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July 31, 2009

Why Lead-Carbon Batteries Will Deflate the Lithium-Ion Bubble

John Petersen

For over a year I've been cautioning readers that while lithium-ion batteries are glamorous, sleek, sexy and hot; they are about to face a formidable challenge from lead-carbon batteries that are a little bulkier and heavier, but offer competitive cycle-life and power for a tiny fraction of the cost. To placate lithium fundamentalists and EV evangelists, I want to clearly state up front that lead-carbon batteries will probably not be the first choice for plug-in vehicles. Nevertheless, it is crystal clear that lead-carbon batteries will be the only sensible choice for micro, mild and full hybrid electric vehicles (HEV's) and many grid connected energy storage applications. A July 30th article from Earth2Tech titled, “Vinod Khosla On Why Lithium-Ion Batteries Are Overhyped” says it all, "The most important thing to remember is economic gravity – the cheapest thing ends up winning." What do you know; somebody far smarter than me who believes cheap beats cool.

As regular readers know, I recently participated in Infocast's Storage Week 2009 and served on three discussion panels. The core data for this article came from a slide-show that Patrick T. Moseley PhD, the president of the Advanced Lead-Acid Battery Consortium (ALABC), presented at the conference. While I've known about the surprising gains that come from the integration of advanced carbon materials into conventional lead-acid batteries for several years, the Moseley presentation is one of the first public documents to explore the details. A copy of Dr. Moseley's Storage Week presentation is available here. A complete archive of my articles on the energy storage sector is available here.

The media began paying attention to lead-carbon batteries in January 2008 when Autobloggreen reported the results of a road test that used a split-electrode lead-carbon "Ultrabattery" developed by Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO) to power a modified Honda Insight for 100,000 miles. The gist of the report was that in exchange for a weight penalty of 17 kg (37 pounds) and a fuel economy penalty of 2.8%, the Ultrabattery promised to shave up to $2,000 off the sticker price of a mild hybrid. Dr. Moseley's presentation took the Autobloggreen report a couple steps further and provided the following graph of ALABC-sponsored cycle life testing that compared the Ultrabattery to a standard NiMH battery through 180,000 cycles at discharge rates of up to 5C and recharge rates of up to 4.5C using the European Council for Automotive R&D (EUCAR) Power Assist Profile (click on the graph for a larger image).

Similar cycle-life improvement was clear in another graph from the Moseley presentation that compared the performance of conventional lead-acid batteries with lead-carbon batteries that incorporated 2% carbon black and 2% graphite by weight (roughly 10% carbon by volume) in the sponge lead paste for the negative electrodes (click on the graph for a larger image). This particular series of tests compared the two battery strings at discharge rates of up to 4C and recharge rates of up to 3C using a duty cycle developed by BAE Systems for its hybrid transit bus program. Once again, the cycle-life gains were remarkable.

The real meat and potatoes of the Moseley presentation, however, was a slide that compared the performance and price of the Ultrabattery against (click on the graph for a larger image):

While I hate belaboring the obvious, a simple battery technology that surpasses USABC goals by a comfortable margin while reducing the sticker price of a mild hybrid by up to 10% is important in hard times because the majority of American and European consumers are carefully weighing car buying decisions and demanding real value. More importantly, lead-carbon batteries can be manufactured in existing plants without building a new manufacturing, supply chain and distribution infrastructure from the ground up. As a matter of simple capital efficiency, lead-carbon battery manufacturing will be an order of magnitude cheaper. It can also ramp up to required volumes in years rather than decades.

In a January 2009 article titled "Lead-Carbon: A Game Changer for Alternative Energy Storage" I reprinted a graph that showed the results of a series of partial state of charge (PSOC) cycle-life tests that Sandia National Laboratories performed in 2008 on five different batteries including a valve regulated lead-acid (VRLA) battery, two VRLA batteries with carbon enhanced pastes, an Ultrabattery, and an advanced lithium-ion (Li-FePO4) battery. I also reprinted Sandia's summary slide which concluded, "The new carbon enhanced negative electrodes in VRLA batteries have dramatically improved utility PSOC cycle-life up to a factor of 10."

In a follow-up article titled "Lead Carbon Batteries: A Game Changer for Alternative Energy Storage - Part II" I compared the relative strengths and weaknesses of the principal lead-carbon battery developers, both public and private. The four public companies that are actively developing lead-carbon battery technology are:
A 10-fold improvement in the performance of any technology is highly disruptive. The fact that lead-carbon batteries can do the work using cheap and plentiful raw materials from domestic sources and provide a product that is easily recycled in existing facilities is a game changer; particularly when both lithium-ion and NiMH batteries are based on imported raw materials that are likely to face substantial short-term supply constraints and will require the development of new recycling techniques and the establishment of a new recycling infrastructure.

In America we get up in the morning, we go to work and we solve our problems. NiMH and lithium-ion batteries cannot help the auto industry meet accelerated EU tailpipe CO2 emission standards and US CAFE standards because factories to make the batteries do not exist and even if they did the world's mines couldn't extract the needed raw materials fast enough to satisfy the demand. Over the next decade there's a fair chance that lithium-ion batteries will complete the development and testing path described in an unpublished "pre-decisional draft" of a DOE report titled, National Battery Collaborative (NBC) Roadmap, December 9, 2008, which discusses the merits, risks and expected costs of an aggressive eight-year initiative to foster the development and facilitate the commercialization of lithium-ion batteries. However those future advances will have no impact on our current problems.

It's time to quit talking about the distant future and focus on solving today's problems.

In closing I want to once again share an image from cartoonist Jan Darasz that was published in the Winter 2008 edition of Batteries International magazine with my article, America Must Rebuild Domestic Battery Manufacturing Infrastructure.

DISCLOSURE: Author is a former director 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.

July 30, 2009

Biochar Investing

Tom Konrad, Ph.D., CFA

BioChar, or using black carbon directly as a soil amendment holds the promise of both increasing agricultural yields and locking up carbon in the soil for centuries or millennia.  Are there ways for stock market investors to benefit?

The technology is simple, but the results are potentially quite profound.  By pyrolyizing (heating in the absence of oxygen) biomass, and mixing the resulting char into the soil, it is possible to produce 

  1. Energy, in the form of heat, electricity, and or liquid fuel
  2. Carbon sequestration
  3. More productive agricultural land.

Key to producing both energy and sequestering carbon is what would otherwise have happened to the biomass if it had decayed under normal conditions: The carbon content would have been returned to the atmosphere as CO2 or methane.  Pyrolysis produces two products: pyrolysis gasses or BioOil, which can be burned for energy or upgraded into transportation fuels, such as jet fuel, gasoline, and diesel, and char, which  can either be used as a fuel (charcoal- the same stuff we grill hamburgers on), or as a soil amendment (biochar.)  

Biochar resists ordinary decomposition in the soil, and hence stays there for centuries or millennia.  In addition, it enhances soil fertility.  Although biochar alone has not been shown to enhance soil fertility.  Biochar's complex surface area and intricate pore structure is hospitable to soil bacteria and fungi which help plants absorb nutrients from the soil.  Christoph Steiner, a researcher at the University of Georgia's Biorefining and Carbon Cycling Program says, "We believe that the structure of charcoal provides a secure habitat for microbiota, which is very important for crop production."

For all these reasons, biochar has broad support in the environmental community as one more tool to devote to combating climate change.

An Investing Perspective

Such win-wins are essential for us to tackle climate change without crippling our economy, but can stock market investors benefit?  The low-tech nature of creating biochar is a challenge.  No high technology is needed to create charcoal.  In fact, the benefits of biochar as a soil amendment were discovered thousands of years ago by Amazonian aborigines who used the process to enhance crop production in the poor soils of the Amazonian basin.  Portuguese colonialists called it terra preta, or "Black Earth."

Modern pyrolysis enhances traditional methods of creating charcoal by capturing the volatile organic compounds as Bio-oil, reducing pollution and creating a second potential value stream.  One company attempting to commercialize this process is Dynamotive Energy Systems (DYMTF.OB), which recently obtained an independent analysis of their upgraded BioOil, confirming that 80% by weight could be distilled into gasoline, jet, and diesel fuel.  Dynamotive expects that it can "deliver advanced (second generation) fuels from biomass at a cost of less than $ 2 per gallon of ethanol-equivalent fuel in facilities processing about 70,000 tonnes of biomass per annum."

Although I have not taken an in-depth look at Dynamotive's business model, I'm cautious.  The price of the biomass input is highly variable, and will have considerable impact on the eventual fuel cost. The company's technology seems to center around upgrading the BioOil, but I am uncertain if this is the best use of the volatile organics; it may end up being much simpler to simply burn them to generate electricity or heat to use on site.  

There is also private competition.  There are at least two private companies: Carbon Diversion, Inc., and Alterna developing competing reactors for producing energy and biochar.  Just as I discussed regarding Algae biofuel companies, public equity investors should be cautious when the majority of an industry is still private; because the private companies do not disclose, it becomes much more difficult to tell which company is in the strongest competitive position.

In the same article, I concluded that price and supply of feedstock will be essential to the profitability of advanced biofuel companies, and I see the likeliest beneficiaries to be the growers of the biomass feedstock advanced biofuels companies such as Dyamotive use in their processes.  The potential for additional revenue streams from biochar and carbon offsets could accrue to the technology firm, but it could just as easily accrue to the owner of the biomass, depending on the local competitive uses for the biomass.  Meanwhile those same biomass growers may benefit from increased productivity with biochar.

Probing Deeper

At the moment, I don't see any practical way to invest in the potential of biochar.  However, next month I plan to attend the North American Biochar Conference 2009 in Boulder.  I hope to discover ways investors can help sequester carbon through Biochar, and see a good return on their investments at the same time.cees ibi biochar logo 2009.png


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.

July 29, 2009

India Joins The Solar PV Club

Charles Morand

One of the - if not THE - most popular debates in solar PV circles is about when exactly the electricity produced by solar PV systems will reach "grid-parity", or become competitive with like-generation fuels (i.e. non-baseload) on a stand-alone basis (i.e. no feed-in tariffs, mandates or rebates).

A lot of the time, these discussions slip into arcane sub-debates about module costs, as expressed on a dollar per watt basis, and how far they need to fall for solar PV to be competitive. But module costs are only one part of the equation; inverter, installation and other balance-of-plant costs can make up to 50% of the installed cost of a system, and the local solar regimes, cell efficiency, interest rates and system orientation can all impact the levelized cost of the power produced, and thus its relative cost position on the grid.

While such discussions are most definitely intellectually stimulating, the fact remains that the solar PV industry is, by-and-large, heavily dependent on regulatory incentives for growth. Recent figures by REN21 (p. 24 of the PDF document) demonstrate the extent of this dependency. In 2005, Japan accounted for ~24% of new installations and ~35% of total installed capacity for grid-tied solar PV globally, while for Spain the numbers were ~2% and ~2%, respectively. By the end of 2008, Japan made up ~5% of new installations and ~15% of installed capacity, whereas Spain accounted for ~48% and ~26%, respectively. What changed in those three years? Japan canned its residential incentive in 2006 and Spain implemented its feed-in tariff in 2004. Now, both countries have made 180-degree turns, with Spain canning and Japan re-instating. I expect investment flows to reverse. 

Reaching grid parity in certain regions with high wholesale power prices is not going to change that situation overnight - last year, McKinsey & Co published a forecast in which they estimate that economic demand for solar PV will begin outpacing policy-driven demand by about 2015. By 2020, the authors believe, policy-driven demand will still account for a little under a third of total global demand. Regulatory incentives are thus going to account for a substantial portion of installed solar PV capacity for at least the next decade.

That is why solar PV investors should be elated that India has finally decided to join the solar club by planning to have its own targets and incentives announced by September. Early information points to a non-trivial target of 20 GW installed by 2020 (Germany had about 5.4 in 2008), with 1 to 1.5 GW installed by 2012. The scope for solar PV growth in India is massive, especially growth in distributed solar as over 600 million people - mostly in rural areas - currently don't have access to electricity.

As of yet, few details have been made public on the upcoming policy so it is difficult to gauge what this will mean for the solar PV sector. However, if India's solar ambitions turn out to be as big as their IT ambitions, this could prove a welcomed boost for the industry.  

I am finding it difficult to pick stocks in the solar PV sector for three reasons: (1) the intense sell-side focus - exemplified by the fact that every shop on the Street now has a solar PV analyst - makes it very difficult to gain and exploit an informational advantage; (2) stocks tend to be highly volatile, with the success stories trading at astronomical multiples (e.g. First Solar) and the firms experiencing difficulties getting destroyed (e.g. Timminco); and (3) the industry remains relatively young, with new entrants and emerging technologies continually threatening established market positions.

My favorite way to play this sector and macro events like the India announcement thus remains through one of the two solar power ETFs: the Claymore/Mac Global Solar Index ETF (TAN) or the Market Vectors/Van Eck Global Solar Energy ETF (KWT) . While volatility and high multiples remain a factor for the ETFs, they nonetheless eliminate much of the firm-level risk.

I took a long position in TAN in early March, and this has done quite well for me so far. My time line there was 18 to 24 months and that remains the case today. However, the announcement by the Indian government in September could provide near-term momentum for these two ETFs, especially if the program is to be implemented sooner rather than later.

DISCLOSURE: Author is long TAN       

July 26, 2009

Clean Energy Stocks Shopping List: Smart Grid and Strong Grid

My five favorite stocks with technology to improve grid reliability.

Tom Konrad, Ph.D., CFA

Although the market has risen above where it was in early June, when I said "We're near the top," I'm still bearish.  And I'm still making lists of stocks to buy when prices seem more favorable.  Previous articles in this Clean Energy Stocks Shopping List series are listed at the end of this one.

The Strong Grid

I recently wrote about our list of Smart Grid Stocks, and at least two readers were prompted to ask why wasn't (1) Beacon Power (BCON) on the list?  "Smart grid" does not have a uniform definition; the one I use focuses on the "smart:" making a more effective grid through the better use of information and communication.  Beacon uses high speed flywheels, a form of Electricity Storage extremely well-suited to high power, low energy applications to sell frequency regulation services to the grid.  Since this improves the effectiveness of the grid, but does not do it through the use of information, I think of Beacon as a "Strong" rather "Smart" grid technology, and it's listed in our Electricity Storage and Flywheel stock lists.

Frequency regulation is usually provided by keeping a natural gas turbine running at less than full capacity, although Lithium-ion and other battery manufacturers are also trying to enter this market.  There are significant efficiency gains and carbon savings to be had by using flywheels or other electricity storage for frequency regulation, and allowing the turbine to run at an efficient constant speed.  Because flywheels are cheap on a per-kW or power basis compared to batteries (even though they are expensive on a per-kWh or Energy basis,) I think they will have an advantage over batteries for this relatively overlooked, power-intensive application.

Beacon, however, still has relatively small revenues and is burning through cash quickly, with little on hand.  They are raising money through an ongoing share purchase agreement with a fund at a 14% discount to the exchange traded share price.  This ongoing dilution should keep the company afloat, but it is unlikely to do much for the share price.

Beacon has received a DOE loan guarantee for a 20MW frequency regulation plant in New York, but are looking for creative ways to provide their equity contribution to the project.  This project creates a great upside opportunity for Beacon shareholders, since it will probably bring the company to profitability if completed, but the ongoing search for funds to pull it off may also create excellent buying opportunities along the way.

In addition to being a wind turbine designer and parts supplier, (2) American Superconductor Corporation (AMSC) is another company I'd call "Strong Grid."  In addition to the eponymous high temperature superconducting cables, which both can carry 10 times more power than conventional cables and simultaneously suppress fault currents that can result in serious outages, and a China-focused wind turbine business, the company makes products which regulate power from wind farms, grid-scale surge protectors, and voltage stabilization systems.  It's these later products focused on grid stability that interest me much more than the superconducting cables, which I expect will only be cost effective in dense urban areas.

Although the company is not profitable yet, they have $2.50 cash per share in the bank, which is enough to fund their operating cash outflow for years to come.  With a Beta of over 2, the company's stock price is highly sensitive to market moves, so a market downturn should provide an excellent buying opportunity in a company that Smart Grid expert Jesse Berst thinks is 'Poised for Super Results."

The Smart Grid

I previously stated I like all smart grid stocks because I see so much potential for the sector, and I have a hard time picking winners.  But when I have to choose, in a competitive market with many new entrants, I tend to favor established companies that already have established business lines and experience working with customers in the space.  (3) Echelon Corporation (ELON) fits this bill.  The company's LonWorks building automation products are well established in the market; the move into smart grid is more the expansion of existing business lines than creating a new business.  Over the last few years, I've lost count of the number of cities which have signed up to use the company's technology to save electricity by dimming street lights.  This sort of thing is not nearly as sexy as home automation, but working with large municipal customers to save large quantities of energy seems like a much easier way to make money than dealing with millions of fickle homeowners.

The company is not yet profitable, but has sufficient cash not to need to raise new capital anytime soon.

Solidly profitable (4) Itron, Inc. (ITRI) is a leading supplier of electricity, gas, water, and heat meters worldwide.  For Itron, smart meters are simply an extension of existing product lines, and their existing business relationships with utilities should give them an advantage when competing with start-up rivals for utility business.  

Spanish company (5) Telvent Git S.A. (TLVT) is more than a smart grid company, it's also a smart water, smart transport, and smart pipeline company.  In short, they sell software and services to make all sorts of networks operate more efficiently, and have established business relationships with a broad range of utilities.  In addition to being profitable, I like the company's large exposure to transportation, because while making the electric grid smarter will do a lot to combat climate change, making our transportation system smarter will not only help with climate change, it will also help with peak oil.

Other articles in this series:

DISCLOSURE: Tom Konrad and/or his clients own AMSC, ELON, ITRI, and TLVT.

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.

July 23, 2009

Raser Technologies (RZ): A Bargain, or Just Cheap?

Tom Konrad, Ph.D., CFA

Raser Technologies (NYSE:RZ) stock has fallen almost 50% since the company announce an offering of shares on June 30.  Although the round quickly filled, the stock continued falling, and it seems like a screaming deal.  Is it?

Raser Technologies

On July 7, Raser Technologies sold $25.5M of stock and warrants in a secondary offering.  According to press reports, this amounted to 13% of Raser's stock, thereby valuing the company at (very approximately) $200M, or $175M pre-money.  

The units, each consisting of 1 share and 1/2 a warrant exercisable at $4.62 was offered at $2.98.  Depending on how you value the warrants, this means that the institutional investors who purchased the shares valued the stock at between $2.50 and $2.75 per share, which was approximately what the company's shares were trading at the day the offering closed.

Low Temperature Geothermal Development

Raser's model is to focus on previously known, relatively low temperature geothermal resources which had previously been passed over because they had historically been to cool to develop for electric power.  As I discussed in my overview of Geothermal Power, exploration risks have historically prevented much geothermal power production.  By using known geothermal resources, Raser completely avoids the risk and expense involved in exploration.  

There is also little technology risk, since the modular PureCycle turbines produced by United Technologies Corp. (UTX) are only slightly modified (by UTC) from a decades old production chiller from the same company.  Assembly-line manufacture of the turbines also speeds deployment.  The twelve to 18 months within which they expect to be able to develop projects is half that of the industry standard 2-3 years.

Raser is currently in negotiation with lenders in order to obtain financing for its 300MW geothermal development pipeline.  In order to obtain that financing, lenders want to know that Raser will remain in business in order to build and operate the proposed plants.  The additional cash from the secondary offering will go a long way towards alleviating that concern.

Raser is also pursuing a Department of energy loan guarantee, as well as stimulus funding under the ARRA.  With Raser's Thermo plant now in New Mexico selling power to the city of Anaheim since 2008, utilities now seem to believe that Raser can deliver on its promises.  Some evidence of this came in the form of a (non-binding) term sheet with  the Southern California Public Power Authority (SCPPA) for 110 MW of geothermal that envisions part of the purchase price paid up-front, in effect, having SCPPA finance part of the plant construction.

If any of these multiple avenues for project finance are finalized, I expect the stock price to receive a big boost from the currently depressed levels.

The 100 MPG Hummer

If turning the business model for geothermal development on its head is not enough, Raser is also working on hybrid vehicles.  They've put together a range extended electric drive train for large vehicles, which they chose to showcase in a Hummer H3.  Like Trinity AFS, they choose to grab headlines by ignoring the electricity used to charge the vehicle, and emphasize the relatively meaningless MPG number.  I'm not sure if much of this technology is unique; large vehicles like the Hummer are especially well suited for dual mode EV conversions because the frame is capable of carrying the extra weight of batteries without an extensive redesign.

I personally would be happiest if Raser divested their Transportation and Industrial segment, in which they are pursuing the hybrid technology.  There seems to be little obvious synergy between the two segments, and they don't seem to have an outstanding technology or business model.  Furthermore, they face significant competition, not only from incumbent car and heavy duty vehicle manufacturers, but also from countless startups, such as Trinity.  I know of two other pure-play publicly traded companies in the large electric vehicle space: Balqon Corporation (BLQN.OB), and UQM Technologies (UQM), and where there are two public companies, there are bound to be several private ones.  A third public company, Odyne, went bankrupt last year and sold its assets to Dueco, which is now a competitor in the hybrid heavy equipment market.  I would prefer if management were to focus on geothermal, where their business model is relatively unique in the industry and the main competition is with increasingly expensive fossil fueled electricity generation.

However, while management denies any intent to shed the transport arm in interviews, they seem to be doing the next best thing: Devoting most of their resources to geothermal.  According to the last annual report, assets in the Transport and Industrial segment fell from almost $1M in 2006 to $750,000 in 2008; they have "reduced our resources committed to new developmental efforts" in this segment.  Meanwhile, assets in the Power Systems (geothermal) segment grew from approximately $6M in 2006 to $168M in 2008.

Too Cheap to Ignore

RZ Chart.png

Raser's future success will be highly dependent on their ability to raise project financing for their very ambitious development plans.  In the current environment, raising such financing is far from certain.  They will need to raise significant amounts of money for project finance, and successfully develop those projects if they are ever to reach profitability.  If they fail, the stock price will continue to fall.

With such large uncertainties, it is difficult to value the company, so my inclination is to rely on the implied valuation from the recent offering, of between $2.50 and $2.75 a share.  These large investors would only have invested if they felt they were getting in at a discount to the value of the business, and so I am comfortable buying at slightly over $2.00, giving me a comfortable discount to the offering.

At these beaten-down prices, any good news should cause a sharp spike in the stock price in very short order.  

End Notes 7/23/09

 I wrote this article over the weekend, and have since then tripled my position, at prices between $2.00 and $2.05.  I also bought some January 2011 $5 calls.  This morning, Raser announced the restructuring of an existing line of credit, not something I would consider major news, but it's a step along the way to advancing the projects in their pipeline.  The stock seems to be starting to rebound on the news.

Other recent articles: 

Clean Energy Stocks Shopping List: Landfill Gas and Geothermal
Q2 Performance Update: Ten Green Energy Gambles for 2009

DISCLOSURE: Tom Konrad and/or his clients own RZ and UTX.
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.

July 22, 2009

Carbon ETFs/ETNs: Playing Copenhagen

Charles Morand

At $126 billion transacted in 2008, up from $11 billion in 2005, the global carbon market is the fastest growing commodities market in the world and, provided that an agreement is reached at the COP15 conference in Copenhagen and that the US adopts a cap-and-trade program, this growth could go on for several more years.

Yet this is a market that remains comparatively unknown for a number of reasons, not the least of which is the fact that the rules surrounding it are very complex. Unlike other commodities, to successfully invest directly in carbon assets one must have a complete understanding of various layers of rules and regulations, starting at the top with broad public policy objectives all the way down to the minutiae of how carbon assets can be traded.    

 In early May, I wrote an article discussing how US investors could invest in emissions trading. In that article, I mostly ignored the iPath Global Carbon ETN (GRN) and the AirShares EU Allowances Fund (ASO) - the two ETF/ETNs that track European carbon prices - because the article focused on US carbon emissions and neither has exposure to US emissions markets such as the RGGI or the CCX.

These two products, launched in the past year, provide investors with direct exposure to carbon contracts. In a way, they are a much more direct means of expressing one's view on the carbon market than going through the back door by owning an exchange such as Climate Exchange PLC (CXCHY.PK) or a trading platform like World Energy (XWES).

Although I first discussed GRN and ASO in early January, I never researched either of them in any detail. Yesterday, I looked into how they had been performing in 2009. The graph below shows their performance over the past six months.

What accounts for GRN's seeming outperformance (I haven't checked for statistical significance) is the composition of the underlying portfolio of carbon assets. The following table provides a summary of the main carbon assets traded around the world (for a larger table, you can download the Barclays Capital report from which I took it and scroll to page 4).

Currently, the most liquid and active carbon markets are for the EU ETS' EUAs and secondary CERs (see table above). I will not cover the rules of the EU ETS in this article, but you can find a detailed overview of the program here. In 2008, out of a total of about $126 billion transacted on international carbon markets, EUAs accounted for $92 billion and secondary CERs $26 billion - together, they made up roughly 94% of transacted value.

EUAs must be surrendered to governments by regulated companies each year in an amount equivalent to the company's emissions. CERs can also be used toward meeting regulatory requirements, although their use is capped at 13.5% of total  permit requirements in the EU ETS (this varies by country). CERs thus tend to trade at a discount to EUAs even though the marginal cost of abatement might be lower in the emerging economies where they are generated.


Although they both hold carbon futures contracts transacted on the European Climate Exchange, GRN and ASO are set-up very differently.

ASO, according to information available on its website, holds a basket of EUA futures of different vintages - that is, of different compliance years - that is rolled over annually. You can view the current portfolio here. ASO holds the futures until  shortly before the EUAs come due in December of each year, at which time it sells them and uses the proceeds to invest "in futures contracts expiring in December of the next five subsequent years [...]" Since ASO is not a regulated entity under the EU ETS, there is no sense in the fund taking physical delivery of the EUAs.

GRN, on the other hand, holds a basket of EUA (~79%) and CER (~21%) futures. The weights are determined annually by a committee and the index is re-weighted in November of each year. The other major - and, arguably, more important - difference with ASO is the fact that GRN holds only current year contracts. When it is re-weighted each November, the futures for period T (current year) are thus entirely replaced with futures for period T+1.  

GRN is heavily leveraged to near-term market developments, whereas ASO takes a longer-term view.


Because ASO looks five years out, a strong agreement in Copenhagen  in December would be favorable for the fund, as the EU has indicated that it would raise its greenhouse gas reduction target from 20% below 1990 level by 2020 to 30% below 1990 by 2020 if such an agreement were reached. The 2013 futures then held by ASO following the annual roll would most likely experience a pop.

Additionally, if the US were to join the carbon trading club by the end of the year, the long-term picture would brighten substantially, which again might favor ASO.

Besides these macro events, I don't currently have a view on which security is superior as I haven't done sufficient analysis of the EU ETS yet. This is something I intend to do in the next few weeks and months, as I think interest in this commodity will grow substantially in the lead-up to Copenhagen.

DISCLOSURE: None            


UPDATE (JULY 28, 2009): A reader alerted me to this: http://www.indexuniverse.com/sections/newsinfocus/6256-xshares-to-close-carbon-etf-.html - ASO has now been withdrawn. Not especially surprising in my opinion.

July 20, 2009

Grid-Based Energy Storage; Notes, Questions and Heresies from Storage Week

John Petersen

Last week I had the pleasure of participating as a panelist in Infocast’s Storage Week and attending four days of presentations by industry executives, national thought leaders and policymakers. While most of the presentations were too detailed and specific for a blog about energy storage stocks, there were a few high-level discussions that may be interesting to readers and while I'll never qualify as a journalist I can at least share some of the thoughts I jotted down.

Storage for Integration of Renewables

Two of the most important presentations came from Dr. Imre Gyuk, the DOE's Program Manager for Energy Storage Research, who explained that the unbuffered grid is vulnerable to collapse, noted that power outages cost American business an estimated $79 billion per year in lost productivity, and described grid-based energy storage as "a disruptive technology that will induce a paradigm shift in the utility industry." He further explained that storage has become a national priority as an integral subset of the smart grid program because of the multiple benefit streams it offers utilities in the form of frequency regulation, peak shaving, energy management, and transmission and distribution system upgrade deferral.

In his presentation, Dr. Gyuk specifically asked participants to support S. 1091, the Wyden Bill, which will provide a 20% investment tax credit for grid connected storage facilities that have at least 2 MW of capacity and can deliver 500 kWh for a period of 4 hours; makes utility-owned storage facilities eligible for clean renewable energy bonds; and provides a 30% investment tax credit for residential energy storage equipment. When the new subsidies are coupled with existing provisions that provide investment tax credits for storage system manufacturing facilities; ultra-rapid depreciation on eligible projects; and a short-term program that will offer cash subsidies to renewable energy storage projects in lieu of tax credits, the potential impact is massive.

In his discussion of the challenges associated with integrating intermittent renewables into the power grid, Dr. Gyuk explained that the peak-efficiency hours for both wind and solar do not mesh well with periods of peak demand for electric power. In the case of wind, the peak efficiency is usually at night when customer demand is lowest. In the case of solar, peak efficiency is usually around noon. Since peak demand typically occurs at about 4 P.M., Dr. Gyuk explained that short-term storage to shift power availability from off-peak to peak hours significantly increases both the usefulness of intermittent power sources to utilities and the economic returns to owners of those generating assets.

Community Energy Storage

Another important presentation came from Ali Nourai, AEP's manager of distributed energy resources who provided an overview of AEP's new Community Energy Storage (CES) program. In discussing the CES program, Dr. Nourai explained that the concept is "technology neutral" and emphasized that system reliability and "commodity priced batteries" would be critical drivers. He also noted that if PHEVs and EVs follow their expected development path, the batteries used in CES installations would likely be the same batteries used for automotive applications because widespread adoption in the auto industry would drive battery prices down to a level where they would likely be attractive to utilities. The key factors that Dr. Nourai stressed as critical for the CES program were:

  • Improved safety and security;
  • Increased customer reliability and value;
  • Optimized realization of multiple value streams;
  • Simplified integration of distributed power generation;
  • Simplified budgeting for smaller neighborhood projects; and
  • Simplified purchasing decisions by lower-level personnel.

Since the CES proposal contemplates installing batteries in a standard sized transformer box and assumes that Li-ion batteries will become a dominant technology for PHEVs and EVs, it clearly gives a short-term advantage to Li-ion battery developers who can make products that will fit in a limited volume. I remain skeptical about whether Li-ion battery technology will ever be robust enough or cheap enough for widespread adoption in the automotive industry and I wouldn't be surprised to see the volume constraints relaxed over time to facilitate the substitution of flow batteries and advanced lead-acid batteries. Seriously, does anyone really care whether the ugly green box hiding behind the shrubs is 3' by 3' instead of 4' by 4'? For the time being, the CES program favors Li-ion technology by imposing size constraints that have nothing to do with performance. It will be interesting to see how the program evolves as the cost and performance profiles for various battery technologies become clearer.

Energy Storage Heretic

On the third day I had an opportunity to play devil's advocate during a presentation by Mark Peters, the Deputy Associate Laboratory Director for the Li-ion battery development program at Argonne National Laboratories. During the question and answer session, I explained that for several months I've been suggesting that the inflection point for Li-ion batteries seems to be when you put a plug on a car because until you get to an all-electric drive train, the weight and volume differences don't justify the additional cost. Mr. Peter's response came as a pleasant surprise to me because he basically said "While there are members of my staff who would probably disagree with you, I tend to personally believe that your assessment is reasonable and the sweet spot for Li-ion batteries arrives when you add a plug."

By the afternoon of the fourth day, I had lapsed into full heretic mode for a panel discussion on the future of vehicle to grid technology. I think it came as a bit of a shock when I said "I don't believe V2G will happen because I don't believe PHEVs and EVs will happen in anything that even remotely resembles current plans." I then laid out the simple case against PHEVs and EVs as follows:

  • The principal goal of the smart grid is the minimization of waste in the electric power industry;
  • The most wasteful activity I personally engage in is using gasoline to power 4,000 pounds of car and 300 pounds of passengers at highway speed;
  • The only activity I can imagine that would be more wasteful is using batteries to power 4,000 pounds of car and 300 pounds of passengers at highway speed;
  • While most of the conference participants can afford the $40,000 cost of an eco-bling PHEV or EV, that option is not available to over 90% of the car buying public who need to worry about things like budgets and car payments;
  • There are 6 billion people who live in crushing poverty and for the first time in history most of them understand that there is more to life than subsistence farming;
  • As the 6 billion become consumers, our biggest challenges will be finding relevant scale solutions to shortages of water, food, energy and virtually every commodity you can imagine;
  • Last year 23 million electric bikes and scooters were sold in China and those E2Ws used the same battery capacity that one million American style PHEVs would have required;
  • From the perspective of a foreign government planner, providing mobility for a million wasteful Americans is not as important as providing mobility for 23 million locals who have more reasonable demands and aspirations; and
  • From the perspective of raw economics, a purchaser who needs a small battery pack can afford to pay a higher price per watt-hour than a purchaser who needs a large battery pack, which will leave PHEVs, EVs and grid-connected applications at the bottom of the food chain rather than at the top.
I wonder if they'll invite me back as a panelist for next year's conference.

July 19, 2009

Clean Energy Stocks Shopping List: Solar Stocks

The market correction I've been expecting seems to have begun.  If it continues, I will start buying again.  Here are five solar (and solar balance of system) stocks I'd buy at the right price.

Tom Konrad, Ph.D., CFA

This article continues my Clean Energy Stocks Shopping List series.  So far I've brought you:

Long-time readers will know that I don't focus on solar because I feel that too many other analysts cover the sector, and so it is much more difficult to gain an informational advantage.  I expect the price drops in the cost of photovoltaic modules, caused by efficiency gains from thin film producers such as Ascent Solar Technologies Inc (ASTI) and First Solar Inc (FSLR) and from increased solar grade silicon supply continue.  For instance, LDK Solar (LDK) is having trouble with decreasing revenues despite increased demand.  This trend should benefit sellers of balance of system components, such as inverters, something which many investors considering solar plays are unlikely to consider.

I'm also a long time fan of Concentrating Solar Power (CSP), mainly because it is the only dispatchable form of renewable electricity that has no practical limitations on scale.  My optimism is fueled by the Department of the Interior's recent move to speed solar development on public lands, something which has been a major roadblock to CSP.

#1 Solar Millennium AG (SMLNF.PK) is a proven project developer, having completed two 50 MW CSP plants with 8 hours of thermal storage in Spain.  When I wrote about Solar Millennium in May, the stock was trading at $18.  I didn't buy, because I was already becoming bearish about the short term market outlook, but readers who did have seen 80% gains, due to a deal with Southern California Edison to build two 242 MW CSP plants, and the growing momentum of the Desertec initiative.  I still like the company, but I don't like the price, so I'm waiting on the sidelines.

If Solar Millennium's stock does not drop to a point where I again feel comfortable, I can continue to participate in CSP through the back door with my Electricity Transmission picks. More than any other form of renewable electricity, CSP will need a massive investment in transmission infrastructure.  The best solar resources for CSP are in deserts, mostly far from the large electric load centers (with the exception of the desert Southwest and Southern California.  In order to achieve its potential of balancing fluctuations from other renewable energy sources, we will need continent-wide networks of powerful electricity transmission, as envisioned by the Desertec initiative, and North American grand solar plans.  Such plans typically call for High Voltage Direct Current transmission, in which Siemens (SI) and ABB Ltd. (ABB) lead.

#2 SatCon Technology (SATC) is a leading supplier of inverters for large scale Photovoltaic and Wind farms.  The company is not currently profitable, although analysts currently expect profitability in 2010.  Between then and now, Satcon needed to find the money to fund at least another year of operating cash losses, which amounted to $10M in 2008.  On July 3, the company raised $25M in additional preferred and common equity capital, which is enough to give the company a comfortable cushion.  

The stock seems reasonably valued at the current $1.70, but a market decline will probably knock SatCon back with everything else.

#3 Power-One, Inc. (PWER) is far more diversified than SatCon, producing a wide range of power conversion products in addition to renewable energy conversion. They serve both commercial and residential markets with their inverters, and their power converters for electronics are ubiquitous. 

They are also not currently profitable, but they have substantial cash and recently raised more through a private offering, so they should only need to raise further cash if it comes on favorable terms.  

Renewable energy is still only a small slice of their business (only part of the 16% of revenues in their "other" segment), and so Power-One is still mostly a bet on the IT market.  But the strong balance sheet makes this one worth watching.  I especially like the fact that two of the directors have been buying shares.

#4 Sustainable Energy Technologies (STG.V) is a development stage company working to use a massively parallel approach in order to achieve a higher electricity output from PV farms, with their technology especially targeted towards the fastest growing segment of PV, thin film.  The company is not particularly well capitalized, with less than a year's worth of operating cash on the balance sheet, and the stock could easily be knocked down if they are forced to raise capital on unfavorable terms.  However, an investor who uses such an opportunity to buy shares on the cheap will have bought a low-cost, highly leveraged thin film solar play.

#5 Advanced Energy Industries (AEIS) is another diversified electronics play, which not only does power conversion for the solar market, but also power conversion for PV manufacturing.  They also sell liquid and gas control systems and thermal instruments.  The solar market accounts for about 20% of their sales.  

Their solar inverters (introduced only in 2007) are particularly efficient, having achieved record ratings from the California Energy Commission, an advantage which should enable them to gain market share.  With positive cash flow and a strong balance sheet, AEI seems to be the safest way to play the solar Balance of System.

DISCLOSURE: Tom Konrad and/or his clients own SI, ABB, SATC, STG.

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.

July 17, 2009

Energy Storage on the Smart Grid Will Be 99.45% Cheap and 0.55% Cool

7.17.09 Storage Week John Petersen

Infocast’s Storage Week was all I had hoped it would be, and more. While I thoroughly enjoyed serving on three discussion panels and was warmly received by roughly 250 attendees, including executives of companies that I've occasionally criticized, the most important value for me came from the opportunity to hear four days of high-level presentations by industry executives, national thought leaders and policymakers who repeatedly stressed that:
  • From a utility perspective grid-based energy storage is the functional equivalent of an instantly dispatchable generating asset;
  • The combination of wind assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
  • The combination of solar assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
  • When it comes to grid-connected energy storage, cost, reliability, maintenance and cycle life will be the primary decision drivers.
Consensus was that an optimal smart grid configuration will need storage capacity equal to at least 5% of peak system load and areas that rely heavily on intermittent renewables like wind and solar will need a higher capacity to maximize the value of those assets.

In the example of California, the required annual storage build was estimated at 500 MW per year for the next 10 years. Of this total, 50 MW would need to be fast storage in the form of flywheels and Li-ion batteries and the 450 MW balance would be 4 to 6 hour storage in the form of pumped hydro, compressed air, flow batteries and advanced lead acid batteries.

The following table assumes that fast storage for frequency regulation will have an average discharge duration of 15 minutes and load shifting storage will have an average discharge duration of five hours. It shows how the aggregate annual storage build for both California and the U.S. as a whole will break down in terms of both MW of dispatchable power and MWh of stored energy.

State of California
MW Percent MWh Percent
Annual Fast Storage Build
50 10.00% 12.5 0.55%
Annual Load Shifting Build
450 90.00% 2,250 99.45%

Nationwide (8x California)

Annual Fast Storage Build 400
Annual Load Shifting Build 3,600

Using a quick and dirty pricing metric of $1 million per MW for fast storage devices including flywheels and Li-ion batteries the annual revenue potential of $400 million is impressive. Using an equally quick and dirty pricing metric of $500,000 per MWh for load shifting storage, the annual revenue potential of $9 billion is mind-boggling.

In the fast storage space, the leading contenders are Maxwell Technologies (MXWL), a leading manufacturer of supercapacitors; Active Power (ACPW), which builds low-speed flywheel systems for industrial power conditioning and UPS applications; Beacon Power (BCON), which builds high-speed flywheel systems for utility frequency regulation and recently snagged a DOE loan commitment for a 20 MW fast storage demonstration project; Altair Nanotechnologies (ALTI), which has built and deployed 2 MW of fast storage that is currently being tested by a major utility; and A123 Systems, which has also built and deployed several MW of fast storage for utility customers in the U.S. and overseas.

In the load shifting space, the leading contenders are Dresser Rand (DRC) which builds above ground compressed air systems, ZBB Energy (ZBB), which builds zinc-bromine flow batteries; lead-acid battery manufacturers like Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP); and innovators like Axion Power (AXPW.OB) which is in the early stages of demonstrating the capabilities of its lead-carbon storage technologies.

The broader market has not yet come to grips with the realities that:
  • The combination of wind and storage yields better returns than wind as a stand-alone;
  • The combination of solar and storage yields better returns than solar as a stand-alone; and
  • While the fast storage developers have been grabbing all the headlines because of the push to develop PHEVs and EVs, the manufacturers of cost effective load shifting systems will lay claim to well over 90% of the anticipated revenue.
As investors in the $100+ billion wind and solar sectors come to understand the critical need for storage to maximize the economics of those intermittent renewables, interest in the $2 billion storage sector will surge. As storage sector investors come to understand the critical need for cost-effective load shifting storage, interest in established manufacturers of less glamorous technologies will also surge. It all goes back to my fundamental premise that for the next decade, cheap will beat cool.

I'm in transit from California to Europe and won't have access to electronic copies of the Storage Week presentation materials for a few days. So I apologize for the dearth of links to source materials. When those materials become available, I'll follow up with a more detailed series of articles that get into the grittier questions of which companies are best positioned to capitalize on explosive growth in both fast and load-shifting grid based energy storage.

For the first time in my career, I find myself on the leading edge of a trend that will be larger than most investors can begin to imagine. It's going to be a fun decade for investors who position their portfolios early because events like Storage Week and the anticipated IPO from A123 Systems are rapidly sending a clear signal to the broader market.

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

July 16, 2009

Our Smart Grid Stock List

Tom Konrad, Ph.D., CFA

I've been writing about the smart grid and its potential since before I joined AltEnergyStocks, in 2007, although at the time, I wasn't using the term: I mostly called it "Smart Metering."  Now, Smart Grid is a central part of federal stimulus plans, and the term is firmly ensconced in the popular lexicon.  GE even created a Super Bowl ad around the Smart Grid (video).

It was far past time to create a Smart Grid category in our Alternative Energy Stock List, but now we've done it.  The companies in the Smart Grid Stock List were previously categorized as both Energy Efficiency Stocks and Electric Grid Stocks.  Now, they are in the Smart Grid and Electric Grid categories, but only in the Energy Efficiency category if they also have a more conventional energy efficiency business.  The broader Electric Grid category contains both Transmission and Distribution companies, like the ones in my Transmission Shopping List, as well as companies more narrowly focused on the smart grid.  A few of the IT companies which have been moving into smart grid (such as IBM, Cisco, and Google) are in the Smart Grid category, but not in Electric Grid.

For readers who want something more than just a list of companies, I'm planning to pick my top five for a future Shopping list, but it will be a difficult choice to pick my five favorites... I like them all.  Smart grid is one of my favorite categories because of the enormous potential to help decarbonize the economy.  Successful adoption of smart grid technology will:

Sound too good to be true?  It isn't.  It's what happens when you start using your brain on a problem that you'd previously only attacked with brawn.  Hence the "Smart" part of Smart Grid.

Here's the link to our Smart Grid Stocks.

DISCLOSURE: Tom Konrad and/or his clients own GE.  He has a short position in GOOG.
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.

July 14, 2009

Q2 Performance Update: Ten Green Energy Gambles for 2009

Tom Konrad, Ph.D., CFA

I never thought 2009 would be a good year for risky stocks, but my readers asked for them anyway.  So far, my risk taking readers have not been burnt too badly, and the portfolio as a whole continues to track its benchmarks.

In my first quarter update for my green energy gambles for 2009, I noted that the portfolio had lost about 10%, between the benchmark returns (-12% and -5%), but not very impressive.  Since then, the portfolio as a whole has gained a little ground, and is almost exactly midway between the benchmarks.

The following table shows stock-by-stock performance.

Ticker Price (1/9/09 close) Price (7/13/09 close)

Percent gain

BCON $0.46 $0.637 38.5%
AXPW.OB $1.20 $1.34  11.7%
VLNC $1.77 $1.51 -14.7%
CPTC.OB $0.30 $0.245 -18.3%
EPG $0.86 $0.54 -37.2%
EMKR $1.43 $1.07 -25.2%
UQM $1.72 $2.46 43.0%
CZZ $4.18 $5.00 19.6%
RZ $3.62 $2.00 -44.8%
ZOLT $7.47 $8.46 13.3%
Portfolio $1,000 $986 -1.4%


ICLN $22.05 $21.01 -4.7%
PBW $9.01 $9.15 1.6%

In January, I made two predictions about this portfolio:

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

Prediction #1 continues to be on target.  As of July 13th, the market as a whole is basically flat for the year, and the portfolio is down a smidgeon.  

Prediction #2 is harder to judge.  The best performing stocks, Beacon Power (BCON) and UQM Technologies (UQM), are up only 38.5% and 43.0%, respectively.  While these are not bad returns, after six months, my more conservative 10 Clean Energy Stocks for 2009 best performers were up 73% (Algonquin Power Income Fund (AGQNF.PK), with dividends) and 60% (Cree Inc (CREE)).  

On the other hand, since that portfolio was up 27.5% overall, or 29% more than this one, the best two performers among these gambles did relatively much better than their peers.  That's clearly small consolation if you bought this portfolio rather than the less exciting one with my more conservative picks, which outperformed in the harsh economic climate.

I continue to own small stakes in a few of these, in conjunction with covered calls.  At current prices, Raser Technologies (RZ) is my favorite, which is why it made my Clean Energy Stocks Shopping List: Landfill Gas and Geothermal.  However, it's still a risky stock, and could as easily go down as up.  

Given my bearish short term expectations, I expect the portfolio as a whole will end the year lower than it is today.  I'm still willing to buy most of these at the right price, but, for most, the right price is significantly lower than the current price.

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

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

De-Carbonizing Electricity - Will King Coal Finally Be Dethroned?

Charles Morand

Last Friday, the WSJ's Environmental Capital blog noted how, according to HSBC, growing government efforts to de-carbonize the electricity supply across the developed world would hurt makers of power generation technology with high exposure to coal.

Yesterday, the EIA released its Electric Power Monthly report for April 2009. In it, the agency notes the following:

The drop in coal-fired generation was the largest absolute fuel-specific decline from April 2008 to April 2009 as it fell by 20,551 thousand megawatthours, or 13.9 percent [...] The April decline was the third consecutive month of historically large drops in coal-fired generation from the same month in the prior year  [...]

Coal's drop is larger than the national decline at 5% between April 2008 and April 2009, and that of all other fuel sources but petroleum liquid:

Generation from conventional hydroelectric sources was the largest absolute increase in April 2009 as it was up by 3,918 thousand megawatthours, or 18.4 percent from April 2008. [...] Nuclear generation was up 3.1 percent. Generation from natural gas-fired plants was down by 1.5 percent. Net generation from wind sources was 34.8 percent higher. [...] Petroleum liquid-fired generation was down by 26.5 percent compared to a year ago [...]

The main culprit for the fall overall fall in generation is the significant decline industrial production:

 For April 2009, sales in the residential and commercial sectors both decreased by 0.7 percent and 1.6 percent, respectively, while sales in the industrial sector decreased by 13.6 percent, as compared to April 2008.

Yet coal remains the single most widely-used fuel in power generation in the US, accounting for more than nuclear, gas and renewables combined:

Year-to-date, coal-fired plants contributed 46.1 percent of the Nation’s electric power. Nuclear plants contributed 21.0 percent, while 20.5 percent was generated at natural gas-fired plants. Of the 1.2 percent generated by petroleum-fired plants, petroleum liquids represented 0.9 percent, with the remainder from petroleum coke. Conventional hydroelectric power provided 7.0 percent of the total, while other renewables (biomass, geothermal, solar, and wind) and other miscellaneous energy sources generated the remaining 4.1 percent of electric power [...]

Coal is indeed public enemy number 1 in the fight to de-carbonize the electricity supply and, as noted in the HSBC report, the elusive (I think illusive is actually more appropriate here) quest for carbon capture and storage is unlikely to change that.

The next two years are going to be interesting as a number of currents converge: (1) a price will be placed on carbon across America; (2) billions of dollars in subsidy money for environmental industries are going to trigger a significant amount of activity both in alternative energy and in energy efficiency; and (3) an economic recovery will eventually get underway and industrial production will rebound, raising the demand for electricity.

Are we truly witnessing the beginning of the end or is King Coal set to rebound with a vengeance as soon as demand picks up again? If coal declines in the U.S. abd Europe, will that make any difference at all given China's love affair with the black stuff?         

Power generation, transmission, distribution and management in North America offer very attractive investment opportunities for investors, and something tells me that the age of coal will end here before the world runs out of it, much like the stone age ended with plenty of stones left.

July 12, 2009

Green Jobs: Debunking the Debunkers

Tom Konrad, Ph.D., CFA

Energy markets are neither free nor efficient, so traditional economic arguments against regulation and other government interventions do not apply. 

In response to my recent article digging into green jobs, a reader sent me a copy of a March paper by Andrew Morriss et al at University of Illinois that attempts to debunk green jobs myths.  While I see major flaws in most green jobs papers I read, many of the myths cited by this paper are irrelevant to what I consider the most important questions:

  1. Can government intervention to clean up the energy sector create jobs and boost the economy?
  2. What interventions are likely to be the most effective or harmful?

Other "myths" are simply not myths; the flaw arises because the debunkers are economists, and approach the subject from the perspective of economics.  The problem is that the energy market is neither free nor efficient, so the traditional economic assumptions about how supply and demand regulate price simply do not apply.  I'll deal with the myths in the order they are presented by Morriss et al.

Define "Green Job"

From the paper:

Myth 1: Everyone understands what a “green job” is.

Fact 1: No standard definition of a “green job” exists.

My Thoughts:  The hundreds of billions of dollars to be committed are designed to promote cleaner energy.  Who cares how green jobs are defined?  The important question is Question #1 above: Regardless if the jobs are defined as "green" or not, will more jobs be created by promotion of cleaner energy, or by some alternative sort of spending.  My last article answered this question in favor of clean energy.

Productivity of Green Jobs

From the paper:

Myth 2: Creating green jobs will boost productive employment.

Fact 2: Green jobs estimates in these oft-quoted studies include huge numbers of clerical, bureaucratic, and administrative positions that do not produce goods and services for consumption.

My Thoughts:  If cleaning up the energy economy simply creates a shift to the less efficient use of labor, then it is not worthwhile.  

However, labor efficiency is the wrong metric.  Higher labor efficiency can nearly always be achieved with greater use of capital or energy.  For instance, driving to work is statistically more labor-efficient than taking light rail.  If I take light rail, then the pro-rated labor needed to run the rail system goes into the cost of getting me to work.  If I were to drive, my labor in guiding the vehicle would not be counted in work statistics, because I am not paid for my efforts (even though I'm probably not enjoying myself much.)  Nor is the capital investment in my car included in the calculation, (although the road I drive on probably is) because it is a private, not business or government expenditure.

Green spending is likely to be more energy-efficient than other spending: reducing energy use one of the main goals.  Capital spending may go up or down, and labor usage may increase, as labor is substituted for fossil energy.  The goal should be to find those sectors which most effectively substitute spending on labor (a renewable resource of which we currently have more than we are using) for spending on fossil energy (a nonrenewable resource which causes harm to the environment.)

As I previously discussed, spending on energy efficiency programs such as weatherization  are ideally suited to substitute labor for energy.  Weatherization gets the largest share of the energy spending from the stimulus bill.


Myth 3: Green jobs forecasts are reliable.

Fact 3: The green jobs studies made estimates using poor economic models based on dubious assumptions.

The forecasts for green employment in these studies optimistically predict an employment boom that will take us to prosperity in a new green world. The forecasts, which are sometimes amazingly detailed, are unreliable because they are based on: a) Questionable estimates by interest groups of tiny base numbers in employment, b) Extrapolation of growth rates from those small base numbers, that does not take into consideration that growth rates eventually slow, plateau and even decline, and c) A biased and highly selective optimism about which technologies will improve. Moreover, the estimates use a technique (input-output analysis) that is inappropriate to the conditions of technological change presumed by the green jobs literature itself. This yields seemingly precise estimates that give the illusion of scientific reliability to numbers that are actually based on faulty assumptions.

My Thoughts: As often with the arguments against greenery, the critics equate greenery with exciting new (and expensive) technologies such as solar PV.  Some of the proponents fall into this trap as well.  And everyone should be uncomfortable with relying on attributing any level of accuracy to a study even though it claims to be precise.  Precision is impossible in economic forcasting.

In fact, the majority of the spending will be going to old, proven technology with a long track record.  Building weatherization and mass transit have been around and evolving for over a century, and these two alone get well over half of the spending.  Cofiring of biomass is also a proven and very cost effective technology.  All of these will reduce, not increase the overall cost of energy, without waiting for technology improvements.

No, we won't get the number of jobs we expect, but for the purpose of decision-making, we only need to be confident that we'll get more jobs than if we had not acted.

"Free" Markets

Myth 4: Green jobs promote employment growth.

Fact 4: By promoting more jobs instead of more productivity, the green jobs described in the literature actually encourage low-paying jobs in less desirable conditions. Economic growth cannot be ordered by Congress or by the United Nations (UN). Government interference in the economy – such as restricting successful technologies in favor of speculative technologies favored by special interests – will generate stagnation.

Myth 6: Government mandates are a substitute for free markets.

Fact 6: Companies react more swiftly and efficiently to the demands of their customers/markets, than to cumbersome government mandates.

My Thoughts: The government already interferes on a massive scale in energy, to support the fossil fuel industries.  Electric and gas utilities are either government regulated (IOUs), government-run (munis), or government-sponsored non-profit cooperatives (REAs.)  Unless you live in Lubbock, your electric utility is a monopoly. Our transportation infrastructure is government-built and maintained (or government-sponsored, in the case of toll roads.)  Rules, taxes , and incentives specifically targeted at fossil fuels are legion.  

Deriding "government interference" in an industry with so much government involvement already is ludicrous.  Nothing can happen in the energy industry without "government interference."   The trick is to make sure that any change is change for the better.  "Hands off" is not an option.

Yes, green spending produces a higher proportion of low skilled jobs than would spending on capital intensive fossil fuels.  But green spending creates more jobs at every skill level than spending on fossil fuels, making workers at every level of skill better off.

A typical instance of the authors' blind faith in markets appears in the section titled "Markets vs. Mandates." "The implication of the necessity of a mandate is that profit-seeking building owners are too foolish to make investments in energy saving despite the alleged short-term paybacks."   Yet this is precisely what happens, if not because building owners are foolish.  It happens because renters, not building owners derive the benefits from the efficiency investments, and because many building owners lack the skills and information necessary to make informed decisions.  

Instances of profit-seeking building owners not making efficiency improvements abound.  When the building owner does not pay the utility bill (as with most rentals), there is no incentive to make such improvements at all.  Even in owner-occupied buildings, how many building owners know what improvements will be cost effective, or make it a priority to find out?  Without adequate information, no improvements will be made.


Myth 5: The world economy can be remade by reducing trade and relying on local production and reduced consumption without dramatically decreasing our standard of living.

Fact 5: History shows that individual nations cannot produce everything its citizens need or desire. People and countries have talents that allow specialization in products and services that make them ever more efficient, lower-cost producers, thereby enriching all people .

To the extent that we're not just exporting the manufacture of energy-intensive goods to other counties, I agree with this caveat.  However, to the extent that transport requires large amounts of energy, some of the arguments for re-localization make sense, or where the production of the good (such as oil) is controlled by non-market forces (Russia, Venezuela, OPEC, etc.) free trade (which is rooted in the assumption that markets operate efficiently) does not make sense.

If we could actually create an increase in domestic oil, the conservative proponents of domestic drilling (whom I think of as the "Local Oil" movement) would have a point, despite the fact that they use the same anti-trade rhetoric.  Unfortunately, since total production of domestic oil is capped by our already-diminished reserves, the Local Oil movement is simply asking for more domestic oil today, at the cost of less domestic oil for our children.  In contrast, today's local farmers can avoid taking food from their children by using sustainable farming practices.

Free trade makes sense in free (or at least reasonably efficient) markets where total supply is not limited.  Inefficient markets may rob us of the benefits of free trade.  When the total supply of a commodity is finite, as with fossil fuels, we can never have true "free trade," because one set of participants has no voice in the transaction.  Future generations have no say about what they give up in future consumption when we consume a finite resource today.


Myth 7: Wishing for technological progress is sufficient.

Fact 7: Some technologies preferred by the green jobs studies are not capable of efficiently reaching the scale necessary to meet today’s demands.

Absolutely true. We can't decarbonize the economy this decade.  We need to start now with the established, cost-effective technologies we have today, such as energy efficiency, electricity transmission, wind power, geothermal, and mass transit which are capable of scaling and bring both jobs and economic benefits today.  As new technologies such as solar become cost effective, we will have the infrastructure in place to allow them to scale.

The gigantic scale of the job is a reason to start as soon as possible, not to delay.

July 09, 2009

$3 Billion For Cleantech & Alt Energy

Charles Morand

The DOE made public earlier today the amount of money that will awarded to clean power projects in lieu of the usual tax breaks: $3 billion.

This will allow project proponents to receive a direct cash grant now instead of a Production Tax Credit or an Investment Tax Credit later on. The guidance document notes the following:

"Section 1603 of the Act’s tax title, the American Recovery and Reinvestment Tax Act, appropriates funds for payments to persons who place in service specified energy property during 2009 or 2010 or after 2010 if construction began on the property during 2009 or 2010 and the property is placed in service by a certain date known as the credit termination date (described more fully below in the Property and Payment Eligibility section). Treasury will make Section 1603 payments to qualified applicants in an amount generally equal to 10% or 30% of the basis of the property, depending on the type of property."
This is the cherry on a sundae of cash handouts announced over the past few months for the alt energy and cleantech industries. Solar and wind installations - which account for the lion's share of alt energy investments - have yet to come back to life in any significant way. It is hoped by both government and industry people that this new measure will provide sufficient impetus in the near term to carry the sector through the remainder of the recession.

To be continued... 

July 08, 2009

Large Hydro Power: The Underloved Energy Source

Charles Morand

While browsing Cleantech News, I came across an interesting post on Energy Outlook on the lack of attention hydro power is receiving in the latest of round of policy efforts aimed at greening the U.S.' energy supply and combating climate change.

Besides having been been scuffed at in Waxman-Markey, hydro power has effectively been ignored in the ARRA, receiving a measly $32 million, peanuts in comparison to the $786.5 million awarded to biofuels, the $350 million for geothermal power and the $117.6 million going to solar. Not mention the millions of dollars that will flow into wind power as a result of changes to the PTC allowing project developers to claim a 30% investment tax credit (ITC) instead, and to obtain direct cash grants in lieu of the actual credit.

What can $32 million get you in today's large hydro power world? The latest North American project announcement that I am aware of is for a large-scale facility (1,550 MW) in the north of Canada forecasted to cost a total of $6.5 billion, or ~$4.2 million/MW installed. Since this is the north of Canada and far from population centers, suppliers of construction materials and the plants where much of the electrical hardware will be manufactured, let's assume that this project will cost about 25% more than an equivalent project closer to civilization, or ~$3.2 million/MW. At that cost, $32 million gets you a stunning 10 MW of new hydro. 

The $32 million is not for new capacity additions but rather for upgrades and improvements to existing facilities. Still, the figures above provide a rough idea of the economics of large hydro power today, and it's safe to conclude that $32 million is peanuts, and that refusing to count large hydro toward the national RPS proposed in Waxman-Markey won't exactly help.

This is unfortunate given that hydro's share of total electricity production in the US and average capacity factor have been eroding over the past decade, no doubt in part due to the fact that most large hydro installations in the US are old and in need of upgrading.

Despite concerns over ecological impacts, hydro large and small can contribute positively to the energy mix in regions with good hydrological resources. As noted in the NYT article linked to above, the utility building the 1,550 MW installation in Canada plans to leverage this huge amount of storage capacity to help integrate into its grid 4,500 MW of new intermittent wind power coming online by 2015.

Of course, not all regions are blessed with the hydrological resource base necessary to achieve something on that scale, just like hydrothermal geothermal can only ever be developed in a few select areas. But where that resource does exist (e.g. Pacific Northwest), it should be exploited. Furthermore, expansions in transmission capacity could certainly facilitate the use of large hydro dam to store power from wind farms far away. Given the potential scale of environmental and economic impacts related to climate change, waging war on large hydro today based on concerns over fish habitat, as many high-profile environmental groups are doing, is like worrying about the air bag while driving straight for the edge of Grand Canyon.

Last April, while doing research on wood pellets, I came across a stock with material exposure to the large hydro equipment business, Andritz Group (ADRZF.PK). This company would likely be a major beneficiary of the kind of hydo revival needed in the U.S. However, $32 million is probably not going to get anyone at Andritz overly excited given that its hydro unit alone generated sales of ~$1.6 billion in 2008.


July 07, 2009

Q2 Performance Update: 10 Clean Energy Stocks for 2009

The Obama Effect continues to make my annual ten picks shine.

Tom Konrad, Ph.D., CFA

This is the second performance update on my 10 Clean Energy Stocks for 2009In the first quarter, the model portfolio was up a tiny 1.6%, but still managed to beat the benchmarks handily (by 8% and 9%), since they were both down significantly.

In the last three months, the market has turned around, logging significant gains, but my ten picks have continued to outperform.

Company  Ticker

Change 12/27/08 to 7/2/09

Dividend & Interest

The Algonquin Power Income Trust AGQNF.PK +64.97% 8.17%
Cree, Inc. CREE +59.96%  
First Trust Global Wind Energy ETF FAN 21.88% 0.46%
General Electric GE -28.24% 3.88%
Johnson Controls JCI 22.14% 1.53%
New Flyer Industries NFYIF.PK +26.23% 5.98%
Ormat ORA +33.27% 0.44%
Trinity Industries TRN -21.97% 0.93%
Warterfurnace Renewable Energy WFIFF.PK +17.77% 2.16%
-2x  S&P Depository Receipts + 3x Cash (was SDS until Feb 13) 3x $ - 2x SPY  -14.45% -0.16%
Total Portfolio  27.05%


S&P 500 2.59%
  iShares S&P Global Clean Energy Index (ICLN) 13.95%

In the second quarter, the portfolio has added 16.5% relative to the broad market index, and 4.1% relative to the clean energy ETF, for a total of 24.5% and 13.1% out performance for the first half.

I continue to attribute my out performance to the Obama Effect, and the fact that clean energy has been outperforming the market as a whole supports this hypothesis.  If it's not just luck, the reason I've been beating the clean energy ETF is also probably due to the Obama effect: my pick are concentrated on sectors which are not only green, but likely to deliver the biggest boost to jobs.

My Trades

As readers are well aware, I don't expect market gains to continue, and have been moving into cash.  I got called out of most of my Cree position, as well as a little of my FAN, shed much of my Ormat position as well, and managed to lighten up on GE when it hit $14.50, but I still like all four companies, and will buy again when I feel the price is right.  The others I've been holding, although I sold some calls on Johnson Controls.  

If I had to buy any of these stocks today, it would be Trinity.  

Despite all this trading, I'm keeping this model portfolio as it is.  I expect these 10 to continue to outperform, even if (as I expect) both the market and this model portfolio head down in the third quarter.

Up Next

Stay tuned for updates on my Ten Clean Energy Gambles for 2009 (now slightly outperforming the benchmarks - Q1 update here) and my Quick Clean Energy Mutual Fund Tracking Portfolio (building on previous gigantic gains - Q1 update here) as these come up on 6 months after the articles were published.

DISCLOSURE: The author and/or his clients own AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, WFIFF.

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


July 06, 2009

Not all Green Jobs were Created Equal

The stimulus package and the climate bill recently passed by the US House and now being considered in the Senate will create jobs while delivering a boost to our economy.  A "green" stimulus swill create  approximately three times as many jobs as the same amount of spending in traditional energy industries.  But clean energy is too diverse to consider a single industry.  What are the differential jobs creation effects of different types of clean energy and are the most effective sectors getting the most money?

Tom Konrad, Ph.D., CFA

In my next Greener Money column for Smart Energy Living Magazine, I look into the economic behind Presidential and green claims that the stimulus package and the Climate bill just passed by the House can both create economic growth while cleaning up the economy.  I found most of the rhetoric coming from the greens to be disappointing. For the most part, it touts the numbers of "Green Jobs" which will be created, without looking at the cost.  For instance, while the report from the American Solar Energy Society does a good job defining "green job" and counting them, it does not look at what would have happened if we put our resources elsewhere.

Probably the most incredible claim I heard from on the green side came from Jigar Shah, who told me via email that spending on solar photovoltaics produces "more jobs per federal dollar invested" than other green technologies.  He did not respond to two requests for his source.  I found this claim hard to believe, because solar manufacturing is very capital intensive, and manufacturing jobs are likely to be high-skill and highly paid.  The labor-intensive installation is unlikely to completely make up for capital intensive (and often overseas) manufacturing.  Clean energy investments which are not capital intensive, such as weatherizing homes, are likely to produce more jobs because 1) less money is spent on equipment and more on labor, and 2) the workers are typically paid less.

The Cost of Creating a Job

The best national report I read was Green Prosperity, which was sponsored by Green for All and NRDC, and written by the economists Robert Pollin, Jeanette Wicks-Lim, and Heidi Garrett-Peltier at the Political Economy Research Institute at the University of Massachusetts, Amherst (PERI).  This report used data from the US Commerce Department Input-Output tables and IMPLAN to look at the potential for job creation from each $1M of spending in various industries, some of which is presented below in table 3 from the report:


  1) Clean Energy Investments 2) Fossil Fuel Investments 3)Difference (col 1-2)
Jobs per $1M 16.7 5.3 11.4 
  % of category   100%   100%
College degree jobs 
  • $24.50 avg wage
3.9  1.5   2.4
  23.3%   28.3%
Some college jobs
  • $14.60 avg wage
4.8 1.6 3.2
  28.7%   30.2%
High School or less jobs
  • $12.00 avg wage
8.0 2.2 5.8
  47.9%   41.5%
High school or less jobs with decent earning potential
  • $15.00 avg wage
4.8 0.7


28.7% 13.2%

Note that while clean energy spending creates more high paying jobs than fossil fuels, clean energy is even better at creating jobs for low skilled workers: Everyone stands to gain, but those who have the most trouble finding jobs have the most to gain.

Comparing Clean Energy Industries

Un fortunately, even this report does not detail the differences Jigar Shah was alluding to: the difference in job creation between clean energy investments.  Where can we best deploy our stimulus dollars for the greatest effect?  I contacted the authors of the study, and Heidi Garrett-Peltier was able to provide the following job creation numbers for industry sectors they considered in their research:

Sector Percent of spending in Green Program

Jobs per $1M spending







Smart Grid












"Green Program"



Fossil Fuel -


Here, "Green Program" is a weighted average of the six energy industries, with the weights approximating the anticipated spending contained in the stimulus package and the climate bill.  They did not look at the credential level job creation benefits of the clean energy sectors individually.

I find it very encouraging that the two best job-creation sectors (Transit/Rail and Weatherization) are also the sectors which get the lion's share of investment; this is why the Green Program as a whole produces more jobs per million dollars spent than any of the sectors besides these two.

Will the Jobs Last?

All this discussion is about a stimulus to the economy, in order to jump start it and get it going again.  The Green Prosperity Report considered only jobs created by the direct effects of the spending, and the indirect effects of increased spending by people whose earnings increased due to higher earnings.  These new jobs are only likely to last as long as the spending continues, after that, the hope is that the economy will have begun producing jobs again without federal stimulus.

Nevertheless, there will be ongoing effects that will help the economy long after stimulus spending has ended, and the impressive job creation numbers above do not consider these effects, which "dominate the job creation figures" according to Howard Geller, the Executive Director of the Southwest Energy Efficiency Project (SWEEP), and co-author of a study on job creation from energy efficiency measures in Colorado.  Weatherization was just one type of energy efficiency measure the SWEEP study looked at, although the other sectors above were not considered because of SWEEP's focus on energy efficiency.

He says, "I don’t think renewables are going to have nearly as much impact [as efficiency].  Using the same input/output model, you won’t get nearly the job creation from the energy bill savings.  It’s the cost effectiveness of EE that leads to the savings and long term job creation."  So, to the extent that measures are cost effective, they will produce ongoing savings and job creation.  Of the spending sectors listed above, Biomass is likely to be the most cost effective of the energy generation technologies (Wind, Solar, and Biomass), if the money is used for biomass co-firing in existing coal plants, and both Wind and stand-alone Biomass will be more cost effective than Solar (see my article What Does Clean Energy Cost?.)  Only Biomass co-firing is likely to be able to compete with weatherization for long term job creation effects among these three.

The ongoing job creation effects of smart grid are unknown, since no one has done it before.  However, giving people better information about their energy usage has been shown to reduce their consumption as much as 15%, so there should be some long term effects.  

For transit spending, the benefits depend on if the transit improvements will be effective enough to allow people to reduce their car ownership:  According to the Green Prosperity study, the marginal cost per mile of travel on transit is about the same as the marginal cost of auto travel, but large gains are available from any reductions in car ownership.


Green investments will be good for both the economy and the environment.  Nevertheless, any additional federal spending will use borrowed fund that have to be repaid.  Hence, we should focus on spending in sectors with both large job creation potential, and long term impacts.  Clean energy as a whole has excellent job creation potential and long term impacts, but some sectors are better than others.  Although the climate bill which passed the house is not everything we might want, it's nice to know that most of the spending is going to the right places.

July 05, 2009

Oil's Sesquicentennial; the Dream Becomes Nightmare

John Petersen

On August 27th, we'll celebrate the 150th anniversary of Colonel Edwin Drake's completion of the world's first successful oil well near Titusville, Pennsylvania. That discovery and the many that followed planted the seeds of an industrial, economic and cultural revolution that transformed America from an agrarian backwater into a global superpower. For the next 114 years, oil was cheap, plentiful and the solid bedrock of the American Dream. Since the early '70s, however, the dream has gradually become a nightmare as domestic and global oil production began an irreversible decline.

My first graph comes from the Energy Information Administration and shows the annual U.S. production of crude oil over the last 150 years.

My second graph comes from Wikipedia and shows both nominal and constant dollar oil prices over the last 150 years (click on the graph for an expanded view).

The most interesting feature of the two long-term graphs is the general shape of the constant dollar oil price curve. If you smooth out the price shocks of the '70s and '80s, the graph shows a pronounced albeit elongated U-shape. While there are many theories about where oil prices will stabilize when the global economy begins to recover, it seems safe to assume that the price won't be $20 or even $40 per barrel.

My third graph takes historical oil price data I downloaded from the Energy Information Administration, adds a price channel overlay on the ten-year trend and shows why I believe oil prices will stabilize around $80 per barrel later this year and continue to move upward in the price channel over time.

Barring unexpected major new discoveries, there's only one way for oil prices to go over the long term.

It doesn't take much reflection to see that oil production, consumption and pricing have become major problems that can only get worse as six billion people in emerging economies strive to attain the lifestyle that 600 million Americans and Europeans have enjoyed for decades. The harsh but undeniable reality is that oil cannot sustain global economic growth for the next 20 years, much less the next 150. This reality is the driving force behind a concerted global effort to identify and harness alternative energy resources that can offer relevant scale solutions to a looming global shortage. Unfortunately, many alternative technologies are even less sustainable than oil because they depend on a smaller natural resource base.

There are only four unlimited energy sources known to man. The first is the internal heat of the earth itself. The second is the movement of the hydrosphere. The third is the movement of the atmosphere. The fourth is the sun. Where the Ancient Greeks taught that earth, water, air and fire were the classical elements, the new science of alternative energy teaches that earth, water, wind and sun are the true classics. When it comes to harnessing that energy, however, the only thing that matters in the long run is the mineral wealth of the earth's crust and oceans.

Many alternative energy technologies including windmills, PV solar cells, fuel cells, advanced batteries, and advanced electric motors depend on exotic metals that were pretty scarce to begin with. Like oil, each of these exotic metals will have a U-shaped price curve and while they're relatively cheap and relatively available for the time being, each will eventually hit an inflection point where they'll no longer be cheap or available. According to experts like Jack Lifton, many critical natural resources will reach their price inflection points within a few years, rather than decades or centuries. So far, the only alternative energy technologies I've identified that do not face daunting mineral scarcity risks are concentrated solar power, or CSP, and geothermal power.

Historically, investors have not had to worry about how natural resource constraints might impair their portfolio companies because the required raw materials have always been available for a price. As we enter the Age of Cleantech, the sixth industrial revolution, those rules will be re-written in ways that many will find shocking. I've previously described how raw materials shortages will impact the battery and hybrid electric vehicle markets. Over the next few weeks I hope to expand my focus to consider the principal raw materials that are critical to the development of a truly sustainable alternative energy infrastructure. Unlike this article, future installments will identify companies that enjoy specific natural resource advantages or suffer from specific natural resource risks, and hopefully help investors identify the likely winners and losers.

Given the long-standing animus between environmentalists who see themselves as protectors of the planet and miners who see themselves as simple providers of essential raw materials, I'm not optimistic that humanity will be able to solve its energy problems without catastrophic conflict and horrific environmental consequences. If we are to have any chance at all, the environmentalists must come to grips with the fact that a clean energy future depends on the robust and responsible development and use of all the earth's resources.

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 July 13th through 16th. 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. If something important happens while I'm on the road I'll try to cobble a quick blog entry together. Otherwise, you can look for my next article in a couple weeks.

July 02, 2009

Money Is Flowing Into Alt Energy Again, But We Are Not Out Of The Woods Yet

Charles Morand

It seems as though the darkest clouds are finally dissipating over alt energy's financing horizon. Over the past few weeks, money has started flowing into the sector again, as evidenced by a number of recent deal announcements:
  1. On June 9, I reported on the upcoming IPO for Magma Energy Corp., a geothermal exploration company. The IPO's size will be upped from an initial C$50 MM to C$100 MM, a sign of increased market appetite 
  2. SunPower Corp. raised $418 MM in early May through a share and debt offering, and recently announced it had reached a $100 MM deal with Wells Fargo to fund commercial-scale solar PV projects across the US
  3. John reported a few days ago that A123 Systems had amended the SEC registration statement for its proposed IPO, positing that it could be much larger than initially anticipated
  4.  In late May, Suntech Power raised $277 MM from a follow-on offering of its American Depositary Shares (ADSs), and recently received a $50 MM convertible loan from the IFC
  5. On June 23, Yingli Green raised $193 MM through a follow-on offering of its ADSs
  6. On June 25, Trina Solar secured credit facilities of about $57 MM
  7. New Energy Finance just reported a slight increase in asset financing for Q2 2009, although it cautioned that money flows into renewable energy projects were: (1) down substantially from what they were a year ago (~66% in the US); and (2) far below the level where they need to be if greenhouse gas emissions are to be brought under control by 2020
As noted by both New Energy Finance and John, requirements for matching funds under the ARRA mean that firms that want to access government grants will have to put up some of their own money, potentially leading some of them to go to market even if conditions aren't ideal.

The recent upsurge in public market financing also certainly has to do with  buoyant markets and higher oil prices, a window that could close if the general sentiment turns negative in the coming weeks.

This increased financing activity is good news to be sure. Pure-play alt energy firms, by virtue of the sectors they do business in, typically have much weaker balance sheets than conventional energy firms or firms in more established industries. They are thus generally in a much weaker position to ride out a long capital markets drought.

But the industry is far from out of the woods yet, and I remain convinced that questionable firms are in a much weaker position to conceal their flaws behind generalized cleantech exuberance than they were in 2006 and 2007. The last rally lifted some boats that didn't deserve lifting, and sooner or later those boats will sink again.

DISCLOSURE: None       

July 01, 2009

Clean Energy Stocks Shopping List: Landfill Gas and Geothermal

Stocks seem expensive now, but that may not last.  Here are two Landfill Gas stocks and three Geothermal stocks I'm hoping to buy if the market falters.

Tom Konrad, Ph.D., CFA

This article continues my Clean Energy Stocks Shopping List series.  So far I've brought you:

This article takes a look at two of the most economical clean electricity generation technologies, landfill gas and geothermal.

Kilowatts from Trash

As I discussed in my recent article on Advanced Biofuels, I expect that advanced biofuels are likely to have to compete with electricity generation for feedstock, and electricity generation is likely to take a large part of the pie.  More importantly, the most likely companies to gain are the ones that control the feedstock.  I like waste management companies because they already have contracts and experience in dealing with local governments.  As those governments adopt broader recycling measures, waste-to-energy, and even mandatory composting, waste management companies that have the skills to process waste effectively will be able to provide these additional services.  This should increase their revenues and profits from the same amount of trash, and may lead to new opportunities to sell byproducts such as recycled materials and electricity.

#1 Waste Management Inc. (WMI). Waste Management not only collects trash, but also does recycling and waste-to-energy services.  Over the last few years, they have been aggressively expanding their methane gas recovery facilities at existing landfills, and often works under contract with governmental entities.  To me, this portfolio of skills seems ideal for exploiting future opportunities to find value in the stuff that we throw away.

WMI has a rock solid balance sheet, with almost $1 billion in cash, strong cash flow, and low debt-to-equity and current ratios.  A modest forward P/E of 13, and a dividend yield of over 4% makes this company attractive to cautious investors, even at current prices.  This is fortunate, since the low Beta means that the stock is unlikely to decline much in response to a general market decline.

#2 Veolia Environnement (VE) Also provides world-wide waste management services, but is a much broader company with an expertise in government contracting.  In addition to solid waste, they offer a large range of environmental management services, from water and wastewater treatment (there are also opportunities to generate electricity from methane produced at wastewater treatment plants.) They're also involved in several of my other favorite sectors: energy efficiency through their energy management services, and clean transportation through their transit and rail services.

The company is much more highly leveraged than Waste Management, however, and had a very thin profit margin in 2008.  This makes the company much more riskier than Waste Management, with a Beta of 1.8 compared to Waste Management's 0.5.  However, a market downturn may provide the opportunity to buy this company at a dramatically reduced valuation.

Geothermal Stocks

Hot rocks are a hot industry these days, and geothermal electricity has a lot going for it.  First, electric utilities are very comfortable with it, since geothermal plants are baseload and are very reliable, and costing only about 6 to 11 cents per kWh.  Geothermal also has strong support on Capitol Hill, gaining explicit mention and ($350 million) in the Recovery Act.  

#3 Ormat (ORA), a vertically integrated geothermal company works with almost all the players in the industry.  Many of the exploration companies, such as US GeoThermal (HTM), contract with Ormat to build their power plants.  They also do their own exploration, construction, and operation of geothermal plants world wide.

Although I consider the company a core geothermal holding, I recently sold much of my position because the recent rally carried the company to very high valuations, with a forward P/E and dividend yield of 25 and 0.4%.  Given that the stock price has almost doubled since early March, I expect to be able to get back in at much better prices.

#4 Raser Technologies (RZ) is a sharp contrast to Ormat, being the industry upstart with a disruptive business model.  Raser is leveraging cheap, off-the-shelf technology from United Technologies Corp. (UTX) in order to greatly decrease exploration costs and time.  This modularity means that Raser can start building a power plant before they have fully explored a geothermal resource.  If they later find that the resource can support a larger plant, they can simply add units.  Their first plant in Thermo Utah was completed in less than a year, on a known low temperature resource that had been previously been considered too cool to generate power, meaning that exploration was not necessary.

The company recently completed a $25.5 million offering at a 22.5% discount to the stock price at the time.  The stock promptly sold off more than 30%.  With the company rapidly burning through cash, the raise was necessary in order to continue their rapid expansion plans.  I would not have touched the company before the raise (although I listed it as one of Ten Clean Energy Gambles for 2009.  With Raser down almost 30% since then, and some fundraising out of the way for the short term, the odds of the gamble are looking a lot better.  

#5 Nevada Geothermal Power (NGPLF.PK) is a more conventional exploration and development company with a few high quality projects.  This company now expects their first producing project at Blue Mountain to be fully operational in October 2009.  The shift from an exploration company to a power producer should bring a whole new class of investors to the stock, although the recent doubling of the stock price has quite possibly discounted most of these gains.  But with thinly traded stocks such as NGP, any change in investor sentiment could easily drop the price significantly and provide new buying opportunities in the meantime.

DISCLOSURE: Tom Konrad and/or his clients own WMI, VE, ORA, HTM, RZ, UTX, and NGLPF.  

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.

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