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February 28, 2009

Viva the Cleantech Revolution

It’s official! Cleantech, the sixth industrial revolution, has arrived on time and in the midst of extraordinary crisis. Like every good revolution, blood is flowing in the streets; the guillotine is en route to Wall Street and the mob is so busy plotting retribution for the excesses of the past that most have no time to consider the future. But as yesterday’s dynasties decay, crumble and fall, a new generation of visionaries is already building on the wreckage of the past. These are indeed troubled times that bear an eerie resemblance to the opening sentence from A Tale of Two Cities.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” Charles Dickens (1812 – 1870)

However like all times of trouble, this too shall pass.

In mid-February, President Obama signed an economic stimulus package that included $38 billion in alternative energy spending. A week later, in a memorable address to a joint session of Congress, the President outlined a vision for America’s future that rests on four pillars: energy independence, improved education, reduced healthcare costs and jobs. Last Thursday, he unveiled a 10-year plan that envisions $150 billion in alternative energy subsidies that will be paid for by a carbon cap and trade scheme. After decades as a backwater agency with a modest mandate and budget, the Department of Energy is finally surging to the forefront as the powerful agency it should be. With a little luck we may even see a comprehensive national energy policy and that would be a wonderful thing.

If you believe the press and listen to the politicians, a brave new world of clean renewable energy is just around the corner, but there are a couple of particularly nasty flies in the ointment. Alternative energy is inherently less stable than its conventional counterparts and cost-efficient transmission, distribution and storage systems do not yet exist. While the litany of potential solutions grows longer with each passing day, these solutions are largely unproven and will take years if not decades to implement nationwide. In the interim, our only option is to wake up in the morning, go to work with the toolbox we own, solve our problems to the best of our ability and be ready to embrace newer and better technologies when they are perfected. If we're lucky and sensible, cheap will triumph over cool.

I’m a dilettante when it comes to power generation, transmission and distribution, so I’ll leave those issues to better-informed writers and focus my attention on a narrow sector that I know well, manufactured energy storage devices.

Historically, batteries have been a critical but largely invisible part of daily life. They start our cars and power our cell phones but the only times they merit more than a passing thought are when they need to be recharged or replaced. With the dawn of cleantech, however, rechargeable batteries are no longer mere conveniences. For the first time in history, rechargeable batteries are fundamental enabling technologies that can help smooth the peaks and valleys in renewable power and foster the development of electric vehicles. Unfortunately, the battery industry is not ready for the current challenges, much less the sweeping changes that the cleantech revolution will require.

To understand the current state of battery technology, one must first understand the historical necessities that were the mother of invention. Around 250 BC, a clever Babylonian discovered that a genie could be released from a clay pot containing the right combination of lead and acid. During the 1800s, people began to find ways to make the genie do useful work beyond electro-plating and parlor tricks. Until the 1970s, there were only two primary classes of batteries: rechargeable lead-acid batteries and disposable dry cells. Lead-acid batteries handled the heavy work like starting cars and providing emergency lighting while dry cells were used for flashlights, toys and consumer goods, including the first portable radios and tape players.

In the mid-70s, maintenance free valve regulated lead-acid (VRLA) batteries were introduced and rapidly became the dominant automotive technology. They worked so well in fact that most battery manufacturers cut their R&D budgets to the bone because VRLA batteries performed well and a complacent auto industry saw no reason to pay premium prices to fund further research. While there was some progress on deep-cycle batteries for golf carts, forklifts and industrial systems, R&D in the lead-acid sector essentially took a 25-year siesta as electrochemistry became passé and college students gravitated toward more exciting, glamorous and rewarding careers in electronics, communications and information technology. Over the last few years, rapidly evolving bulk energy storage needs have sparked a new wave of lead-acid research that uses modern materials and manufacturing methods to improve and revitalize an old-line chemistry. The results have been almost magical and an entirely new generation of advanced lead acid and lead carbon batteries is in the final stages of pre-commercial development. These products are not widely available yet, but the new generation of batteries promise extraordinary performance at a lead-acid price, which once again proves the ancient wisdom that with time, everything old is new again.

The late 70s were a time of sweeping change as electronics manufacturers shifted their focus from toys, radios and tape players to productivity tools. The introduction of business tools like electronic calculators and the pagers, computers and telephones that quickly followed, drove the development of compact and light-weight rechargeable battery chemistries including nickel cadmium (Ni-Cd) nickel metal hydride (Ni-MH) and lithium ion (Li-ion). Since buyers of portable electronics invariably viewed run time between charges as a critical performance metric, R&D spending on these technologies soared and continues to this day.

Until recently, rechargeable batteries were not something the average consumer would think of as a discrete product class. Instead, they were relatively inexpensive components in high-end consumer durables like cars and electronics. In automobiles, batteries typically represent less than 1% of total product cost and in electronics it is rare for batteries to represent more than 5% of product cost. This historically low ratio of battery cost to total product cost resulted in a market dynamic where the auto industry could afford to be complacent, while electronics manufacturers were willing to pay huge premiums for modest improvements in battery performance. Both approaches were sensible in an earlier epoch, but neither has any utility in the emerging world of cleantech.

Where batteries were once viewed as low-cost components in expensive products, the pendulum is swinging in the other direction with a vengeance as the ratio of battery cost to total product cost escalates to the point where the batteries represent up to 20% of the cost of an HEV, up to 50% of the cost of an EV and over 90% of the cost of a grid-based system. Unfortunately, most batteries are simply too expensive for the jobs people want them to do. As thought-leaders, policymakers, manufacturers and consumers come to grips with the cruel and inflexible economic realities, cost accountants and industrial engineers will end up making the hard buying decisions and the opinions of futurists, scientists, techno-geeks and bloggers like me will become increasingly irrelevant. In the end, the only thing that will matter is a rigorous and comprehensive cost benefit analysis for each new energy storage application.

A couple days before Christmas, I published “Alternative Energy Storage Needs to Take Baby Steps Before It Can Run,” an article that was selected as an Editor’s Pick at Seeking Alpha and included cost data from a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage program. While the Sandia report focused on the current and projected capital costs of energy storage for solar power installations, the basic cost structure applies to the entire spectrum of energy storage applications. Several Li-FePO4 advocates promptly pointed me to Chinese Internet sites to support their arguments that Sandia's cost estimates are wrong, but I've found the Sandia estimates consistent with available industry cost data and believe they provide a reasonable basis for investment decisions. The Sandia capital cost estimates are set forth in the following table:

Technology Current Cost ($/kWh) 10-yr Projected Cost ($/kWh)
Flooded Lead-acid Batteries $150 $150
Sealed Lead-acid Batteries $200 $200
Low-speed Flywheel $380 $300
Na-S Batteries $450 $350
Asymmetric Lead-carbon Hybrid $500 <$250
Zn-Br Batteries $500 $250/kWh + $300/kW
Ni-Cd Batteries $600 $600
Zebra Na-NiCl Batteries $800 $150
Ni-MH Batteries $800 $350
Li-ion Batteries $1,333 $780
Vanadium Redox Batteries 20 kWh=$1,800/kWh
100 kWh =$600/kWh 
25 kWh=$1,200/kWh
100 kWh=$500/kWh
High-speed Flywheel $1,000 $800

With the basic cost structure firmly established from reliable sources, it’s probably worthwhile to revisit some cherished mythologies and incontrovertible realities that I assembled from eight months of reader comments and discussed at length in an article on the importance of rebuilding America’s domestic battery infrastructure.

Cherished Mythology Lead-acid batteries are environmental hazards.

Incontrovertible Reality With recycling rates approaching 99%, lead-acid batteries are the most highly recycled product on the planet and substantially all of the materials recovered through recycling can be used to make new batteries. Neither NiMH nor Li-ion chemistries can even come close to matching the natural resource efficiency and environmental safety of lead-acid batteries.

Cherished Mythology Li-ion batteries are one-quarter of the weight of their lead-acid counterparts.

Incontrovertible Reality The relentless but frequently unsuccessful quest for product safety has doubled the weight of Li-ion batteries. So while the explosive Li-ion chemistries have four times the energy density of lead-acid batteries, the safe Li-ion chemistries only cut the weight in half. In either event it’s silly to fret about battery weight in the context of a 3,000-pound car or a stationary power storage installation.

Cherished Mythology NiMH and Li-ion batteries have more power than lead-acid batteries.

Incontrovertible Reality The recent development of asymmetric lead-carbon hybrids has improved the power profile of advanced lead-acid batteries to competitive levels at a fraction of the cost.

Cherished Mythology NiMH and Li-ion batteries have far longer cycle-lives than lead-acid batteries.

Incontrovertible Reality The recent development of asymmetric lead-carbon hybrids has improved the cycle-life of advanced lead-acid batteries to competitive levels at a fraction of the cost.

Cherished Mythology NiMH and Li-ion batteries will improve as the technology matures.

Incontrovertible Reality NiMH and Li-ion batteries are already fully mature technologies. Substantially all of the recent advances in Li-ion technology are like changing a carrot cake recipe; call it what you will, but it's still a carrot cake when it comes out of the oven. There have been big safety gains from new flavors of Li-ion chemistry, but those gains have always come at the cost of reduced energy density.

Cherished Mythology Li-ion batteries are an ideal solution for most energy storage problems.

Incontrovertible Reality Li-ion batteries are the best solution for small format energy storage needs including cellular phones, power tools and portable computers. They also have significant potential for use in electric bicycles and hybrid scooters. Their cost effectiveness plummets when the battery pack is bigger than a breadbox. Even if Li-ion batteries could be cost effective in power-hungry applications like EVs and stationary applications, sound economics and rational industrial policies will always favor the manufacture and sale of 5,000,000 cell phones or 500,000 laptops over exporting the same batteries to power 1,000 EVs.

Cherished Mythology Plug-in electric vehicles provide a cost-effective path to a clean energy future.

Incontrovertible Reality Plug-in electric vehicles provide dramatic PR sound bites for politicians, car companies and environmentalists, but even the auto executives are quick to acknowledge that pure electric vehicles cannot be paying propositions for the average consumer until gas prices are far higher than they have ever been.

Cherished Mythology NiMH and Li-ion batteries will get cheaper as demand increases.

Incontrovertible Reality Roughly 75% of the cost of any battery is raw materials and NiMH and Li-ion batteries have been mainline industrial products for almost 20 years. The bulk of the potential manufacturing cost savings have already been achieved and the only way battery prices can fall dramatically is if massive new supplies of raw materials become available at bargain basement prices.

At the dawn of the cleantech revolution, the financial sector is in shambles and the Obama administration has thrown down the gauntlet on healthcare spending. While I have every confidence that the banks and insurance companies will heal with time, I also believe that margins in healthcare will be pressured for the foreseeable future. So the only investable long-term trend that I see in the current economic and political environment is alternative energy. In the alternative energy sector, the fundamental enabling technologies are transmission, distribution and storage. Each of these sub-sectors is essential, each is a target rich environment for investors and each will be a major recipient of long-term government support. Since accepted market wisdom holds that you should never fight the Fed, I think the policy clues for investors are crystal clear.

I can identify a dozen pure play public companies that have the potential to make a real difference in America’s energy storage future. Since I’ve made my personal opinions clear in earlier articles, I won’t bother re-plowing that ground today. However I encourage readers to study each of the principal market participants, consider where their existing and proposed products will mesh with the needs of the coming cleantech revolution, and consider who the likely buyers of their existing and proposed products will be. The short list of pure play public companies includes:

Name Trading Symbol Product Class Product Status
Active Power ACPW Low-speed flywheels Manufacturing
Altair Nanotechnologies ALTI Li-titanate batteries Demonstration
Axion Power International AXPW.OB Lead-carbon batteries Demonstration
Beacon Power BCON High-speed flywheels Demonstration
C&D Technologies CHP Lead-acid batteries Manufacturing
Enersys ENS Diversified batteries Manufacturing
Ener1 HEV Li-titanate batteries Demonstration
Maxwell Technologies MXWL Ultracapacitators Manufacturing
Ultralife Batteries ULBI Diversified batteries Manufacturing
Valence Technologies VLNC Li-phosphate batteries Manufacturing
Exide Technologies XIDE Lead-acid batteries Manufacturing
ZBB Energy ZBB  Zinc-bromine batteries Demonstration

As a student I strove for the extreme right hand tail of the bell shaped curve. As a businessman, I’m delighted to sacrifice the extremes on both ends of the curve because the bulk of the revenue will go to the company that best serves the needs of the guys in the middle.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

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.

February 26, 2009

Portec Rail Products Beats Estimates, Gets Clobbered

Portec Rail Products (PRPX) released  fourth quarter results on Thursday, comfortably beating analyst expectations.  The stock promptly dropped 18% to just below $5, continuing a two-week decline from around $7.50.prpx2.png

I'm baffled.  Although the rail freight industry is a victim of falling oil prices (which means they lose market share to trucking) and the overall drop-off of the transportation industry, this is not news. Portec has several things going for it.  The company has a strong balance sheet, with current assets exceeding total liabilities, and strong cash flow from operations.  Total revenue is down slightly from last year, but given the horrible performance of rail stocks in general, the slight sales decline of 2.4% is an excellent performance.

The company's friction management products and services were what first drew my attention to Portec.   Because they save fuel and maintenance costs, these should be in increasing demand: orders for new rail cars have fallen sharply.  With declining orders, rail companies will have to contend with an aging fleet, boosting per-car demand for maintenance reducing services and rail car repair.  

Many of their products are useful for both rail freight and passenger rail/transit application.  Their environmental solutions, trackside fault detection safety products, and noise abatement make increasing sense in urban transit environments, meaning that the company should be able to capitalize on any rail transit build-out from the stimulus package.

Although Portec CEO Jarosinski sees a continued difficult freight market in 2009, he is bullish on passenger rail traffic.  He says, "We believe that this economic climate provides Portec Rail with opportunities in various markets, whether domestic or international, for our core rail business operating units. We feel that we are reasonably well-positioned with our business to take advantage of these opportunities if the funds are available for investment."  While that's not exactly bullish, it's hardly grounds for the sell-off we've seen.

At $5, Portec is trading at a 12 month trailing P/E of 6.2.  I see it as a good play on rising oil prices (which I expect), as well as on a rail or rail transit build-out.  The 4.8% dividend yield, which can easily be paid out of even the company's seasonally low 4th quarter earnings provides a reward to patient investors, even if the stock does not rebound soon.

For other rail investing ideas, AltEnergyStocks.com Editor Charles Morand will be publishing an article on high-speed rail stocks next week.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad owns shares of PRPX.

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.

 

February 25, 2009

The Ontario Green Energy Act: What Can Alt Energy Legislations Do For Investors

Dedicated legislations have been at the core of some of the most impressive regional growth stories in alternative energy, most notably in Germany with the Renewable Energy Sources Act or in California with the various legislative solar initiatives. On Monday, the Canadian province of Ontario became the latest jurisdiction to join the fray as lawmakers introduced the Green Energy and Green Economy Act. Why should investors care? Because such legislations have been at the core of some of the most impressive regional growth stories in alternative energy. 

As a bit of a backgrounder on Ontario, there is currently about 800 MW of installed renewable power capacity (~95% wind) in the province with around 2,500 MW under power purchase agreement (PPA) and scheduled to be brought into commercial operations in the next few years. In late 2006, the province introduced a renewable power feed-in tariff incentive, the first one in North America. This incentive was suspended in May 2008 due to transmission constraints. By then, there were about 500 MW of solar capacity under PPA linked to the incentive, including one of the world's largest solar PV farms.

To put these numbers into perspective, California, the largest solar PV market in the US by quite a stretch, had around 500 MW of PV installed by the end of '07. Next came New Jersey at 69 MW and New York at 32 MW. None of the 500 MW under PPA in Ontario has yet reached commercial operation, and at least some of it will probably be cancelled given current credit conditions. Nevertheless, these figures provide a good idea of the market's potential is. The Canadian Solar Industries Association estimates that Ontario could install up to 16,000 MW of solar PV by 2025, with the potential on Toronto's rooftops alone estimated at 3,600 MW.   

The Green Energy and Green Economy Act

The Act targets three main areas: (1) renewable power generation; (2) energy efficiency; and (3) the smart grid.

1) Renewable Power Generation

Perhaps the most significant measures here are aimed at removing what had proven to be critical barriers to renewable energy projects reaching commercial operation in the province:

  1. Renewable energy projects meeting certain criteria will be guaranteed a connection to transmitters and distributors' networks and will be given priority access over other forms of power generation
  2. Transmitters and distributors will have to make the necessary network upgrades to allow for the connection of renewable power projects and the eventual expansion of renewable power capacity
  3. Renewable power projects will be exempt from all forms of municipal permit requirements to counter a growing trend of NIMBY groups lobbying their municipal councils to block renewable energy projects  
  4. A new office of Renewable Energy Facilitation has been created to help speed up the permitting process (e.g. environmental assessments, etc.)

On the revenue side, the legislation does the following:

  1. The feed-in tariff that had been suspended in May 2008 will be reintroduced once new rules have been designed (no timeline provided but Q2 2009 has been thrown around)
  2. A system of PPA auctions for large-scale renewable power projects that has been in operation since 2004 will be maintained 

Analysis

The measures aimed at removing barriers to renewable projects are significant. However, until the new rules around the feed-in tariff are released (e.g. pricing, eligible fuels, etc), the exact impact of the law will remain unclear. My own guess is that the government will be very aggressive with ramping up renewable energy installed capacity over the next five years as, as its name indicates, this law is also about the economy. If you believe the government, this bill is as much about creating a counter-cyclical effect as it is about cleaning up the environment. If my thesis is correct and this turns out to be a boon for developers, the following stocks should be watched:

Name Ticker Description Potential Upside Related to Legislation
Algonquin Power Income Fund AGQNF.PK Ontario-based renewable power developer with exposure to Ontario (income trust) V. High
Boralex BRLXF.PK Canadian renewable power developer with exposure to Ontario V. High
Canadian Power Developers CHDVF.PK Canadian renewable power developer with significant exposure to Ontario V. High
Great Lakes Hydro Income Fund GLHIF.PK Ontario-based hydro power developer (income trust) V. High
Innergex Renewable Energy Inc. INRGF.PK Canadian renewable power developer with exposure to Ontario V. High
Macquarie Power & Infrastructure Income Fund MCQPF.PK Ontario-based renewable power developer (income trust) V. High
ARISE Technologies Corporation APVNF.PK Ontario-based silicon and PV cell manufacturer with a module installation segment. The module installation segment is focused on the Ontario residential market V. High
Northland Power Income Fund NPIFF.PK Ontario-based power developer with some exposure to renewables (income trust) High
Brookfield Asset Management BAM Infrastructure development firm with exposure to Ontario renewables Medium
FPL FPL FPL Energy unit is one of the world's largest wind park owners and has exposure to Ontario wind Low

2) Energy Efficiency

The Act introduced a number of energy efficiency measures with a focus on building efficiency:

  1. No real property can be sold or leased for an extended period of time without undergoing an energy audit
  2. Public agencies will be required to come up with an energy conservation and demand management plan
  3. Public agencies will be required to consider energy efficiency when making capital investments or when acquiring goods and services (although the devil will be in the details here with more precise rules to come)
  4. Energy distributors will be required to meet efficiency and demand management targets (see the brackets above about the devil)
  5. The Building Code will be reviewed to include stronger efficiency measures

Analysis

Energy efficiency measures are clearly targeted at the building stock. There aren't really any good direct plays on this, and won't be until the government releases further information on what it intends to do with its own buildings. Building efficiency firms such as Johnson Controls (JCI) could benefit, although its unclear whether this would be needle-moving. 

3) The Smart Grid

Ontario has been somewhat of a leader in smart grid, with legislation passed back in 2005 requiring every home and business in the province to be equipped with a smart meter by 2010. Hydro One, the largest transmitter, has also begun smartening its network by embedding communication equipment from RuggedCom (RUGGF.PK). The Act contains provisions to expand smart grid capex. The Ontario Smart Grid Forum estimates that C$1.6 billion could be spent on a smart grid ramp up in Ontario over the initial five years of such a program. As I mentioned in a past article, while the absolute amount isn't huge, it is still a fair chunk of change for this emerging industry.

The smart grid measures are:

  1. A timeline for rolling out the smart grid and apportioning spending responsibilities to different players (e.g. transmitters, distributors, retailers) will be released
  2. Communication standards and other technical aspects will de defined through regulation
  3. The regulator (called the Ontario Energy Board, the equivalent of a PUC in the US) will be directed to take actions related to the implementation of the smart grid, although these actions aren't yet defined
Analysis

Once all the rules are released, the legislation will have the effect of formalizing a patchwork of initiatives already underway. In my view, significant smart grid capex can be expected in Ontario over the next few years with a focus on the transmission and distribution infrastructure (rather then end consumers). There are several companies large and small entering the world of smart grid. My personal favorite play on this legislation is RuggedCom (RUGGF.PK): (1) it has already won contracts here; (2) it is part of the home team (based in Ontario); (3) it already generates EBITDA; and (4) even though its stock has withstood the latest storm in equity markets, it's still trading at a reasonable trailing PE compared to peers.   

Conclusion

Many people in the investment world loathe government intervention into anything. However, alt energy has been and continues to be primarily driven by regulation and government policies. In the absence of government support schemes, industry growth rates would be a fraction of what they currently are, and solar PV would not be on the steep cost decline curve it's currently on. It is therefore critical to keep an eye on the policy side to know where growth opportunities will emerge next.

With this new Ontario legislation, my favorite play is the Canadian clean power IPP sector (stocks listed above). The smart grid initiatives will also be worth watching, although more clarity on the rules is required before potential winners can be identified.

DISCLOSURE: Charles Morand does not have a position in any of the stocks 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.

February 23, 2009

Renewable and Alternative Energy Mutual Funds Compared

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

A Choice of Alternatives

There are now 6 mutual funds focused on what I usually refer to as "Clean Energy."  I use this designation because "Renewable Energy" does not include Energy Efficiency, which is the most cost effective and scalable way of cleaning up the economy, while "Alternative Energy" usually is taken to include such technologies as nuclear and coal-to-liquids.  

Nuclear may have low carbon emissions, but security concerns, waste disposal, and cost all lead many investors who wish to green up their portfolios reluctant to invest.  Coal-to-Liquids companies such as Rentech (RTK), in contrast, emit as much or more carbon than would be emitted by the use of the same amount of conventional petroleum products.  As a strategy to cope with peak oil, coal to liquids only makes sense if you ignore the climate impact, and hence these companies cannot be considered clean, even if they are alternative.

The six mutual funds which mostly focus on such clean energy technologies (as opposed to the broader categories of Cleantech or Socially Responsible/SRI) are the American Trust Energy Alternatives Fund (ATEAX), the Calvert Global Alternative Energy Fund (CGAEX), Firsthand Alternative Energy (ALTEX), Guinness Atkinson Alternative Energy Fund (GAAEX), New Alternatives Fund (NALFX), and Winslow Green Growth Fund (WGGFX).  In general, all of these have relatively high expense ratios, even for actively managed mutual funds, but if you are uncomfortable trading the Clean Energy ETFs or individual stocks, these are your choices.

A Renewable Mutual Fund in Your 401(k) Plan?

Another reason to use a mutual fund rather than an Exchange Traded Fund (ETF) is if you're investing through a 401(k) plan.  Although most 401(k) plans do not offer a Renewable Energy Fund as an option, there is a movement to encourage companies to add them with a Federal tax credit.  There's also a how-to guide both for individuals trying to encourage their companies to add such funds, and for companies which want to include such funds in their plan.  

If your company is planning to add such a fund, it makes sense to add the one which will bring the best diversification at the lowest cost, and that's what this article is about.

Cost

Many fund advisors will say that their expense ratios are high because the funds are still small.  In some part, that is true, but the fees are also high because there simply is not enough competition, and most people investing in one of these funds spend more time thinking about the environment than about what they're paying to protect it.  In my view, it's important to protect the environment, and worth spending a great deal of money on, but that money should be spent wisely, in order that it be used to greatest effect.

There are two types of fees you will encounter: Front-end loads and ongoing expenses.  

 expense ratios.bmp

Load Funds

A Front-end load is the percentage of your money which you pay to get into the fund, under the rationale that this allows the fund to charge lower ongoing expenses.  If you are only considering mutual funds, and are confident that you will leave your money in the fund for many years, then a load fund may make financial sense.  

The funds with Front-end loads are the Calvert Global Alternative Energy Fund (class A), and the New Alternatives Fund.  Both have front- end loads of up to 4.75%, after which the Calvert fund's expense ratio is 1.85%, and the New Alternatives fund's expense ratio is 0.95%, making New Alternatives the far better choice of the two.  Most of these funds also have fee for early withdrawal, or back end load, but only if money is not kept in the fund for a minimum period, usually 6 months or a year.

Front-end loads do fall with the amount invested, and are often waived for institutional investors, such as 401(k) plans. Calvert offers class A shares with no sales load to 401(k) and similar retirement plans, but New Alternatives does not seem to.

No-Load Funds

No-load funds recoup their expenses over time, and this cost is expressed in the expense ratio, which is the percent of assets every year which go to the fund manager for expenses and the manager's profit.  For the no-load funds, here are the expense ratios:

Fund Name Expense Ratio Investor/Institutional Minimum initial  investment (Standard/IRA)
Firsthand Alternative Energy Fund 2.10%/- $2000/$2000
American Trust Energy Alternatives Fund 1.89%/- $5000/$2500
Calvert Global Alternative Energy Fund, Class C/ Institutional A 2.85%/1.85% $2000/$2000
Guinness Atkinson Alternative Energy Fund  1.64%/- $5000/$1000
Winslow Green Growth Fund 1.31%/1.06% $2500/$2000

Investor shares are those offered to the public, but a 401(k) plan would qualify for the lower expenses available to institutional investors.  

In this fee comparison, the Winslow Green Growth Fund wins out, since it not only has one of the lower minimum investments, but also has the lowest expense ratio.  The Winslow fund also compares favorably to the New Alternatives fund, since it would take about 9 years for the lower expense ration of the New Alternatives fund to pay back the cost of the front- end load. 

Holdings

The other factors to consider are the funds' holdings.  Do they invest globally?  Are they overly concentrated on particular sectors, such as solar?  How much of their money is invested in clean energy?

Unlike some of the ETFs, all of these funds invest globally.  However, reading the fund descriptions, you will find that the Winslow fund is focused on "environmentally responsible" companies, while New Alternatives "It usually invests at least 25% of assets in common shares of companies which have an interest in alternative energy."  In contrast, the other funds are all at least 80% committed to alternative energy.mutual fund breakdown.bmp

Those are just the investment guidelines, however.  More important is how the funds are actually invested.  I looked at the top ten holdings of each, and here is my categorization of their holdings, and here is the breakdown over major clean energy categories.  I combined technologies such as wave power, batteries, and geothermal into the "Other clean energy" category because of the small amounts held.  With diversified renewable energy companies, I split the ownership between the various categories based on my judgment of how much of the company was involved in each business.

Top ten holdings can change any time, but this should at least be an indication of the general thrust of each fund's strategy.

On the assumption that investors are not buying these funds because they want a fund that is very much focused on clean energy, a fund's investments in the "Utility" and "Non-energy" categories are mostly wasted.  The utility companies in these funds are the greener electric and gas utilities, but they still derive the majority of their energy from fossil fuels.  Additionally, I currently expect regulated utilities to underperform for the next year or two.  

In contrast, I think that clean energy investors should strive to emphasize energy efficiency companies in their portfolios.  This is for the same reason that we do energy efficiency first before installing renewable energy systems on our house.  Energy efficiency measures are much more cost effective.  Most energy efficiency measures pay for themselves in just a few years, and that is why energy efficiency features so prominently in the stimulus plan: the economy will get a short term boost from the spending, but there will also be larger long term gains from the energy savings over time.

Also because of economics, I prefer investments in Wind companies to Solar companies, so despite the large investment of the Winslow fund in two medical companies and an internet company, I still think it has the best portfolio of the six, followed closely by the American Trust Energy Alternatives Fund.

My Top Pick

If you can, you are better off buying one of the clean energy ETFs, or even a portfolio of individual clean energy stocks (here are 10 clean energy picks for 2009.)  However, it you want a mutual fund for the ease of investment, or you are looking to add one to a retirement plan, the Winslow Green Growth Fund comes out on top with its emphasis on energy efficiency stocks (including these two Geothermal Heat Pump stocks), and its lower expenses.

Here's how to invest in the Winslow Green Growth Fund.  Don't forget to read the prospectus.

Tom Konrad, Ph.D.

DISCLOSURE: The Guinness Atkinson Alternative Energy Fund is an advertiser on the author's website, AltEnergyStocks.com.

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.

February 22, 2009

Why Energy Storage Stocks Should be an Easy Double for Investors

For several months I’ve been writing about manufactured energy storage devices and the companies that develop and manufacture them. My basic theme has been that these devices are fundamental enabling technologies for cleantech, the sixth industrial revolution. I’ve repeatedly said that profound economic changes were rapidly evolving and that energy storage would be a major investment theme for decades to come, but even my unbridled optimism could not keep pace with the realities. While most investors have been focusing on obvious problems like bad mortgages, tight credit and recessions, immense changes in the energy sector have gone almost unnoticed. As a result, most investors do not understand that the energy storage sector of today does not even bear a passing resemblance to the one I started writing about last summer.

The economic stimulus bill signed into law last Tuesday includes $2 billion in “facility funding awards” for manufacturers of advanced battery systems and vehicle batteries that are produced in the United States. In the context of an $800 million economic stimulus package, $2 billion is little more than a rounding error. In the context of an industry that would report approximately $1 billion of domestic property plant and equipment on a hypothetical consolidated balance sheet, the amount of the facility funding awards is mind-boggling.

In addition to the facility funding awards, the economic stimulus bill provides an indeterminate amount of grants for energy storage research, development, demonstration and deployment (“RDD&D”) as part of a $4.5 billion pool set aside for electricity delivery and energy reliability. Once again the RDD&D number is easily overlooked in the mega-bill, but it eclipses cumulative VC investments in the energy storage sector by a wide margin.

Finally, I’ve previously reported that the bill includes $300 million for Federal purchases of fuel-efficient vehicles and a substantial expansion of the tax credit regime for electric vehicles, but until I saw a chart in the Wall Street Journal that attached a $2 billion budget cost to the tax credits, I didn’t fully understand what was happening on the demand side of the equation.

When you add up $2 billion in facilities grants, a likely $1 to $1.5 billion in RDD&D funding and an additional $3 to $5 billion in tax credit subsidized consumer demand, it’s easy to see the truth in the late Senator Everett Dirksen’s legendary quip “a billion here, a billion there, and pretty soon you’re talking real money.”

When the Wall Street Journal recently asked Energy Secretary Chu about time frames, the Secretary said, “To really stimulate the economy and help the U.S. recover from this dire situation we're in, my feeling is, a substantial fraction, a majority of it … you're starting to cut checks within half a year to a year.” Later in the same interview, Secretary Chu observed, “The synopsis of the loans I've seen in innovative green energy -- they're in the hundred-million dollar range.” When discussing the methodology he wanted to use in evaluating funding applications and allocating funds, Secretary Chu said “There's always a risk. . . . The protection is to get really good people to ask the right questions, to do a real evaluation. There are two ways of doing this: You can ask the right questions, and you can get people who are good at this sort of economic project management, who are experienced in "how do you smell something that doesn't look like it's going to fly?" or the financial business plan or basis of the company.

Everything I’ve read so far tells me Secretary Chu is a pragmatist who understands that modest projects do more to create jobs than mega-projects; every project entails unavoidable technical, business and market risks; there is no single technology that can provide a cost-effective solution for all essential energy storage needs; and none of the principal players in the energy storage sector has the depth of management, technical and manufacturing expertise to successfully implement a mega-project. While I have no doubt that some battery companies will make the same kind of piggish requests we saw in connection with the auto industry bailout, I believe the only sensible approach open to the DOE is diversification across a broad range of companies and technologies, which tells me that a large number of $100 to $200 million grants are far more likely than two or three mega-project grants.

I’ve been following a group of pure-play public energy storage companies since last August. While companies like Advanced Battery Technologies (ABAT), China BAK Battery (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ) may derive some collateral benefit from increased sales of tax credit eligible products, they are essentially Chinese companies that are not likely to be effective competitors for facility funding awards and RDD&D grants. If you eliminate the Chinese companies from my tracking list, the number of U.S. based companies that have a reasonable chance of effectively competing for a portion of the billions in grant funding gets very short.

The following table identifies twelve pure-play U.S. based public companies that I view as credible competitors in the DOE grant process. The table includes a summary product description, a classification of their current product commercialization status, their 12-month high stock price, last Friday’s closing stock price and their estimated current market capitalization. Every one of these companies is developing or manufacturing energy storage devices that will be essential to our clean energy future and each of them should be able to make a compelling case for a reasonable amount of manufacturing or RDD&D funding (click on the table for a PDF version).

When you consider that the $1.9 billion combined market capitalization of these twelve companies is only a fraction of the available Federal grant funding, it isn’t hard to understand why I see significant potential for impressive short-term gains as the potential federal grants are reduced to approved funding applications over the next year.

I would not presume to pick the winners of the upcoming grant application process or even begin to guess the amounts that the various companies are likely to request or receive. I will, however, suggest that as a group, this short list of pure play energy storage companies stand to receive cash infusions that could easily represent 50% to 300% of their current market capitalizations and propel their business fundamentals to an entirely different level. I think a balanced portfolio of these twelve companies should be an easy double for investors over the next year regardless of what happens in the broader market.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

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.

February 19, 2009

Two ETF Reshuffles

For readers who are tracking my 10 Clean Energy Stocks for 2009 portfolio, take note that I now think that SDS is a lousy hedge.  So in the model portfolio I'm personally tracking, I replaced each dollar of SDS with $3 of cash and $2 short SPY, an ETF which tracks the S&P 500.  Because I'm tracking the portfolio as a way to see how well a reader would perform, I did the replacement at the closing prices on Feb 11th, the day the article where I explained why not to use doubleshort ETFs (and short, ultras, or triples, for that matter.)  

Here's how the portfolio stood as of the close on February 12th:

Company  Ticker Change since 12/27/08 Dividend & Interest
The Algonquin Power Income Trust AGQNF.PK +16.73% 0.87%
Cree, Inc. CREE +42.83%  
First Trust Global Wind Energy ETF FAN -6.42%  
General Electric GE -26.86%  
Johnson Controls JCI -20.90%  
New Flyer Industries NFYIF.PK +2.14% 0.77%
Ormat ORA +9.80%  
Trinity Industries TRN -23.87%  
Warterfurnace Renewable Energy WFIFF.PK +30.98%  
-2x  S&P Depository Receipts + 3x Cash 3x $ - 2x SPY  +2.92%  
Net Change +2.91%

For comparison, the iShares S&P Global Clean Energy Index (ICLN) is down 5.6% and the S&P 500 is down 4.3% over the same period.  The reason that the 2x short + cash position is only up 2.92% instead of 8.6% is because of the underperformance of SDS.  (Here's the brief version: Suppose the underlying index starts at $10, drops $1 (10% of $10), and then to goes up $1 (11.11% of $9) for no net loss or gain.  If you do the math, the corresponding short (x-1) or ultra (x2) ETFs will fall a net 2.2% over the same move, and the ultrashort (x-2) and the triple (x3) ETFs will fall a net 6.7%.)

Problems With Contango

The other reshuffle I did was in my real portfolio.  A couple weeks ago, I wrote about why I bought OIL, a tracker for crude oil in the futures markets.  A reader pointed out that this (and most other oil tracking ETFs) suffer when the futures market is in contango (i.e. the futures prices are higher than the spot price, as they are now.)   Although oil futures market contango is a strong sign that price will rise, I decided that expected gains weren't enough to tempt me to stay in the market, so I sold my position.

Now that crude has dropped further, I'm considering a replacement position in USL, which tracks a basket of futures contracts over the next 12 months, rather than just the closest futures contract tracked by OIL (the same reader brought this one to my attention.)  USL is likely to lose less money than OIL when the market is in contango, because the futures market flattens out as you go out further into the future.  But I'm still on the fence with this one.

DISCLOSURE: Tom Konrad owns AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, and WFIFF.

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.

 

February 18, 2009

Welcome To The New World

Perhaps ironically, it took one of the worst financial and economic crises of the past three decades to bring "the grid" into investor focus. To be sure, certain alt energy aficionados such as Tom have been on this topic for a long time (Tom is actually the one who introduced me to the grid as an investment theme). However, it is fair to say that most investors, including alt energy investors, have not historically paid the grid a huge deal of attention.

That is because most people outside of alt energy and VC circles held, until recently, the Old World view of the grid. In the Old World, the grid was a collection of transmission and distribution systems (i.e. transmission towers, utility posts and wires) connected together by the odd utility sub-station.  In the Old World, investments into the grid mostly took the form of maintenance capex by utilities, and there was little growth, at least in North America, beyond what was needed to keep up with economic and demographic expansion (2-3% per annum often offset by efficiency gains). Though antiquated and inefficient, the system mostly 'did the job' and the lack of coordination between various actors meant that no one would take the lead on massive investments required to upgrade the old infrastructure. In the Old World, the grid was nothing to write home about from an investment perspective.

Enter the New World, the world of the smart grid, where the electric grid doesn't stop at the connection with your house or office building, but can potentially extend all the way into nearly every electric device you use - if it can be plugged in, it can be made 'smart'. In the New World, IT capabilities are leveraged to optimize grid management. In effect, energy management, which used to rely on a closed system approach, is now integrated with the grid, opening a whole New World of possibilities. (I am admittedly not an expert in the technological ramifications of the smart grid and this post is not about the tech side. I find SmartGridNews.com to be a great source of info. I liked their reviews of various smart grid technologies)

The New World has actually been with us for some time. Smart grid pure plays such as Comverge (COMV), RuggedCom (RUGGF.PK) and EnerNOC (ENOC) all IPOed in Q2 2007, raising the profile of New World investment opportunities. However, in the broad world of alt energy investing, smart grid plays were often overshadowed by the mightier solar sector, in part because growth rates were far higher and in part because the smart grid business model is a bit arcane.

Fast forward to the 2008 US presidential run-off, where the leading candidate, Barak Obama, spoke repeatedly of the need to invest massively into the US power grid to make it smarter and more efficient. Most people probably can't remember the last time they heard a presidential candidate make the electric grid a central pillar of his/her energy policy. Nearly immediately following the election, the new President pumped, as part of his American Recovery and Reinvestment Act, $4.3 billion into mostly New World grid opportunities.

While this may seem small in comparison to the total size of the investment required to upgrade the grid (Old and New World) over the next couple of decades (The Brattle Group estimates that around $880 billion in transmission and distribution investment will be made by 2030), this amount is over 15x the combined 2008E sales of Comverge, RuggedCom and EnerNOC. Throw in Itron (ITRI), a $2 billion company that provides a number of utility products and services beyond smart meters, and the final package is still over 2.2x the combined 2008E revenue of all four companies. In other words, for this emerging sector, this is a fair chunk of change.

Besides the revenue that will flow in as a result of direct government expenditures, the impact of the American Recovery and Reinvestment Act will be felt for years to come as it jump-starts the industry. And the US isn't alone: the Canadian province of Ontario established a Smart Grid Forum that recently recommended spending C$1.6 billion over the next five years on smartening the grid there. Smart grid opportunities are also attracting large firms with no energy management background but expertise in complementary areas that can be leveraged.

Where does that leave investors? With the very real possibility that smart grid stocks will outperform the broader alt energy space over the next 12 months. Like other areas of alt energy, there are a growing number of ways to play the smart grid as larger cap firms with diversified revenue sources enter the space. The table below lists out some of the main publicly-traded plays on the smart grid. 

Smart Grid Stocks
Name Ticker Exposure to SG Mkt Cap ($mm) PE
RuggedCom RUGGF.PK Very High 252 18.88
Comverge COMV Very High 103 n/a
EnerNOC ENOC Very High 225 n/a
Itron ITRI Very High 1,810 66.39
Echelon Corp ELON Very High 287 n/a
Digi International DGII High 192 20.19
IBM IBM Medium 123,260 10.24
Cisco CSCO Medium 90,878 12.12
Google GOOG Low 110,110 26.24

To be sure, I am a little late on this one. Although I did discuss the potential for the smart grid to receive some focus in Obama's economic stimulus package in December, I initially believed that the Old World grid would receive as much if not more than the New World grid. In the end, Old World got next to nothing, which somewhat surprised me given its state of disrepair.

While I don't expect the smart grid to move the needle for the companies whose exposure is categorized as "medium" and "low" in the table above, my sense is that the "very highs" and the "high" will outperform alt energy stocks in general over the next 12 months. We will check again then!

DISCLOSURE: Charles Morand does not have a position in any of the stocks 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.

February 16, 2009

Welcoming John L. Petersen To AltEnergyStocks.com

As most of you noticed, John L. Petersen recently joined AltEnergyStocks.com as a Contributing Editor. John brings a wealth of experience from years working as a corporate lawyer with growth-focused companies. His expertise in energy storage technologies has made him one of the best bloggers on this topic there is. We were thrilled to see how engaged you all got with his articles on long-range EVs and lithium-ion batteries, and we look forward to more top-quality material by John and insightful comments by you!

For those who missed it, here is John's bio:

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.

Life After Coal: It's Sooner Than You Think

by Tom Konrad, Ph.D.  

A couple years ago, I began to see reports that coal supplies might not last the 200+ years we've all been lead to believe, so I wrote an article about what you could do to prepare your portfolio for Peak Coal.

Now two years have passed, and Peak Coal is undeniably 2 years closer.  (Did you ever wonder why people who have been saying that we have 200 years of coal for 20 years aren't now talking about 180 years of coal?)  But more than being 2 years closer, the evidence continues to mount.  Caltech Professor David Rutledge, has been spreading the peak coal word for most of the time since.  I recommend the video of his 2007 lecture on the subject.

It's great that the NY Times is asking "Is America Ready to Quit Coal?" but the real question may be "Will we have any choice?"

On February 12th, Clean Energy Action released a report on Powder River Basin coal supplies, based in part on a 2008 USGS report.  The Powder River Basin matters because Western coal has been the only source of new coal production in the US for the last two decades.  Appalachian and Interior coal production has been declining, despite mostly increasing prices, and uniformly increasing prices since 2003.  Northern Appalachian coal production having peaked in the middle of the last century, while Interior coal production peaked at the start of this decade.  When production declines in the face of rising prices, constraints other than economics must be coming into play.  Future increases in production in these regions seems unlikely.

coal by rail.bmp

Of the top 6 coal producing states in the US, only Wyoming and Montana are still increasing production.  West Virginia, Kentucky, Pennsylvania, and Texas all peaked in the 1900s.  With existing Wyoming mines, which dominate current production, all having less than 20 years of reserves remaining, only Montana will remain... and we simply don't know much about the geology to know how much can be recovered.  Jim Hansen, author of the Master Resource Report, tells me that available rail supply lines out of Montana are likely to be another critical limiting factor on that state's production.

The 2007 report from Energy Watch Group (which triggered my earlier article), David Rutledge, and Clean Energy Action all found that what we don't know about our coal reserves far outweighs what we do know.   What we do know should be very worrying to anyone who hopes that we might be able to replace our current coal fired electricity generation with any sort of "Clean Coal."  Any attempt to sequester CO2 by pumping it underground or to the bottom of the sea would require considerably more energy than simply releasing it into the atmosphere, as we do now.  That energy would come at a cost of less net energy from what will likely prove to be very limited coal supplies.

Peak Coal Accounting

If "Clean Coal" can be made to work, and we are able to replace part of our electricity supply with this technology, it seems increasingly unlikely that we will be able to supply as much electricity from coal 30 years from now as we do today.  Coal plants are intended as 50 to 60 year investments, and part of the reason they are considered so "cheap" is that the construction costs are depreciated over more than half a century of payments.  If, in reality, those construction costs must be paid over a shorter period, the effective cost of coal fired electricity will be considerably higher... even if the accounts do not yet show it.

Transitioning away from coal now makes sense both from an economic and climactic standpoint.  If new coal plants will have shorter than expected useful lives simply because of the limited supply of coal, an honest accounting cannot spread construction costs 60 years, as has been done in the past.  A shorter useful life means significantly raising the accounting cost of coal power per kWh, even before we place any price on carbon emissions or other environmental damage.

Carbon Capture and Storage

That is not to say that improving Carbon Capture and Sequestration technology will not be useful.  Even without building new coal plants, we have a massive fleet of existing coal plants which are already spewing carbon into the atmosphere.  According to a recent Inside Renewable Energy podcast, French utility EON puts current carbon capture technology costs about $40 per ton of CO2, and they hope to get the cost down to $20.  This does not include the cost of pressurizing the gas and injecting it into some form of permanent storage.  (Even permanent storage may not be so permanent.) Capturing CO2 for industrial uses can make economic sense today, and the economics will only get better when we begin to have reasonable prices for carbon emission.  However, cleaning up the emissions of currently built fossil-fueled generation is not the same as investing new money in generation which we hope to clean up later.

We have the technologies today to begin this transition, and other promising technologies at least as near to development as "Clean Coal."  Wind power is nearly as cheap as coal with current accounting.  If we reassess the useful lives of prospective new coal plants, and put a price on carbon emissions, it will be much cheaper.

Building out the Smart Grid and additional Transmission capacity will allow us to integrate much more wind than skeptics currently think is possible.  A recent report from the researchers at the Rocky Mountain Institute and the University of Colorado Boulder found that optimized diversified portfolios in the Midwest of wind and solar generation were 55% more reliable (measured by the variability of output) than the average individual site used in the study. For large scale baseload and dispatchable generation, Concentrating Solar Power needs only continued price improvement which will come from mass deployment, and a more robust national grid.   For large-scale clean baseload power anywhere in the US, Enhanced Geothermal Systems are likely to be easier and cheaper to develop than "Clean Coal."

All of these are the right investments for the country, but they are also likely to be good moves for investors.  We may still have 30 years before coal production in the US peaks.  The stock market reaction will not wait until the actual peak... the stock market reaction will happen when sufficiently many investors realize it's coming. 

How many more reports will that take, I wonder?

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.

February 14, 2009

Congress Approves Billions in Energy Storage Incentives

On Friday, the House of Representatives and Senate passed H.R. 1, the American Recovery and Reinvestment Act of 2009 and sent the bill to President Obama for his signature. The impact on companies that manufacture advanced batteries and other energy storage devices will be staggering. The principal energy storage appropriations include:

  • $2,000,000,000 for grants to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers;
     
  • $4,500,000,000 for grants for “Electricity Delivery and Energy Reliability” including activities to modernize the electric grid, include demand response equipment, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply;
     
  • $6,000,000,000 to pay the cost of guaranteed loans under a “Temporary Program for Rapid Deployment of Renewable Energy and Electric Power Transmission Projects;
     
  • ”$500,000,000 for research, labor exchange and job training projects that prepare workers for careers in energy efficiency and renewable energy; and
     
  • ”$300,000,000 to purchase high fuel economy motor vehicles including: hybrid vehicles; neighborhood electric vehicles; electric vehicles; and commercially available, plug-in hybrid vehicles

In addition, the final bill includes tax credits for purchasers of plug-in electric vehicles as follows:

  • For new plug-in electric vehicles, a base credit of $2,500 plus $417 for the first 5 kWh of battery capacity plus $417 for each additional kWh of battery capacity, up to a maximum of $7,500 per vehicle:
     
  • For new neighborhood electric vehicles, a credit of $2,500 per vehicle:
     
  • For plug-in EV conversions, a credit equal to 10% of the first $40,000 in conversion costs

Analyzing Congressional intent is difficult and predicting how regulatory agencies like the DOE will interpret that intent is even harder. Nevertheless, recent DOE publications and the text of the legislation provide some important clues about how the subsidies are likely to be distributed. So I’ll go ahead and climb out on a limb and offer one lawyer’s opinion of how things are likely to evolve.

There are substantial differences between the original House bill and the final version sent to the President. The original House bill included $2 billion in funding for renewable energy research and development and specifically allocated those funds to biomass ($800 million), geothermal ($400 million) and other ($800 million). It also authorized $1 billion in battery manufacturing grants and $1 billion for the cost of guaranteed loans for battery manufacturing. Most of the bells and whistles were eliminated before the final bill was sent to the President. Now we have a single $2 billion appropriation for battery manufacturing grants. I would characterize the final bill as far more results oriented than the original House bill.

In a recent article titled “DOE Reports That Lithium-ion Batteries Are Not Ready for Prime Time,” I reviewed the 2008 Annual Progress Report for the DOE’s Energy Storage Research and Development Vehicle Technologies Program. While DOE concluded that Li-ion technology was promising, it also noted that there were numerous technical barriers that prevented immediate commercialization of Li-ion batteries for use in automotive applications including cost, performance, abuse tolerance and life. Based on the conclusions, tone and tenor of the DOE report, it’s clear that the DOE views Li-ion as a promising R&D stage technology, but believes it is not a prime technology that’s ready for immediate commercialization.

The final bill sent to the President requires the DOE to include Li-ion battery developers in the class of eligible grant applicants. Without that requirement, I think there would have been a reasonable argument that Li-ion developers should be excluded from grant eligibility. While Congress clearly wants some funding for Li-ion battery developers, it’s clear that the battery manufacturing grants are not directed solely or even principally toward Li-ion technology. The Congress wants energy storage solutions that work today, not potential solutions that may work in 5 or 10 years. On balance, I expect the bulk of the battery manufacturing grants to go to companies that are manufacturing and selling existing products into established markets.

In another recent article titled “Alternative Energy Storage: Enabling the Smart Grid,” I reviewed two recent reports from the Department of Energy’s Electric Advisory Committee that discussed the critical enabling role that energy storage technology would play in the evolution of the Smart Grid. At the time of the original House bill, I speculated that some of the $4.5 billion appropriation for electricity delivery and energy reliability might ultimately be used for energy storage devices. Since the final bill sent to the President specifically added, “demand response equipment” to the list of authorized uses, and the final bill includes a new $6 billion appropriation for guaranteed loans to electric power transmission projects that should alleviate some pressure on the $4.5 billion in grant money, I think my earlier speculation can now be classified as certainty. I’m not courageous enough to predict the amount of electricity delivery and energy reliability grants that will ultimately be allocated to energy storage, but I will be surprised if the grant funds allocated to energy storage don’t exceed $1 billion.

I believe a total of $3 billion in battery manufacturing and electricity delivery and energy reliability grants can do an immense amount of good across broad sections of the energy storage landscape as long as the DOE sticks to legislative intent and funds companies that can manufacture and sell commercial products today. It all goes back to my core belief that we need to wake up in the morning, go to work with the tools we currently have available, solve our problems to the best of our abilities and be prepared to embrace new tools and new technologies when the R&D work is done and the commercial value is established.

I have no doubt that the energy storage sector is in for some very interesting times, but this is a jobs, productivity and manufacturing bill, not a research and development bill.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

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.

February 13, 2009

DOE Reports That Lithium-ion Batteries Are Not Ready for Prime Time

by John Petersen


Last month the DOE released its 2008 Annual Progress Report for the Energy Storage Research and Development Vehicle Technologies Program. This report is a frank and relatively upbeat assessment of the current status of Li-ion battery research and development that also provides a stark wake-up call for investors in energy storage stocks. The reality check has been done and the DOE’s verdict is clear: Lithium-ion batteries are not ready for prime time.

In its description of ongoing research efforts to develop high-power batteries for HEVs, the DOE said:

“High-power energy storage devices are among the critical technologies essential for the development and commercialization of HEVs. This effort is focused on overcoming the technical barriers associated with commercialization of high-power batteries, namely:
  • Cost – The current cost of Li-based batteries is approximately a factor of two too high on a kW basis. The main cost drivers being addressed are the high cost of raw materials and materials processing, the cost of cell and module packaging, and manufacturing costs.
  • Performance – The barriers related to battery performance include a loss in discharge power at low temperatures and power fade over time and/or when cycled.
  • Abuse Tolerance – Many high-power batteries are not intrinsically tolerant to abusive conditions such as short circuits (including internal short circuits), overcharge, over-discharge, crush, or exposure to fire and/or other high-temperature environment.
  • Life – The calendar life target for hybrid systems (with conventional engines) is 15 years. Battery life goals were set to meet those targets. A cycle life goal of 300,000 cycles has been attained in laboratory tests. The 15-year calendar life is yet to be demonstrated. Although several mature electrochemistries have exhibited a 10-15 year life through accelerated aging, more accurate life prediction methods need to be developed.”
I’m a simple-minded creature and I believe that little things like costs and benefits matter, particularly in the midst of the worst recession since the 1930s. When the Annual Progress Report from the DOE group responsible for supporting Li-ion battery research and guiding national policy concludes that:
  • Li-ion batteries will not be a cost-effective solution for HEVs unless and until somebody finds a way to slash manufacturing costs by 50%; and
  • Li-ion batteries will not be a cost-effective solution for PHEVs unless and until somebody finds a way to slash manufacturing costs by 67% to 80%;
I believe them.

When the same Annual Progress Report says that the principal cost drivers are the high cost of raw materials and materials processing, the cost of cell and module packaging, and manufacturing costs, I have to wonder whether the DOE’s target price reductions of 50% to 80% are even remotely possible. My limited understanding of the laws of economics tells me that the price of raw materials invariably increases when demand for those materials increases. Since approximately 70% of finished Li-ion battery costs are attributable to raw materials I have to at least ask where the cost savings will come from. I have never heard a reasonably specific answer to that question.

I fully support Federally funded research to develop cost-effective Li-ion batteries for large scale energy storage, but I’ve spent enough time representing R&D stage companies to know that technical dreams and visions are frequently not attainable in the cruel world of cost accountants and the most spectacular failures occur during the transition from the laboratory bench to the factory floor. Li-ion batteries are a great concept for electric transportation but they are not currently viable products for HEV and PHEV applications and they have some very high hurdles to clear before they become viable products.

Until all of the technical barriers identified in the DOE's Annual Progress Report are overcome,  proposals to spend Federal money building factories to manufacture devices based on existing Li-ion battery technologies are nothing more than Catch 22 arguments that the applicants can manufacture a product for a dime, sell it for a nickel and make up the difference on volume.

I’ve written volumes criticizing the nosebleed market capitalizations of U.S. based Li-ion battery developers including Altair Nanotechnologies (ALTI), Ener1 (HEV) and Valence Technologies (VLNC). I’ve also written volumes on why I believe advanced lead-acid battery producers like Exide Technologies (XIDE), Enersys (ENS), C&D Technologies (CHP) and Axion Power International (AXPW.OB) are undervalued. A complete archive of my articles is available at Seeking Alpha.

My recurring theme since day one has been that Li-ion batteries have insurmountable cost, performance, abuse tolerance and cycle life problems that must be overcome before they become viable products. It’s nice to see a hot off the press DOE report that confirms the reasonableness and validity of the questions I’ve been asking for months.

America’s energy problems are too urgent to overlook and its economy is too stressed to invest billions in technologies that may never become cost effective. Our only rational choice is to go to work today with the tools we have and be ready to embrace newer and better tools when they prove to be cost effective.

Disclosure: Author is a former director of and holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and also holds 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.

February 11, 2009

UltraPromises Fall Short

When I first came across ProShares' UltraShort ETFs, I thought they were a brilliant idea.  They seem to promise a multitude of advantages for investors:

  • The ability to hedge market or sector exposure without having to go short.  (Going short requires a margin account, and US law prohibits the use of margin in most retirement accounts.)
  • They should have a better risk profile than shorting.  With an UltraShort, you can't lose more than your initial investment.  With true shorting, the potential losses are unlimited.  As the underlying index rises, each percentage gain creates a smaller dollar fall, while successive declines in the market index should produce successively greater gains.
  • They should tie up less capital than Short ETFs for a similar effect.
  • Unlike with option strategies, there is no need to choose an option expiration date by which the market move will have occurred.

Unfortunately, it's not so simple.  All Short, UltraShort, and Leveraged ETFs under-perform the seemingly equivalent long or short position in the underlying index, and the underperformance will be worse the greater the leverage and the more volatile the underlying index.  This is stated in the prospectus, but the fund sponsors understate the magnitude of the problem.

I'm far from the first person to write about this.  In fact, I made the mistake of including an UltraShort ETF in my 10 Clean Energy Stocks for 2009 as one option for a market hedge, because I feel that the downside risks for the market as a whole this year outweigh the upside potential, and I expect that many of my readers may not be using margin accounts.  The other possible hedge I mentioned was to "reduce the allocation to large cap stocks" elsewhere in the portfolio.   In some ways, my inclusion of SDS in the list was fortunate, because a commenter trashed UltraShorts, and brought the problem to my attention. 

The Bad, The Worse, and the Appalling

Others have done a decent job of explaining why leveraged funds underperform, as well as looking at the evidence in the historical data, but despite considerable time on the subject with Google, I have not seen any quantification of the penalty an investor in these funds will pay.   So I did an experiment.  I put together a spreadsheet which randomly generates a year's worth (200 trading days) of data from an index for which the daily percentage move follows a normal distribution, except the last 10 days which are calculated to bring the index back to its starting value.  

I recalculated my spreadsheet about 30 times each for 1%, 2%, 3%, 4%, and 5% standard deviation of the distribution of percentage changes in the underlying index.  The table below shows the range of percentage losses I observed for each type of leveraged ETF.  I was a bit surprised to note that Short ETFs and Ultra (x2) ETFs had approximately the same underperformance, while UltraShort (x-2) and Triple (x3) leveraged ETFs also seemed to have the same long term underperformance/frictional losses.

Mostly, I was appalled.

Standard Deviation of Daily Index Returns

1 Year Leveraged ETF Underperformance / Frictional Losses

Short (x-1) and Ultra (x2)  Ultrashort (x-2) and Triple (x3)
Min Max Min Max

1%

1% 4% 4% 8%
2% 7% 13% 18% 26%
3% 14% 24% 34% 53%
4% 24% 43% 64% 74%
5% 32% 60% 67% 96%

Examples

I feel the need to give examples of how to read the above table, because some readers might suspect that they don't understand the results.  I did the calculations myself, and I can barely believe them. 

Based on data from October 22, 2008 to January 26, 2009, the S&P 500 had a daily standard deviation of 3.62%.  If you were to invest in SDS, an UltraShort ETF which has the S&P 500 as its underlying index, and were to hold it for a year, you should expect to lose between 34% and 74% of your money, if the S&P 500 is flat for that period.  This assumes that there are no transaction costs, and that the expense ratio is 0% (in fact, it's 0.91%.)  My experiment also assumed that daily stock market returns follow a normal distribution.  In fact, the the distribution of daily stock market returns is leptokurtotic (it has fat tails.)  According to my mathematical intuition (the Ph.D. is in math, in case you were curious,) if I had performed the experiment with a leptokurtotic distribution, the losses would have been larger.  Obviously, this could be checked, but the results are bad enough as it is.

To put this another way, if your frictional losses were in the middle of the 34-74% range (55%, including the expense ratio,) the S&P 500 would have to drop 27.5% (=55%/2), for you to just break even.   In 2008, the S&P 500 fell 39%.   If you wanted to make a profit by buying SDS on January 1, and holding it until the end of December, the S&P 500 would have to fall from $903 on January 1 to below $654 by the end of the year.  You would do much better (by limiting your potential losses and making profits on a smaller drop in the S&P 500) by buying December 2009 puts on SPY, an unleveraged ETF which tracks the same index.

It simply does not make sense to hold these funds for anything more than a few days (if that.)  The S&P 500 is one of the least volatile indexes around, so the example above is a mild one.   One reader of my recent crude oil speculation article suggested that I use DXO (an Ultra) or ERX (a Triple) instead of OIL.  Using historical data from October 23, 2008 through January 28, 2009, the daily volatility of OIL was 5.18%, implying a 67% to 96% loss in ERX over the course of a year if crude oil prices do not rise.  Although I expect oil prices are headed up, I'm not willing to bet it will happen in the next couple of weeks (over which time an investor in ERX might expect to lose 1-2% if crude prices did not rise.)  

It is worth noting that current volatility is much higher than it has been historically.  However, volatility always goes up in bear markets, precisely the time I would want to use these as a hedge.

What Can You Do?

Short and UltraShort ETFs are not appropriate for creating a long (or medium) term hedge.  In a brokerage IRA, the only effective hedging option I can think of is to purchase long-term puts, or to sell covered calls on the positions in the account.  Both these strategies require option trading authority, which most brokerages will grant to experienced or knowledgeable investors.   

I have avoided buying puts in the past because they, too, lose value over time.  However, if hedging is important to you, the time-value loss can be minimized by buying deep in-the-money puts, at the expense of tying up capital and increasing your potential losses.  Selling covered calls is a strategy I use frequently, but this is more of an income-producing strategy.  The potential of covered calls to offset a large loss is limited.

If you can, however, it's probably better to create a hedge for the positions in your IRA in a taxable margin account, where many more tools are available.

Tom Konrad, Ph.D.

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.

February 09, 2009

Why I Sold My Utility Stocks

In times like these of financial uncertainty, regulated utilities have traditionally been considered a safe haven.  But that is changing.  The Dow Jones Utilities Average was down 30% in 2008, vs. a 34% drop in the Dow Industrials.  Not much of a safe haven.

In a recent interview, utilities analyst Daniel Scotto noted, that the utility industry offers "a lot less security" than it used to.  His reasoning is based mainly on the fact that the regulated portion of utility company's business is smaller than it has been in previous recessions, making them vulnerable to lower growth (or even contracting) energy demand.  Scotto forecasts electricity demand growth at "no more than 0.2% this year, and he sees a chance that the U.S. electric utility industry could experience negative growth for the first time since the 1950s.

Because of my work as an expert witness helping clean energy groups with utility regulation, I fear that even the regulated portion of utilities' business may be in jeopardy.  In November, I wondered if utility Demand-Side Management programs could remain effective with the phase-out of the incandescent light bulb, but that may be only the tip of the iceberg.  I was recently asked to advise an anti-coal, pro renewables advocacy group in a rate case.  Looking at the evidence, I expect that utility regulators may begin to slash authorized returns on equity.

Authorized Return on Equity (ROE)

Because they are monopolies, utility regulators cannot rely on the market to keep utilities from making excess profits.  Instead, they set rates calculated to let utilities make returns on equity comparable to what other companies with similar risk profiles make in competitive industries.  Determining what this might be is complex, and analysts use several models to calculate what might have been.  ROEs can be determined using the Capital Asset Pricing Model, Discounted Cash Flow models, Equity Premium model, the method of Comparables, and various Risk Factor models.

All of these calculations have common elements: they are based on historical data and analysts' expectations for the stock and bond markets.  Over the (very) long term, publicly traded companies total returns should be approximately equal to ROE.  Utility regulators turn this simple relationship on its head, and, after performing considerable manipulation to tease out other factors unique to the business of the utility in question, set authorized ROE based on observed and expected long-run market appreciation.

Crash

In regulatory practice, "long-run" usually means ten to twenty years of returns.  What happens when the market falls 34% in one year, and the continuing weakness of the credit markets causes analysts to revise their long term expectations for the market downward?  Over a 10 year span, a 34% drop will reduce the average annual return by 3.4%, even without any drop in expected growth.  Over a 20 year period, that same drop will reduce annual growth by 1.7%.

Many regulators may look at these lower "long-run" returns, and cut the authorized ROE by 1-3%, something which would soon pass through to the utilities' bottom lines, and hence impact share prices significantly.

It's Different This Time

While historically utilities have done well in a downturn, the market models described above were not developed until the 1960s and 70s, let alone used in utility regulation.  Hence there is little historical precedent to know how regulators will behave.  Will they look at the need to invest in transmission and renewable energy infrastructure, and decide that current authorized returns will help utilities raise the necessary capital?  Or, will they look at the economic plight of ratepayers, and decide that, if the models say that ROE should be cut, why not cut ROE and let ratepayers keep some money in their pockets?

I'm not intimately familiar with each state regulator's decision-making process, so I don't know which utilities are likely to be impacted, nor when.  I've decided not to take the gamble, and have sold nearly all the utilities in my portfolio. 

The decision was made easier by my unrelated resolution to reduce my total number of holdings, which I mentioned in my article Ten Green Energy Gambles for 2009.  At the time, it didn't occur to me that regulated utilities might also be gambles.

Tom Konrad, Ph.D.

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.

February 07, 2009

Energy Storage in the American Recovery and Reinvestment Act of 2009

Here's some political context for my article on Energy Storage for the Smart Grid.

For the moment, the Senate version of The American Recovery and Reinvestment Act of 2009 includes:

"For an additional amount for `Energy Efficiency and Renewable Energy', $14,398,000,000, for necessary expenses, to remain available until September 30, 2010: * * * Provided further, That $2,000,000,000 shall be available for grants for the manufacturing of advanced batteries and components and the Secretary shall provide facility funding awards under this section to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers:

* * *

For an additional amount for `Electricity Delivery and Energy Reliability', $4,500,000,000, for necessary expenses, to remain available until September 30, 2010:

* * *

For capital expenditures and necessary expenses of acquiring motor vehicles with higher fuel economy, including: hybrid vehicles; neighborhood electric vehicles; electric vehicles; and commercially-available, plug-in hybrid vehicles, $600,000,000, to remain available until September 30, 2011."

While there are any number of provisions in the Senate Bill that have the population and the politicians up in arms, the incentives for the battery sector seem to be firmly in place and are not likely to change much.

Two billion in outright grants for battery manufacturing is immense. The fact that there is good reason to believe grid-storage should be treated as a separate sub-class under the $4.5 billion Electricity Delivery and Energy Reliability appropriation is also encouraging. When you figure that battery systems will probably represent 1/4 to 1/3 of the $600 million EV acquisition appropriation, the impact on a handful of stocks will almost certainly exceed anyone's wildest imagination.

John Petersen, Esq.

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.

February 06, 2009

Alternative Energy Storage: Enabling the Smart Grid

America’s electric power grid is subject to immense inefficiencies that arise from the interplay between centralized power generation, local power consumption and on demand utility service. To put things into a broad perspective, the nameplate capacity of U.S. generating facilities is about 1 million Megawatts (MW), so if all of our power plants ran 24/7 we would have a theoretical annual generating capacity of 8.7 billion Megawatt-hours (MWh). Since demand for electricity fluctuates on both a daily and seasonal basis, total electric power generation in 2007 was only 4.2 billion MWh, or less than 50% of nameplate capacity. The goal of the Smart Grid is to maximize the efficiency of existing generating facilities and accommodate the integration of renewable power resources. Since many better-qualified authors are writing volumes about transmission and distribution, demand management and renewable power technologies, I’ll limit this article to manufactured energy storage devices; enabling technologies that will be the beating heart of the Smart Grid for the next 10 to 20 years.

Last August I wrote Grid-based Energy Storage: Birth of a Giant, an introductory article that offered an overview of the potential uses for energy storage systems in the electric grid. At the time I confessed that the subject matter was a bit out of my depth, a problem that was compounded by a dearth of third-party analysis on specific applications. Mercifully, all that changed in December 2008 when the Department of Energy’s Electric Advisory Committee (EAC) published two reports that are must reads for investors that want to understand how the Smart Grid will develop, and position their investment portfolios to profit from cleantech, the sixth industrial revolution.

The first EAC report,“Smart Grid: Enabler of the New Energy Economy,” explains how the Smart Grid will use advanced technology to transform the energy production and distribution system into a more intelligent, resilient, reliable, self-balancing, and interactive network that enables enhanced economic growth, environmental stewardship, operational efficiencies, energy security, and consumer choice. The companion report, “Bottling Electricity: Storage as a Strategic Tool for Managing Variability and Capacity in the Modern Grid,” explains why the evolution of the Smart Grid will depend on cost effective energy storage, particularly in the early stages while other distribution and demand management solutions are being developed, adopted and implemented. This report divides Smart Grid energy storage applications into three functional classes: generation; transmission and distribution; and end-user, and then provides thumbnail descriptions of each potential energy storage application. Since my goal is to encourage readers to download and study the EAC reports and other source documents, this article will use summary tables to identify the major application classes and the existing and emerging manufactured energy storage devices that are expected to be useful in those applications.

I’ll apologize up front for giving short shrift to pumped hydro and compressed air energy storage. Both are highly efficient for storing massive amounts of energy and both are subject to physical and environmental constraints that limit where facilities can be built. More importantly, there are no pure-play public companies that focus on either storage technology, so spending a lot of time discussing cool technologies that you can’t invest in seems futile.

One of the most important concepts in any discussion of grid-based energy storage is discharge duration; or the optimal time required for a particular device to release its stored energy. Some grid-based applications require discharge durations measured in hours, others require discharge durations measured in minutes and still others require discharge durations measured in seconds. In general, manufactured energy storage devices that can store large amounts of energy are not good at discharging the stored energy quickly. Likewise, manufactured energy storage devices that can discharge energy quickly do not generally store large amounts of energy. Since the big challenge for utilities is to only provide slightly more power than customers need at any particular moment in time, they have to focus on peaks and valleys, rather than the averages. That's why a comprehensive solution will require a multi-pronged approach that uses a variety of manufactured energy storage devices to meet particular needs.

The core data in the following table comes from a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. While the original Sandia table focused on the current and projected capital costs for manufactured energy storage devices that can be used in solar power projects, the basic cost structure applies to all Smart Grid applications. Since the EAC’s Bottling Electricity report states that the principal purchase decision metrics in Smart Grid applications will be installed cost, reliability, discharge duration and cycle life, I’ve reordered the Sandia data to create a cost hierarchy and provide summary information for each type of storage device. More detailed information on the advantages, disadvantages, commercial status, current research and development and potential applications for each type of manufactured energy storage device can be found in the SEGIS report.

Click for pdf version

The following table is my attempt to integrate the cost and performance data from the SEGIS report with the Smart Grid application information in the EAC’s energy storage report. My goal is to identify the principal technologies that might be useful in each application and highlight the technologies that seem most likely to prove cost-effective. Since the EAC’s report highlights the need for substantial additional research, development and testing to better identify the optimal technology choices, the table is only one man’s informed view through a cloudy crystal ball.

Click for pdf version

At first blush, the percentages of generating capacity that could be satisfied by energy storage systems seem pretty modest, a mere couple of percentage points here and there with higher margins for alternative power installations. But those tiny percentages become massive potential revenue numbers when you consider that the capital cost of energy storage installations ranges from $150,000 to $1.3 million per MWh. Since the principal competitors in the energy storage sector are small compared with similarly positioned companies in other sectors, I believe energy storage is likely to be a veritable investment tsunami that will offer extraordinary returns.

Most of the buzz in the alternative energy sector focuses on renewable power, demand management technology, advanced power transmission systems and batteries for electric vehicles. In the process, the media has largely overlooked the reality that energy storage devices are essential enabling technologies for both transportation and the Smart Grid. A number of analysts are predicting that annual global demand for energy storage devices could grow from $25 billion to $100 billion over the next decade. Most estimates of future growth in the automotive market talk about battery sales the $15 to $20 billion range. The much larger growth will come from using energy storage technologies to support the development and evolution of the Smart Grid. While size and weight may matter when it comes to automotive applications, they will be meaningless in grid-based applications where installed cost, reliability, discharge duration and cycle life are the critical metrics.

There are two pure-play public companies in the flywheel sector. Active Power (ACPW) manufactures systems that use low-speed flywheel technology to provide backup power for server farms and a wide variety of commercial and industrial installations. Since Active Power’s technology is modular, scaling systems to provide Smart Grid support should be relatively simple and I expect Active Power to be an early beneficiary of the trend toward grid-based energy storage. Beacon Power (BCON) has recently begun field-testing of utility scale governor response and frequency regulation systems. While Beacon will likely require a couple years of testing before utilities are willing to commence wide-scale implementation of Beacon’s technology, its stock offers significant long-term potential.

There are five pure-play public companies in the advanced lead acid battery group including Exide Technologies (XIDE), Enersys (ENS), C&D Technologies (CHP), Ultralife Batteries (ULBI) and Axion Power International (AXPW.OB). Each of these companies has proven products that can be rapidly integrated into storage systems for the Smart Grid. Moreover, Axion’s pioneering work on lead-carbon devices promises a level of performance, power and cycle-life durability that has not previously existed in the lead-acid world. In addition to its activities in the transportation sector that have resulted in a couple of significant grants, Axion is involved in two utility scale demonstration projects. Since lead-acid is frequently perceived as old-tech, the group trades at a significant discount to comparable companies that focus on other advanced battery technologies. I believe the market valuation metrics will normalize as the Smart Grid opportunities become more widely understood.

There are three pure-play public companies in the lithium ion group that have expressed an interest in the Smart Grid market. Altair Nanotechnologies (ALTI) has shipped a utility scale frequency regulation system for testing and both Ener1 (HEV) and Valence Technologies (VLNC) have taken preliminary steps to evaluate the potential for using their technologies in utility scale applications. Since size and weight are not mission critical issues in utility scale installations, I expect the cost of Li-ion technology to be a significant impediment. However, there are limited Smart Grid applications like frequency regulation that could benefit from extreme high performance batteries.

The only pure-play public company actively involved in the commercialization of Zinc-Bromine flow batteries is ZBB Energy (ZBB) which has recently partnered with Eaton for the global distribution of its flow battery systems.

Foreign companies that have active plans to manufacture products for the utility sector include France’s SAFT Groupe (SGPEF.PK), which has partnered with ABB (ABB) for large-format Li-ion devices, and Japan’s NGK Insulators Ltd. (NGKIF.PK).


DISCLOSURE: John Petersen is a former director of and holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and also holds small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

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.

February 05, 2009

A Sign Of The Times

Alt energy investors figured out early on in this crisis that a widespread shut-down of credit markets coupled with a substantial re-pricing of risk would not bode well for the industry. That's why alt energy stocks have outdone the overall market to the downside over the past year, with the iShares S&P Global Clean Energy Index (ICLN) down more than 60% Vs. the S&P 500 loosing a little under 40% over the same period.

Much of this carnage occurred before any real impacts on alt energy had been felt (current prices in equity markets are generally forward- rather backward-looking). Over the past couple of months, however, the proverbial chickens have come home to roost, and companies with weak balance sheets and/or no sales have been experiencing difficulties. Good companies have had to cut back staff and production. Here are some of the headlines that caught my attention:

Yesterday, clean locomotive maker Railpower Technologies Corp. (RLPPF.PK) filed for bankruptcy protection and put itself up for sale. I took a small position in this stock in May and liquidated it at a significant loss in October (this was a pretty bad call on my part but, like many people, I'd failed to grasp how dire things were going to get). Railpower's woes this time around were due entirely to bad luck (and terrible timing!): it had finally overcome initial execution problems and found a credible financial backer, only to have its plans wrecked by the economic maelstrom. Unfortunately, I don't think there'll be a third chance for this one.

Also yesterday, emerging turbine maker AAER Inc. (AAERF.PK) announced that it had extended the deadline on the deal it signed last October for the supply of 100 MW of turbines to a Canadian wind project by two months. The original agreement called for both parties (AAER and project developer Northland Power) to have secured the necessary financing (the former to produce and the latter develop) within four months. AAER has since gone to market and raised debt and equity financing. Northland's situation, however, is less clear. My take: Northland is unable to find cheap debt to develop its project and wants more time to see if things will normalize in the next couple of months. While not terrible, this certainly isn't great news.

VRB Power Systems, the large-scale energy storage technology developer that went bankrupt in November, announced a few days ago that it had finally liquidated its assets. Done like dinner!

Privately-held OptiSolar, a thin-film panel maker and solar park developer, cut 300 jobs in early January (50% of its staff) because of financing problems. Other solar firms, including Ausra, SunEdison, HelioVolt and Suntech Power (STP) have all recently announced staff cuts, although not to the same extent.

Wind tower maker DMI Industries, a unit of Otter Tail Corp. (OTTR), announced in early January a 20% reduction in its workforce at plants in the US and Canada. Not to be outdone, Clipper Windpower recently laid off 150 employees at a US plant (38% of the workforce), while LM Glasfiber let go of 150 and is halting production production at two Arkansas plants. Finally, Trinity Structural Towers, a unit of Trinity Industries (TRN), closed down a wind tower plant and laid off 131 workers in mid-January.

Micro-cap Canadian wind project developer EarthFirst Canada went belly-up in early November because it ran out of cash and couldn't find financing. This bankruptcy had been in the works for some time and I tried to play it...unsuccessfully.

DISCLOSURE: Charles Morand has positions in the following stocks: AAER, EarthFirst Canada.

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.

February 02, 2009

Alternative Energy Will Outperform The Market, With Storage Stocks Leading the Way

The public relations firm Waggener Edstrom released a survey of investors and analysts yesterday seeking opinions on what was in store for alternative energy for 2009 (link to the survey at the end of this article). Of the 81 respondents, 47 were institutional investors, 26 were brokerage analysts, five were from independent research firms and three were classified as "Other industry participants". Overall, 58% of respondents were from the buy side, 32% from the sell side and the remainder from "Other". Here are a few tidbits that caught my attention.

Storage: The Next Boom?

Overall, 50% of respondents expect alternative energy stocks to outperform the market in 2009 because of Obama's policies. Survey respondents are most bullish on energy storage stocks (including battery stocks) and wind stocks, with 43% believing that they will perform above or far above average (other categories include: biofuels, hydrogen & fuel cells and solar). Energy storage edges out wind in terms of bullishness with 15% of respondents believing storage stocks will perform far above average in 2009 (vs. 8% for wind).

This is an interesting development in my view and probably borne out of the recognition that, without significant technological improvements and cost decreases in storage technologies of all scales, alternative energy deployment will eventually plateau.

Unsurprisingly, biofuels receive the most bearish assessment with nearly a quarter of respondents believing the sector will perform far below average this year.

It's The Policies, Stupid!

When asked: "How do you think the following factors/variables will affect the performance of alternative energy stocks in 2009?", 38% of respondents say the Obama administration will have a very positive effect on the sector (1st overall choice), while 33% say government incentives in the US will also have a very positive effect (2nd overall).

Access to capital is viewed as having the most negative effect (33%) on alternative energy stocks, followed by oil and gas prices (14%). When asked: "Generally speaking, public interest and commercial investment in alternative energy will (continue to) diminish whenever oil and gas prices decline", 53% of respondents either agreed or strongly agreed Vs. 38% who disagreed or strongly disagreed.

This appears to indicate that while financing is the single largest risk to sector growth, investors are concerned about low energy prices lessening the case for alternative energy. Nevertheless, policy and regulatory developments are top-of-mind for investors. Apparently, several respondents (although the number isn't stated) revealed that their alternative energy investment theses rested on government incentives.  

Journalists Have Some Homework To Do

Overall, respondents feel that both the mainstream and business press do a poor job of covering the alternative energy sector, with the former often being overoptimistic and the latter being too sceptical.

Only 24% of respondents agree that "generally, the media cover the industry fully and fairly", with the balance (76%) believing that "journalists and other media often overlook or are underinformed about important aspects of the industry".

Stars & Dogs For 2009 

An investor survey wouldn't be the same without stock picks. Without further ado, here are respondents' views regarding the best and worst performing alternative energy stocks for 2009.

Best & Worst Performing Alternative Energy Stocks for 2009
Rank Top Picks Top Dogs
# Company Name Ticker Company Name Ticker
1 First Solar FSLR Solaria Energia SEYMF.PK
2 Vestas VWSYF.PK Suntech Power STP
3 Sunpower SPWRA Theolia THIXF.PK
4 Iberdrola Renovables IRVSF.PK Vestas VWSYF.PK
5 Covanta Holding CVA Aventine Renewable AVA

Interestingly, the top picks don't include any storage or battery stocks while only one of the dogs is a biofuel stock (Aventine).

Either respondents don't want to reveal what they're buying or they won't put their money where their mouth is. I find it a little difficult to believe that respondents truly view storage as THE alternative energy sub-sector to be in for 2009 but can't identify a single storage stock they collectively like. 

The Survey

Access the survey of alternative energy investors and analysts.

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 2009 | Main | March 2009 »

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