« April 2009 | Main | June 2009 »



May 30, 2009

Why Advanced Lead-Acid Batteries Will Dominate the HEV Markets

My last article, "The Obama Fast Track for HEVs" graphically highlighted some critical cost issues that I've been writing about for several months and was surprisingly popular with readers. After responding to numerous comments and considering the gaps in that article, I believe a follow-on article is appropriate to provide additional color, put a finer point on the differences between advanced lead-acid and lithium-ion batteries and try to relate those differences to the rapidly evolving HEV markets.

As I explained last week and in a November 2008 article titled "Alternative Energy Storage; Lithium, Lead or Both?" micro hybrid, mild hybrid and full hybrid vehicles (HEVs) are classified as "power applications." They use relatively small battery packs to:
  • Stop and start the internal combustion engine (ICE) when the vehicle stops and starts;
  • Provide moderate amounts of power to launch the vehicle from a stop and improve acceleration;
  • Recover all or part of the energy that is normally lost in braking to recharge the batteries; and
  • Power accessories like heat and air conditioning while the ICE is off.
Micro, mild and full hybrids need a battery pack that can accept a fast charge over a brief braking interval, deliver that stored electricity over a brief acceleration interval and repeat the process hundreds of thousands of times over the life of the vehicle.

In comparison, plug-in hybrids (PHEVs) are classified as "energy applications." They use much larger battery packs to:
  • Power the vehicle in electric-only mode for a distance of 10 to 40 miles before starting the ICE;
  • Recover all or part of the energy that is normally lost in braking to recharge the batteries;
  • Stop and start the ICE when the vehicle stops and starts; and
  • Power accessories like heat and air conditioning while the ICE is off.
Since power is rarely an issue in larger battery packs, the critical requirement for PHEVs is a battery pack that can deliver substantially all of its stored energy over the time required to drive 10 to 40 miles and repeat that process once or twice a day for the life of the vehicle.

Weight and Volume

Most people find that battery comparisons based on energy densities are confusing because they use metric measurement terms and do not provide a meaningful context for the raw numbers. The following table is my effort to re-state the most common energy density values in familiar weight and volume terms. My goal is to show what energy density actually means to the owner of an HEV. For purposes of the table, I used energy densities of 30 Wh/kg and 50 Wh/l for advanced lead-acid batteries and 100 Wh/kg and 150 Wh/l for lithium-ion batteries as my starting point. I then did the necessary conversions and calculated the weight and volume advantage of lithium-ion batteries for each of the principal HEV configurations.


Fuel Battery Li-ion Weight Li-ion Volume

Savings Capacity Advantage Advantage
Micro Hybrid 10% 0.50 kWh
26 Pounds
0.2 Cubic Feet
Mild Hybrid
20% 1.00 kWh
51 Pounds 0.5 Cubic Feet
Full Hybrid 40% 1.50 kWh
77 Pounds
0.7 Cubic Feet
PHEV-10 55% 5.00 kWh
257 Pounds
2.4 Cubic Feet
PHEV-40 100% 16.00 kWh
821 Pounds
7.5 Cubic Feet

For reference, a subcompact will typically weigh 3,000 pounds and have 10 to 12 cubic feet of trunk space.

Battery Cost

In a July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program, Sandia National Laboratories estimated the current cost of advanced lead-acid batteries at $500 per kWh and the current cost of lithium-ion batteries at $1,333 per kWh. I'm aware of PR claims and forward looking statements that suggest lithium-ion battery costs may be lower, but I've not been able to confirm lower prices based on published price lists from first tier manufacturers or quantify the meaning of terms like significant and substantial. So while I'm not entirely comfortable that the Sandia values are right, I've not been able to find other numbers that I think are better. The following table compares the estimated cost of using advanced lead-acid and lithium-ion batteries in each of the principal HEV configurations.


Battery Li-ion Advanced
Federal Advanced

Capacity Battery Lead-acid Battery Tax
Lead-acid Battery

(kWh) Cost Cost Credits Cost Advantage
Micro Hybrid 0.50 $667
$250

$417
Mild Hybrid
1.00 $1,333
$500

$833
Full Hybrid 1.50 $2,000
$750

$1,250
PHEV-10 5.00 $6,665
$2,500
($2,500) $4,165
PHEV-40 16.00 $21,328
$8,000
($7,500) $13,328

Total Vehicle Cost

For most American comsumers, I believe the most important number will be the incremental cost of an HEV over a comparable car with an ICE powertrain. The following table compares the estimated cost premium for each of the principal HEV configurations using advanced lead-acid and lithium-ion batteries.


Fuel
Savings
Basic ICE
Vehicle Cost
HEV Premium Using
Advanced Lead-acid Batteries
HEV Premium Using
Li-ion Batteries
Micro-Hybrid 10% $18,000
$750
$1,167
Mild-Hybrid
20% $18,000
$1,500
$2,333
Full-Hybrid 40% $18,000
$2,250
$3,500
PHEV-10 55% $18,000
$2,000
$6,165
PHEV-40 100% $18,000
$2,500
$15,828

The following graph summarizes the same basic information in a slightly different format.

(click to enlarge)

Market Forecast

Global market forecasts for HEVs vary widely and are evolving rapidly in response to new laws and regulations. In an October 2008 AW Briefing on "The Global Oil Paradox: Transforming the Automotive Industry," Anil Valsan of Frost & Sullivan presented a slideshow that included two highly informative graphs.

The first graph showed three growth scenarios for the global HEV market. At the time, the biggest unknown was the automobile industry’s response to EU legislation that requires manufacturers to reduce average CO2 emissions from the current level of 160 g/km to 120 g/km by 2012. Eight months later, it’s clear that the industry response has been a concerted effort to standardize micro and mild hybrid technologies throughout Europe. As I noted last week, the Obama administration has recently decided to accelerate CAFE standards by five years. That change can only serve to increase the rate of standardization for micro and mild hybrid technologies. Under current conditions, it looks like Frost & Sullivan’s “optimistic” view from last October will probably fall well short of the emerging reality.


(click to enlarge)

The second graph showed Frost & Sullivan's forecast of HEV sales through 2015 and confirmed my oft repeated argument that cars with plugs will not be a material segment of the HEV market for the foreseeable future and the major business opportunity is in micro, mild and full HEVs.


(click to enlarge)

In combination, the regulatory changes from Brussels and Washington DC have fundamentally altered market dynamics in the HEV sector and increased the critical importance of five facts.
    1. Aggressive CO2 emission standards will increase the rate of HEV standardization in the EU;
    2. Acceleration of CAFE standards will increase the rate of HEV standardization in the US;
    3. The EU standards will be implemented before most proposed lithium-ion battery plants can be built;
    4. Since adequate supplies of lithium-ion batteries will not be available during the 2009 to 2012 EU phase-in window, most major automobile manufacturers will turn to advanced lead-acid batteries for a substantial portion of their micro, mild and full hybrid product lines; and
    5. Once advanced lead-acid batteries earn the first mover advantage in Europe, it will be very difficult, if not impossible, for lithium-ion batteries to overcome an entrenched and cheaper alternative.
I have consistently argued that budget conscious consumers would prefer cheap lead-acid batteries to smaller, lighter and more expensive lithium-ion batteries, particularly for HEV applications. The timing of the new EU regulations has put automakers in a position where they can’t afford to wait for “the battery of tomorrow.” Instead they have to go to work immediately and meet the CO2 emission standards with batteries they can buy today from established manufacturers. Under those circumstances, I’m convinced that advanced lead-acid batteries will dominate the HEV markets until a clearly superior battery technology is developed.

The market dynamic may change over the long-term if PHEVs become a dominant hybrid configuration. It may also be impacted by future changes in the relative price advantage of advanced lead-acid batteries. For the foreseeable future, however, I believe the lion's share of the revenue gains from the HEV revolution will flow to companies like Johnson Controls (JCI), Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP) that have substantial existing manufacturing capacity in both Europe and the US, and from technology driven newcomers like Axion Power International (AXPW.OB) that can rapidly and inexpensively expand their production capacity to satisfy soaring demand from the HEV market.

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.

May 28, 2009

Clean Energy Tracking Portfolio Update: Oops!

My Quick Clean Energy Tracking Portfolio has solidly outperformed its benchmark... was it bad design?

Tom Konrad, Ph.D.

On February 27, I used the top holdings of the (then six) clean energy mutual funds to design a tracking portfolio intended to replicate the performance of those funds at much lower cost.  If my methodology was sound, the tracking portfolio should produce returns within the range of returns of the mutual funds on which it was based. If all went well, the returns would be at the upper end of that range because of the way I chose to emphasize stocks which had underperformed over the previous three years.

Tracking Portfolio

Company Shares Price 2/27/09 Price 5/27/09 % Change
Citrix Systems (CTXS) 48 $20.58 $30.23 45.0%
Echelon Corporation (ELON) 165 $5.99 $7.12 17.3%
SunTech Power (STP) 162 $6.09 $15.46 150.6%
Cemig (CIG) 94* $10.47* $12.67 19.4%
Vestas Wind Systems (VWSYF.PK) 22 $44.85 $75.10 65.8%
Total   $4998.65 $7973.54 59.5%

*Dividend and split adjusted.

And here is the performance of the five remaining clean energy mutual funds:

Fund Shares Price 2/27/09 Price 5/27/09 % Change
CGAEX (Calvert) 122.19 $6.82 $9.58 40.5%
ALTEX (First Hand) 171.47 $4.86 $6.47 33.1%
GAAEX (Guinness Atkinson) 205.76 $4.05 $6.13 51.4%
NALFX (New Alternatives) 29.75 $26.68 $36.02 28.6%
WGGFX (Winslow Green Growth) 111.71 $7.46 $10.35 38.8%
Total   $4999.98 $6922.87 38.5%

As you can see, the tracking portfolio outperformed all the mutual funds in question, with the portfolio's performance 9.4% better than the best performance (Guinness Atkinson) of the five funds, and 21% better than the average of the five funds.  

Oops

Out performance for a tracking portfolio is not necessarily good news: it may be a sign that the methods used to construct the tracking portfolio are flawed, and the portfolio may be as likely to produce underperformance as out performance.  Hence. we should ask:

  1. Is the out performance statistically significant?
  2. If yes, is it caused by some systematic factor?
  3. If a factor or factors can be identified, are they likely to produce out performance in all market conditions, or will they produce underperformance under different market conditions?

Significance

After only 3 months, it's a little early to draw any conclusions, but the standard deviation of the five mutual fund returns is only 8.6%, so the "Tracking" portfolio's performance was 2.43 standard deviations above the mean (p-value = 2.43).   We can be 99% certain that the returns of the tracking portfolio do not come from the same distribution as the returns of the mutual funds, assuming the fund returns follow a bell curve.

In other words, this is a significant result, and deserves further investigation.

Possible Causes

My first thought was that the out performance was due to my choice to pick the stock in each sector with the worst three year performance record, in order to take advantage of the tendency of long-term losers to outperform in subsequent periods.  This is a strategy I've discussed before in my article on selling cash covered puts.  In order to test this theory, I took a look at what would have happened if I'd chose the best performing stock in each sector, rather than the worst performing stock.  The results are shown in my "Winners Portfolio" below:

Winners Portfolio:

Company Shares Price 2/27/09 Price 5/27/09 % Change
LSB Industries (LXU) 114 $8.66 $15.09 72.0%
Echelon Corporation (ELON) 165 $5.99 $7.12 17.3%
First Solar Inc (FSLR) 9 $105.74 180.69 68.6%
South Jersey Industries (SJI) 28* $35.74* $33.35 -7.9%
American Superconductor (AMSC) 23 $13.46 $26.47 94.1%
Total   $4975.30 $7387.38 48.5%

*Dividend adjusted.

The Winners Portfolio also outperformed the mutual funds, although not at a statistically significant level.  Nevertheless, if the out performance of the tracking portfolio were to be described only by winner/loser effects, we would expect the Winners Portfolio to under-perform the funds.  Although it seems like winner/loser effects might be part of the explanation, they are far from complete.

Other Potential Biases

Two other biases to consider are

  1. The sector weights in my tracking portfolio are 20% in each sector, which does not mirror the funds' sector  weights (and underemphasizes Wind and Solar.)
  2. I chose the stocks from the top five holdings of each fund, rather than the complete holdings of all the funds.

Upon examination, explanation #1 fails, since the four stocks (Suntech, Vestas, First Solar, and American Superconductor) had better performance than either the tracking or winners portfolios as a whole.  If I had increased the allocation to any of these stocks, the new portfolios would have performed even better than these two.

The explanation I'm left with is #2.  The top five holdings of the funds are those stocks that, for whatever reason, the funds feel most comfortable holding in large quantities.  If we assume that the fund managers are good enough at their jobs that their judgments are useful, then concentrating on the top five holdings might mean that we are simply benefiting more from the fund mangers' skill (by holding a relatively undiversified portfolio) than investors in the funds are themselves.  However, there is some question as to whether most mutual fund manages add value.  On the other hand, research shows that mutual fund disclosure does hold useful information on outperforming the market.

On the other hand, mutual funds might be holding more of certain stocks because of factors other than expectations of future performance.  For instance, they might only want to hold large quantities of companies which are more liquid, are larger, or are currently more profitable or growing faster.  To the extent that any of this is true, we should be concerned that while the market has favored these preferred types of companies over the last three months, that could change at any time, and cause under-performance in the future.

Conclusion

My guess is that my focus on only the top five holdings of each fund caused much of the significant tracking error.  To avoid this tracking error in the future, I would need to look at the funds' full portfolios. 

I will revisit this tracking portfolio again next quarter to see if it continues to outperform, or if the trend reverses itself, and to see if I can draw any further conclusions. 

DISCLOSURE: Tom Konrad and/or his clients own LXU, ELON, and AMSC. The Guinness Atkinson Fund is an advertiser on his website, AltEnergyStocks.com

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.

 

May 26, 2009

Doing Solar Incentives Right

Different solar incentives encourage different types and locations of solar installations.  Better solar installations will result if we first decide what we want from solar, and then choose the solar incentives we use to match.

Tom Konrad, Ph.D.

Choosing Carefully

This article is based on a presentation I gave at Solar 2009 [11.7 MB].  As with wind, the current incentives for Solar photovoltaics are good for encouraging more solar, but they are less effective at encouraging better solar.  Jigar Shah, founder of SunEdison and Jigar Shah Consulting, told the audience that they should be very careful in calling for a Feed-in-Tariff for solar, saying that "Pigs get fed, hogs get slaughtered," in his keynote address at that same conference.  He was concerned that Germany might become the market of last resort for solar PV because of the supply glut in 2009, and that their government might decide to put a hard cap on the total installations under Germany's Feed-in-Tariff in response.

What do We Want?

Before we advocate for a solar incentive we should look at what we want the incentive to accomplish.  I don't mean the obvious facetious answer "more solar."  James Groelinger, the former President and CEO of EPV Solar, speaking on a panel on investment opportunities in solar, said, "What counts is not modules, systems, megawatts, or capacity; it's energy.... in America we've been rewarding watts installed, while Germany is rewarding kWh produced.  Germany gets approximately 50% more kWh per watt installed than the US, after adjusting for the lower solar resource."

I agree that the relatively low energy production on US systems is probably an indicator of perverse incentives, but Solar should not be considered as solely an energy resource.  For instance, the correlation of PV output with demand is valuable in its own right, and the greater that correlation, the more valuable the energy produced will be, even if greater correlation comes at the expense of slightly lower output.

 We should look at what we want from solar.  We should ask, "What are solar PV's benefits and weaknesses compared to other technologies?"  How important these benefits and disadvantages are greatly depends on how solar is installed.

Benefits of Photovoltaics

Problems with Photovoltaics

Price Stability Current high cost
No Carbon Emissions High Embodied Energy
Timing: Correlated with demand Cloud Transients
Distributed: can be used to defer T&D upgrades Distributed: May result in stranded T&D assets
Timing: Good complement to Wind
Can be installed on low-value surfaces (roofs, and BIPV)

A look at current incentives show that more could be done to take advantage of more of these incentives.

Incentives for energy production

Many incentives for solar involve direct payments per kWh produced.  These include Renewable Energy Credits (RECs) which consumers often use to buy green power, Renewable Electricity Standards (RES), Feed-in-Tariffs (FIT), such as the one just passed by Ontario and the one in Germany which James Groelinger credits for the higher energy output of German solar farms.   Such incentives clearly encourage production of more energy (kWh), but by not differentiating between when or where the energy is produced, they can lead to perverse incentives.  Energy production incentives typically lead to:

  1. South-oriented panels which produce more, but often lower-value, electricity than panels oriented to the southwest.  
  2. Large clustered farms which may have quick fluctuations in output when a cloud passes over (cloud transients.)  A recent study, Quantifying PV Power Output Variability presented by Tom Hoff  on the same panel where I presented showed that, if a cluster of PV installation  is sufficiently dispersed (relative to cloud speeds), the variability of solar output from cloud transients will be reduced by a factor of approximately the square root of the number of installations.
  3. Installations may cluster on the wrong distribution feeders.  If a local electric substation is nearing its capacity at peak times, placing PV on the distribution system of that substation can allow the utility to delay a very expensive substation upgrade.  On the other hand, most new substation are likely to have significant extra capacity, and placing PV in the areas served by that substation will force the utility to pay back the investment on that substation over a smaller number of kWh, a problem referred to as stranded assets. 
  4. The carbon intensity of the electricity displaced by power from PV will vary with time, and, if cloud transients mean that gas turbines must ramp up and down quickly, that will also decrease turbine efficiency and change the carbon intensity of displaced electricity.

From an economic perspective, it makes sense to subsidize peak power production which can help delay a substation upgrade more than pure kWh production, especially if it is from an installation which might strand transmission and distribution (T&D) assets.

Net Metering

Net metering, or allowing the PV owner to sell electricity back to the grid at the same price he pays for it, is also a subsidy.  Net metering may not compensate the utility for the cost of making sure that the power is always there, depending on the tariff.  This is especially true on typical flat-rate residential tariffs, where payments are typically a fixed price per (net) kWh used, and produces incentives very much like the Energy Production incentives discussed above.

A Time-of-Use (TOU) tariff, where a kWh produced when demand is high receives a much higher value than one produced when demand is low, is much better for compensating the utility for the demands a user places on (or removes from) the system.  

In contrast, a typical commercial or industrial tariff, which is based on a low charge per kWh, but a large demand charge payment based on the highest 15 minutes of demand in any given month, can produce very perverse incentives.  Because of cloud transients, PV systems seldom will do much to reduce demand charges, and the low energy payment does little if anything to compensate for the PV investment.  This means that many otherwise ideal spaces on commercial properties are not economically viable for PV installations.  Ron Binz, the Chairman of the Colorado Public Utilities Commission, uses the example of the corners of square farm fields which are irrigated by rotating sprinkler irrigation.  Since farms are normally on demand charges in Colorado, these large areas of otherwise unused, flat space near electric distribution infrastructure are unavailable for PV installations.

Creative tariff structures might be used with net metering to help distribute solar where it could do the most good in helping to defer T&D upgrades.  This could be done with higher per kWh charges for T&D in areas which might soon need T&D upgrades, but probably is not politically possible because of concerns about fairness.

Incentives to Reduce Carbon

If the goal for solar is to reduce global warming pollution, then the best way to do it will be to put a price on Carbon.  This will not only mean that a solar installation which displaces high-carbon electricity (such as coal or inefficient natural gas peaking turbines) will receive a higher incentive than an installation which displaces low-carbon electricity (such as efficient natural gas combined cycle turbines or nuclear,) but it will also take into account the high embodied energy of crystalline silicon PV (if produced using fossil fuels) relative to the lower embodied energy of thin-film technologies.

One weakness of pure carbon pricing (at least from the perspective of solar advocates) is that it does more to encourage less expensive technologies that have quicker energy paybacks.  But if the goal is to reduce overall carbon emissions, that is precisely the result we want.  To take into account the other benefits of solar, other types of incentives will need to be used in conjunction with a carbon price.

Incentives for Investment

Incentives for investment, such as the Investment Tax Credit (ITC) and accelerated depreciation, help with the high cost of PV, but if used alone, without other incentives to reduce carbon or produce peak power, may lead to many installations which don't do much of anything, as highlighted by James Groelinger above.  They are simply an incentive to spend more on solar installations, even if the energy produced has very little value.

By reducing the effective cost of PV, they also blunt some normal market incentives.  Solar manufacturers and installers have less incentive than they otherwise would to cut costs, because their customers are only picking up a fraction of the bill.  Part of any incentive for spending on solar will go to the installer and manufacturers in the form of higher prices.  While this may be a good thing if the goal is to grow the solar industry, a large solar industry is only as useful as the solar installations it provides.

Overall, incentives for investment do not produce many distortions to incentives, and can be an effective way of reducing the cost of solar, so long as they are used in conjunction with other incentives which will assure that the solar installations produce valuable power.

Conclusion

If we want to encourage solar,  we can, and there are many potential benefits to society.  By understanding those benefits, and by not being blind to the drawbacks of solar, we can design incentives which encourage just those benefits we want at relatively low cost, both in terms of price and in terms of the costs that the electric system must bear to integrate solar.

Ask for solar, but be careful how you ask.

May 25, 2009

Not All Alt Energy ETFs Were Created Equal

Charles Morand

A few months ago, I conducted analyses of the wind and solar power ETFs. I've recently turned my attention to the general alternative energy ETFs, or those that span several sectors.

The general alt energy ETFs fall into two categories: 1) US Only and 2) Global. The US Only ETFs are the First Trust NASDAQ Clean Edge US Liquid (QCLN) and the PowerShares Clean Energy (PBW). The Global ETFs are the iShares S&P Global Clean Energy Index ETF (ICLN), the PowerShares Global Clean Energy Portfolio (PBD) and the Van Eck Global Alternative Energy Fund (GEX).

The chart below shows 1-year's worth of weekly returns for the five ETFs. You can click on the chart for an expanded view if you are having difficulty reading it.



The table below provides a few key statistics on the ETFs.

Ticker May 22 Price ($) Expense Ratio (%) 1-yr Return (%) St Dev of Returns (%) 6-mth Return (%) Holdings (# of stocks)
PBD 14.55 0.70 (49.3) 4.2 25.6 77
QCLN 12.75 0.60 (52.5) 4.3 19.7 78
GEX 25.00 0.65 (53.9) 5.1 18.7 28
ICLN 22.96 0.48 (56.5) 5.2 17.9 37
PBW 9.19 0.70 (58.6) 4.4 8.8 80

As the data in the table demonstrates, there is more to picking the right alt energy ETF than simply looking at the expense ratio. PBD, at a hefty 0.7%, has outperformed its peer group with lower volatility over the past year.

For example, $1,000 invested invested into PBD six months ago would have been worth $1,256 pre-expense on May 22, 2009, and $1,249 post-expense. The same $1,000 invested in ICLN, the 'cheapest' of the group, would have been worth, respectively, $1,179 and $1,174 on May 22. Moreover, PBD would have acheived this performance with a lower standard deviation - i.e. volatility - than ICLN.

While one would need to test for statistical significance before making any hard conclusions about outperformance, these results certainly suggest that, when it comes to picking an alt energy ETF, one must dig deeper than simply the expense ratio, as strong outperformance in the long run can more than make up for a few basis points in extra cost.   

Alt Energy & Cleantech Sector Allocation

The table below lists out the percentages of total fund assets invested into the AltEnergyStocks.com alternative energy Categories. I had to make a few judgment calls on how to categorize certain firms, with the most frequent overlap being between Energy Efficiency and Electric Grid.

It must also be said that a few of the stocks held by the ETFs, especially those that I categorized as belonging to the Energy Efficiency Category, would not qualify as either alternative energy or energy efficiency for more purist alt e investors. QCLN, in particular, holds a number of power management stocks that do not appear to be primarily, if at all, targeting environmental opportunities.    

% Of Fund Value Invested In Each Category
Category PBD QCLN GEX ICLN PBW
Solar 35.3 36.8 34.9 51.2 36.1
Wind 20.0 6.4 24.8 17.9 5.7
Power Production 17.2 0 17.2 23.9 5.3
Energy Efficiency 9.1 40.2 11.6 0 13.9
Ethanol 4.0 0 1.0 0 3.5
Battery 3.2 5.4 0 0 10.4
Geothermal 2.5 4.8 1.1 2.1 9.0
Waste-to-Energy 1.4 0 3.8 4.0 0
Fuel Cell 1.2 1.1 0 0.5 1.5
Electric Grid 1.2 1.2 0 0 2.7
Biodiesel 0.7 0 0 0 0.6
Clean Transportation 0.7 0 0.3 0 4.5
Biomass 0.5 0 0 0 0
Microturbine 0.4 0 0 0 0
Environmental Markets 0.3 0 0 0 0
Electricity Storage 0.3 3.7 0 0 1.2
Hydro 0 0 0.7 0 0
Ocean Power 0 0 0 0 0.4
Hydrogen 0 0 0 0 2.0
Other 2.0 0.4 4.6 0 3.2

This table helps shed some light on the reasons behind the higher expense ratios for some ETFs. PBW and PBD, for example, hold 80 and 77 stocks, respectively, and span 15 and 18 categories. ICLN, by contrast, holds 37 stocks and spans only six categories. This wider coverage accounts, in part, for higher costs, although it also results in lower volatility.       
 
QCLN stands out with the 3rd lowest expense ratio, a 78-stock portfolio, the second lowest standard deviation and the second highest returns over the past year. It spans nine Categories and has by far the heaviest weighting in Energy Efficiency (this may be good depending on your view of the sector).

PBW also stands out as the definite dog, which may appear counter-intuitive seeing as it tracks an index by the same provider as PBD. The answer partly lies in the ETF's US focus.   

PBD's top ten holdings, accounting for ~32% of total fund value, span three categories: Wind, Solar and Power Production. There is only one US-listed company, Suntech Power (STP), with the balance accounted for by some leading European wind firms like Vestas (VWSYF.PK) or renewable power developers like Iberdrola Renovables (IRVSF.PK).

Most of alt energy's best and most profitable companies are not based in the United States, conferring the Global ETFs an advantage in constructing their portfolios. This advantage stands out when comparing the quality of top holdings in PBD vs. PBW. 

Despite this, QCLN managed to perform well because of its heavy concentration in Energy Efficiency and Solar. Together, stocks in these two Categories account for 77% of fund value. By contrast, Solar and Efficiency account for only 50% of PBW's value. Both sectors have experienced strong upside over the past few weeks on the back of the Obama plan and the Chinese stimulus package.

Thus, while QCLN holds a relatively large basket of stocks, it is fairly heavily concentrated Category-wise, which has allowed it to outperform along with its main Categories. PBW follows a very similar diversification approach to PDB but the risk spreading in the latter, because of the comparative lack of high-quality alt energy firms in the US, has led to mediocre performance. There is most likely also something to be said for the US stock picking abilities of PBW's makers (or the lack thereof). The result has been a lousy stock mix that has largely missed out on the latest rally.

ICLN and GEX follow broadly similar approaches and asset allocation strategies between Categories, though investors in GEX should in principle benefit through lower volatility from a somewhat more diversified portfolio. In practice, their results are effectively the same both in terms of returns and standard deviation.

Deciding Where To Invest

Which clean energy ETF to invest in depends on what an investor wants to achieve.

1. Play The Obama Administration

The Categories most likely to outperform from recent Obama alt energy policies are: Energy Efficiency, Battery, Electric Grid, Wind and Geothermal. QCLN has a 58% weighting in these five categories vs. 42% for PBW. Besides this, QCLN has outperformed PBW over the past year at a lower cost and similar volatility. The choice here is clear.

2. Play The Conventional Global Sectors Aggressively

The conventional and most mature alt energy Categories are Wind, Solar and Power Production. PBD, ICLN and GEX have weightings in these three Categories of, respectively, 70%, 93% and 77%.
 
Because of its high concentration in target Categories and low cost, my pick here is ICLN if an investor wants to play a strong return to growth in wind and solar. The Power Production Category is made up of developers, IPPs and utilities with strong exposures to renewables. Those entities have been at the fore of wind's growth for the past five years and will play a large role in solar going forward as ground-mounted installations expand their market share.  

2. Play Global Alternative Energy 'Conservatively'   
 
For the investor who wants broad exposure to alternative energy with relatively low risk, my recommendation is PBD. Despite its high cost, it offers good diversification in terms of both individual stocks and Categories. Moreover, its strong performance over the past six months says something about the quality of the underlying index and, indirectly, about the index makers' global stock picking capabilities.

Disclosure: None

From Solar 2009: Investment Opportunities in Solar Stocks: Solar Millennium (SMLNF.PK)

Tom Konrad, Ph.D.

This is the third in a series of entries on opportunities in solar stocks, based on a panel at Solar 2009.  The the first article introduced the panelists, and took a look at the solar sector as a whole.  The second was about First Solar.

Allen Goodman  on Solar Millennium (SMLNF.PK)

"Project developers [such as Solar Millennium] stand out because of their ability to have a relationship with the customer."

Peter Lynch on Solar Millennium (SMLNF.PK)

"I liked Solar Millennium before it ran up to $90 last year, I liked it at $90, and I like it today at $16."

Investment Action

Solar Millennium closed on May 15 at $17.75.  That's over $16, but a lot lower than $90.  If you're looking to buy a solar stock despite the scary market conditions I discussed in the first part of this series, Solar Millennium should be at the top of your list.  Since it's a Concentrating Solar Thermal Power (CSP) developer, an exciting technology I recently highlighted for its ability to produce dispatchable power.  It's one of the rare developers that has show it can build real plants (that differentiating factor Allen Goodman spoke of.)

DISCLOSURE: None.

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.

 

May 22, 2009

The Obama Fast Track for HEVs

John Petersen

Today I'm going to begin with an apology because I've done a terrible job of describing the basics of hybrid electric vehicle (HEV) technology for energy storage investors. Many of my earlier articles dove straight into the mind-numbing details of battery technology without first providing an overview of what those batteries will be used for. In other words I'm guilty of putting the cart before the horse. It's time for me to make amends.

While the differences between HEV technologies have always been important to automobile manufacturers, the public's understanding of those differences is limited. That dynamic is about to change because of President Obama's decision to accelerate the effective date of Federal fuel economy standards that were first adopted during the Bush administration. These accelerated standards will require manufacturers to increase fuel efficiency by approximately 40% over the next seven years. They will also eliminate fleet-wide averaging and force each class of vehicles to carry a fair share of the fuel economy burden. I don't want to oversimplify a very complex topic, but I believe the most cost-effective way to meet the new goals will be the widespread adoption of HEV technology across all classes of cars and light trucks. The new rules are not an HEV mandate, but they have put HEV technologies on a regulatory fast track that will rapidly drive revenue growth across the entire spectrum of battery manufacturers.

There are four primary classes of HEVs including the micro, mild and full hybrids that are available today and the plug-in hybrids (PHEVs) that are scheduled for next year. The following sections provide a simple overview of what the various classes of HEV technology do and what they're expected to cost. More detailed information is available from the Green Car Congress, the National Alternative Fuels Training Consortium and the Electric Drive Transport Association.

Micro Hybrids do not use an electric motor to propel the vehicle. Instead, they rely on hybrid technology to:
  • Use a small portion of the energy that is normally lost in braking to recharge their batteries;
  • Stop and start the internal combustion engine (ICE) when the vehicle stops and starts; and
  • Power accessories like heat and air conditioning while the ICE is off.
The current cost of micro hybrid technology is roughly $500, plus batteries. The main benefit of micro hybrid technology is fuel savings of up to 10% that arise from turning the ICE off when the vehicle isn't moving.

Mild Hybrids use an electric motor that is integrated into the ICE to boost power during acceleration. They also rely on hybrid technology to:
  • Use a larger portion of the energy that is normally lost in braking to recharge their batteries;
  • Stop and start the ICE when the vehicle stops and starts; and
  • Power accessories like heat and air conditioning while the ICE is off.
The current cost of mild hybrid technology is roughly $1,500, plus batteries. The main benefit of mild hybrid technology is fuel savings of up to 20% that arise from using a smaller ICE and turning it off when the vehicle isn't moving.

Full Hybrids use an electric motor that's separate from the ICE and powerful enough to move the vehicle on its own. Full hybrids typically launch from a stop in electric mode, start the ICE when needed and then use both the electric and ICE systems for acceleration. They also rely on hybrid technology to:
  • Use most of the energy that is normally lost in braking to recharge their batteries;
  • Stop and start the ICE when the car stops and starts; and
  • Power accessories like heat and air conditioning while the ICE is off.
The current cost of full hybrid technology is roughly $2,000, plus batteries. The main benefit of full hybrid technology is fuel savings of up to 40% that arise from using battery power in stop and go traffic, using a smaller ICE and turning it off when the vehicle isn't moving.

Plug-in Hybrids fall into one of two sub-classes. A parallel hybrid is essentially a full hybrid with a larger battery pack that increases the EV range and decreases reliance on the ICE. A series hybrid is essentially an electric vehicle that runs on battery power for the first 10 to 40 miles and then uses a small ICE to generate electricity for the powertrain. Both sub-classes rely on hybrid technology to use most of the energy that is normally lost in braking to recharge their batteries.

The estimated cost of plug-in hybrid technology is roughly $2,500, plus batteries. While fuel economy estimates vary widely depending on assumed driving patterns, most commonly quoted estimates fall in the 60% range.

Cost-Benefit Table The following table summarizes the relative costs and benefits of micro, mild, full and plug-in hybrid technologies using lead-acid batteries for lighting, accessory and related systems, and using NiMH or Li-ion batteries for the electric powertrain. The price of $1,000 per kWh for electric powertrain batteries represents a rough average of the current cost of NiMH and Li-ion batteries published in a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage program.


Lead-acid
Advanced Mechanical Incremental Fuel

Batteries
Batteries Components Cost Savings
Micro Hybrid $200

$500
$700
10%
Mild Hybrid
(1 kWh powertrain battery)
$100
$1,000
$1,500
$2,600
20%
Full Hybrid
(2 kWh powertrain battery)
$100
$2,000
$2,000
$4,100
40%
Plug-in Hybrid
(10 kWh powertrain battery)


$10,000
$2,500
$12,500
60%

Cost-Benefit Graph To help remind readers what matters to buyers, I've put together a simple graph that superimposes the purchase price data from the Cost-Benefit Table over a normal bell shaped curve. In this particular graph there is no direct correlation between the background curve and the price points in the foreground. The curve does, however, help put the cost differences and fuel savings into the context of normal forces in a free market.




In combination, the table and the graph clearly show why I believe the vast majority of buyers will choose micro, mild and full hybrid alternatives over their more expensive plug-in cousins. It's a simple matter of economics. Cars with plugs simply do not work for anyone other than the emotionally committed or the mathematically challenged.

The following graph comes from the DOE’s 2009 Annual Energy Outlook and forecasts that sales of full and mild hybrids will grow from 346,000 units in 2007 to 4.8 million units in 2030. Over the same time frame, sales of micro hybrids will grow from 13,000 units to 3.2 million units. Collectively HEVs will account for roughly 63% of unconventional vehicle sales and approximately 40% of all light car and truck sales by 2030.



The companion graph forecasts that less than 7% of the HEVs sold in 2030 will be plug-ins. The other 93% of sales come from full, mild and micro hybrids. Overall, the forecast corresponds well with the distribution I would ordinarily expect under a normal bell shaped curve.



While the sex, glitz, glamour and hype are clearly skewed toward the PHEV tail of the normal bell shaped curve, the bulk of future sales will almost certainly come from the more affordable micro, mild and full hybrid alternatives. Accordingly, I believe the question that investors need to ask themselves is, "which battery technology is best suited to the requirements of these lesser HEV technologies?" The following summary paragraphs may help in that analysis.

Energy and Power The distinction between energy and power is frequently blurred in discussions of HEV technology. In simple terms, energy measured in kilowatt-hours (kWh) limits the distance of travel while power measured in kilowatts (kW) limits acceleration and speed. In PHEV applications that rely on the batteries for an extended travel range, energy is the most important performance metric. For micro, mild and full hybrid applications that use the batteries for short bursts, power is far more important and there are many battery technologies including lead-carbon, NiCd, NaNiCl, NiMH and Li-ion that can easily do the required work. In other words, no technology has a clear performance advantage.

Size and Weight NiMH and Li-ion battery developers emphasize that they enjoy a substantial weight advantage over lead-acid batteries. I'll be the first to concede that weight differences can be critical in the context of a PHEV that needs to carry a 10 to 25 kWh battery pack to provide the desired range. But the weight advantage is almost irrelevant in the context of a micro, mild or full hybrid that only needs to carry a couple kWh of battery capacity.

Cycle Life NiMH and Li-ion battery developers emphasize that they enjoy substantial cycle-life advantages over the lead-acid batteries normally used for starting, lighting and ignition. Those comparisons are inherently unreasonable because they use the best examples of their technology and the worst examples of lead-acid technology. When the best NiMH and Li-ion technologies are compared with the best lead-acid technologies, the cycle-life advantages disappear.

Battery Cost The one metric NiMH and Li-ion battery developers never emphasize is cost, unless it's in the context of a happy-talk prediction that future economies of scale will slash the cost of their products. The simple fact is that the best NiMH and Li-ion batteries cost an average of three times as much as the best lead-acid carbon batteries and there is no reason to believe that the developers will ever be able to close the cost gap.

Revised Cost-Benefit Graph If one assumes that advanced lead-carbon batteries will be the technology of choice for micro, mild and full hybrid applications, and that NiMH and Li-ion batteries will be the technology of choice for PHEVs, the revised cost-benefit graph looks like this:



Over the last couple years the media has fixated on the romantic notion of PHEVs, which has drawn substantial investor attention to small public companies like Ener1 (HEV) and Valence Technology (VLNC) that are generally perceived as leaders in the PHEV battery market. As a result, the stock prices of both companies have risen to levels that include huge premiums for intangible future potential. While the market for PHEV batteries will undoubtedly be large, my sense is that the market has not fully considered the business, technical, operational, competitive, financial and ethical risks these companies are certain to face. That leads me to conclude that both companies have far more downside risk than upside potential under current conditions.

While the media attention has been focused on the right hand tail of the bell shaped curve, established lead-acid battery companies like Exide (XIDE), Enersys (ENS) and C&D Technologies (CHP), along with technology driven newcomers like Axion Power International (AXPW.OB), have been quietly developing next generation technologies that will be affordable for consumers in the middle of the bell shaped curve who need HEV fuel savings but can't afford Li-ion or NiMH batteries. These middle market solutions won't have the high per vehicle value of Li-ion and NiMH solutions, but with far higher market penetration rates, they should easily make up the difference in volume. As I've discussed in earlier articles, the lead-acid sector has been treated like an orphan stepchild of alternative energy for years. That leads me to conclude that these companies have far more upside potential than downside risk under current conditions.

I believe the revised Federal fuel efficiency standards will drive the implementation of micro hybrid, mild hybrid and full hybrid technologies more rapidly than anyone could have predicted and increase overall penetration rates. While the changes are bullish for the energy storage sector in general, the biggest beneficiaries are likely to be the undervalued lead-acid battery manufacturers that will ultimately be the primary source of middle market HEV battery solutions.

In closing I would like each reader to take another look at the last graph and consider a broader ethical issue that we all need deal with. The resources required for micro, mild and full hybrid technologies ramp up gradually as fuel savings climb from 10% to 40%. The incremental resources required for that last 20% in fuel savings one gets by upgrading from a full hybrid to a PHEV are immense. In effect, to save 100 gallons of gas per year by upgrading a single full hybrid to a PHEV, we will have to forego using those batteries to build four additional full hybrids that could have collectively saved 800 gallons of gas per year. This is one of the most appalling examples of selfish and wasteful arrogance I can imagine. It has no place in a resource constrained world where 6 billion people have come to understand how the other 500 million live and the primary challenge for our species is finding relevant scale solutions to persistent shortages of water, food, energy and virtually every commodity you can imagine.

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.

May 20, 2009

From Solar 2009: Removing The $2,000 ITC Cap

Charles Morand

Like Tom, I attended part of the Solar 2009 conference last week. One of the most interesting presentations I heard was by Andy Black, CEO of OnGrid Solar, on the potential impact on residential solar installations of removing the $2,000 ITC limit (link to the actual paper). Prior to changes in October 2008, ITC tax credits for rooftop solar PV installations were capped at $2,000. In the author's own words:

This paper presents revised and expanded financial analyses of residential cases [...]. It will look at Internal Rate of Return (IRR) only (for simplicity of cross comparison) [...] accounting for the increase in the ITC and brought up-to-date with current electric tariffs, incentives (federal, state & local) and, as applicable, Solar Renewable Energy Certificate (SREC) values. The paper then expands coverage to additional US states (NJ, NC, CT, AZ, HI, CO), and also performs a couple of “what if” scenarios to illustrate the effects of changes in individual variables.

The following two tables sum up the author's findings.

There are certain caveats to these results that are discussed in the paper. But if Andy Black is within a 100 basis points of IRR in most cases, we're looking at some very interesting numbers. Residential installations currently account for about 35% of installed solar capacity in the US so this segment is material to the industry.

Ground-mounted and commercial installations will most likely account for the majority of incremental capacity added over the next few years. Credit difficulties, however, are hitting both segments particularly hard (especially ground-mounted). Residential might thus represent a glimmer of hope for the solar PV industry, especially given that module prices are falling rapidly (see the second table).

With the meltdown in equities that occurred in the wake of Lehman Brothers' failure last fall, resulting in a "lost decade" (read: flat for those who bought and held) for the S&P 500 and the Dow, many households are seriously rethinking the wisdom behind putting one's savings in equities. Cash is a lousy asset class, especially in a world where the price of energy will drive crippling inflation, and bonds often provide mediocre real returns. This kind of thinking by German households, prompted by generous government incentives, drove massive amounts of capital into the solar PV industry in that nation.

If households, because of aggressive incentives, are able to generate pre-tax IRRs of upwards of 10% for 10 to 20 years in a nearly riskless venture, I wouldn't be surprised to see some serious money flow into this area. The states covered in this analysis account for about 23% of total US population, an appreciable number. Local governments and utilities have already, in some cases, scaled back incentives following the removal of the $2,000 cap, but even after these reductions households are still be looking at double-digit or near double-digit returns in certain cases.

A surge in demand driven by the residential sector would benefit primarily the silicon-oriented firms with their higher efficiencies, especially in a context where less generous local and utility incentives are counterbalanced by falling module prices.

DISCLOSURE: None

From Solar 2009: Investment Opportunities in Solar Stocks: First Solar (FSLR)

Tom Konrad, Ph.D.

This continues a series of entries on opportunities in solar stocks, based on a panel at Solar 2009.  The first article introduced the panelists, and took a look at the solar sector as a whole.  The others focus on individual companies.

Pradeep Haldar

  • Investors remain bullish on thin film technologies such as CdTe (First Solar's technology.)
  • CdTe currently has the lowest cost, but it may not have long term sustainability.

Peter Lynch on First Solar (FSLR)

  • If First Solar ever stumbles, gravity will take over. They could fall 50% in a day.
  • They are up too high with the P/E's, which is why they are difficult to invest in.
  • They have a differentiating factor- the lowest cost- and investors like that.

Investment Action

If you decided to short a solar stock after reading part 1, First Solar should be up on your list.  The next entry will be a solar stock the panel liked. (Link broken until published.)

DISCLOSURE: None.

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.

 

May 18, 2009

AAER: Tailwinds Or Hot Air?

Charles Morand

Last week, I added a little to my position in AAER (AAERF.PK). I first took a long position in AAER, the Canadian-based MW-size wind turbine maker, over two years ago. I've since pared down it significantly, both because I wanted to take some profit after a meteoric rise in share price in Q4 2007 and later because of the company's seeming inability to get orders for more than a couple of turbines at a time.

Although there was, before the credit crisis hit, a severe shortage of wind turbines and wind turbine components, barriers to entry have remained high: (1) average order size has been growing and scale is becoming more critical; and (2) quality considerations are top-of-mind for funders as defective machines can throw off project economics. Both factors play against small emerging turbine makers with no quality records to show for. Getting a first large order has thus been the key milestone investors in AAER have been waiting for.

Finally, last October, as global markets were in the eye of the storm, AAER reached an agreement with a mid-size Canadian independent power producer, Northland Power, for 61 1.65 MW turbines for a total order size of 100.65 MW. This contract is valued at approximately C$142 million (~$152 million or $~1.5 million/MW) by the company and is structured as a cost-plus agreement, meaning that AAER is guaranteed to recoup its costs and earn a profit on the deal. However, the agreement was only that - an agreement - with a formal contract to be signed when both parties met a number of conditions. After being pushed back twice, this moment came on May 9 when the turbine supply agreement was finalized and signed...sorta. The contract is subject to a "notice to proceed" by the developer contingent "on final permitting, approvals and financing [being] obtained by both parties."

This could mean that Northland is having difficulty securing financing on acceptable terms. It could also mean that Northland anticipates permitting delays - a previous project not too far from this one was delayed by two years because of permitting hold-ups - and doesn't want to commit before it's certain it can get the regulatory green light. It could also mean nothing - according to the contract Northland signed with Hydro-Quebec, the utility buying the power, the developer is not required to show proof that it has secured financing until June 2010, so Northland might want to wait for credit markets to ease out a bit. However, with a contractual deadline obligating Northland to start producing power by December 2010 (failing which the developer must pay a penalty of C$55 per MW per day up to a max of C$2.01 million), the order will have to be initiated soon if the turbines are to be delivered on time.  

In the clearest indication yet that the market's risk appetite is far from back, the stock finished the week down over 15%. While investors are not yet pricing a worst-case scenario, it is fair to say that they feel overall very skittish about the apparent blanket option for the buyer to delay the turbine order as long as it pleases.

Last Friday (May 15), a glimmer of hope appeared after markets closed: AAER increased the size of an upcoming best effort unit offering - one unit is made up of one common share and one common share purchase warrant - from a minimum of C$2 million and a max of C$5 million, to a min of C$3 million and a max of C$7.5 million. Although small in absolute terms, this is an appreciable relative increase in the size of the offering of 50% at both tails. The company's bankers, it seems, are seeing increased appetite for the stock.

I'm liking the contract and added a little to my position. My thesis behind this is two-fold: (1) if the notice to proceed is given within a reasonable time frame - and I believe that it could be - the share price could experience a nice pop, following which I would take a little profit; and (2) although this order falls well short of the plant's theoretical capacity of 400 turbines per year (AAER has only 6 other turbines currently scheduled for delivery in 2009), it might just be enough to keep the firm alive through the end of the worst part of the credit freeze and until US renewable power policies kick-start the sector. Management has taken many of the right steps over the past two years and, with a large order in hand, the firm would be well positioned to fill the order book.     

A Risky Bet

This is a risky play that essentially amounts to a bet on the Northland contract going through. If it doesn't and AAER fails to secure another large order in the next few months, I would be very worried and would pull my money. This is why:

Liquidity: 2009 promises to be a punishing year liquidity-wise, with $14.9 million in contractual obligations and $9.5 million in payables and debt payments due. Meanwhile, AAER has a cash ratio of only 0.19 with C$2.6 million in cash and equivalents. This will be partly counterbalanced by cash coming through from a 2009 order book of around 9.65 MW (something in the neighborhood of $15 million), the money raised through the current unit offering and an unused line of credit worth $1 million. The liquidity crunch exists because AAER is in the process of tooling up its factory, purchasing inventory and paying off licensing fees to the companies from which it is licensing its turbine technologies.

Limited financing options: The credit crisis has made equity financing incredibly expensive for small alt energy companies - they are often forced to raise equity at a fraction of the price investors were willing to pay a year-and-half or two years ago. AAER is a prime example: it raised equity in November 2007 at $1.15 per share but, a year later in December 2008, had to do the same at $0.15. Investors typically don't like dilution, and AAER won't be able to optimize its capital structure by raising significant debt until it shows it can fill the order book. Eventually, too much dilution leads investors to bail, creating yet more pressure on the stock price and raising the cost of equity capital further. As at December 31, 2008, AAER had 122.4 million shares outstanding, a 48% jump on 2007.  

The credit crisis: There is no doubt that the credit crisis has seriously shaken the renewable power sector. Perhaps ironically, the more mature technologies such as wind are amongst the hardest hit because of their relative capital intensity - the disappearance of tax equity investors coupled with the dearth of reasonably-priced debt has led to a marked slowdown in US wind installations. Many of the turbine majors have laid off employees in order to cut costs and reduce capacity. It will probably be a few more months before definite numbers to come out on the state of the industry so far in 2009, but if anecdotes one hears at conferences or reads in the paper are any indication, it ain't gonna be pretty! Needless to say, this is isn't exactly the best time to try to turn a start-up into an established firm in an already-crowded industry struggling to cut capacity. Luckily, this situation will be short-lived.


UPDATE (May 22, 2009): The company just announced that it fully sold its unit offering (~C$7.5 million) and issued another C$1.5 million worth of units to "suppliers and other business partners". This is positive news in my view as it indicates increased market appetite for the firm.

DISCLOSURE: Charles Morand is long AAER.

May 17, 2009

Are Energy Storage Investors Chasing Their Tails?

John Petersen

I didn't learn about normal bell shaped curves in kindergarten but I developed a pretty solid understanding of the concept by the second or third grade because at report-card time A's were worth a quarter, B's were worth a dime and C's had no value at all. By the time I reached college I was chasing the right hand tail of the bell curve on my own initiative. Law school and the competitive nature of my profession merely pushed my drive for the right hand tail up a notch.

Old habits die hard, so I still tend to chase that right hand tail of the bell curve in almost everything I do. The only real exception is investing where 30 years of experience has taught me that the most successful companies are the ones that sell products to the 95% of the population that don't command $200,000 salaries. There are companies like LVMH that have a great business catering to the elite, but they're not in the same league as Target and Wal-Mart.

The energy storage sector is undergoing an amazing metamorphosis as the market comes to the realization that a boring old-line industrial sector holds the keys to cleantech, the sixth industrial revolution. Storage isn't a sexy alternative energy technology in its own right; instead it's an enabling technology that makes other technologies more reliable, efficient and profitable. This dynamic has encouraged a different class of investors to investigate energy storage for the first time. Unfortunately most of the attention goes to technologies on the right hand tail of the performance and cost curves. In my view, this is precisely the wrong place for investors that want to position their portfolios for the coming of cleantech.

I love quarterly reporting cycles because they provide a great opportunity for a reality check. This quarter, the reality check is even more important because General Electric (GE) just announced plans to enter the energy storage business in a big way and manufacture sodium nickel-chloride batteries for hybrid locomotives and grid-connected applications. Their plan to make batteries that integrate well with their railroad and wind turbine businesses makes great sense. Their choice of a technology that currently falls into the "cool" category but has the potential to become very cheap speaks volumes about what GE thinks a reasonable price point will be. If any company on the planet has a good feel for what  everybody needs and is willing to pay for, it's GE.

I first wrote about this theme in "Energy Storage Stocks: Performance, Cost and Bell Shaped Curves" and expanded on the topic in "Alternative Energy, Regular Guy Stuff and Rainbow Stew" and "Alternative Energy Storage: Cheap Will Beat  Cool." I then spent months delving into some of the more mind numbing aspects of energy storage technologies and the companies that are developing them. In the process, my core thesis that cheap will always beat cool has been diluted by gee-whiz performance claims of exotic technologies that are too expensive for 95% of potential buyers. To help remind readers what matters in business, I've put together a simple graphic that overlays an average of the DOE's estimated current and 10-year projected cost of various energy storage technologies on a normal bell shaped curve. In this particular graphic, there is no direct correlation between the background curve and the price points in the foreground. The curve does, however, help put the projected cost differentials into the context of a normal market.



Investing would be easy if the market prices of stocks were based solely on financial statement metrics. In the real world, however, the baseline financial values are impacted by a wide variety of intangible factors that increase or decrease the value of a going concern. The factors that are typically identified as important include history and experience, existing customer and supplier relationships, human and intellectual property resources and the potential for exceptional growth and profitability. The following table compares the market capitalizations of the companies I track with their tangible financial statement values. The purpose of this presentation is to highlight the implied market value of the non-financial assets the various companies hold and help investors decide whether they believe the intangible premiums are reasonable.




Market Tangible Intangible

Trading Recent
Capitalization Value Premium

Symbol Price
(Millions) (Millions) (Millions)
Cool Emerging Group




   Ener1 HEV $6.12
$694.51
$25.16
$669.35
   Valence Technology VLNC $2.06
$252.87
($63.08) $315.95
   Altair Nanotechnologies ALTI $1.26
$117.37
$37.14
$80.24
   Beacon Power BCON $0.75
$85.93
$22.12
$63.82






Cool Sustainable Group




   Maxwell Technologies MXWL $8.90
$200.44
$37.11
$163.33
   Advanced Battery ABAT $3.47
$183.29
$76.12
$107.17
   Ultralife Batteries ULBI $7.35
$124.65
$43.28
$81.37
   China BAK Battery CBAK $2.06
$118.84
$166.91
($48.07)
   Hong Kong Highpower HPJ $2.16
$29.36
$15.84
$13.52






Cheap Emerging Group




   Axion Power International AXPW.OB $1.40
$49.77
$6.14
$43.63
   ZBB Energy ZBB $1.10
$11.68
$7.08
$4.60






Cheap Sustainable Group




   Enersys ENS $16.00
$767.61
$258.33
$509.28
   Exide Technologies XIDE $5.45
$411.36
$285.73
$125.63
   C&D Technologies CHP $1.80
$47.33
($37.04) $84.37 
   Active Power ACPW $0.54
$32.65
$18.75
$13.89

The numerical average of the intangible premiums the market has attributed to the 15 companies I track is $148.5 million. While it's easy for me to justify substantial intangible premiums for companies like Enersys that have stable operating histories, global customer bases and product lines that are affordable for everybody, I have a much harder time justifying huge intangible value premiums for emerging companies that have neither stable histories nor established customers and plan to manufacture products that 95% of the population can't afford, particularly when the 5% who can afford their proposed products may not want them.

These are treacherous times in the energy storage sector. The new investors who are investigating energy storage for the first time are generally early adopters like me who instinctively focus on the right hand tail of the bell curve. We get so enamored with the technical performance claims that we tend to forget the realities of a free market where the vast bulk of potential customers don't have the economic power to choose a cool solution over a cheap solution.

Mark Twain quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he just made the cheapest cars. Microsoft didn’t make the best operating system; it just made the cheapest operating system. In times like these I believe energy storage investors will be well-advised to heed the philosophy of the great value investor Benjamin Graham who said, In the short run, the market acts like a voting machine, but in the long run it acts like a weighing machine. Otherwise, they may find that they're chasing their tails.

Investors that want to develop an in-depth understanding of the issues and opportunities in the energy storage sector may want to consider attending Infocast's Storage Week in mid-July. The speaker's list includes more than 80 thought leaders the battery industry, the government, the utility and automotive industries and the research and development sector. They've even invited me to participate in three panel discussions. Hopefully I'll return from San Diego with investable insights that I can share with readers in future articles.

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), Enersys (ENS) Active Power (ACPW) 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.

May 15, 2009

From Solar 2009: Investment Opportunities in Solar Stocks, Part 1

Tom Konrad, Ph.D.

The last panel I attended at Solar 2009 focused on investment opportunities in Solar.  This is the first of several entries with ideas from the speakers.   They were:

Each had perspectives on the solar (mostly photovoltaic (PV) industry, and struck me as very knowledgeable in the field.  The caliber of the industry and investment knowledge on display impressed me, so I'll share with readers some of the panelists thoughts.

Peter Lynch on the Solar Sector

  • Wall Street likes “techie glitz” of PV because it means they really don’t have to focus too much on reality.
  • In the last 8 weeks, solar stocks have gained 72% on average.  This is unsustainable.
  • Solar Stocks have a very bright future, but you'd better be a trader.
  • All stocks took off in early march.  When stocks move the good ones move first, and others get swept up.  I believe that the Solar stocks were ones that got swept up. 

Allen Goodman on the Solar Sector

  • There are lots of claims [of low-priced PV modules.]  If they can [produce them at that price], that's great, but the challenge is on the companies.
  • The key to picking profitable solar companies is to look for ones with key differentiating factors.  For developers, this may be the ability to have a relationship with a customer, obtain financing, and do permitting.  The other end of the spectrum is to have an edge with technology.

Investment Action

I agree with Lynch that if you're going to make money in Solar stocks today, you have to do it as a trader.  I also agree that the current move is unstainable (I recently called it a bear market rally.)  So if you are a trader, the trade today should be on the short side.  Future articles in this series will have a couple stocks that the panel panned, or you can short the sector as a whole, with either of the Solar ETFsTAN or KWT.

DISCLOSURE: None.

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.

May 13, 2009

GE Enters the Grid-based Energy Storage Business

John Petersen

I've been writing about the rapidly evolving market for manufactured energy storage devices in grid-based applications since last August when I published Grid-based Energy Storage: Birth of a Giant. At the time, only a handful of smaller public companies were working on grid-based storage solutions including Maxwell Technologies (MXWL), Beacon Power (BCON), Altair Nanotechnologies (ALTI), Active Power (ACPW) and Axion Power International (AXPW.OB). Last November, France's Saft Group (SGPEF.PK) announced a partnership with Switzerland's ABB Group (ABB) to develop and commercialize utility scale solutions. Yesterday, General Electric (GE) joined the fray when it announced plans to build a $100 million plant for batteries that it will use in hybrid locomotives and grid-based systems.

The new GE plant will make large format batteries based on a sodium sulfur (NaS) chemistry similar to one developed by Japan's NGK Insulators (NGKIF.PK). The aggregate storage capacity of the batteries produced at the GE plant will be on the order of 900 megawatt hours (MWh) annually. At current prices for comparable products, GE's annual revenue from battery sales should be on the order of $400 million. In connection with the announcement, GE's chairman and CEO Jeff Immelt said, “We believe the advanced battery business could be a $1 billion business over the next decade."

As impressive as the GE announcement is, the more impressive fact is that NaS battery systems like the ones GE plans to manufacture can only serve a small fraction of the broader grid-connected energy storage market. In a July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program Sandia National Laboratories described the broader market as follows:

"Energy storage devices cover a variety of operating conditions, loosely classified as ‘energy applications’ and ‘power applications’. Energy applications discharge the stored energy relatively slowly and over a long duration (i.e., tens of minutes to hours). Power applications discharge the stored energy quickly (i.e., seconds to minutes) at high rates. Devices designed for energy applications are typically batteries of various chemistries. Power devices include certain types of batteries, flywheels, and ECs. A new type of hybrid device, the lead-carbon asymmetric capacitor, is currently being developed and is showing promise as a device that might be able to serve both energy applications and power applications in one package."

It then presented the following chart to illustrate several battery and capacitor technologies in relation to their respective power and energy capabilities. The niche where GE plans to build a $1 billion business is the yellow oval marked Na/S.
 


After discussing the strengths and weaknesses of the technologies that will compete for a portion of the grid-based storage market, the Sandia report went on to summarize the relative costs of the principal energy storage alternatives. The following table separates the Sandia data into power technologies, short duration energy technologies and long duration energy technologies; orders the contenders based on the average of current and 10-year projected cost data reported by Sandia; and identifies the public companies that are focused on each class of storage technology.

Power
Current Cost
($/kWh)
10-year Projected
Cost ($/kWh)
Electrochemical Capacitors
     Maxwell Technologies (MXWL)
$356/kW
$250/kW
High-speed Flywheels (composite)
     Beacon Power (BCON)
$1,000
$800
Li-ion Batteries
     Altair Nanotechnologies (ALTI)
     Saft Batteries (SGPEF.PK)
$1,333
$780



Short Duration Energy
Current Cost
($/kWh)
10-year Projected
Cost ($/kWh)
Flooded Lead-acid Batteries
     Exide (XIDE)
     Enersys (ENS)
     C&D Technologies (CHP)
$150
$150
Valve Regulated Lead-acid Batteries
     Exide (XIDE)
     Enersys (ENS)
     C&D Technologies (CHP)
$200
$200
Low-speed Flywheels (steel)
     Active Power (ACPW)
$380
$300
 Lead-carbon Asymmetric Capacitors
     Axion Power (AXPW.OB)
     Furukawa Battery (FBB.DE)
$500
$250



Long Duration Energy
Current Cost
($/kWh)
10-year Projected
Cost ($/kWh)
Zn/Br Batteries
     ZBB Energy (ZBB)
$500
$250/kWh
plus $300/kW
Na/S Batteries
     NGK Insulators (NGKIF.PK)
     General Electric (GE)
$450
$350

I would be remiss if I failed to note that in addition to its plans to directly engage in NaS battery production, GE also has a substantial stake in A123 Systems which is currently testing a Li-ion based frequency regulation system.

The best single document I've found to give investors a basic technical background in grid-based energy storage systems is Sandia's July 2008 report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. There are also two recent reports from the DOE that I think are "must reads" for investors that want a deeper understanding of how the Smart Grid will develop. The first report, “Smart Grid: Enabler of the New Energy Economy,” explains how the Smart Grid will use advanced technology to transform the energy production and distribution system. The companion report, “Bottling Electricity: Storage as a Strategic Tool for Managing Variability and Capacity in the Modern Grid,” explains why the evolution of the Smart Grid will depend on cost effective energy storage.

In addition to the government reports that focus principally on technological merit rather than investment value, I've written extensively on the companies that are active in the sector. If you want to better understand the potential of energy storage, a rapidly emerging sector that may "dwarf IT to the tune of two orders of magnitude," the following articles can provide a good start.

Grid-based Energy Storage: Birth of a Giant
Alternative Energy Storage: Lithium, Lead or Both?
Alternative Energy Storage: Cheap Will Beat Cool
America Must Rebuild Domestic Battery Manufacturing Infrastructure
Alternative Energy Storage Needs to Take Baby Steps Before It Can Run
Alternative Energy Storage: It's All About Price vs. Performance
Lead-Carbon: A Game Changer for Alternative Energy Storage
Alternative Energy Storage: Cheap Outperforms Cool

Each of my articles includes extensive links to underlying source documents and many have wonderful commentary from readers who have different opinions that are fervently held and eloquently expressed. I have several dogs in this fight and am far from disinterested. But I believe the upside potential for astute investors who position their portfolios early for the coming of cleantech, the sixth industrial revolution, will be handsome.

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), Enersys (ENS) Active Power (ACPW) 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.

May 11, 2009

Smart DOE Battery Manufacturing Grants and Dilution For Dummies

John Petersen

Last month I wrote about a very smart plan the DOE developed for $4.5 billion in smart grid grants authorized by the American Recovery and Reinvestment Act of 2009 ("ARRA"). I was particularly impressed that the DOE's plan created a functional public-private partnership where grants would be available to companies that could raise matching funds from private sources, but would be denied to companies that could not attract substantial private sector funding. While I hoped a similar plan would be adopted for $2 billion in ARRA battery manufacturing grants, my research was hindered by a broken link at www.grants.gov that wouldn't let me download the Funding Opportunity Announcement ("FOA"). Late last week, a reader sent me a copy of the FOA and I was delighted to learn that the same guiding principles will apply to ARRA battery manufacturing grants.

In the FOA for its "Electric Drive Vehicle Battery and Component Manufacturing Initiative" the DOE established goals for five classes of ARRA grant funding as follows:

Industry subsector Total Funding
Awards Award Size
Cell and Battery Pack Manufacturing Facilities $1,200 million 7 to 8 $100 to $150 million
Advanced Battery Supplier Manufacturing Facilities $275 million 14 $20 million
Advanced Lithium ion Battery Recycling Facilities $25 million 2 $12.5 million
Electric Drive Component Manufacturing Facilities
$350 million 3 to 5 $80 million
Electric Drive Subcomponent Manufacturing Facilities
$150 million 6 to 8 $20 million

The FOA also provided that grant recipients will generally be expected to provide 50% of the required funds from private sources. While the DOE has the power to approve grant requests with lower cost sharing ratios (subject to a floor of 25%) any reduction in the cost sharing ratio will count as a negative factor. Teaming among suppliers, manufacturers and end users is encouraged but not required. If the plan works like it's supposed to, $2 billion in DOE grants will be matched with $2 billion in private capital and used to build  $4 billion in new manufacturing plants. It's a far more aggressive start than I could have hoped for when I first argued that America needs to rebuild its domestic battery manufacturing infrastructure.

To put the magnitude of the ARRA battery manufacturing grants in rough perspective, nine of the pure play energy storage companies I track account for about a third of the U.S. battery market and have a combined book value of $1.5 billion. If their ratios are typical, then the book value of the entire domestic battery industry is approximately $5 billion. By the time you add $4 billion in new factories and then add a like amount for associated inventories and accounts receivable, it's easy to forecast outstanding growth in the energy storage sector for several years. It's impossible to identify the likely winners of the grant selection process, but it's a pretty safe bet that every company that can apply will. I also believe that my nine pure play energy storage companies, as a group, are likely to receive a significant share of the awards.

Applications for the first round of ARRA battery manufacturing grants must be filed by May 19, 2009. The DOE plans to select the first round of grant recipients by the beginning of July and finalize the first round of grant awards by the end of September. While there will undoubtedly be a tremendous amount of posturing, positioning and PR over the next several weeks, I don't foresee any clearly investable events before the end of June.

None of the pure play energy storage companies I track has huge cash reserves that can be spent on new factories. This leads me to believe that every company selected for an ARRA battery manufacturing grant will have to go out into the market and find new financing for all or part of its matching funds. Once the new plants are built, a second round of financing will be required for associated inventories and accounts receivable. For most, the required financing will exceed their current capital by a wide margin. Since many of the likely recipients are smaller companies that cannot be classified as high quality credit risks, I expect them to rely heavily on the equity markets. One thing is certain; it will be a target rich environment for investors that are willing to make a long-term commitment to the energy storage sector.

Since it's impossible to talk about large stock offerings without having somebody worry about dilution, this is probably a good time to tackle that issue. I want to apologize in advance for the complexity of the following discussion, but these are critically important issues. So take your time, read it slowly and feel free to ask me about anything that's unclear.

Everybody above the age of five understands the concept of dilution. If you're sitting in a restaurant with a half-empty coffee cup and the server tops it off –
  • With water, your beverage is diluted;
  • With coffee, your beverage is unchanged; and
  • With espresso, your beverage is fortified.
The same basic rules apply in corporate finance and substantially all sales of newly issued shares fortify the issuer's balance sheet. Nevertheless perception problems and other complexities frequently arise because every stock sale impacts three distinct groups who think dilution is important and approach the issue from different perspectives.
  • New investors typically view dilution from a book value perspective and think they're being diluted if the purchase price they're being asked to pay exceeds book value per share;
  • Insiders typically view dilution from a paid-in capital perspective and think they're being diluted if the purchase price of new shares is less than the average price paid for outstanding shares; and
  • Public shareholders typically view dilution from a market price perspective and think they're being diluted if the purchase price of new shares is less than the prevailing market price.
All three perspectives are fundamentally valid, fundamentally flawed and irreconcilable. In most cases, the best a company can hope for is a modest discount from market.

Since the differences between book value, paid-in capital and market price per share can be immense, it's important for investors to understand the range of possible outcomes. The following table provides comparative book value, paid-in capital and market price data for each of the pure play energy storage companies that I would classify as likely applicants for ARRA grants. The data has been taken from the most recent SEC reports filed by the companies and gives pro-forma effect to the conversion of any non-redeemable preferred stock.



Net Book Total Book Paid-In Market


Value Shares Value Capital Price

Symbol (000s) (000s) Per Share Per Share Per Share
Cool Emerging Group





Ener1 HEV $106,413
113,474 $0.94
$3.39 $6.48
Valence Technology VLNC ($63,081) 122,754 ($0.51) $4.06 $2.30
Altair Nanotechnologies ALTI $37,752
93,153 $0.41
$1.99 $1.09







Cool Sustainable Group





Maxwell Technologies MXWL $61,233
23,129 $2.65
$8.56 $9.21
Ultralife Corp ULBI $83,065
16,959 $4.90
$10.02 $7.74







Cheap Emerging Group





Axion Power International AXPW.OB $7,924
35,333 $0.22
$1.62 $1.55







Cheap Sustainable Group





Enersys ENS $661,751
47,975 $13.79
$7.59 $18.99
Exide Technologies XIDE $486,382
75,478 $6.44
$14.71 $6.56
C&D Technologies CHP $49,116
26,296 $1.87
$1.22 $1.89

I regularly participate in pricing negotiations between investment bankers and emerging public companies that need to raise equity. In each case the first thing the bankers do is paraphrase Benjamin Graham and tell my clients that while the stock market is a voting machine, investment banking is a weighing machine. Next they explain that after completing their due diligence they plan to ignore the market price and base their negotiations on fundamental business, technological and product issues like the ones I've been discussing for the last nine months.

While it is generally easy to move the bankers up from a lowball initial offer by showing how historical expenses created enduring non-financial value for an emerging client, the banker's resolve typically stiffens to the consistency of granite as the negotiation approaches 80% of market price. The final negotiating rounds are always bare-knuckle affairs but when the table pounding and cursing is over, my clients invariably acknowledge the supremacy of the golden rule of capitalism (he who has the gold makes the rules) and accept the best price they can negotiate.

I have no experience with transactions like the ones that will be negotiated over the next few months. Potential investors will rightly argue that the ARRA grants effectively double the benefit of their investment for a grant recipient and its shareholders. The grant recipients will rightly argue that the ARRA grants effectively cut the new investors' dilution risk in half. While my right-brain tells me that the ARRA grants will simplify negotiations between companies and investors, my left-brain knows better. On The Mickey Mouse Club of my youth, Wednesday was "anything can happen day." For the next four months, energy storage investors need to remember that every day is Wednesday.

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

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

Storage: The Best Renewable Energy Integration Strategy?

Tom Konrad, Ph.D.

In order to electrify transportation, well need batteries, with ultracapacitors and compressed air playing supporting roles.  Based on cost, John has been making the case that the batteries for economical cars are more likely to be advanced lead-acid (PbA) than the media darling, Lithium-ion (Li-ion.)  I generally agree, especially since recycling Li-ion batteries is an expensive and difficult process, although I see a future where both cars and oil are simply more expensive, and we have far fewer of them.

But transportation is only one application for energy storage technologies.  Another is matching the electricity output of variable power sources such as wind and solar with demand, as well as providing standby power to accommodate sudden ramp-ups and ramp downs.

Storage for Grid-Tied Applications

Below is a chart I put together comparing the cost per kW (Power), cost per kWh (Energy) and Round-trip efficiency of a large range of technologies.  Both axes are log scale.   This slide will be part of a presentation I'll be giving at Solar 2009 on May 15th.  (I'll also be on this panel on the 13th.)  Technologies to the right can store energy cheaply, and are the best for matching variable energy output with demand.  Technologies near the top deliver high power at low cost, and so are best for accommodating sudden changes in supply or demand on the grid.  Larger bubbles represent higher round-trip efficiency, meaning that more of the stored power can be sent back to the grid.

There are many other important characteristics of storage technologies, such as cycle life, O&M costs, memory effects, response time, and size/weight, so the technologies which look best on this graph will not be the best for all applications.

Click to Enlarge

Batteries: Mostly for Cars

It's easy to note that lead-acid batteries dominate Lithium-ion batteries for grid tied applications: In a grid-tied application, the light weight of Li-ion batteries no longer makes any difference, and cost is much more important.  More important, however, it's also easy to note that neither the battery nor flow battery technologies are truly dominant in this context (note that I've lumped hydrogen electrolysis/fuel cell combinations (H2) with flow batteries in this context.  The bubble hidden behind NaS is ZnBr, a Zinc-Bromide flow battery, being commercialized by ZBB Energy (ZBB).)  

If I'd done this research a few years ago, I never would have recommended Vanadium Redox flow batteries (VRB) or Sodium Sulfur (NaS) in 2007, although a quick look at the chart makes clear why NGK Insulators (NGKIF.pk) is still selling NaS batteries while VRB Power declared bankruptcy not long after I sold it: NaS batteries produce much more power at the same cost.  They also have the advantage (not shown here) that they are small enough to be moved, and so can be used to defer transmission and distribution upgrades in multiple locations over the life of the battery.

Lead Costs More than Salt, Water, or Air

When it comes to dealing with the large scale power for grid tied applications, the best technologies are the ones with the cheapest storage media.  Thermal storage molten salt, while pumped hydro (PHES) uses water, and Compressed Air Energy Storage (CAES) uses air.  Demand Response and Transmission do even better by shifting power use in time or space, and dispensing with a storage medium altogether.  

The primacy of Demand Response and Transmission should not come as any surprise to regular readers, who will recall that Demand Response was the hero of the Texas Wind incident, while Transmission compares favorably to most storage technologies because it diversifies away many of the ups and downs of variable electricity supply and demand.

Pumped Hydro vs. Thermal Storage vs. CAES

Transmission is unfortunately difficult to permit and build, and demand response can only be used a few hours a year (at least until we get more responsive demand through smart grid investment.) This means that there will continue to be a large need for the three other forms of large scale, cheap energy storage.  Unfortunately, all three can only be used effectively in special situations.  Pumped hydro requires two adjacent reservoirs with a vertical drop between them, Thermal Storage works best with Concentrating Solar Power plants, especially in the tower configuration, and CAES requires an underground, air-tight cavern.  

While reservoirs and caverns can be built, doing so erodes the economics of the technologies.   It's worth noting that the economics of pumped hydro vary widely depending on the location, and so the apparent advantage of CAES only holds in some cases; the locations of the bubbles are based on averages of the highest and lowest costs in the literature.

Investments

For investors who see opportunity in integrating renewable electricity into the grid, the media fascination with battery technology is an opportunity.  They should focus on Demand Response and smart grid stocks such as EnerNOC (ENOC), Comverge (COMV), Itron (ITRI), Echelon (ELON), Telvent (TLVT), and RuggedCom (RUGGF.PK), Transmission stocks such as ABB Group (ABB), Quanta Services (PWR), General Cable (BGC), Pike Electric Corp (PIKE), ITC Holdings Corp (ITC), and Siemens (SI), before investing in traditional storage plays.

In many ways, this is fortunate, since Pumped Hydro, Thermal Storage, and CAES are all difficult for a stock market investor to get exposure to.

UPDATE: The full presentation comparing large scale energy storage technologies can be found here.

UPDATE 12/29/09- I came across better numbers for the cost of transmission, and updated the graphs here.

DISCLOSURE: Tom Konrad or his clients have long positions in ENOC, COMV, ITRI, ELON, TLVT, RUGGF, ABB, PWR, BGC, PIKE, ITC, and SI.

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.

May 09, 2009

Why the Financial Crisis is like Energy Inefficiency

Tom Konrad, Ph.D.

I have a regular column called Greener Money in Smart Energy Living Magazine.  The Spring issue just printed, and I'd like to highlight this column, because it discusses ideas I have not written about elsewhere.  The column begins:

As people become more aware of how we use energy, many become amazed and appalled at the sheer waste of it.  Why are homes built without attention to insulation and sealing that would not only make them more comfortable, but also mean they cost less to live in, even with the slightly larger mortgage payments?  Why do most microwaves use more electricity running the integrated clock than they do heating food?

The financial crisis can inspire similar emotions.  Why did so many institutional investors buy collateralized debt obligations which they knew they did not understand?  Why did regulators assume that these investors understood the risks they were taking?  Why did lenders make loans to people without first verifying their ability to pay? 

The answers to both sets of questions are surprisingly similar: both are manifestations of market barriers. In the realm of energy, these barriers lead to purchases which might be slightly cheaper in terms of first cost, but come with large ongoing energy costs, far higher than the lower initial cost can justify.  In the case of the financial system, these barriers caused the build up of risks which were much greater than could be justified by the potential gains investors might have achieved by taking them on.

What are these barriers? 

You can read the rest of the article here.

May 07, 2009

DOE Energy Storage Subsidies: Heavenly Grants and Hellish Loans

Much of the buzz in the energy storage sector is focused on DOE administered subsidy programs and what they will mean for investors in smaller public companies. The buzz began when Title XVII of the Energy Policy Act of 2005 ("EPACT") authorized $2 billion in loan guarantees for innovative energy technologies. It ramped up rapidly when the Energy Independence and Security Act of 2007 authorized another $2.5 billion in loan guarantees under the Advanced Technology Vehicles Manufacturing ("ATVM") program. It reached a crescendo when the American Recovery and Reinvestment Act of 2009 ("ARRA") authorized $7 billion in smart grid, battery manufacturing and job training grants. Speculation about who will be first in line when Uncle Sugar arrives at the party with duffle bags full of money is running rampant.

I've had nothing but praise for a plan the DOE developed to administer $4.5 billion in ARRA grants for smart grid projects. My fondest hope is that a comparable plan will be implemented for the other classes of ARRA grants. EPACT and ATVM loans, on the other hand, create an entirely different and to my way of thinking dangerous dynamic. I fear that these loans could be a kiss of death for any smaller public companies that are unfortunate enough to survive the application process.

The simple and undeniable truth is that nothing destroys financial statements faster than leveraged investments in depreciable plant and equipment, which is why many tax shelters are based on building and equipment leases. By the time you account for interest accruals on debt and depreciation on hard assets the double hit to earnings is devastating. The problem is compounded by the fact that the lion's share of any positive cash flow ends up flying out the door to cover debt service costs; leaving little or nothing in the till to grow a business and pay for research and development, marketing and corporate overhead. By the time you work your way down to the bottom of the balance sheet, the shareholders' residual interest in total enterprise value becomes almost inconsequential. For proof you don't need to look any further than the latest GM restructuring proposal that will leave 1% for shareholders, 10% for bondholders, 39% for the unions and 50% for the government. It's not pretty, but debt financing never is.

For investors that want to transcend the hype and irrational expectations that frequently accompany government guaranteed loans, I've found that subtracting 10% of the planned debt from the expected annual cash flow works well as a simple and reliable acid test. The net positive cash balance, if any, represents the maximum contribution a leveraged project can make to other corporate activities. Since the 10% figure is based on an assumed 20-year amortization of principal and an assumed annual interest rate of 5%, a higher acid test number may be appropriate.

While debt financing can be a heavy burden for borrowers that are well financed and profitable, it gets almost unbearable when the borrower is a smaller public company. First, the borrower will be required to contribute at least 20% of the project costs from its own resources, and that can be a big stretch for a small company. Second, if the borrower has a weak balance sheet or a history of losses, a lender will usually insist that the borrower obtain enough capital to eliminate the weaknesses and provide a cushion against future losses. In risk averse markets like we have now and can expect for several years, the probability that a highly leveraged smaller public company will be able to negotiate significant unsecured debt is almost non-existent; which means that applicants who get loan approvals will be required to sell substantial equity before the transaction can close.

I have participated in several negotiations between investment bankers and smaller public company clients that needed to raise equity as a closing condition for project financing. The negotiations were always ugly and the per share value offered by the investment bankers was rarely more than a small fraction of the market price of the client's stock. When the table pounding and cursing ended, my clients were stuck with a Hobson's choice of either abandoning their plans or selling stock at a steep discount to the market. Either way, the existing shareholders ended up holding the short straw.

Three of the cool emerging companies I track are pursuing loans under the EPACT and ATVM programs. Beacon Power (BCON) is engaged in advanced due diligence for a $50 million EPACT loan that will be used to build a 20 MW frequency regulation facility. In January of this year Ener1 (HEV) announced that it had applied for a $480 million ATVM loan to expand their existing battery manufacturing facilities and build a new plant. Last month, Valence Technology (VLNC) announced that it had applied for a $608 million ATVM to build a new battery manufacturing plant. Of the three announced applications, Beacon's is the only one that even comes close to having a reliable future revenue stream to pay debt service costs. The other two have business models are entirely dependent on the commercial acceptance of electric vehicles that third parties plan to introduce to the market at a later date. None of the applicants has a history of operating profits or a tangible net worth that represents more than a fraction of the requested loan amount.

My big question is "What the hell are they going to do if the DOE says yes?"

I hope that Beacon will be able to change its pending subsidy application into a request for a combination of ARRA smart grid grants and fill-in EPACT or ARRA loans. They've been working on their 20 MW frequency regulation project for a long time, it represents an important smart grid technology and it deserves to be installed and thoroughly tested. From what I know about the process, I believe the DOE would be likely to approve a combined grant and loan structure. I'm less optimistic about the chances that Ener1 or Valence will be able to negotiate financially sound alternative proposals. If they can't do so, a rejection of their ATVM loan requests would probably be the best thing for their shareholders.

In almost 30 years of practice I have never seen a smaller public company borrow its way to prosperity. The debt financed projects I've been involved in never worked as well in the real world the way they did on paper. The existence of a large secured creditor with a first claim on major assets always complicated negotiations with junior lenders. A highly leveraged capital structure always made negotiations with new equity investors difficult if not impossible. In every case, existing shareholders who bought a debt-free capital structure and ultimately found themselves at the bottom of the food chain felt the lion’s share of the pain. This is not a theoretical issue for me. It's one that has cost me millions of dollars over the years. I've been through the drill more than once and would never go there again.

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.

May 05, 2009

Financing Clean Energy: Perspectives

Tom Konrad, Ph.D.

I recently moderated a panel on Financing Renewable Energy for the Colorado CFA Society.  I took down choice quotes, with the plan of using them on Alt Energy Stocks' new twitter feed.   I ended up with enough material for a short article.

My panelists were Garvin Jabusch, COO of Green Alpha Advisors, a green-focused investment advisory firm in Boulder; David Gold, a partner at Access Venture Partners, and manager of their Cleantech investments, and Brian Greenman, of Greenman Financial Advisors, who does project development and finance for community wind developers.  The broad range of perspectives seemed to strongly engage the audience of professional money managers and analysts.

Here are some highlights (some are paraphrases, when my notes were not word for word.)

The State of Wind

Greenman: Community wind is like the Wild West.  Everything is negotiable... It gets interesting when these small players run out of something: money, turbines, anything.

Greenman: There has been only one PTC based wind deal in all of 2009 to date.  People expected a bigger boost from all the attention.  It will come, but it takes time and we're going to have to wait.

The State of Cleantech Venture Capital

GOLD: All Venture Capital is down and that includes Cleantech.  It's not different from the rest of venture capital, except that Cleantech has been hit by a double-whammy: the falling price of our main competitor: Oil.

GOLD: There's a big distraction factor of [early stage] companies chasing government dollars.  This is good if it means they don't go broke, but those dollars will be irrationally allocated.  The stimulus will not have the same impact that the macro efforts of getting the whole economy going would.

The State of Postcarbon Stocks

JABUSCH: Our basket of post-hydrocarbon economy stocks has been strongly outperforming the S&P 500 year to date, so we know money is flowing into the most eco-efficient companies.  Since a significant number of the companies are small and micro stocks, we think that most of this is smart money.

JABUSCH: When you add a price for carbon, that will change the structure of how carbon-intensive enterprises are valued.

Try, Try Again

GOLD: Cap and Trade will be passed in some form this year.  The first attempt at Cap and Trade will have many, many problems.  We'll have to go back and revisit it after we see what they are.

Solar vs. Clean Coal

JABUSCH: Solar is already way cheaper than "Clean Coal," when you count the costs of carbon sequestration, if "Clean Coal" can even be made to work.

Wind vs. Coal

Greenman: Everyone in wind wants to get away from the PTC [Production Tax Credit].  Wind is the cheapest form of electricity from new construction, and wind can compete without subsidies when fossil fuels compete without subsidies.

Getting a Job in Cleantech

Greenman: Get out there, start doing stuff, eventually you'll get paid for it.  Clean Energy is an incredibly welcoming community, and there are many organizations to help you network.

Handling Risks

GOLD: As Venture Capitalists, we won't take policy risk.  If the company will only be sucessful based on the implementation of policy XYZ, we won't invest.

Greenman: For wind, the policy framework is the PTC and the ITC [Investment Tax Credit], and we now have several years of visibility for those.  If you can get the project built in the next 2-3 years when we know that we have support in Washington, your PTC will be locked in for ten years forward... or you can take a cash grant in the form of the ITC.

JABUSCH: This is like the early stages of biotech.  Everyone knew great things were going to happen, but knowing which companies would win was difficult.  We therefore use big baskets of stocks (82 right now) to increase the odds we're betting on future winners.  We like to say, The writing is on the wall for clean energy, but it's still hard to decipher.

Greenman: For wind farms, the big risks are not technology... they are getting transmission interconnection and electricity off-takers.  These risks are measurable... we call it "Fatal Flaw" analysis, but the risks are always there and you have to decide.

U.S. vs. Them

JABUSCH: Everyone has a better vehicle than the GM Volt.  But the markets are so big, and the opportunities are so gigantic, the US does have time to catch up with the rest of the world, and even take a leadership position again.

May 03, 2009

Trading Places: Will America's Carbon Market Outsize Europe's?

Charles Morand

In early January, I said the following on the likelihood that the Obama Administration would move on carbon regulations in the near-term: "The next 12 to 18 months are unlikely to produce much in the way of vigorous environmental action on the part of government (barring subsidies for alternative energy related to the stimulus package), especially if it means additional costs on industry." Clearly, I had underestimated the power of another fundamental rule of politics - besides "don't anger the rust belt states that gave you your presidency by burdening their industries with avoidable costs in the midst of an economic downturn" - that says that if you're going to go big public policy-wise, do it in the first few months of your term in office so that four years on voters have forgiven you.

This is the approach Henry A. Waxman and Edward J. Markey decided to take when they introduced their mammoth American Clean Energy and Security Act of 2009 in late March (you can find the full 648 pager here or a 5-page summary here - the excellent WSJ Environmental Capital also wrote an interesting series of posts on the proposed climate bill). While there definitely are components of clean energy and energy security to this bill, it is fair to say that the most significant measure proposed is the introduction of a cap-and-trade system to control greenhouse gas (GHG) emissions. Here are some key quotes from the summary document [emphasis added]:

The draft establishes a market-based program for reducing global warming pollution from electric utilities, oil companies, large industrial sources, and other covered entities that collectively are responsible for 85% of U.S. global warming emissions. Under this program, covered entities must have tradable federal permits, called “allowances,” for each ton of pollution emitted into the atmosphere. Entities that emit less than 25,000 tons per year of CO2 equivalent are not covered by this program. The program reduces the number of available allowances issued each year to ensure that aggregate emissions from the covered entities are reduced by 3% below 2005 levels in 2012, 20% below 2005 levels in 2020, 42% below 2005 levels in 2030, and 83% below 2005 levels in 2050.

The draft allows covered entities to increase their emissions above their allowances if they can obtain “offsetting” reductions at lower cost from other sources. The total quantity of offsets allowed in any year cannot exceed 2 billion tons, split evenly between domestic and international offsets. Covered entities using offsets must submit five tons of offset credits for every four tons of emissions being offset.

The draft directs EPA to create a “strategic reserve” of about 2.5 billion allowances by setting aside a small number of allowances authorized to be issued each year thereby creating a cushion in case prices rise faster than expected. The draft directs EPA to make allowances from the reserve available through an auction when allowance prices rise to unexpectedly high levels.

The draft provides for strict oversight and regulation of the new markets for carbon allowances and offsets. It ensures market transparency and liquidity and establishes strict penalties for fraud and manipulation. The Federal Energy Regulatory Commission is charged with regulating the cash market in emission allowances and offsets. The President is directed to delegate regulatory responsibility for the derivatives market to an appropriate agency (or agencies), based on the advice of an interagency working group.

To ensure that U.S. manufacturers are not put at a disadvantage relative to overseas competitors, the draft authorizes companies in certain industrial sectors to receive “rebates” to compensate for additional costs incurred under the program. Sectors that use large amounts of energy, and produce commodities that are traded globally, would be eligible for the rebates. If the President finds that the rebate provisions do not sufficiently correct competitive imbalances, the President is directed to establish a “border adjustment” program. Under that program, foreign manufacturers and importers would be required to pay for and hold special allowances to “cover” the carbon contained in U.S.-bound products. (Unclear this would withstand a WTO (China) or NAFTA (Canadian Oil Sands) challenge).

Analysis

The bill therefore proposes an enforceable cap on GHG emissions effective as early as 2012, or during the current presidential term. Although the 2012 target may not seem especially daunting (-3% over a 2005 baseline), any reduction at all is no easy task. As shown in the table below, drawn from the EPA's 2009 U.S. Greenhouse Gas Inventory Report, total US emissions of GHG have grown at an average of around 1% per year since 1990 (figures are in millions of metric tons of CO2e). Click on the table for a more comprehensive table in PDF.

A 3% reduction over 2005 equates to roughly 180 million metric tons of CO2e (using the net emissions figure - 5,986 mmt). Assuming a metric ton of carbon trades between $10-$15, this would be worth between $1.8 billion and $2.7 billion. To put this into perspective, 180 million metric tons of CO2 is the equivalent of about 9.5% of total US transportation-based CO2 emissions for 2007 (1,887 mmt), or approximately 21% of total CO2 emissions coming from industrial sources (845 mmt) (see the PDF table for these figures). The latter number is actually more relevant as most of transportation would not be included in the program (sources <25,000 tons per year are excluded). It is not a stretch to say that cutting a fifth of US industrial emissions over three years is no easy task, although this recession will undoubtedly take care of some of that.    

This bill thus has the potential to generate some real - albeit small - carbon emissions trading in the US within about 3 years. For people with an interest in carbon markets, this is significant. And although carbon offsets - investing in projects that prevent GHG being emitted to generate tradable allowances - can only be used with a ratio of 4-to-1 to government-issued allowances, you can expect some significant interest in this area as well (for those not familiar with the offsets market, Bloomberg Markets Magazine ran an interesting story on the leading US player in this space, Blue Source LLC). That means money flowing into areas such livestock methane capture at the farm level, landfill gas capture, ecosystem restoration (i.e. tree planting), etc. 

Beyond 2005, the targets are high enough to incent substantial investments in carbon reduction measures, as well as sustain strong trading volumes in carbon markets. Assuming such a system is launched in 2010, the objective would be to reduce emissions at an arithmetic average of ~2% (assuming 2010 emissions are roughly equal to 2005 because of the economic crisis) per annum by 2020 vs. an arithmetic average growth rate of just under 1% per annum since 1990. Again, to put this into perspective, a 20% reduction over 2005 net emissions (5,986 mmt) equals 1,197 million metric tons, and the total CO2 emissions for the US transportation sector in 2007 stood at 1,887 million metric tons.  

Does this mean the US is about to unseat Europe as the new global emissions trading hotspot? Not quite: according to a World Bank report, in 2007, some 2,061 million metric tons of CO2e were transacted on European emissions markets for a total value of $50.1 billion. An interesting factoid about the European market is that 80% of transaction volumes occurred over-the-counter in 2007.        

Why Only Get Excited About Emissions Trading Now?       

Why, you ask, write about this now, over a month after the draft bill was released? Because last week something happened that materially raised the likelihood that this bill could become law in something close to its current form: Senator Arlen Specter of Pennsylvania crossed the aisle. Coupled with the growing likelihood that Al Franken will prevail in Minnesota, this means that before too long the Democrats could have a filibuster-proof majority in the Senate.

Of course, certain barriers remain, including convincing Blue Dog Democrats. But overall the chances of seeing carbon trading in the US in the next couple of years has increased dramatically. The thorny issue of how to allocate allowances to industry - giving them away vs. auctioning them - was conveniently left out of the bill, no-doubt to serve as a bargaining chip as final details are hammered out.  

How Do I Play US Carbon Markets?  

That's a question I've addressed on a number of occasions on this blog in the past two years, and luckily the range of options has been expanding over time.

On the equity side, World Energy (XWES) just got a whole lot more exciting last week when it migrated from the Pink Sheets to the NASDAQ. This is a company I noticed a couple of years ago but to which I only ever paid scant attention because the prospect for substantial environmental commodities trading seemed distant in the US. In a nutshell, World Energy provides a platform for electronic trading and auctions for various commodities like electricity, nat gas, renewable energy certificates and, most importantly, carbon credits. Electricity and gas account for most of the business right now. 

Things got really interesting for World Energy when it was selected to run CO2 emissions allowance auctions for the RGGI, the first and only regulated carbon market in the US. This is a good development for the company in my view. However, the recent pop in the share's price from a buck something on the Pink Sheets to $6.60 on the NASDAQ as at Friday close has less to do with fundamentals than it does with a reverse stock split at the end of March

I had a quick glance at the 2008 10-K. Revenue has grown by around 290% since 2004 and now stands at $12.5 million. Gross margin has shrunk considerably over that period from 82% in 2004 to 63% in '08. Operating margin has also deteriorated, going from 3% to -55%. However, this is a marked improvement over 2007 when operating margin was -89%. World Energy earned -$0.08 per share in 2008 vs. -$0.11 in 2007.

Balance sheet-wise, the company has a current ratio of 1.20, down from 2.36 in 2007. This drop is due in large part to cash burn, as the cash ratio went from 1.8 in 2007 to 0.46 in 2008. World Energy has no short or long-term debt besides around $3,700 in capital leases. The company has an undrawn credit facility worth $3 million.

Dramatic margin compressions and high cash burn are normal occurrences in rapidly-growing companies. At this time of year in 2006, this wouldn't have particularly worried me. However, at the current burn rate (cash went firm $7 million at the end of 2007 to $1.7 million at the end of 2008), World Energy will most likely have to raise equity sooner rather than later, which could be problematic in the current market environment and result in significant dilution. I would thus wait a little longer before touching this stock, at least until Q1 results are released and the company's cash position can be ascertained.

Another way to play emissions trading through the stock market is through Climate Exchange PLC (CXCHY.PK), the owner of the Chicago and European climate exchanges. This company is the global leader in running carbon exchanges and its primary listing is on the LSE AIM. However, for US investors, the fact that the stock trades only on the Pink Sheets Grey Market (scroll down to the end, just before the skull-and-bones!) makes this a more complicated proposition.

Nevertheless, Climate Exchange is fast-becoming a serious play on carbon trading and financials are improving - revenue grew from £13.8 million (~$21 mm) in 2007 to £22.8 (~$34 mm) million in 2008 while operating margin went from -64% to -12% over the same period. The company has a current ratio of over 4 with ample cash reserves (cash ratio of 3.19). Revenue is growing fast, profitability is within sight and there are no pressing liquidity needs.

Two exchange traded products that actually track carbon credit prices, the iPath Global Carbon ETN (GRN) and AirShares EU Allowances Fund (ASO), are also now available to US investors. In both cases, however, there is a very strong European emissions component, and the timeline for integrating US emission allowances into these products is uncertain. While both could experience a temporary bounce if a climate bill passes, they remain an overall lousy play on US emissions trading due to the lack of exposure to US emissions (duh...)

Lastly - and this is definitely more long-term in nature - there is a very real possibility that natural gas could be a big winner as this would strengthen a trend toward its growing prevalence in US power generationon. This may be an interesting angle for those who like nat gas right now anyways and may be thinking a few years out as well. The main play here would be the US Natural Gas ETF (UNG). Somewhat paradoxically, then, a strong climate bill might provide a catalyst toward a more gas-centric long-term energy policy.

Update (May 6, 2009): In the original entry, I stated that the company had $3.7 million in capital leases. I had mis-read the actual figure which is $3,700.

Disclosure: Charles Morand does not hold a position in any of the securities discussed in this article.

May 02, 2009

Alternative Energy Storage: Cheap is Outperforming Cool

John Petersen

After devoting several months to articles on arcane technical and economic issues that normal investors should not have to endure, I declared a cease fire last week and advised readers that I was done with technology and planned to focus on more interesting topics like the future of the energy storage sector and making money from energy storage investments. I've spent enough time discussing trees. Now I want to evaluate the forest and show investors how to position their portfolios for the coming of cleantech, the sixth industrial revolution.

I hope old friends and new readers alike will find the change refreshing. I know I will.

I began blogging in July of last year and have concentrated on manufactured energy storage devices and the companies that make them. In a series of 55 articles to date, my fundamental premise has been that:
  • Manufactured energy storage devices are just plain boring;
  • Energy storage stocks have historically traded at "rust belt" valuations;
  • As we enter the cleantech age, the market will discover that energy storage is a core enabling technology for many classes of alternative energy; and
  • As the market adjusts to the new realities, valuations in the energy storage sector are likely to soar.
Since July, market interest has developed faster than I expected and it's beginning to look like my predictions of rising tides and investment tsunamis may have undershot the mark. Just yesterday, Energy & Capital ran a headline story that screamed "Advanced Energy Storage: It's Worth Billions." Others like it appear regularly. This is a great time for astute investors who are seeking alpha, but the window of opportunity is closing.

In November of last year, I published an article titled "Alternative Energy Storage: Cheap Will Beat Cool" that discussed the difference between cool innovations and successful products. That article was the first time I segregated companies into a "cool group" and a "cheap group." It concluded with the suggestion that investors who wanted to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.

I'm delighted to report that over the last five months, the market performance of the stocks I classified as cheap has absolutely crushed the market performance of the stocks I classified as cool.

The following table provides comparative price data for the short-list of battery companies I track and includes price data for two flywheel companies that I talk about frequently but omitted from my original table. It shows closing prices on November 14, 2008 and May 1, 2009, calculates the percentage of change over the last five months, and calculates current market capitalizations based on recent SEC reports.



14-Nov 1-May Percent Market Cap
Cool Group
Symbol Close Close Change Millions
  Ener1 HEV $6.75 $5.61
-16.89% $636.59
  Valence Technology VLNC $1.88 $2.18
15.96% $267.60
  Maxwell Technologies MXWL $6.50 $10.22
57.23% $235.91
  Advanced Battery ABAT $2.13 $2.76
29.58% $150.87
  Ultralife Batteries
ULBI $9.08 $7.39
-18.61% $127.17
  China BAK Battery
CBAK $1.99 $2.05
3.02% $118.24
  Altair Nanotechnologies ALTI $0.87 $1.12
29.48% $106.57
  Beacon Power BCON $0.82
$0.85
3.05% $95.13
  Hong Kong Highpower HPJ $3.50 $2.00
-42.86% $27.13






Cheap Group




  Enersys ENS $6.86 $18.66
172.01% $895.21
  Exide Technologies XIDE $3.38 $5.70
68.64% $430.22
  C&D Technologies CHP $1.94 $2.10
8.25% $55.12
  Axion Power International AXPW.OB $1.30 $1.50
15.38% $53.00
  Active Power ACPW $0.40
$0.58
43.75% $34.76
  ZBB Energy ZBB $0.93 $1.22
31.18% $12.82

Between the reference dates, a $1,000 index investment in each of the DJIA, the Nasdaq Index and the S&P 500 would have resulted in an average portfolio appreciation of 3.5%. In comparison, a $1,000 investment in each of the cool companies would have resulted in an average portfolio appreciation of 6.7%. The real shocker is that a $1,000 investment in each of the cheap companies would have resulted in an average portfolio appreciation of 56.5%. I'm reluctant to boldly predict future trends, but I have no reason to believe that the cheap companies won't outperform both the broader market and the cool companies for the foreseeable future because they started from very low valuation levels and have a lot of catching up to do.

Blogging about emotionally charged alternative energy and energy storage issues is always a challenge because the critics are smart, opinionated and outspoken. As a result the comments to my articles are often more interesting than the articles themselves. Since I've received more than my share of fair criticism and learned some things along the way, I've decided to restructure my presentation tables. I'm not going to change the core data or the companies I track, only the manner of presentation.

The biggest impetus for the change is that both of my original groups include two types of entities: established companies with sustainable business models and emerging companies that haven't reached a point where their business models are sustainable. The downside is that it gives me four analytical classes instead of two. The upside is that it will simplify analysis and make the results more useful to investors. My restructured group classification and presentation tables follow.



14-Nov 1-May Percent Market Cap
Cool Emerging Group
Symbol Close Close Change Millions
  Ener1 HEV $6.75 $5.61
-16.89% $636.59
  Valence Technology VLNC $1.88 $2.18
15.96% $267.60
  Altair Nanotechnologies ALTI $0.87 $1.12
29.48% $106.57
  Beacon Power BCON $0.82
$0.85
3.05% $95.13






Cool Sustainable Group





  Maxwell Technologies MXWL $6.50 $10.22
57.23% $235.91
  Advanced Battery ABAT $2.13 $2.76
29.58% $150.87
  Ultralife Batteries
ULBI $9.08 $7.39
-18.61% $127.17
  China BAK Battery
CBAK $1.99 $2.05
3.02% $118.24
  Hong Kong Highpower HPJ $3.50 $2.00
-42.86% $27.13






Cheap Emerging Group





  Axion Power International AXPW.OB $1.30 $1.50
15.38% $53.00
  ZBB Energy ZBB $0.93 $1.22
31.18% $12.82






Cheap Sustainable Group





  Enersys ENS $6.86 $18.66
172.01% $895.21
  Exide Technologies XIDE $3.38 $5.70
68.64% $430.22
  C&D Technologies CHP $1.94 $2.10
8.25% $55.12
  Active Power ACPW $0.40
$0.58
43.75% $34.76

If I had used this four class analytical grouping from the beginning, the average portfolio performance for a $1,000 investment in each company would have been as follows:

Cool Emerging Group
7.9%
Cool Sustainable Group
5.7%
Cheap Emerging Group
23.3%
Cheap Sustainable Group
73.2%

All experienced investors know that equity markets are driven by a combination of greed and fear, emotional reactions that are often at odds with fundamental economic realities. Over the past few years, both cool groups have been driven by headlines that highlight opportunities while both cheap groups have been driven by headlines that highlight problems. Since headlines invariably feed the greed and fear cycle, the cool groups were driven to relatively high valuation levels while the cheap groups were driven to relatively low valuation levels. If the last five months are an indication, the pendulum is starting to move back toward a more balanced position where cheap group valuations will eventually catch up with cool group valuations. As the following summary valuation metrics show, they still have a long way to go.



Shares Price/ Price/ Price/ Book Value
Cool Emerging Group Symbol (000s) Earnings Book Sales Per Share
Ener1 HEV 113,474
6.47 97.60 $0.91
Valence Technology VLNC 122,754

9.39 -$0.51
Altair Nanotechnologies ALTI 95,153
2.53 18.87 $0.46
Beacon Power BCON 112,578
3.56 1367.00 $0.24
    Group Average


4.19 373.22







Cool Sustainable Group





Maxwell Technologies MXWL 23,083
3.58 2.81 $2.86
Advanced Battery ABAT 54,662 8.85 1.97 3.33 $1.40
Ultralife ULBI 17,208 9.43 1.40 0.48 $5.10
China BAK CBAK 57,680
0.73 0.47 $2.92
Hong Kong Highpower HPJ 13,563 13.16 1.87 0.41 $1.20
    Group Average

10.48
1.91 1.50







Cheap Emerging Group





Axion Power International AXPW.OB 35,333
6.69 60.25 $0.22
ZBB Energy ZBB 10,512
1.37 10.33 $0.88
    Group Average


4.03 35.29







Cheap Sustainable Group




Enersys ENS 47,975 9.24 1.24 0.38 $13.79
Exide Technologies XIDE 75,478 7.49 0.87 0.11 $6.21
C&D Technologies CHP 26,247
1.53 0.16 $1.43
Active Power ACPW 60,458
1.71 0.83 $0.35
    Group Average

8.37 1.34 0.37

As the cleantech revolution unfolds, the market will learn that every energy storage decision boils down to a cost-benefit analysis. It will also learn that the bulk of the incremental sales revenue will be funneled to companies that serve the average needs of the average user, rather than the extreme needs of the rare "power user." While I believe fundamental market drivers will result in rapid and sustained growth across the entire spectrum of energy storage companies, I’m convinced the superstars will be the manufacturers of objectively cheap products that can serve the needs of average users at a reasonable price. Until cheap group valuations approach parity with cool group valuations, I continue to believe that investors who want to maximize portfolio performance in the energy storage sector should focus on the cheap group instead of the cool group.
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), Enersys (ENS) Active Power (ACPW) 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 2009 | Main | June 2009 »

Site Sponsors





Oil and Gas



Search This Site


Share Us






Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner


Subscribe by RSS Feed



Certifications and Site Mentions


New York Times

Wall Street Journal





USA Today

Forbes

The Scientist

USA Today

Seeking Alpha Certified

Twitter Updates