCLOSURE: Charles Morand does not have a position in any of the securities listed here.

November 09, 2008

Too Much Solar Could Be Good for Inverter Companies

2009 is likely to be a watershed year for the solar photovoltaic (PV) industry, and one which many PV manufacturers will not survive.  Even before the credit crunch and plummeting housing market made capital intensive PV much harder to finance, the easing of supply constraints in the market for solar grade silicon meant that PV supply was liable to increase rapidly, putting pressure on marginal producers.  I expect that the loss of PV demand due to tighter credit markets will more than compensate for the added demand due to the extension of the solar Investment Tax Credit (ITC) and the exemption of the ITC from the Alternative Minimum Tax in the United States.  One other change was that utilities can now benefit from the ITC, and this may be an added boost to the market.

With PV demand increasing at a slower rate, and PV supply continuing to grow rapidly, and possibly even accelerating, PV cell prices will have to fall significantly to clear the market.  Low cost producers such as First Solar (NASD: FSLR) will continue to make money on every panel, although their profit margins will shrink, but the real pain is likely to be felt by higher-cost, commodity producers, and those with thinner profit margins. 

With volumes increasing rapidly, but much thinner profit margins for even those producers able to remain profitable in a much more competitive climate, I have sold all my holdings in PV manufacturers (Sharp (SCHAY.PK), Evergreen Solar (ESLR), and Solar exchange traded fund TAN.  

Balance of System

The news is not all bad for the solar industry, however.  If volumes rise and prices fall as dramatically as I expect, suppliers of other parts of solar systems and services, such as installation will also see volumes rise.  Those suppliers with pricing power will still be able to maintain or even expand margins even as their volume expands, with a dramatic effect on potential profits.

Which suppliers will have the most pricing power?  Competition theory suggests that pricing power will go to those market participants 

  1. In industries which have barriers to new entrants
  2. Suppliers and Customers have little bargaining power
  3. Have little internal competition
  4. Sell products for which there are few substitutes.

Possible candidates in other parts of the solar supply chain are solar installers, assemblers of solar modules, and suppliers of solar inverters.

Solar installers suffer from fairly easy entry into the industry, and are likely to have fairly weak bargaining power with cash-strapped customers, who can easily choose to not buy solar at all.   Solar module assembly is also fairly low tech, and does not seem to present real barriers to entry.  

One wildcard here may be vertically integrated solar companies.  Sam Weaver, VP of Cool Solar, a solar installer in Boulder, CO, likes SunPower Corporation's (NASD:SPWRA) vertically integrated approach, which the company hopes will allow them to squeeze all components of a solar system equally. 

However, vertically integrated solar companies may be able to gain competitive advantage over companies operating in one or two of these sectors.


The inverter industry is in a much better competitive position.  First, there are few active participants, making the inverter market relatively uncompetitive, in comparison to cells, modules, and installation.  In the residential grid-tied market, the major players are privately held Fronius and SMA. [Correction: SMA is public in Germany. Ticket S92.DE]   Sam Weaver says there are also a couple companies looking to enter the market, meaning that it might become more competitive, although probably not so competitive as the PV market. Until it was recently acquired by Schneider Electric,  Xantrex Technologies allowed public investors (including myself) an entry into this market, although they also compete in commercial and utility scale markets.

The utility scale inverter market is more promising for investors, partly because there are more publicly traded companies.  When I last wrote about inverter stocks a year and a half ago, my thought was to avoid the bubbly nature of the solar sector, but still benefit from its growth.  At the time, I listed Xantrex, SatCon Technologies (NASD:SATC), and  Sustainable Energy Technologies (STG.V, STGYF.PK) as possible ways to play the industry.  

Xantrex was bought out at approximately double the price it had been trading in March 2007, wile SatCon is up about 50%.  Sustainable Energy Technologies is down around 40%.  Considering that most alternative energy indices have lost about 50% over the same period, even Sustainable Energy Technologies has been doing fairly well.

Since that time, Advanced Energy Industries (NASD:AEIS) introduced their Solaron high efficiency utility scale inverter line.  AEI has a solid balance sheet and cash flow, while both SatCon and Sustainable Energy may need to raise money in the next year, which leaves them vulnerable if financial markets continue to be very tight.  I have sold part of my holdings in both companies.   The downside of AEI is that they are exposed to many other industries, which I have not yet researched properly, and probably do not have the same growth prospects as the inverter industry.

One final inverter play was highlighted by AltEnergyStocks.com guest author Saj Karsen, who found value in Equus's (NYSE:EQS) stake in a private inverter company.

For investors interested in playing the Solar market, inverters still seem a relatively good bet, in comparison with direct investment in PV companies.

DISCLOSURE: Tom Konrad has owns shares in  SATC and STGYF.

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

November 07, 2008

What I Didn't Say About Obama and New Energy

I was interviewed for a story on NPR's Morning Edition which aired Thursday.  Tamara Keith asked me what Obama's election meant for Alternative Energy, and I felt many of my points were downed out by the others she interviewed.  Here's what she didn't put in the story:

  • Obama mentioned three challenges ahead in his acceptance speech.  He said, "We know the challenges that tomorrow will bring are the greatest of our lifetime: two wars, a planet in peril, the worst financial crisis in a century."  Of these three challenges, two were thrust upon him, but he chose to tackle climate change.
  • When choosing which Alternatives Energy to support, Obama is likely to consider if they 1) will be cost effective, 2) will create jobs, 3) are necessary for transformation, and 4) promote citizen involvement.
  • The sectors which best fit the above criteria are Energy Efficiency (Cost effective, Jobs, Citizen involvement) and Transmission and Smart Grid (Cost effective, necessary for transformation.)
  • Obama has the skills needed to get people thinking about energy, and overcome the behavioral and attitude barriers which cripple efforts to promote energy efficiency.

At the same time, AltEnergyStocks.com Editor Charles Morand was doing a live interview on the CBC Radio Noon show at practically the same time.  Here is his article about EarthFirst Canada (EF.TO, ERFTF.PK), which was the subject of the interview.

Tom Konrad

November 06, 2008

T. Boone Pickens on Larry King Live Thursday

In the past 24 hours, there have been a flurry of opinions coming out on what a commanding Obama victory would mean for people's portfolios. Alt energy investors certainly have reasons to be cautiously optimistic.

T Boone Pickens, the famous Texas oilman turned clean energy cheerleader, and his Pickens Plan, are likely to have some influence on where President-elect Obama goes with his energy plan and alt energy policies. Pickens has been campaigning for his plan nearly as hard as the candidates have been campaigning for the White House, and his recent rapprochement with the Democratic Party was well-timed to be sure.

If you haven't kept a close eye on what Pickens has been up to, you can catch him tonight on Larry King Live. Some of the things he will talk about could well become areas of focus for the new President, which will be of great interest to alt energy investors.

November 02, 2008

Keynes Meets Carson, And How You Can Invest It (Part 2)

Two weeks ago, I brought you the first of a series of two articles on how you can play the clean infrastructure build-out that could come as a result of an Obama victory today. In that article, I made the point that the political and economic ideology that had prevailed in America over the past 30 years, economic laisser-faire, had been severely undermined by the recent credit meltdown and what now looks like it will be the worse economic shock in a generation or more. I further argued that the increasing sidelining of the "small government" discourse in American politics in the wake of this crisis would provide the impetus for an overt return to a Keynesian approach to dealing with recessions, whereby the government would directly undertake expenditures in the economy to jump-start aggregate demand. Finally, I linked this to Barack Obama's environmental and clean energy credentials, and argued that under his watch, a massive, federally-mandated infrastructure spending program would certainly contain environmental and clean energy components.

Much has happened since I wrote that first article. Firstly, Allan Greenspan, arguably the most influential free-market thinker of the past four decades, shocked the world by admitting that the ideology on which he had relied for the better part of his professional life had been proven "flawed" by the crisis. This admission represents the loss of a major pillar for the intellectual edifice of the Free Market. Second, state and municipal officials' calls for an economic bailout package grew louder last week, with demands ranging from infrastructure spending to direct help in meeting budgetary shortfalls. Thirdly, a plethora of metrics are now pointing toward a significant softening of the economy in the coming quarters, not the least of which is a record drop in consumer sentiment. Lastly, barring a major onslaught of the Bradley Effect, Obama looks nearly certain to win the presidential contest, and there is a very real possibility that the Democrats could emerge with a filibuster-proof majority in the Senate, giving the new president a significant amount of leeway in moving swiftly on an counter-cyclical spending agenda.

In light of what I just highlighted above, I continue to believe that clean infrastructure on the back of government intervention is a potentially interesting theme. There are, of course, some pretty significant risks to this thesis. Firstly, the US is in no fiscal position to launch into a multi-billion dollar economic bailout effort. Second, although credit markets are slowly thawing, my commercial and investment banker friends will readily share that accessing capital for companies remains a daunting task, government contract or not. Lastly, local content provisions aimed at boosting the domestic multiplier effect could eliminate many foreign companies from being eligible for money.

Stocks For The Clean Infrastructure Build-out, Part 2 - Electricity Transmission & Distribution

In the first article of this series, I discussed rail power stocks. In this article, I discuss stocks in the second major area of infrastructure that alt energy investors have an interest in: electricity transmission and distribution. As with the first instalment, I did not do an extensive amount of research on most of these companies, so I welcome any insight readers may have. As with rail stocks, I looked for firms that would benefit from spending programs - i.e. suppliers and contractors - rather than companies that operate transmission systems. A decline in industrial production and a weak economy in the US could spell lower volumes for power generators and distributors in certain states with a high concentration of heavy industries.

The ABB Group (ABB) - Financial statements here. ABB has exposure to a number of areas related to transmission and distribution systems. The company makes cables, transformers and various other products related to power electronics and management. ABB is also a leader in providing power equipment for wind farms, including in the emerging area of offshore wind. This is a stock that has gotten blasted in the past few months on worries over significantly weaker infrastructure spending around the globe, and is down about 60% from its high in April of this year. ABB now trades at a last-twelve-month (LTM) PE of around 6.8x, which is cheap by historical standards.

Allegheny Technologies, Inc. (ATI) - Financial statements here. Allegheny is not as pure a play on transmission as ABB is, but it nevertheless produces some products with grid applications. Among them are a number of specialty alloys and metals for transformers and efficient grids. Allegheny also produces iron castings for wind turbines. At a TTM PE of about 4.5x, this is also a down-and-out stock that has taken a beating. 

Composite Technology Corporation (CPTC.OB) - Financial statements here. Composite is commercializing an innovative transmission cable solution, and has a wind power division that produces utility-scale turbines. However, this is an earning-less stock and those aren't for the faint of heart in the current market environment.

General Cable (BGC) - Financial statements here. This company that makes a range of cables, including transmission and distribution cables of different voltages and underground cables. This is a very direct play on cables, as the name indicates. At an LTM of about 3.8x, this stock is trading squarely in cheap territory.

MasTec Inc. (MTZ) - Financial statements here. MasTec is a subcontractor to the utilities and communication industries, building, installing and maintaining electricity transmission infrastructure. The company is earning-less.

Quanta Services (PWR) - Financial statements here. Quanta is also a contractor to the power transmission and distribution industry, with services including infrastructure design, installation and maintenance. At an LTM PE 23.81x, this is a stock that would be too expensive for me in the current market environment, especially that it doesn't pay a dividend.  

Resin Systems (RSSYF.OB or RS.TO) - Financial statements here. Resin Systems makes composite utility poles for electricity transmission and distribution. Composite materials aren't ubiquitous for utility poles just yet, with wood, concrete and steel still dominating. However, as in other applications, composites probably hold a decent amount of potential. Here, we have an earning-less company trying to set new standards - probably a tall order in this environment.

Schneider Electric (SBGSF.PK) - Financial Statements here. Schneider provides a range of products related to electricity management, distribution and transmission. It is a direct competitor of ABB's. One interesting factoid about Schneider is that it recently acquired Xantrex, a leading maker of power inverters and converters for the wind and solar industries. At an LTM PE of 6.6x, Schneider is valued similarly to ABB...no big surprise here.   

Siemens (SI) - Financial statements here. Siemens makes a range of products for the power transmission and distribution sector, including switchgear, transformer and substations. The company is also a leading manufacturer of utility-scale wind turbine. It is currently trading at a TTM PE of 5.4x.

Valmont Industries (VMI) - Financial statements here. Valmont makes transmission and distribution poles from concrete, steel or a mix of the two. 

DISCLOSURE: Charles Morand has a position in ABB.

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.







Six Reasons Tight Credit Markets Won't Stop the Wind Industry

The Wind Power industry is gaining momentum in the U.S., with more wind power produced here than in any other country last year.  

My own Colorado is quickly becoming a wind manufacturing and R&D hub, with three Vestas (VWSYF.PK) plants, a wind tower manufacturing plant in Lamar, not to mention the National Wind Technology Center. When Vestas first announced the move to Colorado in January 2007, I assumed it was because of the central location in the wind belt and the great rail infrastructure, as well as the strong political support for wind.  At the New Energy Economy Conference two weeks ago, I learned one other reason, Denver has the only non-stop international airport in the Midwestern wind belt, meaning that Vestas executives can get here much more quickly than other windy cities.

Until the credit crunch, the advance of the wind industry seemed unstoppable.  Now articles about how lack of financing could kill the industry are popping up faster than new turbines.  With wind, financing is very important, because it's a lot like buying a natural gas turbine, and all the gas needed to run it the day it's built.  

With wind stocks having dropped even more than the market as a whole (the First Trust Global Wind Energy ETF (FAN) has dropped two-thirds from its launch in June.) I think it's worth reviewing the many reasons to be bullish.

  1. Both presidential candidates are calling for a Carbon Cap'n Trade system.
  2. The Production Tax Credit (PTC) was extended.
  3. Commodity prices are falling.  While that makes power from natural gas less expensive, it should also drop the cost of wind farms.
  4. State Renewable Portfolio Standards set a minimum for new wind production.
  5. In a slow economy, wind farms bring more jobs than fossil fuel generation, especially during construction.
  6. Many states are working to remove the transmission bottleneck. (CA, TX, CO, and KS to name a few.)

None of these will be enough to keep wind projects that can't get financing going, but markets tend to overreact.  The question we have to ask ourselves is, "Is the current fall an overreaction, or is there still more to come?"

DISCLOSURE: Tom Konrad  owns FAN.

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

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