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January 30, 2011

Dividend-Paying Energy Efficiency Stocks

Tom Konrad CFA

Clean energy investing is not on for growth investors, traders, and speculators.  Conservative income investors can invest in green companies as well, and dividend paying energy efficiency stocks deserve pride of place in their portfolios.

In my clean energy investing workshops, I tell attendees that investing in clean energy stocks does not have to be riskier than investing in any other sector.  The key to investing in clean energy with a low risk profile is the same as low risk investing in any other sector: find stable, profitable companies selling at reasonable valuations.

Identifying stable, profitable companies is not always easy.  Even if a company is profitable today, rising competition, the falling price of alternatives, or changing technology can rapidly undermine business models and profits.  A rapidly changing legal, regulatory, and cultural landscape further complicates the search.   All of these factors apply in clean energy, but much more in rapidly evolving technology and incentive driven sectors such as solar PV and cellulosic ethanol than in more staid sectors such as energy efficiency and conservation.

The Economics of Energy Efficiency

Energy efficiency stocks lack the sex appeal of solar stocks or smart grid stocks, but that very dowdiness makes them much more stable than most other alternative energy sectors.  Further, unlike most renewable energy, much energy efficiency makes economic sense without incentives, so the companies are less dependent on the government to drive sales.  If Google (GOOG) had chosen to make energy efficiency cheaper than coal ("EE<C"), rather than renewable energy cheaper than coal (RE<C) they'd have been done before they started. 

One reason firms pay dividends is because it's a way to signal to investors that management is confident about their ability to pay that level of dividend far into the future.  Dividend cuts are embarrassing to management, and even worse for a company's stock price, so companies that pay dividends tend to believe that they will be able to remain profitable and keep on paying that dividend.

Safer Clean Energy Stocks

Given this, dividend paying energy efficiency stocks are a great place to start when looking for relatively stable clean energy investments.  The list that follows is simply a result of me going through our list of energy efficiency stocks and pulling out the ones that pay a dividend.  I plan to look more deeply into many of these companies in future articles.

Company (Ticker)
notes / articles
Aixtron AG (AIXG) 0.3%
Cabot Corp (CBT) 1.8%
green building
Eaga PLC (EAGA.L) 5.0%**
UK residential energy efficiency
General Electric (GE) 2.8%
A little of everything
Honeywell (HON) 2.2%
HVAC, building controls
Johnson Controls (JCI) 1.6%
Building controls
Kingspan Group, PLC (KGSPF.PK) 0.6%**
Green Building
Linear Technology Corp. (LLTC) 2.7%
Efficient power conversion
Neo-Neon Holdings (1868.hk) 1.5%**
PFB Corporation (PFB.TO) 5.0%
Green Building /
Philips (PHG) 2.5%
Power Integrations (POWI) 0.5%

Waterfurance Renewable Energy (WFI.TO) 3.5%
Geothermal Heat Pumps

*The dividend rates were as of January 28, 2010, and may have changed due to changes in the stock price or dividend policy since then.

**These London and Hong Kong listed companies follow the European practice of declaring a final and interim dividend that varies much more than the typical US-based dividend, so the dividend may be less of an indicator of earnings stability.

If you know of any dividend paying efficiency stocks I've missed, please let me know in a comment.


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

January 27, 2011

Electric Vehicles – The Opportunity of Which Decade?

John Petersen

Hardly a day passes without some talking head breathlessly describing electric vehicles as the opportunity of the decade. The fine point most investors miss, however, is that the decade they're describing won't begin until 2020 and for the next seven to ten years electric vehicle manufacturers like Tesla Motors (TSLA) and lithium-ion battery manufacturers like Ener1 (HEV) and A123 Systems (AONE) will hemorrhage cash as they try to traverse the trough of disillusionment that runs through the cruel black heart of the valley of death.

The following graph is a stylized view of the valley of death from Osawa and Miyazaki with a red overlay that highlights the trough of disillusionment. This is the most difficult period in the life of a product when its manufacturer must identify and eliminate any defects, optimize manufacturing processes, minimize production costs, establish a market presence and earn market share. For big-ticket items like cars, the failures and mediocre performers outnumber successes by a wide margin.

1.26.11 Valley of Death.png

Today we're witnessing the first product launches for the Tesla Roadster, the GM Volt and the Nissan Leaf. Despite their gee-whiz glamor and sex appeal, the crushing economic reality is that it takes $46 of incremental capital investment to save a gallon of gasoline per year with a plug-in while it only takes $24 of incremental capital investment to save the same gallon of gasoline per year with an HEV. Under those circumstances, the tyrannical laws of economic gravity dictate that the time between the "Product launch" and "Success as a new product" will be five to seven years under optimal conditions and a decade or longer under likely conditions. Let's be honest, an 8-year payback on an HEV premium is nothing to write home about but a 15-year payback on a plug-in vehicle premium is absolutely atrocious.

My optimistic self wants to believe that plug-in vehicles will eventually offer a sensible value proposition for the average consumer, but my rational self knows that it won't happen quickly because paradigm shifts never do.

In 2000 Toyota introduced a new fuel efficiency technology to the US market called a hybrid electric vehicle, or HEV. The idea was to improve fuel economy by capturing braking energy and immediately reusing it for electric launch and acceleration boost. While HEVs didn't require drivers to change their driving habits or their behavior, they were met with polite skepticism until they proved their value and performance over a period of several years in the hands of consumers. The following graph summarizes annual HEV sales by manufacturer from 2000 through 2010.

1.26.11 HEV Sales.png

In 2010, HEVs accounted for a miniscule 2.4% of light-duty vehicle sales in the US. It took eight years to sell the first million units because an eight-year payback was hard for consumers swallow and manufacturers were fighting a constant uphill battle with the laws of economic gravity. It took Toyota six years to top the 100,000 vehicle a year mark. Last year Toyota booked 69% of domestic HEV sales, Ford and Honda each booked 12%, GM and Nissan each booked 2.5% and the rest were insignificant. The only HEV model that can fairly be classified as a commercial success is the Toyota Prius.

President Obama may dream of a million plug-ins on the road by 2015, but a 15-year payback will be a non-starter for most buyers. Unless and until the technology premium falls to a point where the incremental capital investment per gallon of annual gasoline savings is competitive with an HEV, plug-ins will only appeal to a niche market of philosophically committed and mathematically challenged buyers.

The crucial fact that talking heads fail to grasp is that plug-in vehicles are not an incremental advance in automotive technology. They're a paradigm shift that will force consumers to change their driving habits and their behavior. Those realities bring human inertia into play along side the laws of economic gravity. It's not an easy market dynamic.

Since paradigm shifts are very rare, it's hard to find a current and directly comparable example. Instead we need to study historical paradigm shifts to see how they unfolded and how long the process took. One of the best examples I could find was the paradigm shift from draft animals to tractors on US farms. In that paradigm shift, the new technology was clearly superior to the legacy technology. The only real drawbacks were higher capital costs and less flexibility. Even so, this graph from Wessels Living History Farm shows that the paradigm shift occurred very slowly and it took 35 years for the new technology to earn a dominant market position.

1.26.11 Horse Tractor.jpg

The decade from 2020-30 may prove to be a golden age for plug-in electric drive if reliability, performance, consumer behavior and cost issues can be overcome during the next 10 years. Until then, the knock down drag out marketing battles will focus on direct competition between HEVs and plug-ins because it's extremely unlikely that electric drive will be cheap enough to compete head-to-head with internal combustion engines before 2020.

Under all reasonably foreseeable scenarios, the major business opportunity for the next decade will be improving efficiency for the 90% to 95% of new vehicles that won't have electric drive. In Europe, existing regulations require automakers to achieve an average fuel economy of 42 mpg for gasoline engines and 48 mpg for diesel engines by 2015. In the US, existing regulations require automakers to achieve an average fuel economy of 37.8 mpg for passenger cars and 28.8 mpg for light trucks in the same time frame. Stricter rules are already being discussed for 2020 and beyond. The specific fuel saving technologies automakers choose to meet these new fuel economy standards will not be offered to consumers as options. Instead they'll be standard equipment. Given a choice between relying on marketing and relying on government regulation, I'll bet on government regulation every time.

While emerging mechanical efficiency systems are a bit out of my depth, the leading electrical efficiency system for the next decade will be stop-start idle elimination. If you think about it for a second, it's the most sensible idea around - turn the engine off while your car's stopped in traffic. For simple systems that improve fuel efficiency by 5% the cost is only a couple hundred bucks. For more complex systems that improve fuel efficiency by 10%, the cost is still under $1,000. The one thing that both types of stop-start systems need is better starter batteries, which sets up a wonderful business dynamic for old line lead-acid battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE) and emerging lead-acid technology developers like Axion Power International (AXPW.OB). They may not sell any more batteries, but they'll sell better batteries that have higher prices and higher profit margins. Once you understand that an estimated 34 million new cars a year will need better batteries by 2015, the top line revenue impact and the bottom line profit impact will be stunning. It's a bird in the hand and nobody's paying attention because the application isn't sexy.

I've spent the last 30 years working as securities counsel for companies that were trying to traverse the valley of death. While it's always a miserable time for management teams, it's a disastrous time for investors and it's not unusual to see equities lose 90% of their value before the price begins to recover. Despite the media hype, investors in electric drive are in for a decade of unrelenting pain as plug-in vehicles experience slow uptake rates and have to compete with simpler and cheaper HEVs for market share. With slow plug-in vehicle uptake rates, it will be at least seven to ten years before widely heralded but vaguely defined economies of scale kick in.

If we learned anything from Microsoft and Apple, it's that the objectively cheap technology is the place to be for the first ten to fifteen years of a technological revolution and the objectively cool technology is only a reasonable investment when they figure out how to make cool cheap.

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

General Electric: Seeking to Define the Smart Grid

By Harris Roen

General Electric (GE) is a standout company that supplies products and services in the alternative energy and environmental fields. GE also has a robust stake in smart grid technology; its energy division alone has products that include power delivery, smart metering, charging systems, and power sensing. According to Cleantech, GE is a player in 5 of the 6 critical business areas affecting smart grid development.
As part of their commitment to shape the future of the smart grid, GE committed $200 million for entrepreneurs, students and other innovators as a “call to action” for ideas on smart grid, renewable energy and efficiency. 19 GE also has a fantastic Web site that worth visiting, that allows viewers to visualize and understand what a smart grid can do, at http://ge.ecomagination.com/smartgrid/#/landing_page.

It must be understood that General Electric is one of the largest companies in the world—period. It is in the top 15 of publicly traded companies in measures like sales, gross income, market capitalization and shares outstanding. GE has 23 major business groups ranging from energy to health care to entertainment to finance. GE employs over 300,000 people in over 100 countries worldwide, and netted over $9.8 billion in the past 12 months.

GE can fix your neighbor’s dishwasher or build a nuclear power plant in Asia. Accordingly when looking at GE as in investment, the overall company must be considered, not just areas of interest to the Paradigm Portfolio. Here the news is good—second quarter 2010 earnings were up a whopping 15% from the previous quarter!


The chart on the above shows that GE is still attractively priced compared to historic norms. The 4 columns in the chart show ratios of the current price per share of the stock compared to 4 different measures: sales per share, book value per share, earnings per share and free cash flow per share (FCFPS).

The top of the bars show the highest annual average since 2003 (note that Price/FCFPS exceeds the height of the chart). The bottom of the bar shows the lowest annual average, and cross bar shows current levels.
GE has a price/earnings ratio around 17. While this is higher than the 9 to 10 p/e range when GE was recommended for inclusion in the Paradigm Portfolio in May 2009, it is still within historic norms. Other measures on the chart are well below historic norms.

This means that even if sales, earnings and cash flow remain the same for this company, the stock price has a good chance of appreciating. For all these reasons I am still optimistic about GE, which looks like a reasonably priced company in the $13/share to $17/share range.


This is the third part of a three-part series drawn from “Smart Grid Investment Opportunities: Understanding the Smart Grid Investment Landscape”, a special supplement to the “ROEN FINANCIAL REPORT” ISSN 1947-8364 (print) ISSN 1947-8372 (online), published monthly for $69 per year print or $59 per year e-mail by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

DISCLAIMER: Swiftwood Press LLC is a publishing firm located in the State of Vermont. Swiftwood Press LLC is not an Investment Advisory firm. Advice and/or recommendations presented in this newsletter are of a general nature and are not to be construed as individual investment advice. Considerations such as risk tolerance, asset allocation, investment time horizon, and other factors are critical to making informed investment decisions. It is therefore recommended that individuals seek advice from their personal investment advisor before investing.

These published hypothetical results may not reflect the impact that material economic and market factors might have had on an advisor’s decision making if the advisor were actually managing client assets. Hypothetical performance does not reflect advisory fees, brokerage or other commissions, and any other expenses that an investor would have paid.

Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, Swiftwood Press LLC does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness, and makes no warranties with respect to results obtained from its use. Data sources include, but are not limited to, Thomson Reuters, National Bureau of Economic Research, FRED® (Federal Reserve Economic Data), Morningstar, American Association of Individual Investors, MSN Money, sentimenTrader, and Yahoo Finance.

January 24, 2011

The Market Slowly Catches on to the Good News at Electric Vehicle Company Balqon

Tom Konrad CFA

A recent financing transaction dramatically changes the outlook for heavy-duty electric vehicle company Balqon (BLQN.OB).

Last summer, I mentioned Balqon Corporation (BLQN.OB) as one of ten electric vehicle (EV) and hybrid vehicle stocks as part of my Best Peak Oil Investments series.  At the time, I thought that Balqon's short-haul electric trucks were a better fit for EV technology than electric cars, but that Balqon's constant need for investor funds made the common stock a bad investment because of probable dilution.  Overall, I thought the stock was worth watching, in case the funding situation changed.

At the time, Balqon was in desperate need of funds.  Like many other small (and large) companies in the years following the financial crisis, Balqon had difficulty raising enough funds to execute their business plan effectively.  According to the company's third quarter filings, Balqon delivered only one EV during the first nine months of 2010, despite having a backlog of 11 (now 10) EVs under an existing contract with the City of Los Angeles for the Port of LA.  Balqon was able to deliver nine EVs under the same contract in the 18 months leading up to December 2009, so working capital seems to be the most significant factor holding the company back in 2010.

On December 20, the funding picture changed.  Balqon announced a $5M private placement of stock and warrants at $0.63 cents a share.  That $5M is enough to eliminate the company's working capital deficit, and allow the production of the remaining electric trucks for the Port of Los Angeles by the company's March 31, 2011 target date, and also enable the company to begin work on the order of 10 electric yard tractors for Ford's Michigan Assembly Plant.

This deal also brought Balqon distribution rights and a closer relationship with China-based Winston Battery Limited.  Distributing Winston's lithium-ion phosphate batteries and high voltage charging systems should not only give Balqon some valuable additional revenue, but it will probably also lower the cost of the batteries used in their EVs, which should significantly improve the economics of their vehicles. 

Company Overview

Balqon designs and manufactures heavy-duty, short haul electric vehicles for the transportation of heavy loads at a variety of industrial and transportation facilities.  Their technology includes electric drive systems and motor controllers suitable for extremely high torque applications.  They've also developed a proprietary battery management system customized to their particular types of applications.

Balqon's hardware and software works with existing internal vehicle communications protocols, which enables them to work with existing heavy-duty vehicle OEMs to fit their drive systems into vehicles that potential customers will already be familiar with, and allowing them to piggyback on the product development efforts of existing heavy-duty vehicle OEMs. 

So far, Balqon has sold vehicles to the Port of Los Angeles (as discussed above), the Southern California Air Quality Management District, and has signed an agreement to provide them to Ford's Michigan plant.  The nature of these contracts makes it clear that, although Balqon's EVs promise much lower operating costs and maintenance costs, their customers so far have been motivated at least in part by the non-monetary benefits of EVs.  For Ford, the move helps them burnish the green image of a prominent consumer brand, while the Southern California buyers are primarily motivated by the need to meet strict air quality standards.

Heavy duty EVs make much more economic sense than electric passenger cars because the economics of EVs relative to fossil fueled vehicles improves the more frequently they are used, and the more they are charged.  Further, the limited range of electric vehicles is not a significant issue for vehicles that operate in a single industrial facility or closely clustered group of facilities.  Another large advantage for this sort of EV is idling reduction.  Short haul trucks naturally spend a much higher proportion of their time waiting to be loaded or unloaded, during which time a fossil fuel vehicle will waste energy and incur wear idling, but an EV need not idle at all and will still be ready to move at a moment's notice.

Perhaps the part of their business with the highest growth potential (due to relatively low working capital requirements) is providing their drive systems to other manufacturers of heavy duty electric and hybrid electric vehicles.  Because of my long-term belief that buses will play a significant role on our response to Peak Oil, I was very interested when Balqon received a $490,000 order for drive systems intended for electric buses in China.


Balqon's stock price has been slowly sinking with minuscule volume under the weight of successive rounds of dilutive financing for the last two years.  Each financing was relatively small, and was only large enough to keep the company running (and looking for more financing) until the most recent financing in December 2010.  That transaction consisted of stock and warrants at $0.64 a share, but did not receive immediate investor attention, most likely because of complete lack of coverage of the stock, and the Holidays.  

This January, that lack of attention is going to change.  An article discussing the financing on TheOTCInvestor began to draw attention on January 12th, and quickly moved the stock from the 70-80 cent range to the $1.40-$1.50 range.  The article you are currently reading is the beginning of an attempt by Balqon to raise their profile (see disclaimer below.)  Given the tiny market cap of the company ($36.6M at $1.42 today,) it will not take much additional interest to drive the stock significantly higher.

The $.64 price of the recent financing transaction was in the context of the company desperately needing money to restart production.  Now that the company has sufficient capital for its medium term needs, Balqon will be in a much stronger bargaining position, and be able to raise funds on a much more advantageous basis. 

However, given the company's recent history of dilutive financings, I thought it wise to see if the outstanding warrants and convertible bonds might dilute the stock further at higher strike prices.  The chart below shows the approximate number of shares that are likely to be created at various strike prices.

Share Dilution by conversion/exercise price

As you can see, nearly all the potential dilution is already locked in at 64 cents.  This is because the most recent financing was by far the largest, and also because the outstanding convertible bonds contained an anti-dilution provision which reset their conversion price to $0.64 when that financing took place.  Hence it makes most sense to analyze this stock as if 41 to 43 million shares were already outstanding, while the debt and derivative liabilities are removed from the balance sheet.  Balqon can also reasonably expect to receive an additional $3M investment as warrants are exercised in 2012 and 2013, and an additional $7.25M in 2015 so long as the stock price does not fall back too much from current levels.

Future Revenues

Balqon's future revenues will have little relation to 2010 revenues because of the working capital deficit last year.  Instead, I'll look at the outstanding orders.  If the company can deliver the balance of the Port of LA order in the first quarter as they expect, that will create approximately $2M in revenues.  Assuming that they continue to operate at that capacity for the remainder of the year (some of which will go to supply the Ford orders and some of which must come from future deal flow), I arrive at a guess of $8M in revenues for 2011, but it could easily be twice that, if they find more customers and continue to ramp up production. 

For comparison, their closest competitor, electric drive system supplier UQM Technologies (UQM), trades at about 8 times expected 2011 revenues.  If Balqon were to trade at the same multiple on current shares, a fair value would be $2.50.  If Balqon were to trade at a multiple of 8 with fully diluted shares, a fair stock price would be $1.50. 

Balqon should be given a discount relative to UQM because Balqon trades over the counter, while UQM is listed on the AMEX, but I used a conservative 2011 revenue estimate, and did not check to see if there are significant outstanding UQM warrants which would dilute that company's stock.  Hence, I think a share price range of $1.50-$2.50 is a reasonable expectation for the coming year.

DISCLOSURE: This article is paid research.  AltEnergyStocks.com was paid a flat fee by Balqon Corporation for the research, writing and publication of this article.  The opinions expressed here are the author's own, and neither payment nor publication could be withheld based on those opinions. 

The author also holds a long position in Balqon stock purchased with his own funds before this article was commissioned.

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

January 23, 2011

MasTec (MTZ): Connectivity to the Smart Grid

By Harris Roen

An important part of the smart grid will be devices that connect the user to the grid, or “reading points”. These reading points go way beyond the current meter reading system that just monitor the amount of energy used. The long held belief that meter reading was the only way to monitor household and business’s consumption is quickly being replaced with alternate ideas.
MasTec (MTZ) is a contracting firm with $2.1 billion in annual sales focused on utility and communications infrastructure. It specializes in communications, high-speed Internet and electric distribution, as well as water, sewer and natural gas. This communications and electric specialization makes MasTec a key company in smart grid deployment.

MasTec Sales and Earnings

MasTec is a well-run company with excellent financials. As seen in the graph above, sales have grown continually since 2003 in an almost straight-line fashion. It is particularly impressive that MasTec has maintained increasing sales during the recent recession.
The graph also shows that earnings per share from normal business, which excludes events such as acquisitions, refinancing, asset sales and the like (EPS from continuing operations). This has been positive since 2005. In other words, the company has been consistent in building shareholder value. Estimated future earrings have consistently been revised upwards for MasTec, another positive sign for the company’s long-term share price.

I believe MasTec is still undervalued. My analysis of a fair price per share for MasTec, based on both historic and future predicted earnings, is roughly 9.9 on the low end and 23.3 on the high end. The share price has been heading up the past few months, in the 14 to 15 range, which I think is approaching fair value. I see Mastec as a good trade in the 12 to 13 price range.

DISCLOSURE: At the time of publication, individuals involved with the Roen Financial Report or Swiftwood Press, LLC owned or controlled shares of MasTec.

This is the second part of a three-part series drawn from “Smart Grid Investment Opportunities: Understanding the Smart Grid Investment Landscape”, a special supplement to the “ROEN FINANCIAL REPORT” ISSN 1947-8364 (print) ISSN 1947-8372 (online), published monthly for $69 per year print or $59 per year e-mail by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

DISCLAIMER: Swiftwood Press LLC is a publishing firm located in the State of Vermont. Swiftwood Press LLC is not an Investment Advisory firm. Advice and/or recommendations presented in this newsletter are of a general nature and are not to be construed as individual investment advice. Considerations such as risk tolerance, asset allocation, investment time horizon, and other factors are critical to making informed investment decisions. It is therefore recommended that individuals seek advice from their personal investment advisor before investing.

These published hypothetical results may not reflect the impact that material economic and market factors might have had on an advisor’s decision making if the advisor were actually managing client assets. Hypothetical performance does not reflect advisory fees, brokerage or other commissions, and any other expenses that an investor would have paid.

Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, Swiftwood Press LLC does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness, and makes no warranties with respect to results obtained from its use. Data sources include, but are not limited to, Thomson Reuters, National Bureau of Economic Research, FRED® (Federal Reserve Economic Data), Morningstar, American Association of Individual Investors, MSN Money, sentimenTrader, and Yahoo Finance.

Related Article: Ten Clean Energy Stocks for 2010

January 21, 2011

Nick Hodge's Night Time Solar Energy Tease

Tom Konrad, CFA

NiMH battery company that's going to "make coal and oil obsolete" sleuthed out.

I can't help but chuckle at the hyperbole of some promoters of alternative energy stocks.  We can wish that coal and oil will be obsolete tomorrow all we want, but it ain't gonna happen.  That's just what Nick Hodge was claiming in a recent teaser for Highpower Technology (HPJ)

How do I know it's Highpower that Hodge is hailing as the answer to all our hopes?  Because Travis Johnson, the Stock Gumshoe told me so.  Travis is the same guy who sleuthed out Magma Energy (MGMXF.PK) for us in a guest article a year ago, and that the "Sunless solar" stock Green Chip Stocks was using to stir up the interest of potential subscribers was New Energy Technologies (NENE.OB).

NiMH to save the day?

I'm actually a fan of looking at the stocks of companies using battery chemistries other than Li-ion, since they're less likely to be overpriced because they get less hype (at least until now.)  But I doubt a few improvements to Nickel-Metal Hydride (NiMH) technology are going to allow it to become an economical way to store solar power.  The Gumshoe may claim to not know much about battery technology, but I think he's spot on when he says, "It’s hard to believe that Sanyo or Panasonic or even China BAK or BYD is quaking in its boots."

If you want to know more about Highpower's advances in NiMH technology (or just want a chuckle), here's the full article on StockGumshoe.

You can also look in the comments here for AltEnergyStocks' battery expert John Petersen's answer to my question:
John, what's your opinion on Highpower's technology?  Will it make EVs affordable and oil obsolete?


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

January 20, 2011

Understanding the Smart Grid

By Harris Roen

The modernization of the electric grid is an exciting investment opportunity that promises to be one of the biggest energy investment stories of the early 21st century. Smart Grid systems will provide large growth opportunities for many companies around the globe. This is being accomplished through a combination of updating existing technologies along with the creation of new systems aimed at improving the quality of the electric grid.

By understanding how the dream of a smart grid will become a reality, an informed investor will be in a very good position to capitalize on this trend. Accordingly, this report outlines what the smart grid is, what it can do, and most importantly, which companies are most likely to profit from smart grid business.


According to the U.S. Department of Energy, creating a smart grid is a “colossal task” that will take years or even decades to complete. Because this undertaking is so enormous, and because we are only in the early stages of smart grid implementation, the term “smart grid” defines more of a goal than a specific design or outcome.

Smart Grid technology is defined as having the following characteristics:
  • Enables active participation by consumers in demand response
  • Self-heals from power disturbance events
  • Operates resiliently against physical and cyber attack
  • Provides power quality for 21st century needs
  • Accommodates all generation and storage options
  • Enables new products, services, and markets
  • Optimizes assets and operates efficiently

The smart grid, therefore, pertains to any part of the electric infrastructure, from the power plant to transmission lines to the end user, which can make the system work more efficiently through improved communication and integration.
smart grid information flow
The chart above is a simplified diagram showing how energy and information moves through the smart grid. Energy and information are represented by blue arrows that can move in two different directions.


Currently the grid is all about providing enough electricity during peak usage times so the system will not fail. That means that there is plenty of excess capacity during non-peak periods.

One example of how a smart grid could improve this reality is in conjunction with electric vehicles. Vehicle battery systems could be set to charge at night, when peak demand is low and there is plenty of capacity. Cars that are parked during the day could then feed power back into the grid when electricity demand is higher.

This is but one of the many ways that a smart grid could act synergistically in reducing energy use and promote alternative fuel sources. Some other promises of a fully functioning smart grid include:

A city of buildings that will make slight adjustments to heating or air conditioning when peak demands become critical.

A dishwasher that will know to turn itself on when power demand is at its least.

A utility that will know in real time how to most efficiently use their substations to save on distribution costs and loads.

All this and much more are benefits that a smart grid can bring to the nations power system. When these types of energy savings are combined with maximizing the particular generating characteristics of alternative energy producers such as wind and solar, there is a synergistic benefit of reducing carbon emissions and other pollutants.


Some smart grid technologies are already in use, or are close on the horizon. Many of the ingredients or components that will create the smart grid, however, are farther away as smart grid vendors compete through a myriad of implementation standards and strategies.

To get a handle on what a smart grid means for different industries, it is useful to break down the components of smart grid technologies.

Advanced metering

A typical electric meter merely records the amount of electricity being used. Advanced metering can send information in more than one direction, which will create a mountain of data that will be useful to both electric providers and end users. Businesses in this area are meter manufacturers, communications companies, and data management systems.

Demand Response

Demand response has the goal of identifying peak electric usage times, and finding ways to curtail that use. This has already been going on for decades; utilities may simply get on the phone with major energy users to work on peak time reduction strategies through price incentives or other measures. Also, utilities have implemented outreach programs to home owners and other users. If demand response was updated and automated, it could drastically change the electric grid landscape.

This could well be the most important energy and cost saving component of the smart grid, resulting in a 20% reduction of peak energy use in less than 10 years. Demand response efforts will start with large industrial and commercial users in the short term, and will eventually reach into individual households via smart appliances.

Distribution Grid Management

This effort is focused on improving the inelegance of the electric grid: sub-stations and electric lines. According to Cleantech “Smart meters and home energy management systems may be easier to grasp and may appear more tangible than distribution system concepts such as Volt/VAR control and feeder automation, but improvements in core distribution technology can have tremendous impacts on efficiency.”

Electric companies could see a quick payoff by installing routers, switches, data recorders and that like on thousands of sub-stations, which could have an immediate impact on millions of miles of electric wire, creating substantial business for vendors in this area. Integrating these complex, multi-platform systems will also be a substantial continuing business for service providers.

Home energy management

Systems that integrate a home’s energy usage into a so called “smart home”. This could include a myriad of sensors and communications systems between appliances, outlets, thermostats, consumer devices, security systems and the like. Though initial costs are high, if done in aggregate across millions of homes the energy savings could be substantial.

Building energy management

Deploying smart systems to office buildings, factories, apartments and the like can have a much more immediate impact than home energy management. Most of the savings will come with more intelligent lighting and HVAC (Heating, Ventilating, and Air Conditioning).

These systems will also employ the need for sensors and communication equipment, net-worked together in a centralized monitoring and control apparatus.

Interconnection of the Grid

Defines how different power sources, e.g. wind turbines, solar arrays, conventional power plants, will connect to the electric grid. Solar is particularly different in that it produces power in Direct Current (DC), as opposed to the more common Alternating Current (AC).

The issues of grid interconnection are laid out in detail in the United Nations report Multi Dimensional Issues in International Electric Power Grid Interconnections. The benefits of improved grid interactions range from preventing blackouts to better interfacing with electric vehicles. And the potential cost savings could go into the billions of dollars.

This is the first part of a three-part series drawn from “Smart Grid Investment Opportunities: Understanding the Smart Grid Investment Landscape” is a special supplement to the “ROEN FINANCIAL REPORT” ISSN 1947-8364 (print) ISSN 1947-8372 (online), published monthly for $69 per year print or $59 per year e-mail by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

DISCLAIMER: Swiftwood Press LLC is a publishing firm located in the State of Vermont. Swiftwood Press LLC is not an Investment Advisory firm. Advice and/or recommendations presented in this newsletter are of a general nature and are not to be construed as individual investment advice. Considerations such as risk tolerance, asset allocation, investment time horizon, and other factors are critical to making informed investment decisions. It is therefore recommended that individuals seek advice from their personal investment advisor before investing.

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Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, Swiftwood Press LLC does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness, and makes no warranties with respect to results obtained from its use. Data sources include, but are not limited to, Thomson Reuters, National Bureau of Economic Research, FRED® (Federal Reserve Economic Data), Morningstar, American Association of Individual Investors, MSN Money, sentimenTrader, and Yahoo Finance.

January 19, 2011

Alice in EVland Part III; Cost Benefit Analysis For Dummies

John Petersen

Sometimes I think bloggers like me are the real dummies. We spend so much time delving into the minutiae of a stock or sector that we manage to obscure the big picture with too much detail. I've certainly been guilty of that particular flaw over the last couple years and want to offer an apology to readers I've confused rather than enlightened.

Yesterday a reader sent me a copy of a presentation that Exide Technologies (XIDE) used in its December 2010 Investor Meetings. The slide on page 6 of the presentation did a great job of separating the wheat from the chaff on the subject of vehicle electrification and clarified my thinking on several points I've been trying to make for a long time. Using Exide's presentation data as a guide, I'm going to see if I can finally nail down the economics in terms everybody can understand. I'm sure we'll hear from those who don't want to understand in the comment section.

The following table summarizes the operating capabilities, incremental costs, expected fuel savings and expected CO2 emissions abatement of the leading vehicle electrification technologies. For the baseline case I used a new car with 30-mpg fuel economy and anticipated usage of 12,000 miles per year, which works out to a basline gasoline consumption of 400 gallons per year. The numbers aren't spot-on accurate, but they're certainly in the right range. Since subsidies distort comparisons by shifting the cost of consumption from the buyer of a plug-in vehicle to the taxpayers who pay for the subsidies, I'll ignore them for purposes of this article.

1.20.11 Electrification Table.png

My next graph uses the table data to show the comparative capital cost of leading vehicle electrification technologies per gallon of annual fuel saving and per kilogram of annual CO2 abatement. You can download an Excel file with the calculations here.

1.20.11 Cost Graph.png

It doesn't matter whether you use fuel savings or CO2 abatement as your preferred metric. Vehicles with plugs simply can't deliver anywhere near the bang for the buck that their simpler and cheaper hybrid cousins offer.
  • In the four hybrid categories, the average capital cost per gallon of annual fuel savings is $24 and the average capital cost per kg of annual CO2 abatement is $2.24.
  • In the two plug-in vehicle categories, the average capital cost per gallon of annual fuel savings is $46 and the average capital cost per kg of annual CO2 abatement is $7.25.
Cars with plugs may feel good, but until somebody repeals the laws of economic gravity they will never be an attractive fuel savings or emissions abatement solution.

Lead-acid batteries from Exide and Johnson Controls (JCI), supercapacitors from Maxwell Technologies (MXWL) and lead-carbon batteries from Axion Power International (AXPW.OB) are the only rational choices for stop-start systems and micro-hybrids. Lux research has recently forecast global production of up to 34 million vehicles per year by 2016. Since the growth of stop-start and micro-hybrids is being driven by pollution control and fuel economy regulations in Europe, the US and elsewhere, it's as close to a bird in the hand as most investors will ever find.

Mild and full hybrids have historically used NiMH batteries for their electric drive functions and lead-acid batteries for their starters. Unfortunately, the "M" in NiMH is the rare earth metal lanthanum and production restrictions in China will limit global ability to ramp NiMH battery production until alternate sources of lanthanum come on line. Due to the rare earth metal crisis, I'm convinced that mild and full hybrids will be a competitive market where lead-acid and lead-carbon batteries vie for a share of the down-market offerings while lithium-ion batteries and supercapacitors vie for a share of the up-market offerings. Since design and production decisions will ultimately be made by the automakers, I won't even try to forecast potential market penetration rates for the competing technologies.

Lithium-ion batteries from A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI), Valence Technology (VLNC) and a host of foreign manufacturers are the only technically feasible choice for plug-in vehicles. Since the basic economics of plug-in vehicles don't make sense to me, neither do the basic economics of their manufacturers and battery suppliers. I'm sure we'll hear from commenters who hold different views.

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

January 18, 2011

Analyzing Solar Stocks With False Assumptions

Dana Blankenhorn

The lessons of technology investing also apply to solar investing.

The decision by Evergreen Solar (ESLR) to move to China has some analysts saying "ha-ha" over solar energy. But in fact it reveals a basic fallacy in the way solar power, and solar power stocks, are analyzed by Wall Street.

It's a manufacturing assumption. Solar panels are said to be a manufacturing business. So if prices are going down, that's bad. If governments are no longer seeing solar as just good PR, if they're treating it as a real industry that has to make its own way, that's bad too.

Here's the simple truth. Solar is a technology business. Not only that, it's a new technology business.

Evergreen Solar never understood that, and we're all paying the price for it.  So is the state of Massachusetts, which seems to have thought that luring a solar manufacturing plant was the same thing as luring a car plant.

It's not. It's a risk.

In fact, all solar stocks are a risk. What they require is risk capital.

There are many directions in which solar technology can improve. Systems can become more durable. They can become more efficient. They can use heat and ultraviolet radiation, not just visible light. And the fact that technology becomes cheaper over time is a feature, not a bug. We should assume it and cheer it, not fear it.

As a practical matter, this means that while the capital advantages of Chinese producers are impressive, they're not the whole story. They are not the end game. When it comes to solar technology, this is the era of Fairchild, not of Intel. There are still too many breakthroughs ahead to know who is going to become Intel.

Another warning. There is a basic misconception in technology investing. We say, “had you put $100 into semiconductors in 1970 you'd have a bazillion-gazillion dollars today” or we say the same about Intel or Apple. But it's never that simple or easy. I know people who lost money on Apple, and Intel, because they bet on it at the wrong time. If you put your money into Intel a decade ago, it's gone nowhere since.

So it's a dart board. Even investing through an ETF is no guarantee. For instance, the Chinese market leaders are now looking to develop projects, not just make equipment .

This is what early chip companies tried to do. They tried to make computers because Moore's Law was constantly on their tail. How did it work out? Not too well. Because they're different businesses. And there's a big difference between being a producer of panels and an owner of production capacity. Best of all (for Americans) neither business is where the future lies.

It lies with technology. It lies in the lab.

So I'm going to end this piece with a name, PVT

You can't buy it right now, it's privately held. Their relatively simple idea is to use both the heat and light on a solar panel to generate power, transferring the latter through an Energy Transfer system linked to a home's water heater.  Lots of people already have solar hot water heaters, just as an increasing number of people have solar panels for electricity. This just combines the two.

How long will this remain competitive, before other breakthroughs make it obsolete? I don't know. I only know that will happen.

The only lesson is to not look at solar power stocks the way you would look at utilities or manufacturing. Look at them the way you look at technology stocks. Which means you're buying the story, you're buying the sizzle, you're buying tomorrow, and you better be ready to get burned several times before your portfolio is warmed.

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.

Plug-in Vehicle Subsidies; Taxing Peter To Buy Paul's New Car

John Petersen

Industrial subsidies have been an important feature of the American economic landscape since the late 19th century for one simple reason – they work. After the steam locomotive proved its ability to quickly and cheaply move people and cargo long distances, the government launched a massive effort to span the country with steel rails and bring the benefits of a rapid, safe and reliable national transportation system to all its citizens. After electric lighting proved its merit, the rush was on to build a national infrastructure and bring the benefits to all. After the internal combustion engine proved its merit the rush was on to build better roads and highways, increase oil production and make automobiles a luxury all men could afford. After advances in communications and information technology proved their merit, we were off to the races again. In fact, it's hard to name an industry that hasn't been richly rewarded by our long tradition of subsidizing the rapid implementation of proven technologies through the creation of productive assets that make the nation richer.

Over the last decade, however, there's been a subtle erosion of subsidy theory that most observers have failed to notice. In addition to traditional subsidies that create productive assets and make the nation richer, we're seeing a proliferation of consumption subsidies that enrich individuals while providing no meaningful benefit to society. The poster child for this unconscionable rape of the treasury is the $7,500 tax credit for buying a plug-in electric vehicle. The government is quite literally taxing Peter to buy Paul's new car.

The credit will be available for the first 200,000 qualifying vehicles sold by a manufacturer at a direct cost of $1.5 billion per automaker. On the positive side of the ledger, Paul's new plug-in will reduce national oil consumption by about 100 barrels over its useful life at a cost of $75 per barrel. On the negative side, Paul's State, city, utility, employer and favored merchants will have to spend their own money adapting to Paul's increased demand for electricity and Paul's desire for a convenient charging infrastructure. I have to wonder if it wouldn't be cheaper to just give Paul a 10-year free gas coupon.

At this juncture I'm not sure which thought is most apropos, Everett Dirkson's quip, "a billion here, a billion there, and pretty soon you're talking real money;" Ayn Rand's bleak warning that "No private embezzlers or bank robbers in history have ever plundered people's savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments;" or the bandit Calvera's self-absorbed arrogance in The Magnificent Seven, "If God didn't want them sheared, he would not have made them sheep!"

In December Vinod Khosla surprised cleantech investors when he called for an end to corn ethanol subsidies, which Al Gore characterized as a mistake motivated by presidential aspirations and the importance of the farm vote. While I agree wholeheartedly with their conclusions about corn ethanol subsidies, I have a very hard time buying into the argument that "subsidies should be a short-term, and not a permanent measure, used for five to seven years after a technology first starts scaling in order to allow it to transition down the cost curve until it can compete on its own merits."

No industrial revolution has ever flowered from a technology that did not first prove its merit to a skeptical, competitive and inertia bound market. Subsidies can accelerate the adoption of cost-effective innovations, but they can't make a silk purse out of a sow's ear. The harsh reality is that a business model that can't survive without subsidies can't thrive with subsidies.

While reasonable men can argue the pros and cons of every subsidy, the historical justification has always boiled down to the fact that subsidies encourage domestic economic activity, create domestic jobs and increase the national wealth. Even the much-maligned corn ethanol subsidies were paired with tariffs on imported ethanol to protect domestic producers. But when it comes to plug-in vehicles, domestic productive capacity and economic activity are irrelevant. The credit doesn't add a single brick to the nation's productive capacity and it doesn't even distinguish between foreign and domestic products. Regardless of where the vehicles are built the batteries that will account for 25% to 50% of their total cost will be manufactured overseas, or made in the US using imported equipment, components and supplies.

We've quite literally gone from sending jobs overseas to subsidizing job creation overseas.

In my adult lifetime, every government sponsored energy independence program has failed because the core technologies were not cost-effective. The schemes that were ultimately disastrous for investors include:

28 years ago Methanol
18 years ago Electric vehicles
13 years ago HEVs and Electric vehicles
8 years ago Hydrogen Fuel Cells
5 years ago Ethanol

Does anybody see a pattern besides me? Have investors who are paying ten times book value for Tesla Motors (TSLA) failed to learn anything from the experience of Ballard Power (BLDP) and Pacific Ethanol (PEIX)? What about battery manufacturers like A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) who have no meaningful protection from foreign competition? Does anybody really believe a feel-good program that taxes Peter to buy Paul’s new car will, or for that matter should, survive looming Federal budget battles?

Albert Einstein defined insanity as "doing the same thing over and over again and expecting different results." Once again we've hared off on a tangent and tried to force uneconomic technologies on a skeptical, competitive and inertia bound market. In the process we've made a mockery of more than a century of sound industrial subsidy theory to enrich individuals while making the nation poorer.

Disclosure: None.

January 16, 2011

Solar Tracer at the Penny Stock Arcade

Dana Blankenhorn

This article is no longer available.

Disclosure: None

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.

January 15, 2011

Finding the Apple Computer of Solar Power

by Joseph McCabe, PE

Have you noticed the corporate pitches that compare their products to iPhones or iPads to try and force the feeling that they are "like Apple"? Bill Ford just pitched the Ford electric car in this manner. If Apple is the gold standard, the question becomes, what solar company is closest to being just like Apple? I think the answer is none, at least not yet.

The Apple Model

Apple has a design culture that attracts design professionals to their product. They also have a completely vertical integrated product where their case, graphical user interface (GUI), input devices, high resolution screen and system packaging is all designed around the Apple culture. They have their own proprietary operating system and a steady stream of income from content sales off iTunes.

An analogy to some of Apple’s business strategy might be solar industry business plans, however these are innovations which typically are not unique or proprietary. An example is when SunEdison (now owned by MEMC NYSE:WFR ) institutionalized third party financing. Lots of companies have followed suit.

Solar Companies Today

Grid tied photovoltaics (PV) aspires to be a “set-it-and-forget-it” kind of product, not needing the interaction of a GUI and operating system. Smart grid integration could enable PV to have more of an operating system value proposition, but that hasn't happened yet.

As far as design, I don't think there is a company that comes to the solar professionals mind when considering who is first-in-class with design. Sunpower (NASD: SPWRA)  has the black background module to match their technological improvements in back contact grids along with the highest power module efficiency. Some thin film PVs are better than others at being monolithic black and not fading over time, but these aren't great design features. Flexible thin film amorphous silicon like UniSolar (NASDAQ: ENER) can be seen as looking different from glass based PV modules with aluminum frames and structures, but possibly due to lower efficiencies have not created a robust market. Design features will someday separate specific companies within the solar industry, but that hasn't happened yet.

First Solar (NASDAQ:FSLR) just announced the purchase of the tracking company RayTracker Inc., a company originating out of Energy Innovations (Founded in 2000 by Bill Gross) and IdeaLab. Trackers is where the most appealing designs have been proposed in the past. If you have the time and are interested, check out some of the historical patents on solar trackers. Some wild concepts came out of the funnest bunch of innovative thinkers in the 80's and 90's, mostly because at the time the thought was if you build the best sun tracker, the world will reward you. RayTracker Inc. has now been rewarded for the many years of incremental improvements in their technology and execution of their business plan.

There are a few companies that have tried to package up solar systems into compelling designs. Akeena Solar ( NASDAQ:WEST ) has complete systems solutions with some installation labor savings but no real unique design features. Other companies like Applied Solar (used to be Open Energy Corp) and Lumeta (owned by DRI ) have been integrating PV modules without metal structures directly into roofing for some years. Many solar electric carports are coming to the market with daily news announcements for larger and larger solar carports installations. Envision Solar ( OTC:EVSI ) had one of the first architect designed solar carports, but these companies have yet to capitalize on design in an Apple way.

Solar Companies Tomorrow: Purpose Solar

The future of solar has the potential for design and operating systems to be combined in an Apple way. I call it Purpose Solar, where the solar system provides a needed service like clean drinking water (direct current PV powered reverse osmosis), water pumping, air-conditioning / refrigeration, street lighting, ect. These have traditionally been called off grid applications, not in the limelight of our industries alternating current grid connected focus. But at a consistent $90 a barrel for oil, and lower cost of PV modules, off grid is the place where PV will be taking a larger and larger portion of the worlds energy pie. As the world realizes that an $80 barrel of oil is history, diesel generators currently used for off grid applications will be replaced by off grid PV system.

There are companies currently providing Purpose Solar systems like the PV power drinking water purification systems from World Water & Solar Technologies (privately held) and SwissINSO Holding Inc. (OTCBB.SWHN) who recently announced a healthy Malaysian sales contract and distribution agreement.

Purpose Solar will be valued by the gallons of drinking water produced, the air-conditioning comfort levels, pounds of ice, and the security from lighting, not kilowatts and kilowatt hours. Designs, operating systems and GUI's can be combined, branded and marketed for solar driven, Purpose Solar, solutions. And it is where finally a solar company can be "like Apple".

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.

January 13, 2011

Renewable Energy and Cleantech Mutual Funds and ETFs: Does Tax Efficiency Matter?

Alternative Energy and Climate Change Mutual Funds, Part VI

Tom Konrad CFA

My recent article, In Clean Energy, Active Management Pays, started a bit of a controversy.  Rafael Coven, the Index Manager for The Cleantech Index (^CTIUS), which is the index behind the Powershares Cleantech Portfolio (PZD), left a comment on Barrons and sent me an email saying, "Your comparison of funds and ETFs ignores the tax efficiency differences which are very significant."

Rafael is right that it's important for many investors to consider taxes before making an investment decision, and that ETFs are often more tax efficient than mutual funds.  But are the differences in the particular case of clean energy funds really "very significant"?  I had my doubts, so I decided to look at the numbers and find out.

Why ETFs are Usually More Tax Efficient

ETFs are generally considered more tax efficient because they make fewer capital gains distributions.  A mutual fund or ETF that sells a position at a profit is required by law to return a prorata share of any net capital gains to the fund's investors every year.  Positions held less than a year produce short term capital gains, while positions held more than a year produce long term capital gains.  When these gains are returned to investors, they are taxable as short or long term capital gains, regardless of whether the funds are reinvested.

In general, actively managed mutual funds trade much more often than ETFs, which passively track an index.  While many mutual funds trade much of their portfolio once or more a year, most ETFs only trade a tiny fraction of their portfolio in order to keep up with changes in the underlying index. 

Hence a mutual fund with a Turnover Ratio of 100% (meaning that, on average, 100% of the funds holdings are traded each year) will, on average, only hold a position for a year, and will distribute the majority of capital gains to shareholders every year, much of which will be in the form of short term capital gains, which are typically taxed at a higher rate than long term capital gains.   In contrast, an ETF with a Turnover Ratio of 10% will, on average, hold a position for ten years.  This allows time for significant undistributed capital gains to build up, and when those capital gains are distributed, they almost always come in the form of long term capital gains, which are usually taxed at a lower rate.

Who Needs to Worry About Tax Efficiency, and Who Doesn't

Not all investors need be concerned about the tax efficiency.   Most obviously, investors who are investing in a non-taxable account, such as an IRA and a 401(k).  Tax exempt institutions, such as charities, also need not worry about tax efficiency.  Finally, people in lower tax brackets need be less concerned than those with high incomes, since the taxes on capital gains distributions will be lower for them.

Undistributed Gains

Most renewable energy stocks are down significantly over the last three years (roughly the same period as the track record of most of the ETFs.)  This means that, at least in the short term, many mutual funds and ETFs will not have any capital gains distributions no matter how well they perform, because previous year's capital losses will be available to offset future gains.  (While funds are required to distribute realized capital gains, they have no way of distributing realized capital losses, except for offsetting future gains.) 

The Numbers

Morningstar has data on most fund's tax efficiency, including adjusted returns assuming distributions are taxable, and potential capital gains exposure (undistributed capital gains as a percentage of net assets.)  The following two tables and charts compare the ETF and mutual fund three year returns on both tax adjusted and unadjusted basis, along with potential capital gains exposure and fund turnovers.  Where possible, I used no-load mutual fund shares because I feel they are more comparable to ETFs than load shares, despite the fact that long term mutual fund buyers should generally prefer load shares because of their lower annual expense ratios.

ETF 3yr pretax
total return
3yr tax adj
total return
Potential Cap
Gains Exposure
QCLN -43.34% -43.34% -52% 40%
PZD -28.31% -28.38% -40% 31%
PBD -56.22% -56.28% -98% 62%
GEX -64.96% -65.03% -198% 50%
PBW -59.90% -59.90% -234% 42%
ICLN insufficient track record

Mutual Fund
3yr pretax
total return
3yr tax adj
total return
Potential Cap
Gains Exposure
WGGFX -38.09% -38.76% -46% 93%
NALFX -36.19% -39.81% -25.00% 34%
CGACX -61.73% -61.73% -110% 61%
AECOX -48.72% -51.72% -68% 39%
WRMSX -42.70% -42.88% -260% 114%
SRICX 15.43% 12.65% 0.60% 190%
ALTEX -33.01% -33.01% -22.18% 41%

etf tax chart.png
mutual fund tax chart.png

As you can see from the tables, the ETFs have indeed been more tax-efficient than the mutual funds, but the differences are so marginal that they are difficult to detect in the charts. 

More striking are the extremely large negative capital gains exposures of many mutual funds and ETFs.  The DWS Climate Change Fund (WRMSX), Guinness Atkinson Alternative Energy Fund (GAAEX), Van Eck Global Alternative Energy Fund (GEX), and the PowerShares Clean Energy (PBW) all have undistributed capital losses equal to multiples of the funds' current values (260%, 241%, 234%, and 198%).  That means that all the holdings in each fund's portfolio could be sold for three or more times their current value and the funds would still not have to distribute any capital gains.   Tax efficiency will remain a moot point for years to come, at least for these four funds, as well as for the PowerShares Global Clean Energy Portfolio (PBD) and the Calvert Global Alternative Energy Fund (CGACX).

The only fund for which I can really call tax efficiency a concern is the Gabelli SRI Green Fund (SRICX).  Why does the Gabelli fund stand out as having a "problem" with tax efficiency?  Because the Gabelli fund actually managed to turn a decent profit over the last three years, while their clean energy mutual fund and especially ETF rivals lost money hand over fist.  I recently interviewed John Segrich, CFA, the lead fund manager at the Gabelli SRI Green fund, and he explained in part how they did it.

When it's a sign you're making money, tax inefficiency seems like a good "problem" to have. 


It's also worth noting the fairly high Turnover ratios of all of the ETFs, ranging from 30% to over 60%.  That means that, on average, the holdings of Clean energy ETFs trade once every 2-3 years, which is not enough time to build up substantial unrealized capital gains, although the majority of capital gains distributions are likely to be in the form of long term capital gains.  In fact, the New Alternatives FD Inc (NALFX) has a lower turnover ratio than all but one of the clean energy ETFs.

Even when we return to an environment where most of these funds are habitually making gains, and the negative capital gains exposures of many of the funds are exhausted, these ETFs will have less of an advantage in tax efficiency over the clean energy mutual funds than broad market ETFs have over their peers, unless the ETF turnover ratios fall faster than those of the mutual funds. 


While Clean Energy ETFs are a little bit more tax efficient than Clean Energy Mutual Funds, the difference is not currently significant.  Clean Energy is a very young sector with high volatility and quickly changing industry structure.  The changeable nature of the clean energy landscape means that a lot of the usual rules do not apply.  Not only do active managers have a significant advantage over passively managed funds like ETFs, but passive clean energy funds also have much less significant tax advantages than passive broad market funds.
DISCLOSURE: No Positions. GAAEX is an advertiser on AltEnergyStocks.com. 

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

January 12, 2011

A Solar Penny Stock Worth Watching?

Dana Blankenhorn

As a rule "penny stocks," public companies routinely selling for less than $1 a share, and sometimes just a few pennies, make me nervous.

While the intent is laudable – to give small investors a chance to bet on long shots just like the boys on Sand Hill Road  – the result has always looked like a rigged casino.

Because of its low capitalization and small float it's easy to “pump and dump” a penny stock, boosting its value with some publicity, then selling it short. And if the deal were worthwhile, why isn't the smart money in there already?

Needless to say I would never buy one.

Over the holidays I spied a release about Sunvalley Solar, a California company that says it has filed a patent application covering what it calls a more efficient solar cell design.

“Because of an array of nanostructures with space varying periodicity and orientation, the Sunvalley patented solar cell is less affected by the spectral wavelength, angle, and/or polarization of the incident light,” the release said.

Pretty opaque. But it seems to mean that the structures in this cell face in different directions, allowing a cell to be efficient on a wide variety of solar angles. Cool.

So I did some research on Sunvalley and found they're a penny stock, trading over the counter under the ticker symbol SSOL.OB. (Not just a penny stock, but its shares currently sell for about four-tenths of a penny each.) Got my "spidey sense" tingling. I decided to look at it some more.

The Web site features a highly-educated collection of Chinese-Americans, most with degrees from Beijing University or Tsinghua University. In Chinese these can translate as Harvard and Yale, or Cal and Stanford. But you can be robbed by someone from Stanford as easily as one from Texas A&M in Kingsville. (Go Javelinas.)

Sunvalley also has a manufacturing deal with Baoding Tianwei Solar Films, southwest of Beijing.  Tianwei is tied-in with Tsinghua University with an educational program and Sunvalley CEO Zhijiang “James” Zhang is a Tsinghua alumnus.

So it's real on the front end. What about the back?

CEO Zhang says he needs large-scale manufacturing to proceed with his Green Farm Solar Investment Program in the Imperial Valley of California. The idea is to use government incentives to help finance thin-film development on land owned by date producers like Seaview Packing and Leja Farms, who aren't using all their sunlight.

Real on the back end. Sort of.

Zhang believes thin film is better for these desert locations than crystalline panels, even though they are less efficient. The patent allows his panels to maintain this efficiency while remaining stationary in a field surrounded by plants.

That's his story. Anyone buying?

It seems like Sunvalley has a business model, waiting customers, it has what seems like a new technology and a legitimate manufacturing partner lined up. I would still call it a long shot -- if its prospects were really that great it would have investment bankers crawling all over it.

As best as I can determine, Sunvalley decided to take itself public by buying-out an Edmonton-based outfit called Western Ridge Minerals in a reverse merger. This could let it raise capital while directors retained control. With 800 million shares it has a market cap of about $3.7 million.

It could still be a scam. Heavy promotion caused the stock's value to rise in September, then it tanked again. Words like "shady" were used in describing it around Thanksgiving.

Some things that look like scams are. But some aren't. Which do you think this is?

Disclosure: No Position

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.

January 11, 2011

Energy Storage, The Valley of Death and The Elephant Hunters

John Petersen

Most readers know I'm a lawyer who works in small company finance. Clients come to us in their earliest development stages and upgrade to a larger law firm when they need more comprehensive service than a boutique firm like ours can offer. As a result, I've spent over 30 years guiding entrepreneurs through the "Valley of Death," an exhilarating, treacherous and often terrifying period in the life of every business that begins with the signing of incorporation documents and ends when cumulative cash flow turns positive.

Most companies that enter the valley of death don't emerge. For the fortunate few that do, the difficult times usually last far longer than anyone expected. The one character trait all entrepreneurs share is unbridled optimism. The three character traits all survivors share are determination, focus and fiscal restraint. The following is a stylized view of the valley from Osawa and Miyazaki.

1.11.11 Valley of Death.jpg

The next graph comes from the Gartner Group and presents a stylized view of the Hype Cycle, a well known but poorly understood market phenomenon that typically leads to overvaluation during the early stages of a company's development followed by extreme undervaluation in later stages when the major development and commercialization challenges have been overcome, cash flows are about to turn positive and early stockholders have grown so impatient that they're willing to sell at distressed prices despite improving business fundamentals. It's the second most popular story in the financial world – the elephant that got away because I sold too soon.

Gartner HC Slide.jpg

The two graphs aren't perfect overlays, but they're darned close. Simple logic dictates that two best entry points are the innovation trigger and the trough of disillusionment.  After a 30-year career as a guide in the valley of death, I know to a certainty that there's no better investment risk in the world than a company that's spent several years in the valley of death and survived the trek to the trough of disillusionment. It's a target rich environment for elephant hunters.

With the exception of Enersys (ENS), which was just plain undervalued when I bought it at $6, all of my picks and pans over the last couple years have been based on valley of death analysis. I'm negative on stocks that have a long road to travel before they hit the trough of disillusionment and positive on stocks that are close to the trough or have already arrived. My goal is to buy as close to the trough as possible, when stocks are at their most depressed level, and hold through the transition from negative to positive cash flow until the market finally recognizes the inherent value of determination, focus, fiscal restraint and execution.

A couple years ago, Exide Technologies (XIDE) was a classic example of valley of death analysis. It had emerged from Chapter 11 in the summer of 2004 but was far from healthy. Exide's management spent the next four years restructuring and streamlining operations, a process that punished current earnings but paved the way for consistent future earnings. By the time the crash hit in the fall of 2008, Exide had absorbed most of the restructuring pain and a stock that traded in the mid-$20s in the summer of 2004 had been beaten down into the mid-$4s. Then, to add insult to injury, a hedge fund that that was a large holder of Exide's stock suffered heavy losses in the crash was forced into a wholesale liquidation of its holdings. That drove Exide's stock price down to a low of about $2. For old stockholders it was a tragedy. For investors who took the time to consider my valley of death analysis and understand the underlying dynamics, it was a tremendous opportunity. Exide's business had never been healthier and its stock price had never been weaker. The investors who bought Exide at $2 are up almost 400%. If Exide's earnings and stock price continue to improve, which seems likely at this juncture, it will be a true elephant.

Another classic example of valley of death analysis was Active Power (ACPW) one of the last big IPOs before the tech bubble burst in 2000. From an IPO price of $17, Active Power ran up sharply and then began a slow downward decline into the $2 range as its technology development, validation testing and market development took far longer than anyone expected. By the time the dust settled after the 2008 crash, Active Power's stock price had fallen to a low of $0.26. The collapse had nothing to do with business fundamentals and everything to do with investor fatigue. Sales were building at solid rates and the installed product base was performing admirably. For existing stockholders it was a catastrophe. For new investors who took the time to consider my valley of death analysis and understand the fundamentals, it was another great opportunity. The business had never been healthier and the stock price had never been weaker. Investors who bought Active Power at $0.26 are up over 800%. If Active Power's cash flow and stock price continue to improve, it will be the kind of story hucksters use to sell newsletters.

A good example of an unsuccessful valley of death analysis was C&D Technologies (CHHP.PK). Like the others it was an $8 stock that got beaten down to $2 in the crash and fell into the $1 range after it got dropped from the S&P 500. Unlike the others, C&D's debt burden was high and the due date was dangerously close. While I believed that C&D would have enough time to turn the corner before its debt became problematic, I was caught flat-footed by management's decision to take a huge intangible asset write-off that wiped out stockholders equity. That decision forced a restructuring where debt holders got 93% of the company by converting $115 million in debt to equity. It was terrible for existing stockholders and investors who went elephant hunting too early. It was also a stark reminder that debt is an intolerable burden for all but the strongest of companies that need to traverse the valley of death. Given the number of shares that C&D issued in the restructuring, it will take a long time climb back into the $1 range. A price of $0.40 to $0.60, however, is not an unreasonable goal once the impact of the restructuring becomes clear. There are too many shares outstanding for C&D to be a true elephant, but a double or triple from the current price seems like a pretty fair bet.

ZBB Energy (ZBB) went public at $6 a share in the summer of 2007 and promptly began a slow slide into the $1 range. For most of the last year ZBB traded in the $0.60 range while its management continued to exercise fiscal restraint and implement their business plan. In early December something changed and ZBB's stock price has climbed from $0.57 to about $1.50. It's too early to say for sure whether ZBB has hit the bottom of the trough and started a sustainable climb back toward its IPO value, but the indicators look solid. ZBB's principal product has successfully completed a three-year validation test by Australia's equivalent of the DOE and it's been successful at obtaining working capital when needed at reasonable prices. ZBB is on a run and it looks like the stockholders that gave up hope over the last year are finally out of stock. I'd be reluctant to guess how far ZBB will run before pausing to catch its breath, but this is a fun time for courageous investors that took the time to consider my valley of death analysis when ZBB was trading closer to $0.60.

My current short-list of valley of death buys includes Beacon Power (BCON), Kandi Technologies (KNDI) and Axion Power (AXPW.OB). All three have reached levels of maximum stockholder weariness despite impressive progress in their core business activities. All three have adequate working capital and all three are on the cusp of revenue streams that will either slow the bleeding significantly or reverse it entirely. I can't forecast dates, trigger events or upside potential, but 30 years experience as a guide in the valley of death tells me that further price declines are unlikely and when the trigger events occur the price charts will turn like hockey sticks.

I'm frequently harsh with Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) for one simple reason. They're still at an early stage of their journey into the valley of death and far too optimistic about the time needed to move from today's exciting product launches to future market success and positive cash flow. It may look like a brief span of time on the Osawa and Miyazaki chart, but it took eight hard years for Toyota to turn the corner with the Prius. At some point my outlook for the survivors will change as it recently has for Beacon. Until I can identify a looming inflection point, however, I have to believe the market prices for these companies will follow a long and painful path to the trough of disillusionment.

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

January 10, 2011

Solar Energy Scam Season

Dana Blankenhorn

Any hot investment field is ripe for scams. It's that time for solar energy.

Sun Energy of Australia says it has been making “solar inverters”  since 1987. Its directors appear to all be legitimate businesspeople.

But look a little more closely. What is a stock photo of the old Merrill Lynch bull doing there? A flower? The Earth, seen from space? And click the “language” icons on the home page. They don't lead anywhere.

The Australian Securities and Investments Commission has told the Sydney Morning Herald it suspects stock fraud, adding the same outfit may have tried to pull the same trick  in South Africa. It's an old story -- hype your prospects, sell stock in it, skip town and do it again.

Most directors contacted by the Herald were quick to deny any involvement in Sun Energy of Australia. Only one of the faces on that directors' page turns out to be a real director. His name is John Price (pictured right), and while you can't right-click his picture on the company's Web site for some reason, I was able to work around that.

Mr. Price claims to have been an Australian Entrepreneur of the Year. Funny thing about that. Ernst & Young, which gives out that award, doesn't list him among the winners. A collection of big corporate names are listed on Price's Sunenergy bio as sponsors of the award – only Qantas is currently.

Mr. Price also claims to be a graduate of the Harvard Business School. Hard to check on from Australia. Not so hard from Atlanta.

There is a John R. Price who is a graduate of Harvard Business School. He's a banker in Pittsburgh. Note that the Pittsburgh Price uses his middle initial. That's a good hint for anyone with a common name, if you want people to find you easily.

Linkedin lists 24 people named John Price in Australia. This John Price is not one of them. The Harvard Business School alumni directory is closed to outsiders. I contacted the registrar, there, who has no record of Australia's John Price.

It's unclear what exactly is going on here; investigations are underway. It may be a serious fraud. Unfortunately, that's to be expected in this burgeoning industry where investors are looking for big returns while brandishing their green credentials.

Consumers, business leaders and financiers need to be on guard against this type of behavior. When fraud hits renewable energy, every honest person in the space is a victim.

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.

January 09, 2011

You Call This Cleantech?

David Gold

Invest in a solar, biofuels, or LED lighting company, and nobody will question the company’s cleantech pedigree.  Invest in a manufacturer of network switch upgrades for telephone companies, then call it “cleantech” and you’ll see a lot of raised eyebrows.  I know, because we did just that.

We are investors in Aztek Networks, a company that makes replacements for the TDM switches that handle much of the phone traffic from standard landline phones.  Telecom companies are excited about Aztek’s product because it enables them, for the first time, to incrementally switch out their old TDM switches rather than doing an extremely expensive complete system overlay. Aztek’s technology also enables them to provide IP-based functionality.  Aztek’s switches are IP-based but can co-exist in the network architecture with both IP-based and “old world” GR303-based switches.  Our cleantech company, Aztek, is enabling telecom companies to accelerate their entry into modern IP-based technology.

Eyebrows raised yet?  Now, for the rest of the story… 

Aztek’s switches also reduce energy consumption by 90%.  How big of a deal is that?  The roughly 16,000 TDM switches in the U.S. and Canada alone consume about 15,000 gigawatt-hours each year – roughly 0.4% of all electricity used in those two countries.  Given that these switches run 24/7/365, they are a base load draw.  That means that burning fossil fuels produces the vast majority of electricity utilized by them.  The result is over 8 trillion tons of carbon emitted every year.

To put that in perspective replacing the aging TDM switches with Aztek’s technology is equivalent to installing over 42 million square meters of solar panels in Arizona where insolation is extraordinary (assumes insolation of 6.5 kwh/m2/day and 15% overall system efficiency).  That would be almost 20 times the amount of electricity produced by all solar power in the U.S. in 2009.

What’s even more compelling about Aztek’s technology is that it also provides a phenomenal economic return to its customers.  As an example, in California eliminating a pound of carbon emissions per year with solar costs roughly $3.50 or about $1.80 with all federal and state tax credits.  Aztek eliminates a pound of carbon emissions each year for an equivalent cost of less than 50 cents per pound – without any tax credits.  As much as 60% of the operating costs incurred by telecom companies for their TDM switches are from energy costs.  With Aztek that cost is reduced by 90%.  On top of this, those old TDM switches are huge and require extensive maintenance.  Aztek’s technology is 90% smaller, yielding large real estate savings, and requires about 30% less maintenance.  The overall payback on the technology can be as little as one year.  And without Aztek’s technology, telecom companies would not be able to move as fast to replace TDM switches because of the complexities and costs of doing complete network overlays. 

Now that’s what I call turning Green into Gold! Aztek is a cleantech company and the best kind at that – one that also delivers a huge return on investment to customers without any government subsidy.  Our bet is that Aztek’s environmental impact will exceed many companies in more stereotypical cleantech segments.  And that will raise some eyebrows as well. 

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

January 08, 2011

EIA Electric Drive Forecasts – Running in Reverse Since 2009

John Petersen

The hardest part of blogging on subjects like energy storage and vehicle electrification is synthesizing the mass of data that's generated every year. While I'm not an engineer and don't have any special technical expertise beyond the lessons I learned as a director and officer of a small battery technology developer, my training as a lawyer and accountant stand me in pretty good stead when it comes to reviewing statistical forecasts and comparing the current version of a forecast with earlier versions of the same forecast.

Every year the US Energy Information Administration, a unit of the DOE, publishes the Annual Energy Outlook, a comprehensive statistical report and forecast that covers all sources and uses of energy in the United States and runs to a couple hundred pages. The supporting data for the reference case includes 128 Excel tables that lay out the detailed assumptions underlying the report. One of the most interesting tables for guys like me is Table 57, Light-Duty Vehicle Sales by Technology Type for the United States, a 25 year forecast that breaks light-duty vehicle sales down into cars and trucks, and then subdivides each category by drive-train and fuel. If you've ever wondered where the government's long-term vehicle production forecasts come from, the answer is Table 57.

Last month the EIA published the Early Release Overview for its Annual Energy Outlook 2011. When I pulled up the latest version of Table 57, it struck me that the forecasted ramp rates for electric drive technology seemed more conservative than they'd been in 2010. Since unanswered questions tend to keep me from focusing on other matters, I went back to the 2010 forecast and did a quick comparison that showed about a 30% across the board decline in forecasted electric drive penetration rates. Since big changes invariably lead to more questions, I decided to pull copies of Table 57 for the years 2007 through 2011 and do a detailed five-year comparison to see how the forecasts changed over time.

Frankly I was amazed by the results. Except for pure electric vehicles, which will apparently remain a quirky niche market for the next 20 years, the Department of Energy's forecasted ramp rate for electric drive vehicles has been running in reverse at breakneck speed since 2009!

For those who prefer numbers, the following table shows the DOE's forecasted sales of HEVs, PHEVs and EVs for 2010, 2015, 2020 and 2030 in the Annual Energy Outlook for each year since 2007.

1.5.11 EIA Table.png

For those who prefer graphs, the following 3-D presentation summarizes the same data.

1.5.11 EIA Forecast.png

In December I used a graph from the Electrification Coalition's November 2010 Fleet Electrification Roadmap that highlighted the differences between the 2010 EIA numbers and comparable forecasts from consulting firms and sell-side investment analysts. Since the DOE has been quietly backing down its forecasted ramp rates for electric drive since the last Bush Administration forecast was updated to include the expected impact of American Recovery and Reinvestment Act of 2009, I'd be more reluctant than ever to rely on optimistic reports from hopium dealers.

12.29.10 Forecast Range.png

The EIA is a single data source and the EV faithful will almost certainly disagree with its forecast, but when the White House and its political operatives say, "we love electric drive and plan to push policy in that direction" and their own analysts and statisticians say, " there's no way it will happen that quickly," I tend to believe the staff.

Tesla Motors (TSLA) is the 2010 poster child for hype-induced overvaluation that bears no rational relationship to financial statements, business fundamentals or economic potential. It will be bleeding cash for years, just like A123 Systems (AONE) and Ener1 (HEV). These stocks may provide fun trading opportunities for professionals, but I wouldn't want to be holding their shares when the music stops.

Disclosure: None.

January 06, 2011

Will Chronic Traffic Problems Slow Down Chinese Car Ownership?

Eamon Keane

Following the worst traffic jam in history this past August, Beijing has introduced significant curbs on cars. New car registrations will be slashed 70% to 240,000. Non-registered cars must have a permit and cannot travel at peak hours (7-9am and 5-8pm).

With 4.7m cars and a population of 22m, Beijing only has approximately 200 cars per 1,000 people. This is just half the level of cars in Mexico city with which Beijing is tied in IBM's "Commuter Pain Index". If you think LA is bad, Beijing is 4 times worse:

IBM Commuter Pain Index

When rumours of the restrictions on car sales surfaced a couple of months back, new car purchases spiked dramatically and fights broke out as punters vied for cars. For the 120m Chinese households mainly clustered in coastal cities earning over $5,000 (the level at which car ownership becomes affordable), having a car, aside from the personal freedom it affords, is a sign that you've made it. Banned from owning a car up until the 1980s, Chinese citizens now want some of that private car goodness. Sales increased 46% in 2009 and a further 35% this year, to reach 18m.

Many other cities such as Guangzhou, Shanghai and Shenzhen are snarled up also. Chronic traffic and smog are just two reasons why China must not follow the car centric American/OECD culture. The Chinese road network is almost saturated with cars. One strategy is to frantically expand it and hope for the best. Yet here is a timely opportunity to redefine mobility for the globe's most populous country. The assumption in all energy forecasts is that Chinese car ownership continues to rise quickly:

chinese cars per capita

The growth in Chinese passenger car sales is the single largest growth factor for global oil demand over the next 20 years. The IEA states "Holding all other factors equal, a 1% per year faster rate of growth in car ownership in China alone would result in around 95 million more cars on the road in 2035 and 0.8 mb/d of additional oil demand".

There are some grounds for optimism. Several Chinese websites offer dynamic ridesharing and several cities have bus rapid tranist (BRT), a cheaper alternative to rail. The remarkable rise of electric 2 wheelers (E2W) in China, which occurred nowhere else, shows that things can be different. Chinese sales have soared from a few hundred in 1994 to around 22 million this year and may rise to 32 million by 2014. With around 120 million E2Ws in China, the Chinese are largely comfortable with electric drive. E2Ws took off in China for a couple of crucial reasons: (1) many cities curtailed gas mopeds due to air pollution, (2) E2Ws have a low total cost of ownership, (3) no licence was required and use of the cycle lane was permitted. E2Ws are subject to the 20/40 rule: max speed 20km/h, max weight 40kg. They're still faster than Beijing traffic.

Innovative and cheap EVs, with a modular market structure similar to E2Ws are being built by Kandi (KNDI). They are a great way to cut pollution and all the better if they are used for ridesharing in cities. They also help the Chinese government meet its lofty goal of 1 million EVs by 2015.

With sufficiently strong direction from government further supporting car alternatives (while suppressing cars), a rising oil price, and a terrible driving experience, the Chinese may yet avert their covetous gaze from OECD style private car ownership. They may even teach the West a thing or two - E2Ws are beginning to take off in Europe with sales this year of around 1 million.

Disclosure: No Positions

January 05, 2011

Plug-in Vehicles and Their Dirty Little Secret

John Petersen

Over the last few months I've had a running debate with some die-hard EVangelicals who insist that plug-in cars will be cleaner than simple, reliable and relatively inexpensive Prius class HEVs. Since most of my readers have enough to do without slogging through the comments section, it's high time we lay the cards on the table and show why the myth of zero emissions vehicles is one of the most outrageous lies ever foisted on the American public.

The following graph comparing the life-cycle CO2 emissions of conventional, hybrid and plug-in vehicles comes from a March 15, 2010 presentation by Dr. Constantine Samaras of Rand Corporation. It clearly shows that HEVs and PHEVs are equivalent emitters of CO2 if you take the analysis all the way back to the black earth and base the comparisons on national average CO2 emissions from electric power generation.

1.5.11 GHG PHEV.png

While the graph suggests that there is no meaningful air quality advantage to plug-in vehicles, the reality is much worse because the specific power generation assets that will be used for night-time charging of plug-in vehicles are dirtier than the national average.

The following table is based on data extracted from US Energy Information Administration's recently released "Electric Power Industry 2009: Year in Review." It lists high emissions power from fossil fuels in the top section, zero emissions power from conventional sources in the middle section and "clean power" from renewable sources in the bottom section. Since the data was pulled from different parts of the report, estimates of total power generated from specific renewable sources can't be provided. Since renewables as a class are inconsequential to national power production, I don't think the missing data is relevant.

1.5.11 US Power.png

The most intriguing facts in the table are the capacity utilization rates for both natural gas and hydro power facilities. Natural gas facilities operated at 25% of capacity in 2009, which works out to a national average of six hours per day. You see the same thing with hydro power facilities which operated at 40% of capacity in 2009, or about ten hours per day. While some natural gas and hydro power plants run 24/7, the nation tends to operate both types of facilities as peak power providers rather than baseload power providers. We turn off the clean hydro power and natural gas at night.

The two baseload elements of US power production are nuclear, which usually runs at a steady state 24 hours a day, and coal, which can be ramped up and down within a limited range to help match supply and demand. During night-time hours, the prime time for electric vehicle recharging, the vast bulk of electric power nationwide comes from nuclear and coal because operators want to conserve their more flexible resources including natural gas and hydro power for high value peak demand periods. As a result, coal accounts for a higher percentage of night-time power than it does day-time power or 24 hour power. There's just no avoiding the reality that electricity produced at night is significantly dirtier than the national average while electricity produced during the day is cleaner than the national average.

As you shift the US average emissions line in the Rand graph to the right to reflect the differences between day-time and night-time power, plug-ins become seriously sub-optimal. The conclusions are inescapable when you study the data.

I have searched without luck for a scholarly technical analysis that quantifies the emissions differential between relatively clean day-time power, which has a high proportion of variable hydro power and natural gas, and dirtier night-time power, which has a much higher proportion of coal. If you know of a credible study, I'd love to have a reference.

The dirty little secret of plug-in vehicles is that they'll all charge their batteries with inherently dirty night-time power and be responsible for more CO2 emissions than a fuel efficient Prius-class HEV that costs a third less and doesn't have any pesky issues with plugs, charging infrastructure or range limitations.

News stories, speeches and press releases can only maintain the zero emissions mythology for so long. Sooner or later the public is going to realize that it's all hype, blue smoke and mirrors, and that plug-in vehicles have little of substance to offer consumers. When the public comes to the realization that plug-in vehicles:
  • Won't save their owners significant amounts of money;
  • Won't be as efficient as HEVs when utility fuel consumption is factored into the equation;
  • Won't be as CO2 efficient as HEVs when utility emissions are factored into the equation; and
  • Are little more than feel-good, taxpayer subsidized eco-bling for the politically powerful elite,
the backlash against EV developers like Tesla Motors (TSLA), General Motors (GM) and Nissan (NSANY.PK), together with battery suppliers like Ener1 (HEV) and A123 Systems (AONE), could be unpleasant.

Disclosure: None.

January 04, 2011

First Solar Rides the Wall of Worry

Dana Blankenhorn

When people first get excited about solar energy, one of the first things they think of doing is to invest in it. And the first place they think to throw their money is thin-film solar manufacturer First Solar Inc. (FSLR) of Tempe, Arizona

First Solar is what I might call the  “big iron” play in solar. That is, it mainly produces large, flat panels that are installed by utilities and connected to the grid.

It's a good business. The company regularly earns 25% on assets, 30% on equity, and it's managed conservatively.

So why is it that if you bought in during the mid-point of its 2007 run-up you're only at break even and that since October of 2008 the stock has been basically flat?

It's a mystery to me but here are some theories.

One reason is what I call the wall of worry. The wall of worry is a good thing. No stock rises when everyone wants to buy it. It's only when there are lots of people willing to sell, for whatever reason, that it can climb. But the wall can also hold you down, and it seems to be holding this stock down.

What is everyone worried about? Lots of things.

Technology can change fast. Shorts seem to love the stock, betting on it to fall based on price cuts, changing government policy, or German and Chinese competition. Thus analysts are as likely to downgrade First Solar as upgrade it. It's generally assumed to be a buy at 12 times earning and a sell at 17 times – at $132 per share it can look toppy. But that number is based on anticipated earnings, not current earnings. (Its P/E based on currently reported earnings is over 17.)

Another reason they worry might be that when Michael Ahearn left the CEO slot last year to be replaced by ex-Honeywell executive Robert Gillette, Ahern sold half his FSLR holdings, for $142 million. Ahearn, who is in his mid-50s, said he would become a lobbyist.

Who retires to become a lobbyist? (Lawyers and activists, maybe?) Who leaves a growing company in his mid-50s if everything is A-OK? (Someone looking for a different challenge, perhaps?) I should also note that Ahearn lists his background as investment banking and law, not operations.

The best reason for worry, to me, is whether the company can stay on top of the technology.

New solar technologies may be flexible, they may harvest heat and infrared light as well as visible light, they may not look like panels or be bought by utilities. They may come out of nowhere. Their hype may be justified.

Gillette has to navigate these choppy waters and be ready to buy breakthroughs at high prices when they become ready for the market. Is his background in aerospace and operations right for the job? I don't know. But I don't think anyone has the perfect background when things are changing so fast.

One important disclosure point. I don't own any First Solar stock. (I have some Applied Materials acquired in the 1990s, long before they got into solar, as well as Intel and GE shares bought around the same time.)

In terms of technology history First Solar reminds me a little of the old Digital Equipment Corp., the minicomputer maker that rose to prominence in the 1960s and fell in the 1980s because it failed to adapt to the PC era.

But DEC had its chance, and First Solar has its, too.

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.

January 03, 2011

Ten Clean and Green Energy Stocks for 2011

Tom Konrad, CFA

My annual mini-portfolio of clean energy stocks which I expect to outperform in 2011.

This is my fourth annual list of renewable energy and energy efficiency stocks since I began the series in January 2008. 

The Purpose of this List

For myself, these lists serve as a record of my thinking on the market which I can look back on and learn from over the following year.  When I publish the list, I state my reasons for selecting each stock, and then track the portfolio's performance over the following year in quarterly updates.  This allows me to not only track how well the portfolio performed, but to check that performance against what I expected over the previous year.

For the reader, these annual lists are meant as a mini-portfolio of individual stocks that a small investor can buy to get exposure to clean energy without the high expenses of clean energy mutual funds, or the historical poor performance of clean energy Exchange Traded Funds (ETFs).

Each year, I have measured my success at stock picking against two benchmarks: a broad market index, and a clean energy index fund.  My strategy has changed somewhat since the first list in 2008, as I have gained in my understanding of the sector (I have only been following clean energy closely since the end of 2005.) 

Past Performance

The period over which I have been publishing these lists has been a very bad one for clean energy.  All the public clean energy ETFs are down since the start of 2008, and all but one of the clean energy mutual funds are also down. 

In 2008, my ten picks fell 55%, compared to the clean energy index, which fell 67%.  In 2009, my picks were up 57%, compared to the benchmark which was only up 12%, while the most recent list in 2010 was up 3%, compared to the benchmark, which fell 7%.  All told, if you'd invested in the ETF benchmarks, you would still be down 66%, while an investor in my ten picks would only be down 27% over the same period. 


As I told Stephen Lacey in a recent Renewable Energy World podcast, if the overall stock market does not collapse and drag clean energy with it, I believe that 2011 has the potential to be an excellent year for clean energy stocks after these three years of heavy selling.  Yet I continue to worry that a broad market decline would hold the sector down or drag it lower.

Clean Energy Sector Selection

As long-time readers know, I favor the less exciting clean energy sectors (and enabling technologies) that make few headlines but have higher current profits.  Chief among these are energy efficiency and conservation (where the greatest short-term potential for reducing the reliance on fossil fuels lies), the electric grid (an enabler for variable renewable resources such as wind and solar), and alternative transportation technologies that can reduce the use of the electric car. 

I prefer the most cost effective renewable energy technologies, which are biomass, wind, and geothermal.  Wind and Geothermal power are particularly interesting this year, because the sectors have fared particularly badly in recent years.  I'm putting more emphasis on renewable energy sectors (as opposed to efficiency and the electric grid) in 2011 than I have in the past because I'm more bullish about clean energy in general.  While not as volatile as renewable energy's poster boy, solar power, Wind and Geothermal tend to be more volatile than the relatively defensive efficiency and supporting technology sectors.

Company Selection

When picking individual stocks, I gravitate towards value stocks with low Price/Earnings and decent dividends, where available.  Since financing is still hard to get in the current climate, I also like companies that can fund their operations and investment plans from internal resources if they are not currently profitable.  Finally, I tend to gravitate towards companies with charts that look like they are bottoming.

Without further ado, here are my picks, with prices as of the 2010 close (December 30.)

Energy Efficiency and Smart Grid Stocks

Waterfurance Renewable Energy (WFI.TO, WFIFF.PK US$24.77) is a long time favorite because it's the only pure-play geothermal heat pump stock I know.  David Gold made the case for geothermal heat pumps as an investment in October, so follow the link if you'd like the details.  This is the third year running that Waterfurnace has been in my list, and while it has not appreciated much in that time, it has consistently paid a dividend over 3% (C$0.22 per quarter, or 3.6% annually) while the business has continued to grow.

Comverge (COMV $6.92) is a leader in providing Demand Side Management solutions to electric utilities, both in the form of Demand Response(DR), and energy efficiency.  Demand Response allows utilities to maintain less peak capacity while still maintaining a stable grid (see Drawing the Right Lessons from the Texas "Wind" Emergency) while Comverge's energy efficiency solutions allow utilities to build less base load capacity.  Both DR and Efficiency can be delivered at much lower cost than new baseload or peaking plants, and have the added advantage of no carbon emissions.

The stock has been badly beaten up since its 2007 IPO and can now be bought for one third of the IPO price, and less than one fifth the smart-grid euphoria induced 2007 peak.  While Comverge is still not profitable, they have enough cash on hand to fund the current level of operations for three years, giving them time to raise future funds while negotiating from a position of strength.

EnerNOC (ENOC $23.91) also provides Demand Response to electric utilities, but unlike Comverge, they are currently (if marginally) profitable.  With no net debt and plenty of cash in the bank, EnerNOC has not been beat up quite as badly as Comverge since they both IPO'd in 2007, so this is a safer pick than Comverge with somewhat less upside potential. 

Electric Grid and Clean Transportation Stocks

CVTech Group (CVT.TO, CVTPF.PK $1.30) provides electricity system construction and maintenance to electric utilities, as well as efficient continuously variable vehicle transmission systems for small vehicles such as the Tata Nano.  The company is profitable and pays a C$0.02 annual dividend, for a yield of 1.5%. 

Telvent Git S.A. (TLVT, $26.42) provides management solutions to infrastructure markets including electric utilities, pipeline operators, and transportation authorities.  Better management in these sectors has great potential to lead to large cost and energy savings.

I covered both of these stocks in considerable detail in my Best Peak Oil Investments series.  The article about CVTech is here, and the article about Telvent is here.  The reason neither of these stocks made my list of four top peak oil stocks but are included here is that most of those four have since risen considerably, and I also wanted to limit this list to stocks that are easily purchased by a North American investor.

Biomass Stock
Potlatch Corp (PCH, $32.55) is a US Timber REIT which is a leader in seeking stringent FSC sustainability certification for its timberland.  I wrote about Potlatch in late 2009 in an article highlighting the role of forestry in a clean energy portfolio. Potlatch has a 6.3% forward annual dividend yield.

Geothermal Stocks

Geothermal exploration and production stocks seem to have bottomed in the fall of 2010, but they have not yet really taken off.  I think that could easily happen in 2011, so I include two of my favorites here: Nevada Geothermal Power (NGP.V, NGLPF.OB $0.76) and Ram Power Corp. (RPG.TO, RAMPF,PK $2.22.)  I've recently written about both of these companies in my
Geothermal Stocks Overview and in Three Top Geothermal E&P Companies.


American Superconductor Corporation (AMSC, $28.59), despite its name, is largely a wind component supplier to Chinese wind manufacturers.  Yet it also has an intriguing electricity transmission business based on its eponymous superconducting cables.  The company is profitable, although it trades at a fairly hefty multiple of 45x trailing earnings based on widespread expectations of continued high growth.


Veolia Environnement SA (VE, $29.36) is a global conglomerate providing water, waste water, energy systems (including renewable energy), and transportation system management.  As such Veolia provides services in a wide variety of clean energy sectors, and is a good balance to the usual volatility of a clean energy portfolio with its relatively stable earnings and high 4.1% dividend yield.

As usual, I'll provide quarterly updates on this list throughout 2011.


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

January 01, 2011

Cheap is Still Beating Cool In Energy Storage

John Petersen

In November 2008 I wrote an article titled "Alternative Energy Storage: Cheap Will Beat Cool" where I created a short list of 13 pure play energy storage companies that I divided into two classes; companies with cheap chemistries and companies with cool chemistries. My premise was simple, the best affordable technology always wins out over best available technology and companies that cater to the masses have greater profit potential than companies that cater to the elite. The following graph compares the performance of my original groups and the Dow since the date of that article.

1.1.11 Cheap v Cool.png

Over the last two years I've added five pure play energy storage companies and two EV manufacturers to the list and broken the list into six peer groups to facilitate comparisons. The one year and fourth quarter performance for all 20 companies is summarized in the following table. Where necessary, historic prices have been adjusted for reverse and forward stock splits. The starting point for Tesla Motors (TSLA) is its June 29, 2010 IPO price.

1.1.11 Yr & Q-4.png

My worst bullish call year last was C&D Technologies (CHHP.PK), which took a huge intangible asset write-down in September and was forced into a debt restructuring that transferred over 90% of the company to creditors and will limit its upside potential. My other major disappointment was Axion Power International (AXPW.OB), which got crushed by market conditions that were unrelated to its business and seems well positioned to outperform in 2011. My worst bearish call was Valence Technologies (VLNC), which makes a good product but is burdened by the balance sheet from hell.

Since I only track a few companies and tend to take an accountant's view when it comes to value comparisons, I maintain a simple spreadsheet that starts with the last reported quarterly numbers, factors in changes from subsequent transactions, and compares the adjusted financial statement realities with market valuations. That spreadsheet, which is summarized below, then serves as a starting point for more detailed analysis of which stocks seem likely to rise and which seem likely to fall in coming months.

1.1.11 Comparison.png

I remain bearish on Ener1 (HEV) because I see two technical accounting issues that could arise in this year's audit and would have a negative impact if things went badly. First, Ener1's ownership of 48% of the voting power of Th!nk could require a consolidation that would move Th!nk's losses onto Ener1's income statement and impair the $58.6 million carrying value of its investment in Th!nk. Second, Ener1 is carrying $61.7 million of intangible assets and goodwill on its balance sheet and after watching C&D take a $60 million intangible asset write-down in September and Ultralife (ULBI) take a $14 million write-down last week, it's hard to be confident about Ener1's intangible asset values.

I remain bearish on Valence because it's survived for years on loans from a principal stockholder and those debts will have to be paid from earnings, stock sales or conversions. Valence makes a good product and is focused on an attractive battery market for medium-duty electric delivery vehicles – but it's still losing about $19 million a year and a $75.2 million equity deficit is a very deep hole. In my experience, investment bankers and institutional investors are not kind to companies that are negotiating from a position of weakness and need substantial capital for future growth.

Most investors know that 2010 was not a good year for Chinese companies and the storage sector was no exception. After watching them develop over the last couple years I'm increasingly bullish on Advanced Battery Technologies (ABAT) and China Ritar Power (CRTP). These are solid rapidly growing companies that trade at very low multiples of book value and sales. I have to believe they'll both be stellar performers over the next couple years.

In the electric vehicle space I believe Kandi Technologies (KNDI) is far more attractive than Tesla because its valuation multiples are far lower and Kandi will be selling cheap basic transportation to first-time car buyers in China while Tesla focuses on the eco-bling crowd. Given its high profile partnership with China's biggest electric utility, its sensible business model and its obvious ability to access decision-makers within the Chinese bureaucracy, I will not be surprised if Kandi accomplishes great things over the next couple of years.

ZBB Energy (ZBB) and Axion Power remain my two favorite speculations. ZBB seems to have turned a corner recently with the completion of a three-year validation test by Australia's Commonwealth Scientific and Industrial Research Organisation. While I'm not objective when it comes to Axion because I poured four years of my life and a large chunk of my fortune into the company, its progress over the last year has been impressive and any time I see a $47 million market cap surrounded by multi-billion dollar partners and potential customers I pay attention.

It will be interesting to see whether my predictions can be generally right for another year. I’ll revisit this list on a quarterly basis and either gloat or eat crow as appropriate. In the meantime I'd like to wish everyone a Happy New Year and a prosperous 2011.

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

« December 2010 | Main | February 2011 »

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