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January 31, 2009

Why Long Range EVs Can Never Be Cost Effective

by John Petersen

America’s love affair with the automobile has always been based on the freedom of the road and the ability to hop in the car and drive wherever we want to go; be it to the corner store to buy a loaf of bread or out to the lake for a long weekend. Even though most of our trips are short, people invariably want the flexibility to go for a long drive when the open road beckons. Unfortunately, that mentality is disastrous when it comes to EV economics.

I’ve been writing about energy storage issues for several months and discussing a variety of battery technologies that could be used in EV applications. My basic premise has been that advanced lead-acid and lead-carbon batteries are good enough for EV applications and they are far cheaper than their sexier NiMH and Li-ion cousins. My critics have argued that the size and weight advantages of NiMH and Li-ion batteries are essential to the development and widespread acceptance of EVs that have the flexibility we’ve come to expect in an automobile. It finally occurred to me last week that most of the visionaries who advocate the widespread adoption of EVs do not understand that:

•    You can have an EV that is cost-effective, or

•    You can have an EV that will travel 100 or 200 miles between charges, but

•    You cannot have both in a single package.

It’s a classic economic conflict between capital costs and operating costs. In a conventional automobile, you pay almost nothing for the fuel tank and then pay pump prices for gas when you use it. In an EV, you pay a huge price for the batteries that give you an acceptable travel range and then pay a low price to fill your ‘tank’ with electricity. If you buy more batteries than you use on a daily basis, the breakeven cost of daily travel skyrockets.

In other words, the phrase “cost-effective long-range EV” is an oxymoron and an economic impossibility.

To demonstrate the point, I’m going to become a technology agnostic for a couple of minutes and discuss the basic laws of battery economics. While I will use a pure EV for discussion purposes, the fundamental rules apply with equal force to both EVs and PHEVs. In an attempt to avoid controversy and focus solely on fundamental economics, I’ll work with the following basic assumptions:

•    EV Range – 4 miles per kWh of battery storage;

•    Battery Cost – $500 per kWh;

•    Average Use – 12,000 miles per year (40 miles per day); and

•    Comparable Gas Mileage – 25 mpg (480 gallons per year);

The following table shows the battery economics for EVs that have ranges of 40, 60, 80 and 100 miles based on these assumptions. For purposes of the table, I’ve used straight-line depreciation of 10% per year on battery cost, imputed interest of 6% per year on unamortized battery cost, an average electricity price of $0.06 per kWh and annual maintenance savings of $180. The only assumption that varies is the maximum EV range. If you don’t like my assumptions, feel free to change them and re-run the numbers using assumptions you like better.


EV Range v Cost
The table shows that when you cut through the bafflegab, EVs only offer attractive economics if you carefully match your EV range with your daily driving habits. As soon as you start adding EV range that you won’t use on a daily basis, the economic benefits of EVs plummet. You can have an EV that is cost-effective, or you can have an EV that has long range for the weekend, but you can’t have it both ways!

There is an inherent logical conflict in the visionary argument that we need to develop expensive batteries so that we can manufacture a long-range EV that cannot possibly be cost effective. General Motors’ EV1 was a great car that was initially powered by lead-acid batteries. GM ultimately changed over to NiMH batteries because the lead-acid batteries of the day were not robust enough to handle the heavy demands of an EV. In the last decade there have been tremendous advances in lead-acid and lead-carbon technology and we now have a new generation of products that can stand up to the demands of an EV, but can’t provide the elusive 100 or 150 mile range that the visionaries assume everyone needs and wants.

As the EV markets develop, there will undoubtedly be buyers who insist on a long-range EV and are willing to pay a substantial premium for the flexibility. Those purchasers, however, will be a very small minority who don’t need to worry about petty details like monthly budgets, payment books and cost-benefit comparisons. For average consumers that need to stretch a paycheck and balance a household budget, the only sensible EV will be one where battery capacity and daily use are carefully paired to optimize the cost-benefit relationship. Given the basic laws of battery economics, I can’t help but believe average consumers will choose the cost-effectiveness of advanced lead-acid and lead-carbon batteries over the svelte lines and lower weight of their NiMH and Li-ion cousins.

The underlying theme of the Clinton and Obama campaigns was “It’s the economy stupid!” As long as the newly elected policy team in Washington remembers that theme, the market advantage in the energy storage sector will go to lead-acid and lead-carbon battery producers like Exide (XIDE), Enersys (ENS), C&D Technologies (CHP) and Axion Power International (AXPW.OB) who make affordable products for ordinary consumers. Developers of expensive Li-ion batteries like Altair Nanotechnologies (ALTI), Ener1 (HEV) and Valence Technology (VLNC) will then find themselves fighting over the small percentage of the market that doesn’t care about price. If the new policy team forgets that fundamental economics matter in flyover country, the current push for electric automobiles will follow the same disastrous route as ethanol and result in huge capital outlays for feel-good facilities that have no economic value or enduring benefit.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

January 30, 2009

Getting Fired-up On Cleaner Internal Combustion Technologies

Although the writing has been on the wall for some time now regarding Obama's willingness to move aggressively on the environment file, few expected his first substantive move to have to do with vehicle fuel economy. On Monday, the President requested that the EPA reassess its earlier decision (taken when the Bush administration was still in power) to deny California the right to set and enforce its own fuel economy and car emissions standards above and beyond those set at the federal level.

Not only are California's standards much tougher than the current federal ones (the state is seeking 42.5 miles per gallon by 2020 vs. 35 at the Federal level, a nearly 22% difference), but 16 other states plan on eventually following suit, together accounting for at least 50% of all cars sold in the US. Unsurprisingly, the auto industry, which is currently contending with a complete collapse in demand, isn't impressed.            

While this move might seem counterproductive at a time when the government is expending vast sums of money trying to salvage domestic car companies, it is actually very much in line with two of Obama's defining features - namely that (1) he is concerned with weaning the US off foreign oil and tackling climate change and (2) he believes that regulation can be a force for good. How does the latter point work? Let's go through the main arguments.

First, take the dramatic increase in gasoline prices that occurred over the past few years. There is no doubt that the scale and rate of the rise in energy costs, which far outpaced workers' ability to obtain matching wage increases, left many households feeling significantly poorer, potentially having acted as one of the triggers to this recession. Petroleum accounted for about 39% of primary energy consumption in the US in 2007, the single largest category. A serious push toward raising fuel efficiency can be thus be seen as a means of lessening the blow from a sudden and sustained rise in petroleum costs, something that will almost certainly happen again.         

A related argument in favor of fuel economy regulation looks not so much at the negative wealth effect of expensive oil, but rather at the massive transfer of wealth from North American households to potentially-hostile countries that occurs under such a scenario (the US imports about $5.7 billion worth of oil each week). Sure, imposing standards that are ahead of what industry can meet given its current technological capabilities and operational configuration (a claim that is questionable if not spurious, at least on the technological capabilities front) creates a transfer of wealth, except this time the money flows to companies that are overwhelmingly not based in hostile nations and that often pay taxes here. In an environment where expensive oil is likely to become the norm, the wealth transfer will occur one way or another - it's about deciding where the money flows to.

Lastly, there is the view that regulation can have positive economic impacts by encouraging innovation and spurring job creation. The German Renewable Energy Law is an example. By mandating outcomes rather than means, government lets the market choose the most efficiency path to get there. Under a best-case scenario, the innovations made along the way become commercial and export success stories. After all, the global trend toward greater fuel efficiency will intensify in the years ahead, and a continuation of the US government's complete aversion toward raising fuel economy standards (helped of course by a healthy dose of whining from Detroit every time the topic comes up for debate) would play right in the hands of the Big Three's competitors.   

While the arguments presented above will sound preposterous to many individuals, investors with an interest in alternative energy need to understand that this is in fact the stance that will prevail in Washington for at least the next four years. It will feel a little strange at first given how out-of-favor this worldview has been over the past eight years, but soon people will realize that this is the norm rather than the exception, and that interesting opportunities are emerging as a result. It is therefore important to start looking beyond the current bailout package toward where the Obama administration will go on the regulatory front when the storm has passed. In my view, Monday's announcement provides a good prelude, and tougher fuel economy targets could be on their way at the federal level before too long.

Fuel Efficiency & Emissions Control    

There are two main ways to control car emissions and increase fuel economy: (1) make incremental improvements to existing technologies (e.g. more efficient internal combustion engines, catalytic converters, use of lighter alloys and composites in car bodies, etc.) and (2) boost the deployment of disruptive technologies such as natural gas powered cars, hybrids, plug-in hybrids and electric vehicles. While #2 will offer the most significant growth opportunities in the mid and long terms, #1 will play a key 'bridge' role and will continue to receive much focus. What's more, established companies, which tend to dominate #1, provide in theory safer investments in the current environment where investor appetite for risk has all but disappeared.

Given the discussion above, I thought I would revisit four auto parts stocks we have discussed in the past and that are direct plays on fuel economy and reduced car emissions (they all belong to #1 rather than #2). The auto parts sector has been experiencing significant difficulties of lates on the back of what may turn out to be the worst slump in the history of this sector. Parts makers stocks are thus down and out these days, and I wanted to see if these four clean technology leaders might offer interesting opportunities. If they can make it through these difficult times, they will most certainly benefit from the new regulatory era that's now upon us.  

Company Ticker 12-Month Return (%) Debt-to-Capital Current Ratio Cash Ratio
Magna International MGA -4.9 0.07 1.56 0.43
BorgWarner BWA -16.4 0.26 1.19 0.10
Valeo VLEEY.PK -67.6 0.45 1.06 0.24
Linamar LIMAF.PK -49.4 0.35 1.62 0.12
All figures for Q3 2008 except for Valeo which is Q2 2008

I decided to look specifically at three balance sheet items that are good indicators of a company's ability to weather a period that could be marked by significant reductions in sales, margin squeezes as utilization rates fall, and an overall reduction in operating cash. What I found was broadly in line with my expectations: Magna has the cleanest-looking balance sheet and is thus in a strong position to deal with a cyclical decline in sales.

Not only is the firm virtually debt-less, but it's got sufficient short-term assets to comfortably meet it's short term liabilities (although the cushion isn't huge). What's more, Magna has a comparatively good cash position. Compare it to Linamar, for instance, that has a higher current ratio but the second worst cash ratio. That's because much of its working capital is tied up in inventories and receivables. In the current environment, inventories will be challenging to liquidate and receivables may be difficult to collect as suppliers go under.  

Of course, none of this has been lost on the market, and that's why Magna is trading at a healthy 13.4x TTM EPS, versus 4.13x for Valeo and 3.02x for Linamar. However, it remains cheaper than BorgWarner at 18.77x. Both Magna and BorgWarner are in a strong position to benefit from the new regulation, but I can't help feeling a tad uncomfortable with the latter's PE in an environment fraught with so much uncertainty and where economic forecasters have been missing the mark so frequently.

Lastly, Magna and Ford's commitment to bringing a fully electric, battery-powered car to market within about two years is pretty exciting. If the firms can execute on this plan, it would mean that Magna would be a dominant force in #1 (evolution) and #2 (revolution), something that companies in any industry typically struggle to achieve.

Conclusion

The swiftness with which Obama moved on the fuel economy file is, in my view, the clearest indication yet that we have entered a new regulatory era, especially where the environment is concerned. This era will be defined by a belief that regulation can be a force for good, and regulation will thus be designed in a way to encourage innovation. This, in turn, will create plenty of investment opportunities in the alternative energy and cleantech spaces. While there's ample focus on the stimulus package and what green industries will benefit as a result, investors should keep a close eye on the auto sector when we emerge from this recession as that is likely to be a prime target of this administration.

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

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.

January 27, 2009

Options on Clean Energy ETFs

In my recent article about Green Energy Exchange Traded Funds (ETFs), I said that there were two main criteria investors should consider when choosing one (the fund's expense ratio, and its investment universe.)  This is true for investors who are looking for a single investment in alternative energy, but if you are a more sophisticated investor or speculator, there's another important criterion: Is there a market for exchange traded options on the ETF?

I personally love selling (a.k.a. "writing") options.  If the stock market is a casino, option sellers are the house.  Longtime readers will recall my article last year about cash covered puts.  Using cash covered puts, an option writer will either 1) end up owning a stock at a price that seemed good when he wrote the put, or 2) make a high return on the capital he risks (see the link above for details.)

The other type of option writing I use is covered calls. When I already own a stock or ETF, and would not mind selling at some price X, I write a call at X, and collect a premium.  This is an especially attractive strategy when you expect that the market is not likely to make large gains anytime soon.  I also use this strategy with any stock I want to sell.... I write covered calls with strike prices slightly below the current price, and either end up selling at slightly more than the current price, or collect substantial premium income.  I mentioned this strategy in my article When to Sell: Five Rules of Thumb last year (Rule #4).

Other Strategies

None of these ETFs have liquid enough options markets to execute more complex options strategies such as  spreads or straddles.  However, speculators looking for leverage and increased profit potential are likely to be interested in buying calls or puts.  For many investors, this is the first option strategy they try, partly because it is the easiest for which to get option trading authorization.  Although most options expire worthless, the potential loss is no more than the premium you pay, so monitoring overall risk is much easier than with option-writing strategies.

Clean Energy ETF Options

Since I focus on investing in individual renewable energy and energy efficiency companies, I don't usually use renewable energy and energy efficiency ETFs or mutual funds.  The exception to this is when I have some expectation for the sector as a whole, or for one of the sub- sectors for which there are ETF trackers, such as Wind and Solar

The problem is, exchange traded options markets are always considerably less liquid than the markets in the underlying security.  In illiquid markets, it almost always makes sense to accept the risk that a trade may not go through in order to get a specified price by using limit orders.  But in order to have a chance of the trade executing with a limit order, the more liquid the market the better.

Therefore, when I dabble in ETFs, I seldom use the same ones I recommend to passive investors: I choose the ones with the most active options markets.  They are:

Whole-sector Clean Energy ETFs: PBW.  None of the other whole-sector ETFs (QCLN, ICLN, GEX, PBD) has exchange traded options on it, so the choice is simple.

Wind ETFs: FAN.  Again, the other sector ETF (PWND) does not have options traded on it.

Solar ETFs: TAN. Although the other Solar ETF, KWT, also has options which trade on it, the number of options outstanding on TAN is far greater, a clear indication of greater market liquidity.

Carbon ETFs: Neither of these (ASO, GRN) has options traded on it.

All of this explains my disclosure below.

Tom Konrad, Ph.D,

DISCLOSURE: Tom Konrad has written puts on PBW and FAN.

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.

January 25, 2009

Dipping a Toe in the Black Stuff

I was tempted by greed, and I succumbed.

Last week, I bought the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL), at $19.75 a share.  oil.png

The Temptation

I made the trade as a simple speculation.  I watch oil because the oil price is one of the key drivers of investor interest in alternative energy, although oil is only a true competitor for biofuel companies, not producers of wind turbines (at least until there are a significant number of plug-in electric vehicles.)

With crude trading below $40/barrel, oil producers are cutting back on new drilling.  This is compounded by the extremely difficult financing environment.  Even oil-rich Dubai wants to sell recently acquired luxury retailer Barney's to raise cash.  Many OPEC nations cannot finance their budgets with crude at $60 a barrel, let alone below $40, so they will have to cut spending, even if they cheat on their quotas.  In Texas, the number of active oil rigs has declined 20% since August.

All of this is against a backdrop of relentless depletion and declining production from existing wells.  In 2007 and 2008, with oil prices at record levels, and drillers going all-out, total liquid fuels production increased only slightly, and all of that increase was attributable to OPEC and biofuels.  As noted above, most OPEC nations need $60 oil to fund their budgets, while many biofuels are not competitive below $50 a barrel, although plunging grain prices may help this... but only be reducing farmers' incentives to plant.  I conclude that no significant new supply will come on until crude is again in the $50-$75 range.  

I have little doubt that demand can continue to fall from current levels, but the longer the price stays below the $50 level, the faster declines at existing fields will cause overall production declines to accelerate.  Even if world oil demand falls in 2009, supply is likely to fall faster, eating into current record oil stocks.  With underlying decline rates from existing fields as high as 11% (Mexico), supply will fall faster than demand unless higher prices encourage new supplies.

Moral Qualms

My colleague Bill Paul calls me "Pure Green" because I normally will not touch fossil fuel investments.  I firmly believe that our investing should be guided by moral principles, even if it means making less money.  So why am I going against my belief that we must shift away from fossil fuels as quickly as possible by buying a proxy for that poster child of cheap, polluting energy, crude oil?

Excuses

  1. I can tell myself that the money I make today will be invested in fixing the problem tomorrow.  Although this may sound like a fatal moral compromise, it is similar to the compromise made by buyers of solar panels.  The high embodied energy of solar panels almost certainly comes from fossil fuels, and the buyer believes that after a few years to pay back the fossil energy cost [pdf], the extra energy produced later justifies the initial cost.  This argument only works if I am likely to make money on my speculation.  If I lose money, then not only may I encourage the drilling for oil, but I've lost opportunities to encourage clean alternatives. 
  2. I plan to sell when oil hits $60 (which should give me about a 60% gain.  I'd be happy with 60% even if it takes 3-5 years.)  As I discussed above, I don't believe that oil prices below $60 will encourage new drilling.  Low prices are also hurting clean alternatives, while encouraging people to use more oil today.

Do these excuses justify my speculation?  I believe they do, but if you are considering doing likewise, you may find a different balance.  I think it's more important that we ask ourselves and those who manage our money about the moral aspects of our investments, not just about how much money we're likely to make (or lose.)  Many former Madoff investors will now agree.  If I lose money on this speculation, I will not only feel the loss financially, I will also have lost the opportunity to make the world an ever-so-slightly better place.  That will hurt much more, on a dollar-for-dollar basis, than what I lost on VRB Power or Electro Energy last year.

A Note On Oil Speculation

I've joined the ranks of oil speculators, who were widely blamed for the run-up in oil prices last year (although, unsurprisingly, they received no credit for the decline.)  Some of these "speculators" were mere hedgers, such as United Airlines (UAL), who have recently lost a great deal of money in the decline.  The oil market does not ask if an investor is buying to hedge an underlying risk, or just to make money.  The size of the purchase moves the market, not the motivation for the purchase.

How can an airline be hurt by both rising and falling prices?  They weren't: UAL was hurt by poor planning.  By not hedging when prices were low, and then hedging when they were high, they lost money in both directions.  Most speculators suffer the same fate: If more speculators are buying when prices are high (they must be, or they would not be "causing" the rise,) then more speculators will lose money, simply because they are buying high, and must inevitably sell low.  In other words, attempts to ban speculation are disguised attempts to ban foolishness.  Good luck on that.

I hope that my speculation is of the rarer, and volatility-decreasing "buy low, sell high" variety.  I'm quite confident that we'll see $60 oil again, although I don't know when.  But the sooner it happens, the better, because the longer it takes, the harder it will be to increase oil supplies in response, and the sharper the next price spike will be.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad owns OIL.

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.

January 21, 2009

Alt Energy & Obama's Inaugural Address

Most people have probably seen and/or listened to Barack Obama's inaugural speech by now. In the second presidential debate, Obama ranked energy as his top priority (the choices offered by the moderator were: healthcare, entitlement reform and energy). As I pointed out earlier this week, the President picked an inner energy and environment circle that is heavily tilted in one direction: combating climate change and promoting alternative energy.

We were thus very interested to see if Obama would place a strong focus on energy issues in his inaugural speech given the precarious economic environment. After all, that is probably not where he stood to score the most points.  



We were not disappointed. Here are all energy-related quotes in the speech:

"each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet."

"We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together." (Emphasis ours)

"We will harness the sun and the winds and the soil to fuel our cars and run our factories."

"With old friends and former foes, we'll work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet." (Emphasis ours)

"And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to the suffering outside our borders, nor can we consume the world's resources without regard to effect. For the world has changed, and we must change with it."

We've already discussed this topic at length so I won't be delving into the meaning of every quote. Suffices to say that the President made all the right noises as far as alt energy investors are concerned, and he managed to do it five times in the space of 20 minutes.

You can find a full transcript of the inaugural address here.

January 20, 2009

Alternative Energy Exchange Traded Funds (ETFs)

UPDATE 3/4/2011: An up-to-date article on selecting renewable energy ETFs can be found here.

For investors looking for diversified exposure to Alternative Energy, Exchange Traded Funds (ETFs) are the best option.  I have not found any statistical evidence that actively managed alternative energy  mutual funds can beat the market (and hence justify their higher fees,) so lower expense ratios make ETFs compelling.  Since last year, the wide variety of Alternative Energy ETFs also makes it possible to even speculate on subsectors.  People who expect Solar, Wind, or even Carbon Trading  to do better than Alternative Energy stocks as a whole now have an easy way to place their bets.

Investing in Green Energy as a Whole

For investors who want exposure to Alternative Energy, but don't have an opinion about particular stocks or subsectors, there are two factors to differentiate between ETFs:

  1. Domestic (US) or Global?
  2. Expense ratios.

All else being equal, a lower expense ratio is always better.  Expenses, even small ones, can greatly reduce the overall return of your investment over time.  The choice of a domestic ETF vs. a global one is a bit more complex.    With the new Obama administration firmly behind the New Energy economy, it's easy to believe that US alternative energy companies may do better in the near future than global ones, which would push you towards domestic ETFs.  However, global companies tend to be larger and more established, and are also likely to be a better diversifier for most US investors who already own mostly US stocks, making Global ETFs a better choice for a more conservative investor. 

Domestic ETFs

Name Ticker Expense Ratio
First Trust NASDAQ Clean Edge US Liquid QCLN 0.60%
PowerShares Clean Energy PBW 0.60%

Global ETFs

Name Ticker Expense Ratio
iShares S&P Global Clean Energy Index ETF ICLN 0.48%
PowerShares Global Clean Energy Portfolio PBD 0.75%
Van Eck Global Alternative Energy Fund GEX 0.65%

Given that ICLN brings the advantages of greater global diversification, and a lower expense ratio, ICLN is now my top choice for a single investment in Alternative Energy (I previously preferred GEX, because ICLN was not available before June 2007, and I was not aware of it for some time.  I suspect that part of the lower expense ratio arises from a smaller marketing budget.  If there are any Alternative Energy ETFs I'm currently missing, please let me know in the comments.)

Solar, Wind, and Carbon ETFs: Speculating on Sectors

I personally believe that Obama's push to double US renewable energy in three years is likely to help Wind and Geothermal stocks more than other renewable energy sectors.  While there is no Geothermal ETF, the sector does have a dominant company, Ormat (NYSE:ORA).  Without the ETFs, however, it would not be as easy to speculate on Wind, because not only is there no dominant company, many of the leaders do not trade in North America.  

Similarly, while there are many North American listed Solar companies, several of the leaders do not trade here.  Finally, there are two Carbon ETFs (one's technically an "Exchange Traded Note" but this is likely to make little difference to most investors), which track the price of CO2 credits in different markets.  

Wind ETFs

Name Ticker Expense Ratio
First Trust Global Wind Energy Index  FAN 0.60%
PowerShares Global Wind Energy PWND 0.75%

Solar ETFs

Name Ticker Expense Ratio
Claymore/Mac Global Solar Index ETF TAN 0.65%
Market Vectors/Van Eck Global Solar Energy ETF KWT 0.65%

Carbon ETFs

Name Ticker Expense Ratio
AirShares EU Carbon Allowances Fund ASO 0.85%
iPath Global Carbon ETN GRN 0.75%

If you are trying to decide between each type, the expense ratio is unlikely to be important to you for short term speculation.  Rather you will want to find the one that will benefit most if your investment thesis is correct.  For that, take a look at these comparisons of the Solar ETFs, Wind ETFs, and Carbon ETFs.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad has written puts on PBW,  and FAN, and owns ORA.

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.

January 18, 2009

What's In Store For Alternative Energy With Obama's Cabinet?

As the Obama inauguration nears and his cabinet picks are made public, the impact of his presidency on the alternative energy sector is becoming more tangible. During the campaign, we heard plenty on Barack Obama's views on environmental regulation, climate change and alternative energy. But what about the people who will be advising him day-to-day on these matters, and who will be ambassadors both inside and out of the country for the administration's policies?

One thing is for certain: Obama's picks so far for positions with influence on energy and environmental matters mark a clear break from the Bush administration. I was doing some reading on the matter and put together the table below, along with certain stock categories that could see some upside as a result of these individuals' influence on the incoming administration's policy agenda.

Name Position Responsibilities On The Record Stocks
Rahm Emanuel Chief of Staff Top administrator in the White House. Controls the flow of people and information in and out of the President's inner circle. Strong proponent of natural gas-powered cars; History of voting for clean energy initiatives and against measures favorable to the oil & gas industry Clean Energy Fuels (CLNE); Alternative energy ETFs and MFs
Hillary Clinton Secretary of State Strong foreign policy responsibilities. As far as the environment and energy goes, will be largely responsible for communicating and defending the administration's policies abroad. Get tough with OPEC; Wants "gas price manipulation" investigated; Favors cap-and-trade Emissions trading stocks  
Ken Salazar Secretary of the Interior Responsible for policies related to land management in the US. Tighten controls over oil royalties; Expand the use of renewable energy on public lands; Modernize the interstate electric grid; Cautious on oil shales and off-shore drilling Electric grid stocks; Wind power ETFs
Lisa Jackson Head of the EPA Responsibility for enforcing various pollution laws and regulations, and for setting pollution standards. Commitment to making decisions based on science rather than politics; Unveiled New Jersey's carbon emissions reduction strategy; Commitment to fighting pollution and climate change  Emissions trading stocks
Nancy Sutley Chair of the White House Council on Environmental Quality Main advisor to the White House on environmental policy. Oversaw a program to retrofit buildings in L.A. to increase energy efficiency; Views the roles of cities as important in fighting climate change Building retrofit stocks
Carol Browner Energy Coordinator This is a position that does not yet exist. Its main function will be to advise the President on climate policy. Record of enacting pollution standards Emissions trading stocks
Stephen Chu Secretary of Energy Broadly responsible for the domestic energy file. Strong belief in the urgency of fighting climate change; Proponent of energy efficiency; Very cautious on coal                          Emissions trading stocks; Energy efficiency stocks

To be sure, not all of these individuals will have the same degree of influence on the President, and past opinions or actions may not be an indication of future ones. Nevertheless, two main things emerge from this table, in my view.

First, few if any of these individuals have a history of cozying up to the fossil fuel industry, whether oil & gas or coal. This is markedly different from what people got used to under the Bush administration and while I wouldn't say this is grounds for shorting O&G or coal stocks, these industries should not expect energy policy to be as favorable as it has been over the past eight years.

Second, in most cases, these individuals have openly stated that they view climate change as a significant problem that should be addressed. It is therefore nearly certain that greenhouse gases will be regulated at the federal level.

Obama made his views on alternative energy and climate policy known a long time ago. His appointments confirm that he intends on carrying through with his promises. While I continue to believe that the White House won't seek to have tight climate regulations enacted as long as the economy remains soft, such regulations, likely in the form of a cap-and-trade system, will almost certainly be brought forward before this presidential term is over. 

January 16, 2009

What John Kenneth Galbraith Would Have Said About the Credit Crunch

John Kenneth Galbraith, renowned economist and author of the bestselling The Great Crash, 1929, died in 2006, and so he never saw the crash of 2008.  But he would not have been surprised.  

I just finished reading his A Short History of Financial Euphoria: Financial Genius is Before the Fall, a treatise on bubbles and busts of history, starting with the Dutch Tulip Bubble of 1637 and ending with the crash of 1987. The book was written in 1989, but the message is still timely today.  Galbraith draws out the common factors of all financial bubbles; all will seem eerily familiar to the financial refugees of 2008.

These common factors are:

  • Extreme brevity of financial memory.  Although the bursting of the dot-com bubble happened only seven years earlier, the most similar recent crisis in my mind was the demise of Long Term Capital Management in 1998.  But who remembered that after the dot-com bubble?  (For a refresher, I highly recommend the 2000 Nova documentary Trillion Dollar Bet.)
  • The specious association of money with intelligence.  We have a tendency to think that people who have made a lot of money must be intelligent, and vice-versa.  Surely people who can understand CDOs must be blindingly brilliant and deserve the million dollar pay packages they were earning.  This association is so deep that for most of us, it is an unthinking assumption.  For instance, we might ask about people who invested with Madoff, "How could smart people be so dumb?" when we should be asking: "How could rich people be so dumb?"  This factor is the source of the book's subtitle: Financial Genius is Before the Fall.
  • The thought that there is something new in the world.  By chopping and dicing mortgage risk in different ways, and parceling it off to unknown counterparties (think AIG), financial regulators were persuaded by banks that the overall risk of the system had been reduced.  But it wasn't.  In many cases, it wasn't even redistributed, with banks that had sold bad assets on to investors finding that they still were at risk because they also lent the funds which the investors used to buy the assets in the first place.  As Galbraith says, "The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version."

We All Did It

Galbraith also has something to say about who is to blame for the 2008 credit crunch:

We are to blame.  Everyone who indulged in the rush to buy into an accelerating housing market by taking out a loan which they could never pay back.  People who used their homes as ATMs, using seemingly endless home equity to finance vacations to the Caribbean.  Foundations, Charities, and Funds-of-funds blithely intrusting their money to the likes of Bernie Madoff.   Even investors who bought speculative stocks at inflated prices at the start of 2008 despite the stratospheric valuations.

Unless you took your money out of the market in 2007 or 2006, and used it to pay down your debt, you were part of the euphoria which led to the crash.  With luck, we will all learn this expensive lesson, and be able to remember it long enough not to be part of the next euphoric episode. 

History shows that most of us will forget all too soon (if we learn in the first place.)  Nevertheless, we have the power, and the ability, not to be "most people."

Tom Konrad, Ph.D.

January 13, 2009

Focus On Clean Power Income Trusts

Last week, Tom brought you a piece on the Algonquin Power Income Fund (AGQNF.PK), in which he opined that shift in investor attention away from capital gains toward yield might eventually provide a catalyst for the prices of yield-focused securities such as income trusts to rise. So-called utility trusts, or income trusts where the underlying corporation is engaged in utility activities such as power generation, are a common feature of the Canadian income trust sector (the mother of all income trust sectors). A sub-set of utility trusts is the clean power utility trust, where the power generation assets consist of technologies such as wind, small hydro, biomass and waste-to-energy (WtE). Though new tax rules have effectively made it impossible for new income trusts to be brought to market (barring certain exceptions such as REITs), existing clean power utility trusts (existing as of Oct. 31, 2006) get to operate under the old tax regime until 2011.

The clean power utility trust model is similar to the clean power Independent Power Producer (IPP, see definition) model, whereby firms are pure-play clean power generators (i.e. they own only generation assets) that sell their electricity to utilities, with the exception that the tax treatment awarded to income trusts allows them to pay higher yields by avoiding double taxation.

While changes in legislation mean that this investment vehicle is dying a slow death, Tom was correct to point out that in times where the prospects for strong capital gains are uncertain and interest rates low, income trusts provide a good way for investors to access high yields. What's more, clean power utility trusts, this most unique of Canadian investment sub-sector, allow investors (including US investors) to play North American clean power in a way that does not entail a risky bet on a technology play but is rather much more akin to a utility investment.

Clean Power Utility Trusts             

Name Ticker Related Corp. Entity (Ticker) Yield (%)* Assets
Algonquin Power Income Fund AGQNF.PK N/A 9.16 Hydro, Cogen, WtE, Wind, Water/Wastewater
Boralex Power Income Fund BLXJF.PK Boralex (BRLXF.PK) 19.77 Biomass (wood residue), Hydro, Nat Gas Cogen
Macquarie Power & Infrastructure Income Fund MCQPF.PK N/A 18.88 Nat Gas Cogen, Wind, Biomass (wood residue), Hydro, Long-term Care Home
Innergex Power Income Fund INRGF.PK Innergex Renewable Energy (INGXF.PK) 10.81 Hydro, Wind
Northland Power Income Fund NPIFF.PK Northland Power (not public) 9.44 Nat Gas Cogen, Wind
Great Lakes Hydro Income Fund GLHIF.PK N/A 8.01 Hydro

*As at close on Friday Jan. 9, 2008

One of the major risks facing income trusts is distribution cuts, something that generally happens when the fundamentals of the underlying business are severely diminished or distributions were set too high to begin with (in order to attract investors). As can be noted from the table, the yields on some of these trusts (i.e. Boralex Power Income Fund and Macquarie Power & Infrastructure Income Fund) appear to indicate that investors are anticipating distribution cuts and are demanding a risk premium. Yet preliminary screens on both funds don't uncover much evidence that distribution cuts are in the cards (caveat: these were very preliminary screens).  

While growth will be challenging as long as credit conditions remain tight (individual projects typically use over 50% debt), the underlying business model and existing assets of these funds remain largely immune from a slowing economy - they are utilities with a clean twist. Barring another major round of indiscriminate selling in equity markets, investments in one or more of the clean power utility trusts is a good way of generating returns in the form of cash yields (something that's worth a lot more than the promise of future capital gains in this economic environment) from a comparatively low-risk sector.

Some of the things to look for as red flags in assessing these trusts are: liquidity position (cash on hand; quick ratio) and ability to borrow for emergency purposes (undrawn line of credit); leverage level (debt-to-capital ratio) and the need to roll over debt in the next 12 months; any signs that operating conditions have deteriorated (e.g. for wood biomass, indications that pulp/saw mill closures related to the bad economy are decreasing fuel supply).

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

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.

January 11, 2009

10 Green Energy Gambles for 2009

The credit crunch made me reassess my investing strategy last September.  First, my expectation of the lack of availability of credit for companies without reliable cash flow led me to sell several early stage and troubled companies.  

Second, my experience of attempting to re-orient my portfolio in a hurry convinced me that I simply own too many companies.  For the purposes of diversifying company-specific risk, nearly all the benefits can be achieved with as few as 10 companies, if those companies have sufficiently different performance characteristics. In less ideal circumstances, 20-40 companies will usually be sufficient.  I currently own shares or have written cash covered puts in/on approximately 100 companies, ETFs, or closed-end funds.  I have closed positions in at least 30 more since September.  

One hundred companies is excessive for the purposes of achieving diversification.  My long list of companies meant that I had to spend more time re-evaluating my positions before I could decide what to trade, while the market was falling 5% a day.  It also leads to higher transaction costs.  Hence, I have resolved to reduce my number of holdings to no more than 50 and concentrate my positions in the remainder before the end of 2009.  I plan to keep my portfolio to no more than 50 holdings at a time permanently.

At the request of readers of my article about relatively conservative alternative energy stocks for 2009, here is a list of ten companies I like for various reasons, and which I believe have potential for more than 100% gains in 2009.  All of these companies are ones I owned at some point in 2008, but which I have either already sold, or which will probably not survive this year's cull of my too-complex portfolio.  I like each of them, but I also have doubts.

Unprofitable Companies Without Strong Balance Sheets

It's not a good time to be a pre-profitability development company.  Most such companies' stock prices are currently quite deeply in the toilet, and they are unlikely to recover unless money for such ventures becomes more readily available.  

When finance is difficult, companies that need to raise new money often have to do it by issuing a large number of new shares at prices below the current one.  This means that current shareholders are diluted and find themselves holding a much smaller part of the company, with the new shareholders having paid less for their shares.  

If these companies can raise new money on favorable terms, they all have the potential for spectacular gains.  If they can't, it need not mean that they will never bring their technologies to market and reach profitability, but it does mean that current shareholders are unlikely to profit from it.

Flywheel Stocks and Battery Stocks

Beacon Power Corporation (BCON) has the compelling idea of using flywheels for frequency regulation.  They recently raised $4.1M in a dilutive share offering, but I expect they will need to raise much more money before reaching profitability.  

John Peterson, whom I featured as one my 10 best competitors, has been making the case for Axion Power International  (AXPW.OB) quite effectively since July.  Read a few of his articles and you'll come away convinced they are working on one of the most practical battery technologies available.  Unfortunately, the company has no revenues, and will need to raise more money within a year. (Note: John has left some useful additional info in the comments below.)

Valence Technology, Inc. (VLNC) is a developer of Lithium-phosphate batteries.  They recently signed a deal to supply batteries for electric cars with a French firm, but they'll need more money to deliver.  Will they get it on terms favorable to current shareholders? 

Transmission Stocks

Composite Technology Corp (CPTC.OB) has long been a favorite of mine, but they, too, are bleeding cash and will need to raise more soon.  Both the wind and transmission cable divisions might benefit from a doubling of renewable energy production, especially since wind is likely to play a key role.  Nevertheless, there is no guarantee that this business won't go to larger companies, as opposed to a tiddler like CPTC, despite arguably technically superior products.

Waste-to-Energy Stocks

Environmental Power Corp. (EPG) is one of the very few pure-play waste-to-energy companies.  Its focus on bio-methane means it can even produce a sustainable renewable fuel suitable for transportation with current technology.  But they, too, will need to raise more money within a year.

Solar Stocks

Emcore Corp. (EMKR) produces ultra-high efficiency Gallium Arsenide solar cells used in Concentrating Solar Photovoltaic (CPV) power, as well as space applications.  CPV was a major topic of discussion at both OIDA's Green Photonics Forum, and  CSP and CPV Investment Finance Summit which I attended last fall.  I came away feeling that although CPV has historically been plagued by engineering challenges (see my OIDA Forum article,) it has reached a point that some CPV developers will be able to surmount those challenges at reasonable cost.  If so, CPV is quite suitable for small utility scale solar installations of a few megawatts.  These have the advantage that they can be distributed, and not require significant new transmission, which is the Achilles Heel of large scale solar and wind projects.   I'm particularly enamored with private CPV company Cool Earth Solar, although I would be hesitant to pick one company to succeed in a very crowded field.  

Emcore, however, is one of only a few suppliers of high-efficiency PV cells used by CPV companies such as Cool Earth.  Another is Spectrolab, a division of Boeing.  If I'm right about CPV coming of age in 2009, Emcore may benefit greatly.  If so, the stock, which had been battered by the delay and cancellation of orders in their backlog, as well as a resulting shareholder class action, may currently be a bargain.

Unprofitable Companies, Somewhat Stronger Balance Sheets

Clean Transportation Stocks

In September, UQM Technologies (UQM), I mentioned I was holding on to UQM despite the credit crunch because of their relatively strong balance sheet.  The company manufactures electric drives, and could benefit from US automaker's move to hybrid and electric vehicles.  However, my more recent determination to trim my portfolio, and the uncertain future of the US car industry made me decide to let the company go, despite the fact that an auto bail-out which forced the big three to produce many more hybrid and electric vehicles could prove a bonanza for UQM. 

Ethanol Stocks

Cosan, Ltd.(CZZ) is a Brazilian producer of sugarcane based ethanol, which is both cheaper and more sustainable than the North American corn based variety.  Either a return to high oil prices, or a reduction in America's ethanol import duty could greatly help the stock, but I decided to sell it because even sugar based ethanol is not a green enough solution that I feel a strong need to be investing in it.

Geothermal Stocks

Raser Technologies, Inc. (RZ) has an innovative business model for developing geothermal power plants.  Using United Technologies's modular PureCycle turbines, they can start development of a geothermal site with only a 10MW plant, and then expand rapidly if the geothermal resource warrants it.  The combination of this modularity and low exploration time means that Raser can explore geothermal prospects previously considered nonviable, and that they can work on a large portfolio at once.  As an inexpensive, baseload renewable resource, new geothermal projects are highly valued by utilities used to the reliable power generated by their fossil fueled plants.   

The strength of Raser's model is currently being demonstrated with the rapid commissioning of their first project, consisting of 50 PureCycle units in Utah.  Having recently raised $20M in new equity capital, Raser should not need to raise new funds in 2009.  This should be long enough for them to start earning significant revenues, and hence positioning them to possibly reach profitability using only debt rather than equity capital. 

Raser has all the markings of a great growth story, but if the stock price zooms up as I think it might, I'll probably sell to concentrate more on value and income propositions.

Profitable Companies, For Now

Wind Stocks

Zoltek (ZOLT) manufacturers carbon fiber used for wind turbine blades.  They have had a few setbacks recently, such as the loss of a long-running contract dispute.  Worse, some wind turbine manufacturers are suspending or halting production at some factories, as are other users of carbon fiber such as aerospace.  Some analysts predict  Zoltek will see sales falter in 2009.  On the other hand, if the stimulus package includes measures to quickly double renewable energy production, Zoltek may gain a reprieve, and buyers at current low levels my reap large profits.  

An even greater "buying opportunity" may have been created when Zoltek announced they had halted production at their plants in Hungary because of restricted natural gas supply on Jan 7, and then reopened the plants January 9th. I'd expect a stock price bounce when the market reopens on Monday, but probably not enough to bring it back to $9.30, where it closed on Tuesday.

Given the harsh market conditions, there is no certainty that Zoltek will be able to maintain profitability in 2009.  If it does, it may be currently a bargain.  If not, expect the price to fall further.

Final Thoughts

I've generally been including prices in my stock lists or model portfolios to make it easier for readers to go back and judge performance.  Here, I do the same, but I also want to note that although all of these have a chance of spectacular returns, I think the portfolio as a whole will fall, unless financial market conditions improve rapidly. 

That's what usually happens when you treat the stock market like Vegas.

Model Portfolio - Ten Green Energy Gambles  for 2009.  

Ticker Price (1/9/9 close)
BCON $0.46
AXPW.OB $1.20
VLNC $1.77
CPTC.OB $0.30
EPG $0.86
EMKR $1.43
UQM $1.72
CZZ $4.18
RZ $3.62
ZOLT $7.47

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad has positions in AXPW, BCON, EMKR, RZ, and ZOLT.

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.

January 07, 2009

Some Tidbits From The World Of Emissions Trading

To be sure, the near-term prospects for carbon emissions trading are bleak. Continued decline in industrial production across the world's major manufacturing economies will inevitably lower carbon emissions. The clearest indicator of this, short of directly measuring emissions, is a sharp decline in the price of various fossil energy commodities (i.e. oil, natural gas and coal) on the back of falling demand.

Another important factor for carbon emissions trading is that the commodity in play - the regulatory right to emit a unit of carbon dioxide equivalent (CO2e) - derives its legitimacy entirely from a regulatory scheme rather than from an economic need. Placing faith in carbon markets therefore means placing faith in politicians. The next 12 to 18 months are unlikely to produce much in the way of vigorous environmental action on the part of government (barring subsidies for alternative energy related to the stimulus package), especially if it means additional costs on industry.

These headwinds didn't prevent XShares Advisors from launching a new carbon emissions ETF, the AirShares EU Carbon Allowances Fund (ASO). ASO is an interesting product - it's a commodity pool that holds long positions in emission allowances under the European Emissions Trading Scheme.

ASO is the second product of its kind (sort of...). Last June, Barclays launched the iPath Global Carbon ETN (GRN), an exchange traded note that tracks what it calls "carbon-related credit plans". For now, GRN tracks the EU ETS as well as the Clean Development Mechanism (CDM), conferring it an emerging market angle that ASO lacks.

These two securities now allow individual investors to play carbon trading more directly, but beware; the world of carbon markets is highly complex and unless you're crystal clear on the rules on how these permits are allocated by regulators and traded by market participants, you could be in for some nasty surprises. For instance, for the first phase of the EU ETS (2005 to 2007), European governments over-allocated permits, leading a price collapse when people figured out the market was net long.

Besides these securities, investors can also play carbon trading indirectly by taking equity positions in firms running carbon exchanges, including Climate Exchange plc (CXCHY.PK) or World Energy (XWE.TO). We will continue to seek out and list securities that allow investors to play various environmental markets, so be sure to check our Environmental Markets section regularly.

In closing, although I do believe that in the long run emissions trading will likely become the preferred regulatory route to curtail carbon emissions in many jurisdictions, the next 12 to 24 months could spell more downside for the sector as the perfect storm continues to hit. I will provide an update on these and other securities when I see the outlook brightening.

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

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.

January 06, 2009

Algonquin Power: A Renewable Energy Income Investment

The Pendulum Swings to Cash

Over the long term, market cycles are characterized by swings of sentiment, and changes in investor preferences.  The recent cycle was characterized by an emphasis on growth and capital gains.  In the current financial crisis, investors are again learning the value of cash, and companies which produce steady cash flow and dividends.  Since the market tends to overshoot, I expect there will be a time a few years hence when, once again, the first question any investor asks about a stock is "What's the yield?"

If I'm right, companies with strong cash flows that pay high dividends will likely outperform the market as a whole over the next few years.  This is why I've been looking carefully at company's cash flow statements and balance sheet, and we've been bringing you our picks of dividend paying alternative energy and energy efficiency stocks.

Beyond Dividends

Taking this reasoning a step farther, it makes sense to look at the slightly more exotic income trusts.  Income trusts are companies that own mature, cash producing assets, from which substantially all the income is returned to the trust owners.  In many cases, this structure provides the company with favorable tax treatment.  For instance, US REITs are a type of income trust which holds real estate assets on which the income is not taxed at the company level, so long as 90% of that income is returned to investors.

Various types of income trusts may have different tax treatments for different classes of investors, and for different types of income trust.  Both current tax treatment and changes in tax treatment can greatly influence returns.  Nearly two years ago, I brought three renewable energy income trusts to reader's attention because changes in Canadian tax law meant that the funds were changing hands, and I thought there might be future buying opportunities, although at the time I noted "It's impossible to say what good price entry levels are for any of these funds."

Since then, the tax changes and the market meltdown mean that I now think we are seeing at least one such opportunity.  I more than doubled my position in The Algonquin Power Income Fund (AGQNF.PK), at US$1.62 a share in December.

The Algonquin Power Income Fund 

The Algonquin Power Income Fund owns a mix of hydroelectric, wind, cogeneration, waste-to-energy, and water and wastewater facilities in the US and Canada.  The power and services from these facilities are sold under mostly long term contracts, generating mostly stable cash flows, although some contracts are indexed to natural gas prices, and some come up for renewal each year.

In October, the company cut distributions to unit holders by almost three quarters, and the stock price collapsed.  Nevertheless, the price drop means that the yield, even with the lower level of distribution, is still nearly 11% (based on C$2.22 /US$1.83 stock price.)  However, the large cut in distribution means that further cuts are much less likely to be necessary, and the company will have much less need to raise new capital at current low prices.

Given the good yield, the main concern for investors should be the likelihood of any future cuts in distributions.  According to the press release, the fund's trustees believe that the lower distributions will allow them to both internally fund capital investment, and pursue growth opportunities.  

Unless cash flow deteriorates from the level in the third quarter financial results, the new level of distributions should mean that the company will just be able to fund the current level of investment with cash from operations, without having to raise new debt or equity.  Since this agrees with the fund's stated intent in reducing the distribution, I would be surprised if there is any further reduction in the distribution over the next couple years, although there are likely to be further changes when the Canadian tax law changes finally take effect in 2011.  If cash flow falls below expectations, the Fund retains the option of drawing on a revolving credit facility, as well as temporarily curtailing new investments until cash flow recovers. 

Conclusion

If I am correct in my expectation of stable distributions, and a growing preference among investors for income producing securities, the The Algonquin Power Income Fund should be able to appreciate as the business grows with new investment, all the while returning a healthy return from distributions.  

The biggest risk I see is that the financial climate may prevent the fund from rolling over some of its debt (either at the project or company level) at a favorable rate.  However, currently the main problems companies are having with financing are not because of rates on offer, but rather the much higher credit standards lenders expect from borrowers.  Because the fund has debt at both the project level and the company level, there could easily be some project level debt which would be difficult to refinance in the current climate.  That said, borrowers like Algonquin, which have verifiable, steady cash flows are just the type of borrowers most lenders are currently looking for.  If Algonquin proves unable to roll over debt at a large scale, it will only be in a climate even worse than today's, with no one being able to borrow at all.

Spectacular gains seem unlikely, unless market conditions improve dramatically.  Nevertheless, in this climate, I'm happier with a steady distribution over 10% from the sale of clean energy than a chance of a spectacular gain but no expectation of cash anytime soon.

Note: This article was written in late December, and not published until now because I wanted to bring you 2 top ten lists and a 2008 year in review article around New Year's.  I included Algonquin in my 10 Stocks for 2009, when the stock was trading at $1.82.  As I write, the stock has risen to $2.37, meaning the yield is down to about 8.6%, and the potential upside gain is reduced.  On the other hand, Obama has now said that he wants to double renewable energy production as part of his stimulus plan, although he was not specific over what time period he expected that doubling to occur.  Nevertheless, the additional confirmation of Obama's long-standing commitment to renewable energy will be good for Algonquin's projects in the United States, and may explain the recent rally.  At this price, I'm not in a hurry to buy more, although I might still consider it if I did not own any of the stock.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad owns AGQNF.

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.

January 04, 2009

2008: The Year of (Un)Sustainable Biofuel

Last year, I used a special run of AltEnergyStocks.com's new Cleantech News (CTN) aggregator to bring you the ten stories of 2007 which bloggers found most interesting or controversial. Continuing the tradition, below are the ten stories of 2008 which Cleantech and Green Bloggers were talking about.

One of my favorite features of CTN is how it not only provides links to the original articles, but also links to the articles referencing it. Hence the list below includes links to the entire conversation.

Unsustainable Biofuels

In January, The Gaurdian kicked things off with an article saying burning biofuels may be worse than coal and oil a theme echoed by New Scientist. WSJ.com: Energy Roundup and Peak Energy took note.

In April, The Telegraph published an article linking first world driving to third world starvation. Alt Energy Investor saw it as a reason to prefer Brazillian sugarcane ethanol over the corn based variety. Climateer Investing ranted about ethanol boosting venture capitalists, Sharon Astyk at Gristmill took a more holistic view of how we use the food we have,seeing it as a call to re-examine the unfair way we distribute food.

Biofuel controversy reached a crescendo in July, when the Guardian brought us news of an internal World Bank Report which found that biofuels had increased food prices by 75%, which had apparently been kept secret since May to 'avoid embarrassing President Bush'; Blogosphere reaction was intense, with The Oil Drum, Green Car Congress, Peak Oil News, Peak Energy, and AutoblogGreen, quoting or highlighting parts of the article. Earth2Tech, Green Tech blog, WorldChanging, and Gristmill referenced the report and explored the food-fuel connection further, while American Fuels brought us a counter-argument from the Institute for Agriculture and Trade Policy.

Sustainable Biofuels

With all the controversy, others were discussing better ways to do things.  In March, Worldchanging brought us the two articles on Common Sense on Biofuels and Growing Sustainable Biofuels.  Earth2Tech and Peak Energy found them compelling.

Later that month, Earth2Tech brought us a list of 15 Algae Startups Bringing Pond Scum to Fuel TanksAlternative Energy Stocks' Week in CleanTech, Matter Network, Next Big Future, and Dark Enough to See the Stars referenced it in articles about sustainable biofuels, while EcoGeek.org took it as a sign that Algae had reached a tipping point, but I warned people away from PetroSun, a publicly- traded algae company in the list.  

On the lighter side, TreeHugger exhorted us to Grow our Own Oil with The Diesel Tree.  The idea of Australian farmers tapping these Brazillian trees for agridiesel caught the imaginations of The Good Human  and GroovyGreen.com.

Politics

In September, the BBC told us why IPCC Chair Rajendra Pachauri thinks we can do more for the climate by not eating meat than we can by reducing drivingWatts Up With That? thinks Pachauri is "putting his religious views forward from his position as IPCC chair." But back in August, WorldChanging wondered if Cattle Can Save Us From Global Warming.
 
In November, The Wall Street Journal's Environmental Capital quoted Steven Chu saying "Coal is My Worst Nightmare."  AutoblogGreen expects to be writing a lot about him in the coming years, while Joe Romm at Gristmill had five reas"avg">ons Chu is a great pick.

Wind

In June, The Guardian told us of the massive growth of wind in China, although it's still behind coal.  The WSJ.com: Environmental Capital and  NewEnergyNews took note.

Energy Storage

In July, ScienceDaily trumpeted a 'Major Discovery' Primed To Unleash Solar Revolution: Scientists Mimic Essence Of Plants' Energy Storage System, also covered by Technology ReviewNew Energy and Fuel hope this means the Hydrogen economy might finally take off, but Clippings thinks plants still have the edge.  

Why So Much Biofuel? 

Clearly, these are not the most important stories of 2008... but they did get bloggers blogging.  Probably the most significant events in CleanTech were Obama's election (surely that must trump his choice of Energy Secretary?) and how the Credit Crunch will change the future of CleanTech.  Rather, this is an eclectic look back at what really got our blogging juices flowing in 2008.  Since September, Cleantech bloggers have probably been wishing for that more innocent time when the biggest issue we had to blog about was the sustainability of biofuels.

If you're looking for news from specific CleanTech industries, try AltEnergyStocks.com's category pages, and which collect stories for each of our categories such as Solar, Energy Efficiency, Clean Transportation, Mutual Funds and ETFs, Batteries, Wind, Waste-to-Energy, and many more.  Scroll past the stock list on any of these pages, and catch up on your favorite Alternative Energy sector. 

Tom Konrad

January 02, 2009

AltEnergyStocks.com's Ten Best Competitors

When I began writing about clean energy investing in 2006, my competition was sparse.  The quality blogs with industry heavyweights were either not focused on investing, or were primarily focused on venture capital.  Now the world has changed.  I keep finding new blogs and writers with a strong focus on both clean energy and public companies.  Here are a few I'd like to share with readers:

Dedicated Blogs

Energy Tech Stocks - Three articles a day can be a little daunting, but that's what happens when you try to cover everything.

Camino Energy - Their PurePlay indices are a great way to see what's happening with subsectors that don't have dedicated ETFs.

Best Sustainable Business Blogs

Although not strictly focused on investing, I've gained much useful knowledge and insight from these business writers:

Tyler Hamilton's Clean Break. A must read, especially if you're interested in Canadian companies.

Marc Gunther - Marc's writings on sustainable business are among the best in the field.

Joel Makower's Two Steps Forward.  Joel's probably first among the industry heavyweights I referred to in the intro.  He also showed the great insight of being the first one in this list to add me to his blogroll soon after I started writing.  Thanks, Joel!

Cleantech Blog - The Venture capital focused blog I alluded to in the intro.

The Wall Street Journal's Environmental Capital.

Seeking Alpha Writers

Seeking Alpha is a great aggregator of articles focused on stocks, and many excellent writers about alternative energy companies publish or are syndicated there.  Most of the best writers are already on this list elsewhere.  Two exceptions are:

Greentech Media has excellent writing on many aspects of clean energy, and Seeking Alpha does a good job of publishing just their investing-focused articles.

John Peterson - A battery and energy storage expert who publishes only on Seeking Alpha

Peak Oil Investors

Jim Kingsdale's Energy Investment Strategies is more broadly energy focused, but he's usually spot on when he writes about clean energy.

Honorable Mentions

Both Earth2Tech and Climate Progress have such good writing I wanted to mention them, despite the fact that they have little to say about investing.

Clean Energy Sector - This young blog shows a lot of promise.  Running across it made me think of writing this article.

Other thoughts

If all these are too much to keep up with, try our Cleantech News Blog Aggregator (CTN).  On Monday, I'll use the CTN algorithm to bring you the 10 most controversial stories of 2008 (link will be broken until then.)

If you're not in this list, and you think you should be, leave a comment.  If I get enough good suggestions, I'll write a follow-up.

Tom Konrad


« December 2008 | Main | February 2009 »

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