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April 29, 2009

Our Undiversified Wind Portfolio

Wind advocates like to say "The wind's always blowing somewhere" to counter concerns about the variability of wind power.  This is true, and it means that wind can always be relied on to produce some power, but that does not mean that wind can always meet demand.  In the United States' Great Plains wind belt, wind is typically anticorrelated with demand, meaning that, unless we can shift demand to times when the wind is strong, either through time of use rates or demand planning, overall energy production from wind will not be able to exceed 25-35% of overall demand without completely overwhelming the system when demand is low and the wind is strong.

However, even getting to 25% will be tricky without careful planning and a more robust transmission grid which will be capable of bringing wind power from where wind happens to be blowing (which could be hundreds of miles away in any direction) to where it is needed, or by investing in more expensive grid-based storage.

Potential for Low Variability

Lena Hansen and Bryan Palminter at the Rocky Mountain Institute, and Jonah Levine at CU Boulder have been doing some excellent work to show that portfolio theory can inform how to optimally combine a diversified portfolio of wind and solar sites to dramatically reduce the overall variability of a combined wind-solar portfolio

  mrO Simulation results.PNG
cross-firming wind solar.PNG
Source of Images: Spatial and Temporal Interactions of Solar and Wind Resources in the Next Generation Utility

This demonstration goes a long way towards alleviating concerns about any unreliability concerns for wind or solar, but answering that one question leads to another: Are we actually getting anything like an optimal wind/solar portfolio?

Overly Concentrated Portfolio

The answer to that question is unfortunately, "no."  Current incentives for wind, such as the production tax credit (PTC) and state Renewable Electricity Standards (RES) both reward energy produced, not the true economic value of energy produced.  The PTC is functionally a payment of 2.1 cents for each kWh of wind energy produced, while RES's require that a certain percentage of energy produced come from renewable sources.  An added complication is that many state RES include added incentives to produce renewable energy in-state, which reduces geographical diversity further.

This emphasis on total energy produced leads wind developers to "optimize capacity factor," according to Jim Himelic, and Associate Analyst at Xcel Energy (NYSE:XEL), the US's largest utility seller of wind energy.  Mr. Himelic spoke about Xcel's Wind Integration project to tackle the problem I recently called the "Dumb Grid:" the fact that grid operators do not use much weather forecasting information when trying to integrate wind onto the system.  This is not only from a lack of incentives and tools allowing utilities to integrate weather data, but also simply from a lack of good data.  Most wind farm operators currently have no incentive to provide even turbine-by-turbine production information to grid operators, data which would be valuable for forecasting of short term wind fluctuations.

According to Himelic, because most Colorado wind capacity is clustered in the Northeast of the state, and the above incentives along with constrained transmission means that new additions to wind capacity will also likely be in the Northeast, meaning that, at least in the short term, geographic diversity is likely to decrease rather than increase over time.  This both increases the overall variability of the wind resource, and will also increase the frequency and size of large wind ramp events, when power from wind turbines rises or falls extremely quickly over a very short period.  The worst such ramp events from a grid operator's perspective often come when wind speeds rise so far as to require the turbines to shut down to avoid damage.  This can cause a large number of turbines to go off-line at once, leading to a quick drop in overall power production.

Concentrating a majority of wind farms in a small area means that such wind over-speed events are likely to affect many farms at once, exacerbating the problem for grid operators.

A Gust of Hope

It's ironic that government incentives for renewable energy are adding truth to wind's only partially deserved reputation for unreliability.  Fortunately, recent changes in national policy may help to alleviate some of the pressure to cluster wind farms in small areas.  

First, wind developers now have the option to take a 30% Investment Tax Credit (ITC), comparable to the one available for solar, rather than PTC.  This has the advantage that wind developers receive a portion of their investment costs back, independent of total production, which will reduce some of the disincentive to build wind farms at relatively low capacity factor sites.  Similarly, a national RES would be unlikely to encourage local production of renewable energy, which might improve wind diversity.

Tom Konrad, Ph.D.

DISCLOSURE: None.

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.

April 28, 2009

Keep Up With AltEnergyStocks.com On Twitter!

Dear Readers,

You can now keep up with AltEnergyStocks.com on Twitter by visiting our Twitter page.

We will post updates when we blog as well as other useful info about what we're up to and relevant news stories. Be sure to check us out!

All the best,

The AltEnergyStocks.com Team

April 27, 2009

Plug-in Vehicle Hucksters are Doing P.T. Barnum Proud

David Hannum was right! There's a sucker born every minute and they're all waiting with bated breath for the low-cost plug-in electric vehicles that are coming soon to a dealership near you; if they're not quietly cancelled first.

It's the most insidiously appealing idea of our age: replace those nasty gasoline burning engines with cheap batteries that recharge in minutes and save a fortune on fuel while you "See the USA in Your [electric] Chevrolet." It's so appealing in fact that it ranks right up there with free lunch.

P.T. Barnum would have been proud.

Listen up America – It's a scam! The emperor has no clothes! There is no such thing as a cost-effective electric vehicle that will carry a family of four at highway speeds. But the cautionary if not downright conservative analysis from sources as diverse and credible as the Department of Energy, the White House and Carnegie Mellon University somehow manages to get lost in a media sideshow that focuses on scientific breakthroughs that promise a 5-minute recharge time for batteries nobody can afford to buy.

I hate to be a buzz-kill and point out the brown object floating in the punch bowl but this graph comes from the DOE's brand new Annual Energy Outlook 2009 and shows their best estimate of the market penetration rates for various classes of hybrid electric vehicles over the next 20 years. In this chart, the PHEV-10 and PHEV-40 categories are the only cars with plugs. Everything else is either a full hybrid (HEV) or a mild hybrid (MHEV).



So while your future car is very likely to have modest hybrid capabilities, there is almost no chance it will have a plug or need a charging station. For people like me who think numbers tell a more compelling story, the following table presents some detailed forecast data that I've gleaned from the Supplemental Tables to the Annual Energy Outlook 2009.

New Car Sales
(Thousands)
2010 2015 2020 2025 2030
Gasoline ICE Vehicles 5,554 7,567 7,999 7,878 7,678
TDI Diesel ICE 53 152 359 596 802
Electric-Diesel Hybrid 0 3 8 7 5
Electric-Gasoline Hybrid 195 546 985 1,471 2,034
Plug-in 10 Gasoline Hybrid 0 101 138 198 250
Plug-in 40 Gasoline Hybrid 0 49 57 81 113
Other alternative power systems 312 823 1,176 1,150 1,155






Total New Car Sales 6,114 9,241 10,722 11,381 12,035
Percentage of New Cars With Plugs 0.0%
1.6% 1.8% 2.5% 3.0%






New Light Truck Sales
(Thousands)
2010 2015 2020 2025 2030
Gasoline ICE Vehicles 5,152 4,701 3,664 3,332 3,033
TDI Diesel ICE 195 381 637 921 1,174
Electric-Diesel Hybrid 0 1 1 1 1
Electric-Gasoline Hybrid 92 336 620 951 1,223
Plug-in 10 Gasoline Hybrid 0 32 22 43 65
Plug-in 40 Gasoline Hybrid 0 0 0 0 0
Other alternative power systems 950 1,884 1,613 1,394 1,269






Total New Light Truck Sales 6,389 7,334 6,557 6,641 6,765
Percentage of New Trucks With Plugs 0.0%
0.4%
0.3%
0.6%
1.0%

With due respect for emotionally committed carbon activists who sincerely believe plug-ins are the only way to save our beloved planet, the DOE estimates that cars with plugs will be 0.0% of the new car fleet in 2010, 1.1% of the new car fleet in 2015, 1.3% of the new car fleet in 2020, 1.8% of the new car fleet in 2025 and 2.3% of the new car fleet in 2030. In simpler terms, plug-in vehicles are not the Greatest Show on Earth and the three ring circus we fondly refer to as the auto industry would close the sideshow if it wasn't such a big draw for children of all ages (including government) that bring fat wallets.

We've all been buried in press releases and reports about carmaker plans to introduce plug-in hybrids over the next few years. These are PR stunts, not business decisions. They remind me of a controversy that erupted in the mid-1800s when an entrepreneur named George Hull had the Cardiff Giant carved from a block of gypsum, aged and buried in a field. He then found the treasure while digging a well and promptly sold a two-thirds interest to a credulous investor syndicate managed by a banker named David Hannum. After the sale, Hannum's syndicate moved the Cardiff Giant to Syracuse and increased the entry fee to $1, which was serious money in the 1860s. Things really got rolling when P.T. Barnum tried to lease or buy the Cardiff Giant and was unable to do so. At that point Barnum had a plaster of paris copy made and promptly began denouncing the original as a fake. In newspaper stories about the dispute, Hannum was quoted as saying, "There's a sucker born every minute" in reference to the people who were paying to see Barnum's fake giant instead of the original giant that his syndicate had bought from Hull, which was also a fake. While it's not entirely clear whether Hannum was a sucker or a huckster, they all ended up in court where Hull confessed that the Cardiff Giant was a hoax and the judge ruled that truth was an absolute defense to the syndicate's lawsuit against Barnum.

There is an immense difference between announcing plans to manufacture a product and actually hitting the start button on an assembly line. I am certain we will see a huge variety of one-off prototypes, concept cars and limited production test vehicles over the next couple of years; but unless the DOE's analysts are as clueless as some vocal critics believe them to be, substantially all of the PHEV programs that are being announced today with great fanfare will be quietly axed before too much money is wasted on politically popular ideas that don't make a bit of economic sense.

The headline news out of China is that BYD is introducing a cheap PHEV-62. The truly impressive story is that China built and sold an estimated 23 million electric two-wheeled vehicles (E2W) last year. Collectively, these E2Ws used enough battery power for a million American style PHEVs; all of which leads to a couple of interesting questions for the PHEV crusaders. First, what do you think the chances are that 23 Chinese will give up a little battery power so that one American can squander a lot of battery power? Second, who do you think will have the greater buying power if it comes down to price competition in a resource constrained world, 23 thrifty Chinese or one profligate American?

Li-ion battery developers have access to the same reports I do and they know the PHEV frenzy is a scam. But its a scam where they can let somebody else wildly exaggerate the economic potential of PHEVs and then use baseless auto industry PR to justify building government subsidized factories that do not make sense under any reasonably foreseeable future conditions.

With a simple Google search anybody can learn that Ener1 (HEV) is seeking $480 million in Federal loans to build battery plants with capacity for 600,000 HEVs by 2011 and 1.2 million additional HEVs by 2015. A123 Systems is seeking $1.8 billion in Federal loans to build battery plants with capacity for 5 million HEVs per year. The National Alliance for Advanced Transportation Battery Cell Manufacture is seeking another $2 billion in Federal funding to build one or more manufacturing and prototype development centers that will be shared by the fourteen NAATB members. While I actually believe the NAATB proposal has considerable merit because it includes giants like 3M (MMM), Enersys (ENS) and FMC (FMC) along with emerging companies like Altair Technologies (ALTI), the nagging question that simply will not go away is "Who is going to buy batteries for over 6.8 million HEVs a year when the DOE's demand forecast is less than half of that number?"

Will we ultimately see those same manufacturers back before Congress demanding HEV and PHEV mandates like we saw with ethanol?

I've written a series of articles on how Li-ion technologies stack up against the competition once you move away from the idea of a PHEV-40 that needs an immense amount of stored energy to move a family of four at highway speeds. The entire archive is available on my Seeking Alpha author's page.

Li-ion is a wonderful technology for portable electronics, E2Ws and personal transportation applications where the vehicle weight to passenger weight ratio is less than about five. It is nonsensical when the goal is to move four passengers and a couple thousand pounds of steel and composites at highway speeds. To date the only rational PHEV proposal I've seen is a gas-guzzler to dual-mode EV conversion initiative that's being developed by Axion Power International (AXPW.OB). The raw end user economics are not as attractive as I would like them to be, but the existing fleet of gas-guzzlers is a far larger problem than the new car fleet will ever be. Since my parents always taught me to focus on the big problems first and leave the petty stuff for later, I have a hard time arguing with a proposal to slash gasoline consumption by almost a billion gallons a year for every 1% of the existing gas-guzzler fleet that's converted into gas sipping EV-50s. Everything else is just a sideshow.

Mark Twain once said, "history doesn't repeat itself but it does rhyme." Like the Cardiff Giant, PHEVs are an appealing bit of fiction that everybody wants to believe. Like the Cardiff Giant there are hucksters prowling the land claiming they have the real deal. In the final analysis, the losers will be the investment syndicate members and the suckers who pay their dollar to see the fake giant.

The DOE's Annual Energy Outlook 2009 makes it perfectly clear that PHEVs are irrelevant for normal people who worry about things like budgets, monthly payments and retirement plans. Fortunately, there are many real energy storage solutions from real companies that actually deserve our attention. I may revisit the PHEV loony bin from time to time to poke a little fun at the true believers, but I'm basically done with this topic.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He 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-carbon battery research and development.

April 26, 2009

The Obama Effect: Is Clean Energy Outperforming?

A comparison of the charts for clean energy ETFs and broader market ETFs seems to show that, clean energy funds have, if anything, underperformed the market as a whole in recent months.  Nevertheless, the quarterly performance update for my 10 Clean Energy Stocks for 2009 showed my picks strongly outperforming the market, although the much riskier 10 Clean Energy Gambles was only performing in-line with the sector indices.

It's unlikely that my picks are due to stock picking skill.  My personal experience has shown that I'm much better at picking sectors than individual stocks: my strength is in spotting trends, not picking individual companies which will outperform. 

Trend Spotting

If my picks are not doing better because of stockpicking, it's either because of luck, or because I spotted a trend.  The relative performance of the two portfolios gives a clue as to what it might be.  When Lehman Brothers declared bankruptcy, I began selling stocks that had weak cash flows or balance sheets, and I continue to believe that companies which can internally finance all their capital expenditures and expenses will outperform the rest for years to come.  As such, my Ten Clean Energy Stocks all had strong balance sheets and cash flows, while most of the Ten Clean Energy Gambles will likely need to raise more money by the end of the year.

If I'm right about this trend, then clean energy stocks have indeed been outperforming the market, but this trend has been masked as the market as a whole fell by the fact that most clean energy stocks are young growth companies; they often have weaker balance sheets and cash-flows than older, more established companies.  

Testing the Trend.

To test my hypothesis, I turned to the Capital Asset Pricing Model, or CAPM.  CAPM accounts for the general riskiness of companies by means of a statistic Beta, which is a measure of how much a company moves in response to moves of the market as a whole.  Because clean energy companies tend to be riskier than the market as a whole, they tend to have Betas greater than one, and hence tend to decline more than the market as a whole when it declines, but advance more than the market as a whole when it advances.  Some commentators think that green funds will outperform in a recovery solely because of the higher Beta, but I suspect there's more to it.   Any difference between the  performance of a stock and the expected performance given the performance of the market as a whole is called Alpha, and if my hypothesis is correct, clean energy stocks are likely to have had positive alpha over recent months.

I chose to test my hypothesis over three and six month periods, since that is how long I feel I have been seeing an out-performance of clean energy stocks (I think it started slightly before President Obama's election, when it became fairly clear that he was going to win.)  The CAPM model says:

Alpha = Actual Return - (RFR + Beta*(RM-RFR))

Where RFR is the risk-free rate, usually taken to be a long term treasury rate of interest, and RM is the market return.  On October 24, 2008, the ten year Treasury note was yielding 3.7%, and on January 27, it was 2.5%.  The total return of the S&P 500 has been -1.2% and 2.4% for six and three months, as of April 24th.  That means that for the 3 month period, RFR3 = 2.5%/4 = 0.6%, and RM3-RFR3= 2.4%-0.6% = 1.8%, while for the 6 month period since October 24, RFR6 = 3.7%/2 = 1.9%, and RM6-RFR6= -1.2%-1.9% = -3.1%.

With this data in hand we can now check to see if clean energy stocks in general have been outperforming.  

Clean Energy ETFs

To understand how the sector is performing as a whole, I will use several Clean Energy ETFs: for the sector as a whole, the two domestic ETFs: The First Trust NASDAQ Clean Edge US Liquid (QCLN) and The PowerShares Clean Energy (PBW.)

ETF

Beta

 3 month 6 Month 
Performance Alpha Performance Alpha
QCLN 1.85

9.4%

5.5% 4.4% 8.2%
PBW 1.74 7.7% 4.0% -1.4% 2.1%

Clearly, both these clean energy ETFs have been strongly outperforming the market since Obama was elected and assumed office.  Until the recent market recovery, however, the general market downtrend, combined with the high Betas of alternative energy stocks have been obscuring the strong outperformance. 

Subsectors: Solar, Geothermal, Efficiency, Smart Grid

There are also Solar ETFs and Wind ETFs, which would allow us to see how these subsectors are performing relative to the whole market, but this would require comparison with a global market index, and some time spent importing data into a spreadsheet to calculate beta.  As I mentioned at the end of a recent article on clean energy mutual funds, I expect that the subsectors most likely to outperform are those on which President Obama has been emphasizing in his policy: Energy Efficiency, Smart Grid, High Speed Rail and Transit stocks and those power generation sectors which are most likely to contribute significantly to his goal of tripling renewable energy, Geothermal and Wind.  Solar has also been outperforming, but only over a much shorter time period.  

The boost to solar came from China, not Obama, and so it has only been felt for the last month or so.  Since I don't have appropriate sector ETFs, I used a selection of individual stocks I hoped might be representative of their sector.  I mostly chose stocks which are not in one of the two sets of ten stocks for 2009 discussed above.

Some of these stocks follow the patterns I would expect if their performance is being driven by the new administration's policies, but with just a few companies to choose from, I hesitate to draw conclusions about clean energy subsectors.  Probably the best fit is the battery manufacturer Enersys (ENS).  Battery manufacturers received a large boost from the stimulus package, and, this was more of a surprise than with other clean energy sectors. If you look at my discussion of the likely components of the stimulus package from December, you will see that I expected investment in the electric grid (including smart grid), energy efficiency, wind, and geothermal.  

    Batteries were not on my radar, and the large investment in battery technology seems to have come as a surprise to most other investors as well.  Enersys slid in the three months after the election but before the stimulus was unveiled, but then took off in the last three months. In contrast, the gains in my wind stock, smart grid, rail, and energy efficiency stocks were spread out over the whole 6 month period.  The geothermal stock saw most of its gains early on, perhaps because there was little explicit boost for geothermal in the American Recovery and Reinvestment Act.

Stock

Beta

 3 month 6 Month
Performance Alpha Performance Alpha
FSLR (solar) 1.99 4.5% 0.3% 22% 27%
AMSC (wind) 1.87 51.7% 48% 123% 127%
ORA (geothermal*) 1.21 -.6% -3.3% 35% 36%
PEIX (ethanol) 1.55 -27% -30% -47% -44%
ENS (batteries) 1.16 56% 53% 29% 31%
ENOC (smart grid) 1.52 74% 71% 190% 193%
POWI (energy efficiency) 1.14 8.0% 5.4% 25% 27%
PRPX (rail) 1.39 11% 8% 41% 43%

* Ormat (ORA) is in my Ten Clean Energy Stocks for 2009, but there really is no other choice for a representative geothermal stock.

Tom Konrad, Ph.D.

DISCLOSURE: The author has long positions in AMSC, FAN, ORA, PRPX, and POWI.

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.

April 24, 2009

White House Report: GM Volt is Not Ready for Prime Time

In it's March 30, 2009 summary determination that GM had failed to propose a viable bankruptcy alternative, the President's auto industry task force said:

"GM is at least one generation behind Toyota on advanced, "green" powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable."

This extraordinary conclusion has been public for weeks but I've not seen it reported by any mainstream media. I would have missed it entirely if Plug In America, an EV industry trade group, hadn't made a point of issuing a press release that was drawn to my attention by one of my readers. While the White House did not specifically lay the Volt's problems at the feet of the battery industry, Plug in America did. In their refutation of the auto industry task force report, Plug in America said:

"California law requires that the Volt and other plug-in hybrids come with a 10-year warranty. To ensure this longer life, automakers are as much as doubling the size of the battery pack, increasing cost to manufacturer and consumer. But not a single production plug-in electric vehicle sold to date, from GM’s early EV1 to today’s Tesla, has had a warranty of more than five years, noted Plug In America advisory board member Chelsea Sexton.

“To support early deployment, California should relax the warranty requirement for cars like the Volt to five years, phasing to 10 years over time,” said Sexton, a former GM employee. “This alone could cut the number of batteries required by as much as half and reduce the cost of each vehicle by thousands of dollars."

The warranty reduction would not impose added liability on GM or consumers, Sexton noted, because President Obama has said the federal government will guarantee the warranties of GM and Chrysler vehicles should they go bankrupt. And dealers can sell extended warranties, providing additional security for consumers who want it as well as revenue when auto companies need it most.
"

In January 2009 the DOE released its 2008 Annual Progress Report for the Energy Storage Research and Development Vehicle Technologies Program that concluded Li-ion batteries were not ready for prime time in PHEV and EV applications.  In March 2009 the President's auto industry task force issued a report that the GM Volt, the first Li-ion powered PHEV proposed by a major manufacturer, was not ready for prime time.

Is anybody out there listening to the facts or are the PR jungle drums from a few undercapitalized Li-ion battery developers simply drowning out the voice of reason and prudence?

Cheap Li-manganese batteries from LG-Chem and $7,500 in Federal Tax Credits are not enough to make the Chevy Volt commercially viable. Comparable batteries from Ener1 (HEV) were not enough to keep Th!nk out of fiscal reorganization in Norway. More expensive Li-phosphate batteries from A123 Systems are unlikely to keep Chrysler out of bankruptcy. While Li-phosphate batteries from Valence Technology (VLNC) and comparably priced Li-titanate batteries from Altair Nanotechnologies (ALTI) are being tested in hybrid transit buses and other commercial vehicles that may put enough stress on the batteries to justify their high cost, none of the companies I criticized last July has demonstrated any ability to meet the challenge and do the heavy work of powering America's transportation future.

I love the Li-ion batteries in my laptop and cell phone and believe it Li-ion an excellent choice for applications like electric two-wheelers (E2W) and other vehicles where there is a rational relationship between vehicle weight and passenger weight. But it is high comedy to suggest that Li-ion batteries will ever be able to power 300 pounds of passengers and 3,000 pounds of steel for 40 or 50 miles at highway speed. It's like using 5,000 golden hamsters to pull a stagecoach when what you really need is a horse.

I've been rational, analytical, courteous and engaging for the last ten months, but it's high time for somebody to stand up and call bullshit on the shameless Li-ion hucksters who have nothing to offer but happy-talk forecasts and hype! It's also high time for taxpayers to stand up and say "Not with my money you don't!"

America's leading Li-ion battery developers including Altair Nanotechnologies, Ener1 and Valence had combined losses of $93 million on $42 million of 2008 sales, yet they sport a combined market capitalization of $1 billion. In comparison America's leading lead-acid battery manufacturers including Axion Power (AXPW.OB), C&D Technologies (CHP), Enersys (ENS) and Exide (XIDE) carry a comparable combined market capitalization even though they had combined profits of $140 million on $6.2 billion of 2008 sales.

Something is dreadfully wrong with this picture. Summary data for each company follows.


Ticker
Price
Per Share
Mkt Cap
(millions)
Sales
(millions)
Income
(millions)
Altair Nanotechnologies Inc. ALTI $1.29 $120 $6 ($29)
Valence Technology Inc. VLNC $2.22 $273 $29 ($21)
Ener1 Inc HEV $5.40 $613 $7 ($43)
Group Total


$1,005 $42 ($93)






Axion Power
AXPW.OB
$1.40
$49
$1
($11)
C&D Technologies
CHP $2.10 $55 $375 ($8)
Exide Technologies XIDE $4.66 $352 $3,698 $58
Enersys ENS $13.96 $670 $2,162 $101
Group Total


$1,126 $6,236 $151

For months my message to storage sector investors has been simple: the energy storage sector will ride the crest of an investment tsunami as we enter the cleantech revolution, but cleantech is all about price vs. performance and there is no room for irrational expectations. The DOE has said the same thing and now the President's auto industry task force has joined the chorus. Lithium dreams have become an investor's worst nightmare. It's time to wake up and smell the coffee, go to work and solve our problems to the best of our ability with cost-effective technical solutions like compressed natural gas and advanced lead-acid and lead carbon batteries.

The airbrushed Li-ion centerfolds may have serious investment merit in the future, particularly if somebody in the EV world develops a product that is proud to be an EV instead of pretending to offer the functionality of a family car. But that day is not today and investors need to stop deluding themselves. Cool technology that cannot provide a cost effective solution to real world problems has all the nutritional value of rainbow stew. So let's stop wasting time and money on feel-good solutions that cannot work and get to work solving the problems with readily available and cost effective technologies.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He 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-carbon battery research and development.

April 22, 2009

The Obama High-Speed Rail Strategy: What Will Happen When The Steel Meets The Track?

Over the past few weeks, John Petersen has written a number of very insightful articles on the energy storage space, with a particular focus on automotive applications. To be sure, this sector has gotten a lot more exciting since Obama's election, with real dollar commitments coming from the government and even tangible signs that certain technologies are moving into the mainstream. It is fair to say that, on the back of explicit state support, batteries and smart grid have dethroned solar as the new "hot" thing in alt energy/cleantech.

Equally exciting in my view is the focus high-speed rail (HSR) is ostensibly receiving from the Obama administration. To me, mass transit (excluding air travel) is to transportation what efficiency is to electricity. Renewable power offers a way to make electricity production "cleaner", but a kWh saved is the best kWh there is both in terms of economic efficiency (at least initially as efficiency eventually runs into diminishing marginal returns) and environmental benefits. Similarly, while new battery technologies will reduce the air emissions footprint of cars, rail can be, given the right conditions (i.e. high population densities, a congested road system, high fuel costs [whether gasoline, natural gas or electricity], the right distance) a superior economic and environmental alternative per pound of human body transported.

My interest in rail transport (especially of the fast kind) also partly stems from the year I spent living in London and during which I travelled to Paris on a number of occasions (the two cities are 414 km apart, or around 260 miles). The Eurostar was a pleasure to ride; it was comfortable, you left from downtown London and arrived downtown Paris, and it was just an overall much simpler alternative to the plane.

In early March, shortly after details of the American Recovery and Reinvestment Act (ARRA) were made public, I wrote an article looking into two HSR stocks: Bombardier (BDRAF.PK) and Alstom (AOMFF.PK). These were, in my view, the two train makers most likely to experience share price appreciation as a result of potential ARRA HSR money because of their heavy focus in this realm. This is still my view.

Since then, the Obama administration has released a much more detailed plan for its HSR strategy, along with more numbers. Over the weekend, I read through that plan and, after crunching a few numbers, was left wondering: is this enough money to achieve anything close to Obama's HSR vision?

Vision For High-Speed Rail In America       

On April 16, the Obama Administration released its plan for HSR, entitled "Vision For High-Speed Rail In America" (see President Obama's announcement in the video below).


A Vision for High Speed Rail from White House on Vimeo

There is more to the ARRA's transportation component than only HSR, and you can find a good summary on Transportation For America's website. The plan released on April 16 focuses solely on HSR and outlines a rather bold vision backed by not as bold an amount of money. There are three pillars to the plan:

  1. Projects: grants for shovel-ready projects where engineering work has already been completed
  2. Corridor programs: use ARRA money to develop phases or geographic sections of HSR corridors (see map below) that have completed plans and environmental documentation
  3. Planning: use non-ARRA appropriations in budgets between FY 2010 and FY 2015 to work toward fully developing and an HSR network

The HSR corridors identified in the plan as holding development potential are shown on the map below (click on the map for a larger PDF). Further details on these corridors can also be found on the Department of Transportation's website.

The plan uses the following definitions for the various categories of HSR (underlines added):

Rationale for HSR

In a recent report on HSR, the Government Accountability Office (GAO) noted the following as arguments in favor of HSR.

On congestion at airports and on highways:

"The Department of Transportation (DOT) estimates that several intercity highways linking major urban markets will experience significant congestion by 2035. According to a recent report, capacity limitations will constrain air traffic at 14 airports in 8 metropolitan areas, even if planned capacity improvements are carried out through 2025. In addition, the dependence of growing highway and air travel on fossil fuels raises significant environmental concerns regarding greenhouse gas emissions."

On the demand side:

"The National Railroad Passenger Rail Corporation (Amtrak), the nation’s intercity passenger rail provider, has seen nearly a 20 percent increase in riders in the last 2 years, in part because service enhancements in some intercity corridors have improved overall travel time and reliability, making the train more competitive with highway and air travel. Still, Amtrak does not offer service in many heavily traveled intercity corridors. Moreover, Amtrak’s service continues to have slow average speeds relative to other transport modes, and experiences significant delays, often resulting from sharing track with commuter and freight rail." (emphasis added)

"In the United States or elsewhere, high speed rail tends to attract riders in corridors with high population and density, especially where congestion on existing transportation modes prevails." (emphasis added)

On optimal ranges:

"According to foreign and domestic officials with whom we spoke, generally lines significantly shorter than 100 miles do not compete well with the travel time and convenience of automobile travel, and lines longer than 500 miles are unable to overcome the speed advantage of air travel. Between 100 and 500 miles, high speed rail can often overcome air travel’s speed advantage because of reductions in access and waiting times. Air travel requires time to get to the airport, which can often be located a significant distance from a city center, as well as time related to checking baggage, getting through security, waiting at the terminal, queuing for takeoff, and waiting for baggage upon arrival at a destination. By contrast, high speed rail service is usually designed to go from city center to city center, which generally allows for reduced access times for most travelers."

HSR Funding - Where The Steel Meets The Track

As stated above, the sums going into HSR are overall unimpressive. They are broken down as follows:

  1. $8 billion of ARRA money mostly for pillars #1 and #2 above with the added advantage that, unlike other ARRA-funded initiatives, funding for intercity passenger rail development will remain available for obligation until Sept. 30, 2012 
  2. $1 billion per year for five years in budget appropriations starting with the FY 2010 budget to fund pillar #3 above

This equates to $13 billion over a roughly five-year period. The plan does not, however, claim that this $13 billion is the only money that will be made available for HSR projects. Historically, rail has lagged other modes of ground transport with respect to the federal government matching state capital funding (see graph below). States will therefore be expected to be significant financial partners in the projects as will the private sector. Still, even with significant participation from other stakeholders, the question remains: in today's HSR world, is $13 billion enough?     


The best way to gauge the potential size of the federal contribution is to examine it in light of what other recent HSR projects have cost or are projected to cost. The following two tables are taken from the GAO report discussed above. The first one lists out six international projects in Europe and Japan and the second four US projects.




Based on these tables, the international average cost per route mile (excluding trainsets) is in the neighborhood of $66 million with a standard deviation of $41.23 million. The US average is $66.75 million with a standard deviation of $46.96 million. The averages are thus relatively similar. The international median cost is $47.5 million per route mile while the US is $56.5 million. Assuming the US median cost applies to all projects, I created the table below.

Besides using the US median cost, I also assumed that trainsets would be priced at the low end of the range discussed below the table of international projects ($32 million per set). I have no real basis for assuming how many trainsets will be required, and that doesn't matter - their cost per unit range as reported by the GAO is below the median US cost of building one mile of track. For instance, Siemens just won a Chinese HSR contract to provide 100 trains at a cost of $10 million a piece, with each train capable of transporting 1,000 passenger. Trainsets do not make or brake a project.  

This table demonstrates that, in order to get serious HSR mileage out of the current pool of money, construction costs will either have to drop significantly - which is unlikely given that Americans have not been building HSR along with the rest of the industrialized world over the past 20 years and thus have little expertise in the area (the Obama plan discusses this capacity gap on a number of occasions) - or the government's commitment will have to be materially boosted.

The GAO notes that costs can drop to the $4.1 million to $11.4 million per route mile range if projects are incremental rather than new, but that also limits possible speeds to between 80 mph and 110 mph, which in most of the world doesn't qualify as fast. Presumably, a fair chunk of this money will go toward such projects so the the bang-for-the-buck analysis will look a bit better. But what this analysis demonstrates is that current funding levels are no where near high enough to build true HSR (HSR - Express and HSR - Regional in the definitions box above) across even half of the corridors identified on the map.           

Conclusion

Unlike battery technologies or the smart grid, a few billion dollars in funding does not provide significant boosts in large, mature industries like rail, so unless the government is willing to up the antes, I wouldn't bet on the US becoming the next major HSR market. China, for instance, is spending $24 billion on one HSR line alone (the article linked to here is worth reading if HSR interests you) connecting Beijing to Guangzhou (1,157 miles or roughly $21 million per route mile - it's always nice to have a labor cost advantage).

The Obama plan acknowledges that it will be challenging for certain states to provide significant matching funds as many of them are in budgetary binds. The GAO study also finds an overall low degree of interest on the private sector's part for HSR given the risks involved; some of the HSR projects the GAO studied in international locales aren't even forecasted to meet operating costs from ticket sales, let alone earn a return on capital invested. 

The good news, however, is that there are plenty of places where governments accept this fact of HSR because of the other benefits it provides (i.e. lower emissions, less clogged highways) and where growth will continue to be significant in the next few years. I continue to view Bombardier (BDRAF.PK) and Alstom (AOMFF.PK) as the two firms for which a boom in HSR will have the most notable impact on the bottom line. I also still think that Bombardier's stock has the greatest capital appreciation potential although it's been mainly flat since I wrote the initial article on concerns over its aviation unit. While some contracts may flow to both companies from the current Obama plan - and we should find this out by later this year or early next - people with an interest in HSR should have their sight set on China, as that is where the action really is right now. 


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

Letter to the Editor: Advantages of CLFR

                We appreciate AltEnergyStocks.com’s coverage of the CSP industry with its recent article, The Future Shape of CSP.  Unfortunately, the article fails to recognize that compact linear Fresnel reflector (CLFR) companies like Ausra are making tremendous progress in advancing the technology and creating new and diverse market segments for CSP. 

                 CLFR is already on a path to being commercially demonstrated in the U.S., as well as in Australia and Southern Europe.  In fact, Ausra recently commissioned the first major solar thermal power plant to be built in California in nearly two decades and developed and brought online the world’s first solar/coal-fired power augmentation facility in Australia�both CLFR installations are running now and performing as modeled. 

                 One of the key benefits of CLFR technology is the diversity of its applications.  Contrary to what the article’s anonymous “industry observer” asserts, Ausra serves more than just the process steam market.  Our solar thermal energy systems are also ideally suited for power augmentation and standalone power generation, as demonstrated at our two CLFR installations.   

                CLFR will continue to play a major role in helping advance the CSP market.  The following are just a few of the benefit’s of Ausra’s next-generation CLFR solar thermal energy systems:  

·         Simple, robust design for low-cost and durability

·         Most land-efficient solar technology (highest energy density)

·         Standard, common materials:  carbon steel pipe and structural components, flat  glass

·         Direct steam generation (150°C/300°F to 400°C/750°F) without heat transfer fluids, such as synthetic oils, thereby reducing expense and environmental risks

·         Rapid deployment and modular installation: high-volume, automated production (6-to-18 month field installation); regional and on-site manufacturing

·         Durable structure: 2-inch carbon steel pipe; horizontal mount solid piping; no moving joints; steel-backed reflectors rotate downward to protect the mirrored surface

·         Flexible steam generator flow: once-through or recirculating

·         Highly-automated computer controlled tracking

        In addition to the technical benefits of our CLFR systems, we continue to enjoy strong financial support from our investors, particularly through our most recent $25.5 million equity financing facility. We look forward to continuing our dialogue with AltEnergyStocks.com about our CLFR technology as we expand and accelerate our solar thermal energy equipment supply business.

William M. Conlon, P.E., Ph.D.

Vice President, Engineering

Ausra, Inc.

April 21, 2009

A Very Smart Plan for Federal Smart Grid Grants

In mid-February President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA), a massive spending bill that spawned gigabytes of analysis and comment from bloggers like me. Unlike many, I've tried to stay politically agnostic and focus solely on the economic impact of ARRA on companies that manufacture batteries and other energy storage devices. From that limited perspective, everything is wonderful!

The principal energy storage appropriations included in the ARRA were:
  • $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;
  • $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;
  • $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 a February 22nd article about why I believed energy storage stocks could easily double as a direct result of ARRA spending, I cautiously speculated that a large number of $100 to $200 million grants seemed more likely than a handful of mega-project grants. In response, many readers expressed concerns that the ARRA funding would be hijacked by the utility industry or wasted. While we've all been eagerly awaiting clarification, I'm very impressed with the direction the Administration's policies seem to be heading.

In his early remarks on ARRA policy objectives, President Obama seemed inclined toward an egalitarian approach that would use ARRA funding for a wide variety of projects in a concerted effort to create new jobs, explore reasonable alternatives and rely on market mechanisms rather than policy-wonks. I was particularly impressed by remarks President Obama made at the Southern California Edison Electric Vehicle Technical Center last month when he said:

"Show us that your idea or your company is best-suited to meet America's challenges, and we will give you a chance to prove it. And just because I'm here today doesn't exempt all of you from that challenge - every company that wants a shot at these tax dollars has to prove their worth."

While we all know the opera ain't over 'til the fat lady sings, an April 16th press release from the DOE has spurred my optimism to new heights and given me reason to believe the DOE's plans for smart grid grants will take a very reasonable and pragmatic approach. In discussing their plans for financing smart grid projects, the DOE press release said:

"$3.375 billion for Smart Grid Investment Grant Program"

DOE’s Smart Grid Investment Grant Program will provide grants ranging from $500,000 to $20 million for smart grid technology deployments. It will also provide grants of $100,000 to $5 million for the deployment of grid monitoring devices. This program provides matching grants of up to 50 percent for investments planned by electric utilities and other entities to deploy smart grid technologies. The program will use a competitive, merit-based process to select qualified projects to receive funding.

Eligible applicants include, but are not limited to, electric utilities, companies that distribute or sell electricity, organizations that coordinate or control grid operations, appliance and equipment manufacturers, and firms that wish to install smart grid technology. There will be a 20-day public comment period on the Notice of Intent; the Department will use feedback to finalize the grant program structure and subsequent solicitation.

$615 million for Smart Grid Demonstration Projects

The draft Funding Opportunity Announcement is for smart grid demonstrations in three areas:
  • Smart Grid Regional Demonstrations will quantify smart grid costs and benefits, verify technology viability, and examine new business models.
  • Utility-Scale Energy Storage Demonstrations can include technologies such as advanced battery systems, ultra-capacitors, flywheels, and compressed air energy systems, and applications such as wind and photovoltaic integration and grid congestion relief.
  • Grid Monitoring Demonstrations will support the installation and networking of multiple high-resolution, time-synchronized grid monitoring devices, called phasor measurement units, that allow transmission system operators to see, and therefore influence, electric flows in real-time.
Each demonstration project must be carried out in collaboration with the electric utility that owns the grid facilities. An integrated team approach that includes, for example, products and services suppliers, end users, and state and municipal governments, is encouraged. The projects require a cost share of at least 50 percent of non-federal funds."

Frankly, the DOE's goals are more ambitious, reasonable and broad-based than I had hoped they would be. Instead of a relatively small number of $100 to $200 million grants that would provide immense boosts to a small number of companies, the DOE is talking about hundreds of more modest grants that will benefit a much larger number of companies and probably be spent more wisely.

If the policy objectives defined by President Obama and clarified by the DOE flow through the entire ARRA grant allocation process, we may be entering a golden age for investors in companies that are developing batteries, energy storage devices and other smart grid technologies; a tidal wave of public and private funding that will lift all boats in the sector rather than a select few.

The overriding policy objectives I've been able to glean from the statements to date are:
  • The DOE will spread the wealth across a broad range of technologies and companies; and
  • The DOE will not finance technologies or companies that cannot attract the bulk of the required funding from non-government sources.
The result is a true public-private partnership where generous government support is available for companies that the market is willing to support as stand-alone business ventures, but the market holds the ultimate trump card. It's a structure that's simple in its genius and recognizes that the job of government is to enable the market process rather than supplant it.

I've written more than a few unkind words about publicly announced applications under the DOE's Advanced Vehicle Technology Manufacturing Loan Program because many applicants including A123 Systems, Ener1 (HEV), Tesla Motors and Th!nk are underfunded and the amount of the requested loans is disproportionate to the established value of the advanced vehicle technologies they want to manufacture. My basic question has always been "What if they build their proposed factories and nobody wants their products?" That question, in turn, led to the inescapable conclusion that the ATVM loans are a 'heads I win tails you lose' proposition that can be nothing but good for successful applicants and nothing but bad for the government.

We may indeed end up with a wasteful outcome from the ATVM loan program because it takes a lot of money to build manufacturing capacity from the dirt up and the process has been politicized. My sense, however, is that the ARRA grants will be another story altogether. Carefully administered ARRA grants can double the available funding for grid-connected energy storage partnerships like the ones that A123 Systems, Altair Nanotechnologies (ALTI), Axion Power International (AXPW.OB), SAFT Batteries (SGPEF.PK) and ZBB Energy (ZBB) have negotiated with counterparties including AES Corporation (AES), ABB Limited (ABB), Eaton Corporation (ETN) and NYSERDA. If similar policies flow control the ARRA grant policies for advanced battery manufacturing, the impact on the entire energy storage sector can be huge.

I frequently criticize the bloated market capitalizations of Li-ion battery developers, but it's important that readers understand that my criticisms relate to stock market factors rather than an assessment of the underlying technology. We need Li-ion, lead-acid, lead-carbon and flow batteries, and a host of other technologies that haven't even been invented yet if we want to break our addiction to imported oil and pave the way for cleantech, the sixth industrial revolution.

While I've always believed that good things happen in America in spite of government, the evolving policies of the Obama Administration may well change my views. At least for now, I believe the Administration's plans for distributing the ARRA smart grid grants are very smart indeed because they rely on the capital markets and sound business judgment as a counter weight to idealism that frequently drives government action.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds a small long position in 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-carbon battery research and development.

April 19, 2009

Bragawatts

Tom Konrad, Ph.D.

When Solaren announced they are seeking PUC approval for a power purchase agreement (PPA) with PG&E (NYSE:PCG) for solar power from outer space, I wasn't too surprised.   California utilities signing deals for large solar projects which quite likely may never be built is something of an industry trend. 

At a Concentrating Solar Power (CSP) conference last fall, John White, the Executive Director of Cleanpower.org, said that competitive solicitations for power supplies in California are becoming a sideshow, and that the "Process lacks credibility among the most serious and qualified developers." 

Rainier Aringhoff, the president of one of those serious and qualified developers, Solar Millennium (SMLNF.PK), agreed.  "Building CSP plants with storage is only with in the reach of a few companies," he said, "and these companies require regulatory certainty."  If the PUC is approving renewable projects that are unlikely to be built, how likely are they to enforce California's RPS if utilities fail to meet them because of developers' failing to deliver?

Sun, Sun Everywhere, But Not a Gigawatt Built

There are more than technical and financial barriers to development of large CSP projects.  According to Aringhoff, the transmission regulatory bodies FERC and CAISO need to sort through all the interconnection applications and determine which are for otherwise viable projects. They should also create land use corridors along main transmission trunks throughout the western electrical system which can be more easily permitted for renewable energy.  A full 5,000 MW of renewable energy projects are waiting on transmission upgrades.

Land use rules are also important.  One of the best areas for solar development would be the Mojave Desert, given its high insolation and proximity to California's population centers.  Unfortunately, the West Mojave Plan actively hinders renewable development, with only one percent of the land area set aside for renewable development.  Five percent is dedicated to off road vehicle recreation.  

As John White said, "It’s amazing that we can take a disturbed piece of ground where there is development across the street and the Mojave Desert commission will say 'No, we have to protect the Mojave ground squirrel.'"

Given these barriers, it's less surprising that PG&E is looking to space, where there are no endangered ground squirrels.

I'm not a space exploration expert, but solar from space seems fraught with technical risk, and Solaren seems to be planning to start with a commercial scale project (200 MW, to be scaled up to 1700 MW.)  If the technical problems were solved, it would still be at risk of destruction by space debris and any country with a functioning space program.  Assuming such a satellite could collect about ten times as much energy per acre as a ground-based plant, it would still need to cover 100 acres of increasingly cluttered space in order to produce 200 MW, or 850 acres for 1700 MW, making it likely to suffer regular impacts.

Would investors in any climate be willing to fund such an essentially unknowable venture? Perhaps they would if some deep-pocketed entity decided to take on much of the risk, as United Technologies Corp (UTX) is doing with Solar Reserve.  But, according to Jonathan Marshall, a PG&E spokesman, "There is no risk to PG&E ratepayers for this."  If there is no risk for ratepayers, there is no protection (at least from PG&E) for Solaren investors.

Of the companies that have signed PPAs with California utilities, Stirling Energy Systems' 1750 MW of projects have been most often cited to me as unlikely to be built.  They have signed PPAs with San Diego Gas & Electric and Southern California Edison, but if these projects do not get built, they will probably not be alone in that.

Strategic Shifts

In contrast, Ausra, with their innovative Compact Linear Fresnel Reflector (CLFR) geometry, has not been signing PPAs they won't be able to fill.  Seeing the harsh financial climate, they took the logical step and decided not to develop their own plants, but rather to sell equipment into the process heat market.  I recently wrote skeptically about this while pondering the future of Concentrating Solar Power, but not because the move is foolish.  The question in my mind is if the move will be enough.  Can a CSP equipment manufacturer be able to ride out the storm by selling equipment to power generators or industrial customers with other, less capital intensive options that work around the clock?

Other solar developers think so.  They are following this path and choosing to reduce their financial risk and need for capital by becoming equipment suppliers.  Skyfuel has always been a technology and equipment provider, rather than a developer.  The recent announcement from GreenVolts shows a similar shift in emphasis to selling equipment (although GreenVolts is not quite comparable to Ausra and Skyfuel, being a CPV startup that sells electricity (not heat) producing equipment.)  

In addition to the financial crisis, these shifts may have been encouraged by a recent change in the Investment Tax Credit rules which allows utilities to own projects and still gain the tax benefits.  But unless someone is willing to take on technical and regulatory risk, we're going to see a lot fewer of these projects built than we would like. 

If we can't build new transmission, and allocate more than 1% of the Mojave to renewable development, we may just have to hope for solar electricity from space.  Unfortunately, as Brett Steenbarger said in a recent interview "Hope is comforting, but ultimately is not a particularly effective coping strategy."  

Hope's not a good coping strategy for climate change, either.

DISCLOSURE: The author has a long position in UTX.

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.

April 17, 2009

The Time is Right for Gas-guzzler to Dual-mode EV Conversions


Since early 2008, Axion Power International (AXPW.OB) has been quietly developing an experience base and building grass roots support for a gas-guzzler to dual-mode EV conversion initiative that has the short-term potential to transform up to 120 million gas-guzzling pickup trucks, sport utility vehicles and vans into gas sipping EV-50s. If recent articles from sources as diverse as The Daily Green, Edmunds Green Car Advisor and the Environmental Defense Fund are reliable indicators, the initiative is rapidly gaining ground.

The concept is simple – add electric power trains and battery packs to America's least fuel-efficient vehicles and give them 50 miles of plug-in EV range coupled with unlimited internal combustion range. The potential benefits to the economy are enormous because the U.S. could slash gasoline consumption by a billion gallons per year for every 1% of the gas-guzzler fleet that's converted to dual-mode. It's also a solution that could be immediately implemented using domestic products and create untold thousands of new cleantech jobs.

axion dual mode.jpg
The first public discussion of Axion's gas-guzzler conversion initiative was in Dr. Edward Buiel's testimony before the Senate Committee on Energy and Natural Resources last July. A few months later, Andrew Grove, the former chairman of Intel, published an article in McKinsey Quarterly titled "An Electric Plan for Energy Resilience" that approached the topic from a slightly different perspective. While Dr. Buiel's testimony focused on using lead-acid batteries and Mr. Grove's article focused on using Li-ion batteries, both men reached the same conclusion: that gas-guzzler to dual-mode EV conversions are the most cost effective baby-steps America can take in its drive for energy independence.

The following table summarizes the estimated cost to convert a Chevy S-10 pickup into a dual-mode EV-50 using off-the-shelf drive train kits and lead-acid and Li-ion batteries from domestic suppliers. For both system types, the table assumes a 10-year useful life and a 15 kWh battery pack for a 50-mile electric range. For the lead-acid system, the table assumes a battery life of 40 months, the equivalent of 800 charge-discharge cycles, and two battery replacements. For the Li-ion system, the table assumes battery replacements will not be needed. Since space and weight are not critical constraints in a pickup, SUV or van, I have not made any adjustments for the 300 to 400 pound weight advantage of a Li-ion system. I've also avoided maintenance estimates because they're beyond my capabilities.

Essential Conversion Components
Gas-guzzler to Dual-Mode EV 50
Lead-acid
System
Li-ion
System
15 kWh battery pack
$3,000
$15,000
LAB replacement after 40 months
$3,000

LAB replacement after 80 months
$3,000

Off-the-shelf electric drive conversion kit
4,500
4,500
Miscellaneous conversion materials
900
900
Conversion labor
    3,000
    3,000
    Total up-front cost before subsidies
$11,400
$23,400
    Total 10-year cost before subsidies
$17,400 $23,400

The following table drills down another level and calculates how the capital costs would likely work in the case of a typical pickup, SUV or van owner. I've depreciated the electric drive system over a 10-year period and depreciated the batteries over their respective useful lives. I've then added an imputed interest factor of 6% per year on the total up-front cost before subsidies. Finally, I've factored in charging costs at an average price of $0.10 per kWh and calculated a fully loaded breakeven gas price before subsidies assuming a baseline fuel efficiency of 17.5 mpg for the unmodified vehicle.

Estimated Monthly
Cost of Ownership
Lead-acid
System
Li-ion
System
Depreciation of electric drive costs
$70
$  70
Depreciation of battery costs
75
125
Imputed interest on up-front cost (6% per annum)
57
117
Electricity for daily recharge (20 days @ 15 kWh @ $.10)
     30
     30
   Total monthly cost
$232
$342
Monthly gas savings (20 days @ 50 miles @ 17.5 mpg)
52.7
52.7
    Fully loaded breakeven gas price
$4.40
$6.50

It is very important to understand that I have not included any tax incentives or other subsidies in either of these cost tables because of the variety and complexity of existing and proposed Federal and State programs. If new subsidy regimes are implemented to encourage gas-guzzler to dual-mode conversions, the breakeven costs to users are likely to plummet.

While my fully loaded breakeven gas price numbers don't look all that good in comparison to current prices of $2.25 per gallon, I am convinced that current prices are not sustainable. The following graph from the Energy Information Administration tracks the spot price of West Texas Crude from January 1986 through April 2009.



What I find most intriguing is that the long-term trend was basically flat from ’86 until it reached an inflection point in the late '90s, at a time that roughly coincides with recovery from the ‘97 Asian financial crisis. Since then, oil prices have followed a consistent upward trend. I don’t want to join the peak oil debate, but I think the long-term price chart presents compelling evidence that the world passed a “peak cheap oil” inflection point about 10 years ago. If my analysis is correct, oil prices will revert to their new trend line over the next 12 to 18 months and then resume their relentless upward march until the next inflection point is reached. By the time the global economy emerges from the current recession, I believe $80 to $100 oil is a virtual certainty, as are $3.50 to $4.00 gas prices.

Some of most common comments on my EV articles relate to vehicle range limitations. While most Americans drive less than 50 miles per day, the ability to get in the car and drive without constraint seems to be deeply ingrained in our collective psyche. Therefore, I believe most pickup, SUV and van owners will truly appreciate the flexibility of a dual-mode system that will let them switch back and forth between the internal combustion and electric drive systems depending on the needs of a particular trip.

I'm convinced that a rapid implementation of Axion's gas-guzzler to dual-mode EV conversion initiative could be just what the industry needs. While I believe most consumers will choose the least expensive solution, there will still be large numbers of users who are willing to pay a premium price for the perceived advantages of Li-ion. Since gas-guzzler to dual-mode EV conversions use off-the-shelf technology and nobody can claim a solid intellectual property advantage, every manufacturer would have a level playing field in a multi-billion dollar market where technologies would succeed or fail on their own merits. More importantly, small battery producers would not be forced into the unenviable position of a midget negotiating with a giant.

America's strength has always been the ingenuity and flexibility of its entrepreneurs. In a world where we need to get up in the morning, go to work and solve our problems to the best of our ability, I believe the Axion initiative is a tremendous first step that holds immense short-term promise for the energy storage sector, energy independence, jobs and the domestic economy.

Disclosure: Author is a former director and executive officer of Axion Power International (AXWP.OB) and holds a large long position in its stock. He also holds small long positions in Exide Technologies (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-carbon battery research and development.

April 16, 2009

The Future Shape of CSP

Parabolic Troughs have dominated Concentrating Solar Power (CSP) until recently, but several companies are vying to replace them. Will the upstarts succeed, or will incumbency and improvements to trough technology ward off the competition?

Dr. Arnold Leitner, CEO of Skyfuel, Inc., thinks the battle for dominance of CSP will be "winner-take-all."

The technology which can deliver power when it is needed at a reasonable price should triumph. Photovoltaic (PV) technologies are rapidly producing price reductions, and can be used almost anywhere, but only produce power when the sun is shining. In contrast, CSP is still cheaper than PV enables inexpensive thermal storage, with the promise of dispatchable power to compensate for the variability of other renewable power sources and demand. Dispatchability assures CSP with storage a place in the eventual energy mix.

Heat Transfer Fluids

The ability and efficiency of a technology to accommodate thermal storage (and provide dispatchability) is a function of the heat transfer fluid and working temperature.

Three heat transfer fluids have been demonstrated to date: Steam (in power towers and troughs) mineral oil (in most parabolic trough plants,) and molten nitrate salts (in power towers.) The working temperature for steam is limited by the potential for corrosion. Molten salts and oil break down at high temperatures, with molten salt and steam capable of achieving the highest temperatures (about 565° C for nitrate salts.)

Companies such as BrightSource and eSolar are currently working to commercialize supercritical steam in power towers.

Lower temperature steam is also the working fluid for Ausra, a company working to commercialize the Compact Linear Fresnel Reflector (CLFR) geometry. CLFR breaks up a trough into a series of narrow, nearly flat, reflectors saving on the high cost of carefully focused troughs.  Ausra recently announced that they were refocusing on becoming a technology and materials provider, rather than building solar farms on their own.  An industry observer who prefers to remain anonymous thinks that this will mean the end of the company for practical purposes, since the process heat market is very difficult to sell into, and few companies are willing to back expensive, untried technology, especially from a third party vendor. Ausra is hardly alone in grappling with scarce financing in a capital-intensive industry, and the same could be said about several competitors.

Oil is commonly used as the heat transfer fluid in parabolic trough systems because it does not freeze at night (nitrate salts freeze at 220° C) and operates at lower pressure than steam. According to Bill Gould, Chief Technical Officer of Solar Reserve, such systems have peak operating temperatures of 375°C.  Solar Reserve is working to commercialize the nitrate salt/power tower combination which was demonstrated at DOE's Solar Two in the late 1990s, for which Bill Gould was the project manager.

Nitrate Salt

Composition

60% NaNO3 and 40% KNO3 by weight.

Melting Point

221 °C

Boiling Point

Has very low vapor pressure, but begins to decompose around 600 °C

Cost

$90-$160/kWe (trough); $30-$55/kWe (tower)

Other uses

Fertilizer

Thermal Storage

The best established thermal storage system is two-tank molten salt, according to Greg Glatzmaier, a Senior Engineer II on the National Renewable Energy Laboratory's (NREL) CSP research team. Pressurized steam or oil have also been used, but at higher cost per kWh.  Pressurized steam is only practical for short term buffer storage, according to Greg Kolb, a Distinguished Member of Technical Staff National Solar Thermal Test Facility.

Commercial projects using oil as a heat transfer fluid and molten salt for thermal storage include Nevada Solar One and Solar Millennium's (SMLNF.PK) Andesol parabolic trough plants. Solar Millennium is currently the only pure-play publicly traded CSP company I'm aware of.) 

According to Gould and Glatzmaier, the thermal storage systems systems at the Andesol plants suffer 7%-10% round-trip energy losses in heat exchange. If molten salt is also used as the heat transfer fluid, then there is no need for heat exchangers, and no such heat loss. The lower working temperature of these plants also requires much more salt and larger tanks to effectively store the same amount of electricity as for a power tower, once the lower temperatures and  efficiency losses are taken into account..

Gould calculates that a trough plant will require three times as much molten salt (along with larger tanks to store it) as a power tower to store an equivalent amount of energy. With additional information from Glatzmaier, I calculate that, to store the equivalent of 1 kWh of electricity at a trough plant requires approximately $90-160 of capital cost, compared to about $30-$55 at a tower, with the variability arising from the commodity price of salt, which is mainly used as fertilizer.

The Shape of Things to Come

In terms of configuration, many experts see long term advantages in power towers. Nate Blair, a Senior Analyst at NREL says the underlying efficiency advantage of towers arising from higher working temperatures will lead to more power from a similar investment in hardware. A Rankin cycle turbine will operate at about 37% efficiency for troughs, or 41% for a tower, meaning a tower can produce approximately 8% more electricity from the same amount of heat.

The combination of energy storage using molten salt, no heat transfer losses, and the thermal efficiency of power towers, point to power towers with molten salts as the working fluid as the long-term favorite.

There are challenges. Only parabolic troughs are a proven, bankable technology. Dr. Leitner estimates that it will cost between $500-$700 million to commercialize a new technology. Solar Reserve plans to overcome this barrier with a performance guarantee from United Technologies (NYSE:UTX) up to the value of the contract, or $200 million, but in the current financial climate financing remains difficult.

SkyFuel has plans to use the innovative reflective film ReflecTech in a hybrid of parabolic trough and CLFR configuration called a Linear Power Tower (LPT). By increasing the diameter of the receiver they hope to reduce heat loss and allow the salt to stay molten for longer periods. ReflecTech enables relatively inexpensive, large parabolic mirrors to be used in the CLFR configuration, with 10 mirrors, each about 3 meters wide focused on each receiver. This should achieve 85x magnification, sufficient to reach temperatures comparable to those in a power tower.

SkyFuel hopes to commercialize the LPT incrementally, by first testing it as part of existing parabolic trough plants using oil as the heat transfer fluid. Might the parabolic trough triumph by incorporating the advantages of power towers?

Tom Konrad, Ph.D.  

DISCLOSURE: The author has a long position in UTX.

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.

April 14, 2009

Congratulating Axion and Exide

Yesterday Axion Power International (AXWP.OB) announced the signing of a memorandum of understanding with Exide Technologies (XIDE) following fourteen months of negotiation and technical investigation. This alliance could prove to be a sea-change event for the domestic battery industry. Copies of the press release and an archived version of the subsequent investor conference call are available on Axion's website.

As a former chairman of Axion's board of directors and a very substantial Axion stockholder, I've been waiting for an agreement like this for a very long time. I'm delighted to see confirmation from Exide that my faith in Axion's PbC technology, its management and its technical team were justified.

Over the last nine months I've written a series of articles on the energy storage sector in general and the battery industry in particular. My basic premise has been that none of the battery technologies we've relied on in the past are robust enough and cheap enough to satisfy the requirements of cleantech, the sixth industrial revolution. The result has been a race to fill the void as lead-acid battery manufacturers worked to improve performance and Li-ion battery developers worked to reduce costs. The prize to the winners will be major chunks of market share in an industry that expects explosive growth from $30 billion to over $100 billion per year in the next decade. In the words of Merrill Lynch analyst Steve Milunovich:

". . . cleantech markets dwarf IT to the tune of two orders of magnitude. Unlike tech names, cleantech companies often don’t need huge unit growth to succeed – modest improvements mean more. New IT vendors often face a hurdle of a 5-10x improvement over incumbent technology to succeed while in cleantech doing the same amount of work with reduced CO2 emissions might be enough.”

Axion has always been unusual because there was never a question about whether its PbC technology worked. Early technical studies conclusively showed that replacing the lead-based negative electrode in a conventional lead-acid battery with a carbon electrode like you find in most supercapacitors had a tremendous impact on both cycle life and power. Two years ago, when Axion received the prestigious 2006 Technology Innovation Award for North America in the field of lead acid batteries, Frost & Sullivan noted that Axion's PbC technology had:

". . . the potential to revitalize the lead-acid battery industry by breathing new life into an established technology that was not well-suited to the requirements of important new applications like hybrid electric vehicles and renewable power."

The real challenge has always been transitioning the science from a laboratory bench to a factory floor. The  commercialization alliance with Exide is clear independent confirmation that Axion has succeeded where the vast majority of R&D companies fail.

Over the last couple of months the battery industry has been headline news as the Federal government adopted massive loan, grant and subsidy regimes for advanced battery technologies. While the mainstream press has focused most of its attention on the potential of plug-in vehicles, the enabling legislation also recognizes the crucial role that cost-effective energy storage will play in the development and implementation of the smart grid and the more widespread use of wind and solar power. The fundamental goals of all the recent legislation are to build a new domestic battery manufacturing infrastructure that will help liberate America from the economic tyranny of imported oil while enabling the more widespread use of alternative energy technologies and cutting carbon-dioxide emissions.

The biggest advantages Axion's PbC technology offers are low cost and rapid deployment. As of today, there are no large-scale Li-ion battery manufacturing facilities in the U.S. and while a number of companies have disclosed plans to build new factories if Federal subsidies are made available to them, there are significant unanswered questions about whether the battery technology solutions these companies are proposing are cheap enough, robust enough and safe enough to warrant a multi-billion dollar implementation effort. Even if the hoped-for subsidies materialize and the proposed factories are built, the process of building the factories, perfecting manufacturing techniques, establishing reliable supply chains for imported raw materials, introducing new products and training an entire country to use those products will be a major undertaking.

In comparison, there are dozens of companies that already operate lead-acid battery factories in the U.S. and Axion's PbC technology has now reached a point in the development process where it can be implemented in the existing factories starting immediately without substantial changes to existing equipment, components or manufacturing processes. So for the first time America has a real a choice between "sometime a few years from now" and today.

I love it when a plan comes together.

I cannot begin to predict the impact the new alliance will have on Axion or Exide. After giving pro-forma effect to the conversion of its outstanding preferred stock, Axion has 34.7 million shares outstanding and a market capitalization of roughly $31.2 million at yesterday's closing price of $0.89. Exide, in comparison, has a market capitalization of roughly $364 million and annual sales of approximately $3.7 billion. The combination of Axion's technical expertise in lead-carbon chemistry with Exide's manufacturing, distribution and customer service prowess should be exciting. I certainly expect that the news will have a positive short-term impact on both companies and an even greater long-term impact as the pervasive scope of the alliance becomes clearer.

Disclosure: Author is a former director and executive officer of Axion Power International (AXWP.OB) and holds a large long position in its stock. He also holds a small long position in Exide Technologies (XIDE).

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-carbon battery research and development.

April 12, 2009

3 Month Performance Update: Ten Green Energy Gambles for 2009

This year, I published a list of 10 clean energy stocks I thought people should buy, and, because of readers' requests, also published a list of ten speculative clean energy companies.  For the most part, these speculative companies were chosen because they have compelling technology or manufacturing capability, but were not profitable or were only marginally profitable, and they had been beaten up because they would likely all need to raise money this year.

That means that if the financial crisis eases quickly, these companies should be able to raise money on favorable terms.  If the crisis continues or worsens (which has so far turned out to be the case) the stocks will continue to fall.  This is why they are gambles; as a whole, the portfolio is really a gamble on a quick resolution to the credit crunch.

Performance So Far

Until the recent market rally, spurred by Treasury Secretary Geithner's relatively clear plan for the financial sector, and the FASB's relaxation of mark-to-market accounting, all these stocks were down for the year.  I'm a bit surprised that the FASB rule change has had such a salutary effect on the market.  After all, one of the major problems is that we don't know how to value the murky mortgage-backed securities.  Giving banks more leeway to muddy the waters even further seems like a lousy idea to me (at least in the long term.)  I feel it's more win-the-battle-lose-the-war thinking, and will hurt markets in the long term by undermining investors' confidence with increased uncertainly.

Ticker Price (1/9/09 close) Price (4/9/09 close)

Percent gain

BCON $0.46 $0.47 2.17%
AXPW.OB $1.20 $0.85 (29.17%)
VLNC $1.77 $2.23 25.99%
CPTC.OB $0.30 $0.23 (23.33%)
EPG $0.86 $0.34 (60.47%)
EMKR $1.43 $0.84 (41.24%)
UQM $1.72 $1.70 (1.16%)
CZZ $4.18 $4.45 6.46%
RZ $3.62 $4.13 14.09%
ZOLT $7.47 $7.98 6.83%
Portfolio $1,000 $900.20 (9.98%)
ICLN $22.05 $19.40 (12.02%)
PBW $9.01 $8.55 (5.11%)

The recent rally has been very good for alternative energy companies as a whole, and this portfolio in particular.  As of a month ago, all these stocks were down for the year, but now half of them are showing positive returns.  

Benchmarks

In January, I made two predictions about this portfolio:

  1. The portfolio as a whole will fall, unless financial market conditions improve rapidly.
  2. All of these stocks have a chance of spectacular returns.

Prediction #1 has so far been spot-on: financial market conditions have not improved rapidly, and the portfolio as a whole is down.  Prediction #2 is still difficult to judge.  None of these stocks have produced "spectacular returns" (although stay tuned for my quick clean energy mutual fund tracking portfolio update coming at the end of May.)  Nevertheless, "spectacular returns" tend to come from quick up-moves of stocks, and most of these stocks will require an improvement in financial markets to take off.

I've provided two Clean Energy ETFs as benchmarks: The oldest such ETF, the PowerShares Clean Energy ETF (PBW) and my preferred global clean energy ETF, the iShares S&P Global Clean Energy Index, (ICLN).  So far, the portfolio as a whole is slightly below the average of the two (see table).  This performance is neither impressive nor horrible, but since I never intended these stocks to be purchased as a portfolio (see prediction #1), what really matters to readers will be if they bought one of the five that is up or one of the four that is down much more than the market as a whole.

I personally still have small positions in Raser (RZ), Axion (AXPW.OB), Emcore (EMKR), and Zoltek (ZOLT), which is mostly a function of the fact that I've sold calls on my positions, and they have not yet been assigned.  I'm a bit down on these positions (even counting the gains from the call premiums) over the quarter.  

Tom Konrad, Ph.D.

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

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

April 10, 2009

Lead-acid Batteries and How Cheap Beat Cool at Google

On April 1st CNET News published a story about a previously secret technology that Google (GOOG) has patented and implemented system-wide. The technology, which Ben Jai of Google reportedly described as their "Manhattan Project," builds a 12-volt battery into each server to provide backup power. The point that fascinates me is Google's choice of small format valve regulated lead-acid batteries to keep its servers running. When an ultra-sophisticated company like Google picks cheap over cool for a mission critical function, I think it speaks volumes about the future direction of the energy storage industry.

Stephen Shankland of CNET took the following rear-view photo of a Google server. The lead-acid battery is the small box on the lower right with the red and black leads. Similar batteries are readily available on the Internet for about $20.



Google's motivations for building backup batteries into its servers are obvious; reliability, cost-effectiveness and energy efficiency. Those same motivations drove the choice of valve regulated lead-acid batteries over a more exotic and expensive battery chemistry. I think Google's choice of lead acid batteries to support their mission critical server network provides a great backdrop for a reality check.

First, batteries are boring and as a user I just want them to work. Unfortunately, the only battery I've ever owned that delivered exactly what it promised was a Sears Die Hard I bought in the early '70s. I'm the first to admit that my cell phone and laptop batteries have improved a lot over the last 20 years, but my satisfaction to frustration index is still pretty close to even.

Second, batteries are stupid and the only thing they can do is store electricity in chemical form for future use. If the future use of the stored electricity is valuable to me, so is the battery. If the future use has limited value to me, so does the battery. In the final analysis, any discussion of battery value that is divorced from the specific needs of a particular user is meaningless. It's the usefulness of the electricity that creates the value, not the battery technology.

Third, batteries are fungible commodities that rarely inspire brand awareness, much less loyalty. I have no idea who made the batteries in my car, cell phone and laptop. I'll give long odds that you don't either. Since usefulness for a specific purpose is the only thing that matters to most users, the lowest cost producer of a competitive product will always establish the price.

Fourth, different ways of making the same type of battery are not critical intellectual properties. If several manufacturers make a comparable lead-acid, NiCd, NiMH, Li-cobalt, Li-manganese, Li-phosphate or Li-titanate battery, then nobody enjoys a meaningful technological advantage and the process patents are merely window dressing.

Fifth, small companies that try to run before they learn how to crawl invariably stumble, fall and get crushed by their customers. This is particularly true when a small company's target customers are giants. Bluster, trash talk, hype and drama may be appropriate as prelude to a WWE Championship, but they are deadly in business.

Sixth, energy storage needs do not fit neatly into a few cubby-holes and there are no universal solutions. So instead of a future where a few dominant competitors survive and the rest fall by the wayside, we are more likely to see dozens of strong competitors thrive by selling different technological solutions to discrete billion-dollar market segments.

In my third Seeking Alpha article I wrote:

"For better or worse, the world changed while most of us were busy making other plans. When waste was cheaper than conservation, waste ruled. Now that waste is getting painfully expensive and global energy demand is growing far more rapidly than supplies, we have a serious problem with no easy solution."

That dynamic is still the driving force behind energy storage decisions. Since reliable service is critical to its mission, Google needed to ensure that its servers would not go down in the event of a power failure. One could easily argue that reliability is so important to Google that backup power is priceless. But Google is well known for spending wisely and while any number of energy storage technologies could have served its purposes, Google picked the most affordable and environmentally friendly battery technology over several cooler technologies.

The energy storage sector can be very confusing for investors because of the political appeal of and media hype over plans to use Li-ion batteries in a new generation of plug-in electric vehicles. In an effort to milk the current irrational exuberance for all it's worth, many Li-ion battery developers swan around like minor princes gossiping about the king's impending illness and waxing prophetic on how marvelous things will be once they get government guaranteed loans to build U.S. factories, magically slash their production costs, find customers that aren't bankrupt or teetering on the brink of the abyss and triumphantly ascend to the throne. Since the politicians and press don't know any better, and the environmentalists are eager to embrace any feeble reed that might reduce carbon emissions, the meaningless forecasts of future victories are accepted as fait accompli despite the fact that the king is in fine shape and the minor princes have not shown any ability to lead, much less rule.

Batteries are a not a cause or a crusade, they're a business. Unfortunately for many investors, that message has been lost in the hype and created some incredible market distortions. If you compare market capitalizations, Ener1 (HEV) is almost as valuable as Enersys (ENS). If you compare financial statements, however, you'll find that Ener1 wouldn't qualify as a rounding error if it was part of Enersys. The distortions are every bit as striking if you make the same comparisons between Valence Technology (VLNC) and Exide Technologies (XIDE). Comparable distortions are obvious for late stage technology development companies like Altair Nanotechnologies (ALTI) and Axion Power International (AXPW.OB).

The realities of the battery industry are such that every survivor will prosper and have more business than it can say grace over, but it will take years if not decades for Li-ion developers to grow their businesses to the point where their fundamentals justify their market values. So while the currently unloved lead-acid battery companies are growing their businesses and increasing shareholder value, the minor princes are more likely to stagnate, stumble and fall.

When it came to a mission critical buying decision, cheap beat cool at Google. Does anybody really believe American consumers will act differently when it comes to their own money?

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also holds small long positions in Exide Technologies (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. (AXPW.OB) a small public company involved in advanced lead-carbon battery research and development.

April 08, 2009

Why CSP Should Not Try to be Coal

Joe Romm, at the influential Climate Progress blog, has hit on a formula for countering the coal industry's claims that we need baseload power sources.  Since Concentrating Solar Power (CSP) in conjunction with thermal storage can be used to generate 24/7 or baseload power Joe has renamed it "Solar Baseload."   This is win-the-battle-lose-the-war thinking.  While it does neatly counter the argument we need coal or nuclear, since there are renewable power sources which can produce baseload, such as CSP, Geothermal, and Biomass.  I fell into this coal-industry trap myself in a 2007 article about Geothermal, as did AltEnergyStocks Editor Charles Morand in an article on CSP.

Dispatchable Solar, not Solar Baseload.

Continuous power from solar energy was first demonstrated at the Department of Energy's (DOE) Solar Two project in the late 1990s. I recently interviewed Bill Gould, CTO of CSP company Solar Reserve.  Solar Reserve is now working to commercialize the molten salt thermal storage and solar receiver technology demonstrated at Solar Two, where Bill Gould served as project manager.  

According to Gould, DOE's intent at the Solar Two project was to demonstrate dispatchable power, not baseload power.  Dispatchable power is power that can be called on when needed, in contrast to baseload power, which is essentially always on.  As a demonstration, Gould's team throttled back the output from Solar Two to 10% of capacity, and this allowed the plant to produce power continuously for a couple weeks until it was interrupted by several consecutive days of cloudiness.  But, in essence, it was a stunt: baseload power is far less valuable than dispatchable power.

The coal industry says that we need baseload power because our refrigerators still come on in the middle of the night.  This is like saying we should have the water running constantly in the kitchen sink because we may get thirsty at any time and want a drink.  Put in these terms, the assertion that we need baseload power is clearly nuts: what we need is controllable power that's there when we need it, but is not wasted when the lights are off and the fridge is not running.  

The Problem With Baseload

Last spring, I discussed one of the problems with baseload power.  The more baseload power you have, the harder it is to use variable generation such as photovolatic (PV) solar and wind power.  Or, from the baseload generator's perspective, the more variable generation on the grid, the less baseload power can be added.    This fact has not been lost on the UK's nuclear industry, which is fighting to get wind targets lowered.

To illustrate the incompatibility of baseload and variable energy sources, I downloaded 4 days of real demand data (January 1-4, 2008) from ERCOT's website.  I then simulated production curves for two variable sources, one designed to mimic solar PV (only on during the day, with some variability due to clouds) and a more random type of generation to simulate wind.  I then fixed the amount of baseload power at 25,000 MW (68% of demand) and 5,000 MW (14% of demand) in each of two scenarios, and saw how much wind and PV the remaining demand could accommodate with the constraint that total generation could not exceed demand.

wpe6.gif

wpe5.gif

As you can see, when I dropped baseload power from 68% to 14% of demand, I was able to increase the power of variable sources from 10% to 36% of demand.  Almost half of the drop in baseload power was filled by variable power sources, with the balance requiring an increase in dispatchable generation.  If you'd like to try your own scenarios, you can download my Excel spreadsheet here.

Better than Baseload

It should be clear that  dispatchable generation is a truly premium power source.  Dispatchable generation, like energy storage, long distance transmission, and demand response, all allow the grid to accommodate more variation in both power supplies and in demand.  In a carbon-constrained world, where we want to use as much variable generation such as wind and PV as possible, zero carbon, dispatchable power from CSP can do far more to help us decarbonize the grid than CSP baseload.

Baseload power is part of the problem; it's not the solution.  We should not denigrate CSP by pretending it is only a substitute for coal or nuclear.

Concentrating Solar Power is much better than baseload.

Tom Konrad, Ph.D.

April 07, 2009

Congratulating Chrysler and A123 Systems

On April 6th, Chrysler LLC announced the creation of a strategic alliance whereby A123 Systems, Inc. will become a primary battery supplier for Chrysler's planned line of plug-in electric vehicles. This is a huge step toward rebuilding America's domestic battery manufacturing infrastructure and both companies should be congratulated. The next steps I see in my murky crystal ball are finalization of A123's pending IPO coupled with an announcement that A123's $1.8 billion loan request under the DOE's Advanced Technology Vehicle Manufacturing Program has been approved. If the foundation has been properly laid, it will all come together very quickly.

I've been following A123 since it first filed its SEC registration statement. While the IPO was delayed by last fall's market implosion, its team stayed the course and announced plans to build a $2.3 billion battery manufacturing facility in early January. To help pay for the planned facility, A123 applied for a $1.8 billion loan under the DOE's Advanced Vehicle Technology Program. In an earlier article that focused on the ATVM loan requests from A123, Ener1 (HEV), Tesla Motors and Integrity Automotive, I questioned how those requests could be approved without proof that the applicants would have willing buyers for their products. Yesterday's announcement provides a clearer picture of the negotiations that have been going on behind the scenes for months.

Thirty years ago, Michael Milken popularized the use of letters that said Drexel Burnham Lambert was "highly confident" financing could be arranged on specified terms if the underlying business transaction could be negotiated. These letters then formed the basis for negotiations between sellers, bankers and other necessary parties. My guess is that A123 and Chrysler have used the same mechanism quite effectively. If I'm right, the Chrysler release is just the first piece falling into place and the others will quickly follow.

From a securities regulatory perspective, A123 is almost done with its IPO filings. The registration statement went through three rounds of staff review and comment last year and was basically ready to go by late November. Updating the registration statement to include year-end financial information and disclose the terms of the agreement with Chrysler and the terms that have presumably been negotiated with the DOE should be fairly simple. So the only critical timing issues seem to be a final DOE decision, a registration statement amendment and a road show.

This is great news for the energy storage sector because like I said last August, there is nothing like a high-profile IPO road show to draw market attention to energy storage in a new way and mark the beginning of a major upward trend in a basic industry that's been undervalued for years. It should be a fun spring after a dismally hard winter.

In addition to the visibility boost I think the Chrysler – A123 alliance will bring to the storage sector, there may well be a second tier of good news for other manufacturers of energy storage devices. The ATVM program allocated $22.5 billion to major manufacturers and set aside another $2.5 billion for loans to "small automobile and component manufacturers" that have fewer than 500 employees. While I originally questioned whether A123's loan request was part of the large manufacturer allocation or the small manufacturer set aside, it's now clear that A123 has been joined at the hip with Chrysler for months. Therefore, I think it's safe to assume that the $2.5 billion set-aside for small manufacturers will remain intact. While I remain skeptical about how the small company applicants will be able to meet the stringent business viability requirements I discussed in my earlier article on the ATVM loan program, it is entirely possible that similar behind the scenes negotiations are already in process on other ATVM loan requests.

While the Chrysler – A123 alliance will almost certainly spark a tidal wave of interest in the energy storage sector, I think it's important for investors to remember that the best opportunities are often found in the least glamorous stocks. The energy storage sector is a target rich environment that does not have a single ‘silver bullet’ technological solution. The root causes of the challenge include:
  • Storage needs that range from watt hours to megawatt hours or even gigawatt hours;
  • Discharge needs that range from seconds to hours or even days;
  • Cycling rates that range from infrequent (e.g. back-up power) to intense (e.g. recuperative braking);
  • Cycle depths that range from very shallow (e.g. engine starting) to very deep (e.g. fork lifts);
  • Technological improvements that are usually incremental gains instead of disruptive advances;
  • Products that require huge inputs of high value or exotic raw materials;
  • The need to carefully analyze costs and benefits for each potential storage application; and
  • The sheer immensity of the current and potential market for energy storage products.
The informed consensus is that annual revenues of companies in the energy storage sector will increase from $30 billion to $100 billion or more over the next several years. While I track a handful of pure-play public companies that are focused on billion-dollar market segments and likely to be strong competitors in those segments, none of their technologies has broad utility across the entire energy storage spectrum. So instead of a future where a couple of dominant competitors survive and the others fall by the wayside, it’s easy to envision a future where dozens of strong competitors will thrive by serving different billion-dollar market segments.

Over the last nine months I've written a total of 47 articles on the energy storage sector and the principal pure play companies that are active in the sector. The entire archive can be accessed from my Seeking Alpha author's page. While I have a strong personal preference for lead-acid technology, I also have a contingent of faithful readers who help round out the discussion so that a clear and informative picture emerges. You may find some of my analysis useful if you're looking at storage for the first time.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also holds small long positions in Active Power (ACPW), Exide Technologies (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-carbon battery research and development.

April 05, 2009

Lithium-ion Batteries and Nine Years of Price Stagnation

This May will mark the nine-year anniversary of "Costs of Lithium-Ion Batteries for Vehicles," a seminal study from the DOE and Argonne National Laboratory that sent America lurching down a path toward an HEV, PHEV and EV future based on Li-ion batteries. Since nine years is a respectable length of time in most industries, I thought it might be interesting to review the prevailing expectations in May of 2000, consider the cost reductions achieved over the last nine years and question whether the market frenzy over Li-ion battery companies is even close to rational. Regular readers know that I'm an unrepentant critic of both Li-ion batteries and the companies that make them. So if you're a true believer in Li-ion technology, I would implore you to stop reading now.

To keep it simple, I'll dispense with the foreplay and get straight to the vulgar financial issues. In its May 2000 report "Costs of Lithium-Ion Batteries for Vehicles," the DOE published its estimate of the prices Li-ion battery packs would need to achieve before HEVs, PHEVs and EVs could be cost-competitive. For complete details see Section 6 beginning on page 37.

Battery Type
Baseline
Optimistic
Industry Goal
High-Energy
(35 kWh Battery Pack)
$706 per kWh
($24,723)
$250 per kWh
($8,767)
>$150 per kWh
(USABC)
High-Power
(100 cells, 10 A-h each)
$2,486
$1,095
$300
(PHGV)

These figures were not a forecast of what the Li-ion battery companies were likely to achieve. They were a simple statement of the fundamental economic barriers to entry that had to be overcome before a market could develop.

After nine years of work and incalculable spending on Li-ion battery research and development, the following table shows exactly how far the Li-ion battery industry has come.

Manufacturer
Chemistry
Current Price
Target Price
Ener1 (HEV)
Li-polymer
$660 per kWh
N/A
Valence Technologies (VLNC)
Li-phosphate
$1,000 per kWh
$500 per kWh
Altair Nanotechnologies (ALTI)
Li-titanate
$1,000 per kWh
N/A
A123 Systems (power tool packs)
Li-phosphate
$1,228 per kWh
N/A
2008 DOE SEGIS-ES Estimates
(PV Solar battery packs)
Various
$1,333 per kWh
$780 per kWh
2009 NEDO Survey Results
(Average of Japanese Producers)
Various
$2,018 per kWh
$1,000 per kWh
(next year)

Price stagnation is the kindest term I can use for nine years of research that has failed to reduce costs.

In the 2008 Annual Progress Report for its Vehicle Technologies Program, the DOE reported that the cost of high-energy Li-ion batteries for PHEV and EV applications "is approximately a factor of three-five too high on a kWh basis." Likewise, with respect to high-power Li-ion batteries for HEV applications, the DOE reported that the cost "is approximately a factor of two too high on a kW basis." Is it any wonder that a recent report on the electric two-wheeled vehicle (E2W) market in China says that roughly 85% of new E2Ws are powered by heavy lead-acid batteries instead of their lighter Li-ion cousins? Could it have something to do with a 400% price differential and a population that knows the value of a dollar?

I have seen all the glowing reports about immense progress in the Li-ion battery sector. One of my personal favorites is on Slide 14 from a Summer 2008 presentation by David Anderson of the Rocky Mountain Institute that shows a highly favorable "industry consensus" regarding future Li-ion battery manufacturing costs (Click here for image PDF).



In what alternative universe is that kind of industry consensus reasonable? Over the last nine years Li-ion battery companies have had a hard time maintaining Y2K price levels much less reducing them. While their products are safer, I've seen nothing to indicate that the industry consensus is based on anything other than hope and the certain knowledge that unless prices collapse Li-ion batteries will never be cost effective in HEVs, PHEVs and EVs.

To put it bluntly, the progress the DOE hoped for in Costs of Lithium-Ion Batteries for Vehicles never materialized. We live in a resource constrained world where demand for water, food, energy and every conceivable commodity is increasing rather than decreasing. Since the DOE said in the introduction to Section 6 that materials costs account for 80% or more of finished product costs, it is patently unreasonable to believe that further cost reductions are possible, much less likely.

I am an incurable optimist and believe that cost-effective solutions to our energy storage problems will be found. But in the case of Li-ion batteries what started as cautious skepticism in a DOE report has gradually morphed into a baseless urban legend of immense proportion, a lie so colossal that nobody would expect a responsible industry sector to distort the facts so blatantly or allow the politicians and press to do the dirty work for them. I think it's time for the investing public to rely on their own experience instead of the deafening drumbeat of PR and hype that says, "your experience is meaningless – listen to our promises instead."

Stock market investors are currently placing big bets on Li-ion battery companies in the hope that massive Federal grants and loans will increase the intrinsic value of their investmentss to a level that roughly approximates current market values. While that plan may have short-term appeal for day traders and other speculators, the fact remains that you can tie a pork roast around an ugly baby's neck and the dog will play will play with it for a while, but bad economics are ugly to the bone.

If you want a long-term investment that will grow over time and derive immense benefit from the coming cleantech revolution, then the low-profile lead-acid battery manufacturers including Exide (XIDE) Enersys (ENS) are probably the best choices. If you want a low-cost speculation on advanced acid or lead-carbon technologies in the final development stages, then C&D Technologies (CHP) and Axion Power International (AXPW.OB) may be good choices. In life, the plain and reliable girl next door usually makes for a better wife than an airbrushed centerfold. In batteries, the plain and reliable lead-acid variety that we've used for decades have far more potential to serve our needs than the famously expensive and finicky batteries we use to power our cell phones and laptops.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He 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.

April 02, 2009

Investing In Wood Pellets, Part II - A Stock

Two weeks ago, I wrote about the emerging wood pellets industry and how this form of biomass was experiencing rapid growth as a coal substitute in power generation, mostly in Europe as a result of renewable energy and climate regulations. In the time since I wrote that article, I have been looking for ways to invest in the global wood pellets sector. Unfortunately, my search came up mostly empty (except for 1 stock discussed below).

In response to my previous post, a reader pointed me to an article Joe Romm at Climate Progress had recently written about biomass co-firing. In that article, we learn that co-firing biomass with coal has the technical and economic potential to replace at least 8 GW of America's coal-based generating capacity by 2010 (~2.4% of  the 2007 nameplate coal installed capacity), and as much as 26 GW by 2020 (probably somewhere between 5 and 8% by then). We also learn that demonstrations and trials have shown that biomass can replace up to about 15% of the total energy input at coal-fired plants with only minor modifications - this is thus probably a good figure to go by given that international trade in pellets can overcome supply limitations in the US.

As I was searching for ways to invest in the wood pellets sector, I came across some additional information on the current state of the market provided by Andritz Group. In 2008, the global market for wood pellets was estimated at around 9 million metric tons in volume, which replaced around 6.3 million metric tons of coal (you thus need around 1.43 metric ton of pellets per ton of coal displaced). Whereas coal packs in about 24 gigajoules of energy per metric ton, wood pellets contain about 17 GJ/metric ton (17 x 1.43 = 24.31). To put the volume numbers into perspective, over the past few years, the US electric power sector has been using around 1.04 billion short tons of coal per year, or about 944 million metric tons. 15% of this total would represent around 144 million metric tons of coal, or about 206 million tons of pellets. There is thus plenty of theoretical room to grow in the US alone, even if you cut that number down by 50%.        

The fuel substitution from those 9 million metric tons of pellets has helped save around 7.5 million metric tons of CO2 emissions. Assuming CO2 prices of €25 ($33)/metric ton, this could be worth around $248 million gross, from which the fuel cost difference would be subtracted to get to a net figure. Although I did not run the numbers, it is safe to assume this difference yields a positive amount given how popular wood pellets have become in Europe for exactly that purpose (i.e. meet regulatory limits on greenhouse gas emissions). 

What drew my attention to wood pellets the most is that they offer a standardized means of moving carbon-neutral energy around, much in the same way crude oil or coal are used to transport carbon-positive energy (of course neutral and positive are relative terms in this context, but let's leave that discussion for another time).

The North American forest industry is currently facing a difficult time, and using biomass for power generation is one means of killing two birds (the environment and the economy) with one pellet, although as the numbers above indicate it is no a panacea. In fact, wood biomass will most likely never account for more than 10-15% of total power production and is unlikely to be cost competitive with coal without a price on carbon. However, given that a price on carbon is forthcoming in the US, it is fair to assume that wood pellets will represent one of those fundamental bridge solutions to reduce the costs of moving to a de-carbonized economy. This is a point Joe Romm makes in his articles on the topic.    

However, the trade in wood biomass for power generation cannot be expected to scale up if a standard isn't adopted around which transportation logistics and technology requirements can be established. Wood pellets provide this standard. This is why I have left other wood biomass sources such as wood chips or waste wood from logging operations out of my analysis. If a sizeable market for wood biomass is to emerge, it will have to be in the form of a market for pellets. 

A Wood Pellet Stock

The wood pellet production process is relatively simple (see video below): (1) wood material is dried and turned into a dough-like mass by being passed through a hammer mill; (2) and this mass is then squeezed through a high-pressure die with holes of the size required (i.e. standard pellet size) - the pressure causes a rise in temperature which causes the lignin in the wood to plastify and hold the pellet together.    

Andritz Group (ADRZF.PK) currently has, according to itself, an about 50% share of the global market for wood pellet production equipment. Andritz is an Austrian firm that provides equipment and services for the global hydro power, pulp & paper, steel, animal feed & biofuels and other industries. In fact, following the acquisition of a large chunk of GE Energy's hydro power operations, Andritz cemented its position as a dominant player in large hydro globally.

The main problem with Andritz is that its US listing is on the Pink Sheets Grey Market (this is common for foreign shares), making it hard for some investors to trade the stock through their brokers. Moreover, trades on the Grey Market are not always efficient as the lack of a Market Maker for the security can result in lower liquidity and higher prices. The quality of the company is not problematic however, as Andritz is a blue chip stock in Austria.

Despite this limitation, Andritz is, in my view, an interesting beast. In 2008, revenue (€3.61 billion/$4.85 billion) was broken down as follows between the business segments: Hydro (electromechanical systems and services for large hydro power stations), 33%; Pulp & Paper (equipment and services for all forms of pulp and paper production), 37%; Metals (production and finishing lines for metallic strip), 16%; Environment & Process (equipment and services for solid/liquid separation for various industries), 10%; and Feed & Biofuel (equipment and services for production of animal feed and biomass pellets), 4%.   

Balance sheet-wise, the company is well-positioned to weather the current storm: although it had gross debt (bonds, bank debt and leases) of about €432 million ($580 million) as at the end of 2008, its €822 million ($1.1 billion) in cash and marketable securities gave it ample net cash (debt minus cash & equivalents) of about €390 million ($524 million). The current ratio is only 1.29. However, around 35% of current liabilities are accounted for by a revenue recognition liability which has no bearing on liquidity. Dividing only cash and equivalents €822 million ($1.1 billion) by accounts payable (€306 million/$411 million) plus the current portion of debt and lease obligations (€37 million/$50 million) yields a ratio of around 2.4, which is very healthy and even begs the question: what is the company planning on doing with all this cash?.

Operationally, Andritz has been stable over the past five years, maintaining stable EBITDA, EBIT and net margins in the neighborhood of 7.5%, 6.0% and 4.2% respectively. However, cash flow from operations has been somewhat volatile, standing at €255 million ($343 million) in 2008 but only €33 million ($44 million) in '07.

The stock is currently off around 65% from its high of May 2008 (the Pink Sheets listing). Andritz is trading at a trailing 12-month PE of about 7.9x and price-to-book of about 2.08x. On a PE basis, that is a cheap stock, especially given that the company's scale and market share in the hydro segment probably confer it a certain amount of earnings power. The stock pays a dividend per share of €1.10 for a yield of 5.08%, which is quite attractive in my view (this information is for the Frankfurt listing so one would need to inquire to his/her broker to know what the figures are for US investors purchasing the Pink Sheets security).

Conclusion

Although the wood pellets concept is attractive (I certainly thought so when I first attended a workshop on it), the global trade in them remains comparatively small and largely Europe-focused for the time being. As a result, finding ways to play this emerging sector in the stock market is rather difficult. However, if activity by private firms is any indication of the future of this industry, then it could turn out to be interesting niche to be in, although it will not grow past a certain point and is no panacea.

The one stock I identified as global leader in wood pellets, Andritz, is actually attractive for a number of other reasons. The exposure to large hydro is very interesting, in my view. Although certain greens find large hydro objectionable, most individuals and organizations concerned about climate change agree that it's better than the fossil-fuel alternatives, and the sector is forecasted to get a boost from installations in China and India over the next few years. The focus on industrial energy efficiency should also be of interest given the focus this area received in the Obama Stimulus Package.

But this is a stock that will unfortunately be hard or impossible to trade for many small investors. You might just have to wait a few more years to see more interesting plays on wood pellets emerge on a stock exchange near you!

The Wood Pellet Production Process: A Vid!

DISCLOSURE: Charles Morand does not have a position in Andritz.

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 disclaimerhere.

April 01, 2009

Performance Update: 10 Clean Energy Stocks for 2009

I promised I'd do a performance update on my 10 Clean Energy Stocks for 2009 each quarter.  Here is the first (although readers got a mini-update in mid February, because I decided I didn't want to use double-shorts.)

Company  Ticker

Change 12/27/08 to 3/27/09

Dividend & Interest

The Algonquin Power Income Trust AGQNF.PK +7.14% 5.36%
Cree, Inc. CREE +59.96%  
First Trust Global Wind Energy ETF FAN -10.73%  
General Electric GE -32.50% 1.94%
Johnson Controls JCI -25.97% 0.77%
New Flyer Industries NFYIF.PK +13.52% 2.31%
Ormat ORA +6.81% 0.23%
Trinity Industries TRN -33.20% 0.47%
Warterfurnace Renewable Energy WFIFF.PK +17.77% 1.05%
-2x  S&P Depository Receipts + 3x Cash (was SDS until Feb 13) 3x $ - 2x SPY  4.31% -0.14%
Total Portfolio  1.61%

Benchmarks

S&P 500 -6.51%
  iShares S&P Global Clean Energy Index (ICLN) -7.30%

As you can see, the portfolio has been strongly outperforming both the market index (+8%) and clean energy stocks (+9%).  The big gainers were Energy Efficiency Stocks Cree and Waterfurnace Renewable Energy, and Mass Transit stock New Flyer Industries.  All of these are set to benefit from the American Recovery and Reinvestment Act: New Flyer even received a visit from Vice President Joe Biden.  The inclusion of these stocks in the list was no accident: I chose to emphasize energy efficiency and transit because I was expecting them to be a large part of the stimulus (although I can't claim to have predicted the VP's travel itinerary.)

On the losing side, we see conglomerates (each also involved in clean transportation and/or energy efficiency) which have been knocked down by the continuing financial crisis (GE), car industry (Johnson Controls), or rail industry (Trinity), all of which have been disproportionately  hurt by one aspect or another of the continuing downward slide of the economy.  It was for just this contingency that I included the SPY short, since, as I said "I feel there is more downside risk than upside potential for the market as a whole in 2009."  

As usual, in hindsight, I feel I should have seen the implications of GE's exposure to finance, or Johnson Controls's exposure to the auto industry, but I can't complain about the overall performance.

Stay tuned for updates on my Ten Clean Energy Gambles for 2009 (on a losing streak, but no more than the benchmarks) and my Quick Clean Energy Mutual Fund Tracking Portfolio (more "turbo-charged" than "tracking") as these come up on 3 months after the articles were published.

Tom Konrad, Ph.D.

DISCLOSURE: The author owns AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, 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.


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