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November 30, 2009

Green Energy Investing For Beginners: Index

Tom Konrad, CFA

I write about investing in Renewable Energy, Energy Efficiency, and other green technologies because I'm worried.  I'm worried that the inevitable transition away from fossil fuels driven by peaking supply and climate change could be much more painful than it needs to be because, as a society, we have massively underinvested in the infrastructure that we will need for the transition.

I don't care if my readers are motivated by an altruistic wish to make the world a better place, or they just want to cash in on what promises to be the hottest stock market sector for years to come.   I expect that most of you, like me, have some of both, and hope to do very well while doing good.

Whatever your motivation, I want to give you the tools to accomplish your goal, because, if you invest in the companies in this sector, they will be better able to continue developing and deploying the technology and infrastructure we all will need not too far down the road.  This too is both altruistic and selfish: I don't want to live in a world where we managed the transition badly.

That said, here are your tools.  My intent is that in a few hours of reading these articles, you will know how to prepare your portfolio for the transition and will be able to use that information after taking into account your personal resources, needs, and investing experience.

If you don't feel that you know what you need to do after reading all four, leave a comment.  The answer to your question could very well end up being part five.

Part 3: Before you invest in Green Energy.

Part 1: Choosing between Green Energy Stocks, ETFs, and Mutual Funds

Part 2: How much to invest in Green Energy?

Part 4: Choosing the best Green sectors.

Part 5: The Basics from a Small Canadian Investor's Perspective

Part 6: How Many Stocks Should You Buy?

I've changed the order to give the series a more logical flow.  Part 3 should have really been part 1, but I wrote it at a reader's suggestion, after part 2 was published.  

Stay tuned for a short series on Green Energy Investing for Experts to be published in December.  (The link is to a search, articles will show up as they are published.)

DISCLOSURE: None.

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

November 29, 2009

Green Energy Investing For Beginners, Part IV: Model Portfolio

My target sector allocation for Green Energy Sectors: How much to put in Solar, Wind, Geothermal, Biomass, Biofuels, Energy Efficiency, Alternative Transport, and enabling technologies such as Smart Grid and Transmission.

In Part I of this series on green energy investing (see also Part II and Part III), I suggested readers "structure your portfolio to reflect the technologies which are actually going to make a difference."  This is not the same as investing in a market portfolio, because the market tends to overemphasize the most exciting or familiar (as opposed to the most useful) technologies.  This is true for all-too-human venture capitalists, as well as public stock investors.

Checklist

Real advantage in investing comes from doing better analysis than the majority of other investors.  By understanding the mistakes or biases of other investors, even small investors are capable of beating the market.  For each green energy sector, we should ask ourselves:

  1. How big a role will this sector play in our energy future?
  2. How big a role do stocks in the sector play in the market currently?
  3. Can we buy stocks in companies which will profitably play this role, or is the current industry likely to be disrupted by new entrants and technologies?
  4. If we can't invest in the companies which will make a difference, can we invest in enabling technologies?

If the sector's role will be large, but it plays a smaller role in the current stock market, and we can buy companies today which are likely to play a significant part, then that is a sector which should be prominent in our portfolio. 

Assessing Sectors

There are countless studies and reports detailing what our energy future will or should look like.  One that I think takes a fairly unbiased view of the available technology is the Gigaton Throwdown.  The Gigaton Throwdown looked at technologies' potential over the next 10 years and asked if they could make a difference in job growth, energy independence, and climate change.  Another reference I've used in the past is the London Accord, which used modern portfolio theory to assess the effectiveness of many technologies towards mitigating climate change.  Because most of these studies focus more on climate change than peak oil, which I consider to be a more immediate threat, I also consider strategies such as mass transit, biking, and road pricing which will help us cope with transportation fuel scarcity.  I lump these strategies together as Alternative Transport.

To get an idea of the market's view of technologies, I obtained a report from BofA Merrill Lynch Global Research.  Below is a chart of the market capitalization of the CleanTech sectors they cover:

BofA Merril Lynch does not consider Alternative Transport to be Cleantech, but they do cover most of the other technologies I think are important.  

Industry Disruption

In terms of industry disruption, I look at what reports have to say about what is required to achieve scale in the industry.  For instance, Geothermal is an extremely economic form of renewable electricity with relatively low environmental impact.  In order to achieve scale, Enhanced Geothermal Systems (EGS) will have to be developed, a technology which is not currently being worked on by publicly traded industry players.  EGS is unlikely to displace the current set of companies, whose profitability depends on extracting energy from existing resources and owning the mineral rights to those resources, but neither are they likely to be able to take advantage of the opportunities of EGS.

Solar needs technological innovation in Photovoltaics (PV) or Concentrating Photovoltaics (CPV) in order to be cheap enough to be brought to scale quickly, and such innovation is likely to be harmful to many existing industry players working on incremental improvements to current PV.  Concentrating Solar Thermal have few established players and is already in the midst of industry technological disruption.

Efficient lighting is in the midst of rapid technological change, but many efficiency technologies, such as geothermal heat pumps have been around for years and have established and profitable players.  The insulation industry is even more staid.  Advancing energy efficiency requires much more cultural and political change than technological change, so efficiency investments are likely to be very profitable if concern about climate change and energy security drive the needed cultural and political changes.

Putting these sources together, here are my assessments of the four questions I outlined above for each sector.

Sector Role Current Market Cap Chance of Disruption Enabling Technologies
Wind Large Large Low Transmission, Smart Grid
Solar Large Large High Transmission, Smart Grid, Storage
Efficiency Very Large Small Low or Ongoing Political and cultural change
Plug in Vehicles Small Small High Smart Grid, Storage
Biofuels Moderate Small Moderate to High Cellulosics, use of Waste Streams
Geothermal Moderate Small Req. to achieve scale Transmission, EGS
Alternative Transport Large Medium Low Political support, Smart Growth
Nuclear Moderate Moderate Medium Safe disposal of radioactive waste
Waste Small Small Low none needed
Transmission Enabling Medium Low n/a
Smart Grid Enabling Small Ongoing n/a
Storage Enabling Small Ongoing n/a

Of the nine technologies  listed, only Efficiency and Alternative Transport (Mass Transit, Biking, etc.) strongly meet my criteria.  Among enabling technologies, only Transmission is a well-established industry not prone to disruption.

Smart Grid and Storage technologies also appear frequently as enabling technologies, but both of these industries currently are undergoing rapid technological change, and so investments should be chosen carefully.  Finally, Wind, Geothermal, and Waste show current market capitalization of a similar scale to their likely future, while Waste has the added advantage of being an enabling technology for biofuels.

My Target Portfolio

Target Portfolio.PNG

Putting all of this together, the majority of my target portfolio is composed of Energy Efficiency, Alternative Transport (such as mass transit), and Electric Grid sectors.  The balance goes to Wind, Geothermal, Electricity Storage, and Biomass/Waste to Energy.  In contrast, Modern portfolio Theory would suggest that your Green Energy Portfolio should look very much like the market cap breakdown I obtained from BofA Merrill Lynch Global Research.  Yet Modern Portfolio Theory is designed for people who are trying to match the market, not beat it.  

If you disagree with my judgments here, you should now have the tools to incorporate your own thoughts on our energy future into your own table, and use the result to allocate your portfolio.

Building Your Portfolio

If you'd like to achieve a portfolio like this yourself, Alternative Energy ETFs can get you about half-way.  As I discussed in my recent comparison of Green Energy ETFs, the Powershares Global Progressive Transport Portfolio (PTRP) is a good way to invest in Alternative Transport, and the First Trust Global Wind Energy Index (FAN) serves the same function in the wind sector.

In November, First Trust launched their Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (Nasdaq: GRID).  When I analyzed GRID's portfolio holdings, I found that it was much more of a general grid infrastructure ETF than a narrowly focused Smart Grid ETF, but that it addresses the sector I'm most interested in much better than it would have if it only focused on Smart Grid stocks.  

The other sectors still need to be addressed with stock-picking, but stock picking is likely to be more effective (and take less time) if you can focus on a narrower range of companies.  I discussed some simple approaches to stock picking in Part I.  For those looking at the battery sector, an excellent place to start is John Petersen's series Battery Investing for Beginners, the popularity of which was the inspiration for the more broadly focused Green Energy Investing for Beginners series you are now reading.  

If you have suggestions for further articles in this series, leave a comment.

DISCLOSURE: None.

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

November 27, 2009

Lithium Ion Batteries And GEVs Are Faith-based Cures for Oil Addiction

John Petersen

Last Tuesday a reader sent me a copy of "Ending the ICE Age," a new industry overview from Bank of America Merrill Lynch analyst Steven Milunovich on the future of plug-in vehicles, which the newly organized Electrification Coalition has christened grid enabled vehicles, or GEVs. After spending several hours studying the report I concluded that Mr. Milunovich has found the true religion of the new millennium while I'm still an unwashed pagan, or worse yet a heretic.

The grim reality is that when you look at American energy policy as a faith-based initiative, a new religion with its own rigid doctrine, dogma and ritual, it begins to make sense. It explains why our Secretary of Energy feels comfortable with a public comment that he's agnostic about natural gas. It also explains why the coastal waters of California and Florida together with huge swaths of Alaska have been forever consecrated as holy ground. It even explains why climatologists, eco-clerics and fanatic faithful feel justified suppressing facts and ostracizing skeptics that call their world-view into question.

It's a 21st century version of the Spanish Inquisition and I have a front row seat. What fun!

The Milunovich report is the third bullish analysis of GEVs that I've reviewed since the beginning of October. The other two came from Credit Suisse and HSBC. All three reports wax poetic on the fuel savings and CO2 reduction potential of GEVs, all three assume that battery pack costs will fall from current levels of roughly $1,200 per kWh to something on the order of $500 per kWh over the next five to ten years, and all three warn that the GEV industry will not bear fruit unless lithium-ion battery developers can deliver on their promises to make cheap, powerful, durable and safe products. The fundamental problem with all three reports is they don't ask whether the premise of GEVs is reality, or blue smoke and mirrors. The only way to answer that question is with a spreadsheet that presents a side-by-side comparison of the alternatives. I'll try to keep it simple.

Reality vs. Blue Smoke and Mirrors

The best information I've been able to lay my hands on indicates that the capital cost of a new lithium ion battery plant is on the order of $1,000 per kWh of annual capacity. The following table provides a simplified analysis of the economic impact of a hypothetical $500 million plant. It provides a baseline column for conventional internal combustion vehicles, together with additional columns that allocate 100% of plant capacity to battery packs for Leaf class BEVs, Volt class PHEVs and Prius class HEVs. To minimize controversy, I've assumed that the batteries will cost $500 per kWh; every vehicle will travel 12,000 miles per year; every GEV will get 4 miles of electric-only range for each kWh of charge; and all GEVs will use electricity from utilities that emit the national average of 585 grams of C02 per kWh.

Economic Impact of $500 Million Lithium Ion Battery Plant
Production Capacity 500,000 kWh Per Year









ICE
BEV
PHEV
HEV
Battery Pack Requirement

  24 kWh
16 kWh   1.3 kWh
Vehicles enabled per year

20,833
31,250
384,615








Vehicle cost without batteries $20,000
$19,500
$21,600
$21,800
Battery Cost at $500 per kWh

$12,000
$8,000
$650
Total vehicle sales price $20,000
$31,500
$29,600
$22,450








Annual Gasoline Use (gallons) 400
0
0
240
Annual Electricity Use (kWh)

3,000

3,000


Annual CO2 Emissions (metric tons) 3.7
1.8
1.8
2.2








Annual economic impact






Battery sales (000s)

$250,000
$250,000
$250,000
Non-battery vehicle sales (000s)

$406,250
$675,000
$8,384,615
Tax credits to purchasers

-$156,250
-$234,375

Net economic impact

$500,000
$690,625
$8,634,615








Annual Gasoline Savings (000s)

8,333
12,500
61,538
Annual CO2 Reduction (metric tons)

40,425
60,638
568,062

While the HEV values in the table are very attractive in the context of a gasoline fueled car, they get downright gorgeous if you take the analysis a step further and factor in the potential use of CNG as a substitute fuel in conventional HEVs. Think about it – a CNG fueled HEV uses no imported oil and its carbon footprint is lower than a BEV that uses electricity from an average utility. The only significant drawback is an underdeveloped retail CNG distribution system but that impediment is relatively easy to solve since America's natural gas distribution backbone is pervasive, robust and far more modern than the electric grid.

When you calculate gasoline savings and C02 emission reductions per dollar of capital investment, no technology fares better than advanced lead-carbon batteries for start-stop micro-hybrids. To put things in perspective, a $500 million investment in plant and equipment for micro-hybrid battteries would permit the production of 7.5 million vehicles per year, generate roughly $1.9 billion in battery sales, slash gasoline consumption by 180 million gallons and reduce C02 emission by 1.7 million metric tons. In other words it is very likely that the $68 million in ARRA battery manufacturing grants that went to lead-carbon battery manufacturers will generate greater gasoline savings and C02 emission reductions than the $1.2 billion in ARRA grants that went to lithium-ion battery companies. This is not a question of faith. The numbers cannot lie and the magnitude of the differences is too big to ignore. If you really want to make a difference, you take the baby steps and harvest the low-hanging fruit first.

Nobody with a spreadsheet and a rudimentary understanding of mathematics can honestly argue that subsidizing batteries for GEVs will hold a votive candle to using the same funds to subsidize batteries for Prius class HEVs. Adding the cost of GEV charging stations to the abysmal economics results in a picture that nobody but the blindly faithful could love. I have no doubt that a variety of GEVs will be introduced over the next couple of years because that's what the new religion demands. For obvious reasons, I expect the phenomenon to be a flash in the pan.

The Hype Cycle

While I was doing my background research for this article, I came across a wonderfully informative graph titled "Hype Cycle of Emerging Technology" that TIAX LLC adapted from a Gartner Group concept and presented at the Plug-in 2008 conference. The graph is particularly useful for investors because in addition to showing how public perceptions of technologies develop over time, it shows how early stage markets for equity securities develop.



While TIAX suggested that PHEVs were approaching their peak visibility level in May 2008, I don't think we'll reach the peak until 2012 at the earliest. By 2015, when significant numbers of GEVs have been sold to consumers who discover to their chagrin that their oh so sexy GEV is little more than a 20 foot power cord connected to an expensive, temperamental and inflexible automotive supermodel that doesn't like heat, cold or hills, and has a nasty habit of taking several hours to recharge and refresh just when you need it most, we should be well into the trough of disillusionment.

I can almost hear the phone conversations now, "I understand that Johnny Jr. needs to see a doctor for that projectile vomiting thing but I just plugged my GEV into the charging station and I won't be able to get to the school for another four hours. Could you do your best to keep him comfortable, give him a book or maybe an aspirin and tell him that daddy will be there soon?"

I'm a big fan of hard-core economics. I have no fundamental problem with Government subsidies to manufacturers that support critical infrastructure and have a reasonable chance of accomplishing their stated goals. It's an entirely different matter when taxpayer money is used to subsidize luxury consumption. New factories make the economy richer if the fundamental business premise is sound. Eco-bling subsidies to the new faithful have no justification in sound public policy. We deserve better.

The supermodels of the energy storage sector including A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) are well up the hype cycle curve and approaching the Peak of Inflated Expectations. In contrast the stalwarts of the battery business including Exide Technologies (XIDE) and Johnson Controls (JCI), together with new technology entrants like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) that are developing disruptive enhancements to established battery technologies, are just approaching their technology trigger point. As stop-start and mild hybrid technologies become standard equipment on internal combustion engines over the next few years, I believe these overlooked low-priced companies with sustainable business models that work in the real world of pagans and heretics will sparkle.

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

November 25, 2009

Smart Grid Sector Gaining Traction from Stimulus Funds

Digi International Positioned for Growth

by Joyce Pellino Crane

Caught between a maturing sector and a nascent one, Digi International, Inc., (Nasdaq:DGII) is stirring opposition among research analysts, who view its recent acquisitions as either a brazen entry into an emerging area, or a compensatory cover for poor performance.

Over the past five years, the company has ventured into the smart grid sector through several acquisitions of wireless and cellular technology companies.

One industry observer, who did not want to be quoted, said acquisitions artificially increase revenues during a down economy.  Another, who asked not to be identified, said the Digi acquisitions were not panning out, and it was unclear whether that was due to poor decisions or the economy.

But Jay M. Meier, senior research analyst at Feltl and Company said Digi’s growth will parallel the nation’s emerging smart grid.

“Everybody’s complaining that the company didn’t grow much between 2003 and 2007,” he said. “But Obama just announced $3.4 billion in matching grants in smart grid technology. It’s a whole new industry.”

Meier argued that the company has positioned itself as a one-stop shop for all digital transmission modalities, from blue tooth to broadband, and the fruits of its labor will be harvested as stimulus funds begin infusing the economy.

Digi International, a telecommunications sector company, has been moving into the smart grid space by supplying components to manufacturers of smart grid connectivity devices and solutions. Companies that buy Digi’s products integrate them into completed solution systems, much like Dell (Nasdaq:Dell) does when it builds a laptop. In addition, Digi sells industrial automation equipment, converter interfaces for utility company networks, and legacy equipment to healthcare facilities, and retail stores.

In October smart grid companies got a major boost when the Obama Administration announced $3.4 billion in grants from the 2009 American Reinvestment and Recovery Act for smart grid technology. The government money will be matched by industry funds, for a total public-private investment worth over $8 billion, according to the DOE. An analysis by the Electric Power Research Institute estimates that the implementation of smart grid technologies could reduce electricity use by more than 4 percent by 2030, according to the DOE. That would mean a savings of $20.4 billion for businesses and consumers around the country.

Meier expects Digi to benefit from the federal funds, but because it will take a while for the Energy Department to disperse the grants, he anticipates growth to begin by the middle of 2010. His price target is $16 per share.

“I’d like people to think about this as an investment and not a trade,” he said.

Share price was $7.90 as of Monday’s (Nov. 23) close.

Net sales for the preceding 12 months were $165.9 million as of fiscal 2009, ending September 30, down more than 10 percent from the same period a year earlier. But Meier noted, the plunge occurred during the global economic meltdown, which began in September 2008 and led the country into a recession that only now seems to be ending.

“The markets were in free fall, the banks were collapsing,” Meier said. “…and the stock bounced off $6.50 like bedrock.”

In an earnings conference call on October 29, Joe Dunsmore, Digi president and chief executive officer, said the revenue target for fiscal 2010 is $178 million, and $500 million by 2013, with smart energy products comprising ten to 20 percent of sales.

In September, Clean Edge, Inc., a research and publishing firm devoted to clean tech, included Digi as one of 29 pure-play and diversified companies to comprise the Nasdaq:QGRD, an index of smart grid infrastructure companies. To quantify, a company must have a global market capitalization of at least $100 million and exceed $500,000 in daily trading volume over three months.

“…the next evolution in our electric grid,” said Ron Pernick, managing director of Clean Edge, “will include the embedding of smart meters, controls, and networks to make the grid more intelligent, and the introduction of a two-way flow of electrons and energy storage to enable better integration of renewable power and energy efficiency.”

Smart grid is a term used to describe the pending transformation of the nation’s current power grid as utility companies, homeowners and businesses invest in new gadgets, transmission lines, connectivity and wireless devices that will upgrade how electricity reaches consumers and how it is consumed. The build-out is waiting for the smart grid market to gather steam, government cash to infuse the economy, and consumers to grasp the benefits.

In July, Fortune Small Business named Digi one of America’s 100 fastest growing small public companies.

The company’s 2009 annual report government filing says it has almost $76 million in cash, and Meier notes that Digi has not carried long-term debt at least since 2001.

“We think these levels create solid bases at which we recommend buying the stock,” he said, referring to the stock’s performance even during the economic crisis.

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: JoyPellinoCrane.
She can be reached at joyce pellino crane at gmail dot com (no spaces.)

DISCLOSURE: No position.
DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

November 24, 2009

Wind Works Power Corp

A Bet on Wind Industry Growth

Tom Konrad, CFA

Wind Works Power Corporation (WWPW.OB) presents investors in publicly traded wind power stocks a new type of opportunity with the potential for high reward, and a complementary risk profile to existing plays.  

In the past, I've lamented the dearth of choice in publicly traded wind power stocks on North American markets, but both the number and types of opportunities are growing, allowing investors to diversify risk or to make more narrowly focused bets on how they expect the sector to evolve.

I classify wind stocks into three types:

  1. Wind turbine manufacturers
  2. Wind industry suppliers
  3. Wind farm developers and owners

Each type comes with its own risks and rewards.  

Turbine Manufacturers

Turbine manufacturers are either large, established firms or feisty startups.  The large firms (Vestas (VWSYF.PK), Gamesa (GCTAF.PK), GE Wind (GE)) are capable of producing steady profits, but unlikely to see large multiple returns because of their large size and increasing competition.  They are also well known and followed by industry analysts, so a small investor has little chance of gaining an informational edge.  Small turbine manufacturers AAER, Inc. (AAERF.PK) and A-Power (APWR) hold the promise of large potential rewards if they manage to break in and get their products accepted.  However, breaking in to an established industry, even with superior technology is always extremely risky, and has become more so since the industry swung from turbine undersupply to glut between early 2008 and now.

Suppliers

Wind industry suppliers were a good bet when the industry could not build enough turbines.  A good rule of thumb is that the companies most likely to benefit when supply is tight are the suppliers of critical components and services very high up the value chain.  Since these suppliers do not often account for a large percentage of the cost of a turbine, they can earn extremely high margins without destroying the industry's overall economics.  In contrast, when the industry is in oversupply, these same companies often feel the squeeze much more than turbine manufactures who use their increased bargaining power and ability to switch suppliers to squeeze prices.

Wind Farm Developers and Owners

In the current state of oversupply for wind turbines, wind farm developers are in the best position.  If they have financing and all the permits and agreements in place needed to build a wind farm, the most expensive part of wind farm development, wind turbines are readily available at reduced prices.  To date, the vast majority of wind farm developers are also wind farm owners: they develop and build their own farms, and plan to profit from the sale of power and associated tax incentives.  Such companies range from Babcock and Brown Wind Partners (BBWF.PK) and the Algonquin Power and Utilities (AQUNF.PK, until recently known as the Algonquin Power Income Fund) at the established end, to Western Wind Energy (WNDEF.PK) in the middle to Sky Harvest Windpower (SKYH.OB) and NaiKun Wind Energy (NKWFF.PK), each with a single project in the early development stage at the startup end of the spectrum.

The more established developers have the most stable business model, because the revenues from existing farms allow them to fund new investments (At least in part) from the revenues of their established farms.  Once built, a wind farm is a stable business, with some fluctuation in revenues due to changes in weather conditions from one year to the next, and some risk of maintenance problems, but very little market risk for the power sales, since nearly all wind energy is sold under a pre-negotiated Power Purchase Agreement (PPA) to a local utility.  The flip side of this stability is slower growth, and less opportunity for outsized gains, since the expected revenues from the farm are well known far into the future.

Startup developers with only early projects are much more risky bets, since they have no ongoing source of income and must return to the capital markets periodically for funds.  Their advantage lies in the fact that the amount of capital needed in these early stages is much less than what is actually needed to build a wind farm.  If they are able to negotiate the hurdles of assembling a land package, navigating through the permitting process, signing an advantageous PPA, and establishing a grid connection, they can acheive outsized returns on their relatively small capital investment as successive levels of risk are removed from the process.  They can then go about the more certain and capital intensive business of actually erecting their wind turbines and collecting the revenue from the electricity generated, graduating into the ranks of wind farm owners.

Wind Works Power

Wind Works Power Corporation (WWPW.OB) focuses solely on the early, low capital, high risk, high reward stages of wind farm development.  Their strategy is to work on shepherding  several early stage projects through the hurdles of land package assembly, permitting, PPA negotiation, and site preparation with the intent of selling the projects to later stage developers who actually build and operate the wind farms. By working on several projects at once, Wind Works is able to diversify much of the project-related risk away, giving them a somewhat less risky profile than single-project companies such as Sky Harvest and NaiKun.

Rather than being capital-intensive, the early stages of wind farm development are very people-intensive.  Wind Works' key employee is CEO Dr. Ingo Stuckmann.  Dr Stuckmann has decades of experience developing wind farms around the world.  Surrounding him are people with strong connections to the power industry of Ontario, where Wind Works' first farms are located, and a former general manager at Nordex, a leading turbine manufacturer.  In other words, the team has the experience and connections necessary to manage wind farm development from start to finish.

Risks

While the potential gains of Wind Works' model are enticing, there are also substantial risks.  The source of the foremost risk is the same as the source of the potential reward: Investors are staking their money on a very people-intensive process that relies on just a few key people.  Wind Works does not have any proprietary technology, patents, or manufacturing capacity that might give them an edge in the market place.  Investors need to believe that this team will  be able to bring project development forward at a reasonable pace while dealing with unpredictable changes in regulations, environmental permitting, and managing the sometimes capricious sentiment of local residents and landowners.  While this is a process that Dr. Stuckmann in particular understands and has managed many times before, his experience is in no way unique in the industry, and better capitalized players with more resources could out-compete Wind Works for the best development locations, spots in the interconnection queue, and PPAs with utilities.

Even if the development process goes smoothly, investors are making a bet on the market conditions for wind farm development at unknown points in the future.   For the last year, there has been very little demand for ready-to-build wind farms because development companies have had trouble getting the necessary financing due to the financial crisis.   That is beginning to change, and is being helped by regulatory encouragement.   Ontario has passed North America’s first Feed-in Tariff, a generous incentive structure for encouraging renewable energy development that was pioneered in Dr. Stuckmann’s native Germany.  The United States has given wind developers the option of receiving an up-front cash payment for up to 30% of a wind farm's cost in lieu of the former Production Tax Credit, which tied payments to electricity production.  Assuming continuing support, these and other such incentives should make ready-to-build wind sites more valuable than they have been in the past.

The Payoff

In essence, Wind Works is positioning itself high up in the Wind Farm value chain.  When wind turbines were in short supply, the companies to own were suppliers of wind turbine components.  The credit crisis lead to a near halt in wind farm development, which is just starting to ease, but government policies such as Ontario's Feed In Tariff, Renewable Electricity Standards in many US States, and possible regulation of carbon emissions are all driving demand for completed wind farm, even while supply is constrained by lack of credit.  North America is building up unmet demand for wind farms.  If the credit situation improves, or governments step in to fill the gap, we may see ourselves in a situation where wind farm developers have all the turbines and credit they need, but not enough approved sites to build on.  Wind Works' business plan is ideally suited to take advantage of just that situation.

DISCLOSURE: This article is paid research.  The author was paid a flat fee by Resultz Media Group for researching, writing and publishing this article.  The opinions expressed here are the author's own, and neither payment nor publication could be withheld based on those opinions.

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.

November 23, 2009

Is the New Smart Grid ETF GRID All That Smart?

Tom Konrad, CFA

First Trust Launched a Grid Infrastructure Exchange Traded Fund (ETF) on November 17th.  Although the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (Nasdaq: GRID) is labeled a "Smart Grid" ETF to capture popular excitement around smart grid technology, it covers the whole grid infrastructure sector.  This broader focus is good for clean energy investors.

I've been an advocate of investing in electric transmission and smart gird stocks since early 2007, and for almost a year now, a regular reader has been telling me to create a transmission ETF so he can buy it.  Now I don't have to: First Trust's new GRID ETF will do quite nicely.

griD Breakdown.PNGThe ETF's holdings are not those of a smart grid index.  The top holding, accounting for nearly one eighth of GRID by value, is SMA Solar (S92.DE), a leading German solar inverter company.  While I'm more enthusiastic about inverters than any other part of the solar sector, and it also makes sense to classify them as grid technology, it's quite a stretch to call them "Smart Grid."  Three other holdings, Power-One (PWER), SatCon (SATC), and Advanced Energy Industries (AEIS) also fall into this category.

The chart to the left shows a rough classification of the 29 holdings.  Overall, I found that only 23% of ETF assets were in smart grid technologies, and 34% were in older style grid infrastructure.  Solar, Wind, Energy Efficiency, and Electricity storage accounted for 11%, 9%, 6%, and 2% respectively.  The balance (Other - 15%) was the non-grid, non-green energy related businesses of these companies.  

None of these percentages are precise... such an assessment would have required sifting through company financial statements to determine what percentage of revenues or earnings came from each business.  Instead, the breakdowns are my best guesses based on my familiarity with the companies involved, many of which have been profiled in these pages.

Not Smart, but Not A Problem

I like the GRID ETF as part of a green energy port folio, despite "Smart Grid" may be a misnomer.   In fact, I like it better than I would if the fund were solely focused on Smart Grid companies.  While I'm a fan of Smart Grid stocks, so much so that I suggested that our new writer, Joyce Crane, do a series on smart grid companies, I think smart grid is too narrow a focus for an index or ETF.  GRID's much broader focus on electric grid infrastructure should bring much steadier and surer long term returns.

For instance, just before I heard about GRID's launch, I wrote an article explaining why transmission is so essential to renewable energy, and listing eight companies readers might consider.  Those, along with two I added as an afterthought in a comment, constitute 32% of the portfolio.  

Smart Grid Stocks

For readers interested in pure smart grid investments, take a look at the specific stocks that are almost totally light green on the left.  Of these, we've published recent articles on RuggedCom (RUGGF.PK, RCM.CN): One about the RuggedCom's business and the other on its attractiveness as a stock. Digi International (DGII) is profiled hereEchelon (ELON), EnerNOC (ENOC), and Comverge (COMV) are also worth considering.

Personally, I'll most likely purchase the ETF as a whole rather than individual stocks the next time I think the market  is attractively valued.  The advantage is instant diversification, and easy access to interesting foreign-listed firms SMA Solar (S92.DE), NGK Insulators (5333.JP), and Schneider Electric (SBGSF.PK, SU.FP), which together account for 28% of the ETF.

The Fund's expense ratio is currently capped at 0.70%.

DISCLOSURE: LONG PWER, SATC, RUGGF, ELON.

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.

November 20, 2009

Bold or Bogus? Digi International’s Move toward Smart Grid Technology

Research Analyst Bucks Naysayers

By Joyce Pellino Crane
Jay M. Meier may be out on a lonely limb, but the senior research analyst at Feltl and Company is unwavering in his enthusiasm for Digi International, Inc. (Nasdaq:DGII)Digi International

Meier is recommending Digi as a buy, insisting that the company is undervalued given its potential for growth in the smart grid sector.

“The company is woefully undervalued,” he said, “and it’s probably going to start growing in the second half of 2010 as evidenced by all the smart grid technology it has...”

But other research analysts are not so sure. I spoke with two who questioned whether the company’s six acquisitions since 2005 are panning out. One said that their products are tied to corporate enterprise spending, which has plummeted in the current economy. Smart grid purchases, he noted, can be put off until the economy improves because the nation’s power grid is functioning. The other noted that Digi has a catalog of legacy networking products, with none rising to the top as a big seller. Neither analyst agreed to speak on the record. The first said he stopped analyzing the company in December because it no longer fit with his coverage universe. The second said he was not well-versed enough on the company to speak about it publicly.

Meier acknowledged that his stance has spurred opposition from some industry observers.

“I understand my position is unique,” said Meier, “but I don’t believe that the bears have thought it all the way through. The smart grid didn’t exist when Digi started buying these connectivity companies.”

Smart grid is a term used to describe the pending transformation of the nation’s current power grid as utility companies, homeowners and businesses invest in new gadgets, transmission lines, connectivity and wireless devices that will upgrade how electricity reaches consumers and how it is consumed. The build-out is waiting for the smart grid market to gather steam, government cash to infuse the economy, and consumers to grasp the benefits.

Digi International, a telecommunications sector company, has been moving into the smart grid space by supplying components to manufacturers of smart grid connectivity devices and solutions. Companies that buy Digi’s products integrate them into completed solution systems, much like Dell, Inc., (Nasdaq:DELL) does when it builds a laptop. In addition, Digi sells industrial automation equipment, converter interfaces for utility company networks, and legacy equipment to healthcare facilities, and retail stores.

Naysayers argue that Digi has grown artificially from acquisitions.

“It’s true Digi has not grown organically in a meaningful way over the last few years,” said Meier. “However, they have acquired meaningful Intellectual Property around new transmission modalities, that makes Digi uniquely situated to provide the core transmission technology for the smart grid and other asset management verticals.”

Its acquisition of MaxStream, Inc., for $16.1 million in July 2006 blazed its entry into the wireless device networking market. The wireless solutions are focused on automated utility meter reading, oil and gas monitoring, remote control monitoring of commercial heating and air conditioning systems, fleet management, industrial controls, wireless sensors, and electronic signals. These products, according to Meier, are the foundation for future growth.

Meier noted that the company has publicly announced partnerships with Elster Metering, a manufacturer of smart grid meters, Itron, Inc., (Nasdaq:ITRI) a smart meter provider to global energy and water industries, Silver Spring Networks, a hardware and software provider of smart grid solutions, and Comverge, Inc., (Nasdaq:COMV), a provider of smart grid solutions. Digi will supply them with its wireless sensors and gateway technology as components.

In 2008, Comverge announced a partnership with Digi and Texas Utilities to offer smart thermostats to 2.1 million electricity customers. The gadgets will use the Zigbee communication standard chosen by the US Department of Energy for home area networks. Digi has a family of ZigBee products, pioneered by MaxStream, including gateways for home thermostats capable of connecting with utility providers over broadband or cellular technology. The ZigBee components will collect and transmit data to the utility company.

Meier touts Digi’s versatility, noting that it can supply all of the potential transmission modalites—satellite, ZigBee, celluar, blut Tooth, broadband, 802, and Wi-Fi in pre-certified modules.

“Digi is truly the only one-stop shop on the planet,” he said.

Coming next: An overview of Digi International’s financials (link broken until publication).

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: Wordtrope. She can be reached at joyce pellino crane at gmail dot com (no spaces).

 

Digi International Acquisitions Since 2005

This timeline is intended as a supplement to the article: Bold or Bogus? Digi International’s Move toward Smart Grid Technology.

Source: The Investor Relations Group, New York, NY


April 2005 - FS Forth-Systeme GmbH/Sistemas Embebidos S.A. (FS Forth), providers of embedded modules based on the company's processors and NET+OS software, as well as other microprocessors with supporting embedded software.

May 2005 - acquired Rabbit Semiconductor® Inc. (formerly Z-World™, Inc.). The acquisition expanded Digi's embedded portfolio to include the Rabbit line of microprocessors and microprocessor-based core modules and Z-World single-board computers (now all sold under the Rabbit brand).

July 2006 - acquired MaxStream®, Inc. (MaxStream), a wireless device networking supplier. MaxStream supplies device manufacturers and integrators with reliable wireless modules and box products that allow customers to wirelessly monitor and control electronic devices. Typical applications include automated utility meter reading, oil and gas monitoring, remote control and monitoring of commercial heating and air conditioning systems, vehicle information access for fleet management, industrial controls, wireless sensors, and electronic signals. MaxStream was also a pioneer in the field of ZigBee®/802.15.4 wireless communications. The MaxStream acquisition significantly expanded Digi's wireless offering both with embedded modules and non-embedded wireless communications adapters. The products also play a key role in Digi's Drop-in Networking initiative. Effective October 1, 2007, MaxStream merged into Digi International Inc.

April 2008 - acquired Sarian Systems, Ltd. (Sarian), a designer, developer and manufacturer of advanced wireless/cellular IP-based routing equipment for mission critical applications. Sarian has a strong customer base in ATM connectivity, retail and payment systems connectivity, remote monitoring telemetry, lottery terminal connectivity and wireless backup of wired broadband connections.

July 2008 - acquired Spectrum Design Solutions, Inc. (Spectrum), a design services organization. Spectrum’s engineers have extensive experience in wireless technologies such as GSM, CDMA, GPS, Wi-Fi and proprietary RF as well as ASIC design, FPGA integration, embedded software and complete turn-key product development which allows them to address virtually any wireless development need.

July 2009 - Digi entered the market for satellite Subscriber Communicators for the ORBCOMM network with its recent purchase of MobiApps Holdings Private Limited (MobiApps). MobiApps is a developer of M2M communications technology, focusing on ORBCOMM satellite, cellular and hybrid satellite/cellular solutions. The acquisition of MobiApps by Digi will result in Satellite Communicators that are especially suited to applications that cross country and continental boundaries, providing connectivity in very remote locations, and providing mission critical wireless backup solutions when cellular coverage is insufficient. Digi will continue to produce the MobiApps M10, M100, M200 Subscriber Communicator models, as well as the custom designed and patented mixed signal application specific integrated circuit (ASIC), that it supplies to other module manufacturers.

November 19, 2009

Grid Enabled Vehicles – I Told You So!

John Petersen

On Monday of this week the Electrification Coalition, a newly organized industrial lobby that styles itself as a "nonpartisan, not-for-profit group of business leaders committed to promoting policies and actions that facilitate the deployment of electric vehicles on a mass scale in order to combat the economic, environmental, and national security dangers caused by our nation’s dependence on petroleum" released a 170 page policy paper titled, "Electrification Roadmap, Revolutionizing Transportation and Achieving Energy Security." Like most industrial lobbies jostling for position at the Federal trough, the coalition's core membership includes a baker's dozen of top executives from AeroVironment (AVAV), NRG Energy (NRG), Nissan (NSANY), Johnson Controls (JCI), FedEx (FDX) and A123 Systems (AONE), along with several lesser known private companies. Their basic pitch is that the economic, technical and practical challenges associated with a transition to PHEVs and EVs, which the cognoscenti will hereafter refer to as "grid enabled vehicles," or "GEVs," are insurmountable in a free market economy. Quoting from the preface:

"Ideally, the technology and deployment of electric vehicles would emerge through regular market mechanisms. Events conclusively demonstrate that this path to electrification is unlikely, however. Therefore, if the desired transformation is to occur anytime in the foreseeable future, focused and sustained public policy will be required."

In less florid terms, GEVs won't be an affordable transportation alternative in the foreseeable future and the only way to overcome the abysmal economics of electric transportation is to hide part of the costs in the utility rate base, provide lavish subsidies for GEV manufacturers, increase tax credits for GEV purchasers and concentrate command and control on the banks of the Potomac where all wisdom resides and all power truly belongs. I'm still having a bit of trouble with the idea that American consumers can't afford a GEV future while American taxpayers and utility customers can, but I guess some sophisticated economic concepts are just above my pay grade. The good news is that implementing the Electrification Roadmap should be less costly than Obamacare. The rest is less encouraging; particularly for ordinary folks who think that investments should turn a profit from sales of competitive products.

The core problem we all want to solve is oil prices, which hit an inflection point in the late '90s and show no signs of deviating from their new trend. To help readers visualize the problem I've created a simple graph from historical statistics published by the Energy Information Administration and then added a price channel overlay in blue. While there are any number of opinions about the future of oil prices, history clearly shows that severe price spikes lead to recessions that lead in turn to equally severe price troughs.  Over the long term the only prediction I feel comfortable making is that oil prices will probably bounce around in the price channel until we hit another inflection point. The only certainty is that each of us will be forced to choose between suffering the pain of increasing oil prices or taking individual responsibility for our choices and changing our behavior as consumers.



I believe America should do everything in its power to escape the fiscal tyranny of imported oil and minimize the obscene indirect costs of protecting tenuous supply chains in a dangerous world. I do not believe, however, that a rapid transition to GEVs is either possible or desirable. There is only one commercially available GEV on the market today. While several manufacturers plan to introduce GEVs beginning in 2010, their forecasts and performance claims are based on computer models, estimates and laboratory testing instead of real-world experience. Can you imagine the outrage if somebody tried to pull that kind of crap with a new drug? It took ten years for the venerable Toyota Prius to build a reputation for reliability and earn consumer trust and loyalty. The idea that a radically new product class that costs twice as much and offers far less flexibility can or should be forced into the market ignores human needs and is, by definition, irrational.

The roadmap begins with a lengthy discussion about the cost effectiveness and relative cleanliness of electricity as an energy source for transportation. It also mentions in passing that batteries are not sources of energy, but devices that store energy. In a conventional car the energy storage system costs about $5 per gallon of fuel tank capacity and the energy costs about $0.10 per mile. In a GEV the energy only costs $0.02 per mile but the energy storage system will cost over $4,500 per equivalent gallon of capacity even if widely promised and incredibly vague economies of scale materialize. Ultimately the trade-off is operating costs vs. capital costs. By the coalition's reckoning, the unsubsidized cash-on-cash breakeven point for a new GEV will be 10 to 12 years. If you include Federal tax credits in the calculations, the breakeven point is pushed forward into the 5 to 8 year range. Those payback periods may appeal to the philosophically committed or the mathematically challenged, but they will be non-starters for budget conscious consumers.

Like people, lithium-ion batteries work best in climate-controlled spaces. The bulk of our experience as battery users comes from consumer electronics we use in our homes, offices and cars. The limited experience most of us have with using batteries in extreme heat or cold is generally bad. I'm the first to acknowledge that GEVs may perform well in the friendly climates of San Diego and Honolulu, but their performance on frigid winter days in Chicago and torrid summer days in Phoenix will leave much to be desired. While the roadmap doesn't delve into the impact of terrain,  I've spent enough time pedaling my bicycle uphill to know that the eco-optimists in San Francisco will be less than enchanted with GEV performance in their fair city. The inescapable truth is that by the time you eliminate places that are too cold, too hot, too hilly or simply too sprawling, GEVs will be little more than niche products in the U.S., even with unlimited governmental support. GEVs may make some sense in Europe and Asia where daily drives are shorter, public transport is better, gasoline taxes are three to ten times higher and socialism is politically correct, but even then I have grave reservations.

One of the more startling aspects of the roadmap is its frank discussion of charging infrastructure requirements and costs, a subject that I've completely overlooked in earlier articles. Initially, the coalition believes two public charging stations will be required for every new GEV. For Level II (220 volt) charging stations, the costs will typically be in the $6,000 to $10,000 per vehicle range. When the capital cost for public charging stations is viewed as part and parcel of the aggregate GEV investment, the dismal economics only get worse. While I've suspected as much for a long time, the roadmap also makes it clear that  persistent happy talk about Level III quick charge stations (30 kW to 250 kW) is meaningless because first generation GEVs will be designed to accept a 220 volt charge at less than 30 Amps and it doesn't take an engineer to know that something expensive will turn to slag the minute you plug a 6.6 kW battery pack into a 30 kW charging circuit.

Batteries are commodities, as are all of the raw materials that are used to make the batteries, motors and other components required for a GEV. The roadmap assumes away critical issues of raw materials availability by proving that the elements exist in nature and then ignoring fundamental natural resource development issues like location, economics, environmental impacts and the difference between known mineral resources and developed mineral reserves. It also assumes that recycling issues will resolve themselves despite the fact that the only class of ARRA battery manufacturing grants that went begging was battery recycling.

In How PHEVs and EVs Will Sabotage America's Drive For Energy Independence I showed that until batteries are dirt cheap and available in unlimited quantities, basic Prius class HEVs are more efficient users of available battery capacity than GEVs. In PHEVs and EVs; Plugging Into a Lump of Coal, I showed that the same dynamic applies to CO2 emissions. In both cases, the unpalatable but undeniable truth arises from the law of diminishing returns. A Prius class HEV uses about 1.3 kWh of battery capacity to reduce both fuel consumption and C02 emissions by 40%.  GEVs will use 10x to 20x the battery capacity to reduce fuel consumption and C02 emissions by about 65%. When you consider that every GEV that rolls off an assembly line will preclude the production of 10 to 20 Prius class HEVs, there is simply no contest in terms of either fuel consumption or C02 emissions.

The first 40% is low hanging fruit that can be harvested with 1.3 kWh of battery capacity per vehicle. That last 25% is a technical nightmare that cannot be solved without an unconscionable waste of natural resources. In a world where six billion people want a small piece of the lifestyle that 500 million of us have and take for granted, I'm appalled by the arrogance. What ever happened to the concepts of personal responsibility and shame?

Real albeit modest vehicle electrification solutions are already being implemented by a variety of companies in the energy storage and automotive sectors. These simple and cost effective baby steps are nowhere near as exciting as the quantum leaps envisioned by the Electrification Coalition, but at least they don't expect Peter to pay for Paul's eco-bling.

In a market economy companies thrive by selling reliable products that satisfy human needs at competitive prices. Businesses that feel compelled to hire lobbyists to argue that their business models can't work in the absence of massive governmental intervention are doomed from the start (think grain ethanol). I may be an optimist, but even I understand that sometimes a 170-page pile of manure is not hiding a pony.

DISCLOSURE: None.

November 18, 2009

The Case For Transmission, and Transmission Stock List

by Tom Konrad CFA

We cannot choose between transmission and renewable distributed electricity.  Local renewable generation requires long distance transmission to even out variations of supply.  Hence, both advocates of distributed renewables and large wind and solar farms should support transmission improvements.  Here are a few stocks which should benefit from such investments.

Shortly after I launched Clean Energy Wonk, Blogger took the site down because I made the mistake of including both the words "Cheap" and "Free" in the title of an article about Energy Efficiency.  Since it can apparently take up to 2 months for a human to actually check that a blog is not spam, I moved the Clean Energy Wonk domain to Wordpress.

I've now posted an article on the new Clean Energy Wonk making the case that distributed wind and solar need transmission to export excess power when they are operating, and to supply power when the wind does not blow or the sun does not shine.  Simply arguing that a state can produce enough renewable electricity locally to supply its needs does not mean that that electricity will show up at the right time, or even the right month.  Buying storage to bridge the gap would be prohibitively expensive.  I estimate that investments in transmission would cost 1/65th as much as the investments in electricity storage that they would make unnecessary. The long version on Clean Energy Wonk is called "Heretic Battles Strawman."

Because transmission is necessary for large scale renewable development, investors in transmission companies should be able to benefit from a large scale build-out of renewable generation without having to bet on a particular solar or wind company, or even a particular technology.  Our Electric Grid stock list is full of such companies.  These are my favorites:

WIRES:

CONSTRUCTION:

GRID OPERATOR:

  • ITC Holdings (ITC) is probably the safest way to play this sector, since, as a utility gird operator, most of its assets are subject to utility regulation, and hence earn a regulated return on equity paid for by utility customers.

DISCLOSURE: Long AMSC, PWR, BGC.

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.

 

November 16, 2009

Green Energy Investing For Beginners, Part III: Before You Invest

Before you consider green stock market investments, invest in yourself.

A reader of my article on asset allocation for green energy investors brought up an important point: we may have green opportunities in our own lives, such as improving the energy efficiency of our homes, which will return much safer and higher returns than green stocks, especially when the market as a whole is as overvalued as I currently believe it is.

Homeowners typically have a large number of high-return energy efficiency investments they can make.  Since energy efficiency reduces energy use, it both produces returns and is very green, since pollution from fossil fuels is reduced.  Even reducing the use of renewable energy is green, because all energy production has some impact on the environment and uses resources.  Furthermore, energy efficiency reduces financial risk, because you are less subject to fluctuating energy prices if you use less energy.  

If you are considering investing money that is in an IRA or other account that is difficult to access without tax consequences, you should probably go ahead with your green investment plans.  But if you have money that is easy to access, here are a few steps you should take first.

Assess Your Opportunities

Most homeowners have countless opportunities to invest in energy efficiency or renewable energy that they don't know about.  An energy audit is a good way to discover your opportunities.  Many utilities have programs to give customers free or subsidized energy audits.  

Check with your utility (gas and electric) first to see if they have such a program.  If not, and you are a do-it-yourselfer, visit a website dedicated to helping you improve your home's efficiency, such as the EnergyStar site. If you're not a do-it your selfer, look for a RESNET certified energy auditor and pay for an energy audit.  Prices for audits vary a lot, but I've heard that $200 - $300 is a good ballpark figure.

You will be amazed, or even shocked, at how many opportunities for savings you find, even in a brand-new home. The improvements you make usually qualify for federal tax credits, as well as (possibly) rebates from your utility or state tax credits.

Any energy efficiency or renewable energy measure with a payback of less than 10 years is likely to be a better investment than green stocks or funds, especially in today's overvalued markets.  Here are ten that almost always have great financial returns, many of which are good enough to perform even if you rent and plan to stay in one place for a year or two.

  1. Keep your car tires inflated to the proper pressure.  
  2. Change and clean your air furnace filter regularly.  Take a hose and get the dirt off the coils in the outside heat exchanger as well.
  3. Caulk air leaks
  4. Use CFLs.
  5. Install a Water Heater Blanket.
  6. If you have an old fridge in the garage or basement, unplug it.
  7. Install low-flow showerheads.
  8. Use an intelligent Power Strip to turn off standby mode.
  9. Get a power meter to hunt for energy hogs around the home.
  10. When replacing electronics, computers, cars, and appliances, get energy efficient ones, especially anything that's often on or in standby when plugged in. (cordless phones, TVs and set-top boxes, clocks, etc.)

Lists like this abound on the internet. Consult several for ideas.

Debt

Paying off debt causes no environmental harm, and increases your financial security.  Since I think the market is overvalued, if you have any debt, including credit card debt, car loans, and even tax-deductible mortgages, you'll probably be better paying those off than investing in the stock market.  As everyone who didn't already know it learned in 2008, all investments are risky.  On the other hand, if you pay off debt, you get a guaranteed return equal to the interest rate you're paying off, and your investment can't fall in value.  That debt won't be there no matter what happens in the stock market.

There are times when stock market investments make sense even if you have low-interest debt.  It made sense to invest in March 2009.  Now, in late 2009, I fell the markets are quite overvalued, so paying off any debt makes a lot more sense to me than buying stocks or mutual funds.  Even green stocks and funds.

Conclusion

If you've paid off all your debt, and taken advantage of your efficiency investing opportunities, then it's time to consider green stock market investments.  If you have not read them already, here's where I discuss how much to invest, and what to invest in.

I don't currently have plans for more articles in this Green Energy Investing for Beginners series.  If you feel there's something I still need to cover, please leave comments here.

DISCLOSURE: The author will receive referral payments for purchases through the Amazon links.

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.

November 15, 2009

Is Ruggedcom, Inc. as Solid as its Networks?

Tom Konrad, CFA

RUGGEDCOMOur recent article on Ruggedcom's (RUGGF.PK, RMC.TO) technology for a smart grid that's also robust against a number of threats such as cyberterrorism and electromagnetic pulses prompted a long-time reader to ask if we also think it's a good investment at these prices.

Good question.  As outlined in the article, Ruggedcom, Inc. has a robust business providing ruggedized routers for mission-critical networks, including electric utilities growing smart grids.  But not every great business is also a great stock.

What Makes a Great Stock

There are several things I look for in a great stock, and a strong business is only one of them.  They are:

  1. A good business.
  2. A strong balance sheet and cash flow that can allow the company to continue executing its business model when external financing is scarce.
  3. Competent and honest management with both an understanding of the business and a record of straightforwardness with shareholders and analysts. 
  4. A good value for the money.

Balance Sheet and Cash Flow

Based on Ruggedcom's Fiscal 2010 second quarter financial statements, released Nov 4, the company had $63M in current assets (those which can be turned into cash in less than a year) and $13M in current liabilities and negligible long term liabilities on September 30, 2009.  Cash from operating activities in the six months to September 30, 2009 was $652 Thousand, down from over $6M the year before.  

The large drop in operating cash flow is explained by large increases in sales and research staff, as well as negative exchange rate effects from the appreciating Canadian dollar, while revenues continue to grow despite the markedly difficult economy in Q2 and Q3 2009 when compared to the same period of 2008.  In addition to growing revenues, the company also continued to broaden its customer base over the last year.

Management is tapping the company's internal resources in order to take advantage of expected opportunities in the Electric Power and Transportation sectors.  Despite this, operating cash flow remains positive, and the company has not needed to tap the markets for external financing since before the beginning of the financial crisis, demonstrating the ability to execute without external financing.

Overall, I consider the company's balance sheet and cash flow to be excellent.

Management

The company as too new of a publicly traded stock for me to determine if management has a habit of puffing results to shareholders.  One sign of deceptive management practices are overly complex financial reporting structures.  When I reviewed the last quarterly and annual reports, they did not seem to me to be overly complex, giving me a generally positive view of management's honesty and straightforwardness.

Valuation

The company had 12.6M fully diluted shares outstanding at the end of the quarter, 6 month earnings of $0.15 and a share price of $16.60.  This translates into a P/E ratio of 55, which is extremely high, and would require phenomenal long term growth rates to be justified.  The company has about $5 per share in annual revenues, giving it about a 3.3 price to sales ratio.  This is not particularly out of line for a growth stock, but still higher than I am comfortable with.

Conclusion

Ruggedcom has a great business, a solid balance sheet, and I have found no reason to suspect management of incompetence or deception.  However, given the current valuation, I have no interest in buying more, and continue to hold my current stake only because I am hedged against overall market moves.  If a market decline were to lead to a significant drop in the stock price (as often happens with growth companies), I will look to acquire a substantial stake at that time, assuming the company's fundamentals have not also weakened substantially.

DISCLOSURE: Long RUGGF.

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.

November 13, 2009

Interview with Ray C. Anderson, of Interface Inc.

Tom Konrad, CFA

Ray Anderson, the pioneering founder and Chairman of Interface, Inc. (IFSIA) was an early pioneer of sustainable enterprise.  We recently had the opportunity to interview him on the benefits he sees for investors from corporate sustainability (full transcript follows.)

ifsia.png

I've recently been thinking about corporate sustainability (in the green sense) and how it relates to  corporate sustainability (in the business survival sense.)  Since I expect business conditions to be more difficult in the coming years than they have been in the past, any edge in resilience a company might gain from pursuing sustainability may be useful, both on the long and short side.

As you can see from the stock chart, Interface had a wild ride through the financial crisis, losing as much as 85% of its pre-crisis value in early March 2009, but has since rebounded strongly.

Is the depth of the fall an indicator that the company's sustainable culture was not enough to ensure its corporate survival, or does the recent rebound show that most investors do not yet recognize the value of corporate sustainability in a crisis, and such crises present buying opportunities in uniquely resilient sustainable companies?

Read what Ray Anderson has to say about sustainability at Interface, and decide for yourself.

Interview Transcript

AES: Can you please define for our readers what your vision of a sustainable enterprise is?

Anderson: At Interface, we’ve defined our vision as follows: To be the first company that, by its deeds, shows the entire industrial world what sustainability is in all its dimensions: People, process, product, place and profits — by 2020 — and in doing so we will become restorative through the power of influence. For us, as a manufacturer, it means primarily focusing on processes and products that move us away from petrochemicals and towards renewables, to create a closed loop via which our products are born and re-born, again and again, and reinventing commerce so that we move away from “stuff” and towards a service economy.

AES: What drives you to want to be sustainable? Do you do it because it’s the “right” thing to do? Is it primarily about controlling your costs and finding new sources of revenue? Is it all of the above?

Anderson: We’ve learned that it is indeed all of the above – so right, so smart. Over 15 years we’ve demonstrated that sustainability is a better way to a bigger and more legitimate profit. I’m driven by a personal sense of legacy, to be sure, but also to the entrepreneurial opportunity that preserving our world for future generations represents.

AES: In your experience, how does the financial community view corporate sustainability? Does anyone outside of the Socially Responsible Investment community care? Have you encountered much skepticism?

Anderson: In the early days of our journey, we definitely experienced skepticism from the financial community. In fact, our former CFO Dan Hendrix (who is now the Interface CEO) was asked on more than one occasion if I had “gone ‘round the bend.” I explained that as a leader, that was my job, because ‘round the bend is where our future lies. I went around the bend once before and found carpet tile technology, and that worked out pretty well for us.

Today, skepticism has given way to a high regard for Interface’s leadership in sustainability. Rather than bury it in a product brochure, we lead with it, on Wall Street, in our annual reports, and with our customers.

AES: The financial crisis we’re going through has led many investors to focus more heavily on risk management than they might have in the past. In this brave new world we live in, do you believe that sustainability can help decrease risk?

Anderson: Absolutely! What company can run without air, without water, without the capital that nature provides? Managing risk in the future means managing – and limiting – our dependence on dwindling natural resources and increasing our capabilities in terms of true, closed loop recycling. Managing risk also means moving away from the dwindling availability and volatile pricing of oil and other natural resources, and increasing our capability to reuse and recycle.

AES: What other investor benefits do you see in corporate sustainability?

Anderson: At Interface, the business case for sustainability has manifested itself in four key ways:

  1. Costs are down, not up, dispelling the myth that sustainability is expensive. Our first initiative, a zero-tolerance waste initiative, has netted us over $400 million in saved or avoided costs, more than paying for any capital intensive or R&D costs associated with sustainability.
  2. Products are the best they’ve ever been. Sustainability is a well-spring of innovation, and our product designers have been particularly successful using biomimicry (the study of nature’s design principles) as a guide. 
  3. Our people are galvanized around our mission, owing to a sense of higher purpose and self-actualization that comes when you focus on something bigger than yourself. Academics and experts who have studied the cultural transformation at Interface say they’ve never seen the type of top-to-bottom and bottom-to-top alignment that sustainability has helped foster at Interface.
  4. The goodwill of the marketplace is tremendous, winning business for Interface because customers want to be aligned with a company that is trying to do the right thing by our environment. No amount of marketing, no clever ad campaign could create the kind of customer loyalty that we have experienced. It makes sense, given that the whole journey began for us when our customers started asking, “What is Interface doing the for the environment?”

AES: How does sustainability help returns for investors and over what time horizon?

Anderson: As with any new thinking there’s a time lag between early adoption and mainstream acceptance, and that naturally influences the return horizon for investment in new products, processes and technologies. I believe there are new fortunes to be made as we define this, the next industrial revolution. I also believe that part of what needs to change is our focus on short time horizons, i.e., the focus on the next quarter, for both companies and for their investors. Sustainability by its very nature requires a long view on the future as we consider the impact of our decisions today on future generations.

DISCLOSURE: None.

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

November 12, 2009

Green Energy Investing For Beginners, Part II: How Much To Invest

In Green Energy Investing for Beginners, Part I, gave information to guide the choice of green investment vehicles (mutual funds, ETFs, or stocks.) This article is intended to help investors decide how much of their money to put into those vehicles.

An informed decision of how much to invest in green energy is at least as important as how you make the investment.  The choice between green Exhange Traded Funds (ETFs) and green Mutual funds rests on a difference of about one percent per year, caused by differences in fees.  Yet in the first three quarters of 2009, the S&P 500 (general stocks) returned 17%, ICLN, a green ETF returned 21%, and my ten green stocks for 2009 returned 41%.  With differences between performance as large as 20-30% a year (green stocks did much worse than the market as a whole in 2008,) the decision between investing 10% of your portfolio or 60% of your portfolio in green stocks will make a large difference (8% to 12%) in your total returns for the year, far more of a difference than how you invest.  The other important factor will be sector selection within green energy.  I believe that the main reason my Ten Green Stocks for 2009 have done so much better than the benchmarks is because I emphasized sectors I believed would benefit from the stimulus package.  At that time, the stimulus was  only something that I (and other green commentators) were predicting as part of Obama's response to the financial crisis (He had not yet been sworn in.)

Your Allocation Decision

How much of your savings you put into green energy will depend on two things:

  1. Your risk tolerance and market expectations.
  2. Why you are investing in green energy in the first place.

Market Expectations

Most people should not try to time market moves.  Endless studies have shown that small investors tend to put their money into the market near market peaks (1999 or 2007, for instance) and withdraw that money near troughs (2002 or early 2009.)  The economics of supply and demand make this inevitable: the more people want to buy stocks, the higher demand for stocks is, and the higher prices rise.  The more people who want to sell stocks, the larger the supply of stocks is, and the lower stock prices will fall.  

This may sound like circular reasoning (do stock prices peak because buying peaks, or does buying peak because stock prices peak?), but circular reasoning is the only way to understand stock prices. The price-setting mechanism itself is circular.  George Soros called this "reflexivity" in his classic book on market trends, The Alchemy of Finance. Most people want to buy when they see prices rising, causing prices to rise more.  Most people want to sell when they see prices falling, causing prices to fall more.

Hence, most people will get market timing wrong, and that is why your investment advisor is always telling you not to time the market.  However, understanding the psychological mechanisms which cause most people to be wrong about market timing can let a minority of investors take advantage of these predictably irrational decisions.  

Since June, I have felt that we're near a market peak, and have not changed my mind because of the market advance since then.  If you are reading this in late 2009, and the market has not fallen significantly since the writing (the S&P closed at 1042 today), I feel it would be irresponsible to suggest that anyone buy green stocks today, without a suitable market hedge.  Hedging is beyond the scope of this discussion, but I have outlined five simple hedging strategies here.  If you want a portfolio that is greener even than the green stocks, ETFs, or mutual funds, you might consider hedging with shorts on some of the least green companies.

All further discussion in this article assumes that either:

  1. You have chosen not to time the market.
  2. You have faith in your own predictive ability, and believe the market will continue to rise, OR
  3. Your portfolio will be hedged against major market moves.

Risk Tolerance

Many green energy investments are more volatile than other sectors.  This is because the majority of green energy stocks are not yet profitable, and do not have the internal cash to see them through hard times.  This can force companies to raise money from the financial markets when those markets have fallen, and will cause the stock prices to fall further in market declines.  Such stocks are especially concentrated in the domestic and specialty green ETFs, such as PBW, TAN, and KWT.  Most of the green energy mutual funds, and the international green energy ETFs such as ICLN and PBD are less volatile due to a higher concentration of established companies.

Investors can deal with the greater volatility of green energy in several ways:

  1. Stick to the less volatile green energy investments.
    1. Stock investors can emphasize profitable green companies over unprofitable ones.  Almost all of my 10 for 2009 picks referenced earlier are profitable companies, and those that are not currently profitable had a history of profitability prior to the financial crisis.
    2. Stick to the less volatile ETFs that contain a broad base of profitable global companies, instead of the more volatile domestic ETFs.
  2. When hedging your portfolio, use a larger market hedge than you would otherwise.  The method I outline in my hedging strategies article automatically incorporates this adjustment.
  3. If replacing an allocation of normal stocks with an allocation of green stocks in a larger portfolio,
    1. Replace an equally volatile sector allocation with your green energy allocation, or
    2. If replacing an allocation to ordinary stocks, replace part of that allocation with less volatile bonds, and part with green energy stocks.

Investment Motivation

It makes sense that the more confident you are that green energy will outperform other sectors, the more money you should allocate to it.  Keep in mind, however, that almost everyone has a strong overconfidence bias.  That is, we believe we are going to turn out to be right a lot more often than we actually do.  This bias persists even when we are aware of overconfidence bias.  Even when we tell ourselves, "I feel that X has a 95% probability of happening, but I know I'm likely to be over-confident, so I'll act as if the probability is only 80%," it usually will turn out that the real probability of X was even lower than our 80% revised estimate.  

Hence, we should only let our confidence in green energy have a small influence in our overall allocation decision.  Like market timing, this is another rule that I honor in the breach: my entire stock portfolio is in some way related to green energy.  In ten or twenty years, we'll find out if I actually know what I'm doing, or am just overconfident like most everyone else.

    Motivation: Doing the Right Thing

If your main motivation for investing in green energy is to be more environmentally responsible, you are faced with a trade-off: the more you invest in green energy, the more volatile your portfolio will become.  However, feeling better about your investments may make you more comfortable with the added volatility.  This may allow you to hold more green energy because of your increased risk tolerance. 

However, if you don't believe that green energy will outperform, there are less risky ways to do the right thing.  You could instead replace your stock holdings with companies that are more green than most companies in their sector.  In a recent paper by Meir Statman and Denys Gluskov entitled "The Wages of Social Responsibility", the authors found that socially responsible investment managers were able to achieve higher returns by favoring "best of class" companies in each sector, a process they described as socially responsible "tilt."  In contrast, they found that completely shunning sectors such as alcohol and firearms led to lower returns over time.  Based on theses results, there is a win-win available for environmentally responsible investors who want to do the right thing: they can rebuild their entire stock portfolio by keeping the same sector allocations they had made before the change, but replacing the stocks in each sector with the greenest stocks from lists such as Newsweek's rankings of the 500 largest US Corporations that I wrote about in September.

    Motivation: Fighting Climate Change

If your motivation for investing in green energy is to fight climate change, you must balance the trade-off of increased risk from concentration in one industry, with your expectation that that industry will produce higher long-term returns because of increasing regulation of greenhouse gasses, and support for alternative energy.  In general, I find it very difficult to predict which companies are going to benefit from climate change regulation.  Will politicians choose to subsidize solar, wind, biofuels, or energy efficiency?  Will carbon credit giveaways create a windfall for utilities and other large emitters of greenhouse gases. 

Not being able to predict politicians, I instead choose to focus my investing based on the (clearly false) assumption that politicians will do (roughly) the right thing. While I know this assumption is wrong, I also know I don't know in which direction my assumption will be wrong: the idea is that the ideal political action averages out all the likely errors that politicians are likely to make along the way.  How do we know what the ideal actions are?  We look at reports from relatively unbiased sources that recommend particular actions.  I recently wrote two articles based on an article from two economists that looked at what Modern Portfolio theory has to say about the best technologies for climate mitigation (here and here.)

In terms of how much of your portfolio you should devote to fighting climate change, if that is your motivation, it should depend on how quickly you expect the effects of climate change to occur.  The biggest gains from a climate change focused portfolio will occur as more and more political leaders stop being able to ignore the urgency of responding to climate change.  I personally feel that this will be triggered by the increasing frequency of climate-related disasters, caused by the increasing severity and frequency of unusual and dangerous weather events such as hurricanes, droughts, floods, and blizzards.  This is something that I already see happening, but I don't expect it to be obvious to the many people who want to ignore the effects of climate change for another 5-15 years.  

Based on your own belief of when you expect this political transition to occur, you should only allocate money to climate change mitigating investments if you do not need to withdraw that money before the expected political change is likely to occur.  In some ways, this political change has already begun, and money is being awarded to deserving green energy firms.  However, investors should not ask what has already happened, but what unexpected changes are likely to occur.  The unexpected (by most other investors) change that I expect is the realization that Climate Change will not only be a serious problem, but that it will be a serious problem in our lifetime, and that it's worth risking damage to the economy by devoting massive resources to the project of combating it.

In my case, my investment horizon is about 20-30 years, which is longer than the 5-20 I expect for the political change, so I consider fighting climate change as a good motivation to increase my portfolio's allocation to green energy.

    Motivation: Peak Oil

The connection between fossil fuel prices and the performance of green energy stocks is tenuous at best.  Investors should not expect their solar stocks to go up or down with the oil price.  After all, we do not yet have a fleet of plug-in vehicles which might let us substitute electricity from solar for gasoline from oil.  Hence, investors motivated by peak oil should stick to green energy sectors which reduce the need for liquid transportation fuels.  These sectors include biofuels, hydrogen fuel cells, technologies which make transportation more efficient, and technologies such as batteries which enable the electrification of transport. 

Like climate change, how soon you expect to see the effects of peak oil should affect how much money you invest.  I feel that the effects of peak oil in terms of the reduced affordability of gas and diesel are already upon us.  This does not just mean high oil prices (which we have), but decreasing ability to purchase oil due to the economic disruption and contraction caused by those prices.  Low oil prices make our economies vibrant, which provide the money needed to buy oil.  High oil prices cripple the economy, which in turn means that we're less able to buy oil at any price.  This is what I mean be "reduced affordability."

In a recent report, "The Peak Oil Market," Deutsche Bank predicts that post peak, both oil prices and oil demand will fall due to the introduction of disruptive technology: plug-in vehicles (Thanks Nate Hagens.)  If they're right, investing in oil or oil companies is not the best way to profit from peak oil, but rather the potential disruptive sectors.  Of the sectors I mention above, efficient transportation, hydrogen, and electrification are the only ones that can possibly scale to replace a significant portion of our fossil fuel demand.  Biofuels are limited by the available supply of biomass.  Biomass can more efficiently power a vehicle when burnt to produce electricity to charge an electric vehicle's battery than when converted into liquid fuels for an internal combustion engine.  A similar efficiency argument applies to hydrogen, although breakthroughs in electrolysis and fuel cell technology could change this.  However, I don't consider betting on possible technological breakthroughs a sound investment strategy.  After all, even if a breakthrough occurs, it's at least as likely to come from a new player than an industry incumbent.

Batteries will need some technological breakthroughs in order to make plug-in vehicles economical enough to displace gasoline.  However, the needed improvements to the electric grid needed to accommodate electrified transportation (as suggested in the Deutsche Bank report) can be accomplished with existing technology.  Hence, investors motivated by peak oil should be looking to investments in transport efficiency, transmission and smart grid stocks.

In terms of how much to invest in these strategies, it probably should be a lot (at least if you believe as I do that the peak in oil production has either already happened, or will happen soon), and it should probably be accompanied by a hedge using shorts in oil intensive industries such as airlines.  The hedge is necessary because a peak in oil supply will hurt the world economy, and is likely to make stock prices as a whole fall, quite possibly even the stock prices of the companies which are working to displace oil with disruptive technology.  However, it is a good bet that these companies are likely to fare better than companies whose economics depends on the large scale consumption of cheap oil.

Conclusion

Your goals, expectations, and risk tolerance will affect both how you invest in green energy, and how much you invest.  Before you make any decisions, answer these questions for yourself:

  1. Do I believe investing in green energy is the right thing to do? Will this help me bear the pain of declines in my portfolio?
  2. How soon will Climate Change reach the top of the political agenda?  Do I have the time to wait for the expected investment returns?
  3. How soon will oil production peak?  Do I have time to wait for the expected returns?
  4. How confident am I about my answers?  Do I have reason to be confident, or is my confidence based on self-delusion?

Knowing the answers will help guide your investment allocation.  

I don't currently have plans for more articles in this Green Investing for Beginners series.  If you feel there's something I still need to cover, please leave comments here.

DISCLOSURE: None.

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

November 11, 2009

Electricity and Water– Can We Have Both? 

by John V. Anderson

The Water-Electricity Connection: Basic Principles

There’s been a lot of discussion – and a fair amount of controversy – lately about water use in power plants. Unfortunately a lot of this discussion is based on an incomplete understanding of the fundamental issues involved. First of all, virtually all of the non-hydro power we consume is generated by heat engines of one sort or another. All heat engines absorb energy from a hot source (e.g. a flame, nuclear core, or solar), and they all reject energy to a cold sink – that is they all need some type of cooling. 

And of course all heat engines are subject to the laws of thermodynamics which dictate that the maximum efficiency a heat engine can achieve is a quantity called the Carnot efficiency. The most important impact of this law for our purposes here is that the efficiency of any heat engine is strongly dependent on the difference in temperature between the hot temperature and the cold temperature. If we can raise the hot temperature relative to the cold temperature, or lower the cold temperature relative to the hot temperature, then we can improve efficiency. Since any energy not converted to electricity must be rejected, increasing the efficiency has the additional salutary effect of reducing the amount of energy that must be rejected. 

Gas Turbines

Now, gas turbines (or combustion turbines) appear to violate this rule since they don’t need water cooling. However, this is deceptive. In fact, they are simply using the atmosphere as their cool reservoir. They pull cool ambient temperature air from the atmosphere and then return it to the atmosphere at a very high temperature (typically 1000 F or more). The maximum temperature inside a gas turbine is limited by materials issues, and is pretty well fixed for the purposes of our discussion. Since the hot temperature is essentially fixed, the temperature difference is driven by the temperature of the inlet air: the cooler the inlet air the higher the efficiency. (You might note that gas turbines are actually running at their poorest efficiency during the very hottest summer days when they are most commonly used for peak generation.) 

Looking at the exhaust from a gas turbine, it is fairly obvious that this very hot air still has quite a bit of energy in it even though it is at too low a pressure to be useful in a turbine. Combined cycles work by using this high temperature exhaust air to boil water and raise steam for a steam turbine, usually referred to as a “bottoming cycle”. It is identical in nearly all respects to any other steam cycle except for the source of heat. 

Steam Cycles & Types of Cooling

In a typical steam cycle (a version of a heat engine called a Rankine cycle) the highest temperature is the steam leaving the boiler to go to the turbine, and the low temperature is in the condenser where that steam is condensed before returning to the boiler. Raising the temperature from the boiler and/or lowering the condenser temperature will increase the efficiency. As before, the hot steam temperature is set by materials constraints and conditions within the system and is pretty well fixed (see below). The condenser temperature is dependent on ambient conditions and on the type of cooling used. 

There are actually three approaches to cooling steam cycles. The first is to draw water from a lake, river or ocean, use it to cool the condenser of the plant, and then return it to its source. Unfortunately this requires pumping a large amount of water and the return water is typically much warmer than the inlet water, leading to undesirable ecological consequences. For these reasons this type of cooling is used much less frequently in the last couple of decades. However, this approach has the advantage that the difference between hot and cold temperatures – and thus the efficiency – is almost entirely independent of ambient temperature. The plant will run at the same efficiency winter or summer. 

Recalculating Cooling

The second cooling approach is called “recirculating” cooling. In this approach, water is circulated between the condenser and a cooling tower. In the cooling tower some of the water is evaporated, and the rest is circulated back to the condenser. New water is added on each cycle to replace the water that is evaporated and to prevent the buildup of dissolved salts in the water. Now as we all know from swimming, evaporating water absorbs quite a lot of energy and can cool things pretty effectively (this is the difference between dry bulb and wet bulb temperatures). Thus the evaporation of some of the water will cool the remainder of water to well below ambient temperature. This is particularly true on very hot, dry days, which create peak loads and the highest demand for power. Using this type of cooling largely relieves the dependence of the efficiency on the ambient conditions. 

Dry Cooling

The third type of cooling is dry cooling. The warm water from the condenser is run through a series of fan-coils (think of a really, really big automobile radiator). Ambient air is blown past the fan coil and the water is cooled to slightly warmer than the ambient air. Now, this approach has been used only rarely for large steam plants (although it is pretty common in some smaller geothermal plants) because it extracts several types of penalty on the cost of energy. First of all, as we have seen above the efficiency of the plant now decreases as the ambient temperature increases. This effect can amount to a 20% or more reduction in the instantaneous output of the plant, and perhaps a 5-10% decrease on an annual basis in hot locations like the Mojave or Sonoran deserts. In addition, the fan-coils used to cool the water are fairly expensive relative to a cooling tower. 

Hybrid Cooling

A new hybrid approach to cooling is emerging which can reduce both the performance penalty of dry cooling and the amount of water consumed by recirculating cooling. This hybrid technique uses dry cooling whenever the ambient temperature and the power demand are low enough. Then as the temperature and the power demand rise, wet cooling is used to supplement the dry cooling and minimize the efficiency penalty on very hot days. Although this approach increases the cost of the system it is likely to see increased use, especially in the southwestern US where water issues are coming to the fore. 

Cost and Water Savings

With this understanding, the issue of cooling becomes one of cost, and we can start to have a rational discussion about tradeoffs and how we value things. Electricity made in dry and/or hybrid cooling plants will cost somewhat more than in a recirculating cooling system, but will use less water. Is the additional water worth enough to justify the additional cost for water? Or is a lower power bill worth enough to justify additional water use for power generation? 

Water Use in Solar Power

This issue of cooling and water use is currently raising lots of questions (and creating lots of confusion!) because of the concern about large solar thermal plants in the deserts of CA and AZ. Today’s reality is that some types of solar plants have material limitations that keep the hottest temperature lower than in a coal or nuclear plant. For this reason, their efficiency is slightly lower (perhaps 28-30% vs 32-34%) and thus their cooling needs are slightly higher. However, please note that the solar thermal technology is rapidly evolving, and there are already several approaches that are likely to eliminate this difference in the hot temperatures in the next generation of plants. 

To some extent, solar thermal is a victim of timing. Earlier coal and nuclear plants routinely purchased water rights which almost no one took exception to. In this regard solar thermal plants are being held to a higher standard than the earlier conventional plants. However, that is the growing reality of life in the southwestern US, and we will all need to adapt to it. 

As an aside, photovoltaic solar (PV) doesn’t require any cooling water. However, it has two other disadvantages relative to solar thermal. The first is cost. The societal cost (total installed cost, not the cost to the owner) of a PV system remains significantly higher than that for a solar thermal plant. Ongoing efforts by the PV industry to lower those costs seem likely to reduce that cost disadvantage, but the non-solar (balance of plant, or BOP) parts of a PV system will still likely cost between $3 and $4 per peak watt regardless of what the panels cost. 

Timing of Solar Electricity

The second disadvantage is more serious from a broader system perspective. PV makes electricity instantaneously as sunlight hits it. If the system doesn’t need the energy at that time, more cost-effective systems must be turned down or the PV energy must be sloughed off. On the other hand, although the peak in PV output correlates fairly well with the beginning of the peak demand periods (usually mid-afternoon on hot summer days in this part of the world), the output from the PV system falls off too early to meet the tail of the peak load that extends into the evening (end of peak on the APS system is now 8:00 PM). 

A further disadvantage is that all the PV systems in a particular geography are likely to turn on and off essentially together. If there are only a few PV systems on a particular power line this isn’t much of an issue. However, as the PV-generated power becomes a larger fraction of the energy on that line the sudden jump -- or drop -- from all the PV systems going on or off simultaneously creates significant difficulty for managing the loads on that line. 

By contrast solar thermal plants can store the hot liquid they generate so that they can “ride through” short periods without sun, or shut down in an orderly manner for longer cloudy periods. In addition, if the storage is large enough the plant can simply collect energy from the sunlight without generating electricity until the grid needs the power. For example, the SEGS plants in CA routinely generate 100% of its capacity through all of Southern California Edison’s peak summer periods. 

Conclusion

In many ways it is unfortunate that these questions don’t behave in a way that allows simple, quick answers. The electric grid is one of the largest and most complicated man-made devices ever assembled, and we are now operating it in ways that weren’t anticipated by its original designers. Despite that, it has provided low-cost and reliable energy that has powered our economy in so many ways that we aren’t even aware of many of them. 

For a variety of excellent reasons we are now starting to re-think how we want this huge device to work and what new services we want from it. In order to make decisions that will work well for us over the long term we need to be smart about how this huge device actually works, what it can do and what it can’t. We all need to learn quickly and think carefully before we make changes.

John Anderson has a 30 year career in clean energy technology, investments and markets. He is currently an independent consultant helping clients with due diligence, project development, and strategic planning in the area of clean energy. His clients include electric utilities, Fortune 500 firms, and individual investors. Previously John served as the Manager of the Energy and Resources practice at the Rocky Mountain Institute, and the founding Managing Director of the Connecticut Clean Energy Fund, as well as the COO of a small fuel cell startup. John began his career at NREL, the National Renewable Energy Laboratory, where he worked on energy in buildings, concentrating solar power, geothermal, and solar chemistry technologies. John received a MSME from the Solar Energy Lab at UW-Wisconsin in Madison, and is a registered Professional Engineer.

John Can be reached at jva1000 [at] gmail,com or 303 885 9264

Tres Amigas Proposes Three-way Transmission Link

by Michael Giberson

If completed, the Tres Amigas project will encourage renewable power development and efficient power flows.  Publicly traded wind power and superconducting cable company American Superconductor Corp. (Nasdaq: AMSC) is a large minority shareholder and the planned supplier.

Tres Amigas LLC has proposed building a three-way superconducting HVDC link between the three separate power systems that span the United States and much of Canada: the Eastern Interconnection, the Western Interconnection, and the Texas (ERCOT) Interconnection.  The three systems currently are linked by a small number of separate and relatively unimportant DC interties.  The proposed three-way link would allow substantial quantities of power to be moved among the three systems.gridamigas.GIF

Public statements by Tres Amigas[pdf] and partner American Superconductor Corporation (Nasdaq:AMSC) highlight the way the project can help foster development of renewable power in the region — and it would be helpful for accommodating the large amount of wind power capacity expected to be built in the area — but as a practical matter the project should be a good deal for all kinds of power plant developers and for power consumers.  The American Superconductor news release indicates that the company acquired a minority equity interest in Tres Amigas, LLC for $1.75 million in cash and stock, and the company will hold one of four seats on the Tres Amigas board of directors.  Tres Amigas is also supported by Alt Energy, LLC, a Connecticut-based investment and advisory firm.

The project is as a very early stage, and not all financing has been secured.  In addition, numerous federal and state regulatory approvals will be required. Recent news reports indicate that Tres Amigas CEO Phil Harris has been encouraging New Mexico landowners and energy developers to be prepared to offer supporting statements to regulators when the appropriate time comes.  (Links to several other early reports are in this post from Knowledge Problem on the Tres Amigas announcement.)

Basic economics tells us increasing trade opportunities between markets of any kinds tends to increase overall economic efficiency.  In electric power systems the benefits from transmission links and increased trade can include more efficient use of generation capability, increased system stability, and the ability to economize on stand-by reserves.  More efficient use of generation results when the joined systems can reduce reliance on high cost peaking units by importing cheaper power from their neighbor instead.  The joined system will have more generators available to exert stabilizing influences in response to short term disturbances, aiding reliability.  In most conditions, each of the systems should be able to safely reduce the quantity of reserves held for reliability, too, when transmission interconnection capability is increased.

A more complete analysis would have to consider the costs of the link, the efficiency of the scheduling process, the ability to share reserves, and other costs and benefits.  The key to finding a benefit comes from at least a minimal amount of diversity among the interconnected systems.  If the systems have identical generation characteristics, costs, load profiles, and coincident peak loads, then the gains from trade will be modest.  Differences among the system open up opportunities to benefit from trade.

In a case such as the Tres Amigas proposal, estimating the size of the benefits available will require extensive modeling of the three power systems to be connected, including generation and consumer load characteristics, as well as detailed modeling of the innovative three-way superconducting HVDC link between the three systems.  

(Some additional observations with some links to economics articles are available in this Knowledge Problem post on the economics of transmission interconnection.)

Distribution of benefits from trade between power systems

Generally, increased trade between regions should tend to equalize prices across the regions, meaning that consumers in the formerly high-priced regions would see lower prices, but consumers in the formerly low-prices regions may see higher prices.  In certain conditions it is possible that efficiency gains would allow consumers in all regions to see lower prices.

The producer’s story is approximately the flip side of the consumer’s story.  As increased trade tends to equalize prices, producers in the formerly high-priced areas would see lower prices, while prices in formerly low-priced areas would see higher prices.  The typical expectation is lower prices on average.  High cost generation would become less profitable and may be driven from the market.  Lower cost generation will run more frequently, but may earn lower profits given lower average prices.

Yet, with stronger interconnections and flexible trading rules between regions, each area should be less likely to need to resort to costly emergency procedures to manage the occasional stressful situations that arise in power systems.  The costs avoided represent savings to consumers, but not necessarily profits sacrificed by generators since not every emergency is accompanied by high power prices.

Benefits for renewable energy

The portions of the three interconnections near the Tres Amigas site feature good wind and solar power resources, and Tres Amigas has been pitched as a “renewable energy hub.”  Certainly, once power is put onto the transmission system there is no distinction between renewable and fossil-fueled or other electric power.  Yet there are reasons to believe that renewable power plants will see a bit more benefit than traditional dispatchable generating resources.

Linking renewable resources together over larger areas tend to reduce the net variability in output experienced by the grid, since wind and solar conditions at different sites are not perfectly correlated.  In addition, the degree of correlation tends to fall the further the resources are from each other.  The ability to shift power from region to region will therefore tend to reduce the in-system accommodations needed to compensate for renewable power output fluctuations.  So if Tres Amigas is built, the three interconnections should be able to accommodate wind and solar power resources at lower cost, with the result that more renewable power generation is likely to be built in the area.

Recent news reports indicated the possibility of grid-connected battery storage as a component of the Tres Amigas project, which would further enhance the projects ability to promote low marginal cost generation (including nuclear, wind and solar) while also supplying low-cost short term energy balancing services (and so not requiring additional balancing services from natural gas units).  Much would depend on the battery design, and no details on the possible battery component have been reported.

Challenges the Project May Face

NIMBY: Transmission projects tend to face a number of challenges, and an innovating proposal like the Tres Amigas project may face more challenges than more traditional projects.  Transmission projects tend to offer benefits to generators at one end and consumers at the other end, but few benefits to those landowners and communities that only see the transmission lines.  While the Tres Amigas project itself will be relatively contained and will offer direct economic benefits to the community hosting the facility, the project will only be valuable to the extent it is linked to upgraded transmission lines in each of the three regions.

ERCOT is already developing upgraded transmission lines that will come near the proposed Clovis, NM, site, and the regional transmission system operator in the part of the Eastern Interconnection that would be linked to Tres Amigas is evaluating a number of plans for the area.  Plans in the Western Interconnection are not as far along in the area, but the support of the New Mexico state government for the project may be seen as an encouraging sign.  Commonly seen NIMBY-based opposition to transmission has tended to be muted in the area as transmission expansion is seen as aiding in the development of wind power projects, and such projects are seen as bringing significant local economic benefits.

TEXAS: Because Tres Amigas would result in expanded wholesale power trade between ERCOT and power systems outside of the state of Texas, some observers have suggested the proposal will run aground on federal-state jurisdictional issues.  The Texas Interconnection managed by ERCOT is wholly within Texas and predominantly under the jurisdiction of the PUC of Texas and Texas state law.  Texas policymakers have devoted significant resources to maintain the state’s authority over the system, and it is believed by many observers that Texas policymakers will veto any proposal that would undo the state’s jurisdiction over ERCOT and the Texas Interconnection.

Current links between ERCOT and out-of-Texas power systems are very small, relatively speaking, and have been allowed without significant change to state jurisdiction over the system.  The large scale of trade possible under the Tres Amigas proposal may invite FERC to reconsider the current division of jurisdictional duties.  Tres Amigas is proactively seeking an opinion from FERC stating that the project would not upset existing jurisdictional boundaries around ERCOT.

TECHNICAL: Two kinds of technical issues must be overcome before the Tres Amigas can deliver on its potential, the first involves the application of American Superconductor’s technology (profiled here) and the second involves development of the right operating practices.  American Superconductor has been built on the promise of transmission efficiencies from use of superconducting materials.  After over 20 years in business, the company turned its first profit in the last quarter of 2008.  That profit was only the result of recent acquisition of a company manufacturing parts for wind turbines.

Other issues are more a matter of business systems design.  Tres Amigas will need scheduling rules that facilitate the flow of power from where it is most available to where it is most needed.  A key problem arises in the need to simultaneously coordinate a power transaction with matching transmission capability.  Power systems are becoming increasingly efficient at coordinating the dispatch of generating resources and flows of power with the systems, but scheduled flows between systems get accommodated by ad hoc rules which are not as efficient.

In principle, a unified system dispatch would efficiently coordinate use of generation and optimize power flows, including power flows across regional borders.  However, given extensive differences in power systems and operational procedures among the three interconnections, a unified system dispatch likely would not work.  Nonetheless, some explicit coordination of trade between regions can yield substantial efficiency gains while allowing individual systems to maintain diverse operating procedures.  The current best approach along these lines is termed “market coupling,” with a tri-lateral market coupling process now in place among the power markets in the Netherlands, Belgium, and France.  (Additional discussion and links are available in this Knowledge Problem post on market design issues.)

Conclusion

TRESAMIGAS L.L.C The Tres Amigas project is innovative proposal that faces considerable barriers.  To some extent the proposal is ahead of its time, but given how long it will take for complementary transmission lines to be built in the three interconnections, it is probably necessary to launch the project “ahead of its time,” so that the necessary coordination can be done.

How far ahead of its time is it? The public remarks so far are a little light on the timing. A news release from the New Mexico State Land Office [pdf] reports that the current lease with Tres Amigas gives the company two years to evaluate the proposed site.  That news release suggests that power will be flowing “by 2014.”  Given the speed at which regulatory processes move and the speed at which transmission planning and development usually moves, five years strikes me as a very optimistic projection for Tres Amigas.  Achieving the full vision laid out in early announcements ­ 5 GW transfer capability into or out of all three interconnections ­ could easily take ten years, or more.

With innovation comes a certain amount of uncertainty.  Currently the links among the three systems are almost non-existent, so any increase is likely to offer benefits.  We will learn the size the benefits, and at what cost they can be achieved as new information emerges over time.  

Michael Giberson is an instructor and research associate at the Center for Energy Commerce at Texas Tech University's Rawls College of Business, blogs on energy economics and other topics at Knowledge Problem.

November 10, 2009

AMSC’s “Secret Sauce” Starts to Simmer

Market Heats Up for Disruption-Resistant Superconductors

By Joyce Pellino Crane

When electrical transmission cables and tree branches glisten in brilliant sunlight, drop your camera and run to the nearest hardware store for a generator.

I learned this hard lesson in December after an ice storm left downed wires, branches and debris throughout several counties northwest of Boston and across six other northeastern states, leaving one million without electricity, some for as long as two weeks. It will be a long time before I forget what it’s like to wrap holiday presents by a smoky fire with gloves on.

American Superconductor’s (AMSC: Nasdaq) wires run underground inside cable systems that are less susceptible to nature or terrorist attacks than the current technology. A high temperature superconductor has almost no resistance to the flow of electricity and is imbued with the capacity to transmit 150 times the power of copper wires. A key characteristic of AMSC’s superconductor technology is its ability to self-heal by automatically isolating dangerous power surges. The feature allows a smart grid to survive attacks and natural disasters without impacting the rest of the chain.

Today’s aged and inadequate power grid is linked by copper and aluminum wires that will burn or melt if too much power is pushed through them. In August 2003, a cascading voltage collapse plunged 50 million North Americans into darkness. Eight US states, from Michigan to Massachusetts, as well as the Canadian province of Ontario, were without power, in some cases, for four days. The blackout cost the US government as much as $10 billion. Canada suffered a net loss of 18.9 million work hours.

AMSC’s superconductor wires are composed of a crystalline compound of yttrium barium copper oxide (YBCO). The company, based in Devens, Mass., uses proprietary techniques to whip up its “secret sauce,” according to Jason Fredette, AMSC director of corporate communications. That technology is now being tested in Columbus, Ohio and Holbrook, NY, where a half-mile of superconductor cable in each location are sending electricity to households and businesses. In Holbrook, the Long Island Power Authority is feeding 574 megawatts of power to 300,000 homes with a 138,000 volt system. The Columbus pilot is bringing electricity to 8,600 residents and businesses through American Electric Power’s Bixby substation. Both programs are funded, in part, by the US Department of Energy.

“Now other electric utilities from the US and overseas are seeing that the superconductor cable system isn’t much different from the regular cable system,” Fredette said, “so that gives them the confidence to try it.”

Commercial applications of AMSC’s superconductor technology are just beginning.

AMSC and LS Cable, Ltd., a Korean manufacturer, recently agreed to co-market 10 kilometers of commercial superconductor cable in power grids over the next five years. LS will sell cable systems containing the wires to utility companies across the globe.

Last month, the Tres Amigas Project announced it will use AMSC’s superconducting technology to link the three major US power grids: the Eastern Interconnection, the Western Interconnection and the Texas Interconnection. The arrangement will give renewable energy companies the means to sell power through a superconductor pipeline for the first time. [Ed. Note: We'll have an in-depth article on Tres Amigas tomorrow.]

Superconductor electricity pipelines, according to Fredette, are underground, easy to site and access, highly efficient and controllable, offer greater security and avoid complex cost allocation issues for interstate transmission of power in contrast to competing technologies.

Over the past 52 weeks share price rose from $8.22 to $37.58 each, according to Bloomberg.

Revenues are expected to climb to about $300 million by the end of the current fiscal year on March 31, according to Fredette, as compared to $183 million in fiscal 2008. Fiscal 2009 second quarter revenues jumped to $75 million from $40 million for same period a year earlier. Wind power is the company’s other core market.

“We’re still in the midst of a very rapid growth phase,” he said, “and we see that continuing for the foreseeable future.”

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: Wordtrope. She can be reached at joycepellinocrane-at-gmail period com>

November 09, 2009

The Launch of Clean Energy Wonk

Tom Konrad, Ph.D.

I've been writing for AltEnergyStocks for over two years now, but it has not always been about stock market investing.  Often, it is about my other passion, energy policy and economics.  While this can inform stock market investing, I have come to believe that many people who come to a site called AltEnergyStocks, are probably more interested in investing-focused fare.

Because of this, I've been writing less about policy and economics than I would if I were writing for a more policy- or economics-focused blog.  Since I'm not about to give up my either my interest in policy or my interest in investing, I thought it was time for each to have its own place.

The new place for my policy articles will be my new Clean Energy Wonk blog.  When those articles will usefully inform my stock market articles, I will continue to link to them from here, and vice versa.

My first original article for Clean Policy Wonk has now been published.  It is an in-depth look at what Energy Return on Investment (EROI) and Energy Internal Rate of Return (EIRR) can tell us about how to make the transition away from fossil fuels.  

If you'd like to continue to read my wonkish policy and economics articles, please look for them there.  Otherwise, you'll still see the occasional link to them in investing articles here.

Quick Polls:

November 06, 2009

Green Energy Investing For Beginners, Part I: Stocks, Mutual Funds, or ETFs

Investing in green energy can be good for both the climate and your wallet.  How good depends on choosing the right investment vehicles (mutual funds, ETFs, or stocks) and sectors to invest in. This will get you started.

More and more investors are investing in green energy.  According to the Cleantech Group, the Cleantech sector is now the largest sector for venture capital investment.   Green Energy is not just for venture capitalists.  Small investors have done well in 2009.  Since the market bottomed at the start of March, the average green energy mutual fund topped the S&P 500 by 13%, while the average clean energy ETF beat the S&P 500 by 18%.  

Knowledgeable investors will scoff at that last statistic because, of course, most green energy companies are riskier than the tried-and-true companies of the S&P500, and what out-performs in an up market will under-perform in a down market.  That is true, but only to a point.  When I investigated it this Spring, I found that green energy stocks had outperformed the rest of the market even on a risk-adjusted basis

Nor are all green energy companies risky.  While the sector has more than its share of profitless startups, there are also established companies which have been making the planet a greener and safer place for a long time, but now have the opportunity to benefit from rising public awareness of the need to do something about climate change. By knowing what to look for, an investor can be green without taking on excessive risk.

Stocks, Exchange Traded Funds, or Mutual Funds

The small investor has three basic options:

  1. Green Energy Mutual Funds,

  2. Green Energy Exchange Traded Funds (ETFs), or 

  3. Individual Green Energy Stocks.

Green Energy Mutual Funds

Mutual funds will be the most familiar option to the small investor.  The available green energy mutual funds are all actively managed, which means they try to choose the best green companies.  Mutual funds charge high fees for this service, but I have been unable to find evidence of skill among green mutual fund managers which would justify the cost.  Numerous studies of the mutual fund industry also find that manager skill is very rare and difficult to distinguish from (much more common) manager luck.  Green mutual funds are not the best way to gain exposure to the sector: even compared to most actively managed mutual funds, the green energy mutual funds are quite expensive, and so they make sense only for investors who have no other option.   

I took an in-depth look at the available green energy mutual funds here.  

Green Energy ETFs

The second option is green energy Exchange Traded Funds, or ETFs.  ETFs are like mutual funds in that they allow an investor to own small stakes in a large number of companies with a single investment, but, unlike mutual funds, they do not have managers who try to pick the best investments.  Instead, their goal is to gain exposure to a wide range of green energy companies by buying the companies in an industry index.  Investors buy ETFs from other investors on a stock exchange, much like they would by individual stocks; the ETF manager seldom deals directly with individual investors.  This hand-off approach means that they can charge investors much smaller fees for their services.  Furthermore, since there is little evidence that active mutual fund managers add value, the ETF investor benefits from cost savings, but probably does not lose any benefit from active management.

ETFs are an appropriate investing strategy for a hands-off investor with a few thousand dollars or more to invest.  I published an in-depth look at the available green energy ETFs here, which includes recommendations of the best ETFs for different types of investors.

Green Energy Stocks

The final option is investing in green energy stocks.  This can deliver significant cost savings relative to investing in green ETFs (and almost certainly will deliver cost savings relative to mutual funds), but typically requires considerably more investment of time than does using the green ETFs.  This must be weighed against the additional work required to select individual stocks instead of ETFs, but carries the advantage of access to green energy sectors which the mutual funds and ETFs neglect, better control of both sector and stock selection..

In order to give readers a relatively simple option to invest in green energy stocks without a lot of work, I have published a list of 10 stocks on January 1st for the last two years.  My ten green stocks for 2008 lost 55% that year, but this was still better than all the ETFs and all but one of the mutual funds in 2008.  Most of these lost between 60% and 70% of their value in 2008.  In the first three quarters of 2009, my ten picks returned 41.5%, handily beating the green ETF I chose as a benchmark (by 20%).  (I have not looked into the performance of all the ETFs over the same period.)  As with mutual fund managers, it's impossible to say if my 1 3/4 year track record is skill or luck, but at least the costs are low.

I'll publish a new list of ten on AltEnergyStocks.com at the start of 2010.

Four Articles on Sector and Stock Selection

No matter which investment vehicle you use, understanding a little about the clean energy sectors can lead to a stronger, safer, and more profitable portfolio.  It can also lead to a greener portfolio, in the environmental sense of the word.

I've published a series of articles to help investors make the right decisions.  Two are based on research into which technologies would be most effective against climate change.  The first looked into those technologies which would have a significant impact on climate change, and the second looked into those technologies which were not going to make significant contributions.  I  believe it makes sense to structure your portfolio to reflect the technologies which are actually going to make a difference.  People who want to do the right thing will know that the companies they own are doing the right thing about climate change.  People who want to make money will know that rational investments to fight climate change will also benefit the companies they have invested in.

The third article looked at the types of questions investors should ask when selecting stocks or sectors, as part of a basic framework for investment decision-making.  We are currently inundated with information about companies, but most of it is useless when trying to predict stock returns, because it is already reflected in market prices.  Knowing the difference between useful information and useless information can dramatically reduce research time and lead to better decision-making.

The final article in this series looked at psychological factors which can lead incautious investors to invest unwisely, and how investors who are aware of this tendency can do better.  The article also includes a list of twenty green energy stocks and sector ETFs that I think have the best prospects in their sectors.

Stock Selection Shortcuts

Individual stock selection is also more complex than selecting a few companies from stock lists, even my lists.  Selecting stocks requires a level of due diligence when looking into each company.  However, for investors who would like a shortcut and don't want to use my lists, another trick would be to choose stocks from the portfolios of the green mutual funds to match your intended sector allocation.  Even if we can't be sure that the mutual fund managers are good at stock picking, we can be fairly confident that they have looked into the companies in their portfolios and avoided the obvious scams.  

I tried such an approach by using stocks from the mutual funds' portfolios when I constructed my Quick Clean Energy Tracking Portfolio earlier this year.  The purpose then was not to outperform the mutual funds by better sector selection, but instead to match their performance at lower cost.  It didn't work out that way.  The portfolio vastly out-performed, which turned out to be due in large part to an unexpected bias towards riskier stocks than those in the funds, in combination with a strong upward trend for the overall market over the period in question.  

Even though that particular experiment did not work, the portfolios of the green energy mutual funds and ETFs are good places to start when selecting green stocks, and I will continue to do so myself.

For investors following the mutual fund or ETF routes to green portfolios, I give breakdowns by sector of each fund's portfolio in the linked articles on Green Energy Mutual Funds and Green Energy ETFs.

Part II of this series will attempt to help you decide how much to invest in green energy. (Link will be broken until publication.)

DISCLOSURE: None.

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

November 05, 2009

Fending Cyber Threats with a Fortress

RuggedCom Fortifies the Smart Grid and Captures the Substation Market

By Joyce Pellino Crane

    I wonder how many utility executives lie awake at night worrying  about cyberthreats to their electricity substations.

    If you’ve ever gone a few days without electricity in your home,  you’ll quickly realize how minimal life becomes.  Working on your computer—the speedway to higher thinking and creativity— is impossible.

    Watching television, charging your cell phone, keeping food frozen, and  micro-waving popcorn, can no longer be done. Every task requires  planning and, much more physical labor—consider what it would take  to wash and dry your laundry. Without electricity, all business and  governmental systems would stop cold. Imagine a world without  money transactions. Payrolls couldn’t be met, loans would languish, and interest accruals couldn't be calculated. This is the stuff of a great  Hollywood thriller.RUGGEDCOM

     But for RuggedCom, Inc., (RUGGF: Pink) a manufacturer of  ruggedized communications equipment for utility substations,  it is a serious reality. The company’s products are designed for  the smart grid, with interconnectivity options and security features  necessary for regulatory compliance. Utility customers are able to  prevent accidental or malicious service disruptions by establishing  an electronic security perimeter with its routers and switches around  critical infrastructure.

     RuggedCom designs its routers, switches, serial servers, and  media converters to withstand extreme weather conditions such as  heat waves and the negative effects of natural phenomenon like lighting  strikes. The products are also immune to radio and electro magnetic interference.

     In March a major US utility company agreed to purchase $2 million  worth of RuggedSwitch and RuggedRouter products for about 300  substations over the next four years. The units will be used to create secure communications networks for use in substation automation  and smart grid applications, according to a company press release,  dated March 17. The document did not disclose the name or location of the utility company.

      A router is a high-speed highway for transporting packets of  information among a network of computers, and a switch acts  as a bridge between the highway segments. Similar to the Internet, the smart  grid is designed to isolate disruptions and prevent cascading events.

      So far, RuggedCom has lassoed 40 percent of the worldwide  substation market, according to Manish Grigo, research analyst at Toll Cross Securities, Inc., in Toronto, because the hardware  is outperforming that of its competitors. He recommended the  company’s stock as a buy.

      RuggedCom of Woodbridge, Ontario,  competes with Cisco Systems (CSCO: NASDAQ), Inc., of San Jose, Calif., and GarrettCom, Inc., of Freemont, Calif., among others.

      The company’s fundamentals are strong, said Grigo,  even though share price has fluctuated lately. Over the  past 52 weeks, share price soared to $26.29 from $8.87,  according to Bloomberg—an 86 percent return.

     “I would expect some lumpiness along the way,” Grigo  said. “But if someone is in it for the long-term, you definitely  will benefit from this stock.”

      Utility companies test equipment extensively before  making a purchase, he said, and typically  stagger their purchases over several years. Therefore, once a company settles on a supplier, utility officials  will likely continue to buy from it.

     “They don’t upgrade their entire network all at once," he said.  “They do it over 5 and ten year periods, so they will be customers for the long haul.”      Company officials will announce fiscal 2010 second quarter  results, ending September 30, today. (Nov. 5) At the end of its first  fiscal quarter on June 30, profits were up 26 percent from the  comparable quarter a year earlier and net income was $0.9 million,  representing the seventeenth consecutive quarter of profitability,  according to a company announcement.

      “Customers are spending millions on RuggedCom’s technology,”  Grigo said. “To me that speaks volumes about their product.”

    Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: Wordtrope.

November 04, 2009

CyberTerrorism and the Smart Grid

Is There a Crack in the (Fire)Wall?

Joyce Pellino Crane

Last December when 325,000 Massachusetts homes went dark for days on end, I finally understood the transformative powers of electricity.

For starters, my hair went limp when the blow dryer didn't turn on, my laundry piled high, my food froze in the garage, and my stove was stone cold. After five days of living like Pioneer Woman, I got tired of waiting for the utility company to restring snapped cable wires, and checked into a hotel.

The nation's electric power grid is a hodgepodge of exposed wires, transformers, switching stations, antiquated meters, and power generators. Much of it has not been updated since the 1940`s when it was built for coal-fired technology. Its vulnerability was underscored last winter when as many as one million people, living in seven northeastern states, lost power to an ice glazing under frigid temperature conditions.

A push by the Obama Administration to transform today's sagging lattice into a smart grid capable of telling consumers about their energy usage and of powering their hybrid vehicles, is giving rise to new hardware. The forthcoming smart grid will be designed for energy efficiency and real-time communications, characterized by smart meters that monitor and regulate energy consumption on the spot, substations with intelligent switches and routers, and new transmission cables with significantly greater capacity then the existing ones.

But the technologies that smarten up the grid, will also make it susceptible to viral attacks, privacy issues, and other security breaches, say some industry observers, and the cost of transforming it will far outpace the government dollars earmarked for its upgrade.

 The net cost of transforming from the current grid to a smart one is estimated to run as high as $165 billion over 20 years, or $8.3 billion per years, according to a 2004 report by the Electric Power Research Institute, an independent, non-profit research company. That makes the $11 billion allotted for development of smart grid technologies from the government's 2009 stimulus package a drop in the bucket and raises questions about the return on investment.

 But the networking effects of the power grid promises revenue growth. The same EPRI report estimated the benefit-to-cost ratio to be at least four-to-one, and listed the smart grid's attributes as: increased power flow, self healing characteristics for a quick recovery, improved power quality, reduced frequency and duration of outages, reduced power plant emissions and other environmental impacts, a safer work environment for utility employees, a better quality of life for North Americans, and increased productivity.

Several companies are manufacturing smart grid technologies that will help accomplish these characteristics. Over the next few days, I'll take a look at two (RuggedCom, T: RCM, Pink:RUGGF, and American Superconductor, NASDAQ: AMSC), and tell you how their technologies are contributing to the creation of a smart grid.

Coming tomorrow:  An interview with a Toronto-based research analyst for RuggedCom, Inc., of Concord, Ontario. (Link broken until publication.)

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: Wordtrope.

November 03, 2009

Welcome David Gold

Tom Konrad, Ph.D., CFA

I first met David Gold when he agreed (at the last minute) to sit on a lunchtime panel about Financing Renewable Energy I organized for the Colorado CFA Society in April. When he emailed an announcement in September that he was starting Green Gold Blog, I immediately signed up, because I expected he'd have something interesting to say.  

I also know that what's relevant for Venture Capitalists is often relevant for public investors.  For instance, doesn't his recent article on VC cleantech investment trends have some almost eerie similarities to my article about why small investors by solar stocks? And both have similar lessons for investors: there's probably a lot of opportunity that others are not looking at because they either don't have the right background or perspective to see the opportunities.

I put together a quick graph showing the Venture Capital (VC) investment numbers from David's article, and compared them with the numbers of public companies on our corresponding stock lists.

 VC vs AES.PNG

The parallel is very tight except in Geothermal and Energy Efficiency.  And I think the parallels would be a lot closer if not for the fact that I and AltEnergyStocks' Editor Charles Morand share an interest in Geothermal, and it's fair to say that I'm obsessed with Energy Efficiency as an investment theme.  In other words, the length of our geothermal and energy efficiency stocks lists probably has more to do with our interests than the number of companies out there.

The question David and I are both asking is this: Does the size of current investment in Cleantech/Green Energy sectors relate more to the size of the opportunity, or more to the predilections of the investors?

I hope readers find David's articles as engaging and provocative as I do, and that you look forward with me to more.  We expect to publish something from David about twice a month going forward.

DISCLOSURE: None.

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

November 02, 2009

Cleantech Venture Capitalists are Human Too

David Gold

Sectors like solar, biofuels and smart grid have received a significant overweighting of venture capital investment compared to other sectors. Is this because they are better investment opportunities or because venture capitalists (VCs), being human, invest in what they know and who they know? While many entrepreneurs may not believe it, VCs are human, too.

In my last post, “Human Capital, Not Venture Capital, the Biggest Cleantech Need,” I discussed how the greatest challenge today to growing a successful early-stage cleantech business is the shortage of successful, experienced cleantech entrepreneurs. But finding the right human capital to build great cleantech businesses isn’t the only stumbling block: Human capitalists (VCs) have been limited by their own experiences and networks.

At the end of the day, venture capitalists almost always invest first in people. A great, experienced management team can make a business out of an average technology. A bad management team can destroy the most amazing of technologies. Over the past decade, as cleantech VC investment started to expand to more than a handful of specialized funds, VCs naturally turned to their business networks to learn about the sectors, identify opportunities and build management teams. Given that the largest categories of VC investments in the preceding few decades have been in software/web, semiconductors, information technology and pharmaceuticals, these are also the areas where the VCs’ largest network of experienced successful entrepreneurs resided.

As crossover entrepreneurs and crossover VCs started to explore or create opportunities, they naturally looked where their knowledge could be most applied. It should not be surprising that the lion’s share of VC investment dollars have been going into areas that have closely related technology foundations to the traditional areas of VC investment. Sectors like solar, smart grid, biofuels and LEDs have received most of the VC dollars and, as a result, increased press hype. The table below highlights the approximate portion of cleantech VC investments in some of these key areas over the past three years.

No doubt there are exciting investments to be made in these sectors. Our fund, Access Venture Partners, has invested in both an LED lighting company (TerraLUX) and a smartgrid company (Tendril Networks). But what about sectors like green building materials, industrial energy efficiency, geothermal and nuclear? They serve equally enormous markets (if not larger) and at least in some areas (if not most) have equal or greater potential impact on the economy and the environment.

Solar is a particular anomaly, receiving the single largest share of all cleantech venture capital. While sexy because of its elegance, solar is a challenged technology. The economics of solar must struggle against the triple confluence of very low efficiencies, very high costs and the fact the sun simply doesn’t shine much of the time (think night and clouds). No doubt that solar venture investments are targeted at changing those factors – except for the sun, of course. There are limits to what even VCs can accomplish. But even if the cost of solar cells dropped to zero, solar still would find itself challenged to compete with other renewables, let alone traditional energy, because at least half the system cost is outside of the cells.

Geothermal, which unlike solar can be used as “base load” (meaning that it is always on), is at the other end of the spectrum. There have been few geothermal venture capital investments, yet it has some of the most compelling economics at both the utility and home scale. I would highlight both MIT’s 2006 report on the huge potential of geothermal energy and, of more contemporary interest, the October 2009 issue of Consumer Reports, which showed how a geothermal heat pump’s potential economic return usually outperforms that of a home-based solar thermal system.

So why the VC investment preference for solar over geothermal? I’m betting that much of the bias has to do with the fact that not many VCs have strong networks of geologists, drilling technologists, heat pump engineers and steam turbine power generation experts to build great geothermal companies (myself included). While it is certainly important to be knowledgeable and comfortable with the people and technology of a company, VCs must challenge themselves to think outside their own box. If the cleantech market is going to fulfill its full business potential, VCs must push themselves beyond the normal human inclination to stick with what’s familiar. A comfortable investment may not be a great investment. Cleantech VCs need to take a peek over the side of our box. What we see and what we can learn may surprise us. 

Cleantech Segment Traditional VC Corollary Estimated % of Cleantech VC Investment $’s 2006-2008
Solar Semiconductors 33%+
Biofuels Biotech 20%+
SmartGrid Software, Web, Information Technology 14%+
LED Lighting Semiconductors and Information Technology 5%+
Geothermal None <2%
Nuclear None <2%
Building Materials and Efficiency None <2%
Industrial Energy Efficiency None Not tracked… likely <2%

Data aggregated from sources including NVCA, PriceWaterHouse Coopers MoneyTree and Greentech Media. Data from these organizations use different sources that yield different totals and each has different categories they track with cleantech funding.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com

November 01, 2009

Human Capital, Not Venture Capital, the Biggest Cleantech Challenge

David Gold

Building great businesses typically requires three key ingredients: phenomenal people, compelling technology and investment capital. Cleantech companies are no exception. While cleantech venture capital investments have expanded rapidly, averaging an annual growth rate of 65% over the past five years and now representing over 15% of all venture investments, the compelling technologies are mostly early in their development cycles and the human eco-system for early stage cleantech companies is in its infancy. There is much buzz about the venture capital and government funding that is being invested in cleantech companies, but the immaturity of the cleantech entrepreneurial ecosystem is overlooked as a significant challenge in accelerating the growth of successful cleantech companies. 

In the more traditional areas of VC investment such as software/internet, life sciences, and semi-conductors there are a relatively large number of successful entrepreneurs who have had exit events that made them wealthy. These individuals are the most likely source of smart early angel financing for other start-ups in the same sector. I emphasize “smart” because angel investors who invest in companies within industries that they know well not only make wiser investments but also can add real value to those businesses. And they tend to be more prolific investors within those industries for just that reason. The reality is that the list of successful cleantech entrepreneurs, where success is defined by a healthy exit event, is very short. 

Early stage cleantech companies struggle much more than companies in traditional areas of venture capital to find wise angel investors, or advisors and executives with both industry and entrepreneurial experience. While crossover entrepreneurs – those with success in a different sector who desire to get into cleantech – can be helpful and bring valuable wisdom, nothing can substitute for the valuable knowledge and experience gained by building a company within the same sector. Efforts like the Cleantech Open, some of the emerging cleantech incubators (like CleanLaunch, Austin’s Cleantech incubator and San Francisco’s incubator) and cleantech network groups (like Colorado Greentech Group, the Renewable Energy Business Network and the CleanTX Foundation) can assist in the tough challenge of bringing the right mix of entrepreneurial, business and industry expertise together for an early stage cleantech company. But, in the end, only time will fully cure this problem by generating experienced and successful entrepreneurs who can breed the second generation of cleantech companies. In the mean time, the challenges of growing and investing in early stage cleantech companies are as great as they will ever be. Fortunately, I believe, the rewards will be equally great.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com


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