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January 31, 2010

2010: The Year of the Strong Grid?

Part I: With Smart Grid Brains and Transmission Brawn...

Tom Konrad, CFA

A robust national grid will be essential to achieving high penetration for renewable electricity at reasonable cost, and the companies that can help build it are an essential part of a clean energy portfolio.  

Many renewable energy advocates, especially those enchanted by the gigantic potential for solar, think that we can get by with local renewable energy.  While it's a pretty vision, the timing of wind and solar (the only forms of renewable energy that have the potential to produce 100% of our electricity) mean that this could only be achieved with prohibitively costly investment in grid tied energy storage.  It makes much more sense to invest in a smarter and more robust grid before making large investments in energy storage.

Diversification of Electricity

There are two aspects of this: managing our energy usage better, which is the province of the smart grid, and interconnecting it better, allowing us to take advantage of the natural variations between both supply and demand in different locations with long distance transmission.  In much the same way combining two imperfectly correlated stocks in a portfolio reduces overall risk, connecting two regions with high voltage transmission reduces the overall imbalances between variable supply and variable demand that need to be met with dispatchable generation.  

It's much easier to balance supply and demand over a large area than it is over a small area.  On the smallest scale, this is the reason that almost all net zero electricity homes are grid-tied.  Although such a home has the capacity to produce all the electricity it needs on an annual basis, the cost of the batteries needed to store the extra electricity produced during sunny summer months for use on long, dark winter nights would be prohibitive.  Instead, home owners use the wires connecting them to the local grid as extremely inexpensive virtual storage.  Long distance transmission can serve the same function on a much larger scale at a cost of only a fraction of the comparable real storage.

Time and Space

Transmission shifts electric supply in space, while storage shifts electric supply in time, and smart grid technologies shift electric demand in time.  Both Smart Grid and Transmission can therefore provide virtual storage, and both do it at a low cost compared to real electricity storage.  

Last year saw investors finally take notice of Smart Grid stocks, but transmission has yet to capture their attention (perhaps because many renewable energy aficionados still cling to the dream that we can transition to clean energy sources using just the smart grid and storage.)  While such a transition would be physically possible, it would make no more economic sense than putting solar panels on your roof and racks of batteries in your basement in order to cut your connection to your electric utility.

If 2009 was the year investors woke up to the potential of the Smart Grid, 2010 may be the year they begin to see the strong grid.

Part II of this article will look at which Strong Grid stocks are the strongest financially.


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.

January 29, 2010

Why Petersen is Such a Buzzkill

John Petersen

In one of my first articles, "Battery Technology: A Different Set of Rules," a commenter suggested that I was a bit of a Captain Buzzkill. Eighteen months later it's clear that a lot of readers share that uncharitable view. This morning I had an e-mail exchange with a reader that raised the same basic issues and reminded me that it's been a while since I've discussed the fundamental differences between energy storage and other technology related sectors. Since the subject matter can be very important to investors who want to make sound decisions, I've decided to edit the e-mail exchange and publish it as an article.

Inquiry: I've read your posts and thank you for your insights into the topics you cover. I have to ask this however ... is there not "anything positive" you can say with regards to lithium-ion battery companies? I mean, can't you give credit for anything? It seems to me that in a necessary longer term evolution of technologies they and others DO play a critical role in getting from proverbial A to B for all of us.

Response: I believe several lithium-ion battery developers have the potential to become fine companies and that the world desperately needs all of the lithium-ion, lithium air, sodium sulfur, zinc bromine, lead acid, lead carbon, sodium metal halide and nickel metal hydride batteries we can make. The products are critical to an energy efficient future and so are the companies that make them. The needs are immense beyond imagining but companies that want to survive and thrive in the energy storage sector need to be willing and able to say:
  • We can provide batteries for Application A today and earn a reasonable profit;
  • With luck we may be able to provide batteries for Application B in X years and earn a reasonable profit; and
  • Until the market dynamics change, we won't be able to provide batteries for Application C and earn a reasonable profit.
Any other approach is certain to set up unreasonable expectations in the collective consciouness of the market and over the years I've seen too many examples of disastrous market reactions to unsatisfied expectations. Given my long and sometimes painful experience advising small companies, I have a hard time remaining sanguine when companies start the game by setting their goals too high.

Over the years I've had a number of friends and clients decide that they wanted to sell products to WalMart. The negotiations were long and brutal, but the vendors were always delighted when their products hit the shelf because the sales volumes were immense. Within about six months, they discovered to a man that it was almost impossible to sell anything to WalMart and earn a reasonable profit margin. Within eighteen months they were all out of business.

Selling batteries for electric cars and utility applications is a lot like selling a product to WalMart. Starting negotiations from a position where you're saying "we understand that we won't be able to business with you unless we can slash our costs by at least 50% coming out of the chute" is darned near suicidal. Small companies need to start in markets where they can earn outsized profits while they learn to optimize their activities. Learning to swim in the shark tank is a good way to get eaten.

Right now the lithium-ion battery developers are promising a brave new world of electric cars and grid-based storage. I've shown why electric cars are a horrifically suboptimal use of batteries. I've also seen drafts of a new report from Sandia National Laboratories that shows most grid based applications will require even cheaper batteries than the automotive sector requires. At last fall's EESAT conference in Seattle, Ali Nourai of American Electric Power explained that they're 'technology agnostic" as a company and their current efforts are focused on lithium-ion batteries because they assume that sales into the automotive market will drive lithium-ion battery prices to low enough levels that they'll be attractive for low-value utility applications.

In Joseph Heller's classic novel Catch 22 a character named Milo Minderbinder planned to buy eggs for a dime, sell them for a nickel and make it up on volume. That can't happen in the real world, regardless of what people want to believe.

If the lithium-ion battery developers were all out telling the market that they planned to focus on high value markets that they could serve today and they hoped to expand into other markets as they built experience and improved their technology, I'd be a huge booster. As long as they're promising things that can't happen in the real world, they're either setting the market up for major disappointment or setting themselves up for a string of losses that won't end until a Chapter 11 petition is filed. I can't be a cheerleader for either of those outcomes.

Follow-up: Thanks so much for your kind reply ... Very interesting conclusions is all I can say. This reminds me of none other than solar, and look at where those stocks are this week "as we speak" eh ? Even the "best of the breed" are subject to subsidy cuts as was obvious just the other day, with the announcements out of Germany, proposing to cut more than were the expectations of the market. The only good things that can be said about it is that is causes prices to get cheaper for the end user, and makes the industry far more competitive in the long run I suppose, but it sure does just basically kill positive forward guidance at a time when it sure would be nice to have some, hmmm ?

Reply: Based on the experience of the last 40 years most investors are optimistic about the future of all things alternative energy. In some cases the optimism is warranted. In others, particularly in energy storage, the optimism is dangerous.

Substantially all of the miracles of the information and communications technology revolution were due to advances in the science of physics. Researchers have found ways to use steadily smaller resource inputs to get exponentially larger outputs. It's been true in communications, computing and even solar cells. As a result the idea that it's always possible to do more with less has been burned into our collective psyche and the masses resist any suggestion that another result is even possible.

The biggest problem with energy storage is that it's all based on chemistry, which is limited by an entirely different set of natural laws. On any given atom there are a defined and immutable number of sites where chemical bonds can be formed and reactions can take place. For hydrogen atoms the number is 1; for oxygen atoms the number is 2; for nitrogen atoms the number is 3 and for oxygen atoms the number is 4. I could continue the series but you get the idea. When you put atoms together to make stable molecules, the number of bonds on each side have to match. That's why chemical compounds are express with formula like H20 or CO2 or NH3 or CH4. No matter what we do the ratios can't change, the number of atoms in a gram of material can't change and the number of possible chemical bonding sites in a gram of material can't change.

Most chemical reactions used in battery chemistry are quite efficient to start with, which means that the best researchers can do is work around the margins to maximize the surface area where reactions can occur. There's a lot of talk about nanotechnology in the battery sector but what it all boils down to is grinding materials into extremely fine particles in order to maximize surface area. In the case of some of the carbon compounds used in batteries, surface area has already been optimized to the point where a single gram of material has as much surface area as a football field. About the only advances on the horizon that promise to significantly increase surface area are materials like carbon nanotubes and graphene, but they're terribly difficult to work with and ungodly expensive. Since the materials have been the subjects of intense research and development for the last 10 to 20 years and progress has been extraordinarily slow, I don't expect breakthroughs tomorrow.

The bottom line is that chemistry is grunt manufacturing that requires immense amounts of raw material. The science is progressing every day but you rarely see disruptive changes from companies like Dow, Monsanto, Exxon and the like. The battery industry will be no different.

Because we're dealing with chemistry instead of physics, current lofty expectations of rapid disruptive change are misplaced. There will no doubt be progress, but it will not be rapid or disruptive. The bottom line is progress in the storage sector will mirror progress in the chemical industry in spite of the fact that the the goal is to store electricity.

Conclusion: I'm a huge booster of the energy storage sector and want everybody in the industry to be fabulously successful. The really crazy part is I don't even think about competition between companies because I believe every company that brings a reliable and cost-effective product to market will have more business than it can possibly handle. What I object to are outsized claims of likely technical progress and cost reductions from advances in chemistry in a resource-constrained world. Human beings always want more than they can possibly have because that's the nature of the beast. Promising to satisfy human desires that are beyond the limits of the possible is neither good business nor good public relations.

January 28, 2010

Plug-in Vehicles Are A Luxury No Nation Can Afford

John Petersen

I'm going to apologize up front for revisiting a topic that inevitably draws furious comment from readers who just don't get it, or who refuse to get it. I understand that it's painful to learn that politicians, environmental advocates and the mainstream media have been lying about critical issues, but that doesn't make exposing the lies less important. So I'm going to endure the slings and arrows of the eco-religious one more time and use a new example to show that plug-in vehicles are a luxury no nation can afford.

Ener1 (HEV) is a pure-play manufacturer of lithium-ion batteries. While I am frequently critical of Ener1's penchant for vague disclosures and EV happy-talk, today I'm going to take a different tack and accept their disclosures as gospel. In the Company section of its website, Ener1 describes its domestic production capacity as follows:

"Current production capacity is 10,000 electric vehicle (EV) packs per year, equivalent to 100,000 hybrid electric vehicle (HEV) packs. Capacity will peak at 30,000 EV packs per year in the current Indiana-based facilities at full utilization.

On receipt of the conditional $118.5 million in federal grants from the U.S. Department of Energy (DOE), EnerDel will double this number by 2012, to give a production capacity of 60,000 EV (600,000 HEV) packs per year, creating an estimated 1,700 new jobs in the State of Indiana. ..."

In a press release dated January 21, 2009, Ener1 disclosed that it planned to spend $237.5 million to expand its domestic battery production capacity to approximately 600,000 HEV or 60,000 EV packs per year. Roughly half of the planned expansion funding will come from a $118.5 million ARRA battery manufacturing grant that Ener1 was awarded in August 2009. Ener1 will have to raise the balance from open market equity sales and other non-government sources to fulfill the requirements of its grant.

HEVs and EVs both use advanced batteries and sophisticated electric drive technologies to capture energy that would have been lost in braking, use the captured energy in subsequent acceleration cycles and minimize the waste of gasoline. While HEVs draw the line at maximizing vehicle efficiency, EVs go a step further and use additional battery capacity to replace the fuel tank, which means an outlet in your garage becomes your fuel source instead of your neighborhood filling station.

The typical American drives about 12,000 miles per year and if he buys a new fuel-efficient car he can expect to pay roughly $18,000 for the vehicle and buy about 400 gallons of gasoline per year. In comparison, a consumer who buys a new HEV for roughly $22,000 can expect to buy 240 gallons of gasoline per year and a consumer who buys a new EV for roughly $40,000 won't buy any gasoline at all.

According to www.fueleconomy.gov burning one gallon of gasoline produces 20 pounds of CO2. While EVs don't burn any gasoline and are widely touted as super-green, the power plants that generate electricity in the U.S. release an average of 9.7 pounds of CO2 for each gallon of gasoline equivalent.

With those numbers firmly in hand, let's do some simple comparisons of what happens when the batteries from the Ener1 expansion leave the plant and are used to manufacture 300,000 additional HEVs or 30,000 additional EVs.

Incremental manufacturing revenue
    Per vehicle
    Plant total
$1.20 billion
$0.66 billion

Annual gasoline savings

    Per vehicle (gallons)
    Plant total (gallons)
48 million
12 million

Annual CO2 emission reduction

    Per vehicle (tons)
    Plant total (tons)
480,000 61,800

It's important to note that the table presents the two extremes on the range of possibilities and the likely impact on manufacturing revenue, gasoline consumption and CO2 emissions is somewhere in the middle. Nevertheless, I think it's important for everyone to understand that using the additional battery production from the Ener1 plant to produce 300,000 HEVs instead of 30,000 EVs would be twice as effective at creating jobs, four times as effective at reducing national gasoline consumption and eight times as effective at reducing national CO2 emissions, especially when I consider that the taxpayers are going to pick up half the tab for the plant expansion.

How about you?

This really isn't a rhetorical question. I want to know what my readers think. Please take a few seconds and respond to the following single question poll.

Disclosure: None.

January 27, 2010

Playing the 'Global Grid Game' - Japan's NGK, GE Majority-Owned Indo Tech Look Strong

Maintaining and expanding the world's electric power grids in order to avoid stupendous blackouts, add gigawatts of green power, and bring electricity to a billion additional people, will cost hundreds of billions of dollars over the next 10 years.

Retrofitting just the U.S. power grid will cost $130 billion, estimates the Electric Power Research Institute (EPRI). China has earmarked $135 billion to upgrade and expand its high-voltage grid. India will need to spend billions if it has any hope of reaching its goal of increasing electrical generation capacity to 200 GW by 2012 from roughly 150 GW currently. Among the many planned projects that will cost billions are the super grids that will connect North Sea offshore wind farms to northern Europe and North African desert solar installations to southern Europe.

Of the many players in the "global grid game," two in particular that appear to have strong long-term positions are Japan's NGK Insulators Ltd. (Symbol NGKIF.PK) and Indo Tech Transformers Ltd., an Indian company that trades in Mumbai (Symbol 532717) in which General Electric Co. (Symbol GE) recently acquired a majority stake through a joint venture with a Mexican firm.

As Jesse Berst - whose web site, SmartGridNews, should be required reading - noted last month, "When it comes to the suppliers of grid-scale storage, there's Japan's NGK and its proven product line and then there is everybody else."

Given the growing need to "store" electricity from wind, solar and other so-called intermittent power sources, grid-scale energy storage will be a $4.1 billion market by 2018 compared with just $329 million in 2008, according to Pike Research, and NGK has already "garnered several significant multiyear battery orders," according to Berst.

To be sure, shares of power-storage companies (including NGK) have been performing well for many months. But with governments around the world due to spend upwards of $200 billion in green stimulus money this year and next, NGK's upward climb would logically appear to have a ways to go.

As for Indo Tech, while it's just one of several power transformer manufacturers in India, it's the one that GE appears to be using to spearhead its growth in the fast-growing Indian power market. "As generation ramps up, I think there are going to be a lot of opportunities for growth in the transmission and distribution sector," GE Energy's man in India was recently quoted as saying.

Think of Indo Tech as a purer play that may generate bigger absolute returns than GE itself will in a global market that everyone agrees is, and will continue, growing by leaps and bounds.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

January 26, 2010

New Transmission Technologies

Tom Konrad, CFA

Why wasn't Aluminum Conductor Composite Core (ACCC) technology mentioned in Colorado's REDI report?

In December, I gave readers a brief summary and a few investing ideas based on Colorado's Renewable Energy Development Infrastructure (REDI) report.  I've now read the entire report, much of which is focused on Colorado's needs in terms of electric infrastructure.  In addition to some useful price data for long distance transmission, there was a short section on "the potential for new transmission technologies" (page 35.)  

The new technologies mentioned were 

  1. Aluminum-conductor, steel-supported (ACSS) with ultra-high strength cores.
  2. Aluminum-conductor, composite reinforced (ACCR)
  3. Superconducting Electricity Pipelines

ACSS is produced by the private company Southwire, while ACCR was developed by 3M, and Southwire is the contract manufacturer.  Superconducting Electricity Pipelines were developed by American Superconductor (AMSC), a company we recently profiled here.  

The Dog that Didn't Bark

What surprised me was what was not in the REDI report: Composite Technology Corp's (CPTC.OB) Aluminum Conductor Composite Core (ACCC) cable. I followed CPTC in 2007 and 2008.  According to most studies I saw, ACCC cable outperforms both ACSS and ACCR on a cost-adjusted basis.  Although I included the company in my Ten Green Energy Gambles for 2009 (one of my less successful picks, the stock was flat that year), I have not been following it closely since the financial crisis began, because I did not think that the company had the financial strength to do well in the new financial climate.  

But I didn't stop following the company out of any doubts about its technology, so I was curious about the absence of ACCC cable from the REDI report.  Since I have several contacts at the Colorado Governor's Energy Office (GEO), I asked around.  Unfortunately, no one was willing to talk on, or off, the record.  

What Can We Conclude?

Since I can't share with you the substance of my conversations with my contacts at GEO, I can only speculate here what the absence from the REDI report might mean. (Note that these speculations are based on my thoughts previous to talking to my contacts at GEO, and are not based on those conversations in any way.)  Knowing that the technology wasn't mentioned, we can only guss that 

  1. The drafters of the report were not aware of ACCC's technical superiority to ACSS and ACCR, 
  2. ACCC isn't really superior to ACSS and ACCR, or
  3. It was a bureaucratic oversight.

In any case, this is not good news for CPTC.  Perhaps a lack of funding or other circumstances has meant that Composite Technology has not been able to effectively communicate the advantages of ACCC to decision makers.  If that does not sound good, it could be worse: Perhaps ACCC really does not have the benefits I thought it did.  

The best-case scenario is #3, a bureaucratic oversight, but even then, why wasn't Composite Technology there making sure such oversights didn't happen?  Superior technology is only one small part of business success.  Another is making sure that people who might make decisions about your technology are aware of it.  The REDI report is intended for legislators 

Prospective investors in Composite Technology Corp. (CPTC.OB) should probably decide for themselves how important this is before investing, and current investors might consider re-evaluating their holdings.  It's all speculation, but if you're on the fence, this might tip you one way or the other.

If readers have any additional insight or guesses, let us know in the comments.


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.

January 25, 2010

Vehicle Electrification – Press Releases, Production Decisions and The Hype Cycle

John Petersen

Writing an investment blog on hype-riddled sectors like vehicle electrification and energy storage is tough because the topic is emotionally charged and expectations are often based on political promises, issue advocacy, press releases and mainstream media stories that never tell the complete truth. As a result I spend a huge amount of time debunking popular mythology that's 180 degrees out of sync with business realities and responding to commenters who refuse to believe cars with plugs will be:
The risk and the opportunity for investors is that distorted perceptions of commercialization timelines have led to unreasonably high expectations for lithium-ion battery developers that may experience huge revenue growth in the second half of the decade and unreasonably low expectations for lead-acid battery manufacturers that are certain to experience huge revenue growth over the next five years. As the revenue impact of current automotive production decisions becomes more clear and the wide gulf between expectations and reality narrows, I believe that the equities of objectively cheap lead-acid battery manufacturers will surge while the equities of objectively expensive lithium-ion battery developers underperform.

Press Releases

For better or worse the markets are emotional creatures that can't help but react to press releases and news stories designed to fire the imagination and inspire "wouldn't it be great if ...?" thinking. Some of the more inspirational examples of the unrelenting electric vehicle hype we've seen over the last few months include:
If one just reads the press releases and news stories, it seems like the whole world is going electric and the days of sunshine, lollipops and roses along Electric Avenue are just around the corner. Perhaps it's my skeptical nature, but plans alone don't impress me because I've seen so many ill-conceived plans fail. I also remember that:
In isolation, the press releases and news stories seem impressive. In the context of an industry that sold 10.5 million vehicles in 2009 during the worst recession since the 1930s, the planned introduction of cars with plugs is inconsequential. These are PR stunts, not credible products. While cars with plugs may become credible by 2020 if they can earn consumer confidence at rates that are comparable to HEVs, I believe their growth potential over the next five years is modest at best.

The following graph comes from www.hybridcars.com and shows annual domestic HEV sales over the last decade. In light of high cost, limited flexibility and unresolved consumer acceptance, performance and safety issues, I have to believe the ramp rate for cars with plugs will be far slower than the ramp rate for HEVs, which took nine years to hit the million vehicle mark.

1.25.10 Graph 1.png
The eco-religious will strenuously disagree with my admittedly conservative view that a goal of "one million plug-ins by 2015" is sheer presidential fantasy, but differences of opinion are what make horse races and investments interesting.

Production Decisions

Once you back away from the wishful thinking and start looking at automakers' real-time production decisions, a different picture emerges. Instead of trying to leap tall buildings with a single bound, the automakers know that a journey of a thousand miles begins with a single step and they've started on the journey because their customers demand it. The technologies that are going into production, however, are rational incremental steps to improve efficiency without reinventing the industry. The step that is most important for energy storage investors is the rapid implementation of idle elimination technologies, which are typically referred to as either micro-hybrids or stop-start systems.

There are few ideas that are more sensible than idle elimination. Instead of burning gasoline and spewing emissions while you're stuck at a stoplight, turn the engine off until the light turns green. Stop-start systems have little value for a drive in the country, but they can reduce fuel consumption in congested city driving by 6% to 10% for an outlay of a few hundred dollars. After several years of testing, automated stop-start systems have proven themselves to the point where the entire industry is adopting them as standard equipment. A few examples of major stop-start production decisions include:
  • Mercedes Benz, which will introduce stop-start systems throughout its entire passenger car line;
  • BMW, which has already implemented stop-start systems on all Series 1 and 3 vehicles with manual transmissions;
  • Volkswagen, a stop-start pioneer that is implementing the technology throughout its passenger car line;
  • Toyota, which has already impemented stop-start systems in its Auris and Yaris lines; and
  • Ford, which plans to introduce stop-start systems throughout its entire passenger car line.
In short, the widespread implementation of stop-start technology is not something that might happen on some fine day in the vaguely defined future. It is happening today in factories around the world and while the future of cars with plugs is unclear, it is virtually certain that stop-start technology will be standard equipment within a few years because it's a cheap and proven way to improve fuel economy and reduce emissions. The following graph comes from a 2008 Frost & Sullivan presentation and summarizes their forecast of global hybrid vehicle sales over the next five years, broken down by technology type. The blue sections of each column represent stop-start systems.

1.25.10 Graph 2.png

Micro hybrids with stop-start technology are already saving about a hundred million gallons of gasoline per year. By 2015 they'll be saving well over a billion gallons of gasoline per year, which compares favorably to the 400 million gallons that could be saved if the presidential goal of a million plug-ins by 2015 was remotely possible. Once again, sensible action by private enterprise has trumped central planning by delivering vastly superior results for far less money.

The major challenge with stop-start technology is that it's very hard on starter batteries because instead of starting the car once per trip, a stop-start system will stop and restart the engine at every stoplight. The current approach is to use premium lead-acid batteries instead of the lower quality batteries the auto-industry historically used as original equipment. The long-term solutions that are currently in final stages of development include:
  • Using a combination of batteries and supercapacitors to satisfy the intense demands of stop-start systems, an approach that's being developed by Maxwell Technologies (MXWL) and Continental AG (CON.DE).
  • Using lead-carbon batteries that combine battery and supercapacitor characteristics in a single device, an approach that's being developed by Exide Technologies (XIDE), Axion Power International (AXPW.OB) and East Penn Manufacturing.
While the numbers were eclipsed by the headline awards to lithium-ion battery developers and largely ignored by investors, President Obama's August 2009 announcement of the recipients of $1.2 billion in ARRA battery manufacturing grants included:
  • $34.3 million to Exide Technologies with Axion Power for the production of advanced lead-acid batteries using lead-carbon electrodes for micro and mild hybrid applications; and
  • $32.5 million to East Penn Manufacturing for production of the Ultrabattery (lead-acid battery with a carbon supercapacitor combination) for micro and mild hybrid applications.
In other words, these are real technologies that are being built into real production model vehicles and being sold to real customers today. There's no wishful thinking involved. The wave of change has hit the shore and will wash through the entire industry over the next few years.

The Hype Cycle

Professional investors understand that all emerging technologies are subject to a phenomenon the Gartner Group calls "the hype-cycle" and they time their investments accordingly. Venture capital types typically buy before the technology trigger point and sell at the peak of inflated expectations. Value investors frequently wait for the trough of disillusionment before they buy for the long term. The only professional investors that are active during the peak of inflated expectations are traders. TIAX LLC offered the following overview of emerging vehicle technologies and the hype cycle at the Plug-in 2008 Conference.

1.25.10 Graph 3.png

The big problem with graphs like this one is that they don't provide specific guidance to investors on where individual companies stand. Since I've never been one to avoid controversy and experience has proven that my opinions don't impact the markets I've decided to bite the bullet and offer one man's views of where the pure-play energy storage companies are located on the hype cycle curve.

A123 Systems (AONE) had a tremendously successful IPO in September and is currently trading at 132% of the offering price. It finished 2009 in solid financial condition and has done a great job of managing short-term expectations. All things considered, I'd peg A123 somewhere along the upward slope between the technology trigger and the peak of inflated expectations. While I expect A123's focus on cars with plugs to eventually result in significant disillusionment, the day of reckoning is probably 18 to 24 months off.

Ener1 (HEV) has been a centerfold darling of the cars with plugs set for several years and may well be past its peak of inflated expectations. Ener1 finished 2009 in dreadful financial condition and will require massive capital infusions to stay afloat and provide matching funds for the ARRA battery manufacturing grant it received last August. Ener1 recently filed a Form 8-K to disclose the presentation materials it's currently using in discussions with private investors. Given current market conditions and the huge hits that other companies have taken in recent down-round financings, my sense is that Ener1 is headed into the trough of disillusionment unless management can pull off a major miracle.

Maxwell Technologies (MXWL) has done a very effective job of publicizing its work on stop-start solutions and explaining the potential to investors. As a result, its stock has gone from a low of $4.50 to a closing price of $17.23 on Friday. I've toured Maxwell's supercapacitor plant in Rossens, Switzerland and believe their Boostcap technology has an important role to play as the micro-hybrid market develops. My sense is that Maxwell has already passed through its trough of disillusionment and is now working its way up the slope of enlightenment.

Exide Technologies (XIDE) has done a terrible job of publicizing its work on stop-start solutions because it already sells a couple billion dollars of batteries into the automotive market every year. So unlike the new kids on the block, Exide doesn't need to attract new customers. It just needs to visit existing customers and show how the new lead-carbon product will better serve the customer's needs. The same dynamic exists at East Penn Manufacturing, which couldn't care less about PR because it's privately held and already has a massive customer base. I believe that Exide is out on the plateau of productivity and rapidly approaching a new technology trigger point with the lead-carbon solutions for the micro-hybrid market. With a stock price that only equates to 24% of trailing sales, I think Exide has tremendous potential as customer testing of its new products matures into substantial purchase orders over the next year.

Axion Power International (AXPW.OB) is my old home team and I'm far from unbiased because I've watched the PbC technology mature from laboratory experiment through commercial prototype and am proud of the time I served as board chairman. Axion has always been a public relations oddity because it partnered with East Penn in 2004 and Exide in 2008, which means it's always had to behave like a mature manufacturer instead of taking some of the liberties one would normally expect from a technology start-up. As a result of its existing partnerships with two of the three largest automotive battery manufacturers in the world Axion doesn't need to attract its own customers because its partners already have them. Axion's stock price took a bit of a beating in December when it completed a $26 million down-round financing with some very high quality institutional investors, but when its partners start signing high-volume supply contracts with their existing customers, I expect a technology trigger response that bodes well for Axion's future stock price.

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

January 22, 2010

The Holdings of the Powershares Global Progressive Transport Portfolio ETF (PTRP)

Tom Konrad, CFA

I included the Powershares Global Progressive Transport Portfolio (PTRP) as an investment option instead of three stocks in my Ten Clean Energy Stocks for 2010, as part of a simplified portfolio for small investors wanting to minimize costs by making fewer trades.  The other Exchange Traded Fund I used in this way was the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (GRID).  I took a look at the holdings of the Smart Grid ETF here, and they are not exactly what you would expect from the name.  Since it makes sense to know what you're buying, I decided to do the same for PTRP.

The left side of the chart below shows my classification of the companies held by PTRP (as of the end of 2009).  Some companies fell into multiple categories, so I divided their industry allocation accordingly.  The right side shows a similar treatment for the three stocks I suggested substituting PTRP for in my "10 for '10" portfolio (New Flyer (NFYIF.PK-bus), Portec Rail Products (PTRP-rail), and First Group PLC (FGP.L - Bus & Rail))

Notes on Categories

  • Smart Transit: routing traffic/freight/etc. more intelligently
  • Efficient Vehicles: Improvements to internal combustion engines, and materials to lighten vehicles.
  • Alt Fuel: mostly natural gas, but some propane and hydrogen as well.
  • Electric/Battery: Battery manufacturers, material suppliers, and suppliers of electric motors and transmissions.
  • Other: the non-transportation parts of the businesses of included companies.

Comparison with the 10 for '10 Portfolio

As you can see, PTRP is far from a perfect substitution for the 3 stocks from my 10 for '10 portfolio.  This is for several reasons:

  1. While I included a battery company (C&D Technologies (CHP)) in the 10 for '10 portfolio, I counted it as a "grid" investment as opposed to an electrified transport investment (since batteries serve both functions.)  If both substitutions for grid and transport investments are made, the allocation to batteries actually works out fairly well.
  2. My favorite transport investments are alternative modes that directly reduce fuel use, such as rail transit, bus transit, and bicycles.
  3. I did not include a bicycle investment in the 10 for '10 portfolio because none trade in the US or Canada.  One of the things I like most about PTRP is the 8% allocation to bicycle companies.

I don't expect that PTRP will track the three companies from the 10 for '10 portfolio very well, but the greater diversity of the holdings makes it a little less risky.  The downside, however, is that I chose the large allocation to busses for a reason: I think this is the quickest and cheapest option (other than bicycles) we have when we finally get serious about reducing our dependence on petroleum.  Such a decision probably won't be voluntary.  Rather, it will be the consequence of our near total unpreparedness for the reality of peak oil.  That very unprepardness is what gives busses and bus rapid transit an advantage over rail based transit: it takes a lot less time and money to order buses and designate a bus lane than it does to build a rail transit system.


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.

January 20, 2010

Lithium-ion Batteries Are Too Valuable To Waste On Plug-in Vehicles

John Petersen

In November 2006, a slick issue-oriented documentary asked the provocative question "Who Killed the Electric Car" and argued that General Motors' EV1 project was terminated because of collusion between the auto and oil industries. The truth is nobody killed the electric car. It died in infancy from congenital birth defects and the same flaws that killed the EV1 will probably kill Tesla Motors, Fisker Automotive, Nissan's (NSANY) Leaf and GM's Volt. This is not a question of cost, performance, abuse tolerance or cycle-life. It's a fundamental flaw in the economics of using batteries to replace a fuel tank; a flaw that will cost investors billions before the current round of electric car hype fades and the rotting corpse of an idea only Hollywood could love is buried with a silver stake through its undead heart.

The electric car died for two simple reasons. First, the batteries are too valuable to waste. Second, it takes a couple hundred pounds of batteries to store the useful energy found in a gallon of gas that weighs 6.4 pounds. In the end you get an obscenely expensive vehicle that virtually guarantees substandard performance if you stray outside your reliable recharge radius.

Batteries of all types are marvels of chemistry and automated manufacturing, but they're made from natural resources that are orders of magnitude more scarce than oil. To put things in perspective, the world produces about 4,500 million tons of oil annually, which is second only to 6,800 million tons of coal. The closest metal is steel at 1,400 million tons. When you start looking at the less plentiful metals that are used to make batteries, annual production rates plummet to 39.7 million tons of aluminum, 15.7 million tons of copper, 3.8 million tons of lead, 1.6 million tons of nickel, 0.124 million tons of rare earth elements and 0.027 million tons of lithium. When you consider that global demand for all of these metals has been climbing for years and the situation can only get worse as several billion people transition from subsistence farming to industrialized society, the time-honored American tradition of planning for unlimited resource availability is more than a little short-sighted.

Simply put, the world produces plenty of oil that can be burned in engines but it only produces tiny amounts of metals that can be used to make batteries. Spending billions of dollars on new mining infrastructure can significantly increase global supplies of most battery metals, but the gains won't be rapid and they won't amount to a rounding error in comparison to global oil production. While Toyota (TM) just spent over $100 million to protect its lithium supply chain by buying an interest in a new mine; everyone else in the industry seems to be relying on the natural resource fairy. Since it violates the fundamental laws of economics to use scarce and expensive natural resources as substitutes for plentiful and cheap natural resources, business plans based on the illusion that you can use batteries to replace gasoline must fail.

Electric vehicle advocates led by the recently organized Electrification Coalition have done a masterful job of positioning the grid-enabled vehicle, or GEV, as a miracle cure for a variety of ills including mounting oil prices, climate change, terrorism and war. While their comparisons with internal combustion engines have tremendous emotional appeal, the claimed benefits disappear in a cloud of blue smoke when you consider the macro-economic picture. A couple weeks ago I wrote an article titled "Plug-in Vehicles, Unconscionable Waste and Pollution Masquerading as Conservation." While I can't criticize a business for putting the best possible spin on a planned product, somebody needs to stand up and shout balderdash when spin crosses the line and morphs into a lie so colossal that investors and taxpayers are likely to lose billions.

There are two basic ways to use batteries in transportation.
  • The first uses a relatively small battery to minimize gasoline waste by eliminating idling and capturing some portion of energy that would otherwise be lost in braking for use in the next acceleration cycle. The generic term for vehicles in this class is hybrid electric vehicle, or HEV, and the best example is the efficient and reliable Prius from Toyota (TM).
  • The second uses a plug, a power cord and a much larger battery to replace some portion of the fuel tank with electrical energy storage. The generic term for vehicles in this class is grid-enabled vehicle, or GEV, and examples include the Tesla Roadster, the Fisker Karma, the Nissan Leaf and the GM Volt.
While HEVs and GEVs occupy different positions on a common technological continuum, the differences are as stark as night and day, which coincidentally occupy different positions on a common time continuum. HEVs are masters of fuel efficiency that have proven themselves over the course of a decade in over a million vehicles worldwide. GEVs use fuel substitution techniques that have no meaningful track record in the real world, promise more than they can hope to deliver, and are a shameful waste of limited and expensive natural resources. The sooner the public comes to understand the differences between black and white, the sooner we can get to work finding relevant scale solutions to our energy and air quality problems.

Lithium-ion batteries were developed for use in portable electronics and have become mainstays in cellular phones, MP3 players, laptop computers and a host of consumer, medical and industrial products. Last year, the lithium-ion battery industry sold $7 billion of products into these markets. Most consumer applications use somewhere between one and ten cells and the cost of the battery is an insignificant sliver of the purchase price. A Tesla Roadster, on the other hand, uses 6,800 cells and the battery pack represents somewhere between 1/3 and 1/2 of the purchase price. I don't worry about battery cost when I need five watt-hours for my cell phone or 40 watt-hours for my laptop. When you start talking about 20,000 watt-hours for a vehicle, however, it's an entirely different ballgame.

If we wanted to create a hierarchy of possible lithium-ion battery applications going from the highest value per watt-hour to the lowest value per watt-hour, the list would look something like this:

Cellphones and MP3 players
5 watt-hours
Portable Medical Devices
10 to 50 watt-hours
Laptop Computers
10 to 50 watt-hours
Electric bicycles and scooters
500 to 1,000 watt-hours
Hybrid electric vehicles
1,000 to 1,500 watt-hours
Plug-in hybrid vehicles
10,000 to 16,000 watt-hours
Pure electric vehicles
24,000 to 50,000 watt-hours
Grid-connected utility applications
500,000+ watt-hours

In a normal free market, production capacity is allocated first to high value applications and then to successively lower value applications. In cases where supply is constrained by resource availability, manufacturing capacity or a host of other reasons, high value applications that only need a little battery capacity will always be able to outbid lower value applications that need a lot of battery capacity. The end result is that GEVs and grid-connected utility applications will always end up at the bottom of the food chain with the weakest bargaining position and the only batteries available to them will be the surplus that nobody else needs or wants. Once again, lithium-ion batteries are simply too valuable to waste on plug-in vehicles. The economics may work for the eco-religious crowd who will pay any price for the right status symbol, but it's insanity to believe that electric vehicles have any future in the real world of paychecks, monthly budgets and cost-conscious consumers.

Historically I've been fairly sanguine about the survival prospects for lithium-ion battery developers including A123 Systems (AONE) and Ener1 (HEV) because I've been convinced that they'd be able to sell all the batteries they could produce for use in HEVs and new small-scale energy storage applications that are certain to emerge as better batteries become available. Over the last couple months, however, I've seen an ominous trend where Ener1 used almost all of its available working capital to rescue Th!nk Global from bankruptcy and A123 invested $23 million in Fisker Automotive so that Fisker could satisfy the 20% matching funds requirement for a $529 million DOE loan. In my experience, the first round of rescue financing for a key customer is rarely the last. While I think it fair to ask why development stage battery manufacturers are using critical capital resources to support other businesses that the capital markets seem reluctant to finance, I'll refrain from further comment except to remind everyone of the famous Rodney Dangerfield quip, "As a baby I was so ugly that my parents had to tie a pork chop around my neck so the dog would play with me."

In closing for today, I'll share a quote from Ardour Capital's 2009 Year-in-review, 2010 Look-Ahead:

"As for energy storage players, while lithium ion is receiving stimulus, we look for lead acid to still be the preferred technology for large scale applications for the foreseeable future. We believe that the $2.4b stimulus is an important step toward launching a US lithium-ion battery industry which has been largely non-existent. In addition, the 2009 IPO of lithium-ion battery maker A123 Systems has stirred significant interest in larger scale lithium ion applications. However, we look for the cheap and reliable lead-acid battery to be the mainstay of industrial battery applications. To those ends, we expect lead acid sales to see recovery in 2010 thanks to improving economic conditions and stronger trends in the automotive markets, primarily for replacement batteries."

In my next article I'll revisit earlier discussions of the start-stop, micro-hybrid and full hybrid technologies that are certain to become mainstays of the global automotive industry over the next decade.

Disclosure: Author is a former director of Axion Power International (AXPW.OB), a developer of advanced lead-carbon batteries, and holds a large long position in its stock. He also holds small long positions in lead-acid battery producers Exide Technologies (XIDE) and C&D Technologies (CHP), and zinc-bromine flow battery developer ZBB Energy (ZBB).

January 19, 2010

This 'Green' Sector May Grow 573% to $37.7 Billion by 2020 - And the Big Winners Will Be . . .

Bill Paul

Nobody knows the alternative energy landscape better than Clint Wheelock, whose firm, Pike Research, generates in-depth research on everything from smart meters to carbon capture and sequestration.

Now here’s a forecast deserving of far wider attention than it has so far received: by 2020 total revenue generated by energy services companies (ESCOs) could hit $37.7 billion, up a monstrous 573% over 2009’s $5.6 billion. At a minimum, Wheelock expects ESCOs’ revenue to hit $19.9 billion by 2020, a 255% increase.

In an exclusive interview last week, Wheelock explained that as much as demand is already growing for services that cut a commercial building’s energy and operating costs, he’s starting to see what he called a “shift in mindset” by building owners that promises to send ESCO demand into the stratosphere.

Building owners are starting to “see energy as an asset to be managed, not as a cost,” Wheelock said. They’re starting to realize that improving lighting, HVAC and other energy-consuming building systems both decreases operating costs and, in an ever more eco-conscious society, increases the value of the building. “A big difference,” Wheelock added, is that building owners are increasingly willing to accept a two-to-three-year payback on their efficiency investments, compared with only 12 to 18 months previously.

To be sure, Wheelock’s 573% ESCO revenue growth forecast comes with caveats, most notably that the still-nascent trend of counties and other government entities selling bonds that help pay for energy-efficiency improvements in buildings catches on, which he thinks will happen over the next few years. Right now, he said, ESCO demand is concentrated in single-tenant buildings owned by government, educational institutions, etc. With so-called PACE financing (short for property-assessed clean energy), Wheelock sees ESCO demand spreading throughout the commercial sector and even penetrating the residential sector.

And so we come to the drum roll: if Clint’s new forecast is spot on, which companies could give investors the most bang for their buck?

He agreed with me on the usual suspects, namely: Johnson Controls (Symbol JCI), Honeywell International (Symbol HON) and Siemens (Symbol SI). (Click here for more on Siemens)

Then, citing the growing interconnect between energy efficiency and information and communications technology, Wheelock offered up three untraditional “green” choices: Cisco Systems (Symbol CSCO), IBM (Symbol IBM), and General Electric (Symbol GE).

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

January 18, 2010

Is Cree, Inc. (CREE) Likely to Burn Out?

Tom Konrad, CFA

Pioneering light-emitting diode (LED) maker Cree, Inc. looks overvalued.

Light-Emitting Diodes, or LEDs, can be made to shine more brightly by increasing the power to them.  This has the unfortunate effect of overheating the leads and shortening the lifespan of the LED.  A similar effect may soon hit the stock of LED maker, Cree, Inc. (CREE.)

Since I began the tradition, Cree has been a mainstay of my annual portfolio of ten stocks for the next year, published each January (See the 2008 and 2009 lists.  The Cree-free 2010 list is here.)  LEDs have been among my favorite alternative energy technologies even longer.

While the S&P 500 fell 22%, and the Powershares Wilderhill Clean Energy Index (PBW) fell 60%, Cree rose over 210%.  Despite my conviction that energy efficiency stocks should be a mainstay of a clean energy portfolio, the company's current valuation makes me think the company has come too far, too fast.  At $55, the company is trading at a 109 trailing P/E ratio, and 39 forward P/E based on analysts' consensus estimates.

LEDs, in other words, have become sexy, and cautious investors stay away from sexy investments because they know that you often have to pay too much for them.

LED Overcapacity in 2011?

In addition to overvaluation, there is the additional problem of rapidly growing capacity in LED production.   Many LED manufacturers raised money to build new capacity in 2009, and most of that capacity will come on line in 2011, possibly setting the stage for a shake-out like the one we have recently seen in the market for solar polysilicon, according to Canaccord Adams.  Cree's valuation can only be justified by several years of extremely strong earnings growth, and an industry shake-out would slash Cree's profits.  If investors begin to expect such a shake-out, the stock will have to fall.

Cree is still a good company.  With no debt, it is likely to survive any such shake out, and may emerge stronger because of it.  Investors, however, will probably do better by taking their profits and waiting to get back in at a lower price.  Ten Clean Energy Stocks for 2012, perhaps?

DISCLOSURE: No Position.

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.

January 15, 2010

Will 2010 Be the Year of Cleantech Revenues, IPOs and, Maybe, Even Profits?

David Gold

As a “gearhead” (engineer) I must admit I truly enjoy looking at all the cool technologies being developed by cleantech companies.  The promise of cleantech hinges, in part, on these innovations.  So it is not surprising that so much focus in the blogosphere and the press is given to the funding and development of these new technologies.  Much like the dot-com buzz in the mid-90s, today we celebrate the amazing innovations that are taking seed.
But for cleantech to avoid the fate of synfuels of the ‘70s or that of many of the early dot-coms, we must create real companies that generate revenue, margins and profit.   

In a tough economic climate some cleantech companies are showing such success.  Demand energy management companies EnerNoc (ENOC) and Comverge (COMV) had exceptional growth in 2009, and EnerNoc turned the corner to positive net income (see data below).  Both are early venture funded cleantech success stories. LED manufacturer Cree (CREE) continued its exciting revenue and profit growth.  And while finances of the much more numerous privately held cleantech companies are typically held close to the vest, I can say that our own LED lighting portfolio company, TerraLux, not only had exceptional revenue growth but also showed its first period of positive cash flow.  

2010 has the potential to be a breakout year for certain categories of cleantech.  The IPO market is heating up and this could be the year where we see our first significant wave of cleantech IPOs.  A123 blazed a trail with its successful IPO during the tough 2009 market.  In 2010 we could see the IPOs of Tesla Motors (electric vehicles), Silver Spring Networks (smart grid), Solyndra (solar), Codexis (biofuels), as well as others.  If we see a string of successful IPOs, momentum for cleantech venture investing should experience further pick-up, and we should see increased interest from institutions willing to back venture capital funds.  

All of this plays out for 2010 to potentially be a big year for real cleantech businesses – those with exciting revenue growth, IPOs and, yes, some even with profits. 

One major variable in the 2010 forecast:  Legislation around cap and trade will undoubtedly be a hotly discussed item this year.  The passage of any legislation that has the impact of increasing the price of fossil-based energy sources will provide additional market momentum and increase the ability of cleantech companies to compete in the open marketplace.  Even if the provisions of such legislation do not go into effect for several years, I suspect the market will begin to react to the pending changes fairly rapidly.  But more on this next time.




(Financial Data from Google Finance)

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.

January 14, 2010

New Authentication for Comments

Due to an ever-increasing flood of comment spam, AltEnergyStocks.com has changed how the comments work.  If you would like to comment in the future, you will need to register with an email address, or OpenID.  Most likely you are familiar with this procedure from other blogs.  After you've first registered, you will be able to sign in and comment.

One other change is that comments will now appear immediately, and you will no longer have to wait for us to manually approve your comments. 

Feel free to test this procedure in the comments on this entry.  If you have any problems, please let us know by email.  Our contact information is available on the Contact page.

January 13, 2010

Plug-in Vehicles; Waist Deep In The Big Muddy

John Petersen

Generation specific cultural references can be treacherous ground for bloggers because the flashback effect is usually limited to readers with long and vivid memories. In this case, however, the lessons of history are so relevant that I'll accept the risk and offer some context for younger readers.

In my youth a war wrapped in the liberal ideology of the Kennedy and Johnson administrations and fueled by an underlying concern over who would control oil and gas resources in the Gulf of Tonkin was fought in the jungles of Vietnam, Laos and Cambodia. By current standards, the toll of 47,424 battle deaths was staggering. By the late '60s opposition to the War was widespread and a galvanizing force behind the antiwar movement was music, including an iconic folksong from Pete Seeger, Waist Deep in the Big Muddy.

While my use of an antiwar anthem to make a point about plug-in vehicles is certain to draw howls of outrage from advocates and true believers, I think the analogy is apt because the ideologically inspired road to disaster we trod during the late '60s is frighteningly similar to the path we're on today with plug-in vehicles where the prevailing attitude seems to be "damn the facts, push on."

Our fundamental energy problems are easy to identify – increasing oil prices and increasing reliance on imports. Both numbers have been climbing steadily for decades and consumers have been stubbornly reluctant to change their behavior in response to prices. The burden on the economy becomes heavier with each passing year and if you're willing to extend the current price channel out for another decade, oil price expectations in the $150 to $180 per barrel range don't seem all that far fetched.

WTI Price.png

For as long as automakers have been proposing plug-in electric vehicles, skeptics like me have been noting that fuel savings are unlikely to give consumers a cash-on-cash payback of their incremental cost over the life of the vehicle, much less the three to five year window that consumers typically expect. There are countless vague promises about  economies of scale driving down costs as the industry matures, but at least in the battery sector where raw materials and plant automation are the primary cost drivers and labor is almost a rounding error, I have a hard time banking on a fairy godmother to restrain commodity prices and equipment costs. While the following graph of long-term industrial and precious metal prices from Credit Suisse is a little dated, it certainly has the same general shape and slope as the most recent decade on the oil price chart.

Metals Prices.png

"We were knee deep in the Big Muddy, the big fool said to push on."

For several years realists like Vinod Khosla and others have noted that since the U.S. gets roughly 50% of its electricity from coal and will likely do so for decades to come, the environmental benefits of plugging an electric vehicle into a lump of coal will be few and far between. Last week, I offered a simple comparison of plug-in vehicles with conventional HEV technology (without plugs) that proves plug-ins are about one-quarter as effective at reducing oil imports as cheaper HEVs that can point to a decade of performance under real world conditions.

"We were waist deep in the Big Muddy, the big fool said to push on."

The real flies in the ointment are that plug-in vehicles don't significantly change the energy balance, they're far too resource constrained to make a dent in oil imports, and the fundamental economic premise only works if you are willing to assume that historically moderate trends in retail electricity prices will continue forever.

From an overall energy balance perspective, plug-ins don't change the amount of energy needed to move a vehicle down the road. Instead, they merely move the conversion of fuel to energy from under the hood to a local power station while increasing vehicle cost by 50% to 100%.

Likewise, the batteries that will be used in plug-ins are made from raw materials that are orders of magnitude less abundant than oil. The resource constraint issues go far beyond lithium availability and extend to every component in batteries and battery packs. Those materials all have alternative uses in high value products and from a resource availability standpoint, using batteries to conserve oil is a lot like using gold to conserve copper.

Finally, it's almost impossible to find a newspaper or magazine that doesn't have several articles on the evolution of the electric grid. We're seeing massive investments in wind and solar power installations and the estimated cost of the coming smart grid runs to trillions of dollars. Since the one certainty is that private capital will not finance alternative energy or the smart grid without expecting both a return of capital and a return on capital, it's patently absurd to believe that electricity price increases will remain as benign in the future as they have been in the past.

"We were neck deep in the Big Muddy, the big fool said to push on."

When I was but a lad one of my mother's favorite quips was "use your head for something besides a hat rack." It was her way of teaching me to look beyond my immediate circumstances, consider the factors that led me to a decision-point and reflect carefully on the likely consequences of my actions. When it comes to plug-in vehicles, investors and the general public have been little more than hat racks for too long. Instead of thinking things through and questioning assumptions, they've been placated by "wouldn't it be great if ...?" sound bites. Instead of asking whether crossing the big muddy is possible or the effort worthwhile, they've allowed themselves to be led down the garden path by politicians and activists who vainly promise gain without pain and reward without risk.

If it weren't so damned expensive, I'd describe vehicle electrification beyond the HEV stage as a zero sum game. Given the immense costs that are becoming increasingly clear with each passing day, I'd characterize it as a game where we can't reasonably hope to break even.

Disclosure: No stocks mentioned because we all know who they are.

January 10, 2010

Ten Green Energy Gambles for 2010

Tom Konrad, CFA

If you like to take risks, want to fight climate change and prepare for the impact of peak oil, and would also like a chance to make a big return on your investments, here are ten investments you can make that might do all of those things. 

Note (4/28/2010): A performance update for these picks is available here

A small part of my portfolio is usually in small, risky green companies with the promise of big returns.  This year, however, I'm too bearish to own many small, risky companies, but I'm still making some long-shot bets that could pay off big.  Last year, my list of ten green energy gambles had two stocks that returned over 100%.  This year, I'm hoping to do better by looking for profit on the short side of the market.

In December, I made the case that green and peak oil investors should be looking to the short side of the market.  Declining supplies of oil and gigantic debt are bound to be a drag on the economy for years to come.  Some companies and industries will be hurt more than others.  Action to reduce carbon emissions will have both winners and losers.  No matter how many green jobs are created, some industries will be hurt.  Spotting the companies that will be hurt is easier than spotting the beneficiaries: They're the ones trying hardest to derail climate legislation. They may succeed, but if they fail, we'll see it in their stock price.

Putting Your Money Down

On the short side, these gambles are going to be puts on companies or industries I highlighted in my Green Energy Investing for Experts series.  I'm using puts because they have the right sort of payout for gamblers: if the stock does not fall much, you lose the premium you paid for the put.  If the stock falls a lot, the put pays off in a big way.

One other advantage of puts is that they are more accessible to the ordinary investor than shorting.  It's much easier to get trading authority to buy options from your broker than it is to get permission to sell calls or short stocks.  It's even possible to buy puts in a brokerage IRA, where federal regulation prohibits shorting. Because this is a list of picks for 2010, I'm only going to use puts that expire in January 2011, giving us a target date of one year.

Should you be buying puts in your IRA? Your investment advisor would almost certainly tell you "no."  But he'd probably also tell you that "you should hold stocks for the long run." This conventional wisdom makes no sense if you expect peaking fossil fuels to cause economic decline.  Holding stocks for the long run also didn't make sense when Jeremy Siegel's book with that title was published in 1998.  If you'd bought the S&P 500 at the high in 1998, and sold at the high in 2009, you would have lost 9% over 11 years.  If you'd bought at the low in 1998, and sold at the low in 2009, you'd have lost 27%.  

That's not the kind of performance I want in my account.   Nevertheless, you should use puts judiciously.  This is gambling, even if peak oil is tilting the odds in our favor.  For myself, the money in this type of bet is a very small part of my portfolio.

The Picks

Security Ticker* Portfolio Weight Underlying Price 1/9/10** Related articles
EWW Jan 2011 $30 Put XBLMD.X 20% iShares Mexico $0.825 Experts part II - Shorting Mexico
CHK Jan 2011 $17.5 Put VECMW.X 7% Chesapeake Energy $0.865 Experts Part III - Shale Gas
DAL Jan 2011 $7.5 Put ZQIMU.X 7% Delta Airlines $0.975 Experts Part IV - Airlines
AMR Jan 2011 $5 Put VMRMA.X 7% AMR Corp $0.85 Experts Part IV - Airlines
LUV Jan 2011 $7.5 Put VUVMU.X 7% Southwest $0.50 Experts Part IV - Airlines
CNX Jan 2011 $35 Put VTLMG.X 7% Consol Energy $2.325 Experts Part V -Coal, Experts III Shale Gas
BTU Jan 2011 $30 Put ZZTMF.X 6% Peabody Energy $1.45 Experts Part V -Coal
HOT Jan 2011 $25 Put VVOME.X 10% Starwood Hotels $1.725 Experts/Index - Travel
JBHT Jan 2011 $20 ZORMD.X 10% JB Hunt $0.65 Experts/Index -Trucking
Power Efficiency Corp PEFF.OB 20% n/a $0.275 see below

*These ticker symbols will change after the second quarter 2010.

**Since options are typically illiquid and often go without trading for days, this price is not the most recent trade, but the average of the bid and ask price.

My Long Pick

On the long side, I have one energy efficiency stock that I decided not to add to my Ten Clean Energy Stocks for 2010 because of liquidity concerns.  

This stock is Power Efficiency Corporation (PEFF.OB.)  I first heard about them over two years ago when BJ Lackland, the company CFO called us up and said he wanted to advertise on AltenergyStocks.com.  They had read one of the many articles I write about energy efficiency, and why it should be at the core of a clean energy portfolio, and decided that our readers would get the benefit of cutting energy use of escalators, elevators, rock crushers, and other variable-load, constant speed motors with clever controllers.  Did you realize that a single escalator can draw about 6kW?  One kW is about the amount of energy used by a typical home. Power Efficiency's controller cuts that to about 4kW.  In other words, if an escalator runs 12h a day, one of their controllers will save enough energy to run an entire home. 

When they first became an advertiser, I was reluctant to give them an extra boost by mentioning them in articles, because of the conflict of interest.  I did mention them a couple times, but never as prominently as this, and always with a disclosure about the relationship.  Last fall, however, I finally decided to take the plunge, and made a significant investment in the company, simply because I think it's a good investment.  Now that my own money is where my mouth is, I feel much better writing about the stock.  I can now honestly say that this is a company that I would invest in myself.

Liquidity matters because PEFF trades on the Bulletin Boards.  If too many readers rush to buy, the price will shoot up and make it no longer a good value.  This happened in a small way to C&D Technologies (CHP) which I included in the top 10 list.  That stock was up over 20% the three trading days after I published my top 10 stock list, despite the fact that CHP had a daily turnover of about $300,000 and there was no other news.  There was news of an Army contract the following day, though, so part of the run-up could have been driven by people in the know illegally trading on the information.  I've come to believe that that type of insider trading is quite common, because I often see stock prices moving in anticipation of this sort of announcement.

Power Efficiency only has a daily turnover of a little over $1,000.  Since you're gamblers, I'll just suggest that you get in early, or wait and hope for a correction after this article bumps up the stock price.


You'll note in the table that I've assigned weights.  These are mostly intended for tracking the performance of the portfolio over the year, and were chosen to reflect my general confidence in each of the bets.

I expect that readers are not going to buy all these securities in these proportions. In fact, you will probably be better off if you only buy a few of the suggested puts, and use different strike prices than the ones I've listed.  Only buying a few will save you money on commissions, while using different strike prices will help you get reasonable prices on these illiquid securities.  I'd suggest using limit orders as well, to limit the price impact of your individual orders. 

How Much to Buy

Unlike last year, this portfolio is meant as a complement to my 10 Green Picks for 2010.  If you have a larger portfolio and an account where you can buy options, this portfolio can be used as a complement to that portfolio if you are worried about a fall in the market as a whole.  The dollar investment in these puts should only be around one to five percent of your total long portfolio positions if you're trying to hedge your exposure.  If you are confident that the market will fall drastically and hope to profit from such an event in 2010, you might invest more.  I personally don't have that much confidence in my own sense of timing.  I have a long history of being much too early on my market calls, going back to the start of my investing career in the late 90s, when I thought this Internet fad was going to end at any time. It took three more years.


Because this is a mostly a portfolio of Puts, ordinary benchmarks don't make sense.  Instead, in order to compare like to like, I plan to use a put on an index ETF which also expires in January 2010.  My first choice for an underlying ETF would be SPY, but long dated puts on SPY expire in December, not January.  Instead, I'll use a put on the DIAMONDS Trust (DIA), which tracks the Dow Jones Industrial Average.  In particular, my benchmark will be DIA Jan 2010 $75 Put for the 80% of this portfolio on the short side. This put is currently trading under the ticker ZAVMO.X, with the average of bid and ask prices at $1.49. For the long side of the portfolio, I'll use the Powershares Wilderhill Clean Energy ETF (PBW), with a 20% weight, which closed on January 8 at 11.74.

How the portfolio performs relative to this benchmark will give some indication of how useful my sector and stock picking  is, even though the profitability of this portfolio will mostly be determined by the direction the market takes in 2010.  If we have another year like 2008, this portfolio should be profitable no matter how bad my sector picks were, while if next year is a repeat of 2009, no amount of sector picking is going to save this portfolio from a loss (barring some catastrophic event for one of the particular companies.)  In other words, the benchmark is there to test how good my ideas in Green Energy Investing for Experts really were.

I'll update you on how this portfolio and my top 10 picks are doing each quarter, just like I did last year.  


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.

January 09, 2010

If I Could Own Only One Alternative Energy Stock, It Would Be . . .

Bill Paul

My friend Consuelo Mack, host of "Consuelo Mack's Wealthtrack" on PBS TV, asks her guests for their "one investment pick." What's my one alternative energy stock pick?

A year ago on Consuelo's show, I recommended LED lighting developer Cree Inc. (Symbol CREE), because the LED lighting market (part of the burgeoning energy efficiency sector) is expected to hit upwards of $5 billion by 2013 v. $600 million in 2008, according to investment banking firm Merriman, Curhan, Ford, and because Cree was then an attractive takeover candidate. It still is; however, since the stock has since risen something like 300% and its price-to-earnings ratio is now north of 100, it no longer warrants being my "one" investment pick, though it's still well worth having in a broad portfolio of alternative energy stocks that I think every investor should have.

If I were inclined to pick a stock I think could duplicate Cree's performance in 2010, it would be Ocean Power Technologies Inc. (Symbol OPTT). In my mind, wave and tidal power is the most overlooked, underrated green energy sector in the world. Pike Research said last summer that by 2015 wave and tidal power could be generating 2.7 gigawatts of electricity worldwide vs. just 264 megawatts in 2009.

Ocean Power is virtually the only publicly-traded firm in this sub-sector. (Look for a number of European firms to go public over the next couple of years.) The company is on the cusp of commercial operation and has a partnership with Lockheed Martin (Symbol LMT) that would seem to guarantee deep-enough pockets to survive any growing pains. And, like Cree, I see Ocean Power as a takeover candidate.

But while Ocean Power is also well worth having in a broad-based portfolio, since it still faces possible regulatory and other issues, it's just not enough of a sure thing to be my "one" pick. The same situation is true for wind and solar stocks, though for different reasons. Wind has an enormous future and several wind firms belong in your green portfolio. But the giant turbine manufacturers and wind-farm developers are becoming commodity firms; there's no obvious top pick right now. Solar too has an enormous future, but the technology is developing too quickly for any solar firm to be a sure thing right now, not even much vaunted First Solar (Symbol FSLR), though it too belongs in your green portfolio.

For my one investment pick, I choose a company without which solar and wind's potential can't be realized. It's also a company without which the energy-saving, blackout-avoiding potential of the "smart" grid can't be realized. The same company is spearheading monumental construction projects that will bring into Europe huge amounts of solar power from North Africa and wind power from the North Sea. The same company is developing rapid recharge infrastructure for electric vehicles and is quickly becoming a leader in demand response and energy management services. This company also is a - if not the - global leader in building and rebuilding thousands of miles of electric transmission lines around the world, a business that will require annual expenditures of $33 billion by 2014 vs. $12 billion in 2008, according to NextGen Research.

In January 2010, my one alternative energy investment pick is Siemens AG (Symbol SI).

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

January 08, 2010

The Year of the Balance Sheet

Year in Review: Ten Green Energy Gambles for 2009

Tom Konrad, CFA

My speculative renewable and alternative energy stock picks for 2009 had mixed results. The gambles came nowhere near the performance of my 10 Clean Energy Stocks for 2009, and only kept pace with their benchmarks.  The reasons why can be found on the companies' balance sheets and cash flow statements.

In January 2009 in response to popular demand, I gave readers ten picks of speculative green energy stocks.  I tend to buck the general trend that renewable energy investors tend to be gamblers, but my annual stock picks draw a wider audience, and I decided to give the crowds what they wanted, picking ten green stocks I thought were on the risky side.  I summarized my expectations for these stocks by saying, "that although all of these have a chance of spectacular returns, I think the portfolio as a whole will fall, unless financial market conditions improve rapidly."

Financial market conditions did improve rapidly in 2009, but they did not improve uniformly.  Lenders and other suppliers of capital became much more discriminating, allowing the strong to raise money at reasonable rates, while the weak fell by the wayside.  

What Happened

My green energy gambles were collectively up 22%, compared to returns of 31% for the Powershares Wilderhill Clean Energy Index (PBW), and 9% for the iShares S&P Global Clean Energy Index (ICLN), the two ETFs I specified as benchmarks for comparison when I published the original list.

This is an uninspiring performance, so I'm not happy with the overall results.  After all, my ten conservative green picks were up an average of 57% in 2009 solidly beating their benchmarks, but my speculations didn't even beat both benchmarks.  In a strong bull market year like 2009, I would normally expect riskier stocks such as these to outperform my more conservative picks.  That did not happen, and it did not happen by a wide margin.

I did get some "spectacular returns."  Had I known last January that the S&P 500 would be up 28% in 2009, I would have expected at least three of these to return more than 100%.  As it was, UQM Technologies (UQM) and Cosan (CZZ) more than doubled returning 252% and 116%, respectively.  Nevertheless, it's disappointing in such a good year for the market as a whole.

What happened?

The Weak and the Strong

When I presented these gambles, I broke them up into three categories:

Unprofitable Companies Without Strong Balance Sheets

  1. Beacon Power Corporation (BCON), up 7%
  2. Axion Power International  (AXPW.OB), up 17%
  3. Valence Technology, Inc. (VLNC), down 48%
  4. Composite Technology Corp (CPTC.OB), no change
  5. Environmental Power Corp. (EPG), down 76%
  6. Emcore Corp. (EMKR), down 15%

Unprofitable Companies, Somewhat Stronger Balance Sheets

  1. UQM Technologies (UQM), up 252%
  2. Cosan, Ltd.(CZZ), up 116%
  3. Raser Technologies, Inc. (RZ), down 63%

Profitable Companies, For Now

  1. Zoltek (ZOLT), up 30%

The companies is the first category performed extremely poorly compared to the companies in the latter two categories, with the last four stocks returning an average of 84%, and the first six stocks returning -19%. Because of this (and the out performance of my ten conservative picks), I call 2009 "The Year of the Balance Sheet."  Hindsight, of course, is 20/20, but at least I separated the companies by financial strength for readers who had a better idea of what 2009 would look like than I did.

For 2010, I'm going to try something a little different for any green-minded gamblers out there.  Readers of my Green Energy Investing for Experts series have been getting a preview of what I'm talking about.  I plan to publish the new list Sunday night or Monday morning.


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.

January 07, 2010

Green Energy Investing for Experts, Index and Wrap-Up

Tom Konrad, CFA

My Green Energy Investing for Experts series looked at ways shorting could both protect your portfolio against market decline, and make it greener by shorting decidedly non-green companies.  This is an index of the entries, plus one more industry for you to consider.

Green Energy Investing for Experts, Part I made the case that shorting stocks that are particularly vulnerable to peak oil or climate change is a good way to hedge a portfolio of green stocks against a market decline while making the whole portfolio greener.

Green Energy Investing for Experts, Part II looked at shorting Mexican stocks.

Green Energy Investing for Experts, Part III discussed using puts in case shale gas is not as big a game changer as the industry would have us believe.

Green Energy Investing for Experts, Part IV looked at shorting airline stocks.

Green Energy Investing for Experts, Part V looked at using puts on coal miners, because the muddle in Copenhagen and "climategate" are unlikely to be the end of the coal industry's woes.

I don't know about readers, but after writing these, I find this series formulaic.  I'm not an expert on any of these industries, so my analysis doesn't go into much depth beyond pointing out each industry's vulnerability, and then finding a few stocks or an industry ETF to short.

I'm not out of ideas for industries that are unprepared for peak oil or climate change. Preparedness is still much more the exception than the rule.

My best ideas were air travel and Mexico.  I'll leave the rest as an exercise for the reader.  One such is the trucking industry.  I personally have sold a short call spread on JB Hunt (JBHT.)  Take a look at my article on Newsweek's Green Rankings for a couple more.


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.

January 06, 2010

Plug-in Vehicles, Unconscionable Waste and Pollution Masquerading as Conservation

John Petersen

For eighteen months I've been blogging about the energy storage sector and discussing the current and potential markets for batteries and other manufactured energy storage devices. A recurring theme that I've discussed many times is the unrecognized but undeniable truth that while plug-in vehicles masquerade as conservation measures at an individual level, they're incredibly wasteful at a societal level. The conclusion is counter-intuitive and my articles on the subject invariably draw heated criticism from self-anointed defenders of the faith. Their arguments, however, do not change the inescapable truth that plug-in vehicles are one of the most wasteful concepts ever foisted on gullible government officials and an unsuspecting public.

Today I'm going to do my level best to simplify the numbers and expose the plug-in fraud for what it is. If you want to delve into more detail, you should visit my article archive at Seeking Alpha.

On December 31, 2009 Forbes published an opinion piece titled System Overload that questioned whether the lithium-ion battery industry was overbuilding global manufacturing capacity. The third paragraph said:

"By 2015 the new factories will have the global capacity to produce 36 million kilowatt-hours of battery capacity, enough to supply 15 million hybrid vehicles, or 1.5 million fully electric cars, says Deutsche Bank."

The article then went on to question whether there would be buyers for all those vehicles. I firmly believe that every battery manufacturer that brings an automotive battery to market within the next few years will have more demand than it can satisfy. That being said there is no denying the fact that fully electric cars and plug-in hybrids are unconscionably wasteful.

In America, the average car owner drives about 12,000 miles per year. To power a car for that distance, he'll need about 400 gallons of gasoline for a conventional internal combustion engine; 240 gallons of gasoline for a Prius class HEV; and no gasoline for a fully electric vehicle. The eco-religious among us are beside themselves with glee over the appealing but patently absurd idea that fully electric vehicles are the best way to slash dependence on oil imports and protect mother earth. The numbers tell an entirely different story.

If we stick with the Deutsche Bank numbers quoted in the Forbes article, 1.5 million fully electric cars would save 600 million gallons of gasoline per year. That's a very impressive number until you realize that 15 million Prius class HEVs without plugs would save approximately 2.4 billion gallons of gasoline per year. In my book, the difference of 1.8 billion gallons of gasoline per year is subsidized waste on a massive scale.

While the gasoline consumption comparisons are miserable, the CO2 emission comparisons are nothing short of tragic.

Each gallon of gasoline used in an internal combustion engine releases 20.35 pounds of CO2. While fully electric vehicles are cleaner, they're not CO2 free because the power plants that generate the electricity release a national average of 9.68 pounds of CO2 per gallon of gasoline equivalent. Returning to the Deutsche Bank numbers, 1.5 million fully electric cars would cut annual CO2 emissions by 2.9 million tons, another very impressive number. In comparison, 15 million Prius class HEVs without plugs would slash annual CO2 emissions by a whopping 24.4 million tons. In my book, the difference of 21.5 million tons of CO2 emissions per year is subsidized pollution on a monumental scale.

The final nail in the coffin comes from purchase price comparisons. Toyota's (TM) base sticker price for a 2010 Prius is $22,400. In comparison the base sticker price for the planned GM Volt will be about $40,000. While Federal tax credits of $7,500 are expected to reduce the end-user cost of the Volt to $32,500, it will still cost the consumer $10,000 more than a Prius. The last time I checked, a $10,000 purchase price difference is important to the average consumer, particularly when study after study reports that the Volt is not expected to pay for the price difference in fuel savings.

On a micro-scale, fully electric vehicles and plug-in hybrids are feel good eco-bling for the emotionally committed and the mathematically challenged. On a macro-scale they use more gasoline, emit more CO2 and are more expensive than established HEV technology. At this point I have to wonder, does anybody in Washington DC have a calculator?

I'm a lawyer, a battery guy and a policy geek. I know that six billion people on our planet would like to have a piece of the lifestyle that 600 million of us have and take for granted. I also know that as a result of the information technology revolution, about half of the 6 billion have access to electronic data and understand for the first time in history that there is more to life than subsistence. Even if we assume that they will only become consumers at 5% to 10% of purchasing power parity, the increased pressure on water, food, energy and every commodity you can imagine will be immense beyond imagining. The big challenge will be creating enough room at the table so that we can avoid the unthinkable consequences of inaction.

I love HEV technology because it minimizes waste of both gasoline and other natural resources. I'd love it even more if it were tied to a compressed natural gas fuel system that would eliminate dependence on imported oil, but that's a different discussion. I'm also a big fan of micro- and mild-hybrid technologies that use less robust electric motors and simpler batteries from companies like Johnson Controls (JCI), Exide Technologies (XIDE) and Axion Power International (AXPW.OB) to reduce waste for drivers who can't afford to upgrade to a Prius class HEV. I am offended by the P.T. Barnum class hucksters at Ener1 (HEV), A123 Systems (AONE), BYD Company (BYDDF.PK) and others that use the false promise of fully-electric vehicles to maintain bloated market capitalizations and lead investors down a garden path that will almost certainly end in massive losses once the market understands the true costs and illusory benefits.

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

January 05, 2010

“An opportunity to ‘back up the truck’ on this new HOT stock at a significantly reduced price.”

by Travis Johnson

Stockgumshoe.com teases out the geothermal stock that is the current come-on for Casey's Energy Report. AltEnergyStocks.com reviewed a sister publication, Casey Energy Opportunities, last year.

Today we’re looking at a newsletter from Doug Casey’s stable, the first one of his teasers that I’ve looked at in quite a while.

The pitch is that Marin Katusa has picked 19 consecutive winning stocks for his Casey’s Energy Report, and that you can subscribe now to get in on pick number 20, which is apparently getting close to their buy price.

As they put it …

“Marin’s just getting started. Winner #20 is already on his radar, and chances are it’s going to deliver even higher returns than any of the other 19.”

Katusa apparently has a “three-tiered formula” that helps him make money for subscribers — the first tier is a network of energy insiders that he cultivates, the second tier is some kind of mathematical valuation/screening “system” that helps him target buy prices, and the third tier is his team of energy analysts, who he naturally believes are “the best and brightest.”

I have no idea whether or not those “tiers” really mean anything or are just a marketing ploy, but I would imagine that they’re probably not lying about the 19 winners (though they may not count or credit them the way you would) — notice that we weren’t told that he’s had 19 picks that beat the market, just 19 “winners,” which the little footnote indicates were all chosen in the last quarter of 2008 and the first eight months of 2009, so it’s possible that even picking 19 “winners” in a row could have your overall portfolio trailing the S&P 500. Not to throw cold water on the claim, I certainly haven’t ever picked 19 winners in a row, but we might also argue that every hot streak has to end at some point.

I didn’t receive the email ad for this one directly, I just got the link sent along to me recently, so I can’t tell you for sure when the ad started running — which means it’s possible that this “number 20″ pick has already been made.

So, with those caveats, what is this stock that’s Marin Katusa’s possible 20th consecutive hot pick? You may or may not be delighted to hear that it’s a geothermal stock … a sector we’ve looked at many times in the last couple years, but which one?

“Winner #20 is a geothermal company. And geothermal energy is not only one of the most reliable alternative energies — it will be one of the most profitable, as President Obama continues to pump money into the green sector through subsidies.

“The man behind this company is a legend in the resource sector for his financial insight. It’s no wonder he’s been dubbed the ‘broken slot machine’ for his unrivaled ability to make shareholders money.”

OK, so that’s actually maybe enough for us to identify this stock … but we get a few more clues, let’s use ‘em …

“Recently, winner #20 filed its IPO (initial public offering), and investors as well as industry insiders clamored to get a piece of the action.

“As often happens with IPOs, this frenzied buying quickly inflated and then deflated the stock price, which for now has returned to a more realistic level. During the imminent market decline, Marin believes all stocks will suffer a temporary setback, creating a tremendous buying opportunity.

“An opportunity to ‘back up the truck’ on this new hot stock at a significantly reduced price.”

And as every good copywriter knows, throwing in some quotes from well-respected news organizations makes your deal look more substantive, and quiets the voice in the readers head that says, “what if this is all just a scam?”

So yes, we get a few press quotes, too:

“‘Investors around the world are leaping on the initial public offering of [this] Canadian geothermal energy company, highlighting the soaring interest in the geothermal space and the superb track record of [the company's] founder.’ -Reuters”


“[This geothermal stock] ‘is definitely one of the hottest deals of the year.’ -The National Post”


“Geothermal is one of the great answers to our energy crisis. Add the facts that: [1] you’re not exposed to commodity prices, [2] you’re not exposed to the dictators of the world, and [3] you’re not throwing away your domestic product to foreigners. It’s just a great, great business. -IBT Commodities”


“‘President Barack Obama’s American Recovery and Reinvestment Act provides tax credits for geothermal projects, and the American Clean Energy and Security Act is laden with more incentives for clean energy investment.’ -The Financial Post”

If you’ve been around these parts for a while you’re probably familiar with the concept of geothermal energy — drilling into hot zones, pumping in water, using that heated water to create steam that powers turbines and generate electricity, it’s been proven as a concept for years, at least in hot zones like Iceland and The Geysers in Northern California. Geothermal generation is certainly a lot more “green” than burning coal or natural gas, and provides baseload (”always on”) energy unlike sun-dependent solar or wind-dependent turbines, though it also comes with complications (not least that it can be expensive to drill and develop, and for best results you need a very hot area, and the process is pretty tough on the equipment), so I’ll spare you the rest of Katusa’s general argument in favor of geothermal energy.

This last bit, then reiterates the importance of the man behind the company:

“When asked about winner #20, ‘Vancouver’s mining maven’ had this to say:

“‘The object is to do the same thing we did [with my silver producer]: to build the biggest geothermal energy business in the world.’

“We have every confidence he will do it.

“Indeed, the long-term profit potential is staggering.

“That’s why Marin and the whole Casey team are on board with winner #20.”

So who is this elusive “number 20?”

Thinkolator sez: Magma Energy (MXY in Toronto, MGMXF on the pink sheets — click here for the free trend analysis, which isn’t currently very pretty)

This is the latest endeavor of Ross Beaty, that “mining maven” teased above who has indeed been called the “broken slot machine” for his record of past success (he sold Equinox to Hecla Mining 25 years ago, and more recently built Pan American Silver into the world’s largest silver producer). The quote above, about how he wants to build Magma into the biggest business of its kind in the world, is from an interview that he gave almost a year ago, before Magma went public.

And the company did have it’s Canadian IPO this Summer, a bit behind their original schedule, but they got a fair amount of attention and at the time it was the biggest Canadian IPO of the year — and Beaty apparently got what he wanted, in that interview he noted that he was hoping the IPO would value Magma at $300-400 million, and it’s now got a market cap of C$450 million. That makes them one of the bigger “junior” companies in the space, bigger than the small firms that have just one or two sites under development like U.S. Geothermal, but much smaller than Ormat or Calpine. Probably the closest competitor, in terms of market cap size and focus, is Ram Power (RPG in Toronto, RAMPF on the pink sheets — one of two geothermal stocks in an uptrend at the moment, according to MarketClub), which is a similarly new company in its current form, a rollup of Ram Power and the junior geothermal companies Polaris Geothermal and Western GeoPower, both of which have been teaser targets in recent years as well.

Magma is still very much an early stage company in terms of operations — they are buying into a big established geothermal project in Iceland (they own about 43% now and are investing in expansion, it’s primarily a site that generates power for aluminum smelting), and they own one operating geothermal site in Nevada (Soda Lake, which has been operating for close to 20 years and is at about 1/3 of its nameplate generation capacity). Their other projects are elsewhere in the Northwestern US, in Utah and Oregon as well as more sites in Nevada, and in South America, with concession applications in Peru and some early-stage projects that they own in Argentina and Chile. Aside from Soda Lake and Iceland, it’s all early stage exploration, or flow testing, or drilling and mapping that they’re doing right now. I have no idea how long it takes to get these projects off the ground, but it sounds like a lot of the work they’re doing, in addition to the few places where they’re actually doing exploratory drilling, is updating old seismic and survey data from these sites that is in some cases 20-30 years old. The company describes their pipeline as having 24 early stage projects and seven advanced stage exploration projects around the world, including several new exploration targets that they just acquired in a government auction earlier this year.

The way Magma reports its projects, they have 86 MW of reserves (75 from Iceland, 11 from Soda Lake — though from what I can tell Soda Lake is only 8MW right now) and over 600MW of “resources”, which is apparently the documented potential of their other projects. Of that 600 MW about half is Iceland (HS Orka is the site they have part ownership of), and the other half is split between one big discovery in Chile and a number of smaller Nevada and Utah properties. Another 20 or so early stage properties are not counted in the reserves or resources. According to the timeline they’re projecting, they will boost production to about 100 MW overall next year, and bump up slightly again in 2012 through expansions in Soda Lake and Iceland, then have production close to double in 2013 with two new Nevada plants online, and jump considerably in 2015 with several of their other projects joining the party, including most notably the large 140 MW Maule project in Chile. So that’s the five-year growth plan, and their goal is to be acquisitive and create a global company to consolidate global geothermal generation, so they may well buy up some other projects along the way.

Magma does not have any debt, and they’ve raised well over C$100 million recently (from the IPO, the over-allotment, and a subsequent private placement) and have another C$20 million in credit available, so they should be in fine shape financially, and ready to keep growing by investing in exploration and perhaps acquiring other companies and projects, but there seems little chance that they’ll be profitable anytime soon — which is perhaps why they funded the Iceland investment by selling new stock instead of using their IPO proceeds. They have already received some federal money for their Nevada projects, and it looks like part of their calculus certainly depends on federal “green energy” grants and similar funding, which is no surprise. You can see Magma’s most recently quarterly report press release here, which details their work so far this year and their financial position, and a December investor presentation that goes into some more detail on their projects here [pdf file].

I don’t have any particular insight into which geothermal stocks are the best bet, but it does seem that Magma might be the best “story” right now — having a charismatic and successful resource investor at the helm, lots of cash, and a nice big position in the most well-known geothermal resource in the world (Iceland) certainly helps. As I noted, the other company that has a somewhat similar profile is Ram Power, and smaller firms include US Geothermal (HTM in NY, GTH in Canada — this is the other one that MarketClub thinks is in an uptrend) and Nevada Geothermal (NGP in Canada, NGLPF on the pink sheets), both of which are currently generating electricity, and Sierra Geothermal (SRA in Canada, SRAGF on the pink sheets), which is more capital constrained and not yet producing, but apparently has some promising sites and permits and may be bought up by Ram Power (or so I’ve read in one place, at least). The biggest pure play I know of is Ormat (ORA), which is an Israeli company as well known for building geothermal plants for others as for operating them themselves, it’s fairly expensive, but profitable and much less volatile.

So there you have it — one more geothermal stock to throw on the pile, it may or may not work out as they hope but I’m quite certain that this is the pick teased by Casey’s Energy Report. If you’re more “hotted up” about this sector than I, I’m sure you’ll have some insight or information to share … that’s why the friendly little comment box is sitting below, just waiting for your input.

Travis Johnson is the Stock Gumshoe.  He unravels the email teasers from investment newsletters and advisors, and tracks their performance.

January 04, 2010

Should Coal Company Investors Breathe Easy After Copenhagen?

Green Energy Investing For Experts, Part V

Tom Konrad, CFA

A global climate deal in Copenhagen would have been bad for coal miners, and coal companies have been rallying as the economy recovers, but it may not be clear skies for the black rock.

In the battle to reduce greenhouse gas emissions, coal is enemy number one.  The global disarray in Copenhagen can only be good for coal mining companies, and they duly rallied when the climate talks ended with little to show for it. 

Yet carbon emissions are not the only black mark on the coal industry's record, and investor relief may be premature.  

None of this is to say that coal mining stocks have to fall anytime soon.  Rather, I'm pointing out that there are large and significant risks that coal investors ignore at their peril.  The polarization of climate debate is such that many conservatives seem unable to see these risks because of their preconceived notions.  Climate deniers may crow in anticipation about their impending victory in the climate change debate, but this is a debate they cannot win because the facts simply do not support their case, no matter how many careless emails they are able to dredge up.  

Investors usually have to operate in a realm of uncertainty.  We don't know what next years earnings of any company will be, we only hope that our estimate is better than the rest of the crowd.  The climate debate, on the other hand, is a rare opportunity where we know the outcome with near certainty, and yet there is a large contingent of climate deniers willing to put their money down on the other side of the bet.

Today, with recent polls showing fewer Americans supporting action on climate change than last year, it's easy to become discouraged about the chances of real action to confront climate change.  As an investor, it is dark moments like these when courageous investors put their money down and are rewarded when the pendulum swings back, as it always does.  

Betting Against Coal: A Green Lottery Ticket

I'm not one of those courageous investors.  I prefer to take small risks that still have the potential for large rewards.  Since I don't know if the pendulum of public opinion on climate change will begin to swing back today or ten years from now, I'm not ready to start shorting coal companies.  However, I am ready to make a few small bets that change might be sudden and soon.  I've bought a couple cheap, long-dated puts on coal companies.

The Market Vectors Coal ETF (NYSE:KOL) has exchange traded options, but only with expiration dates going out six months.  In contrast, many of the large coal mining companies have exchange traded options that go out two years.  This situation is similar to the one I ran into when shorting the Mexico ETF and shorting airline stocks.  In particular, I chose to buy January 2012 $30 puts on Consol Energy (CNX) and January 2011 $25 puts on Peabody Energy (BTU.)  I chose these two because, as with airlines, they are the top two holdings of KOL.  Furthermore, both of these came near the bottom of Newsweek's Green Rankings, and BTU scores badly on quantitative valuation measures.

To be sure, these are long-shot gambles.  Coal will be with us for decades to come, and coal companies have an annoying habit of getting politicians to do their bidding.  On the other hand, these bets could pay off even if there is no real action on climate change, because of another stock market collapse (both of my puts would have been in the money at March 2009 lows,) or from some company-specific problem.

Where else are you going to buy a lottery ticket that is so environmentally sensitive?


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.

An Overlooked Christmas Gift For Energy Storage Investors

John Petersen

Monday morning a reader sent me a link to a December 23rd press release announcing that the OM Group, Inc. (OMG) had agreed to buy EaglePicher Technologies LLC, a well regarded name in the battery industry, for $171.9 million, or roughly 1.4x sales. While I overlooked the release during the build-up to Christmas, the transaction is important because it provides a current bright-line reference point for energy storage investors on the difficult question, "what is a battery company worth?"

EaglePicher was previously a unit of Eagle Picher Holdings, a public company that filed a voluntary petition under Chapter 11 of the Bankruptcy Code in April 2005. While I can't find detailed disclosures on the reorganized company's lines of business and profitability, EaglePicher's website describes a variety of battery chemistries ranging from lead-acid to lithium-ion and the press release indicates that approximately 60% of revenue comes from its defense business, 31% comes from its aerospace business and the balance comes from medical and commercial battery systems. The EaglePicher acquisition seems to be a logical step in OMG's vertical integration and diversification strategy.

Since the details are limited, it's hard to perform a meaningful analysis of the various factors that give EaglePicher value. Nevertheless, the 1.4x sales number is very interesting because of the huge disparity in price/sales ratios among the 17 pure play energy storage stocks I follow. The following table identifies the companies in my tracking group, shows their December 31st closing price, shows their current market capitalizations, and shows the price/sales valuation ratios reported by Yahoo finance.


While price/sales ratios have little or no utility when it comes to evaluating emerging companies that have not yet hit their stride when it comes to product sales, it can be a useful screening tool when comparing established operating companies that have relatively stable sales histories. Based solely on the price/sales ratio from the EaglePicher acquisition, I would conclude that the following companies might be undervalued:
  • C&D Technologies (CHP), which trades at 12% of sales;
  • Exide Technologies (XIDE), which trades at 20% of sales;
  • Ultralife (ULBI), which trades at 43% of sales;
  • Enersys (ENS), which trades at 68% of sales;
  • China BAK Battery (CBAK), which trades at 84% of sales; and
  • China Ritar Power (CRTP), which trades at 87% of sales.
Investors can't rely on a single metric in making an investment decision. Nevertheless, since the level of investment success frequently has a direct correlation to the initial entry price, knowing how the market price compares with recent real world deals can be very enlightening.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock. He also holds small long positions in C&D Technologies (CHP), Exide Technologies (XIDE), Active Power (ACWP) and ZBB Energy (ZBB).

January 03, 2010

Storm Warnings For Lithium-ion Batteries and Electric Vehicles

John Petersen

Before moving to Switzerland in 1998 I lived and worked in Houston, Texas, a place that teaches you the importance of keeping an eye on long-term weather forecasts, particularly during hurricane season. Most of the time it turns out to be wasted effort because Mother Nature is fickle and highly unpredictable, but when it's important it's really important. The same logic holds for investments in energy storage and electric vehicle technologies. You have to keep a close eye on the industrial and regulatory climate and be ready to change your plans when conditions change.

For eighteen months I've cautioned that lithium-ion batteries are not suitable or cost-effective for use in cars with plugs, which are collectively classified as grid enabled vehicles, or GEVs, by the Electrification Coalition, a newly organized industrial lobby for the lithium-ion battery and electric vehicle industries. I raised the storm watch flag based on a DOE report that discusses the technical and economic challenges of using lithium-ion batteries in GEVs; a White House report that the GM Volt is not likely to be competitive; an unpublished DOE roadmap for lithium-ion battery development that highlights the need for several generations of improvement in battery chemistry and manufacturing technology; a National Research Council report that battery costs are likely to remain high for decades; and an Energy Information Administration forecast that GEVs won't account for more than 3% of the market before 2035. Politicians, reporters and eco-clerics are all enamored with GEVs, but they generally live in a "wouldn't if be great if ...?" world where economics, paychecks and monthly bills don't matter. In contrast, the people who bear the front line responsibility for implementing unsound policies see nothing but problems.

Now I think it's probably time to upgrade the storm watch to a storm warning.

Storm Warning I: Lithium-Ion Batteries

On December 7, 2009, the DOE's Advanced Research Projects Agency – Energy, which goes by the acronym ARPA-E, released a $100 million funding opportunity announcement for battery research and development projects that have a reasonable chance of achieving the long-term price and performance goals for electric vehicle batteries that lithium-ion technology can't even approach. While DOE funding opportunity announcements are a little arcane for most investors, I found the discussion in the Background section of the Program Overview revealing, which is why I'm upgrading my storm watch to a storm warning.

The background discussion starts out by repeating the widely publicized facts that the U.S. imports roughly 60% of its petroleum and uses almost 70% of available supplies for transportation. After describing the desirable economic and environmental impacts of shifting transportation to the electric grid, ARPA-E lays the blame for the anticipated shortcomings of GEVs squarely at the feet of the battery industry:

"However, the widespread deployment of electric vehicles has been prevented to date by their limited range and high upfront capital costs due to the limitations of currently available battery technologies. Currently available high performance Lithium-ion battery technologies are limited to system level energy densities of ~100-120 Wh/kg, costs of $800-$1200/kWh, and short cycle life, resulting in unacceptably short driving range for the vast majority of consumers and un-economically high lifetime costs for electric vehicles."

After praising recent strides that have been made toward developing high-power batteries for HEVs (without plugs), the tone becomes decidedly ominous on the topic of high-energy batteries for GEVs where oft-stated performance goals "are pushing up against the fundamental energy density limits of traditional Lithium-ion based batteries." After referencing "strong doubts in the battery community as to whether the energy density of Lithium-ion batteries will be able to be pushed to the 200+ Wh/kg system level energy densities required for widespread deployment of all-electric vehicles" and grave reservations "as to whether traditional Lithium-ion based battery production for electrified vehicles offers an opportunity for the U.S. to assert domestic technology and manufacturing leadership within the context of the existing Lithium-ion based battery technology platform," the funding opportunity announcement confirms ARPA-E's "strong interest in supporting the development of new high energy, low cost battery technology approaches beyond traditional Lithium-ion batteries" and offers up to $100 million in grants for battery researchers that are willing to rise to the challenge.

Overall the discussion struck me as a politically guarded admission of the inescapable reality that lithium-ion batteries are not good enough, durable enough or cheap enough for GEVs; and they're not expected to improve much in the foreseeable future. In other words, it's time to kick lithium-ion batteries to the sidelines, launch Plan B and develop new battery technologies that may actually be capable of doing the required work at an acceptable cost.

Storm Warning II: Raw Materials Constraints In Electric Drive Motors

A second storm warning that came to my attention this weekend is an issue that my friend Jack Lifton has been writing about for years -- Chinese domination of the global market for rare earth metals. On December 22, 2009 the DOE released a "Notice of Intent - FY2010 Vehicle Technologies Program Wide Broad Agency Announcement" that includes the following area of interest:

"Subtopic 3 (d)-Motors Using No Rare Earth Permanent Magnets for Advanced EDV Electric Traction Drives

This subtopic is for motor technologies that eliminate the use of rare earth permanent magnets. Analysis of recent price trends and resource availability indicate cost and availability concerns of these material types. Approaches may include the use of non-rare earth magnet materials or motor technologies that do not use permanent magnets to meet the desired size, weight, and cost targets."

I can't wait to see the formal funding opportunity announcement on this one. We may even see a carefully worded admission that the Chinese need their rare earth production to satisfy domestic demand and mining is so unpopular with the eco-clerics that it's easier to do without GEVs unless we can invent a whole new class electric drive motors that are not material constrained. I wonder how long the anti-mining attitudes will last when the general public comes to the realization that the generators in wind turbines are subject to the same raw material constraints.

The Perfect Storm

In combination I view these two DOE funding opportunities as a one-two punch for GEVs. The lithium-ion batteries that the investment world is valuing at nosebleed levels are not going to be up to the job and even if the batteries improve beyond the DOE's wildest expectations there won't be any permanent magnet motors to drive the wheels. From where I sit, it's beginning to look like another abortive government attempt to create a market for technologies that consumers don't want and global supply chains can't support. Other fine examples of the syndrome include:



Revolutionary Technology

25 years ago



15 years ago


Electric vehicles

10 years ago


HEVs and Electric vehicles

6 years ago


Hydrogen Fuel Cells

3 years ago





Grid Enabled Vehicles



What’s next?

Every industrial revolution in history has been driven by innovation that gave people the ability to do more with less. While I believe the coming cleantech revolution will be driven in large part by constraint and increasing competition for water, food, energy and virtually every commodity you can imagine, efficiency is inherently cheaper than waste and the winning solutions will be technologies that allow us to do more with less. Technologies that require more and deliver less will, of necessity, end up on the dung heap of history.

Disclosure: Author is a former director Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide Technologies (XIDE), C&D Technologies (CHP) Active Power (ACPW), ZBB Energy (ZBB) and Great Western Minerals Group (GWG.V).

January 02, 2010

Why Oil & Shipping Firm A.P. Moller-Maersk and Steelmaker POSCO Are 'Green' Investments

by Bill Paul

There's no such thing as an "experienced" alternative energy investor. The sector simply is too new. Also, like an iceberg, most of it lies hidden beneath the surface.

To succeed in these uncharted waters, I believe that alternative energy investors (a group that eventually will include all investors) need to follow a particular set of guidelines that I've started identifying in recent articles. The first guideline is that you must be a long-term investor with a time horizon of at least three to five years. Otherwise, you'll miss out on most of the incredible financial payoff that is to come as the world continues to slowly but surely accept the need to ratchet down greenhouse gas output in ways that don't undermine economic growth.

The second guideline is that to find the best green energy investment prospects, you've got to scour the world, because while Washington continues to waste time fighting over whether climate change is real, the rest of the world is developing the technologies that will become the backbone of a carbon-constrained economy that will continue to deliver solid global growth.

Now here's my third: many of the best long-term green energy prospects are companies whose current operations are "dirty." Two cases in point: Danish shipping and oil group A.P. Moller-Maersk (Symbol AMKAF) and South Korean steelmaker POSCO (Symbol PKX).

The foolish people at the U.S. Chamber of Commerce who think they're helping their constituency by fighting against climate change legislation need to rethink their position, because Maersk and POSCO show how foreign firms that compete with CoC members intend to grow by going green, beating out their U.S. rivals on new multi-billion-dollar business opportunities.

For Maersk, the future involves transporting carbon dioxide gas in specially-built tanker ships from coal-fired power plants where the CO2 is generated to offshore oil drilling platforms where it will be used for enhanced oil recovery (EOR). Maersk recently announced a deal with Finnish power producers that a Maersk official said will be "the first step for us to develop CCS (carbon capture and sequestration) as a business." The executive said that Maersk plans to build a fleet of specially-designed CO2-carrying tankers that will deliver CO2 to oil producers throughout the world.

POSCO, the world's fourth largest steelmaker, is also thinking really big. The company recently said it plans to invest about $6 billion over the next eight years on a variety of green energy technologies. POSCO reportedly believes its $6 billion investment will generate roughly $9 billion in new revenue during the same stretch.

POSCO is investing in wind power, fuel cells, the smart grid, synthetic natural gas and nuclear power. It sees its investment further paying off in a 30% reduction in its own greenhouse gas emissions, which could wind up generating additional revenue by enabling POSCO to sell emission "credits" to other companies.

Who will be buying POSCO's credits? A lot may wind up getting bought by U.S. firms that were led astray by the U.S. Chamber of Commerce.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

« December 2009 | Main | February 2010 »

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