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October 30, 2009

Geothermal Companies Receive Cost Sharing Grants from DOE

Tom Konrad CFA

My entire portfolio of Geothermal companies received DOE cost-sharing grants Friday.  Here's a quick run-down:

Market Reaction

While the geothermal exploration companies (NGP, HTM, and SRA) were all up today, Ormat and the geothermal heat pump stocks were down (ORA -1.23%, WFI.TO -1.12%, and LXU -2.67%, on a day the S&P 500 fell 2.81%)  Ormat was probably down in sympathy with the market because it is much larger than the other companies listed, and these grants won't make that much difference to its bottom line.  Waterfurnace and LSU may have gotten less market benefit since the grants were not directly to them, and money for geothermal heat pumps was already expected to be part of these grants.

Practically the only (nearly) pure-play geothermal company that didn't get something was Raser Technologies (RZ), which I told readers I sold in September when the DOE announced they were no longer under consideration. I sold Raser at $1.78, taking a small (11%) loss.  It closed Friday at $1.18. I'm glad I got out when I did, although readers of the article who sold on my recommendation will have done better than I.  Raser bumped around in the $1.80-85 range for a couple weeks after I published my article, and even hit $2 briefly.


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.

October 28, 2009

Why Do Green Energy Experts Buy Solar Stocks? 

Green energy experts accept that solar panels are one of the least cost effective ways to reduce your carbon footprint.  Nevertheless, many buy solar stocks.  They should rethink their investment strategies.

I recently spoke on "Stock Selection in the Era of Peak Oil and Climate Change" at the ASPO 2009 International Peak Oil Conference.  Whenever green energy enthusiasts find out that I analyze green energy stocks professionally, they react in one of two ways.  Many want to know my top stock pick in general (New Flyer Industries NFI-UN.TO/NFYIF.PK) or in their favorite sector (see below.)    Others tell me about their own green energy investments.  

My guess is that the latter group hopes I will stamp some sort of stock guru seal of approval on their portfolio.  If so, they usually go away disappointed.  This is not only because I have not yet been issued with a special seal by the stock guru union.  It's also because, even if I had such a stamp of approval, I would seldom need to use it. 

I find that even industry experts who know more than I do about green energy fail to apply that knowledge when it comes to investing.  Enthusiastic amateurs are often worse.  The typical green stock holdings of a brilliant cleantech engineer are a couple solar stocks, like First Solar (FSLR) and Sunpower (SPWR.)  People who will lecture tirelessly on the need to improve the efficiency of buildings before slapping solar on the roof don't walk the walk when it comes to their investment portfolios.  Instead, they take whatever portfolio they have, slap on a couple solar companies.  They forget all about the efficiency stocks and other, more cost-effective renewable options such as wind, geothermal, and biomass that they would recommend if they were asked about what we needed to decarbonize the economy.

Invest In What You Know, Use What You Know

To be fair, none of these people are professional investors. They cannot be expected to make the same sort of decisions that a professional would.  On the other hand, many are extremely knowledgeable when it comes to green energy.  The old adage "Invest in what you know" does not mean that a pilot should buy airlines.  It means that that a pilot will have more knowledge of the airline industry than an industry outsider, and my be able to use this knowledge to either choose between well-run and poorly run companies, or to have a better understanding of industry cycles, and buy when industry fortunes are on the upswing, and sell before a decline in profitability.  The key to successful investing is not depth of knowledge, but knowledge that other market participants lack.

Likewise, an energy rater will know that efficiency improvements will deliver much faster paybacks than solar PV.  Yet, based on my informal survey, energy raters are more likely to own a solar stock than an energy efficiency stock  Dedicated greens know taking mass transit or biking to work is much greener than any private car, even an electric one.  Yet these same greens are more likely to have investments in electric vehicles or battery stocks than investments in mass transit or bicycle companies.

"But I Don't Know any Energy Efficiency Stocks"

When I ask these people why their portfolios don't match their lives, they usually tell me they don't know what stocks to buy.  Ignoring the fact that people who aren't willing to do several hours of research for every stock they own should not be venturing into the Wild West of individual stock investing (don't say I didn't warn you) here are a few of my favorite investments in each of the major green energy sectors.

Sector Investments Related Articles
Energy Efficiency Waterfurnace, Cree, Flir Heat Pumps, LEDs, Infrared
Clean Transportation PTRP, New Flyer ETFs, New Flyer
Wind FAN Wind ETF, ETFs,
Transmission/Grid Quanta Services, ABB, General Cable Transmission shopping list
Batteries / Energy Storage Enersys, Exide, A123 Irrational Battery Investments
Solar Solar Millennium, Satcon Solar Shopping List
Geothermal Ormat Geothermal & the ARRA
Smart Grid Echelon, Telvent Smart Grid Shopping List
Biomass/Biofuel Aracruz, Plum Creek, Potlatch Forestry Stocks and ETFs

Note that this is not intended as a list of companies to buy now.  I currently consider most stocks to be overvalued, and am waiting for a market decline before buying again.  But, if you have an urge to buy a glamorous solar stock today, or are reading this article after the market has descended to more reasonable valuations, I hope you'll use this list to buy stocks in the sectors you know are greener, even if they're not as sexy.

The Right Questions

Using your knowledge from the real world to help choose your investments is another variation on the theme of Asking the Right Investment Questions I recently discussed.  The easiest way to gain an advantage over other market participants is to zig when emotional investors zag.  Solar has a lot of appeal because it lets anyone with a rooftop generate electricity, and emotional green energy investors tend to buy solar stocks.

It's difficult to underestimate the emotional appeal of the personal energy independence photovoltaics seem to promise.  Nevertheless, few rooftop solar installations do add to our personal energy security: They are grid-tied, and stop producing power whenever the grid goes down.  While solar panels can be a good investments with sufficient subsidies and tax breaks, or where electricity is extremely expensive, government subsidies and small markets with expensive electricity are not good foundations for the explosive growth that solar stock speculators are betting on.  

Financial modeling shows that solar will only be a significant part of the most effective carbon mitigation strategies if prices fall quickly and dramatically.  Such cost improvements are possible, but will come with the risk of extreme disruption for the current crop of solar stocks.

Investors swept up in the emotional appeal of solar stocks are providing those of us who pay close attention to the economics of green energy an opportunity to profit at their expense.  Taking advantage of the opportunity is not only likely to benefit the investor, it will also help the companies we do invest in raise capital.


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

October 27, 2009

Dyadic International (DYAI.PK): Update

Representatives of Dyadic International (DYAI.OB) were quite upset when I called the company "A Stock to Avoid."  The company has now released audited financial statements for 2007 and 2008.  The lack of such statements was one of the several reasons I said to avoid the company.  Should I retract my article?

Mark Emalfarb, Dyadic International's CEO sent me an email this morning with attached audited financial statements for 2007 and 2008, saying,

I hope that you will act responsibly as journalists and publish a retraction to your article "A Stock To Avoid" which Tom Konrad admits below that he "did not do any in-depth research" before publishing his article.

May I suggest that you have the courtesy of speaking with someone in the know and get the facts next time!

I have no intention of retracting the article, because the company has not been able to find any factual errors, which I would be happy to correct if there were any.  

In that article, I looked into the company, and found just enough information to know that I was not interested in investing.  To Mr. Emalfarb, I respond that he got what he (or his representative) asked for.  The only reason I looked into the company in the first place was because someone at the company had, unasked, added me to the company's email list for press releases.  I presume they hoped for free publicity.  Perhaps they should have checked that I actually liked their business before adding me to their list.  I have written numerous articles which are skeptical about cellulosic ethanol over the years.  A little research of their own (typing "cellulosic ethanol" into AltEnergyStocks.com's search engine, for instance) would have saved them the embarrassment.  For Mr. Emalfarb and curious readers here is a sampling of what they would have found:

The company proudly links to an interview with Renewable Energy Magazine, on their website.  I can only conclude that they object not to my lack of in-depth research (since the interviewer did less) but that I did not do any in-depth research and did not have anything nice to say.  Unlike John Petersen, I was not very well brought up: When I can't say something nice, I sometimes shoot my mouth off anyway.  

Because I'm skeptical of the whole cellulosic ethanol industry, I have no intention of doing the in-depth research Mr. Emalfarb claims to want.  No one is paying for the time that I could otherwise spend researching better investment prospects.  For readers willing to devote their own time, I suggest that they first read my previous short article and acquaint themselves with my other reasons for avoiding the company, and then read the recently released audited annual reports, which are available here [pdf.]

DISCLOSURE: No position.

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


October 25, 2009

Shale Gas: Promises, Promises, Promises

In a panel entitled "Natural Gas Game Changers?" at the 2009 International Peak Oil Conference, Dr. Breman presented some results from his research into the actual production from the nearly 2000 horizontal gas wells drilled in the Barnett Shale in 2007.  The Oil Drum has some interesting background and comments here.  Here are a few of my take-aways from his presentation:

  • The average well he studied will produce 0.95 Billion cubic feet (Bcf) of gas during its productive lifetime, yet he average production expected by Chesapeake (CHK), Devon Energy (DVN), and XTO Energy (XTO) is 2.65 Bcf, 2.2 Bcf, and 3.3 Bcf respectively.
  • The gas companies are assuming a hyperbolic decline curve based on a very limited data set from a few wells, while Dr. Berman found, after studying far more wells, that an exponential decline is the best model for horizontal gas wells in the Barnett Shale.
  • A $7-$8 price per million BTU is required for these companies to break even on a well that produces as much as 1.5 Bcf.
  • Shale gas companies are funding drilling with debt and asset sales.
  • There is not enough data on the later shale plays  such as the Haynesville.   Nevertheless, there is no early indication that recoveries will be higher in these new plays.
  • Operators often state that the average well life will be 40+ years, but Dr Berman has found that the average commercial life is 7.5 years, with the most common well life being only four years.
  • From a hallway conversation, Schlumberger (SLB) has a more effective fracking technology which could produce better results, but Schlumberger has not been able to find a shale gas player willing to try this technology.  The problem is that Schlumberger's technology produces lower initial flow rates, and the shale gas players are relying on high initial flow rates for their high well production projections.  They rely on these projections for their reserves estimates.  These estimates are essential to their ability to tap the financial markets for funding.
  • US Geological Survey estimates for shale gas reserves are approximately three times too high.

Too good to be True?

I don't analyze the gas market, so I have no personal expertise to evaluate Dr. Berman's analysis.  However, they have the ring of truth.  Put simply, when something sounds too good to be true, investors are usually wise to assume that it is not true.  

Peter Dea, of Cirque Resources LP made the optimistic case.  He called shale gas the solution to his "three E's:" Energy Security, the Environment, and the Economy.   That sounds great to me, and he was quite convincing.  Towards the end of his talk, I was thinking about investments in natural gas pipeline companies with pipelines leading from the biggest concentrations of North American shale plays in the Rocky Mountains to areas of potential increasing demand, especially the Northeast US.  The Northeast would likely increasingly substitute natural gas for heating oil under a peak oil, abundant natural gas scenario.

I'm no longer considering gas pipeline investments.  If natural gas infrastructure is overbuilt in the expectation of abundant natural gas supplies, it is not only exploration and production companies with overly optimistic estimates that are likely to suffer.

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

October 23, 2009

A123 Systems vs. BYD and Other Irrational Battery Investments

John Petersen

Mother always taught me that if you can't say something nice, it's usually better to say nothing. While regular readers might question my ability to follow Mom's advice, this is an article I had really hoped somebody else would write. The quick summary is that while the shares of A123 Systems (AONE) may be a reasonable investment at current prices, the shares of BYD Co. Ltd. (BYDDF.PK) are an irrational value proposition, the shares of Ener1 (HEV) are even worse, and the shares of Valence Technologies (VLNC) are beyond understanding. Since many readers find detailed tables more confusing than enlightening, I'll use words instead of numbers to explain my reasoning. I'll also assume that every company I mention has a great technology. Accordingly, this article will focus exclusively on the hard-core financial data and be far shorter than most.

To create a baseline for comparisons, I'll start with Exide Technologies (XIDE) and Enersys (ENS), the two largest pure-play battery manufacturers in the world. During the twelve calendar months ended June 30, 2009, Exide was restructuring its operations and lost $113.1 million on sales of $2.9 billion. During the same period Enersys earned $67.5 million on sales of $1.7 billion. Exide's current market capitalization of $552 million represents roughly 176% of book value and 19% of annual sales. Enersys' current market capitalization of $1.14 billion represents roughly 157% of book value and 66% of annual sales. For the sake of simplicity, I believe a baseline market price standard of 2x book value and 1x sales is probably reasonable for established manufacturers of traditional battery products.

Until recently, it was almost impossible to establish a baseline for emerging manufacturers of advanced battery products. That all changed when A123 Systems (AONE) completed its IPO last month. After adjusting A123's June 30, 2009 financial statements for roughly $400 million in IPO proceeds and $250 million in ARRA battery manufacturing grants, A123 had a pro forma stockholders equity of $823 million and potential annual revenue from existing facilities of roughly $233 million. Its actual revenue for the twelve months ended June 30, 2009 was roughly $72.1 million. Based on yesterday's closing price, A123's market capitalization of $2.35 billion represents roughly 3x book value, 10x potential sales and 33x trailing sales. As A123 uses its available resources to build new manufacturing capacity, its market capitalization to potential sales ratio should fall to roughly 2x potential sales. While I'm convinced that PHEVs and EVs are suboptimal uses for advanced batteries, I have no doubt that A123 will have more demand than it will be able to satisfy. Accordingly, I believe a baseline of 3x book value and 2x potential sales is probably reasonable for emerging manufacturers of advanced battery products.

BYD Co. Ltd. (BYDDF.PK) is a classic example of why it is never a good idea to make investment decisions based on simple questions like "What did Warren do?" Everybody knows that MidAmerican Energy, a subsidiary of Berkshire Hathaway (BRK.A), agreed to buy a 10% stake in BYD for $230 million in September 2008. At the time, BYD was generating roughly $4 billion in annual sales that included $1.6 billion in cell phone components (43%), $1.3 billion in automobiles (31%) and $1.1 billion in batteries (26%). For the first six months of 2009, auto sales more than doubled to $1.3 billion (55%), cell phone components remained flat at $780 million (33%), and batteries fell by a third to $281 million (12%). While it started out as a battery manufacturer, BYD is currently an automaker first, a cell phone manufacturer second and a battery manufacturer by default because it needs the batteries for its core product lines. With first half sales of roughly $2.4 billion, it would be hard to classify BYD as anything other than an established manufacturer of traditional products. BYD's financial statements are available here. According to Yahoo! currency. the conversion factor between the U.S. Dollar and the Chinese Yuan is 6.8336.

So far, the one critical fact that seems to evade most commenters and investors is that MidAmerican's purchase price worked out to $1.02 per share, or 1.2x book value and 0.5x sales. Overall, the MidAmerican purchase is exactly what one would expect from Messrs. Buffett and Munger, a solid value with good growth potential. Since the Berkshire announcement (the purchase didn't actually close till July of this year), the share price of BYD has rocketed to $10.82 per share, which works out to 10x book value and 5x sales. At present, BYD has 2.275 billion outstanding shares and a market capitalization of $24.6 billion. These valuation metrics are out of line with the auto industry, out of line with the cell phone industry and out of line with the battery industry; proving once again that the value of an investment depends on your entry price. BYD was a great deal at $1.02, but it's terrible for investors at $10.82.

Following Ener1 (HEV) over the last year has been a lot like watching a slow-motion train-wreck. Its final private financing round brought in $42 million of offering proceeds in 2007 and $31 million of warrant exercise proceeds in 2008. In the second quarter of 2009, Ener1 entered into a $40 million open market sale agreement that generated $5.8 million in proceeds during the second quarter and has presumably generated another $33 million since the end of June. When these fundraising activities are offset against operating losses, Ener1 has been treading water for a long time.

At June 30, 2009, Ener1 had a $1 million working capital deficit and $26.3 million in long-term debt, including $9.7 million in related party debt. After giving effect to $33 million in new financing, an $18 million investment to rescue a potential customer from bankruptcy and estimated third quarter losses of roughly $10 million, I expect Ener1 to report approximately $129 million in stockholders equity and about $4 million of working capital at September 30, 2009. Its current market capitalization of $758 million is roughly 6x estimated book value and 34x trailing sales. If you adjust Ener1's book value to eliminate $14 million of intangible assets and another $48 million of goodwill, the ratio of market capitalization to estimated net tangible book value soars to 11x. On balance, I think Ener1's report for the quarter ended September 30th will paint a very bleak picture.

While Ener1 was awarded a $150 million ARRA battery manufacturing grant in August, that award is wholly contingent on its ability to provide a like amount of matching funds. With no meaningful working capital, a major investment in a fledgling EV manufacturer that's just emerging from bankruptcy and a large related party debt balance, I can't see where the matching funds will come from. It's certainly not a business picture I would encourage a client to take to market for a secondary offering.

Valence Technology (VLNC) carries a market valuation that never ceases to amaze me. For the last several years, Valence has relied on loans from its principal stockholder to support average losses of roughly $20 million per year. At June 30, 2009, Valence had $27 million in assets and $95 million in debt, resulting in a negative stockholders equity of $69 million. While Valence has recently inked a deal that will throw off up to $2 million per month in proceeds from dribble-out sales of its common stock, the expected proceeds will do little more than keep the company afloat until the next bi-weekly closing. Since Valence's market capitalization of $190 million represents 9.5x trailing sales and the common stockholders are under water to the tune of $0.55 per share, all I can do is scratch my head.

DISCLOSURE: Author has small long positions in Enersys (ENS) and Exide Technologies (XIDE).

October 22, 2009

Asking the Right Questions: Why Invest in Clean Energy?

Often, knowing more about a company is less useful than knowing just a few of the right things.  Knowing the right questions to ask can help investors wade through a sea of mostly irrelevant information.

Take a moment to answer the following poll:

The key to this question was the stated goal of "outperforming other solar stocks."  An investor who is only hoping to achieve returns equal to the average solar stock would most likely choose to invest in an index of such stocks, most likely by purchasing shares of one of the Solar ETFs.  Hence, the assumption that an investor considering individual stocks is most likely looking for out performance.

Achieving out performance requires finding market inefficiencies.  In general, the market is efficient, meaning that most publicly available information is already incorporated into stock prices.  Information which is useful in achieving out performance, in contrast, is either not broadly available, or not broadly acknowledged.  Information may be available but not acknowledged because most investors have some behavioral or emotional reason for not seeking it out or believing it.

Hence, the best answer to the poll is "C. The most-followed analyst of MySolar made a mistake in his calculations, without which his estimate for next year's earnings would be 5% higher."   Although a 5% earnings mis-estimate is relatively small, all of the other answers refer to information which is likely to already be incorporated in the stock price.  The other answers refer to information which is likely to be broadly available, and hence will already be reflected in MySolar's stock price.

Ignoring the Obvious

While the example given above would be useful information, it would also be extremely difficult for a small investor to discover.  This is information which has not been incorporated into stock prices because only investors who have spent hours or days combing over analyst reports are aware of it.

Fortunately, it requires much less work to uncover useful information that other investors are ignoring for emotional reasons.  In other words, the astute investor can take advantage of others' denial.  As Upton Sinclair said, "It's difficult to get a man to understand something if his salary depends on him not understanding it."  More generally, we tend to deny the truth of facts that, if acknowledged, would require action we find costly or unpleasant.

I believe that the inconvenience and cost of dealing with the looming crises of climate change and peak oil are the main reasons that there continues to be a broad segment of the population intent on denying that they exist, despite the evidence to the contrary.  As a human being, I find this endlessly frustrating.  We're likely to continue burning coal and driving Hummers until some disaster forces us to reconsider the implications of our actions, even though the costs of dealing with the problems we are creating continue to escalate in the meantime.

The Fruits of Denial

As an investor, Climate denial and Peak Oil denial are the source of endless opportunities for investment out performance.  I may be forced to live on a planet that is being ruined by our collective denial, but at least I can console myself with profits arising from that same denial.

This, of course, is the main reason I focus my investing and writing on clean energy.  I don't have the patience to spend hours and hours looking for mistakes in analysts' stock reports.  Denial, on the other hand, will end slowly over time, as the defenders of the old order look increasingly more ridiculous.  As denial recedes, the facts, which have been obvious for at least a decade to those who were willing to see them, will continue to be incorporated into market prices, broadly helping companies whose business reduced net carbon emissions or oil consumption.

Clean energy investors would find themselves laughing all the way to the bank, if it were not for the fact that we're going to need every penny of profit to deal with the enormous mess we're likely to be in.  But that will be a lot better than being broke and in the same mess.


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.

October 20, 2009

What Shouldn't Be in a Green Energy Portfolio

The London Accord took a look at what portfolio theory would suggest as the most effective ways to address Climate Change.  Knowing which technologies don't make the cut is at least as useful as knowing which technologies do.

I recently looked at a paper from the London Accord which used portfolio theory to recommend the best mixes of technologies to deliver different levels of carbon abatement.  The most useful technologies to achieve the needed levels of carbon abatement were Forestry, Hydropower, Biofuels, Wind, Efficiency, and Geothermal. I suggested stocks that investors might consider to invest in each of these sectors.

abatement portfolios.bmpOther technologies played on bit parts in the abatement portfolios (left) the report found are likely to achieve the needed levels of climate reduction most efficienctly.  

If we were to assume intelligent political policies, these bit-part technologies should be avoided by investors.  The assumption of intelligent political policy is unlikely to be realistic, however:  Some of these technologies will turn out to be good for investors, even if they fail to achieve the desired goals for the climate.  

Below, I try to imagine the political decisions which would lead to each of these also-ran technologies rewarding investors. 


Nuclear power plays a large role in abatement portfolio 1, shown to the left.  This portfolio delivers about 3 gigatons of worldwide CO2 equivalent (Gt CO2e) abatement per year, at a cost of $25B annually.  Given that necessary level of abatement is at least 5 times that amount, portfolio 1 represents a vastly inadequate policy response to climate change.  We could get such an inadequate policy response if opponents manage to convince decision makers that an adequate response to climate change will do unacceptable harm to the economy.

Such policies would sad for humanity, ibut good for investors in suppliers of nuclear equipment.

Nuclear does not play a big role in the larger mitigation portfolios simply because it's potential for carbon mitigation is limited.  Nuclear plants take a very long time to build, and concerns about the disposal of waste and the desire of most people not to live anywhere near a nuclear plant are not likely to go away.  Furthermore, nuclear power and other baseload technologies which are difficult to stop and start quickly are somewhat incompatible with variable renewable energy such as wind and solar.  If wind is to meet its much larger potential for climate carbon mitigation, nuclear will have to play an even smaller role. abatement cost.GIF


Solar only plays a significant role in the most aggressive portfolios, 4-6.   As you can see in the chart above, portfolios 5 and 6 do not produce much extra carbon savings even though they cost two and three times what portfolio 4 does.  The implication is that solar will do best if society decides that action against climate change is worthwhile regardless of the cost (scenarios 5 and 6,) or in a scenario where we decide that we need to be very aggressive about dealing with climate change, but should keep an eye on costs.

One significant caveat here is that the above abatement portfolios are based on the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report may have had much too conservative assumptions for cost reductions in solar technology (right).sarasin abatement.PNG

With Sarasin's more optimistic assumptions about cost reductions for solar technology, it plays a large role in all mitigation portfolios on the efficient frontier.  Here "solar" refers to solar photovoltaic (PV) and Concentrating Solar Thermal Power (CSP): solar thermal collectors were not modeled.

Stock market investments in solar make sense so long as you believe that you are investing in a company which is capable of drastically reducing the cost of the technology, and will be able to cut solar costs more quickly than its rivals, including those which are yet to emerge.

Carbon Capture and Storage

Carbon Capture and Storage (CCS), the enabling technology for so-called "Clean Coal" does not play a role  in any of the mitigation portfolios which achieve less than 15 Gt CO2e (portfolios 1-3) and only small roles in portfolios 4-6.  This is very similar to solar under the 2007 IPCC Working Group assumptions.  However, CCS differs from solar in that all the believable cost estimates I've come across (even those originating from CCS proponents) expect it to remain very expensive.

Coal with CCS also has the same problem as nuclear: because it is difficult to ramp such "Clean Coal" plants up and down, they are relatively incompatible with large penetrations of wind.  If CCS does take its place as part of an efficient carbon abatement portfolio, it will probably be CCS used in conjunction with natural gas turbines, rather than coal. 

Hence, it would only be reasonable to make stock market investments in CCS technology if you expect significant spending on the technology by governments with little regard to cost.  Given the power of the coal lobby, such a scenario is a real, if unappealing, prospect.


I do not include any of these technologies in green investment strategy.  Even though I believe that the optimistic case for quick reductions in the cost of solar technology makes sense, I do not think that I have the skills necessary to pick a company today which will be able to survive the rapid industry upheaval a technological revolution in PV technology would entail.

All three technologies have the potential to receive large amounts of government largesse, even if the economic case for such help is weak.  However, I am not confident that I can predict the direction of such largess, and more deserving green technologies with better economic prospects seem just as likely to receive government money than these three.  Given my uncertainty about the future direction of government support, I think it makes more sense to invest in forestry stocks, building and industrial efficiency stocks, transport efficiency stocks, and geothermal stocks, than it does to invest in nuclear, carbon capture and storage, or solar stocks.


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.

October 18, 2009

What A Portfolio Approach To Climate Policy Means for Your Stock Portfolio

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it's generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.


The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO2 reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors' defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)


Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO2 emissions (CO2e) reduced annually, and the horizontal axis is the annual investment needed to achieve this level of reduction.

 abatement cost.GIF

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO2e per year, and no practical increase in abatement beyond 20 15 Gt CO2e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO2 at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO2e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO2e (for a total of 18 Gt CO2e, or portfolio 4) by 2060.  abatement portfolios.bmpSince the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.


The most striking thing about these portfolios is that Forestry dominates CO2 abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report's authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.


Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.


Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don't believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.


We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It's also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.


Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It's also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I'll save that for later.


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.

October 17, 2009

Hydrogen Fuel Is Not Dead

John Lounsbury

With the furor over the potential for hybrid, plug-in hybrid and all-electric cars recently, one might think the hydrogen car was dead. Nothing could be further from the truth. Feasibility at an affordable price appears to be established and market availability of hydrogen powered cars may come sooner than you think.

Many issues remain to be addressed and this article will try to cover them. The problems to be overcome are not insurmountable, but are also not trivial. These problems include the economics of hydrogen production, transportation, distribution and storage systems, as well as safety issues for cars involved in collisions.

Alan Ohnsman, writing for Bloomberg, reports that GM (MTLQQ), Toyota (TM), Daimler AG (DAI) and other car makers want to start supplying car fueled by hydrogen as soon as six years from now. Quoting from the article:

"The advances that have been made by the automobile manufacturers are remarkable,” said Scott Samuelsen, director of the National Fuel Cell Research Center at the University of California, Irvine. “Infrastructure is the Achilles’ heel.”

The fuel cell center opened in 1998 and is funded mainly by the U.S. government and California Energy Commission. It has also received grants from Toyota and Royal Dutch Shell Plc’s hydrogen unit, said Kathy Haq, a spokeswoman for the center.”

Here is a picture of a Royal Dutch Shell (RDS-B) hydrogen fueling station in New York City, discussed in a Seeking Alpha Instablog in August


According to the Ohnsman article, the economic factors are starting to line up for hydrogen. He quotes a Toyota objective of a $3,600 price premium for a hydrogen fuel cell powered car. This compares to the current price premium for the Synergy Hybrid Drive system from Toyota, currently averaging around $4,000 for the Camry. This is quite a change from the $1,000,000 price tag estimated to build one of these vehicles just a few years ago.

Advantages of Hydrogen Fuel Cells over Batteries

To understand the significance of this topic, one must first recognize how the hydrogen fuel cell powers a vehicle. Hydrogen fuel cell powered vehicles are electric vehicles. Hydrogen is not burned like a hydrocarbon fuel. Hydrocarbons are storage media for thermal energy which is released for power in an internal combustion engine. The hydrogen fuel cell is a storage medium for electrical energy, which is released when hydrogen and oxygen are combined electrochemically to release electricity. The hydrogen fuel cell is conceptually a battery, providing electricity to power an electric car. Unlike other battery powered cars, the fuel cell uses an onboard source of energy (hydrogen “fuel”) to generate electricity and does not have to stop to be recharged. The advantage of hydrogen powered cars is basically a long driving range, requiring only a fuel refill like internal combustion cars do today.

The hydrogen powered car has advantages for long trips. For daily commutes under 100 miles round trip, the operational convenience of battery and fuel cell energy storage is similar. In fact, it could be argued that the convenience of plugging in within your own garage to recharge batteries is more convenient than finding a refueling station every few hundred miles. The ultimate decision for most commuters will be which power source is cheaper.

Fuel Cost

The most convenient metric to compare fuel costs across the ICE (internal combustion engine) – electric drive interface is the fuel cost per mile. Miles per gallon (mpg) becomes an awkward measurement. Consumers will be required to start thinking in cost per mile terms, because that will become the comparative price on the new car sticker. According to http://www.costpermile.org/, the electricity “fuel” cost per mile (CPM) for electric cars will be between $0.01 and $0.05. Currently electric utility charges per kWh (kilowatt hour) run between $0.10 an $0.15 in most of the U.S., so most of this large range in costs must be associated with the difference in engineering technology and size of the vehicle.

Since I like a larger car, my example will compare to a mid-size Toyota Camry Hybrid. The assumed cpm for an equivalent electric car will be $0.05. (Disclosure: I own a Camry hybrid.) At $2.50 per gallon (near the national average price as this is written), the Camry has a cpm of $0.07 at $3.50 per gallon, the cpm is $0.10. I have used 35 mpg for the Camry hybrid. This is 3% higher than the sticker and 10% lower than my actual experience.

For the standard Camry the cpm would be $0.08 and $0.11 (highway and city, respectively) at $2.50 per gallon and $0.11 and $0.16 at $3.50 per gallon. The sticker mileage numbers have been used for the ICE Camry. These fuel costs are summarized in the following table.

Estimated Cost per Mile (CPM)


Gas at $2.50 per gallon

Gas at $3.50 per gallon






Camry ICE





Camry Hybrid





"Camry"* Electric





*An electric car equivalent to the Toyota Camry.

Electricity cost assumption for Camry equivalent is $0.05 cpm

If the range available with an all electric car is sufficient, then customer acceptance will require that purchase costs (and maintenance costs, which will be ignored here) to be such that the purchase price difference is more than recovered in, say, 100,000 miles. The cost savings for city driving at $2.50 per gallon for gasoline is $6,000 per 100,000 miles of driving, compared to an ICE car. At $3.50 per gallon the cost savings would be $11,000. If two cars are available for our commuter and the electric car purchase cost difference is less than $5,000 more, there will be a big market. If the purchase price is $12,000 more, the market will be limited until the cost of gasoline exceeds $3.50-$4.00 per gallon.

In an August 6 press release, Toyota reported the results of a one-time driving test comparing a Toyota Hybrid Highlander with a new 4th generation fuel cell equipped Highlander Hybrid. In that test, the cpm for the production hybrid was more than double the cost for the fuel cell equipped model. I am taking this test result with a grain of salt because it was a one time test.

The remaining comparison to be made is hydrogen fuel cells to plug-in electric vehicles. Hydrogen requires power for production by electrolysis of water. If the same power is used that is available at the residential power plug, all the added costs of handling, storing, transporting and distributing hydrogen are added to the costs that one has at his own power plug. Hydrogen is very uncompetitive on a cost basis with other sources of power in this scenario. If the cost of gasoline goes much higher than the $3.50 we have in our examples, then hydrogen might compete there. But hydrogen can never compete with electricity for local driving (right now under 100 miles per day) if the same electricity source is used for both battery recharging and fuel cell operation.

Never forget that a hydrogen fuel cell is nothing more than another form of battery, wherein a chemical reaction produces electrical current. A hydrogen fuel cell car is an electric car.

Can Hydrogen be Produced with Cheap Power?

Do sources of electrical power exist that are cheaper than what we produce (or can produce in the future) for domestic consumption? The short answer is: Yes. (Well, maybe.)

One possible source of cheap electrical energy is from ocean currents that have a large temperature differential between the surface currents and those at depths of 1000 feet or so. This process is called OTEC, Ocean Thermal Energy Conversion.


The above graphic, from The World Energy Council 2007 Survey of World Energy Resources, shows that most of the areas with the largest thermal differentials occur in areas that are too far from populated shorelines to make feasible electricity generation for transmission into a power grid. Temperature differentials of 20o C or more are necessary for efficient power generation.

The cost estimates for power from OTEC are somewhat problematic. The World Energy Council estimates that a single 10MW demonstration plant would produce electricity at a cost somewhere between $0.14 and $0.21 per kWh, depending on factors such as recovery of potable water and marketable chemicals such as ammonia and various salts. The existence of carbon tax credits could lower the costs further by as much as $0.03.

It is only with the building of multiple plants of the same design that costs may come down below $0.12, the reference cost for existing electricity generation. For example, eight 10 MW plants could produce electricity at a cost between $0.098 and $0.119.

There is potential here, but the costs have to come down more to bring electricity from OTEC to a price to make hydrogen production economically attractive. Remember, we need to transport this hydrogen from the point of generation by ocean going tanker and distribute it by truck or rail tanker (or pipeline) to retail points.

Another potential source of electricity for hydrogen production is wave and tidal motion. To supply electricity for a power grid, the waves and tides must be close to populated shore lines. Wave motion can be used anywhere for hydrogen production, not just where is occurs close to populated shore lines. The same is true for tidal action in remote regions of the planet. The picture below, from New Scientist, shows a SeaGen tidal electricity generator, made by Sea Generation Ltd, in the tidal currents at Strangford Lough in Northern Ireland. Sea Generation is a division of privately held Marine Current Turbine Ltd.


Generation costs for electricity from capital costs alone will be about $0.07 per kWh for a 25 year depreciation. There will be additional unspecified maintenance and operation costs.

Wave action can also be used to generate electricity. The picture below (from New Scientist) shows a wave operated electrical power generator in a generation farm off the north coast of Portugal.


These generators are made by privately held Pelamis Wave Power Ltd. Each generator is a 150-meter-long steel jointed structure, which flexes to drive hydraulic generators and produce 750 kilowatts of power. The company claims electricity generation a competitive costs, but provides no specifics.

The reasons I selected these examples as potential hydrogen generation power sources are:

1. Potential for a lower electricity price point;

2. Electricity generated with plentiful raw material (water) present to produce hydrogen; and

3. With OTEC, the potential for additional revenue from side products.

Battery Costs vs. Fuel Cell Costs

The implications from currently available information are that the costs and durability will be similar. The current objective for Toyota is to have a price premium for hybrids less than the current price premium for a hybrid. The latest generation fuel cell engine is about the same size as a typical 4-cylinder ICE engine and contains about 30 grams of platinum. This is down from the previous generation fuel cell stack which was more than twice the size and contained 80 grams of platinum. The costs just for the platinum alone have been reduced from more than $4,000 in the previous generation to less than $1,500 in the current one. The final fuel cell structure is expected to use only 10 grams of platinum, the same amount as a typical catalytic converter today.

The dramatic change from the previous generation hydrogen fuel cell stack power system to the current generation is seen in the following picture from AutoBlogGreen.com, showing the latest fuel cell drive system on the left next to the drive system used in the past few years in the Chevy Equinox test vehicles that have been driven by volunteers in California, Washington, DC and New York. The power, range and performance of the two systems are the same. The horsepower rating is the equivalent of a current four-cylinder ICE.


Transportation of Fuel and Wholesale Distribution

The technology for distribution by tanker truck and railway car exists today. You can not spend a few hours on any interstate highway near a population center without seeing several pressurized gas tank transports sharing the roadway with you. Pipeline distribution for pressurized hydrogen gas may require different features than currently use for natural gas, but there is no reason to believe that the engineering and construction would present any more challenges or costs. Currently, there is no data reflecting transportation and wholesale distribution impediments to scaling up the use of hydrogen to higher volumes.

Retail Distribution

The cost to build a new gasoline station has been estimated to be in the $250,000 to $450,000, with the largest variable being land cost, using estimates obtained from national average costs at RS Means Cost Works. Obviously, where land costs are extremely dear, near the center of major cities, for example, the cost to build a gasoline station could be much higher, up to $1,000,000 or more.

The cost of building the first 32 hydrogen refueling stations in Southern California has been quoted as $32 million. As high as this cost projection is, it is less than the current cost for a hydrogen refueling pump in Los Angeles, according to Phil Baxley, President of Shell Hydrogen, quoted in the Ohnsman article. He said currently the cost is from $1 million to $5 million per pump, depending on capacity. Even the lower quoted cost, averaging $1 million each for 32 stations, seems to be more costly than all but the most expensive gasoline stations. However, there are three factors related to hydrogen refueling stations that mean this apparent current cost difference may decrease or even be reversed. These are:

1. externality cost exposures for gas stations;

2. lower costs for hydrogen stations in the future through economies of scale; and

3. lower costs to add hydrogen to existing gas stations than to build new.

There are major externality exposures for petroleum based fueling stations. The biggest exposure pertains to future liabilities for soil and ground water contamination by petroleum products and fuel additives. When these externalities are realized, they can be more than the original construction cost (even adjusted for inflation) and occasionally are many millions of dollars. Hydrogen refueling stations do not have these environmental cost exposures.

When the initial costs and the externalities are considered, the refueling stations for hydrogen have an original construction cost of the same order as petroleum fuel stations. Hydrogen refueling stations may decrease in construction costs from the estimates for the first 32 stations in Southern California when many hundreds are constructed per year. If hydrogen were to become ubiquitous, there might be a few thousand new stations per year for a couple of years. A more likely progression would be the modification of existing gas stations to also offer hydrogen refueling facilities at a fraction of the cost of building new stations.

Other countries have more advanced plans for infrastructure development.Both Japan and Germany are working to build large scale distribution networks, with over 1,000 stations on line for each county in five years.


To start with, we must recognize that hydrogen would not be replacing something that did not have an extremely high fire and explosion hazard. We have managed to live with the risks of gasoline for more than a century, with the material being stored in thin walled tanks that can easily rupture.

Hydrogen, a pressurized gas, would be stored in thick walled, virtually indestructible tanks. Pressurized gases are handled in such containers in a variety of industrial environments today and have been for most of the past 100 years. There are few examples of these tanks being breached. The risks have been associated with the pressure reduction valves (regulating the controlled release of the gas) being broken by impact damage. The major risk associated with using hydrogen will be the exposure to the fuel lines being damaged and allowing the tanks to lose pressure rapidly, turning them into jet propelled missiles.

The pressurized gas tank as a missile is the major safety hazard. It is not insignificant, but should not be an insurmountable problem.


There are still a lot of questions to be answered. But one thing is clear: hydrogen powered cars are not dead. In congested metropolitan areas where electrical costs are high, hydrogen may become widely utilized. The further advantage of much longer travel ranges may also give hydrogen an additional edge over plug in alternatives.

It is too early to make investment decisions trying to select eventual winners. It is not wise to assume there will not be a viable hydrogen car and hydrogen distribution systems during the next decade.

John Lounsbury, CFP, PhD is a financial planner in Clayton, NC. He has extensive experience in computer technology research and development both as an engineer/scientist and in corporate management with academic degrees in physical science. He is a regular contributor to Real Money at TheStreet.com and to Seeking Alpha. Dr. Lounsbury also has his own professional blog, PiedmontHudson. His articles are widely circulated on the internet.

October 15, 2009

EESAT And Energy Storage Opportunities On The Smart Grid

John Petersen

Last week I appeared as a luncheon speaker at EESAT 2009, a biennial international technical conference sponsored by the DOE, Sandia National Laboratories and the Electricity Storage Association that focuses on storage technologies for utility applications. The conference included dozens of high-level technical presentations from storage technology developers and was far and away the best-organized event I've ever attended. The only notable absence was a large contingent of buyers, which left some participants wondering whether they were preaching to the choir. Nevertheless, I was encouraged by rapid growth in the number and size of utility-scale demonstration projects and the growing body of proof that storage will be a critical enabling technology for the smart grid. I left Seattle more convinced than ever that the opportunities in grid-based energy storage are huge, but that successful investing will require study, patience, diligence and a firm grasp of economics.

The theme of my presentation was that some developers of energy storage devices are destined to follow in the footsteps of Arkwright, Fulton, Vanderbilt, Carnegie, Rockefeller, Ford, Moore, Gates, and Brin, and become the next generation of industrial legends for one simple reason: we're entering an era where 500 million people in North America and Western Europe can no longer lay claim to the lion's share of global resources because the other 6 billion inhabitants of our planet know for the first time that there's more to life than mere subsistence. While each of them may only want a small piece of the pie, the law of large numbers will give rise to explosive increases in global demand for everything and the only way to avoid armed conflict or catastrophic environmental damage is to minimize waste in all its forms, beginning with energy.

On the cautionary side I returned often to the unpleasant reality that most grid-connected storage applications won't pay under current economic conditions because the spread between the cost of storage and the value of storage remains narrow. That cost-benefit equation is changing rapidly as energy costs rise and renewables are added, but as long as waste is cheaper than storage, waste will prevail. The following graph comes from a November 2004 presentation by John Broyes of Sandia National Laboratories that provided an overview of the DOE's Energy Storage Systems Program. The chart focused on the California utility market and showed the clear inverse relationship between the installed cost of energy storage systems and total demand for those systems. It merits more than a passing glance from investors who want to know where the business is (see p. 11 of the presentation for an expanded version).

2004 Sandia.png

While the graph contains a wealth of information on the wide variety of potential uses for storage in the utility market, the most important lesson for energy storage investors is price sensitivity. When total installed costs for energy storage systems are $1,000 per kW or higher, demand for storage is almost insignificant. As installed costs fall into the $600 per kW range, the number of cost-effective utility applications soars. I've been told that an updated version of the graph is in the works and will be released shortly. You can bet that I'll be among the first to write about it.

There were several EESAT presentations that focused on important but expensive frequency regulation technologies that are priced beyond the high-range of the graph. Over the last year, demonstration systems from Beacon Power (BCON), Altair Nanotechnologies (ALTI) and A123 Systems (AONE) have shown a remarkable ability to respond to regulation signals in microseconds and provide up and down regulation at speeds that traditional systems can't even begin to match. Based on estimates from the PJM Interconnection, one of the independent system operators that manage the U.S. grid, national demand for frequency regulation installations is on the order of 6,000 MW and could be much higher if flywheel and battery systems prove capable of handling longer duration load ramping intervals. The ongoing tests are not conclusive because the new systems have not been in service long enough to establish their useful lives, but the preliminary results are promising.

There were also several EESAT presentations that dealt with more mundane energy storage applications that were priced in the mid-range of the graph. Those projects ranged from the use of flow batteries at cellular telephone installations in Africa to a recently completed 12-year demonstration where Exide Technologies (XIDE) used lead-acid batteries to effectively eliminate the need for diesel fueled backup power on a remote island where the primary power source was renewable. Yet another presentation showed how computer analysis of satellite maps was being used to identify new locations in Ireland for pumped hydro, a technology that generally falls in the low-range of the graph but is commonly believed to have limited potential because most of the desirable locations are already developed.

Overall, the most important takeaways from EESAT were that from a utility perspective:
  • Storage is the economic equivalent of a dispatchable generating asset;
  • Installed cost and reliability will be the primary drivers of decisions to implement storage solutions;
  • Maintenance and cycle life will be secondary decision drivers;
  • An optimal smart grid configuration will need storage equal to at least 5% of peak system load; and
  • As renewables become prevalent, storage will become increasingly critical to grid stability.
In Energy Storage on the Smart Grid Will Be 99.45% Cheap and 0.55% Cool, I explained that the required annual storage build in the State of California was estimated at 500 MW per year for the next decade. Of this total, 50 MW would need to be fast storage in the form of flywheels and Li-ion batteries and the 450 MW balance would be 4 to 6 hour storage in the form of pumped hydro, compressed air, flow batteries and advanced lead acid batteries. When the California numbers are scaled up to a national level, they translate to billions in new annual demand for as far as the eye can see. When you add in billions in new demand for transportation, it's clear that the sector isn't even close to ready for the near-term demands. To compound the problem, essential raw material supply chains aren't ready either.

In preparation for my EESAT presentation, I spent a good deal of time analyzing how the energy storage industry of today is different from the industry that existed a few years ago. My most important conclusion was that energy storage devices are rapidly evolving from minor components in high-value durable goods to stand-alone end user products. As a result, the cost of energy storage is rocketing from less than 5% of product cost in the case of portable electronics to more than 50% of product cost in the case of an EV like the Tesla roadster. When you get into the utility arena, the storage devices are the products and represent 100% of the product costs. Since consumers generally have higher payback expectations and shorter investment horizons than utilities, I believe consumer price sensitivity will be very high notwithstanding the current flood of optimistic stories, speeches and reports from the mainstream media, politicians and environmental activists.

While some of the stock market valuations in the energy storage sector reflect the emerging reality that energy storage is and will remain a highly price sensitive product, others do not. As a result, we have a weird market dynamic where Enersys (ENS), the world's largest manufacturer, marketer and distributor of industrial batteries, trades at a 50% discount to a newcomer like A123 Systems (AONE); and Exide Technologies (XIDE), the world's second largest manufacturer of OEM automotive batteries, trades at a 28% discount to a newcomer like Ener1 (HEV). While the valuation disparities might be justified if either of the newcomers had a technology that would displace the established leaders or significantly erode their revenues or margins, that outcome can't be expected in the foreseeable future because the newcomers are focused on far more expensive products for markets that don't even exist yet.

Over the last fifteen months I've written 92 blog entries that focus exclusively on the energy storage sector; the established and emerging energy storage technologies; and the principal competitors in the industry. My recurring simple hypothesis has been that cheap energy storage will beat cool energy storage in the market and that companies that manufacture objectively cheap products will experience far more rapid and sustained stock price growth than companies that are developing objectively expensive products. Over that time, my personal trading account that includes Active Power (ACPW), Enersys (ENS), Exide Technologies (XIDE), ZBB Energy (ZBB) and Great Western Minerals Group (GWMGF.PK) has gained over 300%. Nevertheless, I think I've finally reached a point where I've said most things that can be said. Accordingly I plan to slack off a bit and write in response to current events instead of trying to maintain a regular schedule.

Over the next decade, I believe that every energy storage company that brings a product to market will have more business than it can handle. Nevertheless, I believe that companies that have attained lofty market valuations based on ambitious plans to develop exotic products are likely to trade flat or decline in price while the companies that have less ambitious goals and less expensive products have substantial upside potential.

My favorite short-term holding is ZBB Energy (ZBB) because its ZESS 50 and ZESS 500 flow battery systems are market ready and carry an attractive mid-range price while its market capitalization of $15.3 million is but a small fraction of the peer group average. My favorite mid- to long-term holding is Axion Power International (AXPW.OB) because its first generation PbC batteries are in production and have been delivered to select end users for testing, the PbC battery promises a cheap solution for a wide variety of mundane energy storage applications and Axion's market capitalization of roughly $80 million is well below the peer group average.

The only thing that will prove me right or wrong is time.

DISCLOSURE: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock. He also has small long positions in Active Power (ACPW), Enersys (ENS), Exide Technologies (XIDE), ZBB Energy (ZBB) and Great Western Minerals Group (GWMGF.PK).

October 14, 2009

Oil & Alt Energy Redux

Charles Morand

Last week, I conducted an analysis showing the lack of evidence supporting claims that oil and alt energy returns are strongly correlated (claims that sometimes come from outfits as reputable as Bank of America Merrill Lynch).    

I don't want to belabor this topic but I thought I would post the results of another, similar analysis I conducted following comments I received on how to improve the first one. In a nutshell, the comments suggested I do the following:

1) Look at daily correlations or even smaller periods, as "common knowledge" market movements can often dominate over the real relationship in the short and very short run

2) Look at absolute (price) correlations as well as relative (return) correlations (my first analysis looked only at relative movements)

3) Look at directionality (i.e. what % of the time do assets X and Y move in the same direction regardless of the size of the move)

4) Extent your analysis to five years or greater

New Analysis, Same Difference

The three sets of tables below show daily return correlation coefficients, daily price correlation coefficients and daily directionality statistics (% of days that the assets close Up, Down or No Movement together) for oil, nat gas, the S&P 500 and alt energy stocks.

The time periods have been extended from three to five years or since inception. The oldest alt energy ETF available is PBW that was listed on March 03, 2005 - not quite 5 years but a decent chunk of time nonetheless. The other 3 ETFs (sector specific) were all listed in the 2nd half of 2008.

Correl Returns Oct 14-09_3.bmp

Correl Prices Oct 14-09.bmp

Correl Returns Oct 14-09_2.bmp

The first set of tables show that returns on oil are not particularly useful at explaining returns on alt energy stocks on a daily basis (let's say that we enter useful territory at 0.5 and above), although the results for PBW show the relationship strengthening somewhat in the last year (which has been anything but a normal year for the markets). These results are in line with those from my previous analysis which looked at weekly returns.

As far as absolute prices go (the second set of tables), correlation coefficients for oil and alt energy are high, but they are just as high if not higher for alt energy and the S&P 500. PBW shows the relationship strengthening over time, but it strengthened even more between oil and the S&P 500, something Tom opined might be the case a few months ago.

I don't find absolute price correlations all that useful. In the medium and long terms, returns matter far more than absolute prices. If a $1 movement in oil consistently results in a $1 movement in an alt energy ETF over the long run, the high coefficient could obscure a divergence trend between the returns on both assets as their prices rise.

Finally, the directionality tables (note that assets appear in a different order) show a fair bit of co-directionality between oil and alt energy (with the exception of PTRP [alternative transportation], something Tom and I discussed last week). But here again, the S&P 500 emerges as the stronger predictor.


I did not go any more granular than daily data: anything beyond that becomes relevant only to traders.

Once again, the general conclusion that emerges from this analysis is that oil - whether in terms of returns, prices or directionality - is not a particularly useful indicator to go by when investing in alt energy stocks, especially when compared to equity markets in general (i.e. the S&P 500).

The implication for investors is that they should not invest in alt energy as a hedge against or a play on rising oil prices. If anything, what little relationship does exist will probably tend to disappear overtime as alt energy and cleantech stocks respond more to core business fundamentals than to seemingly logical yet unproven narratives about external drivers.  


October 13, 2009

Green Energy ETFs Compared

UPDATE 3/4/2011: An up-to date article on selecting green mutual funds and ETFs can be found here.

Green energy Exchange Traded Funds (ETFs) are the simplest way to invest in the sector at reasonable expense.  Here is what you need to know to choose.

Tom Konrad, Ph.D., CFA

Why ETFs?

Investors interested in a simple way to invest in a diverse basket of renewable energy and energy efficiency companies should consider Exchange Traded Funds (a.k.a. ETFs) first.  Although green energy mutual funds will be more familiar to many investors, they come with costs that are difficult to justify in comparison.  The following chart compares the annual expense ratio, or the percentage of fund assets which an investor pays every year for ETF fund management and expenses, compared to the expense ratio of one of the less expensive green energy mutual funds.  (See my recent article comparing the green energy mutual funds.)


Defenders of mutual funds will note that the cost chart is a bit deceptive, since the Guinness Atkinson Alternative Energy Fund (GAAEX), which is shown, does not have a front-end load (i.e. there is no cost to make the initial investment), but an ETF purchaser must pay a brokerage commission to buy an ETF.  While true, discount brokers have driven commissions so low that this is not a significant advantage.  Many brokers offer a number of free trades for opening a new account or maintaining a certain balance.  When there is no cost to buy or sell the ETF, the argument in favor of mutual funds evaporates.  

Even if the ETF buyer did not qualify for free trades, the comparison still favors the ETFs.  GAAEX has a minimum investment of $5000 for new investors.  To invest that much in an ETF through a discount broker would cost $12.95 at Charles Schwab (or considerably less at other discount brokers.)  That's a 0.1% to 0.26% brokerage commission, meaning that if you were buying an ETF with one of the highest expense ratios (0.7%) at Schwab (+0.26%), you would have broken even after holding the ETF for only 3 months.  Three months is a lot better payback than you're likely to get from solar panels!

Green Energy Sectors

The other advantage of Green Energy ETFs is sector selection.  For the most part, the green energy ETFs are more narrowly focused on  green energy than the mutual funds.  This means that the ETFs are more volatile than the funds, rising more when the sector is doing well, but falling faster when it's doing badly.  

Several of the mutual funds contain more than 10% of their portfolios in companies I would not classify as green energy at all.  Among the ETFs, that is only true for the Forestry ETFs, CUT and WOOD, which I include as a way to get exposure to biomass, but which were not designed with clean energy or climate change in mind.

The sector breakdown chart below is a team effort.  AltEnergyStocks.com editor Charles Morand provided the data on the five general ETFs (PBD, QCLN, GEX, ICLN, and PBW) when he took a look at these five in May.  I have since extended his analysis to the sub-sector ETFs shown.


The Best Green ETFs

At the Rocky Mountain Institute, an energy "think and do" tank, they remind us that when we're greening our homes, we should eat our energy efficiency "vegetables" before having our renewable energy "dessert."   The same is true for greening our portfolios.  

The First Trust Nasdaq Clean Edge US Liquid Index Fund (QCLN) does the best job of giving our portfolio a healthy serving of energy efficiency, compared to both the other ETFs and the green mutual funds, and also has the second lowest expense ratio.  If you are going to make a single investment in green energy, QCLN is my top pick.

For investors who qualify for free trades (see above), or investors putting enough into the sector that their commissions are just a fraction of a percent of the money invested, I suggest putting 80% of your money in QCLN and 20% in PTRP, the Powershares Global Progressive Transport Portfolio.  For the most part, PTRP is also a serving of "vegetables" in the form of efficient transport, such as mass transit, hybrid vehicles, and even bicycles.  Incidentally, bicycle dealers are having a record year even without a "cash for clunkers" scheme.  [Note: this is a UK number. According to a commenter, the US numbers were down.]

One or two trades, and a balanced green energy portfolio is yours at very low cost.  While you are unlikely to out-perform the sector, unlike readers who bought my 10 Green Energy Stocks for 2009 at the start of the year, you're going to spend a lot less of your time doing it.  The "10 stocks for 2009" investors had a lot less of an idea what they were getting.

DISCLOSURE: GAAEX is an advertiser on AltEnergyStocks.com; 

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

October 11, 2009

Green Energy Mutual Funds Compared

UPDATE 3/4/2011: An up-to-date article on selecting green mutual funds and ETFs can be found here.

Most investors looking to get into clean energy think first of mutual funds.  Here are the options, and how to choose.

We track seven mutual funds with a focus on green energy and climate change at AltEnergyStocks.com, since the American Trust Alternatives Fund closed early this year.  I split them into two categories: the funds with a primary focus on clean energy, and those with a primary focus on the environment.  

The clean energy funds are: the Firsthand Alternative Energy Fund (ALTEX), the Guinness Atkinson Alternative Energy Fund (GAAEX), and the Calvert Global Alternative Energy Fund (CGAEX/CGACX).  The environmental funds are the Allianz Global Eco Trends Fund (AECOX), the DWS Climate Change Fund (WRMSX), the New Alternatives FD Inc (NALFX), and the Winslow Green Growth Fund (WGGFX).

Since carbon emissions from energy use are the major driver of climate change, there is a large overlap between the strategies of the environmental funds and energy funds, but there are still meaningful differences.  First, while energy and water are closely linked, the clean energy funds seldom have any investments in water infrastructure.  In contrast, the environmental funds not only have significant investments in water, they also invest in environmental clean-up and waste management to a much greater extent than the energy funds.

Fund Holdings

Below is a breakdown of these mutual funds' holdings, based on the mutual funds' own classifications or my classifications of the stocks in their portfolios, depending on what information I was able to find using Morningstar and the funds' sponsor web pages.fund breakdown.PNG

The sector breakdown shown here is only approximate for AECOX and WRMSX, because I was only able to find the top ten holdings of each of these funds, and the industry break-downs published by these funds do not differentiate between types of alternative energy. 

After the significant allocations to water infrastructure and environmental cleanup among the environmental funds, the most noticeable difference between these two groups of funds is the allocation to solar energy.  This also makes sense given the two groups' focus.  There is little argument that solar has great potential to provide a large proportion of the electricity that society needs.  However, the current potential for solar power to significantly reduce carbon emissions from energy production are limited by the current high cost of the technology.  That will change as the cost comes down, but until it does, investors interested in reducing harmful greenhouse gasses will be much more effective if they place their investments in efficiency, wind, or forestry.

In short the choice between the environmental group of funds and the clean energy group should rest on your goals as an investor.  Investors who are most interested in preserving the environment for future generations will prefer funds from the environmental group, while investors looking to profit from the transition to clean energy will prefer funds in the clean energy group.


Investors should also consider cost when looking at any investment.  Below is a chart of the costs of investing in each of these funds, with the data from Morningstar. fund costs.PNG

An investor pays the front-end load just to make an investment in fund that have them.  Larger investments may reduce the percentage front-end load from those shown.  The expense ratio is the percentage of the investment which goes to pay the mutual fund's expenses every year.  Institutional expense ratio is the expense ratio paid by 401(k) plans and other institutional investors which the fund grants a discount in return for a large amount of business.  The Calvert fund offers both "C" shares (CGACX), with no front-end load but a higher annual expense ratio, and "A" shares (CGAEX), with a front-end load but lower annual expenses.

If you can invest in any of these funds through a 401(k) or other sponsored retirement plan (as opposed to an IRA), you will generally be paying the institutional expense ratio.  As an individual, you will generally have to pay both the front-end-load (if any), and the ongoing annual expense ratio.

In general, these expenses are all very high by the standards of mutual funds.  Because of these high costs, I generally recommend investing in a green energy Exchange Traded Fund(ETF), rather than a green energy mutual fund.  I've shown the approximate cost of investing in a green energy ETF on the same chart for comparison.  I will publish an article comparing the green energy ETFs here in the next few days. (The link will be broken until then.)

The Best Green Mutual Funds

If you still prefer a green mutual fund despite the cost, the best choice among the environmental funds is clearly the Winslow Green Growth Fund (WGGFX).  The lack of front-end load for this fund means that an investor in the New Alternatives fund (the only environmental fund with a lower annual expense ratio) would have to wait 15 years before the lower annual expenses were enough to pay back the high up-front cost.

Among the clean energy funds, I think the Guinness Atkinson fund (GAAEX) is the least unappealing.  While its expense ratio is still a high 1.69%, it has no front-end load, and even this high annual expense ratio is lower than the annual expenses of the other clean energy focused funds.  I also prefer the Guinness Atkinson fund to the First Hand fund because of the more diverse portfolio.  Solar is the most volatile of green energy sectors, and ALTEX's large allocation to solar means that an investor in the fund gains fewer benefits of diversification than an investor in GAAEX.

However, most investors who have the option will be better off in a green energy ETF than a green energy mutual fund.

DISCLOSURE: GAAEX is an advertiser on AltEnergyStocks.com.

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


October 09, 2009

Q3 Performance Update: Ten Green Energy Gambles for 2009

I never thought 2009 would be a good year for risky stocks, but my readers asked for them anyway.  The market's strong third quarter have paid off for risk-takers who gambled on my 10 Green Energy Gambles for 2009.

I started out the year by providing readers with a portfolio of ten relatively conservative plays on green energy.  That portfolio was representative of how I planned to approach the market this year, and has produced stronger returns and less volatility when compared to both green energy stocks and the market as a whole.  Many of my readers are looking for big gains on little stocks, so I also provided (but did not endorse) ten such green energy gambles.

I went into some detail on each, but I generally felt that most of those stocks would benefit disproportionately from an easing of the credit crunch.  In Q1 and Q2, those gambles performed in-line with the green energy sector indexes, but the return of optimism in the third quarter has allowed these risky stocks to shoot ahead of the sector with the turbo-charged performance that I hoped they would provide.  They've even managed to pull ahead of my extremely strong conservative portfolio (by 44% to 41%.)

If the fourth quarter is anything like the third, I'd expect the portfolio to end the year with a double.  I don't expect that to happen, but I've been wrong about the length of this rally before.

The following table and graph show stock-by-stock performance for the first three quarters:

Ticker 1/9/09 close 4/9/09 close 7/13/09 close 10/8/09 close

Gains 1/9 to 10/8/09

BCON $0.46 $0.47 $0.637 $0.686 49%
AXPW.OB $1.20 $0.85 $1.34  $2.14 78%
VLNC $1.77 $2.23 $1.51 $1.60 -10%
CPTC.OB $0.30 $0.23 $0.245 $0.489 63%
EPG $0.86 $0.34 $0.54 $0.44 -49%
EMKR $1.43 $0.84 $1.07 $1.32 -8%
UQM $1.72 $1.70 $2.46 $5.97 247%
CZZ $4.18 $4.45 $5.00 $7.91 89%
RZ $3.62 $4.13 $2.00 $1.46 -60%
ZOLT $7.47 $7.98 $8.46 $10.62 42%
Portfolio $1,000 $900.20 $986 $1443 44%


ICLN $21.93 $19.40 $21.01 $23.08 5%
PBW $9.01 $8.55 $9.15 $10.81 20%



The two benchmarks, the iShares S&P Global Clean Energy Index ETF (ICLN) and the PowerShares Clean Energy Index ETF (PBW) most likely produced such different results because 

  • US-based clean energy companies received more of a boost from the ARRA or stimulus package than global firms
  • The global firms in ICLN's portfolio tend to be better established and more profitable than those in PBW's portfolio, which means that ICLN will typically outperform PBW in down markets, and underperform in up markets.  This is exactly what we have seen this year, with the best performance coming from ICLN in the dismal 1st quarter, but PBW gaining ground since then.  

Compared to these two, the portfolio has done quite well.  Even in the down first quarter, the highly volatile companies in the portfolio managed to perform better than the slightly more stable companies in PBW, but they were able to take off much faster than PBW when the market turned around.

Notes Individual Stocks

With the exception of Axion Power (AXPW.OB) and a small option position on Raser Technologies (RZ), I've sold my stake in all of these, and no longer follow them.   

That said, the best place to go for information on the three energy storage stocks (Axion Power International (AXPW.OB), Beacon Power Corporation (BCON), and Valence Technology Inc (VLNC)) is John Petersen.  He recently discussed how the stocks in the energy sector were performing here

The best performer so far has been UQM Technologies (UQM).  In January, I said "an auto bail-out which forced the big three to produce many more hybrid and electric vehicles could prove a bonanza for UQM."  We had such an auto-bailout, but UQM's success did not come solely from government stimulus.  Rather, the stock began to take off when they announced a deal to supply drive trains for an electric sedan from Coda Automotive, and then accelerated when they received a $45m award of ARRA funds


A similar story to UQM was my lone nod to biofuel, Brazilian ethanol producer Cosan, Ltd.(CZZ).  I said, "Either a return to high oil prices, or a reduction in America's ethanol import duty could greatly help the stock."  Since then, there has been a lot of talk that the administration is considering ending ethanol import tariffs. The recent rise in oil prices also seems to be helping the stock.

My least successful bet has been Raser Technologies, Inc. (RZ).  I began to think the stock had fallen far enough in my six month review of these stocks, and soon after called  Raser "too cheap to ignore" with the idea that an announcement or government loan guarantees or other funding might cause the stock to take off, just as it did to UQM.  A month later, the DOE denied the loan guarantees, and I sold my stake except for a few $5 calls (one of their ships may still come in.)  I'm now even more bearish on Raser with the revelation that they were a bit overoptimistic about delivering power from low temperature geothermal sources.  Fortunately, I got out with only a small loss.

I have not been watching Composite Technology Corp (CPTC.OB), Environmental Power Corp. (EPG), Zoltek (ZOLT), or Emcore Corp. (EMKR) since I sold them.

DISCLOSURE: Tom Konrad and/or his client have positions in AXPW and RZ.

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.

October 07, 2009

Crude Oil & Alt Energy: The Non-Relationship That Just Won't Go Away

Charles Morand

The relationship - or lack thereof - between oil prices and the performance of alt energy stocks has been a long-time interest of mine. I discussed it last in late March when I looked at correlations between the daily returns of alt energy and fossil energy ETFs. At the time, I found that only a weak relationship existed between the two and that if someone wanted to make a thematic investment play on Peak Oil, alt energy ETFs were not an ideal way to do so. 

Seeing as the popular press and countless "experts" continue to claim, whenever they get a chance, that the fortunes of alternative energy stocks are closely tied to the price of oil, I figured I would revisit the topic.

Fossil & Alternative Energy: The Relationship That Isn't There

This time around, I took a slightly different approach for my analysis: I correlated the weekly returns for US oil and US natural gas directly (as opposed to through an ETF) with returns for the S&P 500 and four alt energy ETFs. For US Oil and Nat Gas, I used price data provided by the Energy Information Administration here (Spot Price FOB Weighted by Estimated Export Volume) and here (Contract 1), respectively. I got ETF and S&P 500 price and index value data from Google Finance.

For the ETFs, I picked the Claymore/Mac Global Solar Index ETF (TAN) as the solar sector representative, because I took a position in it in March (which I liquidated last week even though I initially claimed I would hang on to it for 18 to 24 months. I have now grown more worried about downside risk than I am optimistic about upside prospects over that time horizon, so I took my money out).     

The other ETFs were: the First Trust Global Wind Energy Index (FAN) for wind, because it represents a more direct play on the sector than the alternative; the PowerShares Clean Energy (PBW) ETF for alt energy other than solar and wind, as an analysis I conducted earlier this year indicated it is the best way to access other sectors; and the Powershares Global Progressive Transport (PTRP) ETF, as it provides the only proxy I know of for returns on a basket of stocks with exposure to alternative modes of transportation.          

The graph below displays returns for all four ETFs, Oil, Nat Gas and the S&P 500 between Jan. 1, 2007 and Sep. 25, 2009 (click on the image for a large view).             

Oct 7-09 Chart 1_2.bmp

The table below shows returns and volatility for all seven assets over the same time interval but broken down into sub-periods. Seeing as 2009 and the post-Lehman collapse period have been eventful times to say the least, I thought it would make sense to create a few distinct sub-periods for analytical purposes.

What jumped out at me from this table is the relatively strong performance of the Powershares Global Progressive Transport (PTRP) ETF, even after adjusting for volatility. As the correlation analysis below demonstrates, this performance is not due to a rise in oil prices.

My going theory is that there is a Green Stimulus Effect at work given how much of global stimulus dollars have gone to transportation programs. This would be something worth exploring further but it certainly seems in line, at least on the surface, with a prediction I made nearly one year ago. 

Oct 7-09 Fig 1_2.bmp

The following three tables contain the real meat of my analysis. They are fairly self-explanatory: they show correlation coefficients between US Oil, US Nat Gas and the S&P 500 with all other assets. The correlations are for the periods outlined in the tables or since inception in the case of PTRP (Sep. 19, 2008), TAN (Apr. 18, 2008) and FAN (Jun. 20, 2008). The correlation coefficients above 0.5 are highlighted.

Oct 7-09 Fig 2.bmp

These results are, once again, in line with my expectations: there is little reason to believe that there is a strong relationship between changes in the price of oil and the performance of alt energy stocks. Even for natural gas, where one could expect a correlation with wind and solar given that all three fuels are used in power generation (or load abatement), there does not seem to be a strong relationship.

TAN and FAN have not yet been around for long enough to analyze returns going very far back into the past, but PBW has. Although the correlation between PBW's returns and oil's returns seems to have strengthened somewhat in the past year, it certainly does not qualify as strong.

I must admit that I was fairly surprised to find such a low correlation between the returns on oil and those on the PTRP ETF. My guess is that this ETF hasn't been around long enough, and that a relationship might emerge under an extreme Peak Oil scenario. That said, spending on public transportation is heavily dependent on the fiscal health of various levels of government, and we've just been moved from the emergency room to the critical care unit.    

On the other hand, I was not particularly surprised to see that returns for all four alt energy ETFs are strongly correlated with returns for the S&P 500 - that seems intuitive enough given that they all belong to the same asset class. 


It doesn't really matter how one slices and dices the data: there just does not appear to be a strong relationship between returns on oil and returns on alt energy stocks, including alternative modes of transportation.

That's not going to matter to a great many commentators who will continue to claim in newspaper and magazine articles, on blogs and on TV that the success of alt energy stocks is closely tied to the price of crude, even though that's mostly untrue.

Those who invest in alt energy should, however, pay close attention. These results suggest that there are far more important factors than oil prices, most notably returns in equity markets in general and regulatory incentives by governments.

There is a good chance that equity returns and returns on oil will diverge in the next couple of years as oil prices climb and equities stagnate or decline. If such a scenario materializes, those who have the relationship backwards could be in for unpleasant surprises.   

Battery Investing for Beginners: Index

John Petersen wrote a series of popular articles last week to introduce new investors to the battery sector, following the A123 IPO.  We've had a couple requests from readers who missed one part or another, so here is a quick index to the articles.

  1. Part I - Battery industry overview.
  2. Parrt II - Comparison of energy storage technologies and companies.
  3. Part III - Benchmarking Performance of battery stocks
  4. Part IV - Debunking misconceptions about electric vehicles and battery technology.

October 05, 2009

Dyadic International (DYAI.PK), A Stock To Avoid

Dyadic International hopes to use proprietary gene discovery to revolutionize cellulosic biofuel and pharmaceuticals.  Investors should stay away.

DyadicDyadic International (DYAI.PK) says they are applying their "proprietary enabling biotechnologies for multi-billion dollar markets in industrial enzymes, biofuels and biotherapeutics."  A very exciting prospect, and just the sort of thing I've long warned investors to avoid.  In short, they are a company with gigantic claims and not a lot of track record to back them up.

Why I Care (I don't, really)

In our survey of readers, one respondent asked that I write more about stocks to avoid.  Dyadic added me to their press list a couple months ago, probably in response to my popular article on investing in advanced and cellulosic biofuels.  If so, it's ironic. If anyone at Dyadic had read the article and thought about it a little, they would have known that I would not recommend anyone buy the stock, just based on their business plan, let alone the disturbing information I found in their press releases (see below.)

Recently, Dyadic sent me an email starting with the line "As you have shown a prior interest in Dyadic International..." (I didn't.) I decided to take a look at the company.  Here is what I found:

Out of Date Filings, Possible Previous Securities Laws Violations


At this point, I stopped looking.  Why would anyone buy stock in a company that is not providing current information, and whose promises sound too good to be true?  Given limited cash, why not invest it in a company that provides current information and promises to do something useful but believable?  Here are 39 green companies which do just that.

UPDATE: Dyadic has now published audited financial statements for 2007 and 2008.


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.


October 04, 2009

Another Look at New Flyer Industries (NFI-UN.TO, NFYIF.PK)

Should reduced liquidity at New Flyer Industries concern investors?

New Flyer Industries (NFI-UN.TO, NFYIF.PK) is one of my largest single clean energy investments. The company describes itself as the "leader in the heavy-duty bus market for the US and Canada."  This is why I first brought it to the attention of readers in April 2008, as a company likely to benefit from peak oil. Increasing the fuel efficiency of our vehicle fleet can reduce our consumption of oil in North America, but not at a pace sufficient to both accommodate declining oil supplies and increasing oil demand from the developing world.  

United States net imports are likely to decline much more quickly than world oil supply.  Furthermore, while converting some of our transportation fuel to natural gas or electricity may offset some of these lost imports, both require turnover in the vehicle fleet, and battery electric vehicles and plug-in hybrid vehicles are likely to be too expensive and too limited by available battery manufacturing to make a large enough difference in oil consumption to offset the lost imports.  Biofuels (both advanced and conventional) are similarly limited by available able feedstock.

If improvements in the automotive fleet and fuels will come too slowly to offset import declines, we'll have to look beyond the automobile for fuel savings.  If we drive less, we'll either have to travel less, or shift to other modes of transport.  The best solution would be to travel less, and live closer to where we work.  Such changes are likely to happen only slowly.  Having recently massively "invested" in the suburban project, America is unlikely to retreat quickly from those investments.  Ever hopeful, exurban homeowners will cling on, despite rising and volatile gas prices, waiting for the market to "come back" to a place it never should have been in the first place.  Even those exurbanites who chose to shift to a more urban, fuel-efficient, lifestyle will sell their houses to others who believe they are getting a great deal, if only because the price has be reduced by 20%.  Gas prices are likely to cause suburban home prices to fall faster than urban ones, but it will be longer before most of those suburban homes are unoccupied.

Transit Busses

Both a trend towards urbanization, and unaffordable suburban commutes should favor bus transit.  While rail transit is more efficient and more pleasant, it takes years to build out rail transit.  Bus transit only requires the purchase of busses, and perhaps some repainting of roads and other minor changes to improve bus speed by giving them preferential right-of way.  And because, as Winston Churchill said, "Americans can be counted on to do the right thing... after they have exhausted all other possibilities," we're not doing nearly enough to prepare for rapidly decreasing oil imports today.  Instead, we're going to be engaging in an after-the-fact, jerry-rigged effort to keep our society functioning when the gasoline lifeblood it depends on suddenly costs several times what we can afford.

In other words, rather than smooth rail transit, most Americans will make due with jerky busses from suburban park-and-rides.  If we're lucky, the busses will be hybrid electric, because if you've ever ridden on one, you'll know that both acceleration and deceleration is much smoother.

Most bus manufacturers are part of larger truck or automotive manufacturers (Scania, Freightliner, DaimlerChrysler) or are privately held (Gillig, Blue Bird, North American Bus Industries, Nova Bus.)  New Flyer is an exception, being both publicly traded, and focused on just busses.  They have a wide range of products, including compressed and liquid natural gas busses, as well as hybrid and electric trolley busses.

Then and Now

I purchased about half of my current holdings of New Flyer in Spring of 2008, mostly around US$11, and doubled my position in December in the low US$5 range, for an average cost basis of US$8.34, right around current prices.  Since the company pays a large combined dividend/interest payment, I've been happy with my overall results (The 2008 annual payment was C$1.17, 1/3 of which was qualified dividends and 2/3 of which was interest.) Investors who bought the company when I recommended it as one of my Ten Clean Energy Stocks for 2009 at anywhere near the US$6.60 it was trading at when I wrote the article should be quite pleased as well.

New Flyer's structure is unusual, with cash flows and payments to holders of "Income Deposit Securities" or IDSs.  Each IDSs is composed of a common share of New Flyer Industries, Inc., an Ontario Corporation, and C$5.53 principal amount of subordinated notes of "NFI ULC" an Alberta unlimited liability corporation.  

A reader left a comment on my original article expressing concern about the unlimited liability of the ULC.  It's important to note that the IDS holders are not shareholders of the ULC, but rather holders of subordinated notes of the ULC, i.e. debt, not stock.  Investors in the IDS (i.e. NFI-UN.TO or NFYIF.PK) should not be subject to any claims beyond their C$5.53 per IDS share NFI ULC subordinated note.  IDS investors have an ownership stake in NFI ULC only indirectly through New Flyer Industries, and hence are not exposed to unlimited liability from NFI ULC because New Flyer Industries is a limited liability corporation.

Working Capital

What investors might be concerned about is the deterioration of the cash position of the companies.  In the 2008 annual report, the company reported a "customer specific engineering design issue during 2008 Q4 which resulted in delayed bus completions and deliveries creating a temporary swelling of year-end inventory levels."  The Management Discussion and Analysis went on to say "these engineering deficiencies have been resolved and management expects the contract to be substantially delivered during the first half of 2009.  

The second quarter 2009 report updates the situation: "As of July 5... 73 of the total 225 equivalent units related to this customer's contracts had been delivered."  73 of 225 does not sound like "substantially delivered" to me, but the problem does seem to have been mostly resolved to the customer's satisfaction since the customer has "initiated further option conversions" (i.e. ordered more busses.)  Update: This customer is the Chicago Transit Authority (CTA).

However, the delay of deliveries to the CTA, and a smaller delay involving a 30 bus contract with another customer have swollen New Flyer's inventory and caused NFI ULC to draw down its cash reserves and tap its revolving credit line.  In the 2008 annual report management attributed an inventory buildup of 70 units to this problem, which corresponds to an estimated $28 million of deferred revenue.  At the end of 2007, the company had $25M in cash, while at the end of Q2 2009, it had no cash and a revolving bank debit of $16M, meaning that the company's cash position deteriorated by $41M.  Because of this negative cash balance and covenants on the subordinated debt, NFI ULC has been unable to make dividend payments to New Flyer, and has instead advanced loans to allow New Flyer to continue dividend payments to shareholders.  For IDS holders, this amounts to taking money out of one pocket and loaning it to another, a practice which would become worrying if it were to continue for long.  Management has determined that this arrangement will need to continue at least though Q3 2009.

One other major hiccup was an order deferral, announced in June from another major US municipal customer.  Because the company's busses are engineered to order, the company cannot simply shift planned production to other customers.  The deferral was due to delays in state funding to the customer.  The company has laid off 320 workers and will close plants for 2 weeks at the end of the year in response.


Although these problems seem to be the type which the company will be able to work through, is now working with less than its usual buffer of working capital.  Because of the current state of state and municipal budgets, it would not be too surprising to see another order deferral like the recent one.  If that were to happen, the company most likely could not continue the current sleight of hand which allows it to continue paying dividends to shareholders, and payments on IDSs would probably be reduced by 1/3 to just the interest on the subordinated notes.

If that were to happen, IDS holders could expect a sharp decline in IDS share prices, as income investors fled the company.  Depending on the particular circumstances, that would most likely be an excellent buying opportunity. 

With the increase in funding from the ARRA stimulus available over the next year and a half just starting to be distributed, I don't expect any such hiccups to threaten New Flyer's long term survival.  Still, such hiccups could impact short term profitability due to the company's inability to substitute new orders for orders which are unexpectedly deferred.  Note that the company does not expect any such deferrals, nor do they expect a drop in EBITDA, or to have to reduce IDS payments.  

In other words, any such hiccup would be unexpected (by management, at least.)  Investors should realize that it is a possibility, and only hold the securities if they consider the potential for appreciation and a hefty income stream to be worth the risk.  On the other hand, if business proceeds as management expects, we can expect price appreciation relative to the market as production continues to increase and inventory falls strengthening both revenues and the company's cash buffer.  The liquidity issues should be watched, but should not yet be a cause of deep concern.

I consider New Flyer a stable company in an extremely attractive industry.  We can already see some benefits to the company from greater awareness of oil price risks: the company's product mix has been shifting to include a greater proportion of hybrid busses.  The better product mix has allowed them to expand revenues despite the setbacks.  Furthermore, the current combined interest and dividend yield of over 13% continues to compensate well for the risk of any price fluctuations.  If the payments were reduced to just the payment on the subordinated note, it would still be well over 8%.   Meanwhile, the potential for appreciation goes hand in hand with potential increases in the price of oil.

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

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.

October 02, 2009

Battery Investing For Beginners, Part 4

John Petersen

In "The Sixth Revolution: The Coming of Cleantech," Merill Lynch strategist Steven Milunovich heralded cleantech as a new investment theme and forecast a period of gut wrenching change followed by an age of plenty. A few days later venture capital icon Vinod Khosla warned his audience “500 million people on earth enjoy a lifestyle that 9 billion people will want in 2050.” The differences between these two informed viewpoints are more than a little stark, but they highlight a frightening truth about cleantech: for the first time in human history the fundamental drivers of a technological revolution are constraints rather than opportunities. In this final installment of my series on battery investing for beginners, I want to explain why cost considerations and the transitory nature of government policies should temper the optimism of energy storage investors.

Warren Buffett advocates investing in companies you understand, companies that that sell products and services you know, trust and use. Unfortunately, that advice is almost impossible to follow in cleantech because most of the players are new, few can point to a long and successful operating history and the principal disclosures investors rely on are forward-looking statements from people that are trying to build a company in an emerging industry; people who are by nature optimists. Any time you put an optimist's forward-looking perspective into the hands of an optimistic reader, the only possible outcome is optimism squared and that's a dangerous equation.

In 1999, Toyota (TM) introduced a radical concept called the Prius, a hybrid electric vehicle, or HEV, that used recuperative braking, stop-start idle elimination, electric only launch and electric boost to reduce energy waste and slash fuel consumption by roughly 40%. Over the last 10 years, the Prius has progressed from an eco-bling status symbol to a mass-market product. In the process it won the loyalty of consumers and forced other automakers to develop competitive vehicles. The following 10-year graph of domestic HEV sales comes from hybridcars.com and shows how unit sales and product offerings ramped up over time.

US hybrid market historical sales (1999 – 2009)
Hybrid Sales.gif
This chart shows a normal market for an innovative product that evolved organically in response to consumer demand. If not for the current recession, it's easy to see how HEV sales could easily have been in the 500,000 to 700,000 vehicles per year range by now. The HEV is a winning concept that can only get more popular as the base of satisfied customers broadens and gasoline prices rise.

The unspoken truth about PHEVs and EVs is that the fundamental driver for change is government compulsion, not customer demand. The automakers know that they can't possibly meet new U.S. CAFE standards and European CO2 emission standards without including a high percentage of HEVs or a more modest percentage of PHEVs and EVs in their sales forecasts. The government's theory seems to be "if you build it they will come." While there is a high degree of automaker skepticism over whether the average consumer can or will pay an 80% to 100% premium for a PHEV or EV, the automakers all know that if they spend the money to build and introduce PHEVs and EVs and consumers refuse to buy, they'll have the perfect cover when the regulators come calling. Greenwash is expensive, but it's not as costly as being excluded from major markets or finding another line of business.

The hard question I think investors need to ask themselves is, "do you plan to spend at least $40,000 to buy yourself a PHEV or EV?" Unless your answer is an enthusiastic yes, you need to question whether investing in a battery company that has tied its future to the success of PHEVs and EVs makes sense.

My favorite part of the blogging experience is the lengthy debates I get into with informed and opinionated readers. They add a depth and balance I could never achieve on my own. They also provide wonderful insights into what people believe the future holds. The following is a compendium of a few cherished mythologies and incontrovertible realities that I’ve seen time after time in reader comments.

Cherished Mythology lithium-ion batteries are expensive today but they'll get cheaper with economies of scale.

Incontrovertible Reality The lithium-ion battery industry already sells $7 billion of products annually and big companies like Sony, Sanyo, Panasonic, LG Chem, Toshiba and Johnson Controls have done a great job of optimizing their production economies. According to a presentation by RolandBerger Strategy Consultants at last month's Frankfurt Auto Show, between 65% and 75% of the manufacturing cost for lithium-ion batteries represents the purchase price of raw materials and another 20% to 30% represents the cost of increasingly sophisticated and expensive equipment and factories. The balance goes for energy, labor and overhead. The only factors that can reasonably be expected to significantly reduce costs are generational improvements in battery chemistry and manufacturing technology.

Cherished Mythology PHEVs and EVs have limited range for now, but they'll have more flexibility in the future.

Incontrovertible Reality A typical PHEV or EV will get about four miles of travel range for each kWh of useful battery capacity. A comparable car with an internal combusion engine would get at least 28 mpg. In a normal car the fuel tank is cheap and the fuel is expensive. In a PHEV or EV the dynamic is reversed and the battery pack is the functional equivalent of a fuel tank that costs $7,000 per gallon of capacity (28 mpg/4 miles per kWh @ $1,000 per kWh). Once you buy the tank, filling it is dirt-cheap. Under current economic conditions long-range PHEVs and EVs can never be cost effective and the only way to make the economics come close to working is to buy no more battery capacity than you plan to use every day.

Cherished Mythology PHEVs and EVs will help reduce America's dependence on imported oil.

Incontrovertible Reality A PHEV or EV will use 10 times the battery capacity of an HEV. If the batteries are used in one PHEV or EV, national gasoline consumption will fall by 400 gallons per year. If the batteries are used in 10 HEVs, national gasoline consumption will fall by 1,600 gallons per year. In truth, PHEVs and EVs will sabotage America's drive for energy independence instead of supporting it.

Cherished Mythology PHEVs and EVs will help reduce America's CO2 footprint.

Incontrovertible Reality A PHEV or EV will use 10 times the battery capacity of an HEV. If the batteries are used in one PHEV or EV, national CO2 emissions will decline by 190 grams per mile, or roughly 2.375 metric tons per year. If the batteries are used in 10 HEVs, national CO2 emissions will fall by 135 grams per mile, or roughly 16.875 metric tons per year. Until we stop generating electricity with coal, PHEVs and EVs will not significantly reduce CO2 emissions.

Cherished Mythology PHEVs and EVs will become a dominant automotive technology in the next decade.

Incontrovertible Reality In its 2009 Annual Energy Outlook, the DOE estimated that PHEVs and EVs would account for 1.26% of the new light duty vehicle sales in 2020 and grow to 2.28% by 2030. At the Frankfort Auto Show, Roland Berger Strategy Consultants forecast the following market penetration rates for the principal automotive powertrain technologies in 2020:

Internal combustion 23%
Micro hybrid 51%
Mild hybrid 5%
Full hybrid 8%
EV 4%
Cherished Mythology Lithium-ion batteries will be needed for mild, micro and full hybrids.

Incontrovertible Reality Advanced lead-carbon batteries and systems that combine lead-acid batteries with supercapacitors are up to 75% cheaper than lithium-ion batteries and offer acceptable performance in the micro and mild hybrid vehicles that Roland Berger says will account for 56% of U.S. auto sales, 69% of Japanese auto sales and 73% of European auto sales in 2020. While lithium-ion batteries will undoubtedly be used in some luxury hybrid vehicles, they're not expected to be a major factor in the mass markets for affordable light duty vehicles.

Cherished Mythology Revenues will ramp up rapidly for lithium-ion battery manufacturers over the next decade.

Incontrovertible Reality There is no substantial unused lithium-ion battery manufacturing capacity anywhere in the world and future revenue growth will be directly tied to the construction of new factories that typically take three years to plan and build. The only energy storage device manufacturers that already have excess manufacturing capacity are in the lead-acid group. As a rule of thumb, lithium-ion battery manufacturers plan on $1 in capital spending for every $1 of incremental sales revenue. In comparison, lead-acid battery manufacturers generally plan on $1 in capital spending for every $3 to $5 of incremental sales revenue.

Cherished Mythology New battery technologies will take revenue away from established manufacturers and hurt their bottom lines.

Incontrovertible Reality History teaches that increased energy efficiency leads to increased energy consumption and new technology inevitably increases aggregate demand by facilitating the development of new applications that were impossible using old technology. For the foreseeable future, demand for all classes of energy storage devices will increase at rapid rates and the only losers will be companies that can't bring a competitive product to market.

Lithium-ion batteries are a very valuable technology and their future importance to the cleantech revolution cannot be overstated. Nevertheless we've all seen the disastrous consequences investors suffered from ill advised governmental policies to encourage the use of ethanol, the wonder fuel of the new millennium. In a slideshow presentation at a recent clean air conference one auto industry executive described government's "technology du jour syndrome" and offered the following table to prove his point.

25 years ago Methanol
15 years ago Electric vehicles
10 years ago HEVs and Electric vehicles
5 years ago Hydrogen Fuel Cells
2 years ago Ethanol
Today PHEVs and Electric vehicles
2011 What’s next?

It's enough to make you go Hmmm.

As a young lawyer in Houston, my first mentor taught me that you can describe every oil and gas deal with a venn diagram that consists of three concentric circles. The outer circle represents the seller's expectations, the middle circle represents the buyer's expectations, and the innermost circle represents the actual outcome. In the market for energy storage stocks I worry that the venn diagram is distorted because investor optimism exceeds industry expectations by a wide margin. These are conditions that can give birth to bubbles.

My favorite story of unbridled optimism begins with a straight-laced father who thinks his son is overly optimistic and decides to teach the boy a lesson by telling him that a load of manure is his birthday gift. The manure is delivered and dumped in the driveway and the father puts a big red bow on top of the pile. When the son gets home from school, he promptly dives headfirst into the manure pile and starts digging. When the surprised father asks "What's going on?" the boy promptly replies, "There has to be a pony in here somewhere!"

The good news is there are several workhorses in the pile. The bad news is that none of them are the pretty ponies that the government, the mainstream media and the environmental activists are praising with quasi-religious fervor. Unless investors are willing to spend a huge amount of time studying deathless tomes on energy storage, the only rational way to invest in the sector is through a diversified portfolio of cheap and cool stocks.

This will be my last blog for a week or so because I'm scheduled to give a luncheon speech at Sandia National Laboratories’ EESAT 2009 Conference in Seattle on Tuesday. In connection with the speech I'll have an opportunity to attend three days of high-level presentations on electrical energy storage applications and technologies. Hopefully I'll return with some new insights that can help make readers better investors.


October 01, 2009

Q3 Performance Update: 10 Green Energy Stocks for 2009

My annual green energy stock picks continue to hold up, but the Obama Effect for clean energy seems to have been lost in the summer's healthcare debate.

For the first 9 months of 2009,  my ten green energy stocks for 2009 are up 23.4% vs. the S&P 500, and up 20.4% over my clean energy benchmark, the iShares S&P Global Clean Energy Index (ICLN).  For the third quarter, that amounts to a loss of 1% relative to the S&P 500, and a gain of 7% relative to ICLN.

In my second quarter update, I attributed the out-performance of both clean energy in general, and my picks to the Obama Effect.  That is, green energy outperformed the market strongly in the first half of the year because of the strong political and financial support it received from the new administration and Congress.

In the third quarter, with the administration and congress distracted by the health care debate, the market as a whole made up a lot of ground against my general green energy index, but my picks were able to hold on to almost all of their gains, despite the less favorable climate.

Below is a detailed rundown of the 9 month results.  The somewhat cryptic last pick, "3x $ - 2x SPY" is a hedge against a possible market decline.  Rather than using a pure short, I wanted to give it approximately equal weight to the other picks.  In order to have an initial investment of $1 in each pick, including the short, I sold a hypothetical $2 worth of SPY short, but kept the $2 cash proceeds, along with an extra $1 cash allocated to the pick.  Hence that pick is a combination of $2+$1 = $3 cash and -$2 short of SPY.  (I left out a few details here for simplicity.  All the gory detail is here.)

Company  Ticker

Change 12/27/08 to 9/30/09

Dividend & Interest

The Algonquin Power Income Trust AGQNF.PK 77.42% 11.16%
Cree, Inc. CREE 144.02% 0%
First Trust Global Wind Energy ETF FAN 37.42% 0.46%
General Electric GE 2.82% 4.51%
Johnson Controls JCI 50.89% 2.30%
New Flyer Industries NFYIF.PK 26.73% 9.98%
Ormat ORA 37.03% 0.44%
Trinity Industries TRN 0.24% 1.40%
Warterfurnace Renewable Energy WFIFF.PK 68.63% 3.27%
-2x  S&P Depository Receipts + 3x Cash (was SDS until Feb 13) 3x $ - 2x SPY  -54.81% -0.17%
Total Portfolio  41.51%


Standard & Poors 500 Index (S&P500) 17.13%
iShares S&P Global Clean Energy Index (ICLN) 21.11%


My Trades & Updates

I continue to expect a market decline, and am now more worried than 3 months ago, when I had sold most of my positions in Cree, Ormat, and General Electric.  In the meantime, in addition to increasing the overall level of market hedging for my portfolio, I sold more of my GE stake.

If you want to delve deeper, I recently published an update on the Algonquin Power Income Trust.  I'll also have an update on New Flyer Industries which will be published at the preceding link early next week (now published).  The original article has more information on the other picks.

Three months ago, I told readers, "If I had to buy any of these stocks today, it would be Trinity."  In the three months since then, Trinity has risen 29%, compared to a rise of 14% for the S&P 500, a rise of 6% for ICLN, and a rise of 11% for my portfolio as a whole  (relative to their prices at the time.)  Trinity was not the best performer for the quarter, but readers who chose to buy it then will probably be happy with the results.  

If I had to buy any of these stocks today, I wouldn't.  I'd take a position shorting the market (i.e. 3x $ - 2x SPY.)  Let's see how that works out in three months.

Other Portfolios I'm Tracking

I recently published the half year update for my quick mutual fund tracking portfolio. That portfolio had continued to outperform the mutual funds it was designed to track, and, in my investigation, I discovered it was because the portfolio had higher market risk (beta) than the funds it was drawn from.  Since I've now determined that it is not a good tracking portfolio, I don't intend to update readers on its performance again, but I may use some of the lessons learned in future portfolio design.

I also need to update my ten green energy gambles for 2009, which I intend to do (schedule permitting) about 6 months after the list was published, or around October 11.  The six month update is here.  That portfolio also continues to do well, although it is much more vulnerable to a market decline than the 10 stocks I discussed here. 

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

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


Battery Investing for Beginners, Part 3; Resetting The Cheap vs. Cool Baseline

9.30.09 Cheap vs Cool John Petersen

I've been blogging about pure-play energy storage device manufacturers since July 2008. By mid-November I'd assembled a short list of thirteen pure-play public companies that accounted for almost 25% of the $30 billion global battery market. Frankly I was shocked to learn that major battery manufacturers like Exide (XIDE) and Enersys (ENS) that report billions in annual sales carried tiny market capitalizations when compared with far riskier technology development companies like Ener1 (HEV) and Valence Technology (VLNC) that would be little more than rounding errors on the big boys' financial statements. As I focused on the obvious valuation disparities, it became clear that the market was paying huge premiums for companies that are developing cool energy storage devices and heavily discounting companies that manufacture objectively cheap energy storage devices. My belief at the time was that the cool companies were likely lose ground while the cheap companies were likely to gain ground. My original peer group comparison table follows (click on the image for a larger view).

November 08.png

While the last ten months have been anything but normal, I revisited my valuation analysis in May of this year and showed that from November 14, 2008 through April 30, 2009, the cheap group appreciated an average of 56.5% while the cool group appreciated an average of 6.7%. I revisited the analysis again in August of this year and showed that from November 14, 2008 through July 31, 2009, the cheap group appreciated an average of 59.2% while the cool group appreciated an average of 21.42%. We all know that past performance is never a guarantee of future performance, but the theory seems to be holding up pretty well.

With it's successful IPO last week, A123 Systems (AONE) dropped a $2.2 billion market capitalization rock into what was previously a $4.4 billion market capitalization pond. The ripple effect will be felt for months as analysts and investors perform detailed comparisons of the publicly traded energy storage companies in an effort to ferret out the bargains and identify the diamonds in the rough. Now that the initial volatility of A123's IPO has passed, the market seems to be returning to more normal conditions, and we've reached the end of a calendar quarter, this seems like a convenient time to do a final comparison of market performance since November 14, 2008. It also provides an opportunity to conform the cheap and cool classifications to the tables I used in Battery Investing For Beginners, Part II and reset the baseline for future comparisons using yesterday's closing prices.

The following table provides comparative price data for the pure play energy storage companies I track. It shows closing prices on November 14, 2008 and September 30, 2009; calculates the percentage of change since November 14, 2008; and shows current market capitalization of each company. It also provides comparable tracking data for the Dow, the S&P 500 and the Nasdaq Index. While I've included A123 in the cool sustainable group effective September 30th, I have not adjusted the historical performance of the group for the first week of trading in its stock (click on the image for a larger view).

September 09.png

The following table summarizes the portfolio appreciation that a hypothetical investor would have realized over the last ten months if he had invested $1,000 in each company on November 14, 2008. It also presents comparable data for the broad market indexes.

Broad Market Indexes
Cool Emerging Companies
Cool Sustainable Companies
Cheap Emerging Companies
Cheap Sustainable Companies
Chinese Battery Companies

Equity markets are driven by a combination of greed and fear, emotional reactions that are frequently at odds with economic realities. Over the past few years, the cool companies have been driven by headlines that highlight opportunities while the cheap companies have been driven by headlines that highlight problems. Since headlines inevitably feed the greed and fear cycle, the cool companies were driven to objectively high valuation levels while the cheap companies were driven to objectively low valuation levels. If the last ten and a half months are any indication, the pendulum is moving back toward a more balanced position where the cheap group valuations will eventually reach a more reasonable parity with the cool group valuations. They still have a long way to go.

I have consistently argued that every energy storage decision in transportation, alternative power and the smart grid will boil down to a cost-benefit analysis. As long as the cost of storage exceeds the value of the stored electricity, waste will prevail. When the value of the stored electricity is higher than the costs of storage, the market will respond appropriately. While there is no doubt that the cool companies will have more business than they can handle, there is also no doubt that 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." It's ultimately a choice between meat and potatoes or rainbow stew.

While I believe the cleantech revolution will result in rapid and sustained growth across the entire spectrum of energy storage companies, I remain convinced the best stock market performers will be manufacturers of objectively cheap energy storage products. Vinod Khosla is fond of reminding investors that "The most important thing to remember is economic gravity — the cheapest thing ends up winning." Mark Twain once quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he made the cheapest cars. Microsoft didn’t make the best operating system; it made the cheapest operating system. Xerox invented and then failed to commercialize more cool technologies than I can even begin to count. Examples of the fundamental economic reality that cost trumps coolness are too numerous to mention. When you cut through the energy storage hype and drill down to business fundamentals, I have to believe that investors who want market beating returns in the energy storage sector should be focusing on companies that make cheap products.

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).

« September 2009 | Main | November 2009 »

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