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May 29, 2010

Stop-Start Idle Elimination - Slashing Fuel Consumption By Up To 17%

John Petersen

I've written several articles over the last year that explain why idle elimination is a crucial first step in the global effort to increase fuel efficiency and curb CO2 emissions. For readers who are new to my blog, or confused by a torrent of news stories and analysts reports that wax poetic on the expected benefits, costs and challenges of gee-whiz vehicles that are "coming soon to a showroom near you," altenergymag.com describes stop-start systems, or micro-hybrids, as follows:

"These are conventional vehicles powered either by gasoline or diesel engines in which the 12-volt starter motor has been eliminated and a specially designed, belt-driven integrated starter/generator, or ISG, has been installed in place of the conventional alternator. While the ISG of a micro hybrid cannot help to propel the vehicle, it can provide two important hybrid features. First of all, a micro hybrid will feature idle stop. Engine control circuitry is included in a micro hybrid which will shut down the internal combustion engine when the vehicle is at rest. This feature alone can improve fuel economy by 10% to 15% in city/urban driving environments. The electronic control system in a micro hybrid can also control the charge cycle of the alternator so that it produces electricity to recharge the vehicle battery primarily during deceleration and braking. This provides a mild amount of regenerative braking and an additional gain in efficiency."

I usually talk about an 8% improvement in fuel economy for an incremental cost of $400 when I write about stop-start systems. Since I know that blog entries from guys like me who have an economic dog in the fight are often viewed as less credible than articles from writers who merely have a philosophical or political axe to grind, I also spend a good deal of time searching for concrete supporting data from reliable collateral sources.

I recently found a fascinating and somewhat disturbing slide in a presentation that General Motors R&D made at the 2010 Annual Meeting of the Minerals, Metals & Materials Society titled, "Challenges and Opportunities Relative to Increased Usage of Aluminum Within the Automotive Industry." The following schematic from page 13 of the presentation tells me that the 8% estimate I've been using is too pessimistic by half and the real fuel economy target for stop-start systems is closer to 17%.
5.28.10 GM Efficiency.png
Stop-start is not a complete solution to the fuel efficiency challenge, but it is the lowest and juiciest fruit on the conservation tree. Is it any wonder that industry analysts are predicting that stop-start systems will be built into 20 million cars a year by 2015?

The most common question on articles that discuss stop-start systems is, "if stop-start is so important, where are the automakers' press releases touting the technology?" The answer is simple. Stop-start will not normally be offered as a stand-alone option and will usually be bundled in packages like the EfficientDynamics system from BMW that has begun to attract praise from the mainstream media. More importantly, stop-start may be optional equipment for a couple years, but it is almost certain to become standard equipment because there is no compelling reason to waste fuel while waiting at a stop-light.

Automakers in Europe and North America are under tremendous pressure to meet new fuel efficiency and CO2 emission standards or pay huge penalties for failure. The following table summarizes the CO2 emission standards adopted by the European Union in April 2009.

Calendar Year Percent of Fleet CO2 Emission Standard MPG Gasoline MPG Diesel
2012 65.00% 130 g/km ~42 ~48.2
2013 75.00% 130 g/km ~42 ~48.2
2014 80.00% 130 g/km ~42 ~48.2
2015 100.00% 130 g/km ~42 ~48.2

In April of this year, the NHTSA and EPA created comparable standards for the U.S. when they adopted a joint final rule establishing the following fuel economy standards for light duty vehicles including cars, pickups, SUVs and vans.

Model Year Passenger Cars Light Trucks Combined Fleet
2010 (1) 27.5 mpg
23.5 mpg
2011 (1) 30.2 mpg
24.1 mpg
2012 (2) 33.3 mpg 25.4 mpg 29.7 mpg
2013 (2) 34.2 mpg 26.0 mpg 30.5 mpg
2014 (2) 34.9 mpg 26.6 mpg 31.3 mpg
2015 (2) 36.2 mpg 27.5 mpg 32.6 mpg
2016(2) 37.8 mpg 28.8 mpg 34.1 mpg
(1)  Source: Wikipedia Corporate Average Fuel Economy
(2)  Source: NHTSA CAFE-GHG Fact Sheet

The bottom line business dynamic is that every Prius, Volt or Leaf the automakers sell will simplify the task of regulatory compliance, but the lion's share of the progress will come from building simpler efficiency technologies into cars that will be sold to consumers who think the green in their wallets is more important than the green in their conversation.

The second most common question is, "why do you think the widespread adoption of stop-start technology will be a boon to developers of advanced lead-carbon batteries and other systems that combine supercapacitors with conventional starter batteries?" My response has always been that current starter batteries are not robust enough to start an engine several times in a daily commute and systems based on exotic chemistries like NiMH and lithium-ion batteries are too expensive. Until recently, data to prove my point has been limited, which led to some skepticism. Now that hard data is beginning to make its way into the public domain, the task gets easier.

The big problem with stop-start systems is that starting an engine several times in a daily commute is very hard on starter batteries and the constant punishment gives rise to two related problems:
  • First, the dynamic charge acceptance rate falls off rapidly, meaning that charge cycles that take 30 seconds with a new battery can take 2 minutes or more after a few months of use;
  • Second, charging efficiency falls off rapidly, meaning that more energy is needed to bring the battery back to a full state of charge.
Both of these factors limit the frequency of stop-start events because control electronics won't turn the engine off unless the battery is fully recharged and ready for another start cycle. As the frequency of stop-start events declines, so does the fuel economy.

Last week a reader referred me to a Journal of Power Sources article (Volume 194, Issue 4, Pages 1241-1245) that compared the stop-start cycle-life performance of a conventional starter battery, an advanced lead-acid battery with carbon additives, and a lead-carbon battery-supercapacitor hybrid from Australia's Commonwealth Scientific and Industrial Research Organization called the Ultrabattery. The following graph shows the relative performance of all three devices in simplified cycle life testing that slightly under-charged the batteries to show the differences in dynamic charge acceptance rates.

5.28.10 Ultrabattery 1.png

A graph of their cycle-life testing using a normal charging protocol follows.

5.28.10 Ultrabattery 2.png

Axion Power International (AXPW.OB) reported comparable results in its May 19th presentation at the Advanced Automotive Battery Conference 2010.

5.28.10 Axion.png

The bottom line take-away points for investors are:
  • In response to government mandates, stop-start systems will ramp from a few hundred thousand vehicles in 2010 to 20 million vehicles a year by 2015;
  • Initial implementation of stop-start systems is planned the 2012 model year, which will require OEMs to reach design specification decisions by the third or fourth quarter of 2010;
  • Roughly half of the $400 incremental cost of a stop-start system will be spent on better energy storage devices and the balance will be spent on control electronics and electro-mechanical components;
  • While some automakers may choose higher quality conventional lead-acid batteries for stop-start systems, OEMs that want to maximize vehicle efficiency and avoid service problems will prefer technologies that combine the performance characteristics of supercapacitors and batteries; and
  • Incremental revenue for manufacturers of storage devices for stop-start systems will run to several billion dollars a year by 2015.
Five public companies are actively developing specialized materials, components and energy storage devices for stop-start systems and will enjoy a substantial first-mover advantage over the next few years, including:
  • MeadWestvaco (MWV), a packaging material and container manufacturing company that is developing carbon additives for the lead pastes used in ISS batteries;
  • Maxwell Technologies (MXWL), which has teamed-up with Continental AG to develop storage systems for stop-start applications that use supercapacitors in tandem with conventional lead-acid batteries;
  • Furukawa Battery Company (Frankfurt - FBB.F), which licensed the Ultrabattery from CSIRO and then sublicensed North American manufacturing rights to privately held East Penn Manufacturing Company, the recipient of a $32.5 million ARRA battery manufacturing grant award in August 2009;
  • Axion Power International (AXPW.OB) a manufacturer of lead-acid batteries that has built a formidable patent position in lead-carbon technology and teamed-up with Exide for the commercialization of its PbC® battery-supercapacitor hybrid; and
  • Exide Technologies, Inc. (XIDE), a leading global manufacturer of lead-acid batteries that has teamed up with Axion and was awarded a $34.3 million ARRA battery manufacturing grant in August 2009.
While each of these companies is working feverishly to complete OEM testing, build manufacturing facilities and negotiate their first contracts, none of them is truly ready for the anticipated surge in demand. As a result, I believe every company that brings a product to market this year will have more business than it can handle by the middle of next year. When the first design wins are announced later this year, the market response should be impressive, especially in the case of Exide and Axion which are rumored to be trading at depressed prices because of liquidations by troubled funds. Other battery manufacturers will undoubtedly enter the fray, but they'll all be playing catch-up ball for a long, long time.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock.

May 28, 2010

Exxon Could Be the Answer to America's Energy Problems

Bill Paul

In the wake of the massive Gulf of Mexico oil spill, it’s clear the U.S. needs to end its crude-oil addiction as much to protect its economy as the environment.

To move the future forward, America needs one company in particular to come through on behalf of all Americans. In a cruel twist of fate, that company is ExxonMobil (XOM), which is working on arguably the most important energy-research project in the world today. Namely, a project to replace crude with genetically-modified algae that can be cost-effectively refined using existing refinery equipment.

A year ago when Exxon announced its algae project with biotech pioneer J. Craig Venter, the company said that it would take at least 5-10 years to produce commercial quantities of algae-based fuels. “My suspicion, and it’s just a suspicion, is that they still see it as five to 10 years away,” says Addison Wiggin, editorial director of The Daily Reckoning, who has been looking into the Exxon-Venter project for a forthcoming documentary on entrepreneurs in the post-crisis financial world.

Too long. As video of the black death pouring out of that ruptured pipeline gushes onto every American TV and computer screen, it's time for President Obama to declare a new Manhattan Project, a new man-to-moon space race. The goal must be to take America off its crude addiction in less than five years with a literally home-grown industry that will create tens of thousands of agricultural and other jobs without jeopardizing the existing oil industry’s trillion-dollar infrastructure.

Exxon shares would surge the moment this plan became publicly known; however, the President can’t allow the investor payoff to be too bountiful. There will have to be safeguards against Exxon controlling the applicable patents in order to prevent the company from controlling America’s energy future.

Algae oil is no panacea, the President will further need to say. Accelerated development of plug-in electric and all-electric vehicles is needed in order for the U.S. to have, by 2020 or sooner, a nationally-secure, environmentally-sound transportation infrastructure.

In a second twist of fate, not only would Exxon shares likely surge in price, so too might the shares of utilities that generate a lot of electricity from coal. Companies such as Duke Energy (DUK), Southern (SO) and FirstEnergy (FE) might lose their pariah image if part of the President’s strategy were to capture coal plants’ carbon dioxide and use it to accelerate algae growth.

For risk-inclined investors who believe that all this may be on the way, a company that might be worth a closer look right now is tiny OriginOil. (OOIL.OB). The company has started signing up customers as it begins commercializing a technology for producing biofuel from algae using CO2 emissions captured from smokestacks.

Disclosure: No positions

ED NOTE: Follow this link for a look at four algae oil companies, including OriginOil.

May 27, 2010

Valuing the Boralex Power Income Fund Buy-Out

Tom Konrad, CFA

Boralex Inc. made an offer to buy out the Boralex Power Income Fund on May 19.  The price is reasonable. 

Boralex (BLX.TO, BRLXF.PK) announced on May 2 that it would offer C$5 per share in convertible bonds for all outstanding shares of the Boralex Power Income Fund (BPT-UN.TO, BLXJF.PK) that it did not already own in an acquisition approved by both boards.  As usual with mergers, the Boralex Power Income Fund's ("the Fund's") unit price jumped from C$4.61 to C$4.90 the next day, but then if started to fall back as people had time to review the precise terms, dropping as low as C$4.51 on May 13 before recovering and always holding over its average values from before the deal was announced.  The market particpants seem to believe that this deal adds value for unitholders, but only by a thin margin.  What follows is my analysis.


Bid Premium

C$5.00 represents an 11% premium over the Fund's average unit price of C$4.50 for the preceding 60 trading days.  That's low compared to average bid premiums, which have recently averaged in the low 20%'s.  However, the Fund is an income investment, with most earnings returned directly to investors.  Becasue of this, investors cannot reasonably expect much appreciation in the fund's unit price, and a small buyout premium seems justified in this case. 


If the Fund's owners accept a low premium for their income investment, they should not be expected to accept a large drop in income.  On the other hand, some drop in income may be justified because of the additional security they will receive as bondholders of Boralex rather than equity holders in the Fund.  The Fund is currently paying a C$0.03333 monthly dividend, or C$0.40 annually per unit.  The C$5.00 face value, 6.25% debenture offered in exchange will pay C$0.3125 annually, meaning that unit holders who accept the offer will suffer a 21.875% loss of income. 

Using the pre-merger average share price of C$4.50, Fund unit holders were previously receiving an 8.89% annual yield, and will now be receiving a 6.94% annual yield, which seems on its face like a bad deal.  Yet, as discussed above, the Fund's unit holders cannot reasonably expect price appreciation given the fund's current structure, and hence the C$5 face value (which will be redeemed for cash five years after the merger date) should be included in the return calculation.  Using a spreadsheet, I calculated the internal rate of return (IRR) of paying C$4.50 today for C$0.3125 for five years, plus C$5 at the end of the period (the "Debentures" column) as well as the same price calculation with the Fund units' current C$0.40 annual income but no price appreciation.

Debentures Year
Fund Units
-$4.50 T=0 -$4.50
$0.3125 T=1 $0.40
$0.3125 T=2 $0.40
$0.3125 T=3 $0.40
$0.3125 T=4 $0.40
$5.3125 T=5 $4.90

As you can see, the internal rate of return of the offer is 8.81%, within a gnat's whisker of the expected return without the offer (8.89%).  Differing tax rates for some unit holders between the current distributions and interest income may make the offer less attractive to those investors, but the increased security of bondholders compared to unitholders may more than compensate for risk-adverse investors.

An article from the Streetwise column of Globe and Mail on May 12 was skeptical about the offer.  This article quoted Connor O'Brien, the Chief Investment Officer of a major holder of the trust, Stanton Asset Management.  Mr. O'Brien "calculates that unit holders will receive approximately 50 per cent less after-tax income if they end up holding the convertible bonds, rather that trust units."  This is a red herring.  The Fund's privileged Canadian tax status will end in 2011.  Unitholders do not have the option of continuing to receive distributions under the current regime, even if the merger does not go through.  The change in tax status is not the result of the merger, it's the result of the tax law changes which have caused most Canadian Trusts to reorganize in one way or another over the last three years.

Conversion Option
Mr. O'Brian was also concerned about the conversion price.    He was also particularly critical of the C$17 conversion price for the bonds, a "70 per cent premium to where the stock was trading in the 30 days prior to the offer for the trust."  He is right that the conversion option adds very little value for Fund unit holders.  If you're trying to decide if this deal is a good value, you should focus on the value of the cash flows, assuming the debentures are redeemed for C$5.00 after five years.  The value of the conversion option is small, but positive.


Overall, I believe this is a fair value for unitholders.  Maintaining the status quo is not an option.  The Fund's favored tax status will expire at the end of the year, and the fund would have to cut distributions in order to pay the new taxes.  The value of the cash flows from the Boralex Power Income Fund units and the convertible debentures offered by Boralex are roughly equivalent, and the (small) value of the conversion option adds a little spice to the mix.

This conclusion seems to be confirmed by market action.  Fund units have been consistently trading for more than they were before the merger announcement, while the S&P/TSX Composite Index has fallen 5% since the merger was announced.

DISCLOSURE: LONG Boralex Power Income Fund.

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.

May 24, 2010

Opportunities in the Energy Storage Sector

John Petersen

Since I discussed dilution risks in emerging energy storage companies last week, today I'm going to shift gears and offer an overview of the opportunities that have developed in larger pure-play energy storage companies since last September. The following graph tracks the 18-month composite performance of the five categories I defined in Battery Investing for Beginners, Part II and shows how they stacked up against the Dow Jones Average.

5.23.10 Composite.png

To understand what's happened in the storage sector over the last 18 months it's helpful to remember a few key dates. First, we had the November 2008 crash and the March 2009 retest of the lows. The market started to turn in the spring of 2009 and the storage sector fared better than most because Federal stimulus legislation included billions in direct and indirect subsidies that took final form in August when the President announced $1.25 billion in ARRA battery manufacturing grants. Those grants, in turn, laid the foundation for the successful A123 Systems IPO (AONE) that went off in September. Since September, the euphoria has faded as the market came to grips with the fact that building new factories takes time and changes in the cleantech revolution will be slower than they were in the IT revolution. The market is still adjusting to the reality that storage is governed by a different set of rules, but that adjustment period has created some interesting opportunities for investors who want to position their portfolios for a coming tidal wave of change.

In January of this year I introduced the concept of the Hype Cycle in an article on vehicle electrification and used a graph that TIAX LLC presented at the Plug-in 2008 Conference. I've recently found a generic Gartner Group version of the graph that describes the stages of the hype cycle in greater detail.

Gartner HC Slide.jpg

While opinions on where particular technologies fit on the hype cycle graph vary, I believe a macro-economic trend that's best described as a "storage supercycle" is just beginning. In IT terms, today is like the late-70s and headline grabbing energy storage applications like plug-in vehicles, frequency regulation and short-duration renewable power integration are analogs of the IBM 5110, the TRS 80 and the Apple II. In effect, the current headliners are little more than timid baby steps in an economic and technical supercycle that will take a couple decades to unfold before reaching its true peak of inflated expectations.

The thing that surprises me most about storage is our profound ignorance of technical, economic and resource limitations. We don't know whether plug-in vehicles will satisfy mainstream transportation needs because except for a couple of small-scale tests, nobody's built a fleet of plug-in vehicles, put them into the hands of ordinary people, and operated them long enough to find out. We don't know whether lithium-ion battery packs will perform as well in practice as they do in computer simulations and we can't know whether any of the promised economies of scale will actually materialize. For that matter, we're not entirely certain that global raw material supply chains will be up to the task. At the end of the day it's an R&D project that may work out well, but may also prove once again that batteries are not cost effective replacements for fuel tanks.

The same dynamic holds for ongoing efforts to use flywheels and a variety of other technologies to regulate the power grid and smooth the output of windmills. The first goal is to find out whether the various technologies are robust enough to do the required work for a reasonable service life. Once technical feasibility is established, the more difficult and demanding task will be identifying applications and installations where the benefits justify the costs. The process has started, but it will be years before the reports are written and wide-scale implementation decisions begin.

Over the next decade I expect all of today's leading technological contenders to be eclipsed by new developments. Some will be improvements on old-line chemistries, others will be improvements on advanced chemistries, and others still will take gee-whiz science out of research laboratories and move it into factories. The end result will be a crazy quilt where a wide variety of storage technologies will dominate billion dollar market segments, but no technology will dominate the industry. Tolkien is not writing this story and we're never going to see "one ring to rule them all."

Cheap Sustainable Companies

My cheap sustainable category, which includes Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Active Power (ACPW), has been the hands down winner in terms of composite performance, but is off significantly from last fall's peak. When you consider the price trends for the individual companies, it becomes clear that Enersys was the star performer while the other three were relative laggards.

5.23.10 Cheap Table 1.png

Some key valuation metrics as reported by Yahoo! Finance are in the following table.

5.23.10 Cheap Table 2.png

Exide is emerging from a major restructuring that crushed earnings and drove its price down to roughly 25% of the pre-crash high of $18.80 per share. C&D has recently completed a big construction project in China that drove its stock price down to roughly 11% of the pre-crash high of $9.05 per share. Both are trading at prices that are very close to book value and represent obscenely low multiples of sales. They're also emerging from difficult times into a rapidly changing market that's demanding better performance and should favor their high-end product lines. In my view both Exide and C&D could easily double or triple over the next twelve months as the accomplishments of the last few years begin to show up in reported operating results.

Active Power is a textbook example of how a hot IPO can wallow for years if technological and business developments take longer and cost more than the market expects. After starting from an adjusted IPO price of over $70, it faded to an all time low of $0.26 in the winter of 2008. Since then, its flywheel-based power quality systems have gained traction in the data center market and just last week it announced an $8 million order, or roughly 25% of its 2009 sales. It seems that Active Power has finally found its footing after a lost decade of disappointment. If its business continues to follow the trajectory established over the last 18 months, it should be a solid performer in the coming year and could easily double or triple.

Chinese Companies

My Chinese category, which includes Advanced Battery Technology (ABAT), China BAK Battery (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ), has also been a solid performer that's trading way off its peak from last fall. When you consider the price trends for the individual companies, it becomes clear that CRTP and ABAT were the star performers, HPJ did well, and CBAK was the only true laggard.

5.23.10 Chinese Table 1.png

Some key valuation metrics as reported by Yahoo! Finance are in the following table.

5.23.10 Chinese Table 2.png

My two favorites in this category are ABAT, which is pursuing a vertical integration strategy in the booming electric two-wheeled vehicle market, and CRTP, which is a major manufacturer of cheap lead-acid batteries. While Hong Kong Highpower has been a solid performer and is down by 50% from its recent high, most of its sales come from NiMH batteries that require the rare earth metal Lanthanum. Given uncertainties over rare earth metal supplies, I worry that HPJ may face significant resource constraint issues over the next few years. While CBAK is one of the largest lithium-ion battery manufacturers on the planet and has a world class customer list, its financial results highlight a nagging concern that great customer lists aren't always good things if the customers are so tight fisted that you can't earn a decent gross profit.

Cool Sustainable Companies

My cool sustainable category includes A123 Systems, Maxwell Technologies (MXWL) and Ultralife (ULBI). While Maxwell has been a solid performer, Ultralife has trended downward since I started following it and A123 is currently trading for about 75% of its $13.50 IPO price after a run into the mid-$20s.

5.23.10 Cool Table 1.png

Some key valuation metrics as reported by Yahoo! Finance are in the following table.

5.23.10 Cool Table 2.png

Of the cool sustainable companies my favorite is Ultralife because it has a history of profitability, trades at 1x book value and 45% of sales, and has been beaten down by almost two-thirds from its peak in December 2008. I expect Maxwell to perform well over the next year, but think reasonable performance expectations are already priced into the stock. A123 worries me a bit because market expectations for plug-in vehicles are so high and it will be hard for any lithium-ion battery manufacturer to live up to those unreasonable expectations.


These are times of immense risk and once in a lifetime opportunity. Unless you're an expert, the only rational way to invest in the energy storage sector is with a diversified portfolio that focuses on a relatively short time horizon and leaves room to adapt to rapidly changing conditions. All other roads lead to the technology du jour minefields that have been snaring the unwary for as long as I've been practicing law:

25 years ago Methanol
15 years ago Electric Vehicles
10 years ago HEVs and Electric Vehicles
5 years ago Hydrogen Fuel Cells
3 years ago Ethanol and Biofuels
Today PHEVs and Electric Vehicles
2012 The next big thing?

Disclosure: No positions.

May 23, 2010

A Year Later: Market Up, Clean Energy Down

Tom Konrad, CFA

When I called the peak a year ago, it was too soon for the broad market, but not for clean energy stocks.  I think both have room to fall, but clean energy may bottom first. 

Almost a year ago at the start of June, I wrote saying "we're near the peak" of the stock market.  I was too early, and admitted it in August.  But I also said that it was a bad time to be in the market: the risks of a decline far outweighed the potential gains of remaining in an overvalued market.

Since the start of May, investors are once again realizing that not all is right with the economy, and the market can go down as well as up.  I'm willing to go out on a limb again and say I think the market has a lot farther to fall from here, and I expect the S&P 500 to be below where it was when I made my call (at 945.)

What Was I Thinking?

When I made my call, it was based on the feeling that all the stocks I watch (almost exclusively clean energy) had come too far, too fast, and were overvalued.  My mistake, it seems, was extrapolating from what was going on in my sector to what was going on in the market as a whole.

Consider this chart comparing the performance of a domestic clean energy ETF (PBW), a global clean energy ETF (ICLN), and the NASDAQ and S&P500 broad market indexes (click for full sized chart):

Perfomance Chart

While the broad market indexes continued to rise until late April this year, the S&P Global Clean Energy Index (ICLN, in red) peaked at $26.00 shortly after my call.  The Powershares Wilderhill Clean Energy Index (PBW, in blue) had a minor peak at $11.37  at the same time, but went on to scratch out another 5% gain by early January 2010 before turning decisively down.

ICLN is now down 31% from its peak, while PBW is down 22% from its minor peak following my market call. 

What Went Before

You'll also note that in the three months leading up to my call, clean energy had been strongly outperforming the broad market indexes.  I became nervous as I saw stock valuations rise too far, too fast in my own sector, and I made the mistake of generalizing that personal experience to the market as a whole.

Over the last year, I have become increasingly bearish about the broad stock market.  In August of 2009, I wrote that I had shifted my portfolio into a market-neutral stance.  I've had an overall short position since September 2009, and have encouraged readers to get out of the market or take short positions since then.  Most recently I wrote at the end of April that it was time to "double down" on puts to hedge against market exposure or gamble on a market decline.

The Future

I still believe that the market is overvalued.   However, because of the declines in clean energy stocks, I am starting to see individual companies that are decent values.  On May 16, I profiled one such example, CVTech Group (CVT.TO, CVTPF.PK.)  I think it's still too early to begin buying even these reasonably valued stocks.  If we have the broad market decline that is looking increasingly likely, reasonably stocks are likely to get caught in the downdraft, and fall further until they are incredible bargains.

Those bargains, I feel, are now just a matter of months away.  (Time will show the accuracy or inaccuracy of that prediction, too.)

DISCLOSURE: No positions.
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.

May 21, 2010

The Best Peak Oil Investments: Peak Oil Stock Lists

Tom Konrad CFA

Four new stock lists for different approaches to profit from peak oil.
As I've researched and written this series on ways to invest in companies that will profit from peak oil, I've been greatly expanding the number of stocks in our old "Clean Transportation" stock list, at the same time I've been doing a lot of thinking about how these companies will fare.  Because of this, I've decided to split Clean Transportation into four groups of similar companies, depending on how they are working to reduce our dependence on oil.

The new stock categories are:

In addition to these four new categories, we have several other stock lists that are relevant to peak oil, many of which have been expanded as I researched this ongoing series.

If you know of exchange-listed companies that aren't on these lists, but should be, please let me know in the comments.  It's a constant endeavor to keep these lists up to date. 

An index to the "Best Peak Oil Investments" series is available here.

DISCLOSURE: No positions.
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.

May 20, 2010

Dilution Risks in Emerging Energy Storage Companies

John Petersen

The greatest truth in micro-cap corporate finance is that small companies have a lot in common with small children in third world countries – they rarely die of starvation but they frequently die of dysentery. In hard times, small companies that need additional capital can usually find the cash if their management has enough humility to accept the price the new financiers are willing to pay. The problems can quickly become life threatening, however, if management fails to adjust spending to accommodate business conditions or rejects available financing because the terms seem predatory. My advice to clients has always been "take the money when it's available, even if you don't like the terms, because shareholders adjust quickly to sensible decisions but they rarely forgive failure."

Last December a former client Axion Power International (AXPW.OB) found itself with a Hobson's choice because it needed substantial financing to pursue its development plans and the price the new financiers were willing to pay was painfully low. Management made the right decision and sold 45.8 million common shares at $0.57 per share, which was a big discount from the prevailing market price of $1.58 per share, but worked out to roughly 5.7x the company's adjusted pre-financing book value of $0.10 per share.

Earlier this week, ZBB Energy (ZBB) filed an SEC registration statement for an offering of up to $10 million in common stock. Concurrently, it added going concern language to the footnotes in its quarterly financial statements. The market's reaction was violent and shares that closed at $0.80 on March 31st closed at $0.28 yesterday, or 1.27x its book value of $0.22 per share. There's no way to predict what ZBB's offering price will be, or for that matter whether the offering will be successful in a tough market, but given the very small spread between the current price of ZBB's stock and its book value per share, I tend to think the market reaction was overblown and ZBB's shares are attractive at current prices in spite of the uncertainties. In any event I have to admire a management team that's willing to bite the bullet and take appropriate steps to insure their company's survival.

While Axion and ZBB each followed a rational path and got punished by the market for a good business decision, all the companies in my "cool emerging" category have comparable if not greater problems that seem to be complicated in some cases by an unwillingness to bite the bullet on financing terms or slash spending to accomodate current realities. The following table provides summary information on the six companies in my "cheap emerging" and "cool emerging" categories in ascending order of unsatisfied funding needs for the balance of 2010. Comments on each company follow the table.

5.20.10 Table 1.png

Axion has enough cash and working capital to support up to three years of operations at historic levels. Now it's all up to the PbC battery. If ongoing testing by first-tier European and American automakers leads to significant purchase orders, Axion will be able to begin plant expansion with existing capital and, if necessary, go back to the market with a proven value proposition and a solid book of business. If it encounters delays or disappointments, there will be enough cash to weather the storm and solve the problems without going to the market in a position of weakness. Either way the stockholders win because there is no reasonable prospect of dilutive financing for the foreseeable future. Cash is a great thing and I'm delighted that management made the right decision even if the market reacted badly.

Altair Nanotechnologies (ALTI) has a reasonable market capitalization ratio of roughly 2x book value and modest capital spending plans for this year that will be contingent on increases in customer demand for its products. Altair believes its working capital together with revenue from product sales will be sufficient to support its operations for approximately six months.  Consequently, Altair will seek stockholder authorization for a reverse split at its annual meeting next week and plans to raise an undisclosed amount of new capital during 2010. There's no way to predict what the terms of a future Altair offering will be, or for that matter whether the offering will be successful in a tough market, but given the reasonable spread between the current price of Altair's stock and its book value per share, I tend to think Altair's shares are attractive at current prices in spite of the uncertainties. Altair's planned financing and reverse split may prove to be unpopular with some stockholders, but they seem likely to insure the company's survival and that's ultimately the only thing that matters.

Beacon Power (BCON) has a reasonable market capitalization ratio of roughly 1.8x tangible book value and more rigid capital spending plans that represent its share of PP&E spending that is not provided by DOE loan facilities.  Beacon believes it will need to raise $18 - $20 million in 2010 to continue the orderly implementation of its business plan and will seek stockholder authorization for a reverse split at its annual meeting in July. There's no way to predict what the terms of a future Beacon offering will be, or for that matter whether the offering will be successful in a tough market, but given the very small spread between the current price of Beacon's stock and its book value per share, I tend to think Beacon's shares are attractive at current prices in spite of the uncertainties. Beacon's planned financing and reverse split may prove to be unpopular with some stockholders, but they seem likely to insure the company's survival and that's ultimately the only thing that matters.

Valence Technology (VLNC) has always baffled me because I can't understand how a company that's under water to the tune of $75 million maintains a $120 million market capitalization. As near as I can tell Valence owes its survival to loans from a principal stockholder and occasional open market sales of its common stock. In a case like Valence, all I can do is paraphrase the late Billy Holliday, "papa may have, and mama may have, but god bless the company that got its own."

Ener1 (HEV) has consistently carried a market capitalization that's way out of line with its tangible book value. It also has a very high burn rate and aggressive capital spending plans that will require huge amounts of new financing in the immediate future. Ener1's most pressing problem is a $15 million note to Credit Suisse that matures in late June, but its capital spending plans are critical to an ARRA battery manufacturing grant the DOE awarded in August of last year. Ener1 plans to finance its operations and capital spending from open market stock sales and other sources. While Ener1 believes it has access to sufficient capital to continue its planned operations, I'm left with the nagging question "at what price?" In connection with its IPO, A123 Systems (AONE) sold stock for 5.75x its pre-offering tangible book value before. Unless Ener1 can convince investors that it's a better company than A123, I have a hard time imagining a substantial equity offering priced above $1.50 to $2.00 per share.

As a younger man I spent some time in the oil business and learned you don't start drilling a well without enough cash to reach your target depth, complete a successful well, build pipeline and storage facilities and provide for reasonably anticipated contingencies. That's a tall order in corporate finance where the cost of reaching the next milestone is always uncertain. A123 raised enough cash in its IPO to build a U.S. plant and begin production. As painful as its December financing was, Axion has at least a couple years of running room. All of the other emerging companies on my tracking lists will have to endure some pain over the next few months as they seek new capital in a tough market. Those that make solid decisions will emerge stronger for it. Those that don't will fail.

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

May 18, 2010

EIA Annual Energy Outlook 2010: Peak what?

Peak What? Eamon Keane

The Energy Information Administration (EIA) released its Annual Energy Outlook 2010 (AEO 2010) last week, with projections out to 2035. It makes for interesting reading. Most notable was its take on peak oil, natural gas vehicles and on converting natural gas to liquids (GTL).

An otherwise reasonable report was marred by the presumption of oil plenty. Figure 1 shows a graph presented (.pdf) by Glen Sweetnam, director of the EIA's International, Economic and Greenhouse Gas division, in April 2009. Although it mentions the source as being the AEO 2009, this data does not appear in the AEO 2009. It presumably is data from the modeling system which isn't publicly released.

Glen Sweetnam Oil Supply

The large gap of some 52 million barrels per day (mb/d) is quite stark. Fortunately we can all breath a sigh of relief, because the AEO 2010 has found this phantom oil, and then some. Figure 2 shows data from Table C6 (page 180) for the sources of oil supply the EIA forsees in its reference scenario. I added in the yellow line to illustrate oil that will have to be brought online.

AEO 2010 Oil Supply

I used the reference scenario showing 2035 oil supply of 112mb/d to save you spitting your coffee at the low oil price scenario. The low oil price scenario has 2035 oil at $50/bbl and supply at 127mb/d. Seriously. The reference scenario assumes an average price of about $120/bbl and the high oil price scenario has average oil at about $180/bbl, with 2035 supply at 91mb/d.

These numbers are artifacts of the National Energy Modeling System (NEMS) used by the EIA. It has cost curves for all the oil producers in the world, and the three oil scenarios make different assumptions about 'economic access' to these oil supplies. For instance the low oil price scenario assumes that "greater competition and international cooperation will guide the development of political and fiscal regimes in both consuming and producing nations, facilitating coordination and cooperation among them". Whatever that means. The EIA also accept the fantastic notion that OPEC has 940Gb of reserves, and that the world has 1,340Gb. You will notice that the area under the total conventional crude curve is some 900Gb, with no peak in sight. This is either geological illiteracy or assumes we'll suddenly find a few Ghawars under the couch.

The AEO goes on to spend several pages discussing the Pickens Plan. Overall, their analysis is quite cool to the potential for Heavy Duty Natural Gas Vehicles (HDNGVs). They say:

"The Department of Transportation’s Vehicle Inventory and Use Survey (VIUS), last completed in 2002, suggests a wide range for the intensity of heavy truck use. Notably, in the 2002 VIUS, trucks reporting a primary range of operation that extended more than 500 miles from their base averaged 91,000 vehicle-miles traveled (VMT), or more than 5 times the average of 17,000 VMT for trucks reporting a primary range of operation range within 100 miles of their base.

Although long-distance trucking offers a potentially faster payback of the incremental capital costs for HDNGVs, their penetration and acceptance in the long-distance freight market faces two significant barriers: limited driving range without refueling and a lack of available fueling infrastructure. A diesel truck with one 150-gallon diesel tank and a fuel economy of 6 to 7 mpg can drive approximately 1,000 miles without refueling, which can be extended readily with an auxiliary fuel tank. In contrast, a CNG-fueled truck with a frame-rail-mounted storage tank can drive only about 150 miles without refueling, while one with a back-of-cab frame-mounted storage tank can drive about 400 miles without refueling, similar to an LNG-fueled truck with frame-rail-mounted tanks. In addition, regardless of fuel type, long-distance trucks are less likely to be fueled at central bases, which makes them more dependent on fueling infrastructure that is open to the public.

In addition to concerns about driving range and refueling, the residual value of HDNGVs in the secondary market is likely to be an important consideration for buyers. Also, purchase decisions can be influenced by other factors, such as weight limits on highways and bridges, which can make the considerable additional weight of CNG or LNG tanks a significant drawback in some market segments."

Even assuming that long haul trucks adopt natgas, and assuming that incremental HDNGV purchase costs over diesel costs are neutralized with tax credits and $100k subsidy per new NGV station (Pickens Plan), they arrive at about a 40% freight market share in 2035, with approximately 0.67mb/d of oil being abated. That's about 4% of current annual US oil consumption. Figure 3 shows the cost of tax credits versus the cost of fuel saved. By the AEO's estimates, the tax subsidy is larger than the reduction in fuel costs. This does not account for the benefit in balance of payments or energy security, however. Figure 3 assumes 0.67mb/d is achieved and with subsidies until 2027, per Pickens Plan.

Pickens Plan Costs

The AEO also discusses the potential for converting natural gas to liquids. They produced break even curves based on high and low estimates for GTL plants. Figure 4 shows an adapted version of Figure 28 (page 49). Below the line is the feasible region. The AEO assumptions are a 10% hurdle rate and a 10 year operating period.

GTL Break Even

This is interesting, and based on your projections of future oil prices, you can see what natural gas price is tolerable. For instance at $150/bbl, if GTL plants turn out to be very expensive (only a couple are in operation so costs aren't really known), only $2/MMBtu would be tolerable. On the other hand at the low end of the range $11/MMbtu would still allow for a 10% return. It should be noted that 43% of the energy in natural gas is lost in the conversion process, not the best idea in an energy constrained world.

Regarding Coal to Liquids (CTL), the EIA says "although advances in coal liquefaction technology have made it commercially available in other countries, including South Africa, China, and Germany, the technical and financial risks of building what would be essentially a first-of-a-kind facility in the United States have discouraged significant investment thus far. In addition, the possibility of new legislation aimed at reducing U.S. GHG emissions creates further uncertainty for future investment in CTL." CTL involves a loss of 55% of the energy in coal (page 137 of the AEO's assumptions document).

The EIA gives a big shout out to shale gas also. In the High Shale Gas scenario, the EIA sees shale output increasing to 8 tcf by 2025 and 10tcf by 2035. This assumes a Henry Hub price of about $7/MMbtu, although the full-cycle profitability of shale gas at such levels is disputed. In all the EIA's natural gas scenarios, natural gas production never goes above 27tcf, which is 3tcf higher than 2008's 24tcf.

The AEO 2010 is a very useful document but its highly improbable forecast of oil supply means if you're looking for peak oil leadership from the EIA, you'll have to dream on.

Eamon Keane is an Energy Systems Engineering masters student at University College Dublin with an interest in electric cars, rare earth metals and energy.  He is looking for a job in the energy sector anytime after August 2010.

May 16, 2010

The Best Peak Oil Investments Meet the Strong Grid: CVTech Group

Tom Konrad CFA

CVTech Group (CVT.TO, CVTPF.PK) operates in two of my favorite clean energy sectors: electricity transmission and distribution and efficient vehicles.  Here is a look at the company's fundamentals.

CVTech logoIn "The Strongest Strong Grid Stocks" of my 2010: The Year of the Strong Grid? series, I took a quick look at CVTech Group's financial ratios, and decided not to look deeper because they had considerably more debt in comparison to income than the other electricity transmission ("strong grid") stocks I covered in that article.  I came across CVTech again while looking at companies involved in vehicle efficiency for my Peak Oil Investments series.  CVTech came up as a vehicle efficiency stock because it has a division that designs, engineers, and manufactures Continuously Variable Transmissions (CVT).  CVT has the potential to increase vehicle efficiency by 6%, according to independent consultancy Robert Baird & Co, so I decided CVTech deserved a second look. 

Energy Division

CVTech's Energy division accounts for about 88% of revenues, or 84% of the company's EBITDA.  The vast majority of this division is focused on construction and maintenance of electrical utility transmission and distribution (T&D) in Quebec and the Northeastern United States.  According to Judy Chang of the Brattle Group, speaking at the Yale Climate and Energy Institute's Annual Conference in April, the Northeast states will need to invest $10 billion in electricity transmission by 2020 in order to meet their existing renewable energy mandates.  According to a CVTech investor presentation [pdf], Quebec will need to invest more than C$14 billion to upgrade power transmission between 2009 and 2018.  With 2009 Energy division revenues at $140 million, the division could grow rapidly even if it only captures a small fraction of regional T&D spending.

A typical large transmission construction and service contract for the Energy division is a $40M regional "construction, maintenance, of an overhead distribution network" for Hydro-Quebec, with two 1-year renewal options.  A less typical project that caught my eye was installing pole-attached solar panels for PSE&G in New Jersey.  I've been following this project since it was announced because I think it makes a lot more sense for the electric grid to have a large number of small, distributed solar panels than large solar installations.  Distributed solar panels are not subject to large, quick fluctuations in output from cloud transients, yet the mass production and installation of the individual panels for a single owner should allow PSE&G to capture some of the economies of scale that is usually associated with large solar farms.  Because of these advantages, I expect to see more, similar projects in the future, and CVTech's prior experience may give the company an advantage in bidding for them.

Vehicle Division

The vehicle division specializes in the design and manufacture of CVT systems for small vehicles such as snowmobiles, ATVs and Golf Carts.  Because CVTech's CVTs use belts, they do not work well for high-torque applications such as trucks.  They have about 10% of the worldwide market for CVTs in vehicles that use them, but the trend to smaller cars may work to their advantage.  In January, they were selected to supply the automatic transmission option for the Tata Nano, giving them excellent growth prospects.


At a $24 trailing P/E ratio and a 1.7% dividend yield, CVTech does not seem like a good value proposition.  However, earnings were depressed by the economic climate in 2009: the P/E ratio would have been below 8 if 2008 earnings were used instead of 2009.   Spending on T&D in the Northeastern US and Quebec needs to not only rebound but grow to keep up with unmet needs, and CVTech should be in a good position to capture some of that growth.  The company also has good potential for a boost from the Vehicle division.  I think the company is well valued at C$1.20, but I plan to delay my own buying because I expect a general market decline has the potential to bring it to a much better valuation sometime this year.

Late Note (5/14/10): CVTech reported first quarter 2010 earnings after this article was written but before publication.  Income was up $0.02 a share, bringing 12 month trailing EPS to $0.07, making the company look slightly more attractive than discussed above.  Top line revenue increased greatly because of a recent acquisition and the severe storms in the Northeast US in Q1 2010. 

Selected data Date
Stock Price
Shares Outstanding
Market Capitalization
Annual Revenues
Earnings per Share
Earnings per Share
P/E (trailing 12 month)
5/5/2010 price, 2009 earnings
Cash per share
Book Value per Share
Net Debt per Share
Current Ratio
Dividend yield
% Revenues from Electricity(Vehicle) division
88% (12%)
EBITDA from Electricity(Vehicle) division
84% (16%)

DISCLOSURE: No position.

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

May 13, 2010

The Best Peak Oil Investments, Part X: Improving Vehicle Efficiency

Tom Konrad CFA

The easiest way to reduce fossil fuels is to increase vehicle efficiency.  Government mandates already in place will ensure that such improvements occur.  Some stocks may benefit from the trend, but choose carefully.

Dr. Daniel Sperling knows about as much as anyone about what policymakers can do to reduce the use of oil.  He is the Director of the Institute of Transport studies as the University of California Davis, and a long time member of the California Air Resources Board (CARB), so he understands transportation from both the academic and policy perspectives.  He also recently co-authored a book Two Billion Cars: Driving Towards Sustainability, so he understands the magnitude of the problem as well. 
Transforming transportation
I had the pleasure of hearing Dr. Sperling speak at the Yale Climate and Energy Institute's first annual conference: Overcoming Barriers to A New Energy System on April 24th.  In his talk (you can download the PowerPoint here[13MB],) he provided an illuminating analogy:  Transforming transportation is like a three-legged stool.  The first leg is improving vehicle efficiency, which is easiest because we have both the technology and the regulatory tools to do it.  The second leg is transitioning to alternative fuels, which is harder because in most cases the technology or the infrastructure are not quite there yet (The first eight parts of this series looked into various alternative fuels, and reached a similar conclusion.) 

The third leg, labeled "VMT" for Vehicle Miles Traveled is the transformation of the transportation system, reducing car usage by providing alternatives and giving people better incentives to use the most effective alternative.  From a policy perspective, VMT is the most difficult leg.  Reducing VMT requires the policy maker to persuade people to change their habits. This is difficult in a democracy, were citizens and businesses typically oppose policies that require change. 

For example, one fairly straightforward way to incentivize VMT reductions would be to mandate that auto insurance, registration, and license fees fees be charged on a per-mile basis, as opposed to an annual basis.  For the average driver, these fees amount to about 9.4¢ per mile, compared to about 6.9¢ per mile for fuel.  A change to per-mile charges would increase fairness because people who drive more cause more accidents, road wear, and congestion, and the poor tend to drive less than the rich, so per-mile charges would also make driving more affordable for them.  Yet, while low-mileage drivers would see significant savings from per-mile charges, rural drivers and suburban drivers with long commutes would see large increases (unless they were able to reduce their driving by combining trips, carpooling, or shifting to public transit.)  Auto insurance companies may lobby against VMT charges because it would require them to change.  They may also fear that the policies will be successful in reducing driving and accidents, undermining their market.  High mileage drivers often unite with auto insurance companies to oppose any proposed change, while low mileage beneficiaries are often unaware of the potential benefits to them.

The Easy Leg: Vehicle Efficiency

According to Dr. Sperling, in the last twenty-five years, auto manufacturers have made great strides in engine efficiency... but they have used the progress to deliver more power at the same MPG, rather than increasing MPG.  Since 1985, average fuel economy has dropped 5%, while vehicle weight has risen 29% and average horsepower has increased 86%.  That's what makes vehicle efficiency easy: even without further advances in engine efficiency, we could greatly increase fuel economy by just returning vehicle weight and horsepower to 1985 levels.

In February, our own John Petersen provided a list of technologies for increasing vehicle fuel economy, compiled from a report by Robert W Baird & Co.   The table shows nine different technologies, many of which can be combined in a single vehicle which increase vehicle efficiency an average of 12.5%. 

Hybrid Electric Technologies Gain
Prius-class strong hybrids with idle elimination, electric-only launch, recuperative braking and acceleration boost. 40%
Insight-class mild hybrids with idle elimination, recuperative braking and acceleration boost. 20%
Engine Technologies
Direct Fuel Injection (with turbocharging or supercharging) delivers higher performance with lower fuel consumption. 11-13%
Integrated Starter/Generator Systems (e.g. stop-start systems) automatically turn the engine on/off when the vehicle is stopped to reduce fuel consumed during idling. 8%
Cylinder Deactivation saves fuel by deactivating cylinders when they are not needed. 7.5%
Turbochargers & Superchargers increase engine power, allowing manufacturers to downsize engines without sacrificing performance or to increase performance without lowering fuel economy. 7.5%
Variable Valve Timing & Lift improve engine efficiency by optimizing the flow of fuel & air into the engine for various engine speeds. 5%
Transmission Technologies
Automated Manual Transmissions combine the efficiency of manual transmissions with the convenience of automatics (gears shift automatically). 7%
Continuously Variable Transmissions have an infinite number of "gears", providing seamless acceleration and improved fuel economy. 6%

The table shows it should be possible to increase fuel economy by the 40% from 2009 levels by 2016, as required by current law using only engine and transmission technologies.  Hybrid technology, smaller vehicle size, light weighting, low rolling resistance tires, better aerodynamics, or reducing engine power could each increase efficiency further.   Hence, automakers have a wide variety of potential strategies to meet the 2016 targets with existing technology.  While this plethora of options is good news for automakers, it is not all good news for investors.  With the wide choice of existing options for increasing fuel economy, it's difficult to foresee which technologies will bring the greatest returns to investors.  Further, few of these technologies are proprietary to any single publicly traded company. 


Here are three companies from our Clean Transportation stock list that earn a fairly large proportion of their revenues from vehicle efficiency:
  • Clean Diesel Technologies (CDTI) is a more focused company that might benefit from a larger market for its diesel emission reduction technologies if higher fuel economy standards lead to shift to diesel engines.  Since they operate in most diesel engine markets, changes in the automotive diesel market will be only one driver of profitability.
  • CVTech Group (CVTPF.PK, CVT.TO) is a Toronto listed company with a division focused on Continuously Variable Power transmission in small vehicles.  Its other divisions provide construction and maintenance for electrical transmission and distribution in Quebec and the Northeast US.  While transport accounts for only 12% of sales, I include CVT in this list because electrical transmission one of my favorite sectors.  See my Year of the Strong Grid series for more on electricity transmission.
  • UQM Technologies (UQM) designs and manufactures permanent magnet electric motors and drive systems for electric and hybrid electric vehicles.  They have sold technology to all six major automakers for electric vehicle and hybrid electric vehicle development programs, and are also working with several automotive start ups, most prominently CODA automotive.
Two other auto parts suppliers have expertise in some of these efficiency technologies. 
Borgwarner (BWA) produces engine and drive train components, including turbochargers and variable cam timing, while Magna International (MGA) is a diversified automotive supplier with some expertise in hybrid and electric vehicle systems.  However, I don't think that these constitute enough of their business to consider their stocks to be vehicle efficiency investments.

Also not on the list are the large number of manufacturers of batteries, and the auto manufacturers themselves.  Batteries are a critical component for hybrid vehicles, as discussed in part II of this series, but I chose not to include them in order to highlight manufacturers of other components.  For an in-depth discussion of battery company investing I recommend John Petersen's recent articles Common Sense in energy Storage Investing, and More Common Sense in Energy Storage Investing on AltEnergyStocks.com.


Clean Diesel Technologies, CVTech, and UQM may benefit from government mandated increases in vehicle efficiency through increased demand by automakers for their products.  However, higher oil prices and the increased cost of cars may undermine these gains by undermining the market for cars.  A declining car market could occur if people drive less because of high fuel pricesand delay purchases of new cars.  If gains in market share do not outpace market shrinkage, automotive efficiency investors will be disappointed.

Cars are only a slice of the larger transportation pie, so there are companies that can benefit from shrinkage of the automobile market.  Below is a graph from Dr. Sperling's talk, where he projects broad growth in all classes of motor vehicles.

Billions of Motor Vehicles
I believe this graph overestimates the growth of the personal car, and that buses, cycles, and scooters will take a relatively larger share of the motor vehicle market.  I also believe that public transit and telecommunications may take an increasing share of the overall transportation services market, which may reduce the overall number of vehicles shown in the projection.

Investors looking for the purest automotive efficiency stock should choose UQM Technologies (UQM), which is more focused on the automotive market than Clean Diesel Technologies (CDTI), although both have significant exposure to other sorts of vehicles.  Investors interested in both electricity transmission and automotive efficiency should take a look at CVTech Group (CVTPF.PK).

Shifting Away From Cars

I personally prefer companies that can grab parts of the transportation pie away from auto and air travel, since I believe that betting on the general shift away from cars is a surer than betting on any one vehicle efficiency technology.  I will cover companies benefiting from this shift later in this series on peak oil investments.

Investments in alternative forms of transport depend on behavior change to be profitable.  Most people will not change their behavior on their own, and most of us have difficultty imagining giving up our car to ride the bus or biking.  Most jobs currently don't encourage telecommuting.  There is an oft-repeated mantra in business circles that deals can only be done face-to-face, and so business air travel will continue despite the rise of increasingly effective teleconferencing services.

The inability to envision a world where we travel less or by alternative modes represents conventional wisdom.  But I believe that rising fuel prices will get people and businesses to do a lot of things that they cannot currently envision when gas is a mere $3 a gallon.  If they won't stand for politicians to tell them to get out of their cars today, when gas is $10 a gallon, they'll be clamoring for those same politicians to provide mass transit and mandate that employers allow telecommuting.

Investors who can foresee a future that most other investors cannot currently imagine stand to make out-sized profits compared to the mass of investors who expect business as usual.

DISCLOSURE: No positions.

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.

May 12, 2010

DOE Questions the Presumption of Plenty

John Petersen

    "A man's got to know his limitations ..."
                Inspector Harry Callahan
                    Magnum Force, 1973

Last Thursday the Department of Energy kicked-off a new effort "to develop its first-ever strategic plan for addressing the role of rare earth and other materials in energy technologies and processes" by issuing a Request for Information on resource availability and supply chain security. The information categories covered include short- and long-term:
  • Demand forecasts for energy applications and competing issues;
  • Supply issues including investment trends, processing requirements and future research;
  • Technology applications, required quantities and purities, processes and innovation;
  • Costs, availability and impact on energy application costs;
  • Substitutes for constrained materials;
  • Recycling opportunities, capacities and challenges;
  • Intellectual property constraints; and
  • Additional information.
While it's unsettling to learn that the DOE has adopted major policy initiatives in the past without truly understanding the raw material supply chains needed to support them (think corn ethanol), even a belated recognition that resource constraints matter is better than blind adherence to the presumption of plenty – the blind faith that all life's necessities and most of its luxuries will be available in quantities that are limited only by borrowing power.

A recurring theme in my writing is that six billion people are working very hard to earn a small piece of the lifestyle that 600 million of us have and often take for granted, and that the greatest challenge of this century will be finding relevant scale solutions to persistent shortages of water, food, energy and every imaginable commodity. The challenge is even greater in alternative energy because so many green technologies are voracious users of scarce raw materials.

At a recent conference in Shanghai my friend and colleague Jack Lifton presented a table that summarized global mineral production over the last five years. The following is an abbreviated version that focuses on key minerals for alternative energy, shows annual production for the last five years in thousands of metric tons, and calculates our per capita share of mineral production in 2009 based on a global population of 6.8 billion people.

MINERAL 2005 2006 2007 2008 2009 Per Capita
Crude Oil
616 kg
Raw Steel
162 kg
Aluminum 31,900.0 33,100.0 38,000.0 39,000.0 36,900.0 5.4 kg
Copper 15,000.0 15,100.0 15,400.0 15,400.0 15,800.0 2.3 kg
Lead 3,520.0 3,650.0 3,770.0 3,840.0 3,900.0 1.6 kg
Nickel 1,460.0 1,560.0 1,660.0 1,570.0 1,430.0 570 g
Cobalt 58.6 63.4 65.5 75.9 62.0 201 g
Uranium 41.5 39.3 40.7 42.7
6 g
Lanthanum 32.5 32.9 32.9 32.9 32.9 5 g
Silver 20.8 20.4 21.1 21.3 21.4 3 g
Neodymium 18.9 19.1 19.1 19.1 19.1 3 g
Cadmium 20.1 19.9 19.4 19.6 18.8 3 g
Lithium 21.5 24.4 25.8 25.4 18.0 3 g

I have a hard time reviewing global mineral production statistics and accepting the proposition that it will ever make sense to use a 170 kg lithium-ion battery pack in a GM Volt or a 200 kg battery pack in a Nissan Leaf. The bulk of the weight may be relatively plentiful steel, copper and aluminum, but even eight to twelve kg of lithium is massive for a non-recyleable product in a world that only produces three grams of lithium per person. While companies like FMC Corporation (FMC) and Chemical & Mining Co. of Chile (SQM) can significantly increase their production if enough money and time are spent developing new mines, there is no meaningful chance that electric vehicles will ever reach "relevant scale" using current technology. Under the circumstances, I have to wonder whether a lithium-ion business model that depends on substantial short-term cost reductions isn't at least a little optimistic. The bottom line seems to be that we've forged an energy policy without questioning our assumptions and are destined for disaster when the engine of gee-whiz technical feasibility hits the brick wall of natural resource constraints.

The battery industry has known for years that NiMH chemistry was seriously constrained by the availability of the rare earth metal Lanthanum. Over the next couple years we will have to come to grips with the fact that even more daunting constraints are looming for the rare earth metal Neodymium, which is essential for the permanent magnets used in both wind turbines and electric motors. Similar issues exist for a host of other scarce raw materials. At some point in the not too distant future we're going to have to identify the highest and best uses of these scarce raw materials and make hard decisions based on economic reality rather than technical feasibility. The RFI is a good first step.

For as long as I've been practicing securities law a risk factor on raw materials availability has been standard disclosure that all companies included in their SEC filings and most investors dismissed as legal boilerplate. I'm the first to admit that the disclosures were overkill when I was younger. Today the risks are grave and investors who gloss over raw material and supply chain issues do so at their peril.

In recent articles I've shown how plug-in vehicles are unconscionable waste masquerading as conservation and the less glamorous solution of Prius class HEVs is six times more efficient at using batteries to reduce fuel consumption and CO2 emissions. I've also shown why cheaper and simpler efficiency technologies based on readily available materials strike me as a better investment from both a timing and market acceptance perspective.

Over the next few weeks I'll be working closely with Jack Lifton and Gareth Hatch to analyze some of the critical resource constraints in greater depth and provide more specific guidance to investors. It looks like we're entering an era where the environmentalists may have to make peace with the miners. It should be interesting.

Disclosure: Author has no interest in the companies mentioned.

May 10, 2010

Redefining Alternative Energy – Not One Business but 30 Different Businesses

 Bill Paul

For investors to benefit fully from the alternative energy revolution, they must first see it for what it is, namely, some 30 different businesses, separate yet interconnected in their goal to reduce the use of oil, coal and/or natural gas and, with it, the emissions these fossil fuels generate.

While wind and solar dominate the news, analysts’ research reports, and alternative energy ETFs, there are many other prospective long-term winners receiving far less attention.

Some are developing other alternative energy sources, such as geothermal, biomass and biogas, wave and tidal, and algae. Some are developing various forms of energy storage, such as flywheels, fuel cells and ultracapacitors.

Others are making a vast array of energy-saving products, from LED light bulbs to ‘stop-and-start’ motor vehicle systems. Still others are developing components for the coming era of electrified transportation other than lithium-ion batteries, for example, electric bikes and scooters and electric-vehicle recharging equipment (aka, the electric gas pump).

Other companies are involved in alternative energy as consultants and information providers, as investors in green and smart-grid developers, and as renewable energy insurance providers.

To be sure finding technology-based pure-play companies that are still small and undiscovered represents the biggest potential payoff. But especially if you have a low risk tolerance, multinational giants generally associated with other sectors also have the potential to pay off big, given all the money governments are throwing at green energy, energy efficiency, electrified transportation, the smart grid, carbon trading, and more.

Indeed, as much as everyone is looking for the next Cree (CREE) and First Solar (FSLR), over the long-term alternative energy’s biggest winners likely will also include Siemens (SI), General Electric (GE), Microsoft (MSFT) and Apple (AAPL).

For more on all this, investors might want to sign up for a free webinar taking place tomorrow, May 11 at 1 pm EDT. For information, please go to:


May 08, 2010

The Best Peak Oil Investments: Index

Tom Konrad CFA

Subject / Description
Stocks mentioned
Biofuels Overview
Hydrogen Vehicles and Vehicle Electrification
Natural Gas Vehicles WPRT, CLNE,
and one I missed: FSYS
Synthetic fuels: Gas-to-Liquids, Coal-to-Liquids, and Biomass-to-Liquids SSL, SYNM, RTK
Biofuel from Algae GSPI.PK, OOIL.OB,
Barriers to Alternative Fuels

Constraints on Alternative Fuels
Alternative Fuels Compared

What Peak Oil Means for the Economy and Stock Market: The Methadone Economy

Vehicle Efficiency
CVTech Goup
Peak Oil Stock Lists

Smart Transportation: Using IT to reduce congestion
GPS Navigation stocks
Telvent GIT SA: Smart Transport Meets Smart Grid
Great Lakes Dredge and Dock: Alternative Transport and Oil Spill Cleanup
Nine Mass Transit Stocks
Ten EV and HEV Stocks
Six More EV and HEV Stocks
Bicycle and Moped Stocks
Shimano: Bicycle Components
Why Invest For Peak Oil?

PTRP - The Powershares Global Progressive Transport Portfolio PTRP
Three Mass Transit Operators
Four Mass Transit Suppliers
Guest Post Kandi Technologies: A Profitable EV and Battery-Swap Stock KNDI
The Four Best Peak Oil Investments
A. P. Moeller-Maersk
Time to Buy One of the Best Peak Oil Investments

If you are one of the readers who have been asking for a single link to the articles in my popular "Best Peak Oil Investments" series, link to this post.

DISCLOSURE: Long NFYIF, WM, CVT.TO, GLDD, ACCEL.AS (as of 11/28/11).

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.

2010: The Year of the Strong Grid?: Index

Tom Konrad CFA

A somewhat delayed index to my Year of the Strong Grid series, looking into electricty transmission and distribution (T&D) or "Strong Grid" companies.

Subject / Description
Stocks mentioned
Introduction: Why Electricity Transmission and Distribution is a good investment.
Comparing the financial strength of eletricty T&D companies
EMCORE Group (EME) and AZZ Incorporated (AZZ)
General Cable Group (BGC)
Hubbell, Inc. (HUB-A, HUB-B)

I'm pubishing the index now (even though I wrote the series a couple months ago) because I'm about to write a crossover article with my Best Peak Oil Investments series on CVTech Group, a company that belongs in both series.  And I may return to this series again.


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.

May 07, 2010

Separating Sense From Nonsense in Energy Storage Investing

John Petersen

For the last few days the green transportation press has been beside itself with breaking news that the battery pack for the Nissan Leaf costs a staggeringly cheap $375 per kWh. They point to the Times of London as their source, but fail to note that the cost figure was buried in a throwaway sentence in the seventeenth paragraph of an April 4th story about a British executive who'd been transferred to Nissan's headquarters in Tokyo to run their green cars program.

This isn't proof folks, it's hearsay elevated to nonsense that belongs in the same class as the assertion that the $32,780 introductory price for the Nissan Leaf is a better indicator of cost than the Japanese price of ¥3.76 million, or $40,250.

To satisfy my own curiosity, I took a look at Nissan's summary financial statements and found that its normal gross margin is roughly 25% while its normal net income is closer to 5%. With a 20% spread between gross and net it's easy to see how Nissan could claim a small profit while actually taking a beating on each sale. All you have to do is ignore that pesky corporate overhead and everything is beautiful. Despite the halleluiah chorus from the green press, I tend to believe Josh Wolfe of Lux Research was closer to reality when he wrote "Unless Nissan and its battery partner NEC have unlocked the magic Li-ion formula that allows them to manufacture batteries at half the cost of their competitors, Nissan/NEC is almost certainly taking a loss on every Leaf it sells in the U.S., in order to encourage EV adoption and unseat Toyota/Panasonic as the greenest auto-making team."

For those who don't understand how markups work in a business setting, a simple example may be illustrative. If a battery manufacturer spends $375 per kWh to make it's product, it will typically need to sell that product to a customer for roughly $500 per kWh if it wants to pay corporate overhead and earn a profit. By the time a customer builds the battery into a car and then adds its own markup to pay corporate overhead, the battery cost to the end user works out to roughly $667 per kWh. So even if we assume the cost estimate in the Times article is accurate, the cost at the battery manufacturing level is nowhere near a reasonable proxy for the end-user price.

I understand why plug-in idealists want battery prices to collapse. They're all too familiar with the dismal economics that have doomed generation after generation of electric cars to the shredder, and they desperately want lithium-ion batteries to be the automotive equivalent of gene therapy that cures the congenital birth defects. Understanding the motives of idealists, however, does nothing to answer the bigger question – Why would anyone want to own stock in a company that freely admits, "There won't be a market for our product unless we improve performance while slashing our prices by 50% in the short-term and by two-thirds in the long-term." The plan may work for visionaries that want to change the world with battery-powered cars, but I can't see how investors will profit, or for that matter break even.

While the cost arguments of plug-in idealists are economic sophistry based on half-truths, the grander illusion lies in the common belief that lithium wonder-batteries will make all other batteries obsolete and store energy for everything from iPads to solar panels and windmills. It makes for a great story, but it won't happen in our lifetimes.

Most investors are familiar with the concept of disruptive technologies, a term coined by Clayton M. Christensen to describe simple, low-cost technologies that eventually displace established technologies as they mature. According to Dr. Christensen, disruptive technologies often lack refinement and have performance problems because they're new, appeal to an underserved market, and may not yet have a proven practical application; but their low cost creates new markets that induce technological and economic network effects, and provide an incentive to enhance them to match or even surpass the prevailing technology. The following graph illustrates the phenomenon.

Disruptive Technology.gif

Reduced to basics, the plug-in idealists want to take energy storage technologies that were developed for the most demanding uses and make them cheap enough for low quality uses that require huge amounts of storage. The concept flies in the face of time-proven realities that technological improvements invariably give rise to new applications the developers never contemplated and that modest users of high quality products are much fiercer price competitors than wasteful users. If we wanted to create a hierarchy of possible lithium-ion battery applications from the highest value per watt-hour to the lowest value per watt-hour, the list would look something like this:

Device Battery
Type Capacity
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
Uninterruptible power systems
2,000 to 8,000 watt-hours
Plug-in hybrid vehicles 10,000 to 16,000 watt-hours
Pure electric vehicles 24,000 to 50,000 watt-hours
Utility applications 500,000+ watt-hours

I see a bright future for lithium-ion batteries in high value applications that only need a little battery capacity, but think it's foolish to suggest that lithium-ion batteries will become a dominant technology for plug-in vehicles and stationary applications that are incredibly price sensitive. In the world of economics each battery producer will do its level best to sell its products to the customers that offer the highest margins. In the real world, nothing but the dregs will be left for use in plug-in vehicles and utility applications.

In America Must Rebuild Its Domestic Battery Manufacturing Infrastructure, I explained why R&D spending in the lead-acid battery sector was curtailed in the mid-70s after maintenance free valve regulated batteries were perfected and brought to market. Then I explained that while lead-acid research was being curtailed, the emergence of portable electronics led to rapid and sustained growth of R&D spending on advanced batteries, composites and a host of new materials. The dynamic didn't change until the turn of the millennium when emerging large-scale energy storage needs gave researchers reason to go back and investigate the potential impact of new manufacturing methods and materials on old-line battery chemistries. Once the work got started, the result was almost magical.

To date, the most important development in the lead-acid world has been Axion Power International's (AXPW.OB) PbC battery, an asymmetric lead-carbon capacitor that was discussed at length in a recent report from the Naval Research Laboratory, which concluded the PbC and similar electrochemical capacitors have the inherent potential to:
  • achieve much higher energy densities than supercapacitors, while maintaining a relatively fast charge-discharge response compared to conventional batteries;
  • offer longer cycle life and lower maintenance;
  • result in significant reductions in the weight and volume of power systems;
  • facilitate the evolution and deployment of hybrid-electric military vehicles; and
  • facilitate the development of regenerative power systems for cranes and other naval applications.
Equally important research has been quietly progressing at companies like General Electric (GE), which is developing a molten sodium battery for use in hybrid locomotives and stationary applications, and Italy's FIAMM, which recently joined forces with Switzerland's MES-DEA to accelerate the commercialization of the Zebra battery through a newly formed company named FZ Sonick. Over the next year FZ Sonick plans to triple its production capacity to 300 MWh per year and offer higher energy-density systems at prices that are competitive with lithium-ion. Given MES-DEA's twelve year operating history that has put thousands of electric cars, trucks and busses on the road and subjected them to rigorous testing in challenging conditions like the Alps and northern Italy, I expect FZ Sonick to rapidly become a strong competitor in the energy storage sector.

The PbC is basically a power technology that is best suited to repetitive charge discharge cycling like you find in automotive stop-start systems. Molten sodium batteries, in comparison, are basically energy technologies that are best suited to storing large amounts of energy. The key features that the PbC and molten sodium batteries have in common are that neither is a silver bullet, both are old-line chemistries that rely on cheap and plentiful raw materials, both can be easily recycled in existing facilities and both can be dramatically improved by using advanced manufacturing methods and materials that were developed in the last two decades for use in other products. Those common features leave both technologies in a position where they have substantial disruptive potential because there is ample room for improved performance and reduced cost without reinventing the wheel.

The following graph came from FZ Sonick's presentation at yesterday's session of the Electricity Storage Association's 20th Annual Meeting in Charlotte, North Carolina and shows where electrochemical capacitors and sodium batteries currently fall in a hierarchy of output energy densities. Both will improve with time and experience, but molten sodium could theoretically improve to a point where it eclipses metal-air for the energy density crown.

FZ Sonick.jpg

The next graph comes the ESA's website and shows where electrochemical capacitors and sodium batteries currently fall in a hierarchy of relative capital cost per cycle. Here too, both will improve with time and experience.

Capital Efficiency.gif

In a July 2008 report for its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program, Sandia National Laboratories predicted that the cost of asymmetric lead-carbon capacitors like the PbC would fall by at least 50% over the next decade and the cost of molten sodium batteries would fall by up to 80%. The price declines won't arise from fundamental changes in battery chemistry. Instead they'll arise from the normal learning curve gains that arise whenever a disruptive technology is introduced to the market and improved by profit-motivated manufacturers.

I have no doubt that lithium-ion chemistry will continue to advance and that lithium batteries will be the technology of choice for applications where size and weight are critical, and price is not a priority. But I can't buy the proposition that they'll defy economic gravity and supplant inherently cheaper technologies like the PbC, which is better suited to low value power applications, and molten sodium, which is better suited to low value energy applications.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

May 04, 2010

Solar Parking Developer Envision Solar Now Public (OTCBB:EVSI)

Tom Konrad, CFA

One of the best things about Solar Photovoltaics (PV) is that they can be installed close to load but need not take up open space.  Now public company Envision specializes on solar shading for parking lots that not only produces power, but also shade where it's needed most.

I lived in Tucson, Arizona for two years in the early 2000s.  Like everyone who lives in the desert Southwest for any length of time, I became very aware of what would happen if I left my car in an open parking lot for more than ten minutes: it would get very, very hot.   Without a windscreen sunshade, you were liable to burn your hands on the steering wheel if you were not wearing gloves, but even with it, the car interior would feel like an oven.  It would take 5-10 minutes of the air conditioner running at full blast just to bring the temperature down to a bearable 90° F (32C).  If you don't consider 90 degrees bearable, don't move to Tucson, or get used to only going outdoors before the sun is up, at least in the summer.

Needless to say, Tuscon residents become adept at spotting one bit of shade in a parking lot from a scraggly mesquite or palo verde.  These spots of shade are at a premium because such desert trees are small and usually only cast enough shade for a single parking spot at most.

With that experience in mind, the value of Envision Solar's (EVSI.OB) photovoltaic parking lot structures is quite clear.

Envision Park Solar

Solar Trees

When it comes to solar, I much prefer developers to solar manufacturers.  Solar manufacturers face the prospect of ever declining prices for their product and a constant need for technological innovation to keep up in a fierce competitive landscape.  Solar project developers, on the other hand, have strong public support and interest in their product, combined with rising prices for the electricity they sell and declining prices for the solar panels they buy.  They also have much lower fixed costs, meaning that while the threat of new entrants will keep them from ever becoming wildly profitable, they also do not have huge capital investments that can lock them in if building solar installations becomes unprofitable.

The low barriers to entry for solar developers mean that strong product differentiation is valuable. 

Envision has developed parking lot structures they call "Solar Trees" for attractively shading parking lots while producing solar electricity.  The company promotes their products as "addressing the unused millions of acres of parking spaces."  I there's actually more too it than that, because in the sunnier parts of the country, there is value in both the electricity and in the shade.  In an extremely sunny city such as Tucson, Phoenix, or Las Vegas, I would expect that most shoppers would be more interested in visiting a store where they expected to get a shaded parking space, since almost all shady parking spaces in Tucson are almost always already taken.

The idea of solar on parking lot shades is not a new one.  I remember seeing one in the parking lot of an Austin Library Branch in 2000.  But earlier parking lot solar arrays were bespoke designs created anew for each individual project.  With a small number of flexible designs, Envision can not only keep engineering costs down, but also talk with some credibility about the cost and performance of previous arrays they have installed over nine MW of projects for clients such as Dell.  They've also teamed up with Bright Automotive to combine the solar parking structures (which require electric service) with electric vehicle charging stations. Along with the ready-to-build, relatively attractive designs, partners and previous clients like these could establish Envision as the go-to firm for parking lot solar.

EVSI Stock

Envision Solar International, Inc. stock started trading on the Over the Counter market under the symbol OTCBB:EVSI on May 3 through a reverse merger with shell company Casita Enterprises.

I usually like to wait a year or two for a newly listed company to develop a track record as a public company to help me assess the company's financial strength and management effectiveness.  Envision has not yet begun publishing financial statements as the newly merged entity.   I took a few minutes to look over their electronic investor kit, in the hope of finding some hard numbers.  Unfortunately, all the kit contains is an investor presentation without any hard numbers as to assets, revenues, debt, and income.  Until such information is available, I can't say if the stock is worth $0.04, $0.365 (the price it closed at on May 3), or $3.65. 

It's an interesting company, and I'll probably take another look at it when there is more to go on.  For now, the stock is a pig in a poke.

DISCLOSURE: No position.

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

May 03, 2010

How to Build a Cleantech Company Without Huge Investment Capital: A Case Study

David Gold

While many cleantech companies require very large amounts of capital in order to get to market, there is a quiet group of cleantech companies bucking that trend.  Companies like Heartland Biocomposites (Green Building Materials), RealTech (Water Testing) and TerraLUX  (LED Lighting) all built significant and growing businesses with compelling intellectual property and did so initially without multi-millions in capital from venture funds (let alone tens or hundreds of millions). Because TerraLUX is one of our portfolio companies and I therefore know them best, their story is one I am able to share.

TerraLUX boasts customers like Cooper Lighting, Phillips (PHG), GE Healthcare (GE), Snap-On Tools and many others.  It has six awarded patents and eight more filed.  Dr. Anthony Catalano founded the company in 2003 and, with exceptional technology smarts, creative boot-strapping and some of his own capital, he built a business with significant revenues, exciting gross margins and deep intellectual property – all without a penny of outside investment capital.   And now, only after all those accomplishments, has TerraLUX closed a $5.6M financing from Emerald Technology Ventures and Access Venture Partners.

How did TerraLUX pull this off?  The story starts with an entrepreneur focused first and foremost on how to create revenues.  Catalano, who has a PhD from Brown in physical chemistry and is a previous director of the NREL Photovoltaic (solar cell) Division, had the technical acumen to create a business in a number of cleantech sectors but he wisely chose the LED market. He did so because he saw the industry’s explosive growth.  His dream was to create LED lighting for buildings that could have a disruptive impact on lighting energy consumption.  But Catalano realized he couldn’t just create a science project; he had to be able to sell innovative products quickly to create cash flow. 

Seeing that in 2003 the cost/benefits of LED’s were not yet compelling for the large general lighting market he knew he had to turn to a more ready market – portable lighting.  While this market is an order of magnitude smaller than general lighting, it is still a multi-billion dollar market and, most importantly, the benefits of higher brightness, extended lifetime and increased durability have premium value for users of products like flashlights, work lights and surgical lights. The portable lighting market was (and is) willing to pay a premium for those benefits and, as a result, even with the high cost of LED chips in 2003, TerraLUX was able to create real products and real customers.

I suspect some entrepreneurs would have turned up their noses at the thought of launching a flashlight business when their goal was the much bigger general lighting market.  But Catalano didn’t let his ego get in the way of doing what was needed to do to get the business off the ground.  Instead, he went to market with LED drop-in replacements for existing flashlight bulbs and was soon off and running.  From there the company grew into multiple portable lighting product lines and well beyond just flashlights.  As it turned out, creating high-performing portable LED products is, in many ways, more challenging than designing for general lighting.  Limited space, challenging heat sink options, and a non-constant power source (e.g. batteries) create a plethora of challenges.  But Catalano together with his VP-engineering, Dan Harrison (brilliant Caltech guy), used their considerable technical talent to create innovations to solve these problems.  The result has been the creation of a deep intellectual property portfolio around temperature control, optics and circuitry, and the ability of TerraLUX to deliver LED products with unparalleled performance.

Success begets success, and TerraLUX’s flashlight products created awareness in the market.  A few years later, TerraLUX’s phone began ringing with calls from other portable lighting manufacturing companies desiring to create LED versions of their lighting products. These companies needed something they could plug or screw into their existing products to turn them into high-performing LED versions.  TerraLUX was one of the few companies that could deliver such results, and virtually no competitors could do so with the brightness, lifetime and light quality that they were able to achieve. The company responded to this market demand by leveraging its core intellectual property to create LED Embedded Light Modules (self-contained modules that can be screwed or plugged into other manufacturers’ products) on an OEM basis for manufacturers of a variety of portable lighting products.

As the years progressed, LED chip prices compared to their performance continued to drop rapidly and began to open up the potential in the general lighting market.  TerraLUX then got the call it had wanted for years. A key executive at a large general lighting company had bought a TerraLUX flashlight retrofit kit and was impressed with its performance and extremely compact size.  That company had obtained LED products from numerous potential suppliers, but none could meet TerraLUX’s brightness, consistency and quality requirements.  TerraLUX’s intellectual property around thermal controls, circuitry and optics that grew out of the portable lighting business gave them a fantastic edge. Since TerraLUX already had years of experience manufacturing LED Embedded Light Modules (albeit for portable lighting), the general lighting company had confidence in TerraLUX’s ability to deliver.  And, with that, TerraLUX became the general lighting company that Catalano dreamed of when he founded the company. 

Now TerraLUX was in a position to explode into the general lighting market. Although the company had built a growing business with compelling intellectual property, it lacked the polish that venture capitalists typically look for.  At Access Venture Partners we have a soft spot for entrepreneurs that build companies by finding customers. We like to work with companies that have the foundation of a great business, but may have a few rough edges, to help them get to the next level. In late 2008, we saw the potential that TerraLUX had as a business and worked with Catalano to define the things that were needed to enable TerraLUX to raise the capital it now could use to further accelerate its growth.  These included refining the go to market strategy, enhancing company operations, enabling professional accounting, implementing the company’s first financial plan and recruiting Jim Miller, (formerly VP-sales, Global Geographic Regions for Phillips Lumileds), to join the company as CEO. The last item was a step taken with Catalano’s full support, and he remains a key member of the management team as Chief Technology Officer and a member of the board. To accomplish this we made a modest bridge investment and with those tweaks, TerraLUX was in a position to raise a meaningful round of venture capital to even further accelerate its growth and did just that.

Now with $5.6M in growth capital, TerraLUX is able to invest in the sales, marketing and R&D that will enable it to take a strong growing business with deep intellectual property and grow it even faster.  But this growth comes from a foundation built without the large sums of venture capital that get much of the cleantech press that we read about.  Building a company by bootstrapping may not be as sexy as raising a large venture round right out of the shoot.  But the discipline it instills to focus on customers and revenues can create some of the most exciting real businesses in the long run.

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.

May 01, 2010

More Common Sense in Energy Storage Investing

John Petersen

Since last week's article, Common Sense in Energy Storage Investing, was well-received by readers who've recently discovered this blog and want to better understand the energy storage sector, I've decided to continue with the theme and drill down deeper into some broad issues. Most of today's material is pretty basic stuff, but when the hype machine starts spinning a firm grasp on economic reality and investment fundamentals can be important to investors that want to avoid a boom and bust bubble like we had in corn ethanol.

In the fall of 2008 I confessed to being a shameless early adopter of cutting edge technology. I bought the first portable electronic calculator in 1971; bought word processing, laser printing, videotape, compact disks and satellite TV in the early ‘80s; bought a cell phone and established an Internet domain in the early ‘90s; and established a paperless office and a global law practice by the late ‘90s. If it was new and a major advance, I had to have it first regardless of cost. When I look back at the last 40 years, I'm amazed at how quickly the latest and greatest technologies became obsolete when newer, better and cheaper products emerged. The most recent example of how quickly technologies can rise and fall happened just last week when Sony (SNE) announced that will quit making floppy disks next March. As an investor, I'm horrified by the idea that a technology as important as the floppy disk can rise to global dominance and decline to insignificance in forty years.

In most cases, I've adapted well to changing conditions. My only line in the sand has been an almost religious devotion to the Macintosh operating system, which I switched to in the fall of 1989 based on the personal advice of Dr. Wilson K. Talley of the Lawrence Livermore National Laboratory. While I've never questioned my choice in computers, a graph comparing the long-term stock price performance of Microsoft (MSFT) and Apple (AAPL) serves as a stark reminder of how a sound technical decision played out in the equity market.


Today I can sit back and bask in the glow of being right about Apple's inherent technical superiority, but that doesn't change the fact that I was right too early. If I'd been a truly prescient investor, I would have owned Microsoft for the first dozen years and then switched to Apple for the long term.

Last week I re-printed a table from a July 2008 Sandia National Laboratories report that estimated the current and 10-year projected cost of stationary energy storage systems for solar power installations, including the storage devices and power conditioning equipment necessary for turning DC output into 60-Hz AC power suitable for delivery to the grid. The following chart puts the projected future cost of systems using the ten battery technologies included in the Sandia study in graphic form. While the media is enthralled with lithium-ion batteries because of effective PR and the oh so alluring promise of electric cars, my experience as a Mac user tells me that the vast majority of likely buyers will obey the laws of economic gravity and buy the cheapest system that can do the work.

4.30.10 System Cost.png

The bottom-line is that major innovations take decades to evolve and work their way through the markets. The process was first explained in the technology adoption lifecycle, a model that emerged in the '50s and has since been refined by contributions from Geoffrey Moore and others who explain the process with graphs like this one from Crossing the Chasm.


We are living in the first days of the Age of Cleantech, the sixth industrial revolution. The media is chock full of stories about how wind and solar power will change the way we generate electricity, the smart grid will change the way we distribute and use electricity, vehicle electrification will free us from pollution and the tyranny of imported oil, and energy storage will be the keystone – an enabling technology that makes all the other advances possible. What the news stories don't tell us, because frankly nobody knows, is when these technological marvels will hit their stride and make a meaningful difference in the way we live. To help put things into perspective I've used data from a press release teaser for the American Wind Energy Association's annual market report for 2009 to create a graph of the annual and cumulative changes in U.S. wind power capacity over the last 15 years.

Wind Growth.jpg

The first use of a large windmill to generate electricity was a system built in Cleveland, Ohio, in 1888 by Charles F. Brush. If you only consider the cumulative values since 1995 the growth seems pretty stable. If you think about the hundred and twenty year history of wind and study the annual additions and other data from the teaser, it becomes clear that wind power didn't transition out of the innovators stage until 2004, and then it took another three years to reach the early majority stage.

A similar trend is clear in the 10-year history of the HEV market, as shown by the following graph from hybridcars.com.

HEV Growth.png

Viewed in isolation, HEVs have built an impressive growth history. Viewed as a segment of the larger market, they're just beginning to scratch the surface with 2009 numbers that represented 2.8% of light duty vehicle sales. Returning to the technology adoption lifecycle, HEVs are just now transitioning out of the innovators stage and into the early adopters stage. Plug-in vehicles, in comparison, are at the earliest possible point on the curve. I'm very optimistic about the future of HEVs because they've already demonstrated a decade of consistent growth and built a solid core of satisfied consumers. I'm less sanguine about plug-in vehicles because they have no track record and even their strongest advocates acknowledge insurmountable obstacles to widespread vehicle electrification over the next decade including:
  1. The high cost of batteries;
  2. The lack of recharging infrastructure;
  3. Capacity, regulatory and coordination problems in the electric power sector; and
  4. Consumer acceptance issues.
While I'm not willing to go out on a limb and predict what future penetration rates will be for powertrain electrification technologies, Roland Berger Strategy Consultants has predicted that full or partial powertrain electrification will be a key automotive efficiency technology by 2020 and forecast high scenario market penetration rates as follows:

Plug-in HEV Stop-start ICE
Western Europe 20% 7% 67% 6%
United States 13% 13% 51% 23%
Japan 8% 15% 60% 17%
China 16% 6% 30% 48%

If we study the Berger forecast and think back to the technology adoption lifecycle graph, it's pretty clear that HEVs are expected to follow a natural growth path over the next decade as their market share quadruples. It's also clear that something beyond normal market forces is expected to drive the adoption of plug-ins and stop-start systems. In the case of plug-ins the main driver of growth will be subsidies and incentives as governments around the world tax Peter to pay for Paul's new car. In the case of stop-start systems, the main driver will be new CO2 emissions and fuel economy regulations that require automakers to reach increasingly stringent targets. The first approach relies on incentives to create demand that wouldn't otherwise exist. The second approach relies on penalties to force automakers to implement efficiency technologies without regard to consumer preferences. In my experience, government is not very effective when offering a carrot but it's darned good at using a stick. Under the circumstances, I'm inclined to believe the stop-start penetration rates are a sure thing while the plug-in penetration rates include a hefty dose of wishful thinking.

Over the next five years manufacturers of inexpensive energy storage systems for stop-start applications are certain to report major revenue gains from C02 emissions and fuel efficiency regulations that are now fait accompli. The main publicly traded beneficiaries include Johnson Controls (JCI), Exide Technologies (XIDE), Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB). If the planned introductions of plug-in vehicles later this year proceed as planned, the government incentives are successful and innovator class purchasers don't experience too many problems with battery pack failures, range limitations, poor cold weather performance and limited charging infrastructure, battery manufacturers like Ener1 (HEV) and A123 Systems (AONE) may begin realizing revenues that justify their market capitalizations in the second half of the decade.

I've already had my Apple vs. Microsoft experience and don't intend to repeat it. I'll continue to buy green bananas, but my days of trying to carve a new plantation out of the jungle are over.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

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