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December 31, 2010

A New Solar Fuel to the Rescue?

Cerium - an oil saviour? Eamon Keene

Making fuel from solar energy is the holy grail of the renewable industry. In 2008, David Nocera, an energy professor from MIT, gushed about a "major discovery" which would unleash a solar revolution. The MIT press reported on a "simple, inexpensive, highly efficient process for storing solar energy". Ostensibly this was a way to split water to store solar energy in the form of hydrogen and each house would have its own solar panel, which would mean that "electricity-by-wire from a central source could be a thing of the past". These fairly ludicrous assertions are debunked here, however this did not stop one news outlet proclaiming that this invention was "why oil really fell today - and could keep falling".

It was with this story in mind that I read of Caltech Professor Sossina Haile's claim in Science a few days ago to have tested a new way to produce a solar fuel which would "make a major contribution to global gasoline supplies" and was not "cost prohibitive" either.

This method uses concentrated sunlight to heat up microporous CeO2 (ceria) to 1600 celsius. The elevated temperature drives out the oxygen to leave Ce. An inert gas is subsequently pumped through the chamber to remove the oxygen. The cerium is then cooled down to 900C. H2O and CO2 are pumped in. The relatively cool cerium strips the oxygen from the water and carbon dioxide to leave a syngas of H2 and CO. This can be the feedstock to a Fischer-Tropsch or Mobil process plant to make diesel or gasoline.

cerium

The experiment was obviously lab scale, with an area of a few cm^2. The radiation was artificial, but was at an intensity of 1500 suns (1 sun = 1kW/m^2) to generate the high temperatures, which is allegedly typical of solar tower set-ups. The 11MWe PS10 tower in Spain, for example, only has an intensity of 645 suns, but I won't quibble with that. The achieved efficiency in this experiment was 0.8%, however this assumed no energy cost for the pure CO2, the H2O, the purge argon gas or the embodied energy of the setup, but not to worry. It is suggested that the CO2 would come from a  co-located CCGT. Where the water would come from in a desert location is not clear.

The paper states that with refinement the efficiency (narrowly defined) can approach 20%. This happens to be the same efficiency (electrical output as % of reflected solar energy) as the PS10. So conceivably this setup could generate syngas at the same cost as the electricity from the PS10. The PS10 cost €3m/MW and the electrical output has a levelised cost of about 25€cent/kWh. This translates to approximately $100/MMBtu. The PS10 outputs about 20GWh per year and operates at a 20% capacity factor. This setup would provide enough energy for a rather pathetic 33 barrels of oil per day. Assuming a 400MW solar site, this gets the output up to about 1kb/d. Gas to liquid plants are only economic at large scales in the region of 30kb/d (Sasol last week stumped up $1bn to buy some Canadian shale and is exploring building a 40kb/d plant which it estimates can produce a high quality gallon of diesel for $1.50). So faced with natural gas at a current input price of $4/MMbtu (although slightly higher due to energy loss in the gasifier), an unfeasibly large required solar site, and not even mentioning the intermittency of output, I think we can safely put this idea to bed.

So while this is very interesting science, I wish scientists could be reticent in claiming to have found solutions to the energy fix since it can be counter-productive if it leads to complacency. Perhaps I could have shortened this article by simply stating Upton Sinclair's insightful observation "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

December 30, 2010

Why Energy Storage Investors Must Understand Newton's Laws

John Petersen

Vinod Khosla, the founder of Sun Microsystems and an icon of cleantech venture capital investing, is famous for bluntly telling audiences that "Economics matters, NOTHING that defies the law of economic gravity can scale." This principle is a simple yet self-evident adaptation of Newton's law gravitation to the human condition.

An equally self-evident characteristic of the human condition is explained by Newton's laws of motion, which state:
  • First, that a body at rest will remain at rest, and a body in motion will remain in motion with a constant velocity, unless acted upon by a force.
  • Second, that a force acting on a body is equal to the acceleration of that body times its mass.
  • Third, that for every action there is an equal and opposite reaction.
While human beings are far more complicated than physical objects, the reality is we all resist rapid, pronounced, or uncontrollable changes in our lives, our habits and our established rituals, even when the changes might be beneficial. In the final analysis we're all bound by inertia. We praise change, adaptation and progress as desirable goals for others but resist them mightily in our own lives.

By now you're probably wondering where I'm going with the physics discussion so I'll cut straight to the chase. I believe all of the widely publicized forecasts about the future rate of vehicle electrification are wildly optimistic because they ignore the laws of economic gravity and human inertia.

In November of this year JD Power & Associates released "Drive Green 2020: More Hope than Reality?" The JD Power report was widely criticized for being far too conservative in forecasting HEV, PHEV and BEV penetration rates that were less than a third of the rates forecast by the Boston Consulting Group in its January 2009 report, "The Comeback of the Electric Car? How Real, How Soon and What Must Happen Next." When it came out, the BCG report was similarly criticized for being far more conservative than forecasts published by other analysts.

To put things into perspective, the following graph from the Electrification Coalition summarizes the PHEV and BEV market penetration forecasts published by a variety of analytical organizations. The JD Power forecast would have fit nicely between the EIA forecast and the Deloitte forecast.

12.29.10 Forecast Range.png

I created the following graph using historical data on HEV sales from the DOE and forecasts of future HEV, PHEV and BEV penetration rates from the Energy Information Administration (the "EIA") and JD Power.

12.29.10 Past & Future.png

It's clear to me that the EIA has a good understanding of the laws of economic gravity and human inertia; JD Power has put more reliance on peoples' tendency to praise change, adaptation and progress as ideals for others while resisting them individually; and the analysts from Deloitte through Deutsche Bank have spent far too much time drinking lithium-laced Kool-Aid. I suppose anything could happen, but if I'm putting my money at risk to gamble on an uncertain future, I want to see far stronger forces than hype, public relations, advertising and government subsidies driving the change.

In the last decade HEVs had the benefit of gas prices that rocketed from $1.50 to $3.00 per gallon, they had the benefit of government subsidies, they had the benefit of slashing emissions and they had the benefit of a generally positive end-user experience. When those four market drivers ran into the laws of economic gravity and human inertia, the net result was a 2.35% market penetration rate after 10 years. Nobody believes for a minute that cars with plugs will be as trouble free as HEVs. How anyone can think they'll be adopted more quickly is beyond me.

I'm convinced that electric drive will be the crushing investment disappointment of the next decade. We're sure to see parlor tricks like Ener1's (HEV) planned sale of 5 MWh of storage to Russia's Federal Grid Company for an obscene price of $8,000 per kWh, but they won't be repeatable without an oligarch pulling the strings. These are not businesses, they're fairy tales.

The only vehicle segment where I can identify a force strong enough to overcome the laws of economic gravity and human inertia are micro-hybrids that use simple stop-start idle elimination systems to reduce fuel consumption and emissions. This market will not be driven by individual choice. Instead it will be driven by EU mandates that require automakers to reduce CO2 emissions to 130 grams per kilometer by 2015 and US mandates that require automakers to achieve average fuel efficiencies of 37.8 mpg for passenger cars and 28.8 mpg for light trucks by 2016. Car buyers will undoubtedly resist stop-start the same way they resisted seat belts in the 1960s and pollution control systems in the 1970s, but it won't make any difference because government mandates have the power to overcome both economic gravity and human inertia. If you want proof of the principle I can do it with two words – CORN ETHANOL.

Regardless of our individual opinions on the issue, micro-hybrids are coming and stop-start will be standard equipment on most new cars by 2020. Roland Berger Strategy Consultants expects 67% of new cars in Europe, 51% of new cars in the US, 60% of new cars in Japan and 30% of new cars in China to be equipped with stop-start systems. In October of this year, Lux Research estimated that 34 million new cars a year will be equipped with stop-start by 2015.

For the foreseeable future, substantially all stop-start systems will draw their power from lead-acid batteries made by Johnson Controls (JCI), Exide Technologies (XIDE), Enersys (ENS) and others. Since automakers are every bit as inertia-bound as the rest of us, their current plans include flooded batteries, enhanced flooded batteries, AGM batteries, enhanced AGM batteries and combination systems that include supercapacitors from Maxwell Technologies (MXWL) and others to meet the extreme demands of stop-start systems.

At September's European Lead Battery Conference, a presentation from BMW, Ford Research & Advanced Engineering and Moll Batterien reviewed the requirements of battery systems for micro-hybrids and discussed various alternatives the industry is considering, including possible upgrades to lithium-ion. It noted that lithium-ion promised better charge acceptance and a potentially longer service life, but concluded that lead-acid was cheaper, more sustainable and avoided several critical issues that can't be avoided with lithium-ion. It then proposed a technology agnostic testing regime for stop-start batteries and showed that anything less than an optimized AGM battery couldn't handle the strain of stop-start applications for more than a couple thousand cycles, which corresponds roughly to the same number of miles.

12.29.10 Ford BMW.png

A second presentation from BMW and Axion Power International (AXPW.OB) showed that even enhanced AGM batteries performed poorly under the proposed BMW-Ford-Moll test protocol and the only device that demonstrated acceptable performance for a typical automakers' battery warranty period was Axion's PbC® battery, a third-generation lead-acid battery that uses carbon electrode assemblies to replace the lead-based negative electrodes used in conventional AGM batteries and is currently in the final stages of validation testing and production process optimization.

12.29.10 AGM.png

12.29.10 AGM CC.png

12.29.10 AGM HSC.png

12.29.10 PbC.png

While there's little question that micro-hybrids with stop-start systems will be exempt from the laws of economic gravity and human inertia because of government mandates, I don't believe energy storage devices for stop-start systems will enjoy the same status because the buyers of those devices will be automakers. Every storage device that costs more than a flooded lead-acid battery will have to fight the laws of economic gravity. Every storage device that isn't based on lead-acid chemistry will have to fight a century of auto industry inertia. The only real counterbalance will be the desire to avoid warranty claims or recalls arising from stop-start systems that don't function properly because their energy storage systems are inadequate. It will certainly be street-fight for the next few years and while I don't mind cheering for my own team, the victor is far from certain and the only sensible approach for a cautious investor is diversification across the entire range of companies that developing energy storage solutions for this new class of vehicles.

Some of them are going to make a pile of money for their stockholders.

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

December 28, 2010

Ten Clean Energy Stocks for 2010: The Year in Review

Tom Konrad CFA

My ten annual stock picks have outperformed their clean energy benchmark for the third year running.

Each year, I publish a list of ten renewable energy, energy efficiency, and cleantech stocks that I feel will outperform their peers in the coming year.  In both 2008 and 2009, my picks have beaten their industry benchmark, the PowerShares Wilderhill Clean Energy ETF (PBW), the most widely held industry ETF and the one that I recommend for making short-term bets on the clean energy industry.  The 2010 list is here.

This year has been an interesting one for my picks, with one pick (C&D Technologies [CHHP.PK]) going through a bankruptcy reorganization from which it just emerged, and another pick (Portec Rail Products [PRPX]) the subject of a repeatedly delayed friendly takeover that took ten months due to lawsuits and negotiations with antitrust authorities.  The takeover was finally consummated in December. 

This year I offered two alternative lists, one of a full ten stocks, and a second that used two clean energy subsector ETFs to substitute for three of the stocks each.  The First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID) was my stand-in for the three electric grid stocks in the portfolio, while the Powershares Global Progressive Transport (PTRP) stood in for the three transportation stocks in the portfolio.  Unfortunately, PTRP also ceased trading in December; the fund sponsor closed it due to lack of investor interest (although certainly not for lack of trying to drum up interest on my part.) 

Here is a chart of the two portfolios:



The inner ring is the portfolio using the two ETFs, while the outer ring represents the full portfolio.

Performance

For the year from December 27th to December 27th, the portfolio using the ETFs was up 6.9%, while the ten stock portfolio was up 2.8%.  For comparison the industry benchmark PBW fell 6.6%, and the broad stock market, as represented by the Russell 2000 index was up 13.6%.

Performance chart
The individual stock performance is below:

Security (Ticker) % Change
 % Yield
General Cable (BGC) 
9.34%

MasTec (MTZ) 15.95%

C&D Technologies (CHHP.PK)
-83.67%

New Flyer Industries (NFI-UN.TO, NFYIF.PK) 17.44% 12.08%
FristGroup PLC (FGP.L) (in US$) -6.73%
7.41%
Portec Rail Products (PRPX) 19.46%
2.35%
Waterfurnace, Inc. (WFI.TO, WFFIF.PK) 2.90%
3.17%
Linear Technology Corp (LLTC) 13.19%
2.99%
Flir Systems, Inc. (FLIR) -7.48%

Waste Management (WM) 8.47%
3.73%

The number for Portec assumes that the cash payment from the takeover was reinvested in the benchmark when received.

Overall, my long time favorite stock New Flyer was the biggest winner, with an almost 30% total gain, while the biggest loser was C&D Technologies.  That company will probably recover a bit more now that they have a much stronger balance sheet with the bankruptcy restructuring behind them.

Coming up

I'm running a little late this year putting together my ten picks for 2011, but you should see them on AltEnergyStocks.com during the first week in January. 

DISCLOSURE: Long CHHP, NFYIF, WFIFF, LLTC. 

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.

December 27, 2010

Why Cheap Will Beat Cool During The Next Decade Of Vehicle Electrification

John Petersen

Last Friday I received my copy of the presentations from September's European Lead Battery Conference in Istanbul. Most of the presentations were written for a technically astute audience and don't offer much in the way of concrete guidance for investors, but an overview presentation from Ricardo PLC, a global leader in engineering solutions for low carbon, fuel-efficient transportation, included three slides that merit serious investor consideration and show why I'm convinced cheap will beat cool for the next decade of vehicle electrification. I've posted a copy of the Ricardo presentation here.

Technology Timeline

The first slide is a simple timeline that answers the eternal question "When are the technological wonders we read about on a daily basis likely to become profitable business reality?"

12.26.10 Timeline.png

Lead-acid batteries have been the dominant energy storage technology for the last century and the global manufacturing footprint is immense. As vehicle electrification becomes more commonplace and energy storage requirements increase, leading lead-acid battery manufacturers including Johnson Controls (JCI), Exide Technologies (XIDE) and Enersys (ENS) are seeing a pronounced shift in demand patterns. Users who once bought inexpensive first-generation flooded batteries are now buying premium second-generation AGM batteries. Concurrently, lead-acid technology innovators like Axion Power International (AXPW.OB) are finishing development and testing of third-generation devices that will bring the power and cycle-life of lead-acid batteries up to a level that's comparable with NiMH batteries at a reasonable cost. The bottom line for investors is that lead-acid battery technology is rapidly improving and barring a seismic technological shift, manufacturers can only get more profitable over the next decade as global demand for cost-effective mass-market energy storage products surges.

Nickel Metal Hydride, or NiMH, has been the battery chemistry of choice for HEVs since Toyota (TM) introduced the Prius in 1997. Over the last decade HEVs have earned an enviable reputation for efficiency and reliability. Unfortunately, the "M" in NiMH batteries is the rare earth metal lanthanum, which is only produced in small quantities and primarily mined in China. While material supply constraints have not limited NiMH battery production in the past, China has recently announced plans to limit rare earth metal exports in the future. Therefore looming supply constraints will limit the scalability of current HEV technology and most observers believe future HEVs will have to accommodate a lateral substitution of advanced lead-acid batteries and accept a slight weight penalty, or accommodate an upgrade substitution of lithium-ion batteries and suffer a substantial cost penalty.

For several years, dreamers, politicians and environmental activists have shamelessly portrayed lithium-ion batteries as a silver bullet solution to the planet's energy storage needs. From Ricardo's perspective, however, large-format lithium-ion batteries are just beginning to emerge from the prototype stage and enter the early commercialization and demonstration stage. Nissan (NSANY.PK) and General Motors (GM) have recently introduced the Leaf and the Volt and publicized ambitious plans to expand EV production. Those plans, however, will depend on mass-market acceptance of expensive products that haven't been adequately tested under real world conditions by people who just want reliable transportation. I've always believed the ramp rate for plug-in vehicles would be slower than the historical ramp rate for HEVs because users will inevitably have problems with dead batteries, range limitations and other performance issues. As the problem stories spread through the grapevine, the only possible outcome is reduced demand. Ricardo believes it will take at least six years before EVs begin to make the transition from the bleeding edge of early commercialization and demonstration to the leading edge of mass production. I think ten years is more likely.

Application Requirements

The second slide compares the energy and power requirements of various vehicle electrification technologies with the energy and power characteristics of today's leading battery technologies.

12.26.10 Requirements.png

There's no question that plug-in vehicles will need the energy and power of lithium ion batteries if they hope to penetrate the mass-market. Nevertheless, HEVs have built an enviable track record over the last decade using NiMH batteries that were only slightly more powerful than first- and second-generation lead-acid batteries. Since third-generation lead-acid battery technologies promise far higher power and tremendous cycling capacity, I tend to believe that lithium-ion will be viewed as overkill for all but the most demanding HEV applications.

Economic Comparisons

The most intriguing slide from the Ricardo presentation is a simple table that shows the economic performance of their HyTrans micro-hybrid in commercial door-to-door delivery cycles using a variety of energy storage solutions. The table excludes the mechanical elements and control electronics, so it doesn't reflect total system cost. It does, however, highlight the striking economic differences that arise from a decision to use an objectively cool technology to do the work when an objectively cheap technology can do the same work for less money.

12.26.10 Economics.png

For the average consumer the only reason to consider vehicle electrification alternatives is to save money. The Ricardo table leaves little room for doubt on the question of which energy storage technology wins the cost efficiency crown.

What It Means For Investors

Over the last few years a slick, carefully coordinated and beautifully executed PR program from the lithium-ion battery sector has convinced many wishful thinkers that the IT model will carry over to electro-chemistry; that economies of scale will conquer all despite the fact that material and component costs for lithium-ion batteries are four times greater than comparable costs for lead-acid batteries; and that modest size and weight differences will somehow dictate the design and performance of a 3,000 pound car.

As a result lithium-ion battery stocks sell at substantial premiums to their lead-acid peers.

If Ricardo is right, most lithium-ion battery developers can plan on another six to ten years of losses before they turn the corner to profitability. In my experience that's not a healthy business dynamic for investors who worry about details like capital preservation. On the other hand it's equally clear that the next decade will be very good for both lead-acid battery manufacturers and lead-acid technology innovators who are certain to be the first major beneficiaries of the trend toward increasing vehicle electrification.

In another decade, the business dynamic may be different if lithium-ion battery developers can meet their aggressive cost reduction goals and prove a compelling value proposition for plug-in vehicles. Until that happens, however, the safest energy storage investments for investors who want superior portfolio performance are in lead-acid batteries.

I frequently remind readers that I've been a Mac user since 1988 and always believed Apple had superior technology. My opinion didn't change the fact that compared to Microsoft; Apple was a poor market performer until 2000. It only goes to prove that in the gritty world of investments, being right too early is no better than being wrong.

Over the last year the four lithium-ion battery stocks I track have lost an average of 22.2% of their value while the three lead-acid battery stocks I track have gained an average of 15.1%. I don't expect that dynamic to change any time soon.

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

December 25, 2010

Ocean Power Technologies Deploying Wave Power Device


by Donna Salmons

When we think of the ocean, it is often in the context of romantic travel and sand filled beaches. But the ocean, or more exactly the waves from the ocean, may soon be a source of power that a wave power device uses to create energy. At least that is the plan from Ocean Power Technologies [NASD:OPTT].

The Oregon Coast Project

OPTT is planning to deploy its PowerBuoy project in 2011. The 150KW device, known as the PB150, is slated to be launched off the coast of Reedsport, Oregon. In fact, the plan is to develop a total of 10 devices, for a total output of 1.5MW. If everything goes as planned, it will put OPTT as the first company to put a utility scale wave farm in US waters.

OPTT is also developing its PB150 device for use in Europe, where trials in Northern Scotland waters should start in the next few weeks. According to OPTT Chief Executive Officer Charles F. Dunleavy,
We are excited about the continued operation of our grid-connected buoy in Hawaii, and look forward to the completion of our first PB150 in Scotland, which we expect to be ready for ocean trials by the end of this month, and further progress with our autonomous PowerBuoy projects with the US Navy.
Construction on the power take off and control is currently on-going, and testing of that portion will initially be done on land the first half of 2011 before moving to the ocean trials.

Wave Power Device

OPT_PB150

The PowerBuoy system works by having a buoy tethered to the ocean floor. As the waves come in, the part of the buoy that floats works as a piston against the tethered portion, generating energy.

So far, a smaller version, the 40KW PB40, has seen a successful trial in Hawaii, where the technology will be used for an autonomous self-powered radar system for the US Navy.

Challenges

While it would seem that wave power is a clean alternative to other forms of energy production, there are nonetheless certain challenges that the technology faces in becoming widely adopted. One of the most immediate problems is in the displacement of commercial and recreational fishermen from potential fishing grounds. This can impact the economy directly and hurt tourism.

Wave farms can also change the pattern of beach sand nourishment, further impact the marine environment, and even present itself as a hazard to established areas of safe navigation. Eventually they will no doubt incorporate wave farm information to help safely avoid such areas.

Development Grant

OPTT has secured $6.2 million in grant awards for the development of a big brother to the PB150, the PB500. That device, capable of generating 500KW of power, is in addition to the current trials scheduled for 2011 in Scotland and the U.S.

The current project involving the PB150 was made possible through signed agreements with 11 federal and state agencies.

Development Grant

The latest financials from OPTT show a 71% increase in the six months leading up to October 2010 when compared with the previous year. According to the company, the change was due to its US Navy contracts in place.

Overall the net loses were at 11.8 million, due to the development and impending deployment of the PB150 device.

Wave Power is a developing science, but one that has enormous future potential. It has been estimated that there is over 2TW of energy that can be collected from the Earth's oceans. And with OPTT producing the first wave farm for the US, it might make sense to weigh this stock as having some potential, as long as the issues are dealt with in a long term manner. One thing seems certain - 2011 is the year that wave power for the US can become an emerging reality.

About the Author: This is a guest post from Donna Salmons at TestFreaks.com, a gadget review site.  TestFreaks is the world's largest review comparison site with over 10 million reviews and 30 sites world wide. We help 6 million consumers every month find better product information at our TestFreaks sites.

Disclosure: None.

December 22, 2010

Critical Energy Metals - A One Way Bet?

Global Technology Metals Eamon Keene

The Department of Energy (DOE) released a report Wednesday which undertook a strategic review of the use of critical metals in the emerging clean energy space. "Critical Materials Strategy" is a 170 page report which provides a useful overview of the possible metal bottlenecks - and hence investment opportunities - in clean technologies.

The investment thesis which can best benefit from shortages is called "Strategic Positioning". Developed by Patrick Wong, former CIO of Dacha Capital, this thesis "basically looks at parts/processes in the building of any product and looks for ones that are a small % of the overall value yet are critical and cannot be substituted easily." One prominent example is the 50-100g of dysprosium used in hybrid and electric vehicles' motors to allow reliable operation at the 180-200C temperatures reached during driving. 50g dysprosium oxide will set you back $15, a trifling 2,000th of the retail price of a $30k hybrid.

Demand is thus highly inelastic, which bodes well for price in the event of a shortage. Another example is the 4-20kg of gallium and 16.5-110kg of indium required per megawatt of Copper-Indium-Gallium-diSelenide (CIGS) thin film solar. At current prices, these elements make up less than 2% of the installed cost of this flavour of solar thin film. Other examples are the use of terbium in high efficiency linear fluorescent lamps (LFL) and compact fluorescent lamps (CFL) or the use of indium in indium tin oxide (ITO) coatings on LCD screens.

The DOE has helpfully constructed a clean energy criticality matrix to reflect the supply demand balance in the medium term:

criticality matrix

Trying to place large bets on these elements is difficult, because so little is produced annually - only around 200 tonnes of gallium, 250 tonnes of terbium, 480 tonnes of indium and 1,300 tonnes dysprosium. There are no futures markets. Hence Dacha Capital's strategy to store them physically. Dacha currently holds some 200 tonnes of the elements in red in the above chart.

Due to their often small proportion of end product cost, it's not pricing but long term security of supply which is of great concern to OEMs. If security of supply can't be guaranteed, then demand may not materialise. Another important point to bear in mind is that to a large degree, these elements are not indispensible. You can listen to Steve Duclos, Chief Scientist for Materials Sustainability, General Electric Global Research, at the DOE report launch here (45 mins in). He sounds quite sanguine: "How does an OEM address this issue? The good news is there are a lot of solutions....often times there's more than one way to serve a customer's needs, and some of those may use rare earths while others may not".

There are technologies coming down the pipeline, such as Organic Light Emitting Diodes (OLEDs), or dysprosium-free permanent magnets, which require no rare earths. Additionally much of the demand growth will be in clean tech, which is subject to substantial regulatory risk. Solar and wind have encountered something of a perfect storm the past year or two - lower electricity demand, lower natural gas prices, and higher cost of capital. As a result they are likely to require government incentives for the forseeable future. The renewable industry was lucky to have secured a year's extension on tax breaks this week. Next year it might not be so fortunate.

From the current perspective investing in critical metals appears a no brainer, but there are many moving parts.

December 21, 2010

Solar Windows Coming But What Kind?

Dana Blankenhorn

One thing any new industry needs to do is beware of its own hype.

I still remember, almost 20 years ago now, sitting in on the launch of a tablet PC called Momenta. I was just then finishing a book for New Riders to be called “A Guide to Field Computing,” all about hand-held computers and terminals that could collect, transmit and calculate outside. I had reason to believe.

But I didn't believe. Yes, they had big-time backing, big names in the executive suite. Yes, the press release was slick, glossy and over-sized. Yes, the shrimp at the press launch were fat and succulent. But I'd once been in on a press fete like this myself, back in 1984, launching a home banking-and-shopping product called The Promise that died before the shrimp spoiled.

“Deja vu all over again” is a useful perspective to have right now as we see the hype machine turning for New Energy Technologies Inc.  (NENE) and their SolarWindow.

First launched at a Tampa event in September a SolarWindow is sprayed onto a polymer backing , and its backers claim it can produce electricity on any surface, from any source – even the indoor light can be recycled.

The company's hype has doubled its stock price in three months and the idea itself is logical. But in 2011, you are probably better off moving your clients toward more conventional window adhesives that can cut heating-and-cooling costs, not turn your home into a power plant.

Fact is there are reasons to be skeptical about New Energy Technologies Inc..  (NENE)

  • This is still a year away from the market.

  • While savings could be substantial, we know nothing about costs.

  • What about durability?

  • Can manufacturing be scaled?

  • There are competitors.

  • What about efficiency? How does a property owner make the numbers work?

We know, in the long run, how this story ends. Someone is going to get this right. Who and when are open to question. After all, tablet PCs are all the rage these days, and everyone has what I called a “field computer” back in the day.

So color me skeptical about NENE. But this is the direction the world is going in, make no mistake.

Someday every window will be a solar window. Maybe not today, but soon. Don't let the fate of one company determine your attitude about the future, but don't get wedded to any single vendor, either. It's way too early for that.

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned last month after a short 29 year hiatus because it's the best business story of our time. In between he covered PCs, the Internet, e-commerce, open source, the Internet of Things and Moore's Law. It's the application of the last to harvesting the energy all around us he's most excited about. He lives in Atlanta.

Related Article: Green Chip Stocks' "Sunless Solar" Tease

December 19, 2010

Active Power – A Solid Investment Opportunity And A Valuable Object Lesson For Investors

John Petersen

In December 2008 I went hunting for opportunities in the energy storage sector and selected six pure-play stocks that seemed seriously undervalued. I bought Enersys (ENS) at $6.00, Exide Technologies (XIDE) at $2.00 and Active Power (ACPW) at $0.26. While Enersys and Exide have been fabulous performers with appreciation to date of 442% and 397%, respectively, Active Power has been the runaway champion with appreciation to date of 923%.

My other three picks have performed poorly. C&D Technologies (CHHP.PK) is down 96% and finalizing a restructuring that will give 95% of its equity to noteholders; so I don't expect stockholders to recover more than a fraction of their losses. ZBB Energy (ZBB) is down 49% and remains a question because of its weak financial condition. Axion Power International (AXPW.OB) is down 51%, but my confidence in its technology, business model and financial health has never been greater.

A diversified portfolio created in December 2008 with a $1,000 investment in each of my six picks would have been worth $19,218 at Friday's close, for a two-year portfolio appreciation of 220%. In comparison, a diversified portfolio created in December 2008 with a $1,000 investment in each of Ener1 (HEV), Valence Technologies (VLNC), Altair Nanotechnologies (ALTI) and Beacon Power (BCON) would have been worth $2,284 at Friday's close, for a two-year portfolio depreciation of 43%. In simple terms, cheap energy storage has outperformed cool energy storage for two years running and I don't expect that dynamic to change anytime soon.

While an occasional glance in the rearview mirror can be an ego booster, it's rarely helpful for investors who want to position their portfolios for an uncertain future. Since Active Power was the best performer over the last two years; it offers a solid medium-term opportunity; and it can serve as a valuable object lesson in speculative stock picking, the balance of this article will focus on Active Power, its growth opportunities and the object lessons hidden in its history.

A recurring theme of this blog is that the energy storage sector plays by a different set of rules than the ones we came to know and love during the information and communications technology revolution. While IT companies can bloom and grow like wildflowers in an alpine meadow, companies in the energy storage sector behave more like vineyards that need years of careful attention before they begin bearing fruit. Investors who do not understand the differences will suffer.

Active Power manufactures, sells and services mission critical power infrastructure solutions for end-users that demand power quality and reliability at the 99.99999%, or seven nines, level. Past customers include factories, refineries, banks, datacenters, broadcasters, law enforcement command centers, airports and hospitals around the world.

Active Power's infrastructure solutions are not the simple battery backups most of us think of when somebody mentions uninterruptible power. Instead, they're multiply redundant integrated power solutions for users that can't afford outages like the one encountered earlier this month at a Toshiba factory in Japan where a 0.07 second voltage drop interrupted operations and damaged up to 20% of the flash memory chips the plant was planning to ship to customers in January and February of 2011. While the incident was an extreme example, credible estimates peg the total productivity losses from power outages in the US at $150 to $200 billion per year.

Active Power went public in August of 2000 and raised $156 million at $17 per share. It was one of the last major IPOs before the tech-wreck. By September 2000, Active Power's stock had surged to a peak of $79.75 before starting a hellish decline to $0.25 a share by December 2008. It was a classic case of a young company that had a promising technology and ambitious plans that:
  • let irrational expectations run wild in the early days;
  • learned its technology and market development challenges were far more difficult, time consuming and costly than anyone expected them to be;
  • buckled down to hard work of refining a world-class technology solution and then proving the value of that solution to skeptical customers who can't afford failures or mistakes; and
  • turned the corner at a time of maximum discontent and outright investor capitulation.
Since a ten-year stock price chart is too ugly for an upbeat article like this one, I'll use a five-year version instead.

12.20.10 ACPW Price.png

The following graph tracks several important financial statement metrics over the last decade. Since hard numbers for 2010 won't be available till next March, I've used September 30th balance sheet data and trailing-twelve-month income statement data as approximations. Active Power's actual 2010 numbers should be better than they appear in the graph.

12.20.10 ACPW Financial.png

While a detailed discussion of Active Power's products, history and future could fill a small book, there are a few key points that investors need to understand when evaluating Active Power as an investment or as an object lesson.

First, Active Power needed several years to complete the development of its technology and begin installing systems for end-user validation and testing. In the beginning Active Power relied on Caterpillar (CAT) to include its flywheels in power quality systems sold by them. By 2005, it became clear that leaving the marketing function to a large partner that had ready access to several competitive energy storage options didn't always benefit Active Power. That dynamic forced Active Power to adopt a more proactive marketing approach and when it began integrating Caterpillar generators into its own systems instead of relying on Caterpillar as a principal sales channel, the game changed.

Second, end-users needed several years of validation and testing before there was a broad enough experience base to drive working relationships with first tier industrial engineering firms and distribution partnerships with companies like Hewlett Packard (HPQ) and Sun Microsystems (JAVA). Now that core business relationships are established, along with a widespread end-user experience base, Active Power can focus on selling its product line to a rapidly expanding market based on competitive capital cost, high power density, extraordinary system performance and low total cost of ownership.

Third, Active Power's target market is growing very rapidly because global reliance on automation and computerization is increasing while the level of power quality and reliability in many countries is declining. Active Power has no desire to stabilize the grid, but it knows that many industrial, commercial and governmental facilities will readily pay a premium price for the power quality and reliability their utilities can't deliver. Utilities in China typically promise customers 99.1% reliability. While that's an impressive accomplishment for a rapidly developing economy like China's, it's a far cry from the seven nines that many end-users must have.

Fourth, Active Power understands that its flywheel systems must compete with battery-based systems from companies like Emerson/Liebert, Eaton/Powerware and APC/MGE, and rotary systems from companies like Piller, Eurodiesel and Hitec. It also knows that a rapidly growing multi-billion dollar market is large enough to support several successful competitors. Accordingly, its primary goal is market credibility rather than market dominance.

When I first evaluated Active Power in late-2008, it had completed most of the heavy lifting associated with technology development and end-user validation. Its sales were ramping at respectable rates and its losses were narrowing. While Active Power's balance sheet was a mere shadow of its post-IPO glory, it had enough cash and working capital to finance a full year of operations and continue the orderly execution of its business plan. When I combined those factors with a market capitalization that was hovering around 75% of stockholders equity, it was clear that Active Power had limited downside risk and huge upside potential.

Over time, stocks tend to oscillate between undervalued and overvalued and they only touch fair value briefly during the transitions. If Active Power's management can stay the course and continue to execute the way they have over the last few years, I believe today's price is but a fraction of what it will be in 2012. I don't expect another 923% gain because companies like trees don't keep growing forever. However a double or even a triple from current levels would not be an unreasonable target given the magnitude of the undervaluation Active Power suffered through in late 2008.

I've previously written about the Gartner Group's Hype Cycle and think it's worth revisiting here. The following graph shows a stylized version of what happened to Active Power between its peak of inflated expectations in the fall of 2000 and its trough of disillusionment in the winter of 2008. I've seen a similar pattern in the stock of every public company I've ever represented.

Gartner HC Slide.jpg

In my view there are only two great times to buy a stock for investment. The first is in the early days of the innovation trigger, but investments at that stage are usually reserved for venture capital and by the time a company makes its public debut, the price is already in nosebleed territory. The second is at or near the bottom of the trough of disillusionment when business and financial fundamentals are sound, but the market is too tired or distracted to recognize the opportunity.

I am frequently and fervently chastised for expressing negative opinions on high-flying market superstars and favorable opinions on unloved companies with simple products. My goal, however, is to point out the risks of companies that are near the peak of inflated expectations and the opportunities of companies that are preparing to emerge from the trough of disillusionment. It's more art than science, outcomes are never certain and timetables are impossible to predict because of the market's ability to stay irrational for extended periods. In the fullness of time, however, the weighing machine always does its job.

The next couple years should be a lot of fun as Active Power makes the transition from losing money to making money. It's always an exciting time where positive surprises generate favorable price swings but negative surprises are discounted as part of the maturation process. I look forward to devoting more attention to Active Power.

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

December 17, 2010

Chinese wind power company seems to understand American political capitalism

by Michael Giberson

American University’s Investigative Journalism Workshop has published reports detailing the extensive political connections in the United States developed by Chinese wind power company A-Power Energy (APWR) in its effort to build a 600-MW wind farm in West Texas. A-Power (APWR) and their Chinese and American partners were seeking $450 million in section 1603 grants and U.S. Department of Energy loan guarantees to help fund the project. New York senator Charles Schumer objected to the idea that stimulus funds would flow to Chinese workers and sought to block the project’s access to the funds. A-Power chose to fight politics with politics, announcing a turbine factory in Nevada (home of the Senate Majority Leader Harry Reid, project being developed in conjunction with prominent Reid supporters in Las Vegas) and making friends with the United Steelworkers union which had initially opposed the project.

The key U.S. partner to A-Power on the project is U.S. Renewable Energy Group, described in the article as “a Dallas investment firm with strong ties to Washington and the Democratic Party.” On its website, US-REG describes itself as a developer of “renewable energy projects throughout the nation,” but the only project specifically mentioned anywhere on its website is the proposed project with A-Power (here is the US-REG summary touting the benefits of the proposed project). Reading the “About the Team” materials on the website suggests a group of very well-connected lawyers and investors with little direct experience in developing renewable energy projects.

In this particular story, a key company is Chinese and the well-connected movers and shakers are Democratic, but there is nothing especially “Chinese” or “Democratic” about the practice of political capitalism revealed here.

Earlier reports from the Investigative Journalism Workshop detailed that about 88 percent of the section 1603 grant money went to non-U.S. based companies, including companies from Spain, Germany, Japan, and Portugal. (Note that the location of the corporate headquarters likely has little to do with where the money gets spent or who ends up better off because of the subsidy.) Another report indicated that $1.3 billion in stimulus funds went to wind power projects built before the stimulus bill was passed.

A US-REG press release issued in response to the article complains that it “contained a number of biased statements and inaccuracies about US-REG and its Texas wind farm project.” But they don’t do a point by point rebuttal, mostly just reaffirm what a wonderful thing the project will be.  Well, to be fair, their response specifically claims: no U.S. government money has been received (they WANT a lot, but they haven’t received any yet and it begins to look unlikely unless the Section 1603 program is extended), and no U.S. government official has been asked to intervene with the DOE loan guarantee application.

The response also specifically claims “Without these federal incentives, most American wind projects would be forced to lay off workers, go out of business or sit idle until energy prices rise, further stalling much needed growth in the American renewable sector.”

I think they could have been clearer: without the incentives, the wind power companies would not have hired workers in the first place, so those workers would have been engaged in other kinds of productive work instead, perhaps even self-sustaining lines of work not dependent on continuing federal incentives.

NOTE via Seeking Alpha: Recent financial filings by A-Power suggest that the West Texas project will not get built. If the project does not receive Section 1603 grants and the DOE loan guarantee by December 31, 2010, A-Power’s partners have the right to dissolve the partnership. They report, “In our view, it is not likely that Spinning Star [the project's name] will be able to arrange the requisite construction financing by December 31,2010….”

Added: HT to the Dallas Morning News Texas Energy and Environment blog.

Michael Giberson teaches Energy Economics and Energy Policy at the Center for Energy Commerce in Texas Tech University's Rawls College of Business. This post is a revised version of an article that first appeared at the Knowledge Problem blog.

December 16, 2010

Rare Earth Element Shortages Threaten Global Wind Power Development

by Kidela Capital Group

In spite of the recent global economic slowdown, the growth of new wind energy developments has so far continued unabated. Wind turbine technology has evolved considerably in the last decade, and new wind farms are steadily popping up across the globe. To meet rising demand for renewable, clean sources of energy, the push for more efficient wind energy technologies has moved from a proverbial light breeze just a few years ago, to a steady gale today.

The Global Wind Energy Council (GWEC) recently predicted that the world’s wind power capacity will increase by 160 percent in the next five years, with global installed wind capacity estimated to reach 409 GW by 2014, up from 158.5 GW in 2009.1 This surge in wind energy projects can be attributed to increased demand as governments look for cleaner sources of energy to reduce greenhouse gas emissions and meet growing energy needs.

Yet experts warn of a front of high pressure blowing in from the East, which could effectively calm this storm of development — at least in the short term. The newest wind turbine technologies largely depend on rare earth metals, quirky elements that are used to make special magnets that dramatically increase conversion efficiency. Yet the corresponding demand for these materials is hampered by the fact that almost all of the world’s supply is concentrated in China, where strategic investments in rare earth element extraction and refining in the 1980’s has given it cost advantages in the production process and an effective monopoly of the industry.

The GWEC’s prediction indicates the generation of an additional 250.5 GW of wind energy will require 167,000 tonnes of rare earth metals.2 To put that in perspective, China, which currently produces 95 percent of the world’s rare earth elements, only produced 150,000 tonnes of rare earth metals in 2009.

China has shown that it is willing and able to control exports in rare earth metals by restricting supply. This market power is resulting in significant price instability, and is affecting a wide range of industries that rely on the astonishing properties of these elements to produce everything from smart phones to hybrid vehicles.

“Even in the face of a global recession and financial crisis, wind energy continues
to be the technology of choice in many countries around the world. Wind
power is clean, reliable and quick to install, so it is the most attractive
solution for improving supply security, reducing CO2 emissions,
and creating thousands of jobs in the process.”

Steve Sawyer, GWEC Secretary General

China and North America remain the largest two potential markets for wind power expansion.  Despite the lagging global economy, this has hit US markets particularly hard, government grants and incentives have kept wind energy growth on track, albeit at a conservative rate.  Although there are a number of large-scale projects in the regulatory approval stage In Canada, the adoption rate and scale of investment is amongst the provincial governments can be described as inconsistent.

Conversely, China’s wind energy developments have expanded at an incredible rate.  In 2009, China accounted for one third of the world’s new wind farm development. That year, the country generated 25.9 GW of wind power, overtaking Germany as the world’s largest producer.

China has announced that in the next ten years it will construct an additional 133 GW of wind turbine generated electricity.  This plan will inevitably contribute to a steep rise in demand for use of Chinese neodymium and other rare earth metals just to service the country’s domestic wind turbine market.3 To account for this, China will be forced to either ramp up production or slash exports.  This increased internal demand could be at the heart of much of the recent tightening of export quotas and shipments by China.  The effect of their actions has fundamentally shaken the countries around the world out of their slumber with respect to the stability of their REE supplies.

Neodymium is one of the rare earth metals typically used in permanent magnets. Modern high-efficiency neodymium magnets for wind turbines use close to half a metric tonne of the element per  turbine. Other rare earth metals used in wind turbines include praseodymium, dysprosium, and terbium.

Earlier versions of wind turbine technology relied on electromagnets, which use copper coils fed with electricity from the generator itself.  While effective, these generators were bogged down with excess weight. Companies such as Siemens (SI) and General Electric (GE) later developed turbines that use direct drive generators using permanent magnets. The motors turn at the same speed as the rotors and therefore have to be much larger to develop the same power. Yet the weight of the larger unit is significantly less. By using neodymium in the magnets, the weight of the generator can be further reduced. According to experts at Holland’s Delft University of Technology, a 15-mm-thick segment of permanent magnets can generate the same magnetic field as a 10- to 15-cm section of copper coils.4

Europe was an early adopter of wind power technology, and European governments have focused strongly on sustainable energy policy in recent years. But Europe’s capacity is expected to remain somewhat stagnant in the near future.  By 2014, it is expected that Asia will surpass Europe in total wind energy generation. South Africa has also recently disclosed plans for an aggressive foray into the wind power industry, with two huge projects in the assessment stage.

The reality is that China, despite backing off from earlier suggestions that it will limit exports, will be forced to adjust if it hopes to meet its domestic targets. New wind projects currently in the assessment stage in the US alone could soon outstrip the supply of Chinese rare earth exports. Therefore it is incumbent on the industry to identify, secure and develop new non-Chinese sources of these valuable materials. “That’s a serious issue,” says Henrik Stiesdal, chief technology officer of Siemens’s wind power unit.5

The reality is wind turbines can be built without rare earths, but the older permanent magnet technology is dramatically less efficient than those built with neodymium-based magnets, and depending on the project, their return on investment may be too far off to be considered.

Not everyone is convinced the drop in the supply of neodymium will halt the wind turbine industry. Though rare-earth magnets will be employed for a significant percentage of the large electrical generators used in wind turbines, smaller units may be engineered using other technologies that do not use rare earths. Ferrite magnets, for example, while much less efficient than neodymium magnets, are also considerably cheaper and in some cases may close the efficiency gap.6

It is clear that while direct drive technology using neodymium is superior to older wind turbine technology, its potential is ultimately dependent on the ability of the industry to develop and secure new sources of supply rare earth metals.

——

1, 2Global Wind Market Hits 155 GW
3
The Battle Over Rare Earth Metals
4, 5
Wind Turbines Shed Their Gears
6
Magnetics Business & Technology – Summer 2009 Edition (PDF)

Related articles: Rarer Rare Earths Are Not Going To Sink the Wind Power Sector
Can America Regain the Rare Earths Crown?

Nuclear Stocks: Too Hot for an Eco Portfolio?

Guest Author

Nuclear energy is not the “bad boy” it once was

For many years, nuclear energy was labelled as a potential threat to the environment as well as the global population.  Interestingly enough, the memories of the disasters at Chernobyl and Three Mile Island are now distant and the perspective of nuclear energy is changing in positive fashion.  The growing worries created by the ballooning demands on the world’s energy sources, an increase in the competition for energy supplies, rising concerns regarding global warming, and the volatility of the gas and oil prices are reasons that many countries are now re-thinking the nuclear energy proposition.

Why investing in nuclear stocks could be ecologically positive

Politicians and scientists around the world are now viewing nuclear energy as being eco-friendly as well as an economic and efficient solution to the Earth’s looming energy and environmental crisis that we are currently facing.  In so many words, investing in nuclear stocks is now an option that is back on the table and is being viewed as an ecologically positive investment.  Unlike fossil fuel combustion, nuclear energy does not leave a carbon footprint on the environment.  In other words, it does not produce the excessive amounts of carbon dioxide that fossil fuels do.

Nuclear stocks

Where stock trading is concerned, there are numerous reasons to consider investing in nuclear stocks and in the long run, there could be huge benefits, not only for the investors themselves, but the environment as well.  For instance, there is an abundant supply of uranium which as most people know is the primary basis of nuclear energy compared to so many other commodities.  The following are other reasons why investing in nuclear stocks is moving towards the forefront again:

  • concerns over global warming
  • erratic pricing of fossil fuels
  • high-profile catastrophes related to coal and oil production
  • surging demands for energy on a global scale

Environmental and political agendas are now pushing nuclear energy back towards the top of the list of priorities where the above are all concerned.

What are the moral benefits if any?

The moral benefits of investing in nuclear stocks are not necessarily based in financial gains as much as it relates to socially responsible investing overall.  As an alternative energy source and one that does not leave the carbon footprints on the environment that fossil fuels do, it is inevitable that investing in nuclear stocks could be beneficial.  Socially responsible investing describes the type of investment strategy that maximises both financial gains as well as the social good.  It is also referred to as ethical, socially conscious, or sustainable investing.

From the standpoint of being morally beneficial, that may still be up for speculation as nuclear energy is still not the preferred energy source that many environmentalists feel will solve the problems we are currently encountering in the global environment.  However, based on the above, we may not have any other viable alternative energy options to choose from other than the current ones – hydro, solar, and wind.  In so many words, nuclear energy and re-investing in it may benefit the Earth’s chances at survival.

December 14, 2010

Is Lithium-ion A Dead-End Electric Drive Technology?

John Petersen

Last week Energy Secretary Steven Chu addressed the United Nations Climate Change Conference in Cancun. After watching the video presentation several times I can't help but wonder whether the Secretary didn't politely caution his audience that lithium-ion batteries are a dead-end electric drive technology. I could be misinterpreting Secretary Chu's remarks, but if you own stock in a lithium-ion battery developer like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) or Altair Nanotechnologies (ALTID), or are considering any of these companies for your portfolio, the discussion that starts 25 minutes into the following video could be very important.



My impressions, observations and interpretations are summarized below.

Secretary Chu began his electric drive remarks with a politically correct but specious comparison of vehicle efficiencies that followed the EPA fuel efficiency party line I criticized in Alice in EVland, Part II. The numbers simply don't work unless you ignore efficiency losses and emissions on the utility side of the electric meter. Ignoring the political posturing, the most curious and troubling aspect of the Secretary's electric drive remarks was his description of what it would take for electric drive to be competitive with internal combustion:

"And what would it take to be competitive? It will take a battery, first that can last for 15 years of deep discharges. You need about five as a minimum, but really six- or seven-times higher storage capacity and you need to bring the price down by about a factor of three. And then all of a sudden you have a comparably performing car; let's say a mid-sized car which has a comparable acceleration and a comparable range."

***

Now, how soon will that be? Well, we don't know, but the Department of Energy is supporting a number of very innovative approaches to batteries and its not like its 10 years off in the future, in my opinion. It might be five years off in the future. It's soon. Meanwhile the batteries, the ones we have now, will drop by a factor of two within a couple of years and they're gonna get better. But if you get to this point, then it just becomes something that's automatic and I think the public will really go for that."

While Secretary Chu was explaining these bottom-line technical and economic requirements, the following summary text was superimposed on a background slide that compared the relative energy densities of common fuels.

"A rechargeable battery that can last for 5,000 deep discharges, 6-7 x higher storage capacity (3.6 Mj/kg = 1,000 Wh) at 3x lower price will be competitive with internal combustion engines (400 - 500 mile range)."

The unspoken yet undeniable truth in Secretary Chu's presentation is that it's impossible to achieve energy densities of 1,000 Wh/kg with lithium-ion batteries. The following graph comes from the Electricity Storage Association and shows the relative energy densities of various battery chemistries on a logarithmic scale. While the graph uses kilowatt-hours per ton and per cubic meter for its scale, the magic of the metric system means that the watt-hours per kilogram and per liter end up at the same root numbers, just three orders of magnitude smaller.

12.12.10 ESA Graph.gif

Lithium-ion battery developers have made great strides over the last few years when it comes to cycle-life and safety. In every case, however, the gains have come at the cost of reduced energy density. Today's lithium-ion batteries have energy densities of 95 to 190 wh/kg and it's reasonable to believe energy densities will continue to improve at rates of 4% to 5% per year. However the only battery chemistries that have a chance of achieving energy densities in the 1,000 wh/kg range are rechargeable metal-air and other technologies that IBM and others are working feverishly to develop.

What most investors don't understand is that emerging metal-air technologies have nothing in common with lithium-ion technology. The raw materials, fabrication methods, manufacturing facilities and fundamental chemistry are completely different. I can't predict whether or when the new technologies will be available, but Secretary Chu seems confident that the timeframe is more than five years and less than ten. Since he's forgotten more about battery technology than I'll ever learn, I tend to take his predictions seriously.

EVangelicals who believe electric drive ranks right up there with motherhood, apple pie, truth and justice have heralded Secretary Chu’s presentation as wonderful news.  From an investor's perspective, I don't see how it can be viewed as anything less than a shot across the bow of the lithium-ion battery industry – a clear statement that electric drive requires better price and performance than lithium-ion batteries can deliver and an unmistakable implication that the DOE is now focused on more promising technologies.

Were I stockholder in a lithium-ion battery developer, Secretary Chu's presentation in Cancun would scare me senseless. He effectively said that developers of lithium-ion batteries can expect a couple years of intense cost pressure before their products become marginally non-competitive. If prices fall far enough and fast enough, those developers will enjoy a three- to eight-year window when they can build market share and perhaps earn a profit. By 2020, a new generation of even more advanced battery technologies will make the best lithium-ion batteries obsolete.

A recurring theme in this blog is that energy storage plays by a different set of rules. Information technology was great fun because creative types could write code one day and roll it into the global market the next. In the battery business, developers have to spend years refining their technologies, developing new production processes and building factories; which invariably means the next generation technology is nipping at their heels before they can hit the start button for a shiny new factory. Once a newer, better and cheaper technology starts grabbing headlines, obtaining expansion capital to build a second factory for yesterday's technology can be very difficult.

I was a Prodigy user in the early-90s and remember what happened when America Online launched a better platform. I also remember what happened when Yahoo! supplanted AOL and when Google supplanted Yahoo! Nobody knows what it will take to knock Google off its pedestal, but I have every confidence that some creative entrepreneur will find a way because that's the nature of the beast. Today's apex predators always become tomorrow's lunch.

During the fifth industrial revolution, investors made outsized returns by speculating in companies that would be market leaders when the future unfolded. In the sixth industrial revolution the outsized returns will come from investments in established market leaders that sell proven products into rapidly expanding markets while the future unfolds.

I like the lead-acid battery sector because a global manufacturing infrastructure already exists; top manufacturers like Johnson Controls (JCI), Exide (XIDE) and Enersys (ENS) generate billions in annual revenue and substantial profits by selling mundane products that serve the mundane needs of everyday people; and upstart innovators like Axion Power International (AXPW.OB) are developing important enhancements to proven technologies that can be integrated into existing factories without building new manufacturing infrastructure from the ground up.

There will always be a raging battle for the peak performance crown among battery technology superstars. Unless the overall rate of technological progress slows to a snail's pace like it did in the case of corn ethanol, today's best battery technologies will not have enough time to mature and build a global footprint before they're eclipsed by tomorrow's best battery technologies. Meanwhile the established industry leaders will continue manufacturing profitable products to meet rapidly growing global demand.

Call me a Luddite, but I don't want to own a technology that will be obsolete before it becomes profitable.

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

December 11, 2010

The Best Clean and Renewable Energy ETFs

Tom Konrad CFA

For short term holders, the Powershares Wilderhill Clean Energy ETF (PBW) is the best


If cost is the most important factor, an individual investor without the time or expertise to build a clean energy stock portfolio should choose one of the clean energy Exchange Traded Funds (ETFs)

I recently reversed my former stance, and now believe that cost should not be the only factor, because the evidence suggests that, in clean energy at least, the active management available from a mutual fund or an advisor who works with individual stocks can consistently outperform the passive approach used by the ETFs. 

That said, there is a strong case for keeping costs low.  In fact, most investors in clean energy do prefer the ETFs to mutual funds, despite ETFs' poor track records.  The total amount of money invested in general clean energy sector ETFs is over $1.1 billion, while the total invested in clean energy mutual funds is only $900 million, and the ETF total does not include the thirteen sub-sector ETFs listed below.

For readers who find the relatively short record of superior performance by clean energy mutual funds unconvincing, here is a comparison of the available Clean Energy ETFs.

The Funds

There are currently five ETFs addressing the broad alternative energy sector, as well as a few sub-sector ETFs, addressing Solar (KWT and TAN), Wind (PWND and FAN), nuclear (NLR,NUCL), Carbon (GRN), forestry (WOOD and CUT), the Electric Grid (GRID), and mining firms important to alternative energy (LIT,REMX,URA.)  I plan to discuss these sub-sector ETFs in future articles.  For now, I will focus on the general clean energy sector ETFs.  They are: Diversification

While the indexes the funds track sound fairly similar, there are some salient differences.  I think they can be best summarized as "Clean Energy" (most funds) vs. "cleantech" (PZD), and domestic (PBW and QCLN) vs. global (ICLN,PBD,PZD, and GEX.)  For most investors, the reason to buy an ETF instead of common stocks is to achieve quick and easy diversification at relatively low cost.  Hence, most investors should prefer the global ETFs to the domestic ETFs.  Since cleantech is a broader sector which includes clean energy, an investor seeking diversification may also prefer PZD to the other global ETFs because of the broader diversification, but this comes at a price of diluting exposure to the energy sector.

Size and Liquidity

Clean Energy ETF Assets and Daily $ VolumeThe chart to the right summarizes the assets held and the daily turnover (in dollars) of each ETF.  Large investors, and investors expecting to trade frequently using market orders should care about trading volume, which is a measure of the ETFs liquidity.

Market orders to buy or sell an ETF with high trading volume will generally be executed closer to the quoted price than orders to buy or sell an ETF with low trading volume.  Traders using limit orders or placing trades equal to a small fraction of an ETF's daily volume can expect to have minimal price impact, and so are likely to be less concerned about fund liquidity. 

The ETF with by far the best liquidity is the oldest of the ETFs, PowerShares' PBW.  Among the global clean energy funds providing somewhat better diversification, the most liquid is Van Eck's GEX.

Fund Costs

Investors in ETFs can expect to bear several costs.  First, they pay a management fee, which is publicly disclosed as the expense ratio.  They also pay a commission to buy the ETF, and liquidity costs from any price impact of their trade.  Finally, they pay the internal trading costs of the fund, which occur when index components or weightings change over time, and is captured in the ETF's Turnover Ratio (see the discussion of Turnover for mutual funds.)  Since it's typically cheaper to trade domestic stocks than international stocks, the domestic ETFs probably pay lower trading costs than global ETFs given the same turnover.

In the chart below, I've attempted to estimate the annual costs associated with buying $1000 of each ETF and holding it for one year and for five years. My estimates for liquidity costs and the internal Trading costs of the ETF are both very rough.

The costs for broker commission and liquidity are both one-time transaction costs, and will decrease for longer holding periods or increase for shorter holding periods than the five years I assumed.  When estimating a fund's internal trading costs, I assumed that larger funds would have higher internal liquidity costs because of larger transaction sizes, and also that domestic ETFs had lower trading costs than global ETFs.  My estimates for both liquidity costs and the funds' internal trading costs are very rough, and could be off by as much as a factor of 2 or 3 since I have limited information to go on. My estimates are shown in the graphs below.
,
Estimated ETF costs

Estimated ETF costs

As you can see, short holding periods favor the the PowerShares Clean Energy (PBW) ETF because of its greater liquidity.  However, the flip side of having better liquidity is a large funds size, which in turn leads to higher internal trading costs.  For longer term investors, the ETF's expense ratios and internal trading costs become much more important.  For a five year holding period, the iShares S&P Global Clean Energy Index ETF (ICLN) is the clear winner.  ICLN not only has the lowest Expense and Turnover Ratios, it also has a small fund size.  Although the small fund size leads to lower liquidity and higher costs for investors trading in and out of the fund, it also means that the fund's internal trading costs will be lower because smaller trades usually have lower market price impact.

However, the differences between ETF costs are less striking than their similarities.  Other than avoiding the PowerShares Global Clean Energy Portfolio (PBD), which has relatively high costs under both scenarios, the fund choice should probably be based on other factors.

Sector Allocation

As I discussed in my look at the sector allocation of Alternative Energy Mutual Funds, I believe investors will do best with a relatively low allocation to solar PV stocks, and a high allocation to energy efficiency stocks.  I also like investments in Alternative Transportation, the Electric Grid, Biomass, Geothermal, and Hydro, although these sectors are relatively small parts of all the portfolios.  Finally, since we are looking for an allocation to clean energy, a low allocation to "Other" which represents companies and parts of companies with operations that are not related to clean energy should be as small as possible.

Below is my analysis of the sector allocation of the ETFs, based on the complete lists of fund holdings from the fund sponsor websites:

 ETF Sectors
First Trust NASDAQ Clean Edge US Liquid (QCLN) has the highest allocation to energy efficiency, while Powershares Cleantech Portfolio (PZD) has the lowest allocation to solar.  Of the six, the inexpensive iShares S&P Global Clean Energy Index ETF (ICLN) fares worst, with no allocation to energy efficiency and a large allocation to solar.  Although ICLN has relatively good exposure to Hydropower and Biomass, this is not nearly enough to make up for the lack of any energy efficiency companies in the portfolio.  PBD, GEX, and ICLN do the best at minimizing allocation to non-clean energy sectors.

Value

Renewable energy is generally considered a growth sector.  After all, it's relatively new, and growing from a very small base as a percentage of our energy mix.  But that does not mean that there are no value stocks in renewable energy.  Over longer time periods, value stocks have consistently outperformed growth stocks in the broad market, and I see no reason to believe that they will not continue to do so.  Hence I prefer ETFs which put more emphasis on value stocks.

ETFs disclose the average Price/Earnings (P/E) and Price/Book (P/B) ratios of their portfolio holdings, and I've compiled them in the following chart:
P/E and P/B ratios of ETF portfolios
With P/E ratios of 17 and above, none of these ETFs can be said to be truly value-oriented, but there is a significant difference between different funds.  The best two in terms of value are PowerShares Clean Energy (PBW) and PowerShares Global Clean Energy Portfolio (PBD).  The worst (most growth-oriented) is the Van Eck Global Alternative Energy Fund (GEX).

Summary

The following table summarizes the above discussion, grading each fund on diversification, cost, allocation, and value, using a scale from 1 to 3, 3 being best.

Fund
Diversification
Cost
Allocation
Value
QCLN
1
2
3
2
PZD
3
2
2
2
PBD
2
1
2
3
GEX
2
2
3
1
PBW
1
3
2
3
ICLN
2
3
1
2

No ETF is clearly better than the others in all circumstances.  The one you choose should depend on your priorities.  If you are a trader and plan to hold the position for less than a year, PBW serves your needs best.  If you are a long term investors, PZD probably has the best balance of allocation to promising sectors and low cost.  However, if you are a long term investor more interested in Renewable Energy than Energy Efficiency and Cleantech, the best choice is probably ICLN.

My previous surveys of ETFs were less comprehensive, and focused only on Expense Ratio and sector allocation.  Further, I have not previously included the less energy-focused PZD in the list of ETFs I analyzed.   If you own ICLN or GEX because of one of my previous articles, I don't think it makes sense now to switch; all of these ETFs become cheaper over long holding periods.  Instead, you can lower your average cost over time and improve your allocation to the best clean energy sectors by using subsequent investments to buy individual stocks in sectors such as energy efficiency, while the ETF can continue to serve your diversification needs.  You may refer to my recent article selecting stocks from the portfolios of the clean energy mutual funds for a few suggestions organized by clean energy sector.

Conclusion

For traders speculating on short term gains in Clean Energy, the Powershares Wilderhill Clean Energy ETF (PBW) is the best vehicle due to its high liquidity.

For longer term investors, ETFs are my third choice as a method for investing in Clean Energy, after individual stock portfolios and actively managed mutual funds.  Mutual funds may cost more, but provide as much or more diversification and have performed better (even after the higher costs) for as long as most Clean Energy ETFs have been in existence.  For investors with the time or an advisor willing and able to work with individual stocks, stock portfolios offer both lower costs and the potential for better performance through better sector allocation and active management.

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.

December 07, 2010

Kandi Technologies – An Intelligent Vehicle Electrification Plan

John Petersen

The last thing regular readers expect from me is an article praising a vehicle electrification plan, but I've seen one that overcomes most of the problems I've been writing about for the last couple years and is simply too intelligent to ignore. It's a uniquely Chinese solution to their particular problems, which means it might not work in the U.S. or Europe, but the potential in the target market could be huge.

Kandi Technologies (KNDI) has developed the "KD5010" a two-passenger electric vehicle for city dwellers that looks a lot like a stretched Smart Car. Earlier versions of the KD5010 include a 60-unit plug-in fleet that Kandi delivered to the China Postal Service last summer and the Kandi-Coco, a shorter plug-in “neighborhood electric vehicle” that Kandi's distributors are offering in the U.S. for $10,600 (before subsidies). From left to right, the following picture shows the China Post version, the KD5010 and the Kandi-Coco.

12.6.10 Kandi 3.jpg

The KD5010 costs about $6,000 in China (without batteries and before subsidies) and has a 150-kilometer (100-mile) range with a top speed of 52 mph. Unlike its sexier cousins from Nissan (NSANY.PK), General Motors (GM) and Tesla (TSLA), the KD5010 doesn't have a plug. Instead, it draws the needed power from six flat-profile lead-acid batteries that slide into horizontal slots under the driver and passenger doors and can be changed in minutes with simple and inexpensive equipment. Without batteries, the KD5010 tips the scale at 1,000 pounds. With batteries the total vehicle weight is closer to 2,000 pounds.

12.6.10 KD5010 Battery.png

The genius of the KD5010 lies in the absence of a power cord and plug. Instead of giving the owner the ability to decide when and where he wants to recharge the batteries, the KD5010's plug free design requires the owner to drive to the nearest battery swapping station and pay about $6.00 to have the discharged batteries replaced with fresh ones. The process only takes a few minutes and should a KD5010 run out of power on the road, an emergency roadside swapping service is available for a modest premium. Discharged batteries are then returned to a smart central charging facility with a high capacity grid connection that can adjust its demands as needed to optimize overall grid efficiencies.

The swapping stations and central charging facility are operated by a three-party joint venture between Kandi (30%), Tianneng Power International, China's largest lead-acid battery manufacturer (30%), and Jinhua Bada Group, a unit of State Grid Power, a company that provides 91% of China's electricity and ranks as the seventh largest corporation in the world. Kandi launched its unique vehicle electrification and battery swapping station plan in late November with its first sales to retail customers in the city of Jinhua, China, but it's easy to predict a wider rollout if the demonstration is successful.

The principal end-user advantages of Kandi's approach to vehicle electrification include:
  • Offering automotive transportation to users who have no preconceived notions;
  • Offering an electric alternative that's cheaper and lighter than a conventional car; and
  • Offering a battery swapping system that's comparable to a quick fill-up with $3 gasoline.
The advantages to Kandi and its charging infrastructure partners include:
  • Conducting battery charging in a dedicated facility that can optimize battery life and performance;
  • Centralizing battery charging to eliminate infrastructure build out costs and grid stability issues;
  • Facilitating the recycling of old batteries while alleviating raw material supply chain issues; and
  • Generating recurring long-term revenue from battery swapping operations.
The battery-swapping plan is just plain smart. Since the KD5010 uses lead-acid batteries, the battery cost of roughly $1,500 per vehicle includes about $1,000 in lead and $500 in manufacturing costs. Once the lead is in the first KD5010 battery pack, it can be recycled over and over, reducing the consumable cost of the batteries to about $500. Even if the batteries only last for a few hundred cycles before they're returned and recycled, the net battery cost per charge-discharge cycle will be in the $1 to $2 range, plus electricity for recharging and labor to operate the swapping infrastructure. With an end-user swapping fee of $6.00, Kandi and its partners should profit handsomely.

The following table presents summary income and cash flow data for the last twelve months, summary balance sheet data at the last reporting date, and market valuation metrics for Kandi and BYD Co. Ltd. (BYDDF.PK), the best-known Chinese automaker.

12.6.10 KNDI-BYD.png

Kandi's historical financial statements do not reflect major electric vehicle operations, I think its fair to expect substantial revenue growth over the next few quarters.

BYD has been a market darling since Warren Buffet's Mid-America Holdings bought a 10% interest in 2009. The big difference between the two is Kandi is just starting out with a pair of extremely powerful partners while BYD is trying to grow a mature business. When I consider problems inherent in growing any business, I have to believe it will be easier for Kandi to ramp sales by a factor of ten than it will be for BYD to double sales. I've always taken a very conservative "wait and see" attitude when it comes to vehicle electrification in the U.S. and Europe, but when it comes to capitalizing on emerging vehicle electrification opportunities in China I have to believe that Kandi's approach will be a hands-down winner.

In the final analysis, it's a lot like the business dynamic that might have developed if Henry Ford had partnered with John D. Rockefeller or one of the other oil barons in the early 1900s.

Disclosure: None.

December 05, 2010

How the Gabelli Green Growth Fund Got Its Five Stars

Tom Konrad, CFA

An interview with John Segrich, CFA, portfolio manager at the the Gabelli Green Growth Fund (SRIGX).

When I did my recent past performance comparison of clean energy mutual funds, I found that the Gabelli Green Growth Fund (SRIGX and SRICX) beat all its rivals by a long shot over the last three years, earning a coveted five-star rating from Morningstar.  In general, I'm a skeptic about short-term past performance: If you look at enough funds, sooner or later you'll find one that has had great performance by sheer luck.  Even when a few years' out performance is not luck, it may be the result of a fortuitous alignment: the fund's strategy could be particularly suited to recent market conditions.  When those conditions change, so will fund performance.

Nevertheless, I do believe that some managers can consistently beat index funds, especially in an emerging and little-understood sector like clean energy.  I manage clean energy portfolios myself, and if I didn't think that I could do better than indexing, I'd just buy an ETF, and spend the rest of my time more productively by taking up calligraphy. 

Unless you're reading this article in elegant script on a rice paper scroll, you can assume that I have not taken up calligraphy.  I believe some portfolio managers can consistently beat the market. 

How can we tell which money mangers are skillful, and which ones are just lucky?   The only way I know is to understand their investing process.  Which is why I asked John Segrich, CFA, the lead manager for the top-performing Gabelli Green Growth Fund, to submit to an interview.  In our interview, I try to understand his investing process, and if he has been benefiting from a temporary alignment of the (Morning)stars, or if there is some lasting advantage that future investors in his fund can take advantage of.

Our interview follows:

TK: Please tell us a little about your background and why you manage a sustainable mutual fund.

JS: While in college I interned at Gabelli & Company and upon graduating was offered a position as a full time analyst. I spent the next two years looking at emerging internet companies while at Gabelli. I then spent another two years on the buyside as a technology analyst. I moved to London with Goldman Sachs in 2000 and headed up their European Internet and then software research teams for a few years. I remained in London with JP Morgan as the head of their European sell side technology research team. In 2008, I moved back to New York and back to Gabelli & Company to head up their green research efforts. The firm then refocused an existing SRI mutual fund on sustainability in 2009. I also manage a hedge fund with a similar sustainability strategy.

The reason for my interest in managing a fund focused on sustainability is two-fold. First, I believe that by managing a portfolio of investments focused on sustainability, I can have a positive impact on the world with regard to these pressing issues. Secondly, we believe that by investing in these companies, we can achieve superior returns in the long run.

TK: Who are your investing role models?

JS: Mario Gabelli, our Chief Investment Officer, has been and remains my mentor over the years. His approach to investing is rooted in deep, fundamental research and in understanding the entire value chain on a global basis. He taught me to dig deeply into the numbers, read the footnotes, and ask the tough questions. He also is able to take a longer term view of companies and industries, and look through the short term fluctuations to identify value.

George Soros, a fellow philosophy major, also influenced my investment process through some of his writings, in particular in identifying the perception gap within an investment and understanding how the closing of this gap creates value.

I also admire some of the more visible hedge fund managers such as David Einhorn at Greenlight Capital or Bill Ackman at Pershing Square who relentlessly pursued their investment views even when the whole market was telling them they were wrong. They performed their own analysis and were firm in their conclusions despite the market telling them otherwise. Too often there is not enough analysis and many investors just take management’s view as the truth without testing those assumptions. The assumptions need to always be tested.

TK: What factors do you consider when deciding if a company is sustainable?

JS: Sustainability for us is to understand the impacts, opportunities, constraints, and issues that emerge as the world population grows from 6.8bn people. If we take that lens, and overlay it on any traditional sector, it helps us identify where we should look to find investment opportunities.

The starting point for us is to understand the industry on a global basis, analyze supply and demand, and then determine if the economics “make sense.” Can the companies and the industry survive on its own, or do they depend on the handouts of governments? If the industries are subsidy driven, we tend to look for wider margins of safety when investing and may be shorter term investors. If the industry is “sustainable”, then we can invest in solid business models for the long run.

TK: Do you believe sustainability confers a long term advantage to companies?

JS: By definition yes, since companies that do not embrace or understand sustainability issues that impact their business will likely not survive. In addition, we believe that the companies we are investing in are exposed to higher growth drivers due to their focusing on solving sustainability issues and therefore likely offer better investment opportunities combined with secular growth themes than those that are less exposed.

TK: Please describe your stock selection process.

JS: We start with the industry and attempt to understand the entire value chain. For example as we look to invest in the wind industry we start by identifying the companies that own and operate wind farms (typically renewable utilities). We identify all the turbine manufacturers, then break down the turbine into its components and identify all the companies that make blades, bearings, even the carbon fiber that is used in the blade. Through this process we look for areas of constraint in the value chain as investing in those often is quite profitable due to better pricing, margins, and profits. We then establish where we want to have exposure on a global basis – maybe we want exposure to the Chinese wind market but not the European market. After that, stock selection comes down to fundamental analysis and valuation. We also try to incorporate issues such as regulation, currencies, and other macro issues like credit availability.

TK: Recently you have been trading much more than the other fund managers I follow, holding your average position only about 6 months, while most funds I follow hold positions on average about two years. Is frequent trading intrinsic in your strategy?

JS: Yes, at the moment, as many of these industries are still heavily dependent on subsidies for survival. As those subsidies change, we may need to change our outlook on the industry. We have also been through several rounds of sovereign debt concerns, which have a broad impact on many companies in the investment universe. Over time, as the industries mature we would expect to be able to have longer holding periods. In some industries, we can already identify what we believe are long term investments.

TK: Your track record over the last three years has been excellent. The Gabelli SRI Green Fund is the only one I follow that is up since the start of 2008, and you're up 21% since then, while the next best performing fund is down 17% over the same period. Why do you think you've been so successful?

JS: We have deliberately attempted to be global in our understanding of the value chain. Often, we can gain exposure to an investment theme in a less obvious way – sort of the picks and shovels approach to investing. We also have decided that we do not need to maintain exposure to all areas of sustainability and when subsidies are in flux, we might reduce our solar or wind exposure to zero.

TK: Your fund is still quite small. What are the advantages and disadvantages of the small size?

JS: Certainly a smaller fund size helps us in terms of being able to enter and exit positions more rapidly if needed. Hopefully, as more investors realize the opportunities of investing in this manner, the fund will continue to grow. We do not foresee growth in the fund size as a barrier to achieving returns. Moreover, as the fund grows in size, the expense ratio will become less of an issue.

TK: Have you seen a substantial increase in investor inflows now that you've achieved Morningstar's highest five-star rating due to your track record?

JS: Yes, it has helped. I know that we have been on the radar screen of many advisors, and getting the five star rating often marks the trigger point for their investment process.

TK: Let's switch gears and talk about the market. What do you expect the next year to bring to the market as whole and sustainable companies in particular?

JS: I suspect that the market will remain choppy as many of the issues we are grappling with, such as European sovereign debt and even the debt that is mounting here in the US, will not be easily solved. Subsidies are under pressure and while some nations, such as Germany and China, have made strategic decisions to embrace sustainability issues, others, such as the US, have not. As countries continue to compete with each other for leadership in these industries (the space race of our generation), we expect a new engine of job creation and growth to emerge.

TK: Are there any sustainable sectors you expect to do particularly well in the coming year? Why

JS: We are generally cautious on the renewables at the moment as we believe overcapacity will lead to dramatic price declines which in turn will eventually lead to accelerating growth. That growth comes in waves; we believe third quarter 2010 was the peak. We will spend our time looking for the next entry point, when we believe shares have bottomed. We continue to focus on materials and commodities that will benefit from global growth. Industrialization and urbanization of the developing world remain important themes. We also continue to focus identifying companies that have exposure to longer term secular growth drivers, but that make simple products which will benefit if the industry takes off rather than by having to identify an individual company. Again, we often follow the picks and shovels approach to investing. Several battery and materials companies fit this approach.

TK: What are your top holdings right now? Why do you expect them to do well?

JS: Some of our holdings at the moment include Sino-Forest (TRE.TO), Umicore, Polypore (PPO), Globe Specialty Metals (GSM), Duksan High-Metal, GCL Polysilicon, Mead Johnson (MJN), and Novozymes (NVZMY.PK). Most have high exposure to stronger secular growth drivers and are strong beneficiaries of the growth in emerging markets. They also may benefit if the US dollar continues to weaken.

TK: What have you sold recently and why?

JS: We have sold most of our exposure to renewable, in particular solar, as we believe the market is entering a period of overcapacity and that margins have peaked. Additionally, market expectations have caught up to our view and the valuation gap had closed.

TK: Is there anything else you'd like to say?

JS: Just that we believe we are at the beginning of a significant investment opportunity that has only recently shifted from marginal to mainstream. We are looking at issues that could unfold over the next 10, 20, even 50 years and we believe there is still substantial value to be created by investing in the companies that are leading this change.

TK: Thank you for sharing your insights with us today.

JS: You are welcome. Anytime.

Conclusion

In general, I like what John had to say.  His process starts with understanding the value chain.  Because Clean Energy is such a new field, understanding the value chain is something many investors do not bother to do.  Until  Clean Energy becomes mainstream, this should be a lasting source of advantage.  He trades frequently, but with good reason: in reaction to the quickly shifting structure of subsidies that currently supports most clean energy technologies.  This should also be considered an advantage, at least until subsidies are not longer such a major factor in the profitability of many clean energy companies.

I would not be as complacent as he is about the costs of fund size... as assets under management grow, opportunities to invest in microcap companies disappear, as the money the fund would need to invest quickly dwarf's the stock's liquidity.  However, the advantages of fund size in the ability to spread management costs over a greater number of assets will probably be more significant than increasing liquidity costs for quite a while to come.

Would I invest in the Gabelli Green Fund?  The short answer is "yes."  If you agree with me that active mangement pays in alternative energy and climate change funds, then you should choose the fund that can make the best case for having the best manager.  If you're not convinced, you probably should not choose clean energy the mutual fund with the lowest costs, since you can acheive much lower costs with an ETF.  But if you want to hedge your bets, the two funds that seem to have a good balance of low cost, strong sector allocation, and past performance are the Winslow Green Growth Fund (WGGFX), and the New Alternatives Fund (NALFX).

Not convinced? Next week I'll take a look at the Clean Energy ETFs,

DISCLOSURE: None

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.


December 03, 2010

Structural and Electrical BOS Components for Solar PV

by Joseph McCabe, PE

When investing in the solar industry always remember the old joke: Question: Do you know how to make a small fortune in solar? Answer: Start with a large one. There are exceptions to this rule, like when PowerLight was purchased by SunPower the PowerLight principles came away with valuable SPWRA stock options. Powerlight was a structural balance of systems (BOS) company. They had unique rooftop and single axis tracking structural technologies for photovoltaics (PV), and used that IP to win jobs with various PV module manufacturers, the lowest priced ones at any given time.  By purchasing PowerLight, SunPower obtained a healthy revenue stream just when stock prices and P/E’s were soaring. Today SunPower is executing nicely in a more stable stock priced market with many module manufactures P/E’s reflecting more reasonable industrial ratios.

In our previous articles "Metrics for Thin Film Solar CIGS Company Comparisons" and “Finer System Level Details for the Comparison of Photovoltaic Technologies” we alluded to various system level details in the comparison of photovoltaic (PV) technologies and promised this follow up article on structural and electrical BOS components.

Structural and electrical BOS components are increasingly becoming a larger and larger portion of the cost of PV systems. As module prices have dramatically decreased, electrical and structural solutions have not decreased as dramatically. BOS will see more cost reductions, possibly through mergers and acquisitions, in the near future. Something the industry has been hoping for, for decades, is the time when systems, not components, will be marketed by major players. That time is fast approaching.

Now there are newer electrical balance of system’s companies in the market. At the recent Solar Power International conference held in LA this past October, Sam Vanderhoof from [privately held] Petra Solar commented that he saw 27 AC micro inverter or DC optimizer BOS companies, many of them brand new. All of this activity shows that there will be a variety of distributed electronics solutions available in the future.  This includes the better known microinverter approach from companies such as Enphase and next-generation DC optimizers from companies such as Petra, eIQ, SolarEdge and Phobos Energy.  The industry is beginning to understand the tradeoffs associated with microinverters, but has yet to fully grasp the benefits of DC optimizer solutions.  All of these electrical BOS technologies are fairly new and thus their relative benefits and long-term reliability have not yet been sufficiently measured.  Additionally, there is significant new technology being introduced on an almost daily basis. 

Akeena Solar (WEST) has had a complete packaged structural and electrical BOS solutions for a few years called Andalay (Now Westinghouse Solar). It uses the Enphase micro alternating current (AC) inverter and a quick installation framing solution. Structural and electrical BOS companies are merging. Privately held Sunlink Corporation recently purchased the electrical BOS product line from Blue Oak Energy. Even monitoring companies like Fat Spaniel was recently purchased by Power-One (PWER), currently the second largest manufacturer of solar power inverters globally. You will see the same trends with micro boxes on the back sides of PV module manufacturers, where the modules will have either AC outputs or optimized DC solutions.

Vertical integration has been happening in the silicon-to-solar-cells-to-modules side of the solar business. Forward integration is when a module manufacturer buys up structural, wiring, electrical solution components as in the PowerLight/SunPower case mentioned above. Forward integration is happening with the module companies performing in house complete systems solutions. This type of systems approach will become more mainstream with a single warranty and potentially an industry that has AC power ratings in the near future. The industry is going through consolidation as well as forward integration. The good news is that systems solutions will become less expensive, as well as more reliable with one warranty covering the complete system. Be looking for the SunPower (SPWRA), SunTech (STP) and Yingli’s (YGE) of the world to be announcing both electrical and structural BOS relationships addressing specific solar electric market sectors.

When you think of the solar industry, or investing in this industry remember the old joke, and consider the ultimate forward integration possibilities with Berkshire Hathaway. At the 2010 stock holder meeting I was able to ask both Charlie Munger and Warren Buffet about their plans for their solar investment in BYD. It is no secret that Munger has a hankering for solar as shown in his youtube video. Connect the dots, Berkshire (BHK.A) owns a major interest in the company BYD (BYDDY.PK). BYD is known for batteries, cars, but is also a major solar company making modules and inverters. Berkshire owns the roofing company Johns Manville (who have announced BIPV plans). Berkshire owns the building company Clayton Homes and and owns the Electrical Utility companies MidAmerica Energy, PacifiCorp, Rocky Mountain Power, Pacific Power. Munger answered my question regarding forward integrations potentials by indicating that the higher cost of today's solar energy is a small blip when looking at the over all macro economic factors facing the world. In other words he is bullish. I think Berkshire Hathaway has potentially the ultimate forward integration strategy.

Joseph McCabe is a solar industry veteran with over 20 years in the business. He is an American Solar Energy Society Fellow, a Professional Engineer, and is internationally recognized as an expert in thin film PV, BIPV and Photovoltaic/Thermal solar industry activities. Joe can be reached at energy [no space] ideas at gmail dotcom.

December 02, 2010

Election Does Not Spell Cleantech Doom


With the recent “shellacking” (as President Obama referred to the election results) of the Democratically controlled Congress, much of the buzz in the cleantech space has been doom and gloom.  Is cleantech doomed to a new dark age?  I do not believe so.

Energy policy is one area where there is an overlap of goals between the parties.  Members of both parties largely agree that energy is critical to our economic and national security.  And most Republicans do not dismiss out of hand the risks of global warming.

I suspect that energy policy will be a topic where this Congress will get something done especially with the President’s to work across party lines.  It won’t be exactly what the president wants and it won’t be exactly what the Republicans want.  It will be an old-fashion compromise that may actually result in some policies and that will have greater long-term impact on cleantech than most of the short-term handout programs that were put in place under the largelyineffective cleantech stimulus bill.

So, where can the Democrats and Republicans potentially agree when it comes to cleantech?

1)   Energy efficiency.  Republicans and Democrats have demonstrated their ability to find common ground here.  George Bush signed the law from a Democratic Congress that will end the life of the incandescent bulb and that increases the fuel efficiency standards for vehicles by 40% by 2020.  Democrats like tax credits for installing energy efficiency improvements, and Republicans like reducing taxes.  Reads like a match made in heaven.

2)   Renewable energy standards.  Many states have put in place such standards with support of both parties.  Some Republicans in Congress havepreviously voiced their support.  If the definition of “renewable” were expanded to include nuclear as an acceptable alternative, I suspect there would be broad support in Congress.  A renewable energy standard is exactly the kind of long-term macro-economic policy needed to drive change and create more sustainable demand for renewable energy and energy efficiency.  Utilities putting big dollars into development of renewable energy power sources and energy efficiency will drive much more industry growth and relieve issues around debt financing to a much greater degree than the government’s ineffectual efforts to play banker.  And if the definition of “renewable” were expanded to include nuclear, then I suspect the base of support would broaden even more.  Given that most renewable energy sources can’t serve as base load, it would be the right environmental and national security move to include nuclear in the energy mix.


3)   R&D.  Republicans have long been supporters of government R&D.  Although there will be an issue around funding offsets for the R&D, I believe there will be broad consensus on the need to invest in our energy future. What will happen, I suspect, is that the focus of this R&D will shift more to early stage disruptive technologies rather than the late-stage grants and government loans which are already proving to be failures. Even the Administration has internally begun to question the effectiveness of these programs.    If the scope of cleantech R&D is expanded to include clean coal technologies and next-generation nuclear, I believe the support base will broaden even more.  The most effective way to ramp up disruptive R&D funding is likely through the new ARPA-E and possibly to the few federal labs that do not have their roots in our nuclear weapons programs (e.g. the National Renewable Energy Laboratory).  By funding ARPA-E, most of the research would take place in our universities and private companies where the potential for real product development and technology transfer is much greater than in our defense oriented federal labs.  The biggest challenge will be finding the funds given the need to reduce the deficit.  One possible solution would be to take the funds already appropriated to later stage projects/loans that have yet to be awarded and redirect them to disruptive R&D.  Another would be a…

4)   Gas Tax.  Cap and trade is likely dead.  And given that such a program would have been a largely ineffectual mess (see my previous post, Cap and Trade: Right Debate, Wrong Solution) that is not necessarily bad.  As I pointed out, the area where there is the greatest overlap between environmental, national security and economic objectives is with gas/diesel, which most cap and trade proposals largely wouldn’t have touched.  The co-chairs of President Obama’s bi-partisan tax commission recently included a gas tax as a piece of its budget solution and two key Senators (one Republican, one Democrat) recently recently wrote the commission encouraging them to consider even bigger increases.  A heftier tax phased in over time may be possible by using the concept of a “tax and dividend”, whereby a tax is levied to increase its price and much or all of the revenue is distributed back to consumers. If the money raised from this tax is largely given right back to the consumers in the form a rebate, then it’s not a tax increase but rather a tax incentive to reduce consumption of gasoline/diesel.  Increasing the cost of gasoline/diesel to drive market demand for alternative fuels and energy efficient vehicles can help Republicans and Democrats achieve their desire of enhancing our national and economic security while reducing carbon emissions.

5)   Government Procurement.  The government is a large consumer of many items.  One of the best ways to accelerate market adoption is by creating a market for the product/service.  For example, the Federal government’s decision to require all new buildings to be LEED certified is accelerating a shift in the building industry to green buildings.  The government purchases a large amount of energy for buildings, vehicles, airplanes and ships.  Policies that drive increased purchases of domestic energy sources based on non-fossil fuels can provide a significant lift to multiple cleantech industries.  The Department of Defense understands the critical nature of this issue, especially around liquid fuels.  The Pentagon’s concern provides the nexus of an opportunity for collaboration between Democrats and Republicans on government procurement policies.

Even if you believe we will see a stalemate in Washington on cleantech, the global macro-economic trends will not change.  Consumption of fossil fuels is accelerating as the world, especially heavily populated China and India, dramatically increase the number of automobiles, power plants and factories.  It is a certainty that the price of these commodities will, on average, increase over time.  The next spike in oil prices, I suspect, won’t be too many years away and, worst case, whatever lull in cleantech enthusiasm that may occur will be quickly washed away.

The essence of any government policy with the goal of accelerating cleantech is simply an effort to narrow the time between today and the inevitable day when fossil fuels become expensive enough that various renewable energy and energy efficiency solutions become compelling without any government involvement.  If you’ve read my previous posts, you know that I do not believe that we will achieve our cleantech goals through massive grant or loan programs to the private sector.  Policies that target the underlying macroeconomic environment will ultimately have a much greater impact than handout programs.  Many of the policies that lie in the zone of potential cooperation between Democrats and Republicans such as gas tax, national renewable energy standards, and federal procurement policies can help drive steady long-term demand for renewable energy and energy efficiency. I am optimistic that these are areas where real progress can be made.  

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.

December 01, 2010

Alice in EVland Part II; The Hall Of Mirrors

John Petersen

Mark Twain reportedly said that "Figures don't lie, but liars figure." Truer words were never spoken.

On November 22nd the EPA issued an official fuel economy sticker for Nissan's (NSANY.PK) Leaf that shows an impressive electric drive equivalence of 99 MPG. Two days later it issued an official fuel economy sticker for General Motor's (GM) Volt that shows a comparable electric drive equivalence of 93 MPG, a gasoline drive fuel economy of 37 MPG and a combined equivalence of 60 MPG. Both stickers were heralded as the dawn of a new age in transportation. Unfortunately, they were outrageous lies that account for the distance a car can travel on a kilowatt-hour of electricity but ignore the energy needed to make a kilowatt-hour of electricity in the first place.

To arrive at their magical fuel economy numbers, the EPA started with the scientific fact that 1 kWh of electricity contains 3,412 BTUs of energy and 1 gallon of gasoline contains 124,238 BTUs. After calculating a base energy equivalence of 36.41 kWh per gallon, they adjusted that value to show a 7.5% energy loss in the battery and arrive at a final value of 33.7 kWh per gallon. In the words of autobloggreen "Since the Leaf has a 24 kWh battery pack and can go, officially, 73 miles, then, the EPA says, it could theoretically go 99 miles if it had a 33.7 kWh pack."

Now let's talk about what really happens.

To get a gallon of gasoline we have to drill a well, produce the oil, refine it and transport it to a gas pump near you. Overall, the production, transportation and refining consumes about 20% of the raw energy the crude oil contained at the wellhead. So if we back the entire process up to mother earth, each gallon of gasoline had an initial energy value 155,300 BTUs.

To get a kWh of electricity from sources other than water, wind and solar, we have to consume fuel to create heat in a generating plant and then turn that heat into electricity. The conversion process is very inefficient. According to the Energy Information Administration, it takes 10,378 BTUs of coal energy, 11,015 BTUs of petroleum energy, 8,305 BTUs of natural gas energy or 10,453 BTUs of nuclear energy to make 1 kWh of electricity. In other words, about 2/3 of the raw energy extracted from mother earth is wasted. If we include electricity from water, wind, solar and all other sources, the US consumed an average of 8,775 BTUs of raw energy last year for every kilowatt-hour of electricity it produced. By the time we account for transmission and distribution losses on the electric grid, the energy inputs for each kilowatt-hour of electricity delivered to a wall socket near you is about 9,375 BTUs.

When we track all the numbers back to mother earth, the energy equivalency ratio between gasoline in a car's tank and electricity in an EVs battery is 16.6 kWh per gallon – not 33.7 kWh per gallon.

The EPA's official sticker for Toyota's (TM) venerable Prius shows a respectable combined fuel economy rating of 50 MPG. Since the Prius only burns gasoline but does so very efficiently, we have to extract 3,106 BTUs of energy from mother earth to move the Prius a mile. In comparison, we have to extract 3,388 BTUs of energy from mother earth to move the Leaf a mile and we have to extract a whopping 3,873 BTUs of energy to move the Volt a mile.

The bottom line is all the efficiency talk for plug-in vehicles is based on a fundamental deception that ignores the energy required to produce electricity in the first place, the same way it ignores the emissions impact of producing electricity. As a result, all of the arguments in favor of vehicle electrification have the intellectual integrity of a no peeing zone in a public swimming pool.

William Martin wrote that "In America we get up in the morning, we go to work and we solve our problems." We don't delude ourselves by creating a hall of mirrors where unconscionable waste can masquerade as conservation. We can do better, but not until we take our heads out of the sand and recognize the problems.

Disclosure: None.


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