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August 29, 2009

Rarer Rare Earths Are Not Going To Sink The Wind Power Sector

Charles Morand

Once the electric and plug-in hybrid vehicle frenzy fizzles out, as cleantech frenzies typically do when reality comes knocking (i.e. corn ethanol and solar PV), the next hot thing to hit the world of alternative energy investing could very well be rare earths, or the lack thereof. Rare earth metals are used in a number of technologies, most importantly for alt energy investors in NiMH HEV batteries and in permanent magnets for wind turbine generators and electric motors (made with the element neodymium). This article, as its name indicates, will focus on the wind sector.

Consider the following two quotes on the significance of rare earths to the wind power industry (I got them from articles I found on the Climateer Investing blog, which has been keeping on top of this issue for the past few months. Click on the link above to access a number of articles on that topic):

"To make the most efficient, lightest weight, lowest service wind turbine generator of electricity takes one ton of the rare earth metal, neodymium, per megawatt of generating capacity." (Jack Lifton, 5/07/09)

"Let's take a look at wind turbines. In certain applications, two tons of rare earth magnets are required in the permanent magnet generator that goes on top of the turbine. If the permanent magnet is two tons, then 28% of that, or 560 lbs, is neodymium." (Mineweb, 5/13/09)

Why does this matter? Because China, which accounts for around 95% of global output, is purportedly planing on severely curtailing the export of rare earth minerals. Naturally, this has some people worried. Given the total tonnage of neodymium that goes into each utility-scale wind farm, some may wonder whether this trade ban will throw a spoke in the wheel of wind power development; a wheel, as industry observers know, that has been spinning incredibly fast over the past five years.

Understanding Wind Energy Costs

Perhaps the single most important metric in power generation is the levelized cost of the energy produced. The levelized cost includes all of the costs over the lifetime of the facility (capital and operating) plus a pre-determined return on capital. All of these costs (capital costs, operating costs and cost of capital) are then expressed in present value terms and amortized over the facility’s total lifetime production (generally expressed in $ per kWh or MWh).

When assessing the cost competitiveness of electricity generation fuels, the levelized cost approach yields a true apples-to-apples comparison. Thus, when trying to gauge the impact of various events (e.g. higher natural gas prices, higher cement prices, a trade ban on neodymium) on the relative cost positions of different generation technologies, the  impact on the levelized energy cost provides the best measure.

Last Friday, I read a recently-published study by Maria Isabel Blanco, former Policy Director at the European Wind Energy Association (EWEA) and now an academic in Spain, on the economics of wind power. In a nutshell, the study examines, based on survey of EWEA members (EWEA's membership accounts for around 80% of global wind turbine manufacturing) and a review of the literature, the generation costs of wind energy in Europe.

Because there are no fuel expenditures for wind, capital costs make up the vast majority of the levelized cost of wind energy. According to the study, capital costs make up around 80% of the total cost of wind energy over the lifetime of a typical onshore facility (offshore wind is not addressed in this article). The wind turbine ex works - meaning the machine itself plus the tower, transportation to the site and installation - makes up around 70% of capital costs, or 56% of the total lifetime cost. Balance of plant costs include grid connection and site preparation (e.g. roads and other civil engineering work), among others.

The first figure below comes from an article on the wind power supply chain by BTM Consult published in the January/February 2007 edition of Wind Directions (see pages 5 and 6 for the full-size image). The second figure comes from a September 2007 report written by Garrad Hassan for the Canadian government on wind turbine manufacturing (see page 33 for the original figure).       

Aug 29-09 Wind.bmp


Aug 29-09 wind II.bmp

Both figures show the approximate contribution of each core component to the final cost of a wind turbine. There is, of course, variation around the percentages shown here based on the turbine model, the manufacturer, the location of the turbine assembly plant relative to where components and sub-components are manufactured, etc. However, taken together, these two figures yield a good ballpark estimate of how the cost of a wind turbine is broken down between its main parts. 

Both sources agree that the generator, the component that requires significant amounts of neodymium, represents around 3.4% of the total cost of a turbine. The generator thus accounts for around 2.4% of the total capital cost of a typical wind project.

The table below looks at the impact of generator costs on the installed cost (i.e. capital cost) of a fictional wind project. The data comes from EERE's 2008 Wind Technologies Market Report, where capacity-weighted average installed wind costs in the US are reported at around $1,915/kW, and capacity-weighted average turbine costs ex works are reported at around $1,360/kW, or approximately 71% of installed costs (in line with the European numbers above). The calculations assume that all other costs remain constant.

Original Generator Cost @ 3.4% of Turbine Cost ($/kW) % Increase In Generator Cost New Generator Cost ($/kW) Installed Cost  Following The Increase In Generator Cost ($/kW)
% Increase In Installed Cost
46 50% 69 1938 1.2%
46 100% 92 1961 2.4%
46 150% 116 1984 3.6%
46 200% 139 2007 4.8%
46 250% 162 2031 6.0%
46 300% 185 2054 7.2%
46 350% 208 2077 8.5%
46 400% 231 2100 9.7%
46 450% 254 2123 10.9%
46 500% 277 2146 12.1%
       
The Levelized Cost of Wind Energy

Using a model she built, the author of the European study discussed above calculated the levelized cost of wind energy in Europe, based on actual capital, operating and financing costs and ignoring all incentives and taxes - she therefore computed the "true" cost of wind power.

She found that the single most critical variable impacting the levelized cost of wind energy was full load hours, or the average annual production divided by the facility's nameplate capacity (the more often cited capacity factor is equal to full load hours divided by total hours over the measurement period). Capital costs came in second.

A drop of 10% in full load hours, according to the author's model, leads to a cost increase of 8.5%. In comparison, a 10% increase in capital costs, all else equal, triggers a 7.7% increase in total lifetime costs. As can be noted in the table above, generator costs would have to increase by over 400% to trigger a 7.7% increase in levelized energy costs - while 7.7% is not a trivial number, especially if the increase is sudden, it probably does not constitute a project killer in most cases.

Of course, the costs and calculations presented here are rough estimates and will differ across installations and regions. Nevertheless, they provide a good approximation of the potential impact of higher generator costs on the cost of wind energy.

The Market For Wind Generators

Over the past three years, the supply of many core components for wind turbines has been incredibly tight, leading to a reversal of the long-term trend toward lower levelized wind energy costs (for a recent analysis this reversal in the US, see the EERE's 2008 Wind Technologies Market Report). Generators, however, were not one of those rare components. Bearings and gearboxes are the two parts for which the most severe shortages exist (or did, pre-crisis), while the market for generators is relatively well supplied by the likes of Siemens (SI) and ABB (ABB).

Even though increases in copper prices have put upward pressure on generator costs in the past few years, it is fair to say that generators have not been a problem component in the wind supply chain.

Conclusion

It is too early to tell what impact Chinese restrictions on rare earth exports will have on the price of wind generators and, ultimately, on the levelized cost of wind energy. However, as shown above, the wind industry is an position to bear substantial cost increases in this one component before the overall economics of wind projects are affected. 

More generally, I believe it's premature to conclude that limits on the export of rare earths mean that China will also limit the export of value-added manufactured goods such as permanent magnets. The main idea here is, most likely, to bolster the country's manufacturing sector - the very same manufacturing sector that acts as a giant job creation machine and prevents China from experiencing widespread social unrest. As recently pointed out by The Economist, all of emerging Asia's consumers consume about 40% of what Americans do and, although this is gradually changing, it wouldn't be in China's interest to strain that trade relationship by depriving the West of a whole host of technologies that consumers here have gotten used to.

While rarer rare earths may materially impact certain sectors of the economy, the wind industry, by-and-large, should do just fine.

DISCLOSURE: The author is long ABB

PHEVs and EVs; Plugging Into a Lump of Coal

John Petersen

Since I've stirred up a hornet's nest over the last two weeks first by debunking the mythology that PHEVs and EVs will save their owners money and then by showing how PHEVs and EVs will sabotage America's drive for energy independence, I figured I might as well go for the triple-crown of harsh realities by showing readers that in the U.S., where 70% of electricity comes from burning hydrocarbons, PHEVs and EVs won't make a dent in CO2 emissions. They'll just take distributed CO2 emissions off the roads and centralize them in coal and gas fired power plants.

I started to seriously question the policy arguments in favor of PHEVs and EVs when McKinsey Quarterly published an article titled "Profiting from the low-carbon economy" in early August. The article included a "Global carbon abatement cost curve" that shocked me because it showed that HEVs offered a substantial cash benefit from carbon abatement while PHEVs imposed a significant carbon abatement cost. A few days ago I got permission to reprint the original graph from a recent McKinsey & Company report titled "Pathways to a Low-Carbon Economy. Version 2 of the Global Greenhouse Gas Abatement Cost Curve," 2009."

McKinsey Graph.png

While the graph is fairly complex because it shows both the benefits and costs of various carbon abatement options and the potential amount of CO2 that each option could eliminate, the key issue is the relative positions that HEVs and PHEVs occupy on the curve. HEVs are shown on the left hand side of the graph between residential insulation retrofit and electricity from landfill gas; which means that HEVs save €30 ($43) per metric ton of carbon abatement. PHEVs are shown on the right hand side of the graph between nuclear power plants and low penetration wind farms; which means that PHEVs cost €12 ($17) per metric ton of carbon abatement. Since the McKinsey graph analyzed abatement costs at a 'global' level, I felt compelled to dig a little deeper and analyse their impact in the U.S.

In its latest report on greenhouse gas emissions in the U.S., the Energy Information Administration said that CO2 emissions from electricity generation were 2,433.4 million metric tons in 2007. In its 2007 annual summary of electric power in the U.S., the EIA reported that net generation of electric power during 2007 was 4,157 billion kilowatt-hours from the sources identified in the following graph.

Generation.png

When you divide the total CO2 emissions from electricity generation by the total amount of electricity generated, it works out to 585.4 grams of CO2 per kWh. While the figures vary among manufacturers, the average electric-only range of the PHEVs and EVs planned by General Motors, Nissan (NSANY), Mitsubishi (MMTOF.PK), BYD (BYDDF.PK), Tesla Motors, Fisker Automotive, Th!nk Global and a legion of others is roughly 4 miles per kWh of useful battery capacity. So in the U.S., a PHEV or EV will ultimately be responsible for about 146 grams of CO2 emissions per mile unless the owner has the foresight and dedication to buy solar panels or wind turbines to generate the electricity his PHEV or EV will use.

To review the math, a gallon of gasoline releases 20.35 pounds of CO2 (9,231 grams) when it is burned in an internal combustion engine. So a normal car that meets current CAFE standards of 27.5 mpg is responsible for roughly 336 grams of CO2 emissions per mile. In contrast, an HEV like the Prius, which slashes fuel consumption by roughly 40% through a combination of recuperative braking, idle elimination and electric launch will be responsible for roughly 201 grams of CO2 emissions per mile.

The following table compares typical vehicle costs (without tax subsidies) and CO2 emissions per mile for each class of vehicle. It then goes two steps further and (a) calculates an average carbon abatement cost for HEVs, PHEVs and EVs, and (b) calculates an incremental carbon abatement cost for PHEVs and EVs. Both carbon abatement costs are expressed in dollars of capital spending per gram/mile of CO2 emissions.


Vehicle
Cost
CO2
Emissions
 Average
Abatement Cost
Incremental
Abatement Cost
Internal combustion
$20,000
336 g/m


Prius HEV
$26,500
201 g/m
$48.15 g/m

GM Volt class PHEV
$40,000
146 g/m
$105.26 g/m
$245.45 g/m
Nissan Leaf class EV
$40,000
146 g/m
$105.26 g/m
$245.45 g/m

Is it any wonder that Vinod Khosla keeps telling interviewers that in the U.S., China and India, PHEVs and EVs will be plugging into a lump of coal for years to come?

News stories, speeches and press releases can only maintain the electric drive illusion for so long. Sooner or later the public is going to realize that it's all hype, blue smoke and mirrors, and that PHEVs and EVs have little of substance to offer customers in the U.S. market. When the public comes to the realization that electric drive vehicles:
  • Won't save their owners significant amounts of money;
  • Won't be as fuel efficient as HEVs when battery capacity is factored into the equation;
  • Won't be as CO2 efficient as HEVs when utility emissions are factored into the equation; and
  • Are nothing more than feel-good, taxpayer subsidized eco-bling,
the backlash against lithium-ion battery developers like Ener1 (HEV) and Valence Technologies (VLNC) that have attained nosebleed level market capitalizations based on electric drive hype may be vicious. The big winners should be developers of cheap and efficient high-performance lead-carbon batteries like Exide Technologies (XIDE) in cooperation with Axion Power International (AXPW.OB); C&D Technologies (CHP) in cooperation with Firefly Energy; and East Penn Manufacturing in cooperation with Japan's Furukawa Battery Co. (FBB.DE).

It would be wrong for readers to assume that I dislike lithium-ion battery technology, because I believe it will be an increasingly important part of the coming cleantech revolution. I also believe that companies like Advanced Battery Technologies (ABAT), Altair Nanotechnologies (ALTI), Johnson Controls (JCI) and A123 Systems (IPO pending) that are taking a diversified approach by focusing on products for a wide variety of consumer, industrial, utility and military applications will grow and prosper. But the companies, reporters, financial analysts and politicians that have built a mountain of unreasonable expectations from an electric drive molehill may be in for a tough time.

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

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

August 27, 2009

Vacation, Updated Graphs, and 2 Conferences

Vacation and Meet Me at the Colorado Renewable Energy Conference or the International Peak Oil Conference.

I'm on vacation this week, so I'm going to leave you with a preview from a presentation I will be giving at the Colorado Renewable Energy Conference on Aug 29 in Golden Colorado. I'm updating my Investing in Renewable Energy presentations, and I've been able to incorporate a lot of the work Charles and I did on clean energy mutual funds and ETFs since January this year.

ETF Holdings Revealed

Charles did some in-depth work looking at the holdings of the ETFs this spring, and I turned it into this graph (click for the high-res version):

Looking at the holdings data, I've changed my favorite clean Energy ETF to QCLN, since it has a moderate expense ratio, and has more exposure to some of my favorite Clean Energy subsectors: Energy Efficiency, Clean Transport, Batteries/Electricity Storage, and Geothermal than my previous favorite, ICLN, which I picked mainly because of the expense ratio.  However, I think QCLN underweights clean transport and wind more than I would like, so another good option for larger portfolios would be a portfolio of 80% QCLN and 10% each of FAN and PTRP.  I prefer FAN to PWND because FAN is more focused on the wind supply chain, while PWND has more of a focus on wind park operators (Power Production.)

Evidence of a Clean Energy Fund Bubble

I also updated my chart of the number of clean energy mutual funds from March to reflect the closure of the Airshares EU Carbon Allowances Fund (ASO):

 nofunds.bmp

If that does not look like a bubble (in clean energy funds) I don't know what does.  It just goes to show that solid fundamentals do not prevent bubbles... solid fundamentals are often the foundation on which bubbles build their castles in the sky, to mix a metaphor.  However, if you do have solid fundamentals (as I believe clean energy does) the popping of the bubble just sets the stage for years of healthy growth. 

Presentations on Stock Picking

That's not the core of the presentation, but I like to cover mutual funds and ETFs when talking to a general audience of Alt Energy enthusiasts.  The real meat of the presentation, for me, is picking clean energy stocks.  For that, you'll need to wait for future articles, or come to my presentation at CREC, or the Saturday, October 10 workshop "Survive and Thrive After Peak Oil: Creating Personal Plans for the Coming Decades" at the ASPO 2009 International Peak Oil Conference, October 10-13 in Denver, CO.

At the ASPO conference, I'll skip the mutual fund stuff altogether, and spend more time on the how-to's of stock-picking.  

DISCLOSURE: None.

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

 

August 26, 2009

How PHEVs and EVs Will Sabotage America's Drive For Energy Independence

John Petersen

Yesterday I asked a frequent commenter and staunch electric vehicle advocate whether he ever questioned the ethics of building an EV that can save one owner 400 gallons of gas per year while using enough batteries to build ten Prius-class hybrids that could save their owners a combined total of 1,600 gallons of gas per year. I then spent an hour in stunned silence as the critical importance of that question crystallized in my mind. I didn't get a responsive answer from the commenter, but I did get one of those rare moments of clarity when everything suddenly falls into place.

For years the mainstream media, scientists, elected officials and promoters have written and spoken ad nauseum about how a new generation of plug-in hybrid electric vehicles, or PHEVs, will liberate America from the tyranny of imported oil. The problem is the promises are based on flawed assumptions and utterly false. At their best, PHEVs and EVs are all sizzle and no steak when it comes to national energy independence. At their worst, they are deep cover saboteurs that will undermine America's drive for energy independence while stridently claiming to be part of the solution.

The simple facts

The average American drives about 12,000 miles per year. If his engine meets current CAFE standards and averages 27.5 mpg, the average American will burn about 436 gallons of gasoline and generate about 4.4 tons of CO2 per year.

The Prius is a hybrid electric vehicle, or HEV, manufactured by Toyota Motor Corporation (TM) that carries a base sticker price of $22,750. The Prius has an enviable 10-year track record of slashing gas consumption by roughly 40% through a combination of idle elimination, electric only launch and recuperative braking. It's a marvel of efficiency engineering that eliminates waste wherever possible. Each new Prius uses about 1.6 kWh of NiMH batteries to save the average owner roughly 174 gallons of gas per year while eliminating 1.7 tons of CO2 emissions.

General Motors is getting ready to launch its eagerly anticipated, irresponsibly hyped and largely untested Volt, a PHEV that will use a combination of electric drive and gasoline engine technology to offer 40 miles of electric only range before the gasoline engine kicks in. The Volt is expected to have a base sticker price of roughly $40,000 before tax subsidies of $7,500 per vehicle. Each GM Volt will use 16 kWh of lithium-ion batteries and save the average owner up to 436 gallons of gasoline per year.

In 2010, Nissan Motors (NSANY) plans to launch its highly touted Leaf, a pure EV that will do the Volt one better by eliminating the gasoline engine altogether. The Leaf is rumored to have a base sticker price that will be competitive with the Volt and enjoy comparable tax subsidies. Each Nissan Leaf will use 24 kWh of lithium-ion batteries and save the average owner 436 gallons of gasoline per year.

The following table summarizes the maximum impact that Toyota, General Motors and Nissan can have on gasoline imports for every 48 kWh of battery capacity used in their products:


Vehicle Battery Gas Savings Number Total Annual

Cost
Capacity
Per Vehicle
of Vehicles
Gas Savings
Toyota Prius $22,750 (a)
1.5 kWh 174 gallons 32 vehicles 5,568 gallons
GM Volt $40,000 (e)
16 kWh 436 gallons 3 vehicles 1,308 gallons
Nissan Leaf $40,000 (e)
24 kWh 436 gallons 2 vehicles 872 gallons

I used 48 kWh for this example because it's the lowest common denominator.

Automotive drive-train batteries are scarce resources, which is why President Obama recently announced $1.2 billion in Federal grants to help finance the construction of new battery manufacturing facilities. Despite the scarcity, developers of outrageously expensive PHEVs, EVs and the lithium-ion battery packs that will be used in their manufacture have convinced a gullible Congress that their products, which will only save a little gasoline, deserve huge Federal subsidies while more modest HEVs, which could save a lot of gasoline, deserve no Federal support.

Does anybody in Washington DC have a calculator and the capacity for independent thought?

The battery wars

Much of the blame for the current state of affairs belongs at the feet of lithium-ion battery developers like Ener1 (HEV), Valence Technology (VLNC), Johnson Controls (JCI) and others that have mounted a highly effective PR campaign to convince everyone that lithium-ion is the only battery technology that's small enough and light enough to power a fleet of PHEVs and EVs. Their illusory promise of energy independence coupled with frequent assurances that the cost, performance, abuse tolerance and cycle-life issues that plague lithium-ion batteries will be solved in the immediate future have led to an absurd situation where the Federal government is heavily subsidizing a wasteful alternative that will ultimately sabotage America's drive for energy independence..

I have written at length about the development path lithium-ion battery developers must follow if they want their products to become cheap enough and durable enough for the automotive market. I have compared the performance of lithium-ion batteries with far cheaper lead-carbon batteries being developed by Exide Technologies (XIDE) in cooperation with Axion Power International (AXPW.OB); by C&D Technologies (CHP) in cooperation with Firefly Energy; and by East Penn Manufacturing in cooperation with Japan's Furukawa Battery Co. (FBB.DE). I have demonstrated that lithium-ion batteries are not necessary in micro, mild and full hybrids where a 77 pound weight advantage and 0.7 cubic feet of saved space can't justify $1,250 in incremental battery cost. I have also explained how billions of dollars in existing lead-acid battery manufacturing facilities can be leveraged to facilitate the inexpensive implementation of micro, mild and full hybrid technologies in the U.S. and Europe in years instead of decades without the short-term supply chain constraints that will impede the commercialization of other battery technologies.

In December of last year I wrote that the energy storage sector needs to take baby steps before it can run and I regularly quote a favorite a line from "The Lost Constitution" by William Martin that says, "In America we wake up in the morning, we go to work and we solve our problems." America has the technical ability and the manufacturing infrastructure to implement HEV technology in all new light vehicles within a decade. If we wait for cheap lithium-ion batteries and cost effective PHEVs and EVs, the process will take far longer, cost much more and offer less flexibility to consumers. I strongly advocate the continued development of lithium-ion and other battery technologies because HEVs are not the journey's end and we can do better. We cannot, however, take a giant leap into the future without first taking the reasonable steps that are available and affordable today.

Notwithstanding the deafening drumbeat of hype from mainstream media, academics, elected officials and lithium-ion battery developers, the undisputed facts are that lithium-ion batteries are not ready for prime time and PHEVs and EVs are little more than vanity items for elitists who will happily let up to fifteen other Americans waste up tp 2,610 gallons of gas per year so that they can save 462 gallons by driving a 100% green car. The hypocrisy is appalling.

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

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



August 25, 2009

Supercycle Or Not, Expensive Oil Is Unavoidable

Charles Morand

In an upcoming article in the journal Resources Policy, David Humphreys, former Chief Economist at Rio Tinto and Norilsk Nickel, argues that skeptics are right to question the notion that mineral prices in the 2003 to 2008 period were rapidly uptrending as part of an emerging multi-decade supercycle.

He argues that the rise in demand underpinning steep mineral price increases had two distinct causes: (1) an "extended economic upswing" driven by an ample supply of cheap credit (we know now where that got us); and (2) a "deeper-rooted structural shift in the economy" resulting from the growing industrialization and urbanization of emerging markets, driven in large part by a labor cost advantage.

While Humphreys agrees that mineral resource prices may not continue to increase sharply - once the world emerges from recession - for the next 20 or 30 years as would be the case if we were engaged in a supercycle, he nonetheless disagrees that once supply catches up to demand things will go back to "normal".

Supply catching up to demand means prices reflecting the industry's marginal production costs, or the costs of extracting each incremental unit of resource. Although the increase in  mineral prices may not go on for decades, the author argues, there is nonetheless a high probability that the new "normal", when marginal production costs stabilize, will mean substantially higher prices than the old "normal", and that this will become the new reality.

The insight provided by Humphreys applies equally well to oil and gas. Unconventional  resources such as oil sands, shale gas and deep offshore drilling, while they will certainly help alleviate the supply-side impact on prices of declining production in conventional fields, will appreciably raise the industry's marginal production costs, thus contributing to higher long-term prices even if stabilization occurs in a matter of years rather than decades.

Either way - whether we are engaged in a supercycle or not - we can now be fairly certain that we are entering a world where some of the natural resources that were essential to our becoming industrialized and wealthy will no longer be cheap, save for the odd recessionary period.   

The impact on the prices of final goods will vary based on how labor-intensive they are; for many manufactured goods, cheap labor in emerging markets will continue to limit the price impact of more expensive commodities, whereas for goods where commodity costs account for the bulk of final price the impact will be much more direct.

One of the industries that will be most heavily impacted by this is the car industry because of high gasoline prices. Given all of the hurdles that currently stand in the way of electrification, there is a good chance that we reach, within the next few years, a point where drivers are hit really hard in the wallet by high gas prices but not quite hard enough to justify the much higher expense - both in terms of money and foregone conveniences like trunk space and unlimited range - of an EV or PHEV.

The most likely winner from this, in my view, will be mass transit. As I argued in an earlier article on Obama's high-speed rail plan, mass transit is to transportation what efficiency is to energy; although a renewable kWh is good, an avoided one is even better, and so it goes for EVs/PHEVs.

There are three stocks that I see as potentially major beneficiaries from a growth in mass transit - two rail stocks and one bus stock. The two rail stocks are Bombardier (BDRBF.PK) and Alstom (AOMFF.PK), which I profiled earlier this year. The bus stock is New Flyers Industries (NFYIF.PK), which Tom profiled last year. All three stocks will see material positive earnings impacts from growing expenditures on mass transit, unlike Siemens (SI) that, despite a strong position in rail, is highly diversified outside of transit and unlikely to see success in rail move the needle substantially on the earnings front.

As Tom pointed out in his article on New Flyers, it will take a lot for Americans to change their lifestyles and driving habits. However, all signs point to the fact that "a lot" is what we have coming our way - in fact, it will become the new reality and will have crippling economic impacts if we don't find a way to adjust. Moreover, Americans are no longer the only consumers that matter - North American cities are growing more slowly than Asian ones, our population will most likely begin to decline sometime in the next few years and wealth creation is increasingly shifting to Asia. Many emerging markets are already embracing mass transit and will have a much bigger stake than we do in trying to limit the impact of secularly high oil prices on their economic development.

DISCLOSURE: None                
     

               

August 20, 2009

A123 Keeps Powering Forward on its IPO

John Petersen

A123 Systems filed another amendment to the registration statement for its proposed IPO on August 19th. With this amendment, A123 is much clearer on its anticipated Federal funding than it was in earlier filings. In addition to discussing the recent DOE announcement that they'll receive $249.1 million in ARRA battery manufacturing grants, they've reduced their estimate of the ATVM guaranteed loans that they'll be eligible for from $1 billion in their July filing to $235 million in the current filing. This most recent number is specific enough to indicate that it reflects ongoing negotiations rather than hopes and aspirations. I hope they get it.

When A123 originally filed their registration statement last summer, the planned offering amount was $175 million. Under the ARRA battery grant program they'll need to come up with $250 million in matching funds. Similarly, under the ATVM loan program they'll need to come up with roughly $60 million in matching funds. If one assumes that all of the matching funds requirements will need to be satisfied by the IPO, they'll need to raise $500 to $700 million in the IPO to meet their cash requirements.

If the IPO goes off for $500 million or more, it will be a watershed event on Wall Street and likely result in a frenzy of activity for other stocks in the energy storage sector. I'm excited because there are still a number of storage sector stocks that trade at objectively low valuations.

In early August I wrote an article titled "Alternative Energy Storage: Cheap Continues to Outperform Cool" which suggested that the companies in the Cheap Emerging and Cheap Sustainable classes still had significant upside potential. I continue to believe that these companies will be solid performers after a major storage sector IPO. I'm less sanguine about the ability of Ener1 (HEV) and Valence (VLNC) to maintain their current market capitalizations in the wake of a major IPO for a company that makes a competitive product and has far stronger business fundamentals.

September should be a very interesting month.

DISCLOSURE: None


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.

August 19, 2009

Debunking The PHEV Mythology

John Petersen

This week has been fascinating because of three articles that found their way to my computer. The first was a thematic piece in McKinsey Quarterly titled "Profiting from the low-carbon economy" that included a carbon abatement cost graph which showed full hybrid automobiles (HEVs) offered CO2 abatement savings of roughly $50 per ton while plug-in hybrid automobiles (PHEVs) imposed CO2 abatement costs of roughly $20 per ton, or slightly more than a nuclear power plant. The second was GM's widely publicized announcement that the Volt would get 230 miles per gallon. The third was a special report from CNNMoney.com titled "Volt vs. Prius: What's the better deal?"

After reading and thinking about these articles for a few days, I went to work on an Excel spreadsheet to analyze the differences between HEV and PHEV options and reduce them to a simple customer oriented financial analysis. The summary results I share in this article demonstrate once again that the glittering promise of PHEVs is nothing more than post-modern mythology that does not stand up to even basic economic analysis. For readers that take issue with my assumptions and want to test their own theories, a copy of my Excel spreadsheet is available here. The server copy is write protected but you can save it to your system using a different name and check my work at your leisure.

Gas Price Assumptions

Since 1999, the average annual increase in the price of crude oil has been roughly 17.5%. Based on the following graph that I've used in other articles, I believe oil prices will stabilize around $80 per barrel later this year and continue to move upward within the price channel until we hit the next inflection point.



The following table shows potential future gasoline prices over the next 10 years based on three scenarios: a 17.5% annual rate of increase like we've had for the last decade; a 25% annual rate of increase and a 32.5% annual rate of increase. Any way you look at it, the numbers are incredibly ugly. We cry and complain that gas prices peaked at $4.50 last year. Can you imagine the pain and economic dislocation arising from $12.50 gas prices 10 years out?

Calendar
17.5% Annual 25.0% Annual
32.5% Annual
Year
Gas Price Increase
Gas Price Increase Gas Price Increase
2010 $2.94 $3.13 $3.31
2011 $3.45 $3.91 $4.39
2012 $4.06 $4.88 $5.82
2013 $4.77 $6.10 $7.71
2014 $5.60 $7.63 $10.21
2015 $6.58 $9.54 $13.53
2016 $7.73 $11.92 $17.92
2017 $9.08 $14.90 $23.75
2018 $10.67 $18.63 $31.47
2019 $12.54 $23.28 $41.70

Since the goal of this article is to debunk prevailing PHEV mythology, I'll assume that oil price increases over the next decade will mirror the 17.5% rate we experienced in the last decade.

Other Key Assumptions

In a recent Instablog titled "Lies, Damned Lies and MPG Claims for the Volt" I criticized GM for claiming 230 mpg for the Volt because any attempt to combine electric vehicle "EV" range with internal combustion engine "ICE" range is meaningless. I also speculated that the easiest way to get to a 230 mpg figure for the Volt was to assume a 46 mile daily commute, a 40 mile EV range, and 30 mpg fuel economy for ICE powered driving. While I found the numbers arbitrary for a public fuel efficiency announcement, they didn't strike me as inherently unreasonable. So I've decided to follow GM's lead and use the same basic assumptions for this article:

Daily driving distance
46 miles
Annual driving days
250 days
Annual vacation trips
1,000 miles
Total annual mileage
12,500 miles
Basic ICE fuel economy
30 mpg
Baseline electricity cost
$0.115 kWh
Inflation rate for electricity
4.0%
Discount Rate for
     present value calculations

7.5%
Minimum car ownership period
5 years
Maximum car ownership period
10 years

My Baseline Scenario

As a baseline scenario I started with a $20,000 new car equipped with a standard ICE that would get 30 mpg and use 417 gallons of gasoline per year. A consumer who bought the car for cash, used 417 gallons of gas per year, and sold the car after five years for 35% of his initial purchase price would have an undiscounted total cost of ownership of $21,671 for the five year period. Stretching the ownership period out to 10 years and reducing the resale value to 10% of the purchase price results in an undiscounted total cost of ownership of $46,090. To keep things as simple as possible, I ignored maintenance and assumed all batteries would last for the entire service life.

The HEV Alternatives

I then used the same basic assumptions to calculate the total cost of ownership over five and ten year periods for:
  • A $21,000 micro hybrid that would improve fuel economy by 8%;
  • A $23,000 mild hybrid that would improve fuel economy by 20%;
  • A $26,000 full hybrid that would improve fuel economy by 40%; and
  • A $32,500 PHEV (after tax credits) that would offer 40 miles of EV range and 30 mpg fuel economy from its ICE.
The five and ten year total cost of ownership values are summarized in the following table.


Purchase 5 Year Resale Undiscounted

Price Fuel Cost Value Cost of Ownership
Pure ICE $20,000
$8,671
($7,000) $21,671
Micro Hybrid $21,000
$7,977
($7,350) $21,627
Mild Hybrid $23,000
$6,936
($8,050) $21,886
Full Hybrid $26,000
$5,202
($9,100) $22,102
PHEV 40 $32,500
$2,598
($11,375) $23,723






Purchase 10 Year Resale Undiscounted

Price Fuel Cost Value Cost of Ownership
Pure ICE $20,000
$28,090
($2,000) $46,090
Micro Hybrid $21,000
$25,843
($2,100) $44,743
Mild Hybrid $23,000
$22,472
($2,300) $43,172
Full Hybrid $26,000
$16,854
($2,600) $40,254
PHEV 40 $32,500
$6,823
($3,250) $36,073

This table is a very simplistic presentation that assumes a buyer will pay cash for his vehicle and doesn't worry about details like the time value of money. Nevertheless, it shows that a PHEV will represent a 9.5% up-charge for customers who buy with a 5 year ownership horizon and a maximum savings of 21.7% if they buy with a 10 year ownership horizon.

To take the level of sophistication up a notch, the following table calculates the discounted present values of the five and ten year total cost of ownership using an imputed interest rate of 7.5% per year. While it's easy to argue that a 7.5% discount rate is far too low for an individual's financial transactions, the table makes it clear that a PHEV will represent a 21.3% up-charge for customers who buy with a 5 year ownership horizon and a 3.4% savings for customers who buy with a 10 year ownership horizon.


Purchase 5 Year Resale Net Present Value

Price Fuel Cost Value Cost of Ownership
Pure ICE $20,000
$6,855
($4,876) $21,979
Micro Hybrid $21,000
$6,307
($5,120) $22,187
Mild Hybrid $23,000
$5,484
($5,607) $22,877
Full Hybrid $26,000
$4,113
($6,339) $23,774
PHEV 40 $32,500
$2,076
($7,923) $26,652






Purchase 10 Year Resale Net Present Value

Price Fuel Cost Value Cost of Ownership
Pure ICE $20,000
$17,550
($970) $36,579
Micro Hybrid $21,000
$16,146
($1,019) $36,127
Mild Hybrid $23,000
$14,040
($1,116) $35,924
Full Hybrid $26,000
$10,530
($1,262) $35,268
PHEV 40 $32,500
$4,421
($1,577) $35,344

Sensitivity Factors


The most critical sensitivity factor for the total cost of ownership calculations is expected future gasoline prices. In general, ultra-rapid escalation of gas prices makes PHEVs increasingly attractive on a net present value basis, but only at the cost of imposing a crushing burden on the global economy.

The second major sensitivity factor is the imputed interest rate used for the present value calculations. As the discount rate approaches credit card rates of 15%, PHEVs become less attractive.

The third major sensitivity factor is battery cost. The current Federal tax credit for electric drive vehicles is the rough equivalent of a $500 per kWh discount on the purchase price of the batteries. For PHEVs to become truly cost-competitve with micro, mild and full hybrid vehicles, the industry will need to shave another 50% off current heavily subsidized price levels. Unless the government decides that it wants to subsidize PHEV battery costs in perpetuity, battery prices will eventually have to fall from $1,000 per kWh to roughly $250 per kWh, which may indeed be possible given another decade of battery chemistry research and manufacturing technology development. Unless and until we see massive reductions in battery costs, however, PHEVs will be little more than vanity purchases for the green elite who can pay big premiums for status symbols.

We've all heard the mythology that PHEVs will save users buckets of money by using cheap electricity instead of expensive gasoline. The hard reality is that none of the HEV or PHEV options is a money saver for the consumer. To make matters worse, all of the planned PHEVs will be considerably less convenient and reliable than their less glamorous cousins. While I grew up with the family car and have a difficult time imagining life without one, it may be time for the industrialized world to consider a paradigm shift of the type proposed by Seeking Alpha contributor Bill James in his recent article "Personal Rapid Transit: Preempting the Need for Oil in Urban Transport."

The days of using any kind of energy to move 3,000 pounds of steel and 200 or 300 pounds of passengers at highway speed are over! We've just been avoiding that particular reality because it's unpleasant.

In a world where 6 billion people are working overtime to earn a small piece of the lifestyle 500 million of us take for granted, the idea that we can continue to waste any natural resources, including water, food, oil and battery materials, must be crushed. Personal rapid transit may not have all the comfort and convenience we've come to expect from a car, but it beats the heck out of forcing huge segments of America's working population to rely on electric bicycles and scooters.

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.


August 17, 2009

Biochar's Likely Market Impacts

Biochar is still mostly a research and cottage industry, yet it has the potential to impact returns for a broad range of investors.

Biochar, or amending soil with biomass-derived carbon, shows great potential to improve the productivity of soils, as well as to increase the utilization of fertilizers by plants, while sequestering carbon to reduce the drivers of climate change.  On August 10, I went to the 2009 North American Biochar Conference to look at the potential for investors. 

Before I went, I took a look at the publicly traded companies involved in biochar.  I did not learn of  any new public companies at the conference, but I have nevertheless become increasingly convinced that biochar has a large role to play in moving to a sustainable economy, not just for energy, but for agriculture.

While the biochar industry is still too early stage for most stock market investors, understanding the economics of biochar will give investors insight into the effects the broad use of biochar will have on the overall economy, and their other investments.  Many types of public companies are likely to be impacted.  Some industries likely to be affected are  

  • Agricultural and forestry companies, which may benefit from increased yields and an additional market for their products,
  • Advanced biofuel companies which may have to compete with biochar companies for feedstock, as well as for a place in low carbon fuel standards with a biofuel with a much lower carbon footprint, 
  • Any participants in environmental markets for carbon offsets, since biochar is likely to be a source of carbon credits.

Carbon Sequestration

Long-term carbon sequestration in the soil is the headline benefit of biochar.  Depending on how the biochar is made, it may stay in the soil for thousands of years.  Biochar has both volatile and fixed or "recalcitrant" carbon fractions.  The volatile fraction decays relatively rapidly, over a few years or decades, while the recalcitrant fraction stays in the soil for centuries or millennia.  The relative fractions depend on the feedstock and how the char is made, but debate continues about the best conditions and feedstocks for a high recalcitrant fraction, which can be the vast majority of the char.

As a potentially vast source of carbon offsets, biochar has the potential to reshape offset markets for carbon dioxide.  Although biochar is not currently accepted as an offset in any climate trading regime, many expect that it will soon qualify.  Peter Weisberg, an Offset Project Analyst at The Climate Trust not only expects that biochar will qualify as carbon sequestration, but says that The Climate Trust is interested in purchasing offsets from biochar projects.

If biochar does qualify for carbon finance, it will place downward pressure on the price of carbon offsets... to a point.  As anyone who has grilled a hamburger knows, char can also be burned to produce useful heat.  Anyone who buries char gives up the use of that energy.  I asked a couple experts what they thought might be the value of the forgone energy.  David Laird, a Research Soil Scientist at the US Department of Agriculture thinks the break even point would be about $10/ton of CO2, or about $30-$40/ton of carbon.  Dr. Joel Swisher,  Chief Technology Officer at carbon-offset provider Camco International, thinks the number is somewhere between $10 and $20 per ton of CO2, or about $50/ton carbon.

While these prices are higher than offsets currently trade on most exchanges, they also assume that the only benefit of incorporating biochar into the soil is the carbon sequestration aspect.  That is not the case.

Improved Soil

In all but the most optimal growing conditions, biochar increases plant productivity.   Although the mechanisms are not completely understood, most studies show that biochar allows plants to more effectively use Nitrogen and Phosphorus, as well as other nutrients that either occur naturally in the soil, or are added with either organic or inorganic fertilizers.  It also aids water retention.

The effects of this are significant increases in plant growth, especially in poorer soils or with limited fertilizer or water; heavily fertilized and higher quality soils show lesser effects.  In poor conditions, some studies have seen boosts to plant productivity by as much as 40%, although 15-25% is a more normal range, to judge by the studies presented at the conference.

This improved soil fertility has several benefits, each of which could serve as an added enticement for farmers to use char.  Because plants can use the available nutrients more effectively, a farmer should be able to use less fertilizer and still achieve a high rate of growth from his plants.  Not only does this save the farmer money, but because less fertilizer is used, and a greater fraction of it is taken up by plants, there is less resulting pollution in the form of fertilizer runoff and nitrous oxide formation. Nitrous oxide is a potent greenhouse gas and also depletes the ozone layer.

The cost savings from reduced fertilizer use, lowered irrigation costs from improved water retention, as well as any reduced costs of meeting environmental regulations may all have value to farmers which might induce them to sell biochar based offsets at prices below that dictated purely by the cost of the energy forgone.  

These reduced costs for farmers, as well as the potential new revenue streams from offsets and increased crop productivity add weight to my previous conclusion that investing in farms and other sources of biomass feedstocks is one of the best ways to benefit from bio-energy (biofuels, as well as biomass based electricity and biomass cofiring.)

Other Commodities

Increased plant productivity with bichar may eventually increase the supply of available biomass for bio-energy applications and food.  This may benefit the economics of any biofuel technology, but I expect the gains to only be marginal, since most biofuels are commodity businesses, and an increase in feedstock supply may increase volume, but is unlikely to improve long term margins.

Reduced fertilizer use might also be expected to reduce prices in fertilizer markets, but to the extent that fertilizer is made from commodities such as natural gas (which have a wide variety of other uses,) the effect on fertilizer prices can also be expected to be marginal.

Renewable Energy

The whole story, however, is not just the char.  During pyrolysis, a whole range of volatile organic compounds are emitted from the biomass feedstock, and these can be used to 

  1. Produce bio-oil, which can be upgraded into liquid fuel.  The company Dynamotive (DYMTF.OB) is working to commercialize this process, as I discussed in my investing in biochar article.
  2. Fuel a generator to produce electricity.
  3. Produce heat for some other process.

The choice between these options depends on a range of factors, most importantly scale and if there is a local need for heat.  

Some biomass feedstocks, such as poultry litter are available in massive quantities in a single location.  This allows the use of a larger scale plant, and hence will most likely lend itself to the production of higher value energy which requires more processing, such as bio-oil based liquid fuel.  Hence, if a liquid fuel production process is widely adopted, it may not only help the company which commercializes it, but it may also produce significant added value and clean up a pollution problem for producers of concentrated biowaste, such as poultry producer Tyson Foods (TSN).

The specific type of biomass also affects the use of the volatile organics.  Some sorts of biomass, such as corn stover, contain large amounts of silica or other impurities which can cause buildup in electric generators and add to maintenance costs.  In such cases it may make more sense to produce bio-oil or heat, rather than electricity.

Heat can be produced by directly burning the volatile organics, or recovered in a combined heat and power operation when generating electricity. Generating heat is the simplest process, and hence will lend itself most readily to distributed biochar facilities.  The catch is that, in order to capture the economic value, there has to be a local use for the heat.

One practical variation is the use of specially designed efficient cookstoves in the third world.  These are optimized to both improve cooking efficiency, indoor air quality, and biochar production.  Biochar advocates hope this approach could impact developing nations in a number of significant ways including improved health of woman and children, improved nutrition from the garden amendment, and decrease the need for biomass in cooking due to improved cook stove efficiency.

Even if the heat is not used, however, it is important to flare the gasses released when creating biochar, since volatile organics are pollutants in their own right.

Conclusion

Biochar, although a simple technology, is still at a very early stage of commercial development.  Nevertheless, stock market investors would be wise to be aware of the broad ranging effects the industry might have on carbon trading, biofuel, fertilizer, and agricultural markets.  Even these industries may not be a complete list: There is ongoing research into using biochar for remediation of mine tailings.  Backyard gardeners may also be able to improve their productivity and reduce fertilizer use by incorporating biochar into their soil.  

It is important to note that not all biochars are created equal.  Most biochars are slightly basic, and will produce greater benefits in acidic soils.  It's worth knowing the properties of what you plan to be putting in your soil before you incorporate it.  It's also worth noting that biochar has its greatest effects when combined with small to moderate amounts of conventional or organic fertilizers, since biochar is not a fertilizer in and of itself, but rather helps plants make better use of the nutrients in fertilizer.

Mantria sells a commercial biochar called EternaGreen from a biochar plant in Tennessee, with a distribution center in Georgia. I hope this is just the first of many, so most of us will be able to use biochar without having to worry about the carbon footprint of shipping.  Or, rather than waiting, we can make (probably lower quality/less recalcitrant) biochar ourselves.

DISCLOSURE: None.

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

 

August 16, 2009

Western Lithium to Profit from Electric Car Stimulus

Jason Hamlin

The lithium market is buzzing as GM, Nissan and other car manufacturers get set to roll out a new series of electric cars that will greatly increase demand for the obscure silver-white alkai metal. GM has announced plans to construct a $43 million plant in Michigan to build lithium-ion batteries for its Chevrolet Volt electric-powered car, which captured headlines with its claim of 230 miles per gallon.

Adding to the lithium mania is Washington’s support in the form of $2 Billion in stimulus funding:

“New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea. Well I do not accept a future where the jobs and industries of tomorrow take root beyond our borders –and I know you don’t either. It is time for America to lead again.”

- President Obama

For those with concerns that fuel efficiency alone is not enough to entice America’s automobile consumer, consider the company Tesla Motors. While their roadster is the first production automobile to use lithium-ion battery cells and travel more than 200 miles per charge, it is also capable of doing 0-60 in under 4 seconds. Not only will the Tesla Roadster leave most sports cars in its dust, the car recently set a distance record in April 2009 when it completed the 241-mile Rallye Monte Carlo d’Energies Alternatives with 36 miles left on the charge. While the Roadster’s price tag may be out of reach for the average consumer at just over $100,000, Tesla has taken more than 1,000 reservations for the car and expects to begin production of an all-electric and more affordable sedan starting in late 2011. While Tesla remains a private company whose stock you are unlikely to get your hands on, their success bodes well for the future of lithium battery-powered cars.

Lithium prices have nearly tripled over the past decade with 22% compound annual growth since 2000 for use in laptops, cell phones and other electronics. While this demand is expected to continue rising, the recent lithium mania has been ignited by the fact that electric cars require about 3,000 times the lithium needed for an average cell phone or 100 times the lithium used in a computer battery. This huge spike in demand should propel lithium prices much higher over the next few years. Investors are eager to get ahead of the curve and are scrambling to find the companies that stand to benefit most from this new demand.

While most investors turn to the world’s largest lithium producer, Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM), only a small percentage of their revenue is derived from lithium sales. SQM generates the bulk of their sales from iodine and specialty fertilizers for the agriculture sector.

Western LithiumMy preferred way to profit from the coming lithium boom is through the company Western Lithium (CVE: WLC or PINK: WLCDF), which owns the largest known lithium deposit in North America. The near surface lithium clay deposit is located in Nevada, USA and was initially discovered by the US Geological Survey and Chevron USA in the 1970’s. Engineering work completed by Chevron, and later by the US Bureau of Mines in the 1980’s, is now being advanced by Western Lithium.

The company’s flagship Kings Valley property has a National Instrument 43-101 resource estimate for the initial stage of development and in total hosts a historically estimated 11 million tonnes of lithium carbonate equivalent (LCE). The project has a well developed local infrastructure and Nevada has a long history in the metals and industrial mineral mining industry. The company plans a scoping study during Q3 of 2009, a pre-feasibility study with results from additional drilling during 2010 and projected production by 2013. A chart with the world’s largest lithium deposits is below (click on the chart for an enlarged image).

Top Lithium Producers

Western Lithium is well-funded and debt free with CDN$7.3 million (US$6.7 million)) cash on the books. They recently completed a CDN$5.5 million (US$5.0 million) private placement in May of this year and have a market cap of CDN$70 million (US$63.8 milllion). As you can see below, the stock has broken out recently on heavy volume. While some might view the stock as overbought, I believe lithium mania is only getting started and that Western Lithium will outperform its peers both in the short and long term. Despite the recent spike in price, shares are selling at a premium of just 20% to their highs which were put in well before the recent flurry of bullish news. The last time the stock made a move like the current one, it continued to produce a gain in excess of 800%!

We might not know for sure “Who Killed the Electric Car?,” but it appears to be making an impressive resurrection.

western lithium stock

DISCLOSURE: The author is long Western Lithium

Jason Hamlin owns the
Gold Stock Bull. The Gold Stock Bull Portfolio is up 115% year-to-date in 2009 with a record of 29 profitable trades and 14 losing trades. Click here for more information or click here to get started right away.

Want to write a guest article for AltEnergyStocks.com? Write us! We're always looking for a fresh perspective on investing, alternative energy or both.    

August 14, 2009

NanoMarkets LLC Forecasts $8.3 Billion Annual Market For Smart Grid Batteries By 2016

In August of last year I wrote an article titled "Grid-based Energy Storage: Birth of a Giant." Over the last 12 months I've written a series of follow-on articles that discuss the principal classes of manufactured energy storage devices and the companies that are making or planning to make products for smart grid energy storage applications. My entire archive of articles on the energy storage sector is available here.

One of the biggest problems I've encountered over the last year has been a dearth of reliable third party information that can help investors understand the breadth and depth of the business opportunity, and sift through the frequently contradictory claims of energy storage device manufacturers that plan to target the smart grid as a principal market. Since energy storage investors are generally well-informed and frequently opinionated, most of my articles have lengthy comment streams that round out my perspective and are usually more interesting than the articles themselves.

Two weeks ago I ran across a story on greentechgrid that said NanoMarkets LLC, a leading market research firm from Glenn Allen, Virginia, was predicting that the global market for storage batteries and ultracapacitors on the smart grid would grow from its current level of $326 million to $8.3 billion by 2016. Since the market size and growth rate estimates were very impressive and I track many of the companies identified in the greentechgrid story, I contacted NanoMarkets to see if they would send me a complimentary copy of their report.

A little over a week ago I received a copy of NanoMarkets 102 page report titled "Batteries and Ultra-Capacitors for the Smart Power Grid: Market Opportunities 2009-2016." I've been like a kid in a candy store ever since. While the $2,995 report is a little pricey for individual investors, it's a must read for institutions and other large investors that are analyzing opportunities in the energy storage sector. It's also a wonderful planning tool for companies that are developing go to market strategies for manufactured energy storage devices. Individuals who want to better understand how the smart-grid market is likely to develop and grow over the next several years can gain important insight from a free June 2009 NanoMarkets white paper titled "Plug In to Materials Trends for Smart Grid Applications." NanoMarkets has agreed to offer a $500 discount on the full report to my readers who contact Robert Nolan (rob@nanomarkets.net) and mention this article.

Unlike forecasts from storage device manufacturers and stock market analysts who tend to focus on how a particular product, technology or company might fit in an emerging market, NanoMarkets approached the issue of smart grid storage from the end-user's perspective; meaning that they identified the customer's needs first and then focused on the companies that had cost-effective solutions for those needs. The principal near-term applications identified by NanoMarkets are:
  • Load leveling and power quality systems to protect commercial and industrial users from brief power interruptions that cost an estimated $75 to $200 billion per year in lost time, lost commerce and damage to equipment;
  • Peak shaving systems to help commercial and industrial users manage their electricity costs under variable utility tariffs and help utilities manage generating assets to minimize waste;
  • Transmission and distribution support systems to help utilities reduce grid congestion, defer upgrades and minimize waste; and
  • Renewables integration systems to help power producers, utilities and end users cope with the inherent variability of wind and solar power and better match peak wind and solar output with peak demand.
In evaluating the likely development path for energy storage devices on the smart grid, NanoMarkets considered a variety of competing technologies including pumped hydro, compressed air, flywheels, chemical storage batteries, ultracapacitors and superconducting magnets. They ultimately concluded that:
  • Pumped hydro and compressed air had limited growth potential because of geographical and geologic constraints;
  • Flywheels and superconducting magnets were not likely to be widely used beyond niche applications because of their cost and complexity; and
  • Absent a revolutionary breakthrough in cycle life and cost, lithium-ion batteries will have limited application in the smart grid.
From my perspective one of the most refreshing aspects of the NanoMarkets report was their belief that storage systems for the smart grid will be chosen based on fundamental cost-benefit analysis. Equally important was their conclusion that emerging technologies would increase the overall demand for storage and result in rapidly increasing revenue for all product classes. So instead of facing a situation where an emerging technology takes sales away from an established technology, each class of technology can expect rapid sustained growth over the entire forecast period. When the forecasts for individual product classes are stacked on top of each other, it's easy to see why I believe the smart grid storage market will reach explosive growth rates by 2016. The following graph provides a consolidated summary of NanoMarkets' forecast for each of the principal battery classes over the next eight years.



I can't begin to do the NanoMarkets report justice in the limited confines of a financial blog. They thoroughly discuss the economic drivers and development path for each of the principal smart grid markets; carefully review each of the energy storage technologies that have significant potential in the smart grid market; identify the leading developers of energy storage devices for the smart grid; and break their sales forecasts down by both specific applications and geography. If NanoMarkets' forecast is even close to being right, the next decade will be a period of explosive growth for:
  • Sodium battery manufacturers like NGK Insulators (NGKIF.PK) and General Electric (GE) that can look for annual revenue in their sub-sector to grow by $1.3 billion over the next eight years;
  • Supercapacitor manufacturers like Maxwell Technologies (MXWL) that can look for annual revenue in their sub-sector to grow by $1 billion over the next eight years;
  • Lead-acid battery manufacturers like Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP) that can look for annual revenue in their sub-sector to grow by $2.4 billion over the next eight years;
  • Lead-carbon battery manufacturers like Furukawa Battery (FBB.F), Axion Power (AXPW.OB) and Firefly that can look for annual revenue in their sub-sector to grow by $2.75 billion over the next eight years; and
  • Flow battery manufacturers like ZBB Energy (ZBB) that can look for annual revenue in their sub-sector to grow by $499 million over the next eight years;
For energy storage investors who truly want to understand where the smart grid energy storage device market is today and how it is likely to develop through 2016, the NanoMarkets report could well prove to be the soundest investment of all.

DISCLOSURE: Author is a former director Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds a small long positions in Enersys (ENS), Exide (XIDE) and ZBB Energy (ZBB).

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

August 12, 2009

Vinod Khosla on the Future of Lithium-ion Batteries

John Petersen

On Monday of this week, the treehugger blog published a guest essay from Vinod Khosla that clarified his stance on the future of next generation lithium-ion batteries. The essay was prompted by "blog chatter" about an article in Earth2Tech where he was quoted as saying that lithium-ion batteries are overhyped. Since the Khosla essay included a link to my article "Why Lead-Carbon Batteries Will Deflate the Li-ion Bubble," I think it's important to tell readers that Mr. Khosla has written his own essay on the subject and encourage them to get the full story straight from the source.

The essay from Mr. Khosla is available here.

While we use different terms to frame the issues, it's pretty clear that Mr. Khosla's views of the lithium-ion battery sector are not all that different from mine. We both question the ability of leading lithium-ion battery developers to move down the cost curve and up the performance curve over the next five years. We both believe that without disruptive advances in cell design, battery chemistry and manufacturing technology, the market for PHEVs and EVs will be limited to a small fraction of the potential market. We both hope ongoing R&D will lead to the disruptive advances the industry needs. And we're both a little skeptical about EEstor.

After spending a good deal of time analyzing the Khosla essay, about the only place we disagree is his suggestion that "Even the old lead acid battery suppliers like Firefly and other lead acid battery makers are making a play to reach the electric car specifications."

I've always been very careful to respect the difference between cars that use electric drive to supplement internal combustion engines and cars that use internal combustion engines to supplement electric drive.

That difference is a plug.

I firmly believe advanced lead-acid and lead-carbon batteries will be a dominant technology for micro, mild and full HEVs. I do not expect them to be the first choice for PHEVs and EVs where battery size and weight are mission critical constraints. The only clear exception to my general view is gas guzzler to dual mode EV conversions.

Last November I wrote "Alternative Energy Storage is an Investment Tsunami," which began with a Khosla quote that “500 million people on earth enjoy a lifestyle that 9 billion people will want in 2050.” This quote had a profound impact on my thinking and has gradually morphed into a frequently repeated theme that 6 billion people already know about the lifestyle that 500 million of us enjoy and every single one of them wants to earn his piece of the dream. The trick will be finding a way to raise the standard of living in developing economies without crushing the standard of living in developed economies. For that to happen without catastrophic conflict and horrific environmental consequences, the world must find relevant scale solutions for persistent shortages of water, food, energy and virtually every commodity you can imagine.

Since I admire Mr. Khosla, I deeply regret any trouble I may have caused by not spending more time discussing his vision of the opportunities in next generation lithium-ion batteries. A favorite theme of mine comes from William Martin's novel The Lost Constitution, “In America we get up in the morning, we go to work and we solve our problems.” Solving our energy and carbon emission problems is a daunting task that will take decades and probably never be complete. In the meantime, we need to go to work with the tools we have and be ready to embrace new tools when they're developed. I don't view advanced lead-acid and lead-carbon batteries as the be all and end all of energy storage. They are, however, key bridging solutions that can help us get from where we are to where we need to be.

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.

August 11, 2009

The Performance Of Solar PV Systems

Aug 11-09 Solar PV Charles Morand

A couple of weeks ago, I noted the importance of examining parameters other than module costs when gauging the economic competitiveness of solar PV energy. I noted how multiple factors influence the levelized cost of energy produced by solar PV systems, and thus its relative cost position on the grid. Nothing new here.  

However, besides standard test conditions (STC) conversion efficiency, or nameplate conversion efficiency, public data on parameters other than cost per watt-peak is not always easy to come by. That's why I found reading "Potential of photovoltaic systems in countries with high solar irradiation", a paper about to be published in the journal Renewable and Sustainable Energy Reviews, particularly interesting.

The Study

In the authors' own words, the paper reports the results of the following study (funded by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU)): 

Thirteen grid-connected PV systems of nominal power 1 kWp each have been installed in Nicosia, Cyprus and Stuttgart, Germany [...] providing the opportunity for direct comparisons under the different climatic conditions of the two countries.

More specifically, the installed PV technologies [...] consist of twelve fixed plate mounted systems, a two-axis tracking system and a flatcon concentrator system. The systems range from monocrystalline, multi-crystalline silicon to amorphous silicon, CdTe, CIGS, HIT-cell and other solar cell technologies from a range of manufacturers such as Atersa, BP Solar, Mitsubishi, Sanyo, Solon, SunPower, etc.

The PV modules are mounted on mounting racks at the optimal inclination to provide maximum annual yield for each respective location.

This study thus examines the performance of the main commercially-available solar PV cell technologies under the same real-world conditions, rather than in the lab. The annual solar irradiation measured on-site at the ideal inclination was 1997 kWh/m2 in Cyprus and 1460 kWh/m2 in Germany. This equates to roughly 5.5 kWh/m2/day and 4.0 kWh/m2/day, respectively. The NREL Photovoltaic Solar Resource map provides a rough guide to equivalent US locations, while Solar4Power's global maps do the same for the rest of the globe.    

The systems were initially deployed in June 2006 and the data reported is for the first year of operation, so until June 2007.

The systems under study are as follows:

Manufacturer (Ticker) Technology System Power (Wp) Size (m2) Nameplate Module Efficiency (%)
Atersa (uses Q-Cells cells, QCLSF.PK)   Mono-crystalline silicon (tracker) 1020 7.90 12.9
Atersa (uses Q-Cells cells, QCLSF.PK) Mono-crystalline silicon 1020 7.90 12.9
BP Solar (BP) Mono-crystalline silicon (Saturn-cell) 1110 7.52 14.8
Sanyo (SANYY.PK) Mono-crystalline silicon (HIT-cell) 1025 6.26 16.4
Suntechnics (Uses Sunpower cells, SPWRA) Mono-crystalline silicon
(back contact-cell)
1000 6.22 16.1
Schott Solar (Private) Multi-crystalline silicon (MAIN-cell) 1020 7.87 13.0
Schott Solar (Private) Multi-crystalline EFG silicon 1000 8.58 11.7
SolarWorld (SRWRF.PK) Multi-crystalline silicon 990 7.82 12.7
Solon AG (SGFRF.PK) Multi-crystalline silicon 1540 11.50 13.4
Mitsubishi (MIELY.PK) Amorphous silicon (single cell) 1000 15.74 6.4
Schott Solar (Private) Amorphous silicon (tandem cell) 960 18.00 5.4
First Solar (FSLR) Cadmium Telluride 1080 12.96 8.3
Wurth (Private) Copper–Indium–Gallium–
Diselenide
900 8.75 10.3

The study uses energy yield - kWh produced divided by nameplate kWp - to directly compare the performance of each system. Theoretically, this should normalize out conversion efficiency differences between the various systems and, because other key factors such as inclination are kept equal, the performances of the systems should be roughly equal.

The figure below displays the annual energy yield for the Cyprus location. Ignoring the tracker-equipped system, we note some non-trivial differences in AC energy yields between the various systems, with the Suntechnics (SunPower), Wurth, Sanyo and First Solar systems performing best, and the BP Solar and Schott a-Si systems performing worst.    
Fig 1 - energy yield by system cyprus.bmp


The figure below depicts the energy yield by season for the Cyprus location. As can be noted, the thin-film technologies (a-Si, CIGS and CdTe) tend to have higher energy yields in the summer months than most crystalline technologies, but perform in roughly similar fashions or even slightly worse in winter months.

Fig 2 - energy yield by season cyprus.bmp

The seemingly wider variations between summer and winter months for thin-film systems are not actually due to the properties of thin-film materials, but rather to the properties of crystalline materials. The table below displays deviation from the average AC energy yield across all systems, as well as the MPP power temperature coefficient. The latter metric shows the drop in system power per one kelvin increase in temperature.

As can be noted, overall, the crystalline technologies tend to experience much greater performance declines under warmer conditions than do their thin-film brethrens. The authors note that the technologies with the lowest MPP power temperature coefficients showed the highest average energy yields during the summer period. 

Fig 3 - deviation and temperature.bmp


The phenomenon discussed above is perhaps best captured by the graph below, which displays seasonal module efficiency for the Cyprus systems. Once again, by-and-large, thin-film technologies tend to experience much lower drops in efficiency with higher temperatures than do crystalline technologies, with the First Solar CdTe system showing the most stability.

The authors note that the systems installed in Cyprus showed a lower average measured performance ratio than those installed in Germany because of higher temperatures.

Fig 4 - pv module efficiency.bmp

Conclusion

A couple of fairly obvious insights emerge from this article.

First, at least for the time being, crystalline technologies retain an edge over thin-film for applications where available space is an issue. Lower efficiencies in thin-film are forcing much larger system sizes, as depicted in the first table above. The urban roof-top market thus remains crystalline technologies' domain.

However, and far more interestingly in my opinion, thin-film technologies' relative performance stability in warm weathers, as demonstrated by lower MPP power temperature coefficients, makes them superior alternatives for areas where temperatures between seasons range from very hot to hot, and where module temperatures are likely to be fairly high year-round. In Cyprus, according to data in the study, average monthly temperatures stood near or below 15 degrees Celsius (~60 degrees Fahrenheit) during six months out of the whole year. Several potenially large markets will show much higher temperatures throughout the year.    

Incidentally, such regions could become, because of their solar irradiation regimes, very attractive solar PV markets. Areas such as India, North Africa, the Middle East and Australia all come to mind (the scale shows kWh/m2/day).

India recently announced it would be targeting 20 GW installed by 2020, and it was reported that it would institute a production-based incentive, which generally takes the form of a production tax credit or a feed-in tariff. In regions of Southern India with very hot summers and hot winters, thin-film technologies would probably offer the best alternative for ground-mounted installations, which will likely spring up in fields across the region if the incentive is generous enough.

DISCLOSURE: None                   





August 10, 2009

Why I'm Long Active Power

10.08.09 ACPW John Petersen

This morning I awoke to a comment from Seeking Alpha contributor Michael Eisenberg who asked me to lay out my core thesis on why Active Power, Inc. (ACPW) merits attention from investors who are interested in the energy storage sector. While Altenergystocks and Seeking Alpha don't generally like to publish articles about companies that trade for under a dollar, I believe Active Power merits an exception to the general policies.

As regular readers know, I've been a small company securities lawyer for almost 30 years and immersed in the energy storage sector since early 2004. During my career I've had many clients in diverse industries succeed and fail. While their businesses have all been quite different, they invariably go through the same stages of initial excitement over a novel idea, disenchantment as the business model proves difficult and costly to implement, and sustained growth when diligent pursuit of the business model begins to bear fruit. In many ways the life cycle of a small company is like a marriage that begins with an overly optimistic honeymoon, gets rocky for a period of years as the reality of paychecks and budgets sinks in, and then strengthens over time to become something valuable and enduring.

My favorite example of a typical small company growth cycle is J2 Global Communications (JCOM), a company that I got to know first as a customer and then as a stockholder. J2 went public in July 1999 in at an IPO price of $9.50 per share (market capitalization $312 million) and its stock price immediately began a gradual downhill slide to a low in the $0.30 range (market capitalization $16 million). While the market obviously hated the stock, I loved the service, believed J2 had a bright future and bought its stock in the $0.50 range. After living through the indignity of a reverse split, J2's stock price recovered nicely and I ended up selling for a triple in late 2002, which proved to be dreadfully premature. The full trading history of J2 is summarized in the following graph.



I began researching Active Power last fall because they manufacture and sell uninterruptible power supplies based on a flywheel technology that's similar to what Beacon Power (BCON) is developing for grid-based applications. While Active Power's focus is data centers and other facilities that need extraordinary power quality and reliability, its solutions should be easy to scale up as demand for grid-based systems develops. When I first began comparing the two companies, Beacon was sporting a market capitalization of $80 million and Active Power was limping along with a market capitalization of just $24 million. When it came to business fundamentals, however, Active Power had a comparable product, comparable stockholders equity, smaller operating losses and a far more impressive business history. That led me to the inescapable conclusion that Active Power had attractive upside potential while Beacon had worrisome downside risk.

Active Power went public in August 2000 in an IPO price of $17 per share (market capitalization $640 million) and after an initial run-up; its stock price began to tank. The price ultimately decayed to the point that even after a reverse split it traded as low as $0.22 per share last winter. The full trading history of Active Power is summarized in the following chart.



While Active Power's stock price chart tells a tale of unmitigated disaster, the selected financial data from its last Form 10-K tells an entirely different story; a story of sustained growth, improving margins and declining losses (click on figure for a larger view). In other words a management team that’s had the courage to stay the course even when times got tough is successfully implementing their business plan.



During the first six months of 2009, Active Power booked a 24% year on year sales growth and improved its gross profit margin from 12% to 26%. In my view these are solid performance metrics for a small company in recessionary times.

I bought Active Power in the fourth quarter of last year at $0.26 per share because I saw the same long-term pattern developing that I experienced with J2. So far the investment has been very good for me and its market value has increased by 185% in eight months. Since I believe Active Power is turning an important corner in its business development and I'm convinced that overall growth in the energy storage sector will be spectacular for decades, I won't be anywhere near as quick on the trigger as I was with J2. I may even buy a little more.

DISCLOSURE: The Author is long Active Power


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.

August 07, 2009

Clean Energy Stocks Shopping List: Index and Bonus Picks

Index to the Clean Energy Shopping List Series, and a few Bonus Stocks.

Tom Konrad, Ph.D., CFA

I started my "Clean Energy Shopping List" series on the premise that the market was near a peak, and it would be better to wait than to buy now.  My market call turned out to be premature (or just plain wrong... time will tell) and the market has since advanced more than I thought it would.  But I feel the challenges facing our economy and financial system are too grave not to bring down the market from its current heights eventually, so each rise simply makes me more bearish.

However, I feel the shopping list series is getting tired (or at least I'm getting tired of it), so I'm going to end it now, with just a list of stocks in the series and the articles that cover them.  In addition, I'll throw in the few companies I've been thinking about using but have not made it in so far. 

Article

Companies
Clean Transportation Stocks NFYIF.PK, PRPX, FGP.L, WAB, PTRP
Energy Efficiency stocks   ERII, LXU, WFFIF.PK, FLIR, CREE
Electric Transmission Stocks BGC, ABB, PIKE, MTZ, PWR
Landfill Gas and Geothermal Stocks WMI, VE, ORA, RZ, NGPLF.PK
Solar Stocks SMLNF.PK,  SATC, PWER, STG.V, AEIS
Smart Grid Stocks BCON. AMSC, ELON, ITRI, TLVT

It's also worth noting that soon after I included Raser Technologies in my Geothermal Shopping list, I decided that the sale was already on, and decided to buy now.  The company is holding above the $2.00-$2.05 range at which I bought it, but it will be interesting to see if it continues to hold if the downturn I expect materializes.

Bonus Picks

All along, I've been thinking about writing a list of battery stocks I like, but John does that so well, I've decided just to reference him.  Among the battery stocks John follows, the ones I'll be looking to scoop up if they fall in a general market decline are the ones he refers to as "Cheap" (in reference to the value of their products, not necessarily the stock prices.) I like both the "Cheap Sustainable" group that can fund their operations out of existing cash flow, and the "Cheap emerging" ones developing new inexpensive battery technology.  Here are John's lists of battery stocks.

There are also a couple other efficiency stocks that didn't make the list... I was thinking about doing a second list of five, but instead I'll just give you three honorable mentions here: Owens Corning (OC), Linear Technology Corp (LLTC), and Power Efficiency Corp (PEFF.OB).

Thaaat's All Folks!

For a guy who said at the start of the year that I wanted to reduce my individual positions to no more than 50 companies, I clearly have conflicts: I just listed 39 companies I'd like to buy (at the right price.)  At least I already own 2/3 of  the list.  But it's clearly time to stop while I'm behind.  

I just noticed I didn't list any wind stocks.  There's always FAN...

DISCLOSURE: Tom Konrad and/or his clients own AMSC, ELON, ITRI, TLVT, SATC, STG., WMI, VE, ORA,  RZ,  NGLPF, BGC, ABB, SI, PIKE, MTZ, PWR, ERII, LXU, WFIFF, FLIR, CREE, NFYIF, PRPX, OC, LLTC, and FAN.  PEFF is an advertiser on AltEnergyStocks.com


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

August 05, 2009

President Obama Announces Battery Manufacturing Grant Awards

John Petersen

During his address today at Navistar International's (NAV) facilities in Elkhart, Indiana, President Obama announced a total of $2 billion in ARRA battery manufacturing grants and another $400 million in Recovery Act awards for transportation electrification. The complete list of grant recipients, most of whom are private companies, is available here. The recipients of $1.25 billion in the primary class of grants for cell and battery manufacturing facilities are as follows:

Johnson Controls
JCI
$299.2
Production of nickel-cobalt-metal battery cells and packs, as well as production of battery separators (by partner Entek) for hybrid and electric vehicles.
A123 Systems
IPO pending
$249.1
Manufacturing of nano-iron phosphate cathode powder and electrode coatings; fabrication of battery cells and modules; and assembly of complete battery pack systems for hybrid and electric vehicles.
Dow Kokam
DOW
$161.0
Production of manganese oxide cathode / graphite lithium-ion batteries for hybrid and electric vehicles.
Compact Power
Private (Sub. of LG Chem)
$151.4
Production of lithium-ion polymer battery cells for the GM Volt using a manganese-based cathode material and a proprietary separator.
EnerDel
HEV
$118.5
Production of lithium-ion cells and packs for hybrid and electric vehicles. Primary lithium chemistries include: manganese spinel cathode and lithium titanate anode for high power applications, as well as manganese spinel cathode and amorphous carbon for high energy applications.
General Motors  ???
$105.9
Production of high-volume battery packs for the GM Volt. Cells will be from LG Chem, Ltd. and other cell providers to be named.
Saft America
SGPEF.PK
$95.5
Production of lithium-ion cells, modules, and battery packs for industrial and agricultural vehicles and defense application markets. Primary lithium chemistries include nickel-cobalt-metal and iron phosphate.
Exide Technologies with Axion Power
XIDE
AXPW.OB
$34.3
Production of advanced lead-acid batteries, using lead-carbon electrodes for micro and mild hybrid applications.
East Penn Manufacturing
Private
$32.5
Production of the UltraBattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications.

Additional awards to other publicly traded companies include:

Celgard/Polypore
PPO $49.20
Production of polymer separator material for lithium-ion batteries.
Honeywell
HON $27.30
Production of electrolyte salt (lithium hexafluorophosphate (LiPF6)) for lithium-ion batteries.
BASF Catalysts
BASFY.PK $24.60
Production of nickel-cobalt-metal cathode material for lithium-ion batteries.
FutureFuel
FTFL.OB $12.60
Production of high-temperature graphitized precursor anode material for lithium-ion batteries.
General Motors
??? $105
Construction of U.S. manufacturing capabilities to produce the second-generation GM global rear-wheel electric drive system.
Delphi
??? $89.30
Expansion of manufacturing for existing electric drive power electronics components for both passenger and commercial vehicles.
Ford Motors
F $62.70
Producing a Ford electric drive transaxle with integrated power electronics in an existing Ford transmission facility.
Magna E-Car Systems
MGA $40
Increasing production capacity of advanced automotive electric drive system component manufacturing plants located in the U.S.
Kemet Corporation
KEM $15.10
Production of DC bus capacitors including soft wound film and stacked film capacitors necessary for electric drive system power electronics.

On balance, I'd say my predictions from earlier today were not too far off the mark. I was particularly pleased (OK it was closer to "this is almost better than sex") to see that Exide Technologies (XIDE) will receive a $34.3 million grant with Axion Power International (AXPW.OB) for the production of advanced batteries using Axion's proprietary lead-carbon electrode technologies. While sharing of the grant funding will apparently have to be clarified during the contract negotiation phase, the boost to Axion's future revenue and technical credibility will be substantial. I was also happy to see that East Penn will receive an additional $32.5 million for the production of advanced lead-carbon batteries based on the Ultrabattery technology developed by Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO).

While these grants for advanced lead-carbon batteries pale in comparison to the huge amounts allocated to lithium-ion battery manufacturing, they show a clear recognition that the micro and mild hybrid markets will be very important over the next decade and go a long way toward confirming what I've been telling readers for months, that lead-carbon is a game changer for alternative energy storage.

I look forward to reading the press releases from the award recipients which will undoubtedly provide more detail.

ED NOTE: One more: UQM Technologies (UQM) gets $45M.


DISCLOSURE: Author is a former director 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.

My ATVM Loan and ARRA Battery Grant Preview

John Petersen

The next few days are going to be a very exciting time in the energy storage and electric vehicle sectors because the Obama Administration is preparing to announce a series of major ATVM Loan and ARRA Battery Manufacturing Grant awards.

President Obama will be in Elkhart, Indiana where he will presumably announce an ATVM loan to Navistar (NAV) and may announce some additional ATVM loans or ARRA battery grants. Vice President Biden will be in Detroit where he is scheduled to announce one or more ARRA battery grants and perhaps some ATVM Loans. Secretary Chu will be in Charlotte, North Carolina where he will presumably announce an ARRA battery grant to the Celgard subsidiary of Polypore International (PPO) and may announce other ARRA battery grants or ATVM loans.

I've resisted the temptation to wade in and predict the likely winners of the ARRA Battery Grant contest because there are so many deserving companies and many of them are privately held. But since The Wall Street Journal is making predictions I guess there's no harm in handicapping the "Cell and Battery Pack Manufacturing Facilities" category which is expected to include 7 to 8 awards of $100 to $150 million each. My list of likely grand prize winners is:

1.   A123 Systems;
2.   Ener1 (HEV);
3.   JCI/Saft, a joint venture between Johnson Controls (JCI) and France's Saft Batteries (SGPEF.PK);
4.   General Electric (GE); and
5.   Somebody from the lead-acid battery sector.

Trying to round out the top tier list with any more detail is almost impossible and while I have my personal favorites, my opinion and $5 will get you a cup of coffee at Starbucks (SBUX).

The original funding opportunity announcement broke the ARRA grants down into several categories as follows:

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

I have a hard time imagining that the Administration will announce a total of 32 to 37 grants in just three events. Accordingly I expect the process to draw out at least into tomorrow and perhaps into next week. In any event, I suppose we'll know more this afternoon than we do this morning.

DISCLOSURE: None

August 04, 2009

When Market Calls are Wrong

Tom Konrad, Ph.D., CFA.

My recent market call now looks premature.  What lessons can we learn?

When we make market predictions, we will inevitably be wrong some of the time.  I stuck my neck out at the start of June, saying "We're near the peak."  I later gave some numbers to allow readers to objectively judge if that call was right or wrong.  I said that we should consider it an accurate call if the S&P 500 fell 20% (to 756) before it rose 5% (to 992.)  The S&P 500 has not yet come near 756, but it closed at the end of July at 987, very close to my upper limit.  Although I remain bearish, I'm getting ready to admit that that market call was wrong, quite possibly before you read these words.

Why did I do it?

Before I made that call, I knew that the market had a good chance of proving me wrong.  At the time, I said "This is mostly a gut feeling, but when it comes to predicting market moves, most methods (including my gut) are pretty worthless."  Knowing that, why did I not just keep my mouth shut, and avoid subjecting myself to potential derision from readers?  Furthermore, why am I now highlighting my probable mistake when I could just as easily choose not to write about it and distract readers with an article about a hot wind or solar stock?

Because I value my own humility.  I write about many stocks to buy or sell, and it would be easy to find examples of outstanding performance, and forget about the calls that did not turn out so well.  One of the more important benefits I get from writing my thoughts about the market is a permanent record of what I was thinking when I made the choices I did.  Writing for an audience encourages me to work through and put down my thoughts at the time in much more detail that I would if I were just writing for myself.  

By reviewing old articles, and conducting regular performance updates, I have a much better idea of when I was right or wrong, and why, giving me an opportunity to learn from my mistakes.  The times I have been wrong also serve the valuable function of keeping me humble.  I believe that an investor who loses his humility will soon lose his money as well.

What can I learn?

I can't say I've learned much from this market call, since I already knew that most methods for predicting market moves (including my own) are pretty worthless.  I'm still bearish, now thinking that the market call was too early, rather than wrong about the direction of the market. But the too-early call (if that is what it turns out to be) has helped keep me in touch with my humility.

One reader recently asked

Why bother waiting to buy? Why not short the market and go long in these companies? Hedge out beta and you can take advantage of any edges these companies have without exposing yourself to the market. No waiting necessary.

The answer is simply because I know I could be wrong.  At this point, I am still bearish, and I have "hedged out Beta" as the reader described; my portfolio as a whole has a Beta of somewhere between -0.1 and 0.2, as well as much lower volatility than the market as a whole.  This means that I am unlikely to make or lose money due to moves in the market as a whole, although I can still make or lose money on my particular stock picks.  But if I were confident in my market calls, I would actually take my Beta negative with additional shorting, and make money as the market fell (or lose money as the market rose.)

I don't have that sort of conviction, and hence I wait in a neutral stance for either a market decline, or some other significant circumstance to change my mind.

The Benefits of Staying Out

Along the way, I talked a little about why it makes sense to get out of the market, even when you know you might miss a large upside move.  I noted that an investor who manages to miss the greatest annual market declines at the price of also missing the biggest annual gains still comes out ahead, and commented that "The same will hold true for potential monthly, or daily  returns."  I thought it might be useful to back up that statement with a decade of monthly returns. 

Standard and Poors provides a spreadsheet of monthly returns for the S&P500 here.  For the ten years from July 1999 to June of 2009, the total return was -20.1%.  The following chart shows the results of eliminating the n best and worst months over that period.

Total returns if an investor were to sit out of the stock market for the n best and/or worst months from July 1999 to June 2009.

Number of months missed Eliminating the best months only Eliminating the worst months only Eliminating both the best and worst months
0 -20.1% -20.1% -20.1%
1 -27.2% -4.0% -12.6%
2 -33.6% +7.7% -10.5%
3 -39.0% +20.5% -7.9%
4 -43.9% +32.6% -6.8%
5 -48.2% +45.6% -5.5%

While I would clearly have lost touch with my humility if I thought I might be able to accomplish the returns possible by only skipping the worst months in the market, it is more reasonable to assume that I might be able to miss the worst months if I were also willing to miss out on the best months.  

The asymmetric nature of stock market returns, with the bad months being worse than the good months are good means that this strategy also outperforms, as seen by the successively smaller negative returns in the last column.  Just to make sure that this is not an artifact of the past decade of lousy stock markets, I also looked at the whole period supplied by S&P:

Total returns if an investor were to sit out of the stock market for the n best and/or worst months from February 1988 to June 2009:

Number of months missed Eliminating the best months only Eliminating the worst months only Eliminating both the best and worst months
0 +482% +482% +482%
1 +422% +600% +528%
2 +376% +718% +569%
3 +334% +818% +583%
4 +296% +927% +598%
5 +263% +1030% +604%

As you can see, the pattern holds true, with the worst months hurting returns more than the best months help returns over the longer period.

In other words, it's worth looking like a fool by missing a really good month in the stock market if it also means that you avoid a really bad month at some other time.

DISCLOSURE: None

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

August 03, 2009

Alternative Energy Storage: Cheap is Still Outperforming Cool

John Petersen

The next couple months are shaping up as a time of extraordinary change in the energy storage sector. Events that will drive the change include:
So now seems like a good time to update the relative performance of the individual energy storage stocks I've been writing about for the last year.

The following table provides comparative price data for the short-list of pure play energy storage companies I track. It shows closing prices on November 14, 2008 and July 31, 2009, calculates the percentage of change over the last eight months, and calculates current market capitalizations based on recent SEC reports.



14-Nov 31-Jul Percent Market
Cool Emerging Symbol Close Close Change Cap
Ener1 HEV $6.75 $6.38 -5.48% $723.96
Valence Technology VLNC $1.88 $1.83 -2.66% $228.58
Altair Nanotechnologies ALTI $0.87 $0.97 12.14% $90.36
Beacon Power BCON $0.82
$0.76 -7.32% $90.62






Cool Sustainable




Maxwell Technologies MXWL $6.50 $14.16 117.85% $328.26
Advanced Battery ABAT $2.13 $4.28 100.94% $247.47
Ultralife ULBI $9.08 $6.42 -29.30% $108.88
China BAK CBAK $1.99 $3.31 66.33% $190.95
Hong Kong Highpower HPJ $3.50 $1.41 -59.71% $19.12






Cheap Emerging




Axion Power International AXPW.OB $1.30 $1.25 -3.85% $44.53
ZBB Energy ZBB $0.93 $1.30 39.78% $13.80






Cheap Sustainable




Enersys ENS $6.86 $19.79 188.48% $951.70
Exide Technologies XIDE $3.38 $4.87 44.08% $367.78
C&D Technologies CHP $1.94 $2.00 3.09% $52.59
Active Power ACPW $0.40
$0.74 83.75% $48.85

Between November 14, 2008 and July 31, 2009, a $1,000 index investment in the Dow Jones Average, the Nasdaq Index and the S&P 500 would have resulted in an average portfolio appreciation of 17.2%. The following table summarizes the portfolio gain or (loss) that would have resulted from an investment of $1,000 per company in each of my four groups.

Tracking
Percentage
Category Gain (Loss)
Cool Emerging
(0.8%)
Cool Sustainable
39.2%
Cheap Emerging
18.0%
Cheap Sustainable
79.9%

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



Shares Price/ Price/ Price/ Book Value
Cool Emerging Group Symbol (000s) Earnings Book Sales Per Share
Ener1 HEV 113,474
8.63 48.38 $0.74
Valence Technology VLNC 124,905

8.39 -$0.55
Altair Nanotechnologies ALTI 93,153
2.48 16.39 $0.39
Beacon Power BCON 119,239
3.67 519.28 $0.20
     Group Average


4.93 148.11 $0.20







Cool Sustainable Group





Maxwell Technologies MXWL 23,182
5.41 3.79 $2.65
Advanced Battery ABAT 57,821 14.31 2.88 5.04 $1.47
Ultralife Batteries ULBI 16,959 12.64 1.19 0.41 $4.92
China BAK CBAK 57,688
1.19 0.82 $2.74
Hong Kong Highpower HPJ 13,563 10.85 1.14 0.28 $1.23
     Group Average

12.60 2.36 2.07 $2.60







Cheap Emerging Group





Axion Power International AXPW.OB 35,625
7.25 42.09 $0.17
ZBB Energy ZBB 10,618
1.74 15.24 $0.74
     Group Average


4.50 28.67 $0.46







Cheap Sustainable Group





Enersys ENS 48,090 11.56 1.49 0.49 $13.43
Exide Technologies XIDE 75,519 7.49 1.09 0.11 $4.37
C&D Technologies CHP 26,296
1.11 0.15 $1.81
Active Power ACPW 66,458        
2.24 0.91 $0.30
     Group Average
54,091 9.53 1.48 0.42 $4.98

I have long argued that every energy storage decision boils down to a cost-benefit analysis and the bulk of the incremental sales revenue will flow to companies that serve the mundane needs of the average user, rather than the extreme needs of "power users." Based on his recent statement that lithium-ion batteries are overhyped, it appears that Vinod Khosla, one of Silicon Valley's most active cleantech investors, agrees with me. While I believe fundamental market drivers will result in rapid and sustained growth across the entire spectrum of energy storage companies, I’m convinced the superstars will be the manufacturers of objectively cheap products that can serve the needs of average users at a reasonable price. Until cheap group valuations approach parity with cool group valuations, I will continue to believe that investors who want to maximize portfolio performance in the energy storage sector should focus on the cheap groups instead of the cool groups.

DISCLOSURE: Author is a former director Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE), Enersys (ENS) Active Power (ACPW) and ZBB Energy (ZBB).

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

August 01, 2009

Windpower: Focusing the Criticism Away from NIMBYism and Aesthetics

Market-oriented policy analysts have not been shy about cataloguing the problems surrounding windpower development. But in the enthusiasm to oppose the government interventions accompanying wind generation, market-based analysts sometimes have strayed beyond principled defense of markets and unwittingly offered support to anti-market NIMBYism and other meddlesome sentiments. Policy analysts examining wind power issues should consider more carefully which issues ought to be pursued through the policy process.

Two Images

Wind power has two images. In one view, wind power is glamorous, hi-tech, future oriented and almost sexy. Advertisements for products from automobiles to watches to banking services casually feature tall, slowly spinning wind turbines in the background, hoping to suggest that the advertised product, too, is glamorous, hi-tech, and future oriented, and maybe a bit sexy.

A second view shows wind power in a much less favorable light: the product of misguided environmentalism twisted into government-funded corporate welfare. No hi-tech glamour in this view. Instead, destruction and waste becomes emblematic of a windpower industry, which has blighted farm and ranch lands with industrial towers and power lines, killed bats and birds, raised the cost of electricity, and squandered tax dollars.

The second view dominates among policy analysts with a libertarian or conservative policy bent. Market-oriented policy shops have produced several critiques of wind power: the Cato Institute, Heritage Foundation, Competitive Enterprise Institute, Reason magazine, the Heartland Institute. Each has issued policy papers or published editorials or articles about wind power. The details vary, but the overwhelming verdict is negative: wind is more costly than conventional power even with subsidies, it wastes land, the turbines are ugly, the power output is unreliable and requires fossil-fuel backup generation, it produces the most power when it is least needed, the spinning blades are dangerous to both wildlife and human health, and construction damages the local environment.

In addition, wind power development often requires substantial investment in electric transmission lines, which consumes more land and adds to the expense. The Texas Public Policy Foundation has produced a fairly comprehensive critique of wind power development that touches on all of these points and a few more (see links below).

Business versus Policy Issues

The first view contributes to a few policy problems — the hi-tech glamour of wind power gains it unearned public support and therefore special political favor. As one wind energy association analyst has said, windpower “polls extremely well” and has support of both Republicans and Democrats.

But the second, negative view also contributes to policy problems when the analysis goes beyond issues of appropriate public policy and gets involved in a seemingly indiscriminate piling on of negatives. Renewable power policy in the United States has involved the government in heavy-handed subsidies, which is wasting taxpayer monies, distorting investment into electric generation and raising consumer costs. But these points represent about the limit of the market-based objections to windpower development. Most of the technology and resource-use concerns listed above are, for the most part, nobody’s business but the business owners. When analysts encourage negative attention to decisions that naturally fall within a business’s scope of actions, they end up encouraging further unconstrained expansion of public policy.

Let’s sort through that catalogue of complaints about windpower one at a time:

Wind power is more costly than conventional power generation. This claim is not always true, but probably true in many cases and for most of the time. But so what? It may cost more to make a Ferrari than it costs to make a Subaru, but so long as the consumer is free to choose which price it wishes to pay, no real policy issue emerges. Sure, many states mandate that consumers purchase a certain amount of renewable power, but the objection here is to the government picking winners in the marketplace. The mandate would be just as objectionable in principle if renewables were cheaper than conventional generation, so let’s leave cost out of it.

Wind power development often requires substantial investment in electric transmission lines. Wind power development can require investment in electric transmission lines to get the power from the wind farm to the frequently-distant major power consuming regions. (Of course this is not too different for other forms of power generation, only in those cases the fuel frequently moves by pipeline or railroad before being converted to power.) Transmission remains a government-regulated business, even in regions and states with restructured markets, which makes it a public policy concern.

For years the rules governing transmission investment were intimately tied to the needs of the monopoly electric utility. As independent power generation became important to the industry, the rules governing transmission investment had to change too. Accommodations for renewable power are of a similar nature. If policies in fact unduly favor renewable generators, then market-based policy analysts may have a complaint. But development of the transmission grid can be useful in reducing the generator market power that is a legacy of years of government-protected monopolies. It is at least possible that most of the value of transmission investment to support renewable power will come from the encouragement of competition and the resulting more efficient operation of the grid. Consumers should favor such transmission development.

Windpower development is land-intensive. This claim is true in some respects, but greatly exaggerated. It is certainly the case that windpower projects blanket thousands and thousands of acres, but such production is consistent with many other uses of the land – excepting a rather small footprint for the turbine itself and associated facilities. And, again, so what? Agriculture also uses a lot of land, but that is no reason to oppose farming. Landowners are generally considered capable of deciding how much, if any, land they wish to devote to various opportunities. Public policy involvement in these private decisions should be limited, not encouraged.

Wind power output is unreliable. Three parties should be concerned with the variability of windpower output: the company selling the wind power, the company buying the wind power, and the transmission network operator providing responsible for reliable operation of the power grid.

Other power market participants using the grid have a secondary interest, but this interest should be limited to ensuring each power transaction pays an appropriate share of the costs of operating a reliable transmission grid. There are important and difficult issues here, but for the most part they are technical grid operation and market design issues only passingly related to public policy. The various regional power markets are working out the issues, and progress will probably be faster if Congress doesn’t get too interested. Market-oriented policy analysts ought not to encourage politicians to think wind power variability is a public policy issue that politicians need to address.

Wind power requires fossil-fuel backup generation.  In a point related to the variability of wind, it is sometimes claimed that each new megawatt of wind power capacity requires the support of a new megawatt of fossil-fuel generation.  There is, maybe, a grain of truth here, but as stated the point is greatly exaggerated.  First, to an extent every generation unit supplying the grid has to be supported by backup generation in the case that the unit under produces or fails altogether.  Reliable grid operation requires the presence of units kept in reserve.  But not every single unit supplying the market is matched by a unit kept in reserve – since independently operated generators are unlikely to fail at the same time, the system just needs a few units in reserve at any one time.  For this reason, most regional transmission grids have already had sufficient reserve capacity available to accommodate the level of wind power that has been added. 

Wind power presents some new challenges – unexpected output variations across wind farms in the same area will be correlated rather than independent.  But this is a technical issue to be handled by the parties involved, and the main technical issue is assigning wind power developers an appropriate share of the costs of the necessary reserves.

Wind power produces the most power when the power is least needed. On average this claim is true for most existing installed wind power capacity. For example, in West Texas, where the boom in windpower investment is most pronounced, wind speed and wind power output is higher during Spring and Fall than it is in Summer, but the demand for electricity is highest during the Summer. In addition, windpower output tends to be higher overnight, while demand tends to be highest on late summer afternoons. (On the other hand, coastal and off-shore wind power developments tend to produce more power during the day and less power at night.)

An issue related to these last two items concerns references to wind power’s capacity factor. A generator’s capacity factor is calculated by dividing the unit’s power output over a period of time by the amount of power that would have been generated by the unit operating at maximum output. It is frequently noted that wind power generators will have capacity factors that range between 20 and 40 percent, while coal, natural gas, and nuclear power plants tend to have capacity factors that range from 70 up to 95 percent. But capacity factors have substantially different meanings for wind power and the other forms of generation. And once again, the policy significance is limited. If the “capacity factor” of a Subaru plant is higher (or lower) than that of a Ferrari plant, then … so what?

Wind turbines are dangerous to both wildlife and human health. Obviously coming into contact with fast-spinning blades can be dangerous – to humans as well as to birds and bats. Turbines sometimes fail in dramatic and hazardous fashion, as easily findable YouTube videos will show. But producing and burning coal is probably more hazardous to humans, birds and bats as well, and even natural gas is not without risks to animals. Any balanced analysis would at least seek to put the risks of wind power in appropriate context.

It also seems somewhat disingenuous when a think tank usually given to complaining that the endangered species act or similar policies interfere with private property rights starts holding up injured birds in the attempt to discourage private rights to develop property, simply because government subsidies are involved.

Windpower construction damages the local environment. If wind power development is damaging your property, first try negotiation with the developer and if that doesn’t work, then existing property law provides various opportunities for you to pursue a remedy. To the extent that wind power development is damaging other people’s property, they should pursue their rights. It usually is not a public policy concern.

Wind power turbines are ugly. Of course, no policy analysis calls turbines ugly as a serious policy argument; the name-calling just tries to detract a bit from wind power’s glamorous image. But making the claim in the context of a policy argument tends to align the analyst with a NIMBY crowd. If the development of someone’s property is going to spoil a historic view or other community value, the market-based approach would be for members of the community to negotiate purchase of an easement.

My main point is that much of the litany of negative factors surrounding wind power is of limited relevance to a policy analysis grounded in a political philosophy of limited government. Yes, the government intervention into the economy in support of favored kinds of power production is objectionable. But it is just the intervention that is the problem, not the way that the businesses and property of other persons are being developed.

Of course it isn’t just wind power that benefits from intervention, other resources and technologies also see various government supports. It turns out that tallying up subsidies for different resources gets surprisingly complicated, but it is clear that renewable power is the recipient of substantial government support at the moment, particularly on a per-MWh generated basis. Defenders of wind power would also point out that it produces no direct air emissions when producing power, and therefore should be encouraged relative to fossil-fueled generators that do emit pollution. The claim has some validity, but as I have suggested elsewhere, the current set of subsidies for wind is a very inefficient way of pursing those policy goals.

A Suggestion to the Free-Market Community

Now that I have made my main point, let me suggest a principled way to violate it and bring some of these factors back into policy analysis. As any market-oriented person who engages in policy debates has realized, not everyone shares their viewpoint on the role of markets and the value of limited government. In such cases an appeal to principles will not be persuasive. Winning policy arguments appeal to more pragmatic considerations. Cost-benefit analysis is the standard approach.

A serious cost-benefit analysis of public policies supporting wind power would have reason to examine the costs of windpower and the value of its output. For such an analysis, some, but not all, of the negative factors surrounding wind become relevant. Even here a market-based analysts should exercise care to keep issues that should be primarily matters of private choice out of the policy discussion, lest politicians and other less-discriminating analysts become encouraged to further intervene in the market.

For the most part, these market-oriented policy papers and essays are not pursuing a balanced assessment of costs and benefits, just trying to make a case against windpower interventions. I support making a principled case against intervention; I urge policy analysts to refrain from arguments which miss the mark and thus may inadvertently give support to interventionists.

Michael Giberson is an instructor and research associate at the Center for Energy Commerce at Texas Tech University's Rawls College of Business, blogs on energy economics (including wind power) and other topics at Knowledge Problem.  This article was first published on Master Resource.

Appendix: Market Think Tank Critiques of Windpower

Most of these are fairly short commentaries; Drew Thornley’s study for the Texas Public Policy Foundation is probably the most thorough).

Cato Institute: Jerry Taylor, “Picken’s Plan to Rig the Market,” 2008; Robert L. Bradley, Jr., “Eco-dilemmas of Renewable Energy,” 1997.

Competitive Enterprise Institute: Steven J. Milloy, “The Wind Cries ‘Bailout’,” 2008; Neil Hrab, Baptists, Bootleggers and Wind Power, 2004.

Heartland Institute: Cheryl K. Chumley, “Questions Plague Efforts to Grow Wind Power Use,” 2008.

Heritage Foundation: Ernest Istook, “Hot air about wind power,” 2008.

Reason magazine: Ron Bailey, “Wind Breaks,” 2002.

Texas Public Policy Foundation: Drew Thornley, “Texas Wind Energy: Past, Present, and Future,” 2008.


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