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June 30, 2009

Clean Energy Stocks Shopping List: Five Electricity Transmission Stocks

We may be headed into a renewed market slump.  If so, it will pay to wait before buying, but when the time does come to buy, here are 5 electric transmission stocks I have my eye on.

Tom Konrad, Ph.D., CFA

On June 2, I wrote that I thought the market was near its peak.  That day, the S&P 500 closed at 944.74.  On June 12, it closed up 0.15% at 946.21, and has since trended down, currently trading down 5% as I write.  I expect further declines this year, either with the market heading straight down from here, or bouncing around for a while, possibly for a few months, before declining in earnest.

This article continues my Clean Energy Stocks Shopping List series, which I started with the intent of occupying myself while I wait for the market to fall.  Like most people, I find it difficult not to buy when I find a company I'm interested in, even if I don't like the valuation.  I find planning my future purchases lessens the need to use the cash I've been accumulating now, and possibly will be of some help to readers in the meantime.  So far, I've brought you five clean transport stocks, and five energy efficiency stocks.  I have enough others for about three more lists, which you will be able to find here as they are published.

When I'm done, you should have enough to put together a diversified portfolio of companies involved in what I consider the most promising clean energy sectors.  In other words, don't expect any Algae Biofuel stocks (I like the industry, but not the stocks) or Hydrogen Fuel Cell Stocks (I'm skeptical about the economics of the technology.)

I'm not skeptical about either the electric transmission industry or the technology.  As a century-old industry, it contains many mature, profitable companies, but the need to build out and enhance our existing (and rather decrepit) electric grid in order to integrate renewable energy means that there are also exciting opportunities for growth.  Here are five.

Equipment Providers

#1 General Cable (BGC) produces exactly what you'd expect: cable of all sorts, for electrical transmission, wiring, and communications.  If you believe (as I do) that the long term decline in the use of fossil fuels will mean the increasing electrification of the economy, General Cable is the one company I'd point to as most likely to benefit from the trend.   The company is solidly profitable, with a forward P/E of 10, almost $4 of cash per share, and strong operating cash flow.

#2 ABB Group (ABB) is a global technology  firm based in Switzerland with products focused on electrical transmission and distribution, and one of two global leaders in High Voltage Direct Current (HVDC) transmission (the other is Siemens (SI).)  HVDC is the best currently available technology for transporting large amounts of electricity over long distances, and is essential to the hoped for European Destertec Project, and would likely be necessary if we were to use concentrating solar power in the US Southwest as dispatchable power to balance variable renewable energy in the rest of the US.

On a more prosaic level, ABB also has technology to improve the efficiency of electricity distribution as well as transmission. The company currently trades at a P/E of 12.6, has $3 cash per share on the balance sheet, strong operating cash flow, and pays a dividend over 3%.

Service Providers

The companies which will contract to build out the new electric infrastructure seem most likely to be able to leverage the build-out to achieve high levels of growth, and hence large gains in stock price.  Here are three:

#3 Pike Electric (PIKE) performs service and upgrade of electric transmission and distribution throughout the US.   Although the company has a strong balance sheet and cash flow, analysts expect earnings to drop significantly next year.  If lower earnings materialize, we can expect significant price deterioration (especially in the context of an overall market decline,) and may be able to purchase this stock at an attractive valuation.  The forward P/E is currently over 17 at a stock price of $11.60.  The relatively high valuation makes Pike likely to be hit hard by a general market decline, leading to an excellent buying opportunity.

#4 MasTec (MTZ) not only builds and maintains transmission and distribution infrastructure, they also provide those services for fiber optic communications networks, as well as wind farms.  Mastec is less well capitalized than ABB and General Cable, but still has a strong balance sheet and cash flow, and it currently trades at a more attractive valuation than Pike, with a P/E of only 11.6.  As such, it's an interesting wind and transmission play.

#5 Quanta Services (PWR) No stock list of mine is complete without Quanta Services, which was once described to me by an industry insider as the company to call if you want to put steel in the ground on a transmission project.  Quanta has a strong balance sheet (strong cash flow, $2.65 cash per share, and a current ratio of 3.3,) but its high growth means that it trades at the relatively rich forward P/E ratio of 18.6.  Like Pike, a general stock market drop should hit Quanta disproportionately, providing an excellent buying opportunity.

DISCLOSURE: Tom Konrad and/or his clients own BGC, ABB, SI, PIKE, MTZ, and PWR.

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.

June 29, 2009

What's Next For The US Natural Gas Fund (UNG)?

Charles Morand

Natural gas is the one commodity that has mostly resisted the rally ushered in some three months ago by a growing consensus that the worse may be over for the economy.

A number of reasons have been put forward to explain this, including record storage levels and a growing supply base being unlocked through shale gas production in North America.  

Yet natural gas' future looks bright: (a) it burns a lot cleaner than coal, making it a superior alternative to meet base- and peakload power requirements in a carbon-constrained world; (b) it is receiving growing attention as bridge fuel between gasoline-powered internal combustion engines and electric vehicles; (c) there is ample supply of it in the U.S. and Canada, making it popular with the energy independence crowd.

The near-term picture, however, is bleak...and it could be about to get bleaker. According to analysts at Citigroup Global Markets, trading activity at the US Natural Gas Fund (UNG) may be 'artificially' propping the front-month NYMEX contract. The storage situation is apparently bleak enough to warrant yet lower prices, begging the question: when, if it all, will the chickens come home to roost?

Although the combination of a bright future and depressed prices make natural gas - through UNG - an interesting investment idea for light-green alt energy investors with a time horizon beyond 12 months, there could be further price declines on the way. Right now may yet be a little early to pull the long trigger...


June 28, 2009

A123's Planned IPO Moves to the Front Burner

John Petersen  

After six months of regulatory silence and $100 million in new funding, A123 Systems amended the SEC registration statement for its proposed IPO on June 23rd. While this latest filing may simply be A123's way demonstrating its ability to raise matching funds for a scaled back ATVM loan request of $1 billion and pending applications for $438 million in direct Federal grants, my sense is that the proposed IPO will probably come to market in early September. Since ATVM loans will require 20% cost sharing and direct Federal grants will require 50% cost sharing, the IPO will probably be a good deal larger than the $175 million contemplated by A123's original filing.

I'm very interested in A123's IPO for several reasons. First, it will be underwritten by Morgan Stanley, Goldman Sachs, Merrill Lynch and Lazard, which will give us the first clear picture of how the top-tier investment banks and institutional investors value pure-play energy storage companies. Second, the emergence of A123 as a sub-sector leader will encourage lesser Li-ion battery developers to adopt comparably transparent disclosure metrics that will make it much easier to assess their relative strengths and weaknesses. Third, the existence of a large, adequately capitalized and business driven leader in the Li-ion sub-sector will probably dampen some of the unbridled optimism we've seen in the markets for transition stage Li-ion battery developers. Finally, the A123 IPO is likely to launch a renaissance of interest in a basic industrial sector that's been undervalued and ignored for years.

I spent some time over the weekend studying A123's draft prospectus and was able to glean important current data that tends to highlight the yawning economic chasms that Li-ion technology must bridge before it can compete in applications where the end-user has a choice. During the first quarter of 2009, A123's cost of goods sold was $1.89 per watt hour, which does not compare favorably with an average cost of roughly $0.20 per watt hour for lead acid batteries. Likewise A123's $41 million investment in property, plant and equipment that can manufacture up to 151,000 kWh of batteries per year is at least an order of magnitude greater than the capital cost of lead-acid battery manufacturing facilities.

I fully expect that capital outlays and manufacturing costs for Li-ion batteries will both decline dramatically over the next ten years. For the short- to medium-term, however, I expect gross profit margins in the Li-ion sub-sector to remain narrow and sales revenues to ramp-up slowly as Li-ion battery chemistry and manufacturing methods progress through two or three generations of technological change. It all boils down to baby steps; learning to crawl, then toddle, then walk and then run. The bumps, bruises, skinned knees and tears are all part of the learning process.

As regular readers know, I come from the lead-acid side of the battery business and believe that over next ten years the bulk of the expected revenue growth in the energy storage sector will flow to established manufacturers of inexpensive lead-acid batteries that can do the required work for a reasonable cost even if they are bulkier and heavier. Over the longer term, I expect leading Li-ion battery developers like A123 to overcome a myriad of cost, performance, safety, cycle-life, abuse tolerance and raw material constraints that I've written about in other articles, and ultimately usher in a golden age of cheap energy storage for applications ranging from portable power, to vehicles with plugs, to a smart grid that smoothly integrates a host of emerging power generation technologies. The changes won't come overnight and they will be expensive, but by 2020 the world will be very different from the one we live in today.

While I'm not so old that I avoid buying green bananas, I expect to be cold, dead and buried long before competition from Li-ion batteries results in a year on year decline in global sales of lead-acid batteries. Nevertheless, A123's upcoming IPO is certain to focus the market’s attention on the storage sector in a whole new way. Since I've been around long enough to know that a rising tide of investor sentiment lifts all of the boats in the marina, I think astute investors ought to be doing their boat shopping now.

June 26, 2009

Automotive Batteries, Short-term Revenue Growth Favors Lead-acid By 6 To 1

Last week, an article in Green Car Congress summarized a market forecast that Dr. Menahem Anderman presented at this month's Advanced Automotive Battery Conference in Long Beach, California. In his presentation, Dr. Anderman evaluated the market for HEVs in 2011, projected a $1,230 million market for automotive NiMH batteries, and projected a $320 million market for automotive Li-ion batteries. The following graph comes from Green Car Congress, is based on data from Dr. Anderman's AABC presentation, and shows both unit sales and market value of the Li-ion batteries that will be used in HEVs by 2011 (click on the graph for a larger image).

It's sobering if not downright depressing when you get to the middle of the article and read about Dr. Anderman's analysis of the gasoline prices required for HEVs to make economic sense.

Based on a five-year net present value analysis, Dr. Anderman concluded that:
  • Stop-start hybrids make economic sense in the $5 per gallon range;
  • Mild and strong hybrids require a gasoline price of roughly $7 per gallon; and
  • PHEVs and full EVs require a gasoline price of about $10 per gallon.
When he performed an eight-year present value analysis, Dr. Anderman concluded that:
  • Stop-start hybrids make sense in the $3 per gallon range;
  • Mild and strong hybrids make sense in the $5 per gallon range;
  • PHEVs require a gasoline price of roughly $7 per gallon; and
  • Full EVs still require a gasoline price of about $10 per gallon.
I know very few people that can perform a net present value analysis. I know even fewer who go looking for a new car with the idea that they're going to drive it for five to eight years. Given the dismal economics of mild and strong hybrids and the ghastly economics of cars with plugs, I believe the high-end market for the next several years will be limited to the image conscious affluent who are willing and able to pay big premiums to make a statement. While Dr. Anderman's forecast of 40,000 Li-ion powered HEVs in two years strikes me as a very ambitious target, I'm willing to set aside my reservations for purposes of this article and assume that manufacturers of automotive Li-ion batteries will be guaranteed revenues of $320 million in 2011.

While most would agree that $320 million of total revenue by 2011 sounds impressive, it loses a bit of luster when you consider that advanced lead-acid battery manufacturers can expect $900 million to $1.8 billion of incremental revenue by 2011 from the widespread implementation of stop-start technology as standard equipment.

I've used the following graph from an October 2008 Frost & Sullivan presentation in a couple of recent articles, but it bears repeating because the law of large numbers is the fundamental reason that short term revenue growth in the automotive battery market favors lead-acid by 6 to 1 over Li-ion. The long blue segments represent the stop-start market that will be dominated by advanced lead-acid batteries because they can do the required work, they cost 60% to 75% less than NiMH and Li-ion alternatives, and they are the only batteries that can be manufactured in sufficient numbers to serve the short-term needs of automakers. The red, green and violet segments represent the high priced "centerfold" alternatives favored by EV advocates, reporters, politicians and public relations managers who would rather sell a sweet dream than grapple with economic reality.

In How Short-Term Supply Constraints Will Impact Booming HEV Markets, I explained that Frost & Sullivan based their original forecast on European CO2 emission standards but did not account for President Obama's subsequent acceleration of domestic CAFE standards. That change alone will push growth that would normally have occurred between 2015 and 2020 into earlier years and could easily double the growth rates Frost & Sullivan expected last fall. So with that background in mind, let's run the numbers.

Currently automakers spend between $50 and $100 for the commodity lead-acid batteries they use for starting, lighting, ignition and accessories; call it an average of $60. Since stop-start hybrids put far more stress on the battery, the advanced lead-acid batteries needed for stop-start vehicles will probably cost the automakers $250 to $300 per vehicle; call it an average of $260. That means the battery cost increment for a stop-start vehicle will be in the $200 range.

A quick eyeball of the Frost & Sullivan graph shows forecasted sales of 4.5 million stop-start vehicles by 2011, which works out to about $900 million in incremental revenue for lead-acid battery manufacturers, or roughly three times Dr. Anderman's forecast for Li-ion. If accelerated CAFE standards double global demand for stop-start vehicles, the incremental revenue for lead-acid battery manufacturers will be closer to $1.8 billion, or roughly six times Dr. Anderman's forecast for Li-ion.

Li-ion battery developers Altair Nanotechnologies (ALTI), Ener1 (HEV) and Valence Technologies (VLNC) have a combined market capitalization of $935 million and will be vying with a host of established domestic, European and Asian competitors for a piece of $320 million in total revenue.

In comparison, lead-acid battery manufacturers Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB) have a combined market capitalization of $340 million and will be vying with their traditional competitors for a share of $1.8 billion of incremental revenue.

Benjamin Graham
said, "In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine." The voting is based on hopes, dreams and expectations. The weighing is based on revenue growth, earnings and other business fundamentals. Any time I can identify one industry sub-sector that trades at one-third of the market value of its more glamorous cousin but is likely to enjoy three to six times the short-term revenue gains, I have to believe the undervalued sector will reward investors handsomely as the weighing machine returns to balance.

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

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2007 he was a director of Axion Power International, Inc. a public company involved in advanced lead-carbon battery research and development.

June 24, 2009

Clean Energy Stocks Shopping List: Five Energy Efficiency Stocks

Stocks may be expensive now, but they won't be forever.  Five energy efficiency plays to buy when they're cheap again in efficient HVAC, desalination, thermal imaging, and lighting.

Tom Konrad, Ph.D., CFA

This article continues my Clean Energy Stocks Shopping List series.  In the first, I looked at five clean transport stocks I'll be looking to buy when the market falls.  In the second, I took a step back, and outlined why it makes sense to wait for better prices than to buy these companies now.  Here are five stocks I'll be looking to buy  in my all time favorite sector, Energy Efficiency.  Future articles in this series will be found here.

#1 Energy Recovery, Inc. (ERII)

Much has been written about how energy and water are increasingly becoming interlinked problems, with the production of energy (especially biofuels) and the pumping, sanitization, and desalination of water requiring increasing amounts of energy.  One way to invest in this theme is by investing in wind stocks or solar photovoltaic stocks, since these technologies require little or no water to generate electricity.  

Another way would be to invest in water rights or water suppliers, or a water ETF.  I have long avoided this method, because I consider water to be far too politically sensitive.  People have a deep distaste of companies making money from water, and this often leads to politicians expropriating water company assets or changing the rules so that owners of water rights don't make "unreasonable" profits from them.  With all this political risk surrounding water, the only way I feel comfortable investing is through an equipment supplier which can make a profit by selling equipment to utilities.  Once the sale is made, the profit can be booked, and there is much less ongoing political risk than there would be by investing directly in such a utility.

Energy Recovery, Inc. is such a company.  They sell systems which greatly reduce the energy used in desalination, making this both an energy efficiency play and a water play.  Better, they are currently profitable, and have an extremely strong balance sheet and good cash flow.  However, its valuation ratios are all quite high because of high expected growth. I'm waiting for the price to fall before I buy any more (I'm currently short a few August $5 puts.)

#2 and #3 LSB Industries and Waterfurnace Renewable Energy (WFI.TO / WFFIF.PK)

I wrote about these two geothermal heat pump companies last December, and Waterfurnace is one of my Ten Clean Energy Stocks for 2009.  Since I wrote those articles, Energy Secretary Chu toured a Waterfurnace plant, and announced $50 million in government support for geothermal heat pump use.  Given all the attention, both stocks have risen sharply, and I'd be happy to increase my stakes if a market decline results in a buying opportunity. 

#4 FLIR Systems, Inc. (FLIR)

I also recently covered Flir, which I expect to benefit from the growing number of energy auditors and energy audits which have been spurred by the stimulus package, and this stock, too, has advanced strongly.  The business case remains strong, and if a market decline takes this high-growth, high P/E stock with it, I'll be ready to buy more.

#5 Cree Inc (CREE)

Cree is probably one of my longest standing favorite stocks. It is in both my Ten Clean Energy Stocks for 2008 as well as the 10 for 2009, and I was writing about investing in LED companies long before I started the annual lists.  Because the stock price has gone up so quickly  recently, I've sold most of my position.  I went into some depth as to why I like the company in both articles, and I still like it and the LED industry in general, because it's a rare energy efficiency play that's a simple product, and hence does not encounter many of the barriers to energy efficiency. Reasonably high powered LED light bulbs are becoming more common in stores, as well as LED fixtures.  I recently purchased an LED Lamp for reading, and an LED Grow Light. If a market decline provides the opportunity, I plan to rebuild my position in Cree.

DISCLOSURE: Tom Konrad and/or his clients own ERII, LXU, WFIFF, FLIR, and CREE.  

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.

June 22, 2009

Cellulosic Ethanol and Advanced Biofuels Investments

There's much excitement about second generation biofuels made from cellulosic feedstocks and algae, be they cellulosic ethanol, biodiesel, biocrude, or electricity from biomass.  There will be winners, but they may not be the technology companies.

Tom Konrad, Ph.D., CFA

At the 2009 Advanced Biofuels Workshop, there were two major themes: developing new feedstocks, especially algae, and the development of new pathways to take biomass into products such as biocrude, which can be used in exiting oil refineries.  

Big Market, Many Competitors

The current federal Renewable Fuel Standard requires the use of 36 million gallons of biofuels, including at least 21 billion gallons of advanced biofuels by 2022.  Advanced biofuels are defined as fuels other than corn-based ethanol and with greenhouse gas (GHG) emissions half that of the fuel they replace.  This creates a gigantic market, so large that some industry observers doubt if it can be met.

Many of these fuels will not be ethanol, a fuel which poses problems with the current fuel transport and distribution infrastructure.  Even for cellulosic ethanol, there are several different processes that different companies are pursuing: Acid hydrolysis, Thermochemical conversion, Biochemical conversion, and Consolidated Bioprocessing, and combinations of these three used in various combinations by various companies.  

Potential products not only include fuels such as ethanol, butanol and higher-carbon alcohols, but biocrude which can be fed into existing refineries.  Other potential products include plastics, and many other products currently produced by the petroleum based energy industry.  

The bewildering array of potential pathways and products make for a very challenging investment landscape.  An investor in any company would need a lot of confidence that the company they are investing in will be able to take their chosen feedstocks to a potential salable product at lower cost than all the competitors out there.  Unsurprisingly, nearly every company feels it has the best process.

Lessons From the First Generation

With so many variables, I find it's often better to take a step back to see what impact the development of the advanced biofuels market will have on the larger economy.  Will there be impacts on the broader economy which will be independent of the eventual mix of products and processes in the advanced biofuels market?

We can learn from the experience of first generation biofuels.  

Below is a chart from William Thurmond, President of Emerging Markets Online and author of Algae 2020: Biofuels Commercialization Outlook, and Biodiesel 2020: A Global Market Survey:

Click to Enlarge

It shows how biodiesel feedstocks (Palm oil, rapeseed oil, and soybean oil) are increasingly following diesel prices.  There is a massive overcapacity for biodiesel production in the EU, as shown in the shown in the following graph, also from Thurmond:

Click to Enlarge

With this excess capacity, if biodiesel feedstock prices were to fall relative to diesel prices, biodiesel producers would purchase feedstock either until they fill their excess capacity, or until feedstock prices rise again to a point where it is no longer profitable to run additional biodiesel capacity.  Put another way, biodiesel producers cannot be more than marginally profitable (and may be unprofitable) so long as there is significant excess capacity.  Excess capacity can only be filled if additional feedstock can be found, or plants permanently shut down.

What does this mean for advanced biofuels?  As advanced biofuel technologies advance, feedstocks prices are likely to rise.

Why Advanced Biofuels are Different

Unlike with biodiesel and starch based ethanol, many second generation feedstocks are not generally internationally traded; many are actually waste streams from other processes, such as yellow and brown grease (the restaurant industry), corn stover, forest trimmings (the lumber industry,) and even municipal waste.  The more that these feedstocks are internationally traded and easy to transport (such as yellow and brown grease), the more likely they are to follow the patterns seen in the feedstocks for first generation biofuels.  According to Thurmond, this has already happened with yellow grease, and the rise in price was a surprise to most biodiesel industry participants.

Many emerging biofuels companies have learned this lesson.  ZeaChem's strategy specifically includes setting up a long term contract to purchase feedstock from dedicated energy plantations because "the availability of sustainable, cost effective raw materials is essential for an economically viable cellulosic biofuel facility," according to Andy Vietor, ZeaChem's CFO, who spoke at the workshop.  BioFuelBox Corporation is tackling the same problem from a different direction: by developing a biorefinery that they expect can produce biodiesel from a zero-cost waste stream (trap grease), but I'm not sure that they have completely absorbed the lesson.  Even trap grease will acquire some value if they can consistently make fuel from it.  I think they could improve their business model by selling their technology as a turnkey solution to the waste stream owner.

Investments and the "Everything vs. Fuel" debate

Investors who expect advanced biofuels to be successful should pay close attention to feedstocks.  Just as supply constraints for batteries will shape the electric and hybrid electric auto market, limited supplies of biomass will shape the advance biofuels industry.  

If an advanced biofuel company expects to make biofuel from an easily shippable commodity, such as wood chips, they'd be advised to stay away, unless that company also plans to contract for their supply of feedstock well ahead of time, and such agreements will probably constrain a company's ability to react to changing conditions.  Lack of flexibility can be fatal to start-up companies.

Companies which produce easily transportable feedstocks being considered by advanced biofuel companies stand to benefit from new markets for their products.  These include forestry companies (wood chips), waste management companies, and most owners of arable or marginal land.  Wood chips are likely to see price escalation even without the advent of advanced biofuels based on them.  Wood chips and pellets can be cofired in many existing coal power plants with only relatively inexpensive modifications, a process which offsets large amounts of carbon emissions at very low cost.  Biomass cofiring was the cheapest renewable energy opportunity identified in California's RETI study last year.  For an apples-to-apples comparison, the greater efficiency of electric motors means that electricity produced from biomass can propel an electric vehicle 81% farther than an otherwise comparable ethanol-fueled vehicle running on cellulosic ethanol produced from the same amount of biomass.

Furthermore, the existing biofuel industry may also find better uses for cellulosic feedstocks than turning them into biofuels.  I attended a session at the 2009 Fuel Ethanol Workshop the following day where gasification of cellulosic waste streams such as corn cobs or stover was presented as an economical way to reduce the carbon footprint of corn ethanol by displacing natural gas used in the production process.

The flip side of the feedstock equation is that industries which compete for feedstock with the biofuels industry are likely to be hurt by rising prices.  Advanced Biofuels may resolve the "Food vs. Fuel" debate, but they will be doing so by, at least in part, replacing it with a new "Everything vs. Fuel" debate.  For instance, the paper industry (especially those companies which do not own forestry assets) will likely be hurt by rising pulp prices, like Mexicans who found they could not buy tortillas.  Recycled paper pulp is an excellent cellulosic feedstock as well.  On the other hand, businesses which produce or collect paper waste may find more robust markets for their products.

This line of reasoning might also give you pause if you're considering warming your home with a wood pellet stove.  The advent of biofuels from wood chips will mean that the price of your wood pellets will start to track the price of petroleum, just like the price of vegetable oils are already doing.   From an economic perspective, heating with wood pellets may become not much different than using heating oil.  We saw the start of this trend last year with wood pellet factories starting to price dairy farmers out of the market for sawdust in the Pacific Northwest.

Algae to the Rescue?

Algae is the only feedstock that has the potential to be productive enough to supply most of our current liquid fuel demand, but it is still unproven.  Most current algae to biofuel production methods cost an order of magnitude more than the fossil fuels they hope to displace.  This is why most algae biofuel companies are currently targeting higher-value synthetic bioproducts, such as animal feed additives.  But Will Thurmond believes that some algae companies may be cost competitive with fossil fuels as early as 2012, but only in his most optimistic scenario; the process of bringing down costs could take much longer.

There are now three publicly traded Algae companies.  I've previously written skeptically about PetroSun (PSUD.PK,) and Thurmond told me, "Petrosun appears to doing well in the news, but if you examine their financial statements, it's a different story."   More recently OriginOil (OOIL.OB) and PetroAlgae, (PALG.OB) have also gone public.  PetroAlgae is the industry high flyer, and is doing some interesting work growing duckweed, at least according to a hallway conversation.  Unfortunately, the stock is so thinly traded that it would be difficult for even a small investor to get in without significant price impact.  OriginOil shows better volumes, but they, too, are early in their technological development.

Algae has great promise, but the only investments currently available to the retail investor are very early stage.  Even if we were to assume that the algae industry will quickly meet its potential, these three companies only amount to a tenth of the current players, and the rigors of being a public company are not the best environment in which to develop an emerging technology.  Algae could well be a monumental success story, but that does not mean that any of these three companies will participate in that success.


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.

June 20, 2009

How Short-Term Supply Constraints Will Impact Booming HEV Markets

John Petersen

For several weeks I've been writing about robust demand in Europe for a new class of HEVs that are usually referred to as "stop-start" or "micro hybrids." According to the EPA's website:

"Stop/Start hybrids are not true hybrids since electricity from the battery is not used to propel the vehicle. However, the Stop/Start feature is an important, energy-saving building block used in hybrid vehicles.

Stop/Start technology conserves energy by shutting off the gasoline engine when the vehicle is at rest, such as at a traffic light, and automatically re-starting it when the driver pushes the gas pedal to go forward."

The concept is simple and so is the technology. Adding micro hybrid capabilities at the factory typically costs less than $1,000 per vehicle and improves fuel efficiency by an estimated 5% to 8%. It's a baby step, but as my first table in The Obama Fast Track for HEVs shows, it's more cost-effective than any other class of HEV technology. The main reason micro hybrids are so affordable is that they use advanced lead-acid batteries instead of more expensive alternatives.

Since the booming European micro hybrid phenomenon has not reached the U.S., a couple skeptical readers challenged me to show them press releases from major European OEMs announcing plans to produce HEVs that didn't use NiMH or Li-ion batteries. They were not satisfied with my initial response that micro hybrids are being adopted as standard equipment without major fanfare. Yesterday I found an October 2008 "Power Solutions Backgrounder" from Johnson Controls, Inc. (JCI) that proves the point nicely:

"We sold 400,000 advanced batteries for start/stop micro hybrid vehicles in Europe in 2007 and 800,000 in 2008, with the expectation of doubling that number again in 2009 to approximately 1.5 million batteries. These vehicles achieve a 5 percent to 8 percent fuel savings compared to conventional gas vehicles."

I then found www.hybridcars.com, a rich source of data that describes itself as the Internet’s premier website dedicated to hybrid gas-electric vehicles. By combining the micro hybrid battery sales data from JCI with additional data from hybridcars.com, I was able to cobble together the following graph that shows the growth of the global HEV market over the last 10 years. Since I don't have access to comprehensive data on the European micro hybrid market, I assumed that JCI was the only competitor. As a result, the graph understates European micro hybrid sales by a couple of percentage points, but in this case shape is far more important than numerical precision.

Click to enlarge

With historical data to provide context, the following graph from a 2008 Frost & Sullivan presentation that summarizes their forecast of future growth in global HEV sales makes a good deal more sense than it may have in earlier articles.

As I explained in How Growing HEV Markets Will Impact Battery Manufacturing Revenues, the Frost & Sullivan forecast was based solely on European CO2 tailpipe emission standards that take effect in 2012 and did not account for President Obama's subsequent acceleration of CAFE standards. That recent change will have the effect of pushing growth that would normally have occurred in the 2015 to 2020 timeframe into earlier years and could easily double the growth rates that were expected last fall. While I'm happy to leave the work of updating growth forecasts to experts like Frost & Sullivan, it seems safe to conclude that the next few years will be a challenging time for the battery industry.

Under the growth scenario presented in the Frost & Sullivan graph, the bulk of the unit growth in the HEV markets will go to lead-acid battery manufacturers who will not need to make larger numbers of batteries, but will need to make higher quality batteries that are better suited to the performance requirements of micro hybrids. This changing product mix will reduce production volumes for low-margin valve regulated lead-acid batteries and increase production volumes for high-margin advanced lead-acid batteries, and should lead to rapid and sustained revenue and profit growth for all lead-acid battery producers.

As we move away from the micro hybrid market and focus on the higher value markets for mild, full and plug-in hybrids, the challenges become more daunting. Jack Lifton has written several articles on global production constraints for the rare earth metal lanthanum; the "M" in NiMH batteries. His basic concerns are that substantially all of the world's supply of rare earth metals comes from China; their current production of roughly 33,000 tons of lanthanum per year can only provide raw materials for about a million HEV battery packs; and their domestic demand for rare earth metals is growing at an extraordinary rate that will limit future exports. Since it usually takes several years to increase production from an existing mine and even longer to bring a new mine into production, Jack expects the battery industry to encounter substantial short- to medium-term bottlenecks in the lanthanum supply chain. If he's right, automakers will be forced to make a Hobson's choice for an increasing percentage of their HEV battery needs:

  • Use Li-ion batteries despite the performance, cost, abuse tolerance and cycle life concerns; or
  • Use advanced lead-acid batteries despite the weight and volume concerns.
On its face this seems to be good news for Li-ion battery developers like Ener1 (HEV), Valence Technology (VLNC) and Altair Nanotechnologies (ALTI) who consistently argue that their proposed products are best choice to fill the gap between surging HEV demand and constrained NiMH battery supply. While many find those arguments persuasive if not compelling, I remain skeptical for several reasons.

First, Li-ion batteries have a checkered history in portable electronics that are used indoors. We know almost nothing about their long-term performance when exposed to the heat, cold, moisture, vibration, driving habits, user neglect and physical stress that automobiles have to endure on a daily basis. The only way to develop that knowledge base will be to get Li-ion batteries out of the laboratory and into test fleets. While many automakers have announced plans to begin limited production of HEVs and PHEVs that use Li-ion traction batteries over the next two years, I can't help but wonder whether the Li-ion battery sector isn't in exactly the same position that the NiMH battery sector was in 10 years ago. My next graph comes from the May 2009 Dashboard at hybridcars.com and shows the 10-year U.S. sales history for HEVs with NiMH batteries. Call me a luddite, but I have a hard time accepting the idea that HEVs with Li-ion batteries will follow a development path that goes from zero vehicles per year to hundreds of thousands of vehicles per year over the course of four or five years. From all of the projections I've seen, the DOE and all major automakers share those reservations.

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Second, the world's productive capacity for the large-format Li-ion batteries that are needed for automotive applications is very limited. There have been numerous announcements about plans to build new factories, but the bulk of those planned facilities will not be operational until 2011 or 2012. Since most existing Li-ion battery plants are already running at full capacity to make batteries for the high value portable electronics markets, I don't believe Li-ion batteries will be able to make a meaningful contribution to the auto industry's drive to meet European CO2 emission standards by 2012.

Third, I remain concerned that global rates of lithium production will not be able to keep pace with rapidly increasing demand for batteries. According to USGS publications, approximately 25% of global lithium production is used for Li-ion batteries. While global lithium production has grown at an annual rate of roughly 6% over the last couple of years to a 2008 total of 27,400 tons, the production process for lithium from brines involves an 18-month evaporation cycle before the alkali salts contained in the brine are ready for separation, refining, processing and use. Moreover lithium mining is subject to the same expansion constraints as other extractive industries. I'm no longer worried about the long-term adequacy of global lithium resources and I know that production can be expanded over time, but production capacity cannot be expanded quickly and there are certain to be substantial short- to medium-term production bottlenecks.

Finally, I remain concerned about the current development status of large-format Li-ion batteries for automotive use. In a February article titled DOE Reports That Lithium-on Batteries Are Not Ready for Prime Time, I summarized the conclusions of the DOE's 2008 Annual Progress Report for the Energy Storage Research and Development Vehicle Technologies Program that basically said Li-ion batteries would not be suitable for use in mass market HEV and PHEV applications until technical barriers relating to cost, performance, abuse tolerance and cycle life were overcome. I expanded on that theme in Understanding the Development Path for Li-ion Battery Technologies after a reader sent me sent me an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2008, a high-level policy analysis that discusses the merits, risks and expected costs of an aggressive eight-year initiative to foster the development and facilitate the commercialization of Li-ion batteries. While the draft roadmap went a long way toward easing my concerns over the long-term future of large format Li-ion batteries, it merely reinforced my conviction that Li-ion batteries are not currently ready for the big show.

Automakers are a conservative lot and they are intensely sensitive to price, performance and supply chain issues. They understand that NiMH and Li-ion battery supplies are constrained by limited global production of lanthanum and lithium, and that large format Li-ion battery supplies will be further constrained for several years by inadequate manufacturing capacity. They also have substantial reservations about the long-term performance of Li-ion batteries under the extreme heat, cold, humidity and vibration conditions that automobiles have to endure on a daily basis. Notwithstanding these known and very real business constraints, the automakers are under strict regulatory edicts to reduce fleet average CO2 emissions to 130 grams per kilometer in Europe by 2012 and improve fuel economy by roughly 35% in the U.S. by 2016. These are very brief timeframes for changes of this magnitude.

The end result is an untenable situation where proven NiMH batteries won't be available in adequate volumes during the regulatory compliance period and even unproven Li-ion batteries will be subject to daunting supply constraints. In a nutshell, supply constraints will leave the booming HEV markets in a critical state of flux for several years. While nothing can be predicted with certainty, I believe the likely responses from automakers will fit in three distinct categories:
  1. Automakers will continue to use proven NiMH batteries as their preferred HEV technology until limited lanthanum supplies restrict the ability to manufacture NiMH batteries;
  2. Automakers will accelerate their efforts to build demonstration fleets of high value products using unproven Li-ion batteries, but production volumes will remain small until they gather enough hard performance data to justify the widespread commercialization of the technology; and
  3. Automakers will significantly increase their use of advanced lead-acid batteries in high volume budget priced product lines, including mild and full hybrids that can tolerate the seventy-five pound weight gain and one cubic foot space loss that will typically arise from using advanced lead-acid batteries instead of NiMH or Li-ion.
This is a sub-optimal environment for all parties because automakers do not have the flexibility to develop new product lines on a multi-year schedule. They have to go to work immediately with the tools at their disposal and bring their product lines into regulatory compliance in a little over five years. The end result will be an accelerated timeline for Li-ion batteries and increased use of advanced lead-acid batteries in product lines that might have been introduced with NiMH batteries under more normal conditions. As automakers develop experience with using both advanced lead-acid and Li-ion batteries in roughly equivalent applications, the unanswered technical and cost-benefit questions about which technology is best for automotive applications will be conclusively answered. In other words, we're going to have a horse race after all.

DISCLOSURE: Author does not own any of the stocks mentioned in this article because all of his personal investments are in pure-play lead-acid battery manufacturers.

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

June 18, 2009

The Ethanol Industry's Persecution Complex

If the Ethanol industry is going to rehabilitate its image, it needs to understand the issues.

Tom Konrad, Ph.D., CFA

In his opening remarks at the 25th annual, 2009 Fuel Ethanol Workshop, Mike Bryan, the CEO of BBI International called on the attendees to "Take back control of the [fuel ethanol] industry's image."  

It's no secret that the ethanol industry is having problems, mostly, in my mind, due to a classic commodity squeeze: the industry has no pricing power either for its inputs (corn and natural gas,) or its products (ethanol, with a price which closely tracks gasoline.)  This is why, and Mr. Bryan said, the industry could not get plants financed a year before the financial crisis.

Conspiracy or Reality?

For Mr. Bryan, this is about jobs.   He went on to say that he is "not a conspiracy theorist, but a realist,"  but undermined his claim to realism by going on to say, "Tell [the people who say we were building too fast,] "about the people who need those plants for jobs.  Tell that to the community that wants to build an ethanol plant in their community."  Profitable businesses create secure jobs; unprofitable businesses create insecure jobs.  Just as I recently pointed out that investors should not be buying stocks because they need them to go up, the ethanol industry should not be building ethanol plants because they need the jobs.  

Ethanol plants have been a great boon to rural economic development.  As a local value added product to low value commodity corn, they keep more jobs in the community, which in turn create more jobs through economic multiplier effects... but only if the ethanol plants are profitable.  If farmers invest in a local ethanol plant (50% of ethanol plants are locally owned), but that plant cannot be run because they cannot sell the ethanol for the price of the corn, there will be no jobs from the plant, and the investors will lose their investment as well.  Perhaps they should have considered investments in a locally owned wind farm, or making their farming operations more energy efficient.

In short, jobs are not created by, and do not justify unprofitable investments.  There are simply better uses for the money, both in terms of jobs and economic returns.

Is there a conspiracy?  Oil companies don't want to change the way they do business, and be forced to blend in ethanol, nor do they like the competition, even if it is only 7% of their business.  That's real money on the margin, even if land use constraints will not allow ethanol to entirely displace oil.  The food processing industry has even more reason to dislike fuel ethanol.  Although only about 10-15% of price rises in food are due to ethanol-induced corn price rises, ethanol makes a convenient whipping boy for price rises which arise from many factors, most importantly the rising price of energy.  But having people who don't like you does not make for a conspiracy.

Peak Oil

General Wesley Clark, Co-Chairman of Growth Energy, is not a conspiracy theorist.  He, too, is passionate about  the need to take back the industry's image in his keynote address.  For General Clark, ethanol is a national security issue, and I completely agree.   Peak oil means that oil will increasingly be sold at a premium, and as scarcity increases, producing countries will have increasing incentives for producers to keep this high quality liquid fuel for themselves.  

Although the most energy efficient way to power a vehicle is with electric power, batteries are too expensive and have too low an energy density to be practical for long trips.  We will continue to need liquid fuels to power longer trips.  As General Clark said, "Is there any doubt that that the costs of Iraq are related to?  This is about America’s need for imported oil.  It distorts our policy.  It creates friend about people who aren’t our friends; it makes enemies out of people who aren’t our enemies."


Compared to the value of ethanol as a liquid fuel, arguments about carbon impact are de minimis.  Bob Dinnen, President of the Renewable Fuels Association an industry lobby group, was the most moderated of the general speakers.  Unlike the other speakers, I'm confident that his assertions can be backed up with studies.  He claims a 61% reduction in greenhouse gas emissions for corn ethanol compared to gasoline.  This is almost certainly the result of a best case analysis, but the worst case analysis are no more than a 30% increase in emissions, and with current technology, there is almost certainly some greenhouse gas savings.  Even if there is a slight increase in carbon emissions from corn ethanol, these extra emissions are likely to be minimal, and less than tar sands..  When it comes to greenhouse gas reduction, ethanol, even corn ethanol, is not the enemy.  The enemy of the human race, as Jim Hansen says, is coal, and while we environmentalists should be concerned about any lack of decrease in greenhouse emissions, we should not lose sight of the true enemy.  The ethanol industry as a whole agrees that they need to increase their efficiency and reduce their carbon emissions.  These should be measured as accurately as possible, but any green washing we see in the ethanol industry pales against that coming out of the coal industry.  Given limited political capital, this is where environmentalists should be focusing our efforts.

Food and Fuel

Ethanol is a domestic fuel, that puts corn to a much better use than high fructose corn syrup that contributes to growing epidemics of obesity and diabetes.  From a historical perspective, we pay hardly any part of our income for food.  Ethanol does reduce the price of gas, and the money we pay for that gas stays closer to home.  Given that, an increase in food prices from corn ethanol may still lead to a net gain for the average consumer, and the economic benefits of a domestic fuel should make us willing to pay for a small net increase in our overall food and fuel budget.  

If we're concerned about Ethanol's carbon footprint, we might pause to consider the carbon impact of our food.  If a rise in food prices results from corn ethanol, the decrease in our collective carbon footprint from what we eat.  Whatever indirect land use impact we attribute to ethanol, we should be attributing a similar indirect land-use impact to the soda we drink that's so full of high fructose corn syrup.

Stop Exaggerating

While environmentalists should not be joining oil companies and food processors by piling on the ethanol industry over its imperfect environmental record, the Ethanol industry could do itself a lot of good by avoiding the exaggerated claims they are prone to.

General Clark said, "There’s plenty of all we need to have all the fuel we want and all the food we want," and Mr. Bryan said something similar.  This is simply false.  The US currently has about 200 million acres devoted to corn and soy.   Corn Ethanol can produce about 200 gallons per acre, while soy biodiesel can produce about 50 gallons per acre of biodiesel.  If all this land were converted to fuel production with corn ethanol (incidentally degrading the land and increasing fertilizer usage), that means we could produce 10 billion gallons of ethanol, the equivalent of about 8 billion gallons of gasoline per year, or about half a million barrels per day.  The US consumed about 20 million barrels of crude per day in 2007, and had to import about 10.5 million barrels of that.  Not all of our imported oil was used for gasoline, but not all of our corn and soy can go to displace oil, either.

The numbers don't add up.  The Ethanol industry undermines its own credibility with these exaggerated claims.

The industry also uses deceptive statistics regarding indirect land use impacts.  Bob Dinnen said that deforestation has to do with grazing and logging, not Ethanol.  They made much of the fact that deforestation has decreased as ethanol production has increased.  Correlation is not causation, nor is anti-correlation lack of causation.  According to a recent article in The Economist, "rate of deforestation tends to move with prices for beef and soya, with a lag of about a year."  This is because the land is cleared for grazing, and then sold on to soy farmers..  As Biodiesel producers discovered to their dismay, rising corn prices leads farmers to shift land from soy to corn, which in turn leads to rising soy prices, and hence to rising deforestation a year later.

As I left the conference on the first day, I walked by Robert Zurbin, author of Energy Victory: Winning the War on Terror by Breaking Free of Oil.  He was sitting in the main lobby with a stack of books to sign.  I had caught the end of his talk an hour before, in which he spun a captivating and convincing yarn about how oil had been key to allied victory in World War II.  I walked up and told him how I only caught part of his talk, but liked what I had heard, and he encouraged me to buy the book.  I was tempted, but then he lost the sale: he told me that, if only 50% of cars were mandated to be Flex-Fuel, it would put a "cap on the price of oil."  While I agree with him that the increased choice would be good for consumers, and even moderate the oil price, there is simply note enough feedstock, either domestically or globally, and too many other valuable uses for that feedstock to cap the price of oil in the face of expanding demand (which is only likely to be restrained by price or economic downturn) and declining oil output. 

There are many good reasons to like Ethanol, even Ethanol from corn.  But it's only part of the solution: Ethanol is not the panacea, and it's not without adverse impacts.  It's also not always good business.  By acknowledging these weaknesses, ethanol advocates would do a lot to raise their credibility with many environmentalists who are natural allies with an industry taking real steps to reduce its environmental impact and enhance our energy security in the face of the much larger challenges of Peak Oil and Global Warming.

My impression is that the major agenda item on the industry's agenda is legislation requiting 50% of vehicles to be flex-fueled.  This would probably be a change for the better, definitely from an economic perspective (the added cost to the vehicle is fairly minimal.  Unfortunately, the use by carmakers of flex fueled vehicles as a loophole in CAFE standards serves to undermine environmental goals.  If the industry wants more environmental allies today, it will need to be clear than environmental goals will not again come second. I think most environmentalists would get behind a 50% or higher requirement for flex fuels vehicles if it were in conjunction with the closure of the flex fuel loophole in CAFE standards.

June 17, 2009

Where To Next For Solar PV Stocks?

Charles Morand

There was an interesting post in Barron's tech trader daily on Monday discussing how solar PV stocks are coming under pressure, in part because product prices are falling further than expected. About a month ago, I discussed the potential return effect for households in given states of removing the $2,000 ITC cap. Such measures, it seems, are failing to kickstart demand, and solar recovery might end up being significantly slower than many had been expecting.

Case in point, since hitting a high of $11.49 on June 11, the TAN ETF is down about 12%. KWT, for its part, hit a high of $17.35 on June 10 and is down 11% since. The S&P 500, in comparison, is down about 4% from its June 12 high. While both TAN and KWT are up >30% on the S&P 500 over the past six months, neither is up on the benchmark index over the past 12 months.

I took a long position in TAN in early March at $5.00 when an automatic buy order I had had on it for a while kicked in. At the time, I stated:

"I don't expect this investment to realize its full potential for another 18 to 24 months, so patience is of essence. Of course, certain catalysts, such as a rapid rise in oil prices, could push this ETF up before then, and I would be more than happy to take a little profit if that happened.

This is still very much my belief. I took some profit at $10.00 when an automatic sell order kicked in, and I'll gladly purchase a little more if it goes back down substantially. It must be said, however, that I use sell orders at set return levels to protect profit and not in an attempt to time the market.

Overall, those who are investing in one the two solar ETFs today and hanging on will be happy they did so two years from now and beyond. The road there, however, will be fraught with volatility.

DISCLOSURE: The author is long TAN.

The Electric Grid Index

Charles Morand

A little while ago, we received the following request from a reader:

"[...] when are you [...] going to start an ETF or mutual fund called "Energy TS&E". T for transmission, S for storage, and E for efficiency. I guess you need an index first. I'm thinking Quanta, Amer Superconductor, Exide, Axion, Itron, Echelon, etc. There is no good one stop shop for this subsector. Sign me up."

While we don't plan on launching a licensable index or a mutual fund because of all the regulatory thicket we'd have to cut through, this request nonetheless led to a few internal exchanges about the merits of this idea and what could go into such an index/fund.  

Tom had the following to say:

"I [...] think it would make more sense to deal with each of these sectors separately, because storage has a much different risk profile than efficiency and transmission, and appeals to different investors."

Neither the electric grid (let alone the transmission subsector) nor energy storage, taken alone, features a sufficiently large universe of stocks to allow for the construction of a solid index and, in turn, the creation of a dedicated ETF or mutual fund.

The small number of firms for which either sector is material means that effectively all of the available stocks would have to be included in the index to achieved a level of diversification worth paying for, if such a level was even achievable. A small number of stocks also means that an investor might be able to reproduce the portfolio directly on his/her own at a lower cost than the ETF management fee.

Efficiency is somewhat different, seeing as so many activities and products - including some that fall under the grid umbrella - can be counted as 'efficiency'. Besides your garden variety electricity efficiency solutions such solid-state lighting, everything from insulation technology manufacturers to demand-side management service providers could be included. Of the three, efficiency stands the greatest chance of seeing its own ETF pop up in the near to medium term - in fact, I wouldn't be surprised if someone was already working on this.  

Nevertheless, this request and the subsequent discussion piqued my interest, and got me wondering what an Electric Grid Index might look like - I decided I would give it a shot.

The electric grid has received a significant amount of focus in the bailout package and has recently been on the political radar to a greater extent than at any other time in the past few decades.

Last week, the results of a survey of wind power firms revealed that "transmission or interconnection issues [are viewed] as the single greatest barrier to wind development in the United States. " Transmission is also a significant barrier to geothermal power development and, as utility-scale facilities gain in popularity, will definitely become so for solar PV as well.

In my view, the grid will be one of the strongest performing sub-sectors in alt energy over the next four years, because so much of America's renewable power potential depends on a significant expansion of domestic transmission and distribution capacity. At the same time, the growing popularity of smart grid technologies, as evidenced by the Obama administration's efforts to jump-start this sector, will most likely expand in the years ahead as utilties and large consumers become increasingly comfortable with the concept.

The Electric Grid Index

Last February, I wrote a post where I differentiated between what I called the Old World and the New World grids. In a nutshell, I ascribed the New World label to companies working on making the grid into an information-rich environment that can be managed dynamically by using two-way communication, aka the smart grid. Old World companies are firms working on more conventional areas such as cables, towers and maintenance.

I also added a new category: A Bit of Both. This idea came after a reader pointed out the importance of power electronics in enabling a smarter grid, and the need to not be so clear-cut when discussing the Old and the New Worlds. This category also contains firms that actually do do a bit of both.

In order to create a basic list of stocks for a smart grid index, I went back over past articles we wrote on the matter and pulled out a list of firms that had been identified as plays on the grid. I then read through their 2008 10-Ks, 20-Fs and/or annual reports and included only firms that derived 20% or greater of their revenue from the grid or power management activities.

I left out MW-scale storage although the case could certainly be made for adding it...or not. I also left out system operators such as ITC Holdings (ITC) and focused instead on product and service providers.

The following is the final list of grid companies I came up with.      
Name (Ticker) Market Cap
($US MM)
Dividend Yield (%) % '08 Sales Related to the Grid Core Business PE
New World
RuggedCom (RUGGF.PK) 275 0.00 100% Communication Equipment & Services 22.15
Comverge (COMV) 242 0.00 100% Communication Equipment & Services N/A
EnerNOC (ENOC) 458 0.00 100% Communication Equipment & Services N/A
Itron (ITRI) 2,146 0.00 N/A* Communication Equipment & Services 405.33
Echelon Corp. (ELON) 310 0.00 100% Communication Equipment & Services N/A
Telvent (TLVT) 702 0.00 ~27% Communication Equipment & Services 14.77
Old World
Composite Technologies (CPTC.OB) 99 0.00 ~44% Cables N/A
General Cable (BGC) 2,000 0.00 N/A* Cables 10.87
MasTec Inc. (MTZ) 930 0.00 N/A* Services 12.08
Quanta Services (PWR) 4,638 0.00 ~57% Services 28.73
Resin Systems (RSSYF.PK) 59 0.00 >90% Poles N/A
CVTech (CVTPF.PK) 74 0.00 >80% Services 9.25
Valmont Industries (VMI) 1,876 0.80 ~23% Poles 14.17
Stella-Jones (STLJF.PK) 255 1.54 ~36% Poles 9.31
Pike Electric Corp. (PIKE) 386 0.00 100% Services 11.42
A Bit of Both
ABB Group (ABB)37,9842.80~30%Multiple14.72
Siemens AG (SI) 65,944 1.90 N/A* Multiple 21.19
Schneider Electric (SBGSF.PK) 19,195 6.17 >50% Multiple 7.96
* Exact % not disclosed in filing but assumed significant based on other disclosures

Coming up with a simple list is easy enough. However, in order for this list to be considered an index in the true sense of the term, individual stocks have to be weighed according to certain criteria - the weight different stocks and sectors receive is critical to performance for this type of index.

Depending on who creates and index and for what purpose, methodologies for ascribing weights to different stocks can vary. In this case, since this is a purely fictional exercise, I originally opted for a simple capitalization-weighted methodology.

The problem I ran into with using straight capitalization-based weights is the huge discrepancy between the size of the A Bit of Both stocks and the rest: together, they account for nearly 90% of the list's capitalization. This means that even large movements in several other index components would have a marginal effect at best on index performance if those three did not move or moved in the opposite direction.

I thus decided to give each of the three categories (New World, Old World and A Bit of Both) and equal weight of 1/3, to measure each capitalization's weight within its own category only, and to do a weighted-average of those weights using 1/3. For example, Siemens accounts for 54% of its category's aggregate market cap, so its weight in the index is 0.54 * (1/3) = 17.85%.

The 1/3 weight is arbitrary. If I were to create an index like this for purposes of an ETF, my preference would be to rely heavily on business and fundamental information in deciding how to weigh individual stocks. However, given the time and cost involved in conducting solid fundamental analysis on 18 companies, this isn't something I would do for a simplified demonstration such as this one.

The category weights could be changed to reflect sectoral expectations. For instance, a less risk-averse investor could weigh the New World category more heavily as it is likely to generate stronger capital gains, although those will almost certainly come at the expense of lower volatility.

Name (Ticker) Market Cap
($US MM)
% Total % Own Category Weight Weighted Average (%)
New World
RuggedCom (RUGGF.PK) 2750.2071/32.22
Comverge (COMV) 242 0.18 6 1/3 1.95
EnerNOC (ENOC) 458 0.33 11 1/3 3.69
Itron (ITRI) 2,146 1.56 52 1/3 17.31
Echelon Corp. (ELON) 310 0.23 8 1/3 2.50
Telvent (TLVT) 702 0.51 17 1/3 5.66
Old World
Composite Technologies (CPTC.OB) 99 0.07 1 1/3 0.32
General Cable (BGC) 2,000 1.45 19 1/3 6.46
MasTec Inc. (MTZ) 930 0.68 9 1/3 3.00
Quanta Services (PWR) 4,638 3.37 45 1/3 14.98
Resin Systems (RSSYF.PK) 59 0.04 1 1/3 0.19
CVTech (CVTPF.PK) 74 0.05 1 1/3 0.24
Valmont Industries (VMI) 1,876 1.36 18 1/3 6.06
Stella-Jones (STLJF.PK) 255 0.19 2 1/3 0.82
Pike Electric Corp. (PIKE) 386 0.28 4 1/3 1.25
A Bit of Both
ABB Group (ABB)37,98427.61311/310.28
Siemens AG (SI) 65,944 47.93 54 1/3 17.85
Schneider Electric 19,195 13.95 16 1/3 5.20

The index is set at 100 for now. I will measure performance periodically to see how I fare.

While it may not be practical for many investors to reproduce this index because of the number of stocks, I hope it provides a good base to start from. Tom is often a proponent of the portfolio approach to investing (i.e. taking small positions in several stocks to spread risk), and such lists can often provide a good starting point for those interested in following this approach.          

DISCLOSURE: Author is long ABB    

June 15, 2009

Clean Energy Stocks Shopping List: FAQ

Stocks may be expensive now, and the temptation is to buy before they get even more expensive.  Why patience makes the brokerage account golden.

Tom Konrad, Ph.D., CFA

On Friday, I started a series on stocks I'd like to buy when they are cheaper.  The first was on clean or efficient transport stocks which will benefit from both Climate Change regulation and high oil prices due to Peak Oil. Before I continue on with my Clean Energy Shopping List series, I think it's worth talking about the underlying strategy, since it can be counter-intuitive, and I expect that many readers may have some objections.  So here's a FAQ about my strategy.

Q: Most people think that the stimulus will work and the economy is getting back on track.  Why should I trust your judgment that this is a bear market rally?

Market prognosticators are notoriously bad at predicting the markets.  This is not surprising, since part of what causes high levels of stock market valuation is lots of people buying because they think the market will continue to go up.  I tend to think of what "most people" think as a contrarian indicator.

That's not to say I'm right with any certainty, but I have reasons.  Right now both the consumer and companies are tightening their belts.  Although  the stimulus package may boost Clean Energy, for the overall economy, I feel it's likely only to lessen the blow.  Companies are looking to raise money through IPOs and share offerings, while the US personal savings rate has increased substantially.  Meanwhile, governments are issuing unprecedented amounts of debt to pay for stimulus packages and recession induced budget deficits.

With consumers paying down debt and the government and companies soaking up cash, where is all the new money going to come from to buy stocks and keep driving them up?

Q: What if I miss out on a big bull run?  I need to make back my losses from 2008 in order to retire/send my kids to college/take that vacation.

The stock market does not take your needs and wants into account.  The market is decidedly not fair, and if you make investment decisions based on your needs, you clearly are not paying attention to the true forces that guide the market.  After 2008, unprecedented numbers of retired people are going back to work because they can no longer afford to be retired.  Do you think the market paid any attention to their needs?  Do you think that it is going to pay any attention to yours?

The only one looking out for your needs is you.  Not your mutual fund manager, not Jim Cramer, and quite possibly not your financial advisor.   Looking out for your own needs involves making hard decisions, getting some exercise when you'd rather be eating pork rinds on the couch with your DVR.

Q: I've heard that it makes no sense to time the market, because nearly all the market gains come from just a few short periods.  If I miss those periods, I miss out on all the gains.

See the question above... thinking only about what you're missing out on is a sure way to get into trouble.  Stop an consider what might be gained by missing out on the worst periods.  Consider this chart of the percentage annual returns from 1825-2008.  The six highest returns were all in the 60% range, meaning that if you'd missed those six years, you would have less than 1/16 as much money as someone who had stayed in the market for the whole period.  However, the six lowest returns are two -50% returns, one -40% return, and three -30% returns.  If you'd missed those worst years, you'd have twenty times as much money than you'd have had if you had stayed in the market for the whole period.

We have to assume that we don't have perfect foresight, but even if we miss as many good years as we miss bad years, we still come out ahead.  If we miss both the best and worst year over the period, we end up up 25% over where we'd otherwise have been.  If we miss three each of  such good and bad years, we end up 62%, if we miss all six of each, we end up up 15%.   In other words, the bad years are a lot worse than the good years are good, and we only have to miss the extremes to come out ahead.  If we're even slightly better than that, i.e. missing five good years for every six bad ones, the potential gains are enormous.  The same will hold true for potential monthly, or daily  returns, since most of us are not investing to a 200 year time horizon, but a 200 month (12 year) time horizon is something we might be thinking about.

These returns are more impressive when you consider that the average annual return for the period was significantly positive: Skipping any 12 random years would ordinarily produce worse, not better, returns.  Also, when not in the market, you could place your money in short term treasury bills or a money market fund, and have earned interest, which would also add up over twelve skipped years.

In other words, if the market is likely to be unstable, it makes sense to get out, even if that means you might miss a big rally.

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.

June 13, 2009

How Growing HEV Markets Will Impact Battery Manufacturing Revenues

John Petersen

For the last three weeks I've been writing about why rising oil prices, tightened CO2 emission standards in Europe and accelerated CAFE standards in the U.S. will combine to foster rapid implementation of hybrid electric vehicle (HEV) technology in the automotive industry and result in huge revenue increases for all automotive battery manufacturers. These articles have generated record numbers of comments and questions from readers that want a clearer understanding of what the rapidly changing demand picture means for battery investors. While I generally try to avoid revenue forecasts because they require pricing assumptions that can be fertile ground for nit picking, I'll ask readers to bear with me because the conclusion does not depend on the initial assumptions. The bulk of the hard market data I've used in this article was graciously provided by Frost & Sullivan, a leading global consultancy and market research firm that provides best in class coverage of the energy and power systems markets.

So far, the one bright spot in the global recession has been savings at the gas pump. For every $1 decline in prevailing gas prices, nationwide spending on gasoline falls by $12 billion per month and those savings go directly to consumers. Unfortunately, the relief was short-lived and gas prices are once again rising. The following graph is based on historical oil price data downloaded from the DOE's Energy Information Administration. To give readers an idea of why I'm convinced that oil prices will stabilize around $80 over the next few months and be a primary market driver for the shift to HEVs, I've added a simple price channel overlay on the ten-year trend.

Clikc to enlarge

In The Obama Fast Track for HEVs, I explained that there are four basic types of HEVs:

  • Micro-Hybrids stop the internal combustion engine ("ICE") when the car comes to a stop and restart the ICE on demand, but do not provide any acceleration boost to the powertrain;
  • Mild Hybrids stop the ICE when the car comes to a stop, restart the ICE on demand and provide limited boost to the powertrain during acceleration;
  • Full Hybrids stop the ICE when the car comes to a stop, launch the car from a stop in electric-only mode, restart the ICE when needed and provide a higher level of boost to the powertrain during acceleration; and
  • Plug-in Hybrids will allow the car to operate in electric-only mode for up to 40 miles before starting an ICE to recharge the batteries.
I then explained how President Obama's decision to accelerate the effective date of Federal CAFE standards will require manufacturers to increase fuel efficiency by roughly 35% over the next seven years and eliminate fleet-wide averaging, thereby forcing each class of vehicles to carry its own weight. My conclusion was that while the accelerated CAFE rules were not an HEV mandate, they put HEVs on a regulatory fast track in the U.S.

In a follow-up article, Why Advanced Lead-Acid Batteries Will Dominate the HEV Markets, I drilled deeper into the economics of using various types of batteries in HEVs and explained how recent changes in European tailpipe CO2 emission standards would accelerate efforts to make micro-hybrid technology standard equipment. That article included the following graph from an October 2008 Frost & Sullivan presentation that explained their estimates of near-term growth in global HEV demand and showed how that growth would be divided up among micro, mild, full and plug-in hybrids.

Click to enlarge

Since the October 2008 Frost & Sullivan presentation focused on the impact of European CO2 emission standards and assumed that revised CAFE standards would not take effect until 2020, I believe global HEV demand during the forecast period will ramp up far faster than the growth rate reflected in the baseline estimates. For analytical purposes, Table 1 starts from an estimated base of 2 million units in 2009 and then increases production to 5 million units in 2010, 11 million units in 2012 and 20 million units in 2015. In order to put NiMH and Li-ion batteries in the best possible light, Table 1 uses the 2015 Frost & Sullivan market penetration percentages for all years.

Table 1
Market 2010 Increment
2012 Increment
2015 Increment

Penetration 3 Million Units
9 Million Units 18 Million Units
Micro Hybrid 78% 2,340,000 7,020,000 14,040,000
Mild Hybrid 6% 180,000 540,000 1,080,000
Full Hybrid 15% 450,000 1,350,000 2,700,000
Plug-in Hybrid 1% 30,000 90,000 180,000
Total HEV Demand 100% 3,000,000 9,000,000 18,000,000

All currently available HEVs use beefed-up lead-acid batteries for their start-stop functions and NiMH batteries for their powertrain functions. Table 2 summarizes the incremental battery cost for each HEV type assuming a $150 premium for a more robust start-stop battery system and $800 per kWh for powertrain batteries, a value taken from the most recent DOE cost estimate for heavy-duty NiMH batteries.

Table 2
Start-Stop Powertrain

Batteries Battery Capacity Battery Cost Batteries
Micro Hybrid $150

-0- $150
Mild Hybrid $150
0.75 kWh $600
Full Hybrid $150
1.50 kWh $1,200
Plug-in Hybrid -0- 1.00 kWh $8,000

Table 3 summarizes the additional expected demand for lead-acid batteries for new HEVs assuming they will only be used for start-stop applications.

Table 3
2010 Revenue 2012 Revenue 2015 Revenue

Increment Increment Increment

(millions) (millions) (millions)
Micro Hybrid $351 $1,053 $2,106
Mild Hybrid 27 81 162
Full Hybrid   _68      203      405
Totals $446 $1,337 $2,673

Table 4 summarizes the additional expected demand for NiMH and Li-ion batteries for new HEVs assuming they will be used for all powertrain applications.

Table 4
2010 Revenue 2012 Revenue 2015 Revenue

Increment Increment Increment

(millions) (millions) (millions)
Mild Hybrid $108 $   324 $   648
Full Hybrid 540
Plug-in Hybrid   240      720   1,440
Totals $888 $2,664 $5,328

While Tables 3 and 4 paint an optimistic demand scenario for all battery manufacturers, the unvarnished truth is that the incremental near-term demand for NiMH and Li-ion powertrain batteries cannot possibly be satisfied.

Battery manufacturing is capital intensive and it takes 3 to 4 years to build and equip a new NiMH or Li-ion battery plant. According to Frost & Sullivan, global sales of NiMH batteries for automotive powertrain applications were roughly $833 million in 2008. Of that total, $580 million (70%) represented batteries that Panasonic EV Energy, a Toyota subsidiary, made for its parent. Frost & Sullivan has also reported that total global sales of Li-ion batteries were roughly $7 billion in 2008 and substantially all of those batteries were used in non-automotive products. Notwithstanding the flurry of recent press releases about planned battery plant construction in Asia, Europe and North America, those projects cannot be completed before 2011 or 2012 and meeting the incremental automotive powertrain battery production schedule in Table 4 would require manufacturers to build new factories that are equivalent to the world's entire NiMH battery manufacturing capacity every year for the next six years.

Battery manufacturing is also raw material intensive and according to metal mining and natural resource development expert Jack Lifton there are critical production constraints on both the lanthanum that is essential for NiMH batteries and the lithium that is essential for Li-ion batteries. While supplies of both of these metals can be increased over time if enough development capital is available to mine owners, the average lead-time to expand an existing mine or bring a new mine into production is on the order of 5 to 7 years. So even if the battery manufacturing plants could be built fast enough to satisfy the anticipated near-term incremental demand for HEV batteries, the miners can't increase lanthanum and lithium production fast enough.

Automobile manufacturing is a tough business and many product development decisions are driven by legal requirements, supply chain needs and cost considerations that often transcend engineering preferences. The undeniable facts that the auto industry is being forced to come to grips with today are:

  • Strict C02 tailpipe emission standards have already been adopted in Europe and must be met by 2012;
  • Accelerated CAFE standards have already been adopted in the US and must be met by 2016;
  • NiMH battery production cannot increase fast enough to satisfy near-term increases in HEV demand;
  • While validation tests are planned, Li-ion batteries cannot currently meet market standards for HEVs;
  • Li-ion battery production cannot increase fast enough to satisfy near-term increases in HEV demand;
  • Lanthanum production cannot increase fast enough to satisfy near-term increases in HEV demand;
  • Lithium production cannot increase fast enough to satisfy near-term increases in HEV demand; and
  • Since it will be impossible to manufacture enough NiMH or Li-ion batteries to meet the regulatory deadlines, the only alternative is less expensive and more readily available lead-based batteries.
Given the crushing manufacturing capacity and material supply constraints that face both NiMH and Li-ion batteries, I believe it is virtually certain that lead-acid and lead-carbon batteries will be used as substitutes for the NiMH and Li-ion batteries that cannot be manufactured at any price. Under the circumstances, I cannot imagine a near-term future where the incremental revenue to lead-acid and lead-carbon battery manufacturers will be less than the incremental revenue to NiMH and Li-ion battery manufacturers.

I don't foresee a time in the near-term future when lead-acid batteries will supplant NiMH and Li-ion batteries in the hearts of scientists and engineers. I also believe that NiMH and Li-ion batteries are likely to retain their current status as the preferred solution for plug-in hybrids. Nevertheless, in a supply constrained environment like the one we will have to deal with for the next 5 to 7 years, automakers will make the difficult choices, use expensive NiMH and Li-ion batteries for their high value products and use cheaper lead-acid and lead-carbon batteries for their budget priced products.

As I discussed in Why Lead-Acid Batteries Will Dominate the HEV Market, the weight advantage of NiMH and Li-ion batteries in micro, mild and full hybrids is less than 75 pounds and the space savings is less than a cubic foot. While automakers pay a lot of attention to weight and space, these savings are insignificant in the context of a 3,000-pound car.

Overcoming an entrenched competitor like NiMH batteries is difficult and without looming supply constraints it would be difficult if not impossible for lead-based batteries to make inroads into the mild and full HEV markets. For the next few years, however, automakers will be forced to use lead-based batteries because there are no alternatives. My fondest hope is that after the industry has accumulated several years of experience with using lead-based batteries in budget priced HEVs, they'll conclude that the added cost of NiMH or Li-ion batteries is not justified. But even if they conclude otherwise, the benefit of using lead-based batteries as a bridge while Li-ion batteries complete the development process I described in Understanding the Development Path for Li-ion Battery Technologies is substantial.

In his book The Lost Constitution William Martin wrote, "In America we wake up in the morning, we go to work and we solve our problems." We use the tools that are readily available to us and we remain willing to adopt newer and better tools when they become readily available at reasonable prices. Sometimes, however, we give the new tools a try and then decide that the old tools are better for the job at hand. That's the way free markets work.

For most Americans and Europeans the word "shortage" has little personal meaning because we've always been able to buy the goods and services we wanted as long as we were willing to pay the price. For the first time, American and European car buyers will have to accept the fact that some HEV battery options are not going to be available at any price. It will come as a shock to many, but it will also be an increasingly common reality in a resource constrained world where 6 billion people want to earn their share of the lifestyle that 500 million of us have and take for granted.

Welcome to the age of cleantech, the sixth industrial revolution.

Fund managers are beginning to recognize the telltale signs of bubble pricing in the Li-ion battery stocks that I've been writing about for almost a year. Moreover, skeptical reports on the near-term potential of Li-ion battery developers are beginning to find their way into the mainstream financial press. The market has not yet come to grips with the inescapable conclusion that 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 U.S., 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. The window of opportunity is closing rapidly.

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.

June 12, 2009

Clean Energy Stocks Shopping List: Transport

Stocks may be expensive now, but they won't be forever.  Five Peak Oil plays to buy when they're cheap again: Two busses, two rails, and an ETF.

Tom Konrad, Ph.D., CFA

Two weeks ago, I told you why I feel that the market is more likely to head down than up from here (it's been flat since then.)  I've been selling covered calls on my holdings, several of which have been called away.  I plan to sit on the cash until the market has fallen at least 10%, after which I may start selling cash covered puts, but I won't start buying in earnest until the level of fear in the markets is much higher than it is today.

To occupy myself during the wait, I'm putting together my shopping list of stocks I plan to buy when next they are cheap.  This first installment is a set of clean transport stocks, which are combination plays on Peak Oil and Climate Change.  You will be able to find future articles in this series here.

#1 New Flyer Industries (NFYIF.PK, NFI-UN.TO)

New Flyer is a long-time favorite, and I probably won't be buying more even if it falls: I doubled my holdings in this company in the beak days of December 2008, at US$5.09-$5.29.  This is one stock I have not been selling in the recent run-up, despite the fact that it has doubled since then.  So I probably won't be buying more even if it falls just to keep my portfolio relatively diverse.

#2 Portec Rail Products (PRPX)

I brought Protec to your attention on February 26, when the price was trading around $5, for what I felt was no good reason.  Although I already owned some, I put in an order that day to buy more at $4.85, but the stock has never been back there since, and now trades around $10.  If it falls back to $6, I may not be so greedy this time.  Until then, I'm still holding my initial position.

#3 FirstGroup, PLC. (FGP.L)

I first ran across FirstGroup in late 2007 when looking for bus stocks for my investing in mode-shifting theme.  As I mentioned in early 2008, the stock seemed overvalued to me at the time, and I focused my attention instead on New Flyer.  Like Portec, I now wish I'd snapped up a bunch of it near the March lows, but it had dropped off my radar until The Economist brought it back to my attention with a fascinating profile of the CEO, Sir Moir Lockheed, in early April.  By that point, the stock had rebounded sharply, and I'm left waiting for the next buying opportunity.

#4 Wabtec Corporation (WAB)

Also known as Westinghouse Air Brake Technologies Corp, Wabtec was also profiled in my article on rail transit stocks in 2007 (as was Portec.)  Like FirstGroup, it fell off my radar because I didn't like the valuation at the time.  Today, the price is about the same as it was back then, but income has increased, especially in the first quarter of 2009, and we now have much more political support for rail transit spending.  As a profitable company with a strong balance sheet, this is one to scoop up when opportunity presents.

#5 Powershares Global Progressive Transport ETF (PTRP)

Okay, this one's not really on my shopping list, but I many readers might consider it.  I like picking stocks, and generally believe that the diversification benefits of specialty ETFs don't usually justify the expense ratios (PTRP's is 0.75%).  The exception is when the ETF gives access to foreign stocks which the investor might find hard to buy individually.  PTRP does have significant investments in several foreign companies, so it might be worth considering.  Some names in the portfolio the North American investor might find hard to buy are China's BYD group, bike makers Giant and Shimano, and Charles' high speed rail picks, Bombardier (BDRBF.PK), Alstom (AOMFF.PK), not to mention FirstGroup, above.

DISCLOSURE: Tom Konrad and/or his clients own NFYIF and PRPX.

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.

June 09, 2009

Will The Recovery Act Trigger Alt Energy IPOs?

Charles Morand

It goes without saying that the alt energy IPO market has been rather quiet over the past few months. Could this be about to change? Will the slew of alt energy and cleatech incentive programs announced under the Recovery Act, coupled with a return of investors' risk appetite, be enough to convince firms to start going public again?

On Monday, I had a chat with Robert Peterman, who handles cleantech for the TMX Group, the owner of the Toronto Stock Exchange and of the TSX Venture Exchange. In the past few years, Toronto has attracted a number of high-profile cleantech and alt energy stories.

Among other things, Toronto, probably in part because of its heavy mining focus, has been the exchange of choice for several early-stage North American geothermal development companies, including Polaris Geothermal, US Geothermal, Western GeoPower, Sierra Geothermal and Nevada Geothermal.           

Mr. Peterman informed me that a geothermal development company with activities in the US West, Southwest and Latin America had filed preliminary documents for an upcoming IPO in Toronto. The company is called Magma Energy Corp. and has one operating facility and a pipeline of projects at different stages of development.

I had a quick glance through the company's preliminary long-form prospectus (accessible here), one of the required documents for a Canadian IPO that typically provides information on the size of the offering, the nature of the firm's activities, what the funds will be used for, etc.

The size of the offering, the pricing of the shares and even the closing date were left blank for now, so there is not much to go with just yet. The company's investment bankers will soon come up with this information so we can get a better idea of what this IPO means. As I discussed last week, geothermal development is a risky enterprise that has more in common with mining exploration than it does with power generation.

A successful IPO for an early-stage geothermal firm would most likely be a positive sign for the alt energy sector as a whole. Recovery Act programs will require that firms raise significant amounts of money, so don't be surprised if activity picks up over the coming months.


June 07, 2009

What Does Clean Energy Cost?

Renewable Electricity cost estimates from a California transmission study and the investment implications.

Tom Konrad, Ph.D., CFA

The seemingly simple question, "How much does wind/solar/geothermal/etc. cost per kWh?" can be surprisingly difficult to answer.  Advocates often cite particularly low figures, but they are often based on particularly favorable conditions, or analyses that don't include all the costs (for instance, costs of permitting.)  Opponents do the opposite, often assuming particularly unfavorable conditions, or adding in costs which they would never consider adding in for their favored technology.  Adding to the confusion, levelized cost of generation calculations are very sensitive to the interest rate used to discount capital cost and the lifetime of the investment. 

A couple years ago, I put together some slides meant to give a visual comparison of transportation fuels, and another set for electricity generation technologies.  These slides were intended to be more qualitative than quantitative, and were based on my personal synthesis of a large number of reports, rather than using a single methodology for each.  More recently, I brought you an economic comparison of energy storage technologies (and alternatives to storage) based on a quantitative review of the literature.

Costs of Electricity Generation

Recently, a friend who invests in cleantech startups asked me for an update of comparisons of electricity generation technologies.  I have not done an update, but I have found more studies that take fairly impartial looks at the available technologies.  The most comprehensive one I've found is the one Black and Veatch (B&V) did for the California Renewable Energy Transmission Initiative (RETI.)  B&V looked at the costs of generation of various renewable energy resources in the California region, as a first step in planning new electricity transmission to the best resources. 

The Phase 1A report is available on the RETI website (large PDF), and is excellent reading for anyone interested in a relatively unbiased view of the real costs of renewable energy.  It is a regional report (similar to, if much more comprehensive than, the Arizona Resource Assessment I wrote about in late 2007,) so people living in other regions should adjust the numbers to reflect resource availability.  California and the surrounding area have good wind, hydro, and biomass resources, as well as world-class solar and geothermal resources.  In the Southeast US, biomass based power would probably be cheaper, but wind, geothermal, and solar more expensive, while in the Great Plains, wind would be cheaper, but solar, hydro and geothermal would be more expensive.  You get the idea.

Here are some highlights:

Levelized Cost of Generation:

 Click to open in new window

It's interesting to note that the five least expensive renewable energy resources in the list are either baseload resources (Geothermal and Biomass cofiring) or have some potential to be dispatchable (hydropower, and landfill gas, if used in conjunction with storage for the methane.)  Although wind is a variable resource, there are inexpensive potential sources or renewable electricity that are easy to integrate into the grid.   

Although many of these are relatively small in terms of the total amount of energy produced, they can still be profitable investments, since most investors focus on the better-known renewables such as wind and solar.  Charles recently brought you two articles highlighting investments in Geothermal and Biomass cofiringCovanta Holding (NYSE:CVA) is an owner and operator of waste-to-energy facilities including both landfill gas and biomass.  For hydropower investments, you can look at several of the Clean Energy Income Trusts, or suppliers of parts and services for hydropower projects such as AECOM Technology Corp. (NYSE:ACM).  

Performance and Cost Summary

Click to Enlarge  

Resource Size and Industry Maturity

To the extent that the California region is representative, B&V's comments about the size of the resource will also be interesting to investors.  Although companies such as the ones discussed above can be very profitable, a limited resource will place future constraints on growth.  Investors hoping for growth will want to focus on companies focused on types of renewable energy with the largest resources.  

They said:

  • Solar photovoltaic (PV) is unique among renewable technologies, as it can be located almost anywhere, and scaled to virtually any size.

  • "There is several hundred MW of potential small-scale (>10 MW) hydro generation available in California, Washington and British Columbia. ... This potential is small compared with other resources assessed.

  • Wave and Marine Current – These technologies offer substantial technical potential but are unlikely to achieve a commercial level of development sufficient to contribute to California’s RPS goals within the planning horizon [before 2020].

Hence, it will be no surprise to anyone that solar PV is the greatest past and potential growth story of all renewable electricity technologies.  Hydro, in contrast has substantial potential for profitable investment, but investors should focus on the current profitability of the companies in the sector, not on the limited growth potential. 

Investors considering purchasing Wave or Marine Current stocks should take a deep breath and consider other sectors.  Such development stage technologies may have great potential, but research stage technologies are not usually great investments for retail investors: most of the companies are still private, and so there is very little chance that the few public companies are going to be the ones that succeed in bringing the technology to market.

DISCLOSURE: Tom Konrad and/or his clients own CVA and ACM.

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.

June 05, 2009

Understanding the Development Path for Li-ion Battery Technologies

Last Tuesday a reader who works as a consultant in the energy storage and hybrid electric vehicles industries and sent me an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2009, a high-level policy analysis that discusses the merits, risks and expected costs of an aggressive eight-year initiative to foster the development and facilitate the commercialization of Li-ion batteries. The draft roadmap was written during the last days of the Bush administration, has since been partially implemented in the American Reinvestment and Recovery Act of 2009 and has never been officially released by the DOE. It does not necessarily reflect the policy goals of the Obama administration. While I don't generally feel comfortable writing about documents that have not been publicly released, I've discussed most of the basic issues and challenges in other articles and believe the conceptual framework, industry assessment, development goals and timelines discussed in the draft roadmap can help energy storage investors make better decisions. So I've decided to take a deep breath, begin with a couple of important quotes, summarize the broad investment themes that can be extracted from the draft roadmap and try to tie it all back to a likely future for the energy storage sector. This is complex stuff so I encourage readers to offer comments and ask questions.

The introductory paragraph of the draft roadmap says:

"Advanced batteries will play a significant role in the energy and economic security of the United States; therefore, ensuring a domestic supply of this technology is critical. Advanced batteries are essential for the development of electric drive, high-efficiency, light-duty, and heavy-duty vehicles. They are also seen as a critical enabling technology for the large scale deployment of renewable energy sources such as wind and solar. In addition, other applications, such as those in the defense and intelligence industries, would benefit from the use of advanced batteries. Current batteries for these applications are beginning to approach performance targets, but their price, size, and abuse tolerance do not yet meet market standards. In addition, nearly all high-volume advanced battery manufacturers are located in Asia. In contrast, the United States has limited manufacturing capability and a small number of trained battery engineers, scientists, and line workers. To be a global leader in the production and sale of advanced batteries, the U.S. must rapidly develop improved technology and establish a U.S.-based battery manufacturing capability."

While the frank message of the introductory paragraph is stunning, the follow-up discussion of the principal barriers to the development and commercialization of Li-ion batteries is an even bigger eye opener.

"PHEV Battery Barriers: PHEV batteries face many of the same challenges associated with HEV batteries (uncertain calendar life, cost, abuse tolerance) plus additional challenges with energy density and specific energy. There is also concern that the deep cycling required of a PHEV battery all-electric range operation will be more difficult than the shallow HEV cycling. The Vehicle Technologies Program Office does not believe that NiMH systems will be able to meet the weight and volume targets of a PHEV battery with greater than a 10- or 20-mile range. ... Although Li-ion batteries can provide the energy and power for a 10-mile system, 20- to 40-mile goals are very difficult even for them. The major challenges to developing and commercializing batteries for PHEVs are as follows:
  • Cost – The current cost of Li-based batteries is approximately a factor of three to five times too high on a kWh basis. The main cost drivers are the high cost of raw materials and materials processing, the cost of cell and module packaging, and manufacturing costs.
  • Performance – Much higher energy densities are needed (for the 40-mile or greater system) to both meet the volume and weight targets and to reduce the number of cells needed for an entire battery, thus reducing the system’s cost. In addition, durability and reliability of current batteries needs to be assessed and possibly improved for use in passenger vehicles.
  • Abuse Tolerance – Many Li batteries are not intrinsically tolerant to abusive conditions such as short circuits (including internal short circuits), overcharge, over discharge, crush, or exposure to fire and other high-temperature environments. The use of Li chemistries in these larger (energy) batteries increases the urgency with which these issues must be addressed.
  • Life – Hybrid systems with conventional engines have a life target of 10 to 15 years, and battery life goals have been set to meet these targets. The goals of 300,000 HEV cycles and 5,000 deep discharge cycles are either unproven or are anticipated to be difficult. Specifically, the impact of combined EV/HEV cycling on battery life is unknown, and extended time at high state of charge (SOC) is predicted to limit battery life.
EV Battery Barriers: For EV batteries, the challenges are similar to those for PHEVs (weight, volume, calendar life, cost, and abuse tolerance), but the challenges are more difficult. Batteries can be developed to meet these targets, but they will be a generation beyond the current state of the art. In general, the research to meet the challenges associated with EV batteries will build on work done on PHEV batteries, just as research for PHEVs will build on the battery technology used in HEVs.

Renewable Energy Storage Barriers: DOE is also considering the role of electrochemical energy storage systems for optimizing the use of renewable energy sources to reduce U.S. dependence on foreign oil. Affordable energy storage could enable increased market penetration for many renewable energy sources such as solar and wind. The targets of this application are different than those for transportation, and alternative electrochemical energy storage technologies need to be considered. In this application, energy density is less important than for PHEV and EV applications. Of paramount importance are (a) low cost, (b) long cycle and calendar life, (c) high system reliability, (d) low maintenance, (e) low self-discharge rates, and (f) high system efficiency."

I've read the draft roadmap several times and think the DOE's development plan for Li-ion batteries has a reasonable chance of success from a governmental policy perspective. Nevertheless, I believe the plan will expose energy storage investors to a high level of business, competitive and technical risk that will take the better part of a decade to resolve. The simple summary for those who do not have the time to study the draft roadmap in detail is:
  • Battery manufacturing is a national security issue and America cannot rely on imports for this fundamental need;
  • Catching up with Asia is not enough and America must become the global leader in energy storage technology;
  • The best available Li-ion battery chemistries are not robust or stable enough to power America's energy future;
  • The best available battery manufacturing technologies are too expensive for a mass-market product;
  • Current material supply chains are not reliable enough to protect America's national security interests;
  • Li-ion batteries cannot become commercially viable without a massive government funded effort to advance the state of the art in battery manufacturing and Li-ion chemistry through two generations over the next decade;
  • The activity we've seen over the last few years is a good start, but only a start on the work that must be done;
  • The major expected reductions in Li-ion battery costs will arise from generational improvements in manufacturing processes and battery chemistry, rather than simple economies of scale associated with scaling-up current technology;
  • Substantially all of the recently announced plans to build limited numbers of PHEVs and EVs for sale into "entry markets" like specialty vehicles, state fleets, city busses, utility fleets, USPS vehicles, private delivery fleets and the military are essential steps in the R&D process that allow manufacturers to validate the technical potential of their products prior to full scale commercial roll-out; and
  • Commercialization of Li-ion batteries for the mass markets cannot occur unless and until all essential R&D work is successfully completed.
While I'm reluctant to compare the development plan for Li-ion batteries with the Manhattan Project, which cost $24 billion (in CPI adjusted dollars) and employed 130,000 scientists, engineers and technicians, the combined governmental and private sector investments could easily be in the same price range by the time the dust settles.

We are entering the age of cleantech, the sixth industrial revolution. We are also witnessing the birth of massive new consumer markets in South America, India and Asia that will put unimaginable strain on global supplies of water, food, energy and every commodity you can name. In combination, these mega-trends guarantee 10 to 20 years of gut wrenching change and economic dislocation. I have enough oil and gas experience to know that the oil industry will not be able to increase production to levels that satisfy the future demand projected by McKinsey and other macro-economic analysts. I have enough experience in energy storage to believe that by 2020 Li-ion battery manufacturing technology and chemistry will probably advance to a point where PHEVs and EVs are cost effective. But given my age, experience and financial responsibilities, I'm unwilling to put my portfolio at risk by trying to pick the winners of a business marathon that will take a decade or more to run and be subject to the unpredictable and highly variable winds of political and economic change.

I recently reviewed a slideshow presentation from a September 2008 clean air conference that described the auto industry as a serial victim of  technology du jour syndrome and offered the following table to prove the point.

25 years ago
15 years ago
Electric vehicles
10 years ago
HEVs and Electric vehicles
5 years ago
Hydrogen Fuel Cells
2 years ago
PHEVs and Electric vehicles
What’s next?

It's enough to make you go Hmmm.

Every analytical report I've seen concludes that global demand for energy storage devices will grow at extraordinary rates for several decades. Over the next few years, the substantial bulk of the revenue growth will go to existing producers of lead-acid batteries that can deliver proven products from existing factories. As cost-effective Li-ion battery manufacturing technologies and chemistries are developed, tested, validated and commercialized, they will rapidly become the preferred choice for extreme performance applications like PHEVs and EVs. As these technologies mature, Li-ion batteries may even make inroads into less demanding applications that have traditionally been the province of lead-acid batteries. Over the longer term a new equilibrium will develop where lead-acid batteries are used for certain applications and Li-ion batteries are used for others. Unless the market forecasts I've seen are seriously misguided, manufacturers of all classes of energy storage devices will have a hard time keeping up with expected demand.

We don't live in a black or white world and it is patently absurd to think that the future of energy storage will be black or white. The reality is far more likely to be a richly mottled canvas dominated by various shades of green. The simple fact is that we need every energy storage technology that's ever been invented, and more. I believe Li-ion batteries, lead-acid batteries, lead-carbon batteries, flow batteries, pumped hydro, compressed air, thermal solar and flywheels will all make important contributions to the energy storage solution. So I believe a balanced portfolio of energy storage stocks is the only sensible approach for investors who don’t have the time, inclination or ability to do their own detailed research. Articles like this one can provide food for thought, but they should not be relied on as investment advice because every author (including me) has his own agenda, preferences, predilections and prejudices.

As an investor, my goal is to buy low and sell high. Based on five years of work in the energy storage sector, I’m convinced that near-term revenue growth in the Li-ion group will be slower than most people expect while near-term revenue growth in the lead-acid group will be faster than most people expect. If my basic thesis about future rates of technological development and revenue growth is correct, the companies in the lead-acid group are likely to perform far better over the next few years than the companies in the Li-ion group.

Readers that want to develop a deeper understanding of the issues and opportunities in the energy storage sector may want to join me in San Diego for Infocast's Storage Week on the 13th through 16th of July. The speaker's list includes more than 80 thought leaders from the battery industry, the government, the utility and automotive industries and the research and development sector. I'll be participating in three panel discussions and hope to return home with new 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 Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

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

Wind Investors Beware!

Charles Morand

I received a press release yesterday about a new Emerging Energy Research (EER) study on wind power installations in the US for 2009 and beyond.

EER argues that US installations could be down as much as 24% in 2009 from a record 8.55 GW in 2008. While utility-led projects remain mostly on track, smaller IPPs and developers that rely on project finance or other forms of external financing are finding the current market environment challenging.

However, record growth could return as early as 2010 with 9 GW installed, driven in large part by the stimulus package. EER sees the following encouraging signs:

  • Near-term growth could be helped by fiscal incentives, most notably the 30% Investment Tax Credit (ITC). Unlike a Production Tax Credit (PTC), an ITC does not require the existence of a tax liability and should lessen the industry's reliance on tax equity investors - there are far fewer of those kicking around these days 
  • The possible enactment of a Federal renewable portfolio standard would provide a substantial long-term boost for the industry, and momentum is building in this direction
  • New interstate transmission lines aimed at unlocking high-potential wind resources are being built or at the very least discussed 
  • Investments in manufacturing capacity by OEMs remain on track, indicating that the industry sees the crisis as only temporary
  • Regulated utilities - with the ability to finance wind projects on-balance sheet - are making a growing commitment to wind (recently exemplified by Berkshire Hathaway's MidAmerican Energy)
Although the wind power sector is decidedly more 'global' than most other forms of renewable energy - meaning there is greater geographical diversity to the industry's aggregate revenue base - the US remains, according to Ernst & Young, the top-ranked market in the long and near terms. In the near-term, defined as the next two years, the US and China are far ahead of the pack.        

The health of the global wind power sector has, in the space of a few short years, become very much tied to the health of the US wind power sector, with traditionally strong European markets such as Germany and Denmark gradually loosing their influence. What happens in the US over the next two years will thus be consequential for how wind power stocks perform.

It seems as though investors are already looking past the difficult year 2009 will almost certainly prove to be for the industry, having pushed both wind power ETFs, FAN and PWND, for beyond the rest of the market over the course of the latest bull run.

But investors beware! Just as the market was pricing in Armageddon for the clean technology/alt energy sectors just a few months ago, now might be a bit premature to get over-excited:
  • Although credit conditions are normalizing, no one yet knows for certain what the future will look like, but many people agree that the financing environment will almost certainly remain challenging for a long time. Should inflation kick in as a result of fiscal and monetary incentives, interest rates could shoot right up in response, which would prove disastrous for any sector using large amounts of leverage
  • The Federal RPS portion of the Waxman-Markey bill remains controversial and the bill will most certainly continue to undergo changes on its way to becoming law. Unless and until this happens - the bill becoming law with a Federal-level RPS in it - I am inclined to discount this entirely as a potential factor in future growth
  • Transmission has certainly been on the agenda to a greater extent than at any other time in the past few decades, but we are still far - very far, in fact - from the investment levels required to truly unlock wind's potential in America. Governance systems around grid investments remain complex, with key areas of decision-making split between various actors whose incentives are not always aligned. I would venture to say that many people still see this as a major barrier to wind development, not as an enabler
  • The latest run in wind stock has been very impressive, with the ETFs outperforming the S&P 500 by 25-30%. Last fall, their relative decline was equally formidable. As pointed out earlier this week by Tom, the magnitude of gains we've experienced over the past three months should probably be be viewed with some caution. I'm not sure whether we're headed for an imminent decline and, if so, how pronounced it will be (I'm a lousy market timer). But if we are, you can certainly expect wind stocks to fall further than the market as a whole. Any risk-averse investor should probably stay away at this point, or consider taking some profit   
Wind continues to be among my favorite alt energy technologies and there are several years of strong growth left; the sector's expansion is not about to normalize. However, these are uncertain times and caution is of essence. Just as an onslaught of negative sentiment pushed wind stocks further south than they should have gone a few months ago, the current onslaught on positive sentiment - which is not justified, in my view - is doing the opposite.

DISCLOSURE: None             

June 04, 2009

Large Scale Energy Storage Technologies Compared

Comparison of Energy Storage Technologies from Solar 2009

Tom Konrad, Ph.D.

A reader and  CEO of a fuel cell startup sent me an email asking for a copy of my presentation comparing energy storage technologies which I referred to in last months article on Renewable Energy integration.  Since other readers may be interested as well, here it is:

Economic Comparison of Electricity Storage Technologies (Power Point Show, 721 kb)

Here is also the spreadsheet where I gathered most of the data for the graphs. (Excel spreadsheet 74 kb)

Visual Comparisons

These following graphs can also be found in the spreadsheet and presentation.  They all use the same data as the one in the renewable energy integration article, but display it on different axes.  Larger bubbles to the top and right are more economic technologies.

 Click to Enlarge

 Click to Enlarge

I'm still looking for better data on the economic costs for HVAC based thermal storage, such as that sold by Ice Energy, and would appreciate any information from readers on this.

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.


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.

June 02, 2009

Market Call: We're Near the Peak

Tom Konrad, Ph.D.

The current rally from the March 5 bottom has been breathtaking, especially in Clean Energy, with my Clean Energy Tracking Portfolio up 70.5% since it was assembled at the end of February (as of May 1), 11% higher than it was at the three month update last week, and the S&P 500 is up 41% from its March low.  Even in a better economic climate, gains of this magnitude would have me running for cover.  In the current economic climate, with a gigantic mountain of debt keeping consumers out of the stores, makes me feel this bear market rally does not have much farther to go.

This is mostly a gut feeling, but when it comes to predicting market moves, most methods (including my gut) are pretty worthless.  I've actually felt that this rally was on its last legs for the past month, and it continues to head higher. It's easy to predict the market, and then point back to the times you have been right, which is why I don't generally make calls like this publicly.

On the Sidelines

Why am I making the call?  Because I don't have anything to say about specific stocks.  The recent moves have been so extreme, I can't find any stocks that I'd want to buy anywhere close to these levels, and so I can't get excited about writing articles encouraging anyone else to buy them, either.  Maybe I'll research something to short, like First Solar (FSLR)

Until then, I've been selling covered calls on what I do own, to hedge some of my downside risk.  Unlike selling Cash Covered Puts, a bullish strategy I've discussed in the past, selling covered calls reduces your overall risk, so most investors (even relatively inexperienced ones) can get the necessary options permission from their broker.  US laws even allow selling covered calls in IRAs.


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.

June 01, 2009

Geothermal & The ARRA: Some Steamy Details

Charles Morand

In October 2007, Tom wrote an excellent overview of the geothermal power sector. By way of recap, geothermal power produces electricity by using steam from naturally-occurring Earth heat that travels up from the planet`s mantle and core by conduction. Conventional geothermal harnesses hot water and fluids already present in the rock while enhanced geothermal systems (ESG) - or next-gen geothermal - works by injecting cold water into hot dry rock (HDR) and pumping out resultant hot water and steam.

In terms of business risks, geothermal stands at the confluence of mining and utility/independent power production. Extensive testing and drilling must initially be conducted to determine resource availability and quality. If sufficient resource potential can be ascertained, it is often just a matter of negotiating a power purchase agreement with a utility and connecting to the grid (the latter can be a real challenge!)

Geothermal's excellent capacity factors, ranging from the mid-80s to the high 90s, qualify it for both baseload and peak (dispatchable) generation, thus making it the most valuable type of power there is. Unlike gas-fired generation, which accounts for the bulk of peak power today, geothermal power prices are not exposed to volatile energy commodities, although construction costs are impacted by the price of steel, cement, etc.               

In the 2008 edition of Geothermal Today, the DoE's EERE estimated that conventional geothermal electricity costs, before any reductions related to resource credits, between $0.63/kWh and $0.102/kWh to produce. Using crude (WTI), natural gas and retail electricity data from the EIA, I created the graph below to put this into perspective. The graph's geothermal cost band is static and does not reflect actual cost evolution overtime - if it did it would probably be sloping downward with perhaps a lump in 2007/2008 when the prices of construction commodities peaked.

As mentioned by Tom in his original article, risks in the geothermal industry are heavily concentrated in the resource assessment and exploration phases, although the largest component of total development cost is facility construction. According to the investment bankers who underwrote a large chunk of the financing for the North American geothermal pure-plays, each hole drilled while looking for geothermal resources costs around $5 million, which is a fair chunk of change for companies with market caps of under $100 million (see table below).

EERE breaks down development costs for a "typical geothermal power plant" - which account for the bulk of geothermal power's levelized cost - as follows:

Development Stage Cost ($/kW) Percent Total
Exploration and resource assessment 400 10%
Well field drilling and development 1,000 25%
Power plant, surface facilities, and transmission 2,000 50%
Other development costs (fees, working capital, and contingency) 600 15%
Total 4,000 100%
Although geothermal's high capacity factors and inherent predictability give it a clear edge over wind and solar PV, economical geothermal development is currently constrained to a handful of areas with the right geological conditions. This led Tom to call conventional geothermal "boutique" clean power, meaning it can never account for an appreciable proportion of total power production (although in certain regions it can definitely be scaled up substantially.)  

The following table lists out the main geothermal stocks available to North American investors. Besides Ormat, the mother of all geothermal stocks and a mature and profitable company, the rest are development-stage companies that have taken a solid beating along with the rest of the alt energy sector over the past year.  

Needless to say, the current financing environment is not favorable to either the mining exploration business model or the project development by inexperienced teams business model. This has resulted in more expensive capital for geothermal firms - Nevada Geothermal got a loan last September with an interest rate of 14% plus other fees, a punishing cost for any company.   

Name Ticker US$ Price
(May 29)
Market Cap (US$M) TTM EPS (US$) TTM PE LTM Share Price Performance (%)
Nevada Geothermal NGLPF.OB 0.56 52.6 (0.07) N/A (40.8)
Polaris Geothermal PGTHF.PK 0.59 44.8 (0.07) N/A (48.8)
Raser Technologies RZ 3.93 257.4 (0.79) N/A (60.6)
US Geothermal HTM 1.35 90.6 (0.09) N/A (52.5)
Western Geopower  WGPWF.PK 0.23 52.4 NMF N/A (43.2)
Sierra Geothermal SRAGF.PK 0.19 13.6 (0.04) N/A (68.3)
Ormat Technologies ORA 39.89 1,809.2 1.21 ~33x (21.6)
Average market cap 331.51
Average market cap w/o Ormat 120.42
Average LTM share price performance (47.9)
Average LTM share price performance w/o Ormat  (52.3)

New ARRA Money For Geothermal

What led me to want to write about geothermal - arguably one of the alt energy categories that has been the least discussed recently - was the announcement last Wednesday of funds for geothermal under the American Recovery and Reinvestment Act.

In fact, the pool of money announced was for both geothermal and solar, although geothermal caught my attention because I am working on a couple of geothermal mandates at the moment. Geothermal got $350 million, broken down as follows:

  1. Demonstration projects ($140 million): This will go toward geothermal in unconventional settings, including: "geothermal energy production from oil and natural gas fields, geopressured fields, and low to moderate temperature geothermal resources." The first two areas are of special interest to me. I did a bit of work on what is called "geopressured geothermal", or the type of geothermal resource typically found in and around oil & gas (O&G) operations. This resource generally comes in the form of hot, methane-saturated brine that flows to the surface under its own pressure. The methane can be separated from the brine and used in power production along with the geothermal resource in a hybrid plant. Currently, the O&G industry considers this more of a nuisance than an asset, but things could change. The Gulf Coast area is estimated to have substantial geopressured geothermal potential, and the DOE even ran a pilot project in Texas in the late 80s. Although the pilot ran fine, it was estimated that this resource was not economical at the time due to low energy prices. We know now where that argument stands and how short-sighted it can be. There are no public companies that I know of that are currently active in geopressured geothermal development, but this is an area to watch closely in my opinion.
  2. Enhanced geothermal systems technology R&D ($80 million): As discussed above, EGS is the next frontier in geothermal development. Because they allow for geothermal electricity production in HDR, EGS considerably expand the geographical scope of economical geothermal development; in fact, EGS could allow for geothermal electricity production in nearly every region. A 2006 MIT study concluded that, with investments in technology development of between $800 million to $1 billion over a 15 year period, EGS could be improved to allow for the economical construction of 100,000 MWe of capacity over a 50 year period in the US. This initial money takes us 8% to 10% there, and there have already been investments by the private sector (see the Google video at the end of this post.) Should these expenditure levels be maintained in the next four years, EGS would receive a strong boost.
  3. Innovative exploration techniques ($100 million): This is described as: "Funding [that] will support projects that include exploration, siting, drilling, and characterization of a series of exploration wells utilizing innovative exploration techniques." Unlike #1 and #2, this should benefit the whole of the industry. As mentioned above and in Tom's article, drilling represents the apex of risk for geothermal investors and significant improvements here could remove a major barrier to further geothermal development.
  4. National geothermal data system, resource assessment, and classification system ($30 million): This is described as follows: "To fully leverage new low-temperature, geopressured, co-production, and EGS technologies, DOE will support a nationwide assessment of geothermal resources, working through the USGS and other partners. Second, DOE will support the development of a nationwide data system to make resource data available to academia, researchers, and the private sector. Finally, DOE will support the development of a geothermal resource classification system for use in determining site potential." In my view, this will be beneficial mostly to the unconventional geothermal players such as EGS and geopressured.

There unfortunately is not a whole lot of near and medium term actionable material for public equity investors in the ARRA geothermal package presented by the administration. The financing environment will most likely continue to be difficult for early-stage geothermal companies, and lower prices for natural gas probably aren't helping its case. The immiment arrival of carbon trading in America could, however, provide tailwinds. 

The package does, however, give a significant boost to unconventional geothermal resources that had traditionally gotten little attention outside of energy geek circles. If maintained, this financial commitment could substantially shorten the time line for these resources to play a notable role in our energy mix. Opportunities for public equity investors could thus arise before long.     

A Vid On EGS With Steven Chu (now US Secretary of Energy)



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