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February 28, 2011

Kandi Technologies (KNDI) Revisited

Company Delivers Electrifying Performance But Stock Gets Shocked.

Arthur Porcari

What’s that old Wall Street saying. “No Good Deed Goes Unpunished”?  Well, management and shareholders of US listed, China based, always profitable uncontested leader in Electric Vehicle (EV) manufacturing and “Quick Battery Exchange” (QBE) development, Kandi Technologies (NASDAQ-KNDI), know the feeling well. As of now, five months after I published my first article on KNDI, the stock, which subsequently more than doubled on incredible volume, has now made a full round trip and is back to where it started. This in spite of significant business advances and a total absence of negative news. Even more incredulous is the 20+% drop last week at a time when oil prices surged above $100bbl, PRC raised gas prices to a record of over $4.30 a gallon, and Beijing had the following revelation:

Beijing air worse than 'hazardous'

 Bloomberg News February 25, 2011 3:10 AM

Beijing's air quality early this week was worse than "hazardous," the lowest rating on an index used by the U.S. Embassy in the Chinese capital to measure conditions, and was classified as "Beyond Index."
Heavy fog and the addition of almost 900,000 automobiles to Beijing's roads last year have contributed to the deteriorating air quality…”
If there every was a positive “Perfect Storm” brewing for a Company, KNDI, now having begun sales in China of its line of three PRC approved (two, full road speed and subsidies eligible) pure EV’s selling for $6-10,000 before subsidy, should be in the “eye” of it.
Five months ago as a Wall Street unknown, KNDI stock was quietly resting in the low 3’s.  At that time I published a multi-part article which was quickly picked up by EV Internet news services and blogs around the world introducing KNDI. As you can see from the chart below, the effect was immediate and significant to the stock price.

Let me again make my position clear as I have on past articles. Though since my first writing, I have personally visited the company and management in Jinhua China, I do not have, nor do I care to have any access to information not available to anyone who takes the time to do good due diligence.  Aside from what I, along with four other investors saw when we visited the Company last November, (which did not include any restricted information), what I publish is made up of public information in the form of past filings, press releases, active use of Google’s on-line translation features scouring Chinese websites, and of course my opinion.

Exceptional Company Execution

If you are new to KNDI, or need a refresher, I strongly suggest you read my past Seeking Alpha articles on KNDI which can be accessed through the links below. It now appears that my revenues and earnings prognostication for 2010 year end stated in my September article will apparently prove to be too high. This miss is primarily due to a few months delay in State Grids’s (China’s dominant electric utility and KNDI partner) completion of its Main Battery Charging Farm in Jinhua.  This in turn delayed initial sales to only the last five weeks of the year. I think you will find that most other speculations I made have not only come to pass, but in many cases were far exceeded.

This chart shows a chronology of events that have taken place since my first article. I have created a corresponding letter on the chart for each published event to the headlines below. Several of the headlines are from Seeking Alpha articles I wrote giving my “take” on prior events. These articles are annotated by the (SA) after the date. Articles annotated (AES) first appeared on AltEnergyStocks.  My point in listing these events is twofold; one to show there was no negative event to cause the drop in the stock price and two to give the reader quick reference to advances made.   

Annotated KNDI chart


Why Electric Vehicles must succeed

Rapidly growing China with its 1.3 billion population may rank second to the US in World Purchasing Power as seen from the table below, but the following comparison of motor vehicles per capita shows a disparity, which based on “Peak Oil” assumptions leaves little room to even noticeably “close the gap” let alone allowing a catching up with internal combustion (ICE) vehicles. With China’s massive coal and hydro resources along with aggressive building of Nuclear Power Plants, there is no reason they must rely on ICE’s.


Top 10 Countries, as listed by PPP GDP
Ranking Country Approximate GDP- Purchasing Power Parity
1 United States of America $13,860,000,000,000
2 China $7,043,000,000,000
3 Japan $4,305,000,000,000
4 India $2,965,000,000,000
5 Germany $2,833,000,000,000
6 United Kingdom $2,147,000,000,000
7 Russia $2,076,000,000,000
8 France $2,067,000,000,000
9 Brazil $1,838,000,000,000
10 Italy $1,800,000,000,000
Source: Economy Watch

China vehicles
US vehicles
Source:TradingEconomics-US


The tables above compare as of 2008 China to the US in per capita motor vehicle ownership (cars, trucks, buses and freight but not 2-wheelers), China on top with 32.2 motor vehicles per thousand population as compared to the table on the bottom for the US with 819.8. On this basis, stunningly, China stands in 2008 where the US stood in 1915.  Considering China’s current population exceeds the US by four fold, it should clearly be evident, even ignoring the rest of the rapidly growing emerging economies, that alternative energy vehicles will soon be mandatory in China, (for that matter, every country irrespective of the price of oil). Thankfully China understands and has made it quite clear it intends to be the world leader in vehicle electrification. A realistic situation made easier for the country since it has totalitarian control over its infrastructure for “refueling solutions”, plenty of cash for initial subsidies and an emerging middle class that can grow into EV’s, rather then be coaxed away from gas powered vehicles.

US Stock Trading Comparisons

As of this writing, there are really only three relatively pure EV US traded stocks for US investors to speculate on this rapidly emerging potential trillion dollar pure EV space.   Listed on NASDAQ is Tesla Motors (TSLA) and (KNDI), and ZAP which trades on the OCTBB (ZAAP).

The table below shows a general comparison I put together of some key numbers of the three companies. TSLA’s numbers came from filings, press releases and a JP Morgan research report; ZAAP’s from recent press releases and SEC filings; and KNDI from press releases and SEC filings. Estimates for ZAAP and KNDI were derived by me based on information gleaned from press releases.  

TSLA ZAAP KNDI

US based TSLA’s current market cap puts it at around 23 times JPM research 2014 estimate of $1.07 a share. Now this report was put out late last Summer, about the same time BYD (BYDDF.PK) was sure it would sell at least a few thousand of its e6 EV’s between China and the US by the end of 2010. As it turns out, KNDI’s sales of 20 KD5010’s on the first day of sales in China surpassed the total number of BYD e6’s sold through the end of October. And, though some $10,000 cheaper then TSLA’s $50,000 after tax subsidy Model S, BYD has now skipped a year and doesn’t plan on bringing the e6 to the US until 2012. Thus, bringing it more then a year behind schedule.

Lets call a spade a spade. TSLA is trading at its lofty levels for two main reasons. It’s charismatic CEO, Elon Musk, knows how to spin a story and there are a whole lot of “Green” funds that were formed after President Obama took office and promised a plethora of Green companies would soon be blanketing the country. This hasn’t happened, so those Funds have to put their money somewhere. Though in an excellent space, my bet is that TSLA is going to give a big shock to a lot of wallets in the not distant future.  The fact that “money pit” TSLA has a market cap twenty times always profitable KNDI is, IMO, incredulous.   

California based ZAP (ZAAP) is probably a company that most don’t realize is now a possible “contender” in the EV space, both in the US and China. But for those who do, I suspect they don’t truly realize how expensive this entry was. I can’t imagine how this stock can currently be trading with diluted market cap of $385 million. And this is well down from the over half billion market cap it had in early January right after it completed and announced a multi-part macro private share placement at around $.24 a share with a lot of $.25 warrants totaling some 200 million shares. The placement was used to raise $30 million to buy 51% of a Jonway Automobile a Chinese gas powered carmaker who had supposed revenues last year of around $77 million.

As stated in their Jan. 25 PR, “With ZAP’s electric vehicle (EV) technology expertise and international experience, the combined company intends to build the necessary production platform to address the Chinese EV market,” they plan on taking their 16 years as a “pioneer in the electric vehicle industry since 1994, engaging in the design, development, commercialization and distribution of 100% pure electric vehicles and power systems,..” and teach this Chinese company how to convert their gas powered cars to EV’s.  Who knows? After generating some $4 million in revenues in 2010 and accumulating a deficit of $143 million over the years developing their “expertise”, maybe they have finally learned a secret or two to teach the Chinese about EV’s.

OK, so back to KNDI. KNDI, like all players in this new EV space doesn’t have a heavy EV track record. But they have sold close to 4,000 mini-ev’s over the past couple of years. Know any other near pure play company in the space that can make such a claim? As seen by his short bio, KNDI’s  CEO, while not high profile, does have an impressive EV background in China. Take this excerpt:

 “From October 2003 to April 2005, Mr. Hu was the Project Manager (Chief Scientist) in WX Pure Electric Vehicle Development Important Project of Electro-vehicle in State 863 Plan.”  

Incorporated in “State 863 Plan” was the genesis of China’s current push to be the world leader in EV technology. The “WX” in the above quote is Wanxiang, China’s largest diversified EV Company, the same Wanxiang that caused Ener1 (HEV) stock to jump 65% on 21 million shares on Jan. 18th on an announcement of a joint venture between the two.  But enough on history, let’s look to the future.

A potential major win for KNDI

For those who have not been following KNDI, but clearly evident in Company announcements going back to the January 2010, KNDI has been leading a coalition of energy giants in China for a “Quick Battery Exchange” (QBE) solution whereby the consumer pays only for the car, and effectively “rents” the expensive battery.  The “rent” is effectively paid by a small surcharge each time the battery is exchanged. This model was put into limited commercial operation by KNDI through the Joint Venture with State Grid in Jinhua in late November, 2010 as an experimental alternative to just plugging the car into a charging post and waiting several hours for recharging. KNDI was at the forefront of this potential paradigm shift due to its ownership of several patents as can be seen by this State Grid announcement on its website.

In January of this year, through subtle but telling comments by PRC owned State Grid, it now appears that QBE has been selected as a major “Standard” for re-electrification of China EV’s. To date KNDI has been silent as to this potentially monumental Company event, in wait for a more definitive announcement by the PRC. Currently it appears there are two QBE models in operation. There is of course KNDI’s “side slide” model as can be seen by this video clip that was taken with a cell phone on my trip to the Company in November, and the second “rear load”, that can be seen in this video clip. The significance to KNDI is not that the Company expects their mode of QBE to be selected exclusively; it is that the concept of QBE seems now to be a chosen “standard” which in turn gives KNDI’s model already in operation with State Grid a major advantage over future competitors.

Valuation

With its current $100 million market cap, the stock is currently trading around replacement cost of just its land and buildings, plus $25 million working capital excess which should soon be apparent with the soon to be released 10k. The current market is giving no value for its always profitable and growing legacy business, let alone value for its China potential. Let’s look at that potential.

Non-China legacy business should reach $50 million in sales in 2011. That should generate non-GAAP net of $.35-.40 a fully diluted share. Each 5,000 cars they sell in China should add another $.30-35 per share. Considering the cost to a consumer after subsidy will only be around $3000, this should not be an unrealistic number and could just as easily be a multiple with some government or fleet orders.

If and when they reach the 100,000 car per year level, which would still make them a minuscule player in a 20 million car a year market, per share earnings would be in the $8-9 a share level. Put whatever PE you want on that type of growth.

Bottom Line

If the market has taught us anything over the last couple of years, EVERY stock is a speculation, no matter how blue chip. Each investment should be looked at from a risk/reward point of view. Based on its 9 year history (3.5 trading in the US) KNDI management has done an exceptional job of growing the Company in spite of the stock price.  The current “disconnect” between the current business and China potential has, IMO, created an incredible upside with negligible downside leaving me confident that KNDI will reward its shareholders with a multi-billion dollar company irrespective of who the shareholders are when that milestone occurs.  

DISCLOSURE: Long KNDI

Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He blogs on Seeking Alpha under “Corstrat” and has been an on-air guest as well has a guest host on Business Talk Radio Network.  His passion and expertise is for small cap emerging growth companies.

February 25, 2011

Will Distributed Solar Drive Utilities into Bankruptcy?

Tom Konrad CFA

Electric utilities today look a lot like newspapers in 2000: Too much debt in an industry primed for disruption.

Speaking at the Economist's Intelligent Infrastructure Conference, Brad Tirpak, Managing Partner at the private investment fund Locke Partners made the case that electric utilities are as woefully unprepared for the coming disruption of cheap, distributed solar power as newspapers were unprepared for the disruption of the Internet in 2000. 

He outlined the following parallels:
  1. Both had long been considered to be sure-fire businesses with dependable income.
  2. Both took advantage of the seemingly dependable income to load up on debt.
  3. Both face disruption from a disruptive technology (the Internet, and distributed generation and efficiency) with the potential to undermine their businesses.
What Happened to the Newspapers

Newspapers have not gone away, but as readers and advertising increasingly migrated to the Internet, circulation numbers dropped.  When a company is loaded with debt, a small drop in revenues is magnified into a proportionately larger drop in profits.  To stay solvent, newspapers had to raise prices. 

Rising prices drove more readers away, starting the cycle all over again, and eventually leading to bankruptcy for many of the papers.  As you can see from the chart below, many of those papers that survived without bankruptcy lost most of their stock market capitalization as more and more of their income was needed to service their debt. 
newspaper stocks chart

The Price of PV

Mr. Tirpak expects a similar story to play out in utilities.  As solar becomes cheaper and reaches grid parity, installations will grow rapidly. 

Edward Fenster, CEO of SunRun made the case that we don't even need further decreases in solar photovoltaic (PV) panel prices to reach grid parity solar even without the federal subsidies.  According to Fenster, solar panels currently cost $1.65 per watt, but total installed cost is about $5.50 per watt.  While some of the extra cost is Balance of System (wiring, inverter, mounting), the majority is labor and permitting.  In Germany and Japan, permitting and installation are only $1.50 per watt: Fenster believes we can get there too by doing away with local permitting on standard installations ($0.50 per watt reduction) and using greater scale and operating leverage ($1.50 per watt reduction.) 

Those reductions would lead to an installed cost of $3.50 per watt.  According to my calculations, that would lead to a 30-year internal rate of return of 4% (IRR) given a 20% capacity factor and a $0.13 cost of electricity per kWh.  If we assume any electricity price inflation at all, the IRR increases with it, and a $3.50 per watt PV installation looks attractive at any interest rate below the IRR.  We can also safely assume that there will be further reductions in both panel prices and in other system component prices. 

What Might Happen to Utilities

PV will probably reach grid parity in the next few years, through a combination of rising utility prices, increasing returns to scale in installation, and cheaper balance of system costs.  If this then leads to rapidly growing PV installations, will it undermine utility revenues, as the internet undermined revenues at newspapers? 

I think the analogy is based on a misunderstanding of both the scalability of distributed PV and the utility regulatory environment.

First consider the regulatory environment.  Utility regulators are charged both with ensuring that utility customers get service at a reasonable cost, and also that utility investors will continue to be willing to provide capital for necessary utility investments.  If the rapid spread of PV were to threaten utility solvency, regulators would take action to help the utility maintain solvency. 

Mr. Tirpak understood this, but made the assumption that the only action regulators could take to protect utility solvency would be to raise prices, which he assumed to mean the price per kWh of net energy used.  If this were correct, then we would indeed see the vicious cycle of increasing rates and declining volumes that has undermined the solvency of newspapers over the last decade. 

It's not all about cents per kWh

Regulators have other options.  First, they can allow the utility to cut any PV subsidies intended to help the utility reach solar energy targets.  If a utility were threatened by too much solar power, such subsidies would clearly be unnecessary to achieve the statutory PV penetration.  Subsidies are frequently cut in response to unexpected growth in PV installations.  In fact, declining subsidies in response to installation growth are often designed directly into these programs.

Once subsidies are gone, the next step to protect utility solvency in response to PV installation would be to change the structure of electric rates.  Although we often think of energy (kWh) as the only thing we buy from utilities, in truth we buy another valuable service: electricity on demand.  Even a home with enough PV to produce all the electricity it needs on an annual basis cannot disconnect from the grid: The power must be kept on at night and on cloudy days, and excess electricity needs to go somewhere when the sun is bright. 

Electricity storage could be used to take a home entirely off the grid, but such storage would be prohibitively expensive.  If a home's average usage and generation is 24 kWh/day (requiring a 5 kW PV installation), then enough battery storage would be needed to get the house through a few cloudy days when generation is greatly reduced.  Deep cycle lead-acid batteries typically cost $$200 per kWh, so three days worth of storage would optimistically cost $14,400, or $2.88 per kW of installed PV, making even $3.50/W PV uneconomic. 

Since PV does not enable users to do without utility service, regulators can increase the fixed cost of utility service without increasing the variable (per kWh) cost.  This price rise will improve utility profits without improving the economics of PV.  Other options would be to switch to time of use pricing for electricity, with low prices being charged when there is excess electricity (which would be when PV is operating, since we are assuming a PV glut) and higher prices when there is not enough (dusk on hot summer days.)

In a private email, Tirpak responded to this argument by saying he could not "quantify the support for solar.  People hate utilities and love solar. Republicans and Democrats support it. At the end, the [utility regulators] will listen to the public as well as reliability."  I certainly have met too many Republicans who hate solar.  As for utility regulators (and I've testified before electricity regulators several times), I simply can't imagine them intentionally adopting policies that would drive a utility into bankruptcy.

I can't quantify the public support for solar, either, but I can put an upper bound on it. Residential solar leasing companies like SunRun now can provide solar electricity to customers in seven states for less than the cost of grid electricity, without any upfront cost.  They're doing good business, and driving rapid market growth, but most homes in those states still don't have solar: SunRun uses innovative strategies like partnering with One Block Off the Grid (1BOG) to assure sufficient volume.  If everyone truly loved solar, they could just hire a call center in India to answer the deluge of telephone calls spend most of their efforts installing panels.

Scalability

There are natural limits on how much PV can be installed by customers.  Many people's homes are shaded by trees or other buildings.  Other customers are renters, and so do not have the option of installing PV.  Industrial and commercial rooftops are seldom big enough to produce enough power to meet relatively high industrial and commercial electricity usage.

Utility scale installations could produce enough electricity, but such installations need to sell their power directly to the utilities, at much lower wholesale rates.  It will be quite some time before solar PV is able to compete at wholesale rates in the absence of subsidies.

Other Disruptors

Tirpak also lists other potential disruptors of the utility model: energy efficiency, smart grid, LEDs, ground source heat pumps, and cheaper hydrogen.  He did not go into detail on why he expects any of these to be significant, but my take is that only cheap hydrogen has the potential to change the story I outline above. 

Smart grid, by its nature, is being implemented by utilities at regulators' request: the smart grid will not allow us to do without the grid, since it is the grid.  Perhaps Tirpak instead meant microgrids, which are enabled by smart grid technology.  While microgrids have the technical capability of cutting the cord to the larger utility, they seldom have the legal authority.  A microgrid supplying power to a small group unconnected to the utility would legally be a utility itself, and subject to utility regulators.  For the reasons outlined above, those regulators would not allow the formation of microgrids to undermine the solvency of the utility.

Efficiency Technologies

The potential for LEDs to further reduce energy use is fairly small.  In 2008, I made a weirdly similar (and similarly overblown) argument that utilities might be undermined by the phase-out of the incandescent light bulb.   My argument was not that this would reduce electricity sales (which it will), but that it will undermine utility energy-efficiency programs.  This will happen because the phase-out of traditional incandescents would make the former stalwart of residential energy efficiency programs, the compact fluorescent light bulb, (CFL) the new baseline.  Current LED bulbs use almost as much energy as CFLs of the same brightness, although the technology has the potential to use only 40% as much.  But even assuming that LED technology reaches this potential, where a CFL saved 75 watts replacing a 100 watt incandescent, an LED only has the potential (at best) to save another 15 watts: One-fifth of the savings of the CFL when compared to an incandescent.  Current technology saves only 2-5 watts over the CFL, at a cost of $40.  If the now mature technology of CFLs did not disrupt utilities, LEDs don't have a chance.

Ground-source (aka geothermal) heat pumps (GHP) are already a mature technology, and so are unlikely to see rapidly falling prices like solar.  That said, they are already an enormously efficient way to heat and cool a building, and their widespread adoption would do much to reduce energy use. That is why I like GHP stocks.  However, GHPs are more likely to be a boon to electric utilities than a burden.   GHPs replace heating by natural gas or fuel oil with electricity, adding to utility sales.  Just as important, the timing of electricity used by GHPs has the effect of improving utility grid utilization.  When heating, GHPs run mostly in the winter and at night, which is just when utilities often have low demand and high generation from wind.  When used for cooling, they reduce summer peak loads by displacing less efficient air conditioners.

More broadly, energy efficiency technologies (which include LEDs and GHPs) are unlikely to undermine utility revenues because of the significant barriers to adoption.  After all, energy efficiency is already much cheaper than grid based electricity, costing only a few cents per kWh saved.  With grid electricity costing five times as much as efficiency already, it seems unlikely that a price shift that makes it cost even ten times as much will make a radical difference in the rate of adoption of efficiency technology.

Hydrogen

Of the technologies Tirpak listed, only cheaper hydrogen has a chance of disrupting the electric utility model the way the Internet disrupted newspapers.  Hydrogen might disrupt utilities by providing a cheap way to store electricity, which in turn would allow individuals to go off the grid.  Yet while hydrogen has the theoretical potential to provide relatively inexpensive energy storage, cheap and efficient electricity storage with hydrogen has not yet even been demonstrated in the lab, at least to my knowledge.  That puts any such technology at least a couple decades away from commercialization.  I'm not holding my breath.

Conclusion

Given that utility customers are captive in a way that newspaper customers never were, it seems unlikely to me that utility stocks in the coming decade will follow the performance of newspaper stocks in the last decade.  Lower prices for and increasing penetration of PV will change the way we pay for utility service, but not free us from utilities all together.  Only the advent of extremely cheap electricity storage would allow us to truly cut the umbilical power line, and until we can cut that line, regulators will find a way to charge us enough to keep utilities solvent.

While regulated utilities should weather the coming solar storm, independent power producers (IPPs) which sell their power into the spot market, or whose power purchase agreements (PPAs) expire at the wrong time, might be threatened.  This is especially true for IPPs with inflexible generation that cannot easily ramp up and down to compensate for fluctuating electricity supply from renewable sources. 

If you're convinced that PV is on the cusp of grid parity and rapidly expanding deployment, don't short regulated utilities, as Mr. Tirpak suggested.  Instead, look at IPPs with mostly coal-based generation fleets and PPAs expiring in five years or so.

DISCLOSURE: None.

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

February 23, 2011

Just One Sector – Fuel Efficiency Pure Plays

John Petersen

In 1789 Benjamin Franklin wrote "in this world nothing is certain but death and taxes." Today he probably would have written "in this world nothing is certain but death, taxes and rising oil prices." There's no escaping the misery, but astute investors who take the time to understand the fundamental trends can profit as the misery unfolds. For the short term, I'm convinced the biggest opportunities will be in fuel efficiency technologies for cars and light trucks.

After 20 years of complacent stagnation, the US started to get serious about light-duty vehicle fuel efficiency in 2005 and has made solid progress with improvements in the 14% to 18% range. The rate of change will ramp rapidly over the next five years as aggressive new CAFE standards that were adopted in April 2010 take effect. The following graph provides an at a glance summary of new light-duty vehicle fuel efficiency over the last 30 years and new fuel efficiency standards for the next five years.

2.23.11 Fuel Efficiency.png

In their 2010 adopting release for the new CAFE rules, the NHTSA and EPA identified three fuel efficiency technologies that would play crucial roles in automakers' efforts to meet the new standards (page 484):

Efficiency Technology Fuel Savings
Penetration
Gasoline direct fuel injection
4%
60%
Dual clutch transmissions
7%
55%
Stop-start idle elimination
8%
42%

The usual diversified group of first tier manufacturers of automobiles and component systems will control two of the three technologies. Only one, stop-start idle elimination, offers a pure-play opportunity with a certain outcome.

Stop-start is the most sensible fuel efficiency technology you can imagine – turn off the engine while the car is stopped in traffic. While the concept is simple, implementation is a beast because drivers typically want their sound systems, climate control, lights and other accessories to keep working when the engine is off. Therefore, the key enabling technology for start-stop systems is a better starter battery.

Traditionally, a battery had to start a car once during a normal trip. With a stop-start system, however, the battery has to start the engine an average of once per mile and carry critical accessory loads while the engine is off. For a one-minute engine-off cycle, the accessories will demand ten times as much energy as the starter. For a 15-mile commute with one engine-off cycle per mile, the battery will have to deliver 165 times the energy that it would in a car without stop-start. The battery load is immense, but an optimized stop-start system can slash fuel consumption in city driving by up to 15% and do it for an incremental capital investment in the $400 to $800 range.

The normal flooded lead-acid batteries we've used for decades simply can't stand up to the demands of stop-start systems. That reality has forced automakers to rely on cut-out systems that disable the stop-start function when the battery's state of charge falls below a minimum level, and won't re-enable the stop-start function until the battery recovers an acceptable state of charge. The result is stop-start systems that don't function anywhere near peak efficiency. To minimize problems, automakers are currently using dual battery systems and upgrading to absorbed glass mat, or AGM, batteries.

In recognition of the shortcomings of flooded batteries, the leading battery manufacturers are building new AGM battery production capacity at a blistering pace. In 2007, Johnson Controls (JCI), the world's biggest battery manufacturer, had global production capacity for 400,000 AGM batteries per year. Their announced expansion projects will boost that capacity to 11.2 million AGM batteries per year by 2014 and further expansions in the US are being discussed. Exide Technologies (XIDE) is also on an expansion spree that will boost its AGM battery capacity from 500,000 units in 2009 to 3.5 million units in 2013. On a worldwide basis, Lux Research forecasts that AGM battery demand will soar by 800% over the next five years, from three million units in 2010 to 27 million units in 2015. As they substitute higher margin AGM batteries for lower margin flooded batteries, the revenues and margins of leading battery manufacturers including JCI, Exide and to a lesser extent Enersys (ENS) will soar. Their stock prices will follow suit.

While AGM batteries are currently the best available technology for stop-start systems, they are far from ideal because their ability to recover an optimal state of charge deteriorates rapidly as the battery ages. Using simulation protocols from BMW and Ford, researchers have learned that the time required for an AGM battery to recover from an engine-off event increases from 50 to 60 seconds with a new battery to 4 or 5 minutes with a battery that's been in service for six months. The bottom line is automakers need a better solution than AGM batteries. Until a better solution comes along, however, the AGM battery will reign supreme as the battery of choice for the stop-start market.

The two principal contenders for "better solution" honors are:
  • A multi-component system from Continental AG and Maxwell Technologies (MXWL) that combines an AGM battery, a small supercapacitor module and associated control electronics in a system that eliminates the voltage drops and black screens that commonly occur when the starter engages at the end of an engine-off cycle; and
  • The third generation lead-carbon battery from Axion Power International (AXPW.OB) that replaces the lead-based negative electrode in a conventional AGM battery with a carbon electrode assembly that boosts cycle life by 400% and provides consistent charge recovery times of about 35 seconds through four years of simulated use.
The Maxwell - Continental system is available now and was recently selected by PSA Peugeot Citroën for use in Citroën C4 and C5 diesels featuring PSA's e-HDi second generation micro hybrid system. With an estimated three-year value in the $50 million range, this design win should provide a significant boost for Maxwell's top-line revenue. Despite its advantages, however, the Maxwell - Continental system is not an ideal solution because the supercapacitor can slow but it can't stop the deterioration of the AGM battery it's paired with. So over time, vehicles equipped with the Maxwell-Continental system will suffer the same kind of performance degradation that all other stop-start systems exhibit.

The most promising solution to the challenges of stop-start, the PbC® battery from Axion, is in the final development stages and won't be ready for a large-scale commercial rollout until 2012. Axion is currently installing a second-generation fabrication line for their serially patented carbon electrode assemblies and potential customers should begin validation testing on the new fabrication processes and equipment soon. Once its potential customers validate the fabrication process, the last major step will be to build additional electrode fabrication capacity so that Axion can manufacture PbC batteries on its own AGM battery line and sell electrode assemblies to other AGM manufacturers. Since the PbC electrodes are designed to work as plug-and-play replacements for traditional lead-based electrodes, Axion should be uniquely positioned to leverage existing AGM battery manufacturing capacity while giving other battery manufacturers the opportunity to sell a premium product to their existing customers.

While the PbC battery is still a development stage technology and Axion is just barely out of the nano-cap range with a $60 million market capitalization, its roster of disclosed industry relationships is extraordinary. Axion has longstanding relationships with both East Penn Manufacturing and Exide, the second and third largest AGM battery manufacturers in North America; it has a service contract to develop a battery management system for Norfolk Southern (NS) which wants to retrofit a portion of its 3,500 unit locomotive fleet with hybrid drive; and the PbC battery has demonstrated exceptional performance during 18 months of testing by BMW, the industry leader in stop-start with over a million EfficientDynamics vehicles on the road today. In over 30 years as a small company securities lawyer, I've never seen another company that was able to generate a comparable level of interest and involvement from the giants in its industry.

The energy storage sector offers a wide range of fuel efficiency pure plays. The following table provides summary data on key financial (in millions) and market metrics that I consider important. While JCI is not technically an energy storage pure play because of its diversified operations in auto parts and building efficiency, I've included it in this list because 14.6% of its revenues and 52.5% its earnings are derived from battery manufacturing operations.

2.23.11 Market Metrics.png

While I closely follow the energy storage and vehicle electrification sectors and am convinced that every manufacturer who can bring a cost-effective product to market will have more demand than it can handle, these five companies have the clearest paths to market beating growth over the next five years and are my favorites for that reason. JCI, Enersys, Exide and Maxwell have been stellar performers since December 31, 2008 with market crushing gains of 126% to 264%. Axion has been the laggard of the group, losing 39% of its market value it raised new capital in a brutal market and worked to complete the development of its promising PbC technology and start climbing out of the valley of death. For the next few years, I expect the entire group to outperform the market by a wide margin because the die is already cast.

Fuel efficiency has been a hot topic in the automotive world for the last five years and new regulations in the US and EU will provide a massive impetus for immediate change. Increasing political turmoil in oil producing regions can only add to the sense of urgency. There is a wide variety of potential long-term solutions, but short-term solutions to immediate problems are very limited. For the next five years, stop-start will be at or near the top of the list.

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

February 21, 2011

Finding the Key to CIGS PV Reliability

by Joseph McCabe, PE

This past week there was a photovoltaic (PV) workshop that probably wasn't on your radar. It was held at the National Renewable Energy Laboratory (NREL) and is called the PV Module Reliability Workshop (PVMRW). This is where the nerds of the PV industry get together to discuss the factors that influence how long a PV module will last and other factors which might influence the long-term performance of a PV system. It wasn't on your radar because it is not something that influences big business. Or is it?

If you track the PV industry it is more likely that you heard about the February 16th Photon CIS conference in San Francisco where high level people were discussing their company capacities and expected CIS efficiencies. But at the PVMRW meeting, held at the same time, people were discussing the challenges with copper indium gallium and (di)selenide PV (CIGS), which is very similar to CIS. CIGS has the promise of low cost manufacturing with high efficiencies. However many companies are taking quite a long time to develop large markets. CIGS products deposited on glass, like Solar Frontiers (100% subsidiary of Showa Shell [Tokyo:5002]), have had many years of advancements leading to the February 15th announcement indicating commercial production at their newest plant located in Kunitomi Japan.

The Promise of CIGS

CIGS holds the promise of low cost production and of being packaged in a flexible module. This month’s Department of Energy (DOE) SunShot Initiative announcement hopes to reduce PV systems costs by about 75 percent to roughly $1 per watt; flexible CIGS PV modules can provide a large system level price reduction towards this DOE goal. NREL specifically indicated the system level cost reductions could be from $0.17 to $0.94 per watt savings using flexible PV modules instead of traditional rigid glass.

The Hunt for the Culprit

The high efficiency, flexible PV module has been hampered by apparent susceptibility to moisture of the CIGS technology. Potential culprits range from the packaging of the modules that allow for moisture to enter into the PV cells to transparent conductive oxides (TCO). TCO are one of the layers in the CIGS thin film PV module.

At PVMRW companies like Dow Corning, DuPont, Saint-Gobain, Mitsubishi Plastics, and 3M were presenting how their materials can protect the PV product, specifically CIGS susceptibility to moisture. If the culprit causing the susceptibility to moisture inherent in today's CIGS technologies is the TCO, as NREL suggests, these expensive and unproven packaging solutions might not be needed.

Various CIGS companies provided reliability perspectives at the PVMRW. SoloPower, which just announced a conditional commitment for a $197M loan guarantee from the DOE for a new facility in Oregon, presented the effects of light soaking on shunts in their CIGS. Solarion compared reliability of their CIGS in a glass-glass encapsulation to a flexible encapsulation. Ascent Solar (ASTI) presented highly accelerated weathering of CIGS and Nanosolar presented their design for reliability on keeping the water out of CIGS. Companies like ADCO adhesives were supplying reliability information on edge seals and other building integrated PV (BIPV) adhesive attachment solutions appropriate for flexible CIGS.

One company's presentation was quite revealing. Sunpower (SPWRA) had quantified and presented various system failures to help understand reliability from their extensive historical field experience. SunPower's acquisition of PowerLight enabled them to compare various manufactures’ products over a number of years of performance data. This sharing of system failure data is indicative of the spirit of this unique PVMRW meeting. Our industry is learning from each others failures so that the industry as a whole will prosper. Just a note, SunPower’s modules were not necessarily those included in the system failures, but other manufactures modules.

Reliability is Location-Specific

For the first time I was hearing multiple discussions for location specific reliability evaluations. All modules are currently required to pass a set of tests that help build confidence in the safety and potential performance of the PV over time. However, there is not necessarily a correlation of those tests and the actual longevity of the PV product. It has only been assumed that these tests can represent a high probability of long-term performance. The tests reflect a general understanding of failure mechanisms for a relatively hot-humid location. New location specific reliability testing can open up hot dry markets for specific PV technologies, and can help to guarantee performance of PV products that might perform better in cold or humid climates. NREL’s Rommel Noufi suggested looking at today’s highways for what our PV industry might look like in the future. What he meant is that the highways are full of various manufactures and models of transportation solutions, and similarly, there will be many PV solutions for various locations and purposes in the future.

There were three tracks at the PVMRW; crystalline silicon, concentrating PV and thin film. CIGS discussions dominated the thin film track possibly due to the high interest in long term performance opportunities. Kudos has to go to NREL and the DOE for supporting this annual PVMRW workshop. And thanks should go out to the nerds of the industry who have worked for many years to build the current state of reliability in the PV industry. Over the past few decades it is these groups of people that have enabled PV systems to build the confidence in the PV market place that enables more than 20 years of reliable system performance.

DISCLOSURE: No positions.

Joseph McCabe is a solar industry nerd 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 is a Contributing Editor to altenergystocks and can be reached at energy [no space] ideas at gmail dotcom. 

February 20, 2011

Still Renewable, Still Paying Good Dividends

Tom Konrad CFA

Income investors can also invest in clean energy.

Over the past four years, changes in Canadian tax law have led the renewable energy income trusts I introduced investors to in March 2007 to either be bought out like the Boralex Power Income Fund (bought by manager Boralex [BLX.TO, BRLXF.PK]) or convert to corporations like Algonquin Power and Utilities [AQN.TO, AQUNF.PK].

Those that converted to corporations are still out there, and still paying good dividends.  And while a few are gone because of mergers, there are also a few new ones that I did not mention in my 2007 article.  They are a great place to start for investors who want a green portfolio, but need income or can't handle the stomach-turning gyrations of the solar or wind stocks.

I've listed the funds I know of in the table below, along with their current dividends and the sectors they invest in.

Company (Canadian ticker, US Ticker)
Price
Yield
Mkt Cap
Sectors
Algonquin Power and Utilities (AQN.TO, AQUNF.PK) C$4.95
4.8%
C$471M
Elec, Nat Gas,&Water distrib, cogen, biomass, hydro
Brookfield Renewable Power Fund (BRPFF.PK,BRC-UN.TO) C$21.41
6.2%
C$2.2B
Conventional and run-of-river hydropower
Innergex Renewable Energy Inc. (INGXF.PK,INE.TO) C$9.74
6.0%
C$580M
Run-of-river hydro and wind
Macquarie Power & Infrastructure Corp. (MCQPF.PK,MPT.TO) C$8.43
7.8%
C$480M
Cogen, Wind, Hydro, Biomass, Solar, District heating
Northland Power Inc. (NPIFF.PK,NPI.TO) C$15.81
6.8%
C$1.2B
Nat Gas, Wind, Biomass

As you can see, although these companies have become corporations, the yields will appeal to income investors. 

DISCLOSURE:  Long AQUNF, NPIFF.

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.

February 18, 2011

Where are Solar Stocks Headed in 2011?

By J. Peter Lynch, Financial Anaylst

A new series that offers a quick snapshot of the most recent solar stock performance. This week, the current market signals: Investor Caution.


Talk about the Million Dollar Question. Wouldn't we all like to know the answer to 'Where is the Market Headed in 2011?' Unfortunately, as we all know – no one knows the answer to this question.

But we can look at history and find some fairly interesting data (from the Stock Traders Almanac). While it's not perfect, it certainly has a far above-average accuracy.

The Dow Industrial Average [DJIA] managed its best month of January since 1997 with a return of 2.7%, while the S&P 500 [SPX] fared nearly as well with gains of 2.3%.

There is an old stock market saying, first coined by legendary market historian Yale Hirsch, "As January goes, so goes the year,"

The average return, based upon data since 1970, for the rest of the year after an up January is 12.2% for the S&P 500. Following down January returns the S&P 500 has averaged 11-mo returns of -2.1% until the end of the year.

Does this mean that the market will be up over 12% for 2011? There is no way to know.

But it is certainly interesting to look back at history and see that a positive January certainly bodes well for a positive stock market for 2011 as a whole.

On the other hand, currently the market is very overbought and will likely have at least a 10% correction along the way.

Take a look below for an overall summary and table that offers a current snapshot of the "technical picture" of my selected solar stocks. I plan to update this series weekly and/or whenever there are any significant changes.

Summary

Note: At this time there is a general market comment advising caution to perspective buyers.

A number of the stocks I follow have seen their monthly momentum turn negative in the last week or two. The sector finally seemed to be showing signs of life again after a terrible 2010, but in the past few weeks a number of our stocks dropped below their 50 day MA - a short term negative for the stock.

At this time the strongest stocks are: JKS, LDK, SOL, SOLR, TSL and First Solar (FSLR). Two of what I call my "solar seven" (JASO and SOLF) have had their rating reduced from Strong "S" to Neutral "N."

Critical levels for the weakest "solar seven"

JASO - starting to show some strength. If stock closes below $7.00 it is a further sign of weakness, if the stock closes above $8.25 it is a sign that the stock has regained its upside strength.

SOLF - SOLF is at a critical long term support level. A close below $8.00 it would trigger a sell signal.

Other Stock Comments

SPWRA - starting to show some real strength for the first time in quite a while. Looks like the next candidate to move up to a "S" strong rating.

Market Comment - Caution Advised

Currently the market has two potentially serious "red flags" warning investors to be cautious:
  •  Investor Sentiment
      Investor sentiment is considered to be a contrary indicator and when too many investors or investment newsletters are Bullish – it is a time to be cautious.
      At the current time BOTH the American Association of Individual Investors (AAII) poll of its members and the Investors Intelligence poll of investment newsletters are above their danger zones of 50%.
      There is no guarantee of anything in the stock market, as we all know. But levels of sentiment so extremely bullish would historically indicate at least the potential for a market correction of 10% to 15%.
  • Stocks are very overextended
      On the technical side the market is very overbought above its 200 day moving average. In fact, the current overbought condition is more extreme than any important market top in the last 10 years – certainly another significant reason to be very cautious at this juncture in the market.

Solar Stock Review as of the close on Friday 12 February 2011
Symbol Recent Price 50 day MA
Trend
Weekly momentum
# of weeks
RS
Sig Rating
ASTI 3.31 3.468 - Neg 1 Buy W
CSIQ 14.37 13.588 - Pos 5 Sell W
CSUN 4.45 4.442 - Neg 0 Sell N
DSTI 1.37 1.6 - Neg 1 Sell W
EMKR 2.3 1.449 - Pos 3 Buy S
ENER 4.09 4.582 - Neg 5 Sell W
ESLR 2.2 3.231 - Neg 13 Sell W
FSLR 166.11 141.726 + Pos 8 Buy S
JASO 7.73 7.191 + Pos 5 Buy N
JKS 28.58 24.628 + Pos 5 Buy S
LDK 12.92 11.576 + Pos 5 Buy S
RSOL 2.73 2.64 - Pos 7 Sell W
SOL 11.38 9.73 + Pos 6 Buy S
SOLF 8.79 8.68 + Pos 8 Buy N
SOLR 11.2 9.939 + Neg 1 Buy S
SPIR 5.74 5.175 + Pos 1 Sell W
SPWRA 16.04 13.846 - Pos 8 Sell N
STP 8.91 8.596 - Pos 9 Sell N
TSL 27.37 25.248 + Pos 7 Buy S
WEST 0.53 0.51 - Neg 0 Sell N
WFR 13.73 11.793 + Pos 5 Sell N
YGE 12.14 10.843 - Pos 6 Sell W


Table Keys:

50 Day Moving Average (MA) - this is a short term measure of a stock's current technical picture. If the current price is above the 50 day MA it is a positive indication and if it is below the 50 Day MA it is a negative indication.

Overall Trend - this is the overall longer term trend of the stock (Positive+ or Negative -). When solar stocks were badly underperforming the market almost all our solar stocks were in negative trends - the stocks that turn to a positive trend first are usually the strongest stocks relative to the group as a whole.

Weekly Momentum (Mom.) and Number of weeks positive or negative - this is a measure of the short term momentum of a stock. It is derived by comparing the one week moving average (MA) of the stock to the five week moving average. When the one week MA goes ABOVE the 5 week MA the weekly momentum turns positive, when it goes BELOW the 5 week MA the weekly momentum turns negative. Momentum, on average, stays positive or negative for between 6 and 8 weeks. So a stock that has been negative for 1 or 2 weeks will usually have at least a few more weeks of negative action to come. This would be useful, for example, if someone wanted to buy a particular stock and its momentum just shifted to negative, they will likely be able to buy the stock lower if they are patient and wait for a pullback in the price of the stock.

Relative Strength - this is a measure of the strength of an individual stock relative to a widely followed index - in this case the Standard and Poor's 500 (S&P 500). If the relative strength is “buy” this means that the individual stock is stronger relative to the index and vice versa.

Rating - this a my technical rating on each of the solar stocks after reviewing the technical indicators (momentum and trend) plus a number of additional indicators (monthly momentum, strength relative to the S&P 500 stock index, overbought/oversold status etc.) to arrive at a comparative rating as to how each stock stands technically. N = neutral, W = weak and S = strong.

Background Notes

Keep in mind that there are two basic types of equity (stock) analysis. Below is a brief description of each and its primary purpose:

Fundamental Analysis - this is the analysis of the fundamental financial condition of the company and will identify which stocks are stocks you may want to buy when the timing is right. This form of analysis will give you NO indication of the best time to buy the stock.

Technical Analysis - this form of analysis will tell you "when" to buy a stock. It will do this by showing you (in chart format) the basic interaction of supply and demand and when the two change and shift which will indicate a time to buy or a time to sell.

Mr. Lynch has worked, for 34 years as a Wall Street security analyst, an independent security analyst and private investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for 17 years to the Photovoltaic Insider Report, an early publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He is currently a private investor and has from time to time been a financial/technology consultant to a number of companies. He can be reached via e-mail at:SOLARJPL@aol.com. Please visit his website for the promotion of solar energy – www.sunseries.net.

This article was originally published by InvestorIdeas.com and was reprinted with permission.

February 17, 2011

When Contrary Pays

Debra Fiakas

Power One (PWER) looks like a promising contrarian play.

It is a scenario that has plays out quarter after quarter.  A leading company in popular sector reports decent results, but surprises investors with guidance below the prevailing consensus.  Then the stock price crashes as sell-side analysts cut estimates, price targets and ratings.  It is a situation that many investors fear as they see once profitable stock positions lose value.

Not the contrarian investor!  There are potential profits to be made for the obstinate, but fearless investors willing to do their homework.   

This very situation is playing out in shares of Power One, Inc.  (PWER:  Nasdaq), a leading supplier of power conversion and management solutions for renewable energy systems, particularly the solar industry.  The company posted revenue and earnings results for the fiscal fourth quarter ending January 2, 2011, above the prevailing consensus estimate of $352.5 million in sales but a nickel below the EPS estimate.  Power One had consistently beat the consensus EPS estimate in each of the last four quarters.

If those mixed results were not disquieting enough, investors appeared unnerved by management’s guidance for the March 2011 quarter.  Unfortunately, Power One management guided for sales in a range of $260 million to $290 million, well below the prevailing view on Power One’s prospects.  According to Thomson-Reuters analysts had published estimates for sales in a range of $281.6 million to $360.4 million in sales and earnings per shares in a range of $0.28 to $35 for the March 2011 quarter.  This produces a consensus estimate of $0.31 EPS on $313 million in sales.  

Shares of Power One sold off 21.2% in the first day of trading following management’s bombshell.  This may be a bit of an overreaction given that guidance for the March 2011 quarter was in part based on poor weather conditions impacting near-term customer order patterns.  Management did cite a reduction in feed-in-tariffs in European markets and excess inventory in its distribution channels as factors impacting demand in the long-term.  Nonetheless, guidance for sales in 2011 appears to support the prevailing consensus estimate of $1.3 million in total sales for 2011.

Clearly things are not as rosy as analysts had projected.  However, that is not to suggest Power One is going out of business.  The company still appears to have a strong competitive position in both its renewable energy solutions and power solutions segments.  Recent results are not yet available for most of its competitors such as Lineage Power, Delta Electronics, or SMA Solar TechnologyEmerson Electric Co. (EMR:  NYSE) reported sales and earnings in-line with expectations for the December 2010 quarter.  Emerson experienced growth and margin compression in its power segment similar to Power One’s report.

The stock price pullback provides a compelling entry point for investors with the patience to wait out the time it take for the dust to settle on this single quarter report.  The stock is now trading at 9.6 times trailing earnings.  Assuming analysts trim estimates for 2011 by the same margin as they missed in the fourth quarter, we expect the consensus estimate for 2011 to drop to $1.10 (from $1.26).  The implied forward price earnings multiple would then be 8.4 times  -  a compelling deal for the contrary investor.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.  

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. PWER is included in Crystal Equity Research’s The Mother’s of Invention Index in the Efficiency Group.

February 16, 2011

Alternative Energy Technologies and the Origin of Specious

John Petersen

Thanks to a recent comment from JLBR, I've found a new hero in Dr. Peter Z. Grossman, an economics professor from Butler University who cogently argues that government attempts to force alternative energy technologies into an R&D model that was created for the Manhattan Project and refined for the Space Program will always result in commercial disaster because "the goal of the Apollo Program was the demonstration of engineering prowess while any alternative energy technology must succeed in the marketplace." In a recent article titled "The Apollo Fallacy and its Effect on U.S. Energy Policy" Dr. Grossman summarized the problem as follows:

"The Apollo fallacy has been detrimental to the development of effective energy policies in the US [and] instead of asking what kinds of programs might be useful, the government holds out the promise of a technological panacea to be delivered simply by an act of Congress. The prospect of an energy panacea actually has some political benefits. It allows politicians to claim that they can provide simultaneously the two outcomes most Americans seek from energy policy: low energy prices and energy independence. In fact, with conventional resources these goals are mutually exclusive. To get low prices, the government should provide incentives to drill for oil and gas not just in the US but also in places where they might be exploited more cheaply – of course making the nation more dependent on outside sources. To lessen dependence (true energy autarky is not a feasible goal) on foreign resources, the only method government can use with conventional resources is to raise prices through taxes. But a new technology presumably can to both at once: provide cheap, US-made energy. Unfortunately, the history of energy programs argues that the pursuit of a technological-commercial panacea will fail."

In a 2008 white paper titled "The History of U.S. Alternative Energy Development Programs: A Study of Government Failure," Dr. Grossman started with the Eisenhower Administration's wildly optimistic plans to commercialize nuclear fission reactors for civilian electricity and offered a brief history of serial energy policy failures including:
  • The Nixon and Ford Administrations' support for synthetic fuels from coal and oil shale;
  • The Carter Administration's support for synthetic fuels, nuclear fusion and ethanol; and
  • The Clinton Administration's "Partnership for a New Generation of Vehicles" that failed miserably while privately funded initiatives from Toyota and Honda were remarkably successful.
My additions to Dr. Grossman's list would include Bush the Younger's support for fuel cells, the hydrogen economy and corn ethanol, and the Obama Administration's support for vehicle electrification and alternative energy in general.

These ambitious energy policies all shared three fatal flaws:
  • An inability to distinguish between the technologically possible and the economically desirable;
  • A belief that intervention can force innovation and overcome technical challenges on time and within budget; and
  • A failure to recognize that generous subsidies invariably lead to increased demand for more generous subsidies.
The end result has always been grandiose, unrealistic and extravagant mandates that resulted in catastrophic losses for naive and credulous investors who bought the hopium.

For over sixty years, the government has consistently and predictably failed to understand that industrial revolutions arise from technologies that are perfected by entrepreneurs and prove their value in a free market. The government can accelerate advances in basic science and engineering when cost is not an object, but it can't make technologies cost-effective or ignore the realities of a resource-constrained world. The following cartoon from Jan Darasz appears in the most recent issue of Batteries International Magazine and may overstate the problem a bit, but only a tiny bit.

2.16.11 Daraz Cartoon.png

During the "Sputnik moment" discourse in his recent State of the Union Address, President Obama promised to spend billions of taxpayer dollars to put a million plug-in vehicles on the road by 2015. Back in the business world, Johnson Controls (JCI) and Exide Technologies (XIDE) are spending their own money, together with a $34 million ARRA battery manufacturing grant, to build factories that will make AGM batteries for 14.7 million micro-hybrids a year by 2014. The President's plan will save up to 400 million gallons of gas per year by 2015. The 56 million micro-hybrids that will be built during the same time frame using AGM batteries from JCI and Exide will save 1.6 billion gallons of gas per year. Last time I checked, spending millions to save billions of gallons of gasoline was more sensible than the inverse.

I've frequently argued "Alternative Energy Storage Needs to Take Baby Steps Before it Can Run." A favorite quote from William Martin's novel "The Lost Constitution" says it all – "In America we get up in the morning, we go to work and we solve our problems." Unfortunately government programs never use the tools that are readily available to do the work. Instead they impede sensible actions like using compressed natural gas instead of gasoline and let urgent problems fester while new, exotic and politically popular technologies are invented and refined, but never commercialized. A cynic might suggest that it's a great way for a politician to kick the can down the road while deferring blowback from policy failures and unintended consequences until his successor takes the oath of office.

We have 60 years of experience that proves well intentioned but ill-conceived government alternative energy technology initiatives aren't doing the job. Investing $46 of capital to save a gallon of gasoline with a plug-in vehicle is foolish when you can save that same gallon of gasoline with a $24 capital investment in an HEV. Taxing Peter to underwrite the cost of Paul's new car will impoverish the masses instead of empowering them. Using imported metals to make non-recyclable batteries for the purpose of conserving more plentiful petroleum has all the intellectual integrity and economic appeal of using cocaine as a weight loss supplement.

There are solid growth opportunities in the domestic energy storage sector. JCI and Enersys (ENS) both trade at about eighteen times earnings while Exide trades at about twelve times earnings. In the more speculative small company space, Axion Power International (AXPW.OB), ZBB Energy (ZBB) and Beacon Power (BCON) all present intriguing value propositions as they emerge from the trough of disillusionment and begin to build industry relationships and revenue by proving the value of their products one baby step at a time.

I'm convinced that every manufacturer of energy storage devices that brings a cost-effective product to market will have more business than it can handle as dwindling global energy supplies make storage more cost-effective than waste. That conviction, however, does not extend to market darlings like Tesla Motors (TSLA), A123 Systems (AONE) and Ener1 (HEV) who owe their high profiles and huge swaths of their balance sheets to government largess and glittering promises of an all-electric future once they prove that their wonder products work in the hands of normal consumers and learn how to manufacture better than Toyota Motors (TM), Sony (SNE), Panasonic (PC) and a host of lesser industrial luminaries that have proven their capabilities with decades of successful execution.

Over the last several months I've become convinced that a transition from gasoline to compressed natural gas may be one of the great opportunities of our age. Natural gas is abundant and clean, and an easy domestic substitute for imported oil. While I don't know as much as I'd like to about fiscal multipliers, I have to believe a massive shift from imported oil to domestic natural gas would reduce energy costs to consumers, slash CO2 emissions, generate trillions in additional GDP and go a long way toward ameliorating the looming deficit spending crisis many observers predict.

Just yesterday, the 2011 Honda Civic GX, a conventional vehicle with a CNG fuel system, tied with the all-electric Nissan Leaf for top honors in the American Council for an Energy-Efficient Economy's list of the Greenest Vehicles of 2011, a position it's held for eight years in a row. The Toyota Prius came in fourth, well ahead of the GM Volt, which came in seventh. I can only imagine what the ACEEE ratings would look like if Honda added a hybrid drive to the Civic GX or Toyota added a CNG fuel system to the Prius.

Mark Twain observed that "history doesn't repeat itself but it does rhyme." When it comes to specious and ill-conceived alternative energy technology initiatives that originate on the banks of the Potomac and rapidly mutate into bad investments, I can't help but wonder whether we're just hearing another chorus from the same old song – 99 Bottles of Energy on the Wall.

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

February 15, 2011

Ormat No Longer Stands Alone

Tom Konrad, CFA

The market for Organic Rankin Cycle geothermal turbines has become competitive.

In my October 2010 profile of geothermal industry leader Ormat Technologies (ORA), I quoted a conversation I'd had with a Geothermal Energy Association (GEA) representative in 2006, where she told me that Ormat stood head and shoulders above all the other geothermal players. 

As the only truly vertically integrated geothermal developer, with in-house exploration, drilling, turbine technology, and operations, Ormat is still unique among geothermal companies.  But not too long ago their Organic Rankin Cycle turbines (which they call Ormat Energy Converters, OEC) did not have much serious competition when it came to exploiting relatively low temperature (liquid water) resources. 

Organic Rankine Cycles

The Organic Rankine Cycle (ORC) is also called Binary cycles because there are two fluids involved: a working fluid as well as the geothermal fluid which provides the heat.  "Organic" refers to the fact that the working fluid is usually an organic liquid such as isopentane or one of several refrigerants.  The working fluid is chosen so that it has a much lower boiling point than water, and so it is in gaseous phase and can drive a turbine when the heat source is too cool to boil water.  ORCs are also often used as bottoming units to generate power from the waste heat from conventional turbines at higher-temperature geothermal resources, or from the waste heat from other types of industrial waste heat.

Ormat's over 300 million hours of turbine operations is still unmatched by other companies' technology, but several rivals now have enough history in the field and financial strength to provide product guarantees so that geothermal developers and their banks can feel confident that the projects will be reliable and durable enough to lend money against.

The Competition

Mark Taylor, the lead analyst for geothermal and CCS at Bloomberg New Energy Finance gave an overview of the market for geothermal turbines at the GEA Finance Forum in New York on February 9th.  Binary turbines are still only a small fraction of the market, with the majority of installed turbines being larger conventional steam turbines, with leading suppliers being Toshiba, Mitsubishi, and Fuji.  Binary plants are only about 12% of the market by installed capacity, and Ormat's OECs are installed in 92% of these.  However, in terms of recent installations, Ormat has only about half of the market for binary plants.

One sign of the increased competition was Ormat's deal with Nevada Geothermal Power (NGLPF.OB, NGP.V) to develop the latter's Crump Geyser property.  Under the deal, Ormat will earn a 50% stake in the property by doing all of the development work, and paying for most of it, in addition to providing enough financing to Nevada Geothermal that the latter will not need to pay anything more out of pocket to develop the property.  According to John McIlveen of Jacob Securities, a significant factor in Ormat's willingness to do this deal was the assurance that Ormat would be the contractor on the project.

While Ormat's competitors cannot offer drilling services as well as construction and financing, many geothermal developers are comfortable using their own drilling contractors.  The two competitors to present at the forum both appeared to me to have compelling offerings.

One turbine manufacturer that presented was Turbine Air Systems (TAS).  TAS is headquartered in Houston, with several offices in the Middle East and South East Asia.  Unlike the other manufacturers, TAS manufactures their turbines in their factory, and move them on site in a minimum of modules, which they claim saves time and on-site labor during installation.  Another way TAS saves time for developers is by working only with nonflammable refrigerants, which can simplify the permitting process.  Perhaps more importantly, TAS has the financial strength to provide vendor financing, as they did for US Geothermal's (HTM) San Emidio property.

The other major turbine supplier to present was Pratt & Whitney, a division of United Technologies (UTX)Pratt & Whitney purchased Turboden in 2009 adding full size binary turbines to their small-scale mass produced PureCycle offering (I discussed PureCycle in more depth in my 2007 overview of Geothermal power.)  Turboden is a European supplier of ORC turbine with 30 years experience and 174 plants installed mostly in Germany, Austria, and Italy.   Most of their existing plants run off biomass and waste heat, but they have made sales in geothermal, in Germany, Austria, and France.  Despite Turboden's limited experience in geothermal markets, Pratt & Whitney's strong balance sheet and deep experience in power generation markets mean the company has to be considered a serious contender for geothermal power plants, and their competitive offerings are likely to grow stronger as they develop a longer track record in geothermal power generation.

Implications for Investors

For Ormat, the emergence of serious competition for ORC power plants may reduce potential future growth in their product segment.  This may not slow the company's overall growth much, especially since the product segment has recently been lagging anyway, mostly due to many developers' difficulties in obtaining financing.  While the financing problem for geothermal developers is easing, some of the rebounding market is likely to be captured by other turbine suppliers.  Ormat is likely to be increasingly reliant on its electricity generation segment, which may put an upper limit on how quickly the company can grow in future years.  In my recent profile of Ormat, I concluded that it was difficult to justify the company's valuation even with the consensus five year expected growth of 29% which was expected by analysts when I wrote that article in October.

If anything, the newly competitive turbine market will reduce Ormat's potential growth rate.  Apparently other analysts agree, because the current consensus is now reported as 9.8%, a number I feel is much more reasonable.  However, at the current stock price of $29.32, Ormat's forward P/E is 30.2, giving a Price/Earnings Growth ratio of a stratospheric 3.63. 

For geothermal developers, the advent of serious competition to supply binary turbines is good news, because it means that vendors will compete for geothermal developers' business, meaning that more attractive deals will be on offer.  I continue to add to my holdings of Magma Energy Corp. (MXY.TO, MGMXF.PK), Nevada Geothermal Power (NGLPF.OB, NGP.V), Ram Power Corp. (RPG.TO, RAMPF.PK), and US Geothermal (HTM).

DISCLOSURE: Long MGMXF,NGLPF, RAMPF, and HTM.
 
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.

February 14, 2011

The Renewable IPO

By Greg Pfahl

Renewable IPOs in 2010

2010 proved to be a much better year for the initial public offering and renewable energy companies, perhaps surprisingly, saw their share of activity. In 2010 there were more than double the number of initial public offerings than in 2009, and we also saw a significant increase in secondary offerings as well.

Worldwide public investment in renewable energy increased 21 percent last year, with China representing 20 percent of the 2010 market, according to VB/Research of London. The REW 40 Index is up 15 percent over the past year at this writing. While it’s hard to predict if 2011 will be a frothy IPO market for renewable companies, it is clear the public’s appetite for risk in renewables is growing. Despite what you may hear about the effect of lower natural gas prices on renewables, we believe that it is public market performance and availability of willing investors, not commodity prices, that drives the IPO market.

The renewable IPO field saw a series of fits and starts. There were some fits: Solyndra, PetroAlgae (PALG.OB), Trony Solar and Gevo (GEVO) withdrew or reduced their IPOs. But there were some starts as well. Even though Codexis (CDXS) didn’t raise the $100 million it had hoped for last April, it still pocketed $78 million from public investors with its IPO. And Amyris is trading at the $30 level, nearly double the IPO of $17.20.

Codexis and Amyris (AMRS) both succeeded on their IPOs because despite the fact they are money-losing early stage companies, they have proven technology and real revenues and contracts, with potential high-revenue products in the pipeline. Codexis, which develops custom enzymes and catalysts for industrial chemical production, has a project going with Shell, a major investor, to speed up production of biofuels from nonfood sources. Codexis had revenues of $101.5 million last year.

Amyris had revenues of $68.5 million for its synthetic biofuels technology. The company has been well-funded by venture capital investors as it tries to show it can be "the leading provider of renewable specialty chemicals and transportation fuels worldwide." The company’s Biofene yeast-based chemical takes Brazilian sugarcane and ferments it into a petroleum replacement into several different applications, including diesel and jet fuel. Amyris has benefited from consistently telling its story in a convincing way to investors and the public.

California-based photovoltaic maker Solyndra withdrew its IPO in late June citing “ongoing uncertainties in the public markets,” opting for a $175 million private placement and a $535 million loan guarantee from the federal government instead. The Solyndra withdrawal was described by some observers as “muddying the waters” for other solar panel makers to hit the markets, but considering the company had private and government options, it was only prudent for management to pull the $300 million public offer until a better time.

PetroAlgae, on the other hand, is an example of what not to do. The VentureBeat website cited PetroAgae as one of its worst clean tech investments of 2010. The site said most analysts said the company "jumped the gun" because it has burned through $58 million the past three years and has no revenues. Worse, it has a complex corporate structure and has already restated its financial statements. Companies need their investors to understand their story in order to buy into it, including the management, technology, corporate structure and business and financial plan. Complex is bad; simple is good.

How to Plan an IPO

The decision to go public is complex, situational and a big step for any company. Not all IPOs are huge. According to Keating Capital/Capital IQ, 85 percent of NASDAQ companies have market caps less than $1 billion and 40 percent of listed companies are unprofitable. About 10 percent had revenues less than $10 million. If your company determines that an IPO is the correct decision, companies should know what to expect and how to prepare for an IPO, because it isn’t all about the money.

Start early

This is not a fast process. If you are operating on a shoestring budget and have three months worth of cash, the IPO is not for you because an IPO will not get done in three months. Going public can take six months but more likely will take a year. So if funds are dear, consider government grants or loan guarantees, selling tax credits, selling to private institutional investors,  bank financing if you have assets that can be used as collateral, licensing your technology or other fundraising activities.

Still interested? Here are some issues that could trip you up on your way to watching the closing hit the bank if not accomplished at least six months prior:  

Solid financials - You might expect an auditor and CPA to say you need quality financial reporting, but you’ll hear the same thing from underwriters, securities attorneys and investors. The smarter clients considering either an IPO or even a private sale get us involved several years before the deal. Renewable companies are in their early stages. Investors understand that there will be losses until a profit is made, but audited financials by a reputable firm give you better leverage. Generally, when filing your initial registration statement with the SEC, you will need to include the most recent two years’ balances sheets and the most recent three years’ income statements, statements of equity and cash flows, all audited by an independent audit firm registered with the PCAOB. In addition, if the age of the audited financial statements is more than 129 days old, then you will need to file stub period financial statements which are required to be reviewed by your independent audit firm.

Management – A year in advance, evaluate your existing management team and assemble the best team you can, preferably one with transactional or public company experience.

Board of directors – You should begin assembling a strong, independent board and a complete set of corporate minutes and any governance records. Most private companies operate with a board of directors consisting primarily of management and friends or family members. However, most stock exchanges require that the majority of the board of directors of a company traded on their exchange be independent. In addition, the SEC requires an independent audit committee.  

Compensation Disclosure and Analysis – Compensation disclosures have been one of the SEC’s hot buttons over the past several years and as a public company you will need to provide extensive disclosures in your periodic filings. So get the policies and contracts in place prior to going public.

Document material agreements – As part of their due diligence process, the underwriter and their team will be requesting and reviewing all of your material agreements. In addition, you will be required to file as exhibits with the initial registration statement all material contracts outside of the ordinary course of your business. This is where your legal counsel fits in.

Protect your intellectual property – Investors these days need to know what it is you truly own and can defend in court if necessary from patent infringement.

Play defense – This includes anti-takeover provisions and poison-pill takeover measures.
       
Do a risk assessment – Identify any issues that could affect your company and prepare measures to deal with them. This could vary from legal, market, commodity and political risk to workplace issues.

Prepare for periodic filing requirements – As a public company you will need to file quarterly and annual reports with the SEC within the required timeframes. Prior to going public, ensure that you have systems in place to accommodate these requirements.

You will also need to disclose and report on your internal controls over financial reporting. The requirement to provide an independent auditor’s report on internal controls over financial reporting (commonly referred to as 404b) was removed by the Dodd Frank Act for smaller reporting companies as defined by the SEC, but even for smaller reporting companies, management will have to provide their report on the effectiveness of their internal control over financial reporting. The initial documentation of internal controls and ongoing testing required for this report can be quite time-intensive. Some companies are handling this all internally and others are outsourcing but the process can and should be started before going public and not afterward.

Selection of an Underwriter – About six months prior to the IPO, management needs to select an underwriter, who will ultimately market the transaction. Some important considerations in making this selection are as follows:
  • Industry expertise
  • Size of firm, bigger is not always better
  • Their perceived commitment to your company both before and after the offering
  • Their backlog of deals, are you going to be number one on the list or number one hundred?
The underwriter will have its own SEC counsel who will work closely with your own. At this point, the registration statement will begin to be drafted. Once filed, the SEC will review the document and provide comments, generally within thirty days. Within a week to two weeks you will then respond to the SEC’s comments and file an amended registration statement. The SEC will review the amendment typically within about a week and potentially provide additional comments. Because of these iterations of comments and responses, the SEC review process can potentially slow down the transaction’s closing. It is not uncommon during this process to establish direct contact with the SEC to clarify their concerns and to help expedite the process, normally handled by outside counsel and auditors with SEC experience.  

The Road Show – One of the last activities for management prior to closing is the road show, where you make presentations to syndicate members, potential institutional investors and retail brokerages. Management’s job in these presentations is to respond to questions and present the company, not hype the deal. While you can get into projections, you should stick to facts as much as possible.

About the author
Greg Pfahl, CPA, is an audit partner in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Southern California. He also serves as a local leader for the alternative energy practice area. Pfahl can be reached at gpfahl@heincpa.com or 303.298.9600.
 

February 13, 2011

Distinguishing HEV Efficiency from Plug-in Vehicle Waste

John Petersen

Over the last couple years I've frequently argued that plug-in vehicles are inherently wasteful on a micro-economic and a macro-economic level. Unfortunately complex economic proofs are hard to grasp at a glance and my biggest challenge has been finding a simple proof for a patently obvious truth that can't be distorted by flimsy assumptions or misconstrued with rosy forecasts. I hope today's article will drive a stake through the undead heart of plug-in vehicle efficiency claims.

To keep it simple, I'll use the Camry Hybrid from Toyota Motors (TM), the Leaf from Nissan Motors (NSANY.PK) and the Roadster from Tesla Motors (TSLA) as examples.

The Camry Hybrid has an EPA fuel economy rating of 31 mpg city and 35 mpg highway while its conventional sister has an EPA fuel economy rating of 22 mpg city and 33 mpg highway. The Leaf and the Roadster both have EPA fuel economy ratings of 99 mpge. To achieve their fuel economy ratings, the Camry uses a 1.3 kWh NiMH battery pack, the Leaf uses a 24 kWh lithium-ion battery pack and the Roadster uses a 56 kWh lithium-ion battery pack.

If we assume that all three vehicles will have a 10-year life and be driven an average of 12,500 miles per year, the following table summarizes the electric drive miles achieved per kWh of battery capacity.


Camry Leaf Roadster
10-year mileage 125,000 125,000 125,000
Gasoline miles 88,710 0 0
Efficiency miles 36,290

Electric utility miles

125,000
125,000
Battery Pack kWh 1.3 24 56
Electric miles per kWh 27,916 5,208 2,232
Fuel saved per kWh 931 174 74

The first point that merits attention is that electric miles in a Camry come from using gasoline more efficiently. In contrast, electric miles in a Leaf or a Roadster come from an electric power plant that consumes coal, natural gas or uranium to make the juice that dives the wheels. Electric drive is more efficient than internal combustion if you start your analysis at a full gas tank or battery, but most of that advantage evaporates when you carry the analysis back through the supply chain and factor in all emissions and inefficiencies starting with the oil well or coal mine.

The second point that merits attention is that for every kWh of battery capacity, the Camry is 5.4 times more efficient than a Leaf and 12.5 times more efficient than a Roadster. Batteries are most valuable when they're worked hard and cycled often. From the perspective of a battery, going to work in a Camry is full-time employment on an assembly line, going to work in a Leaf is a part-time job in a donut shop, and going to work in a Roadster is retirement on a beach in Belize.

The reason is simple. HEVs are an efficiency technology that uses a small battery to save 40% on fuel consumption. Plug-in vehicles, in comparison, are fuel substitution schemes that use batteries to substitute electric power for gasoline and replace the fuel tank at a capital cost of $3,750 to $7,500 per equivalent gallon of capacity.

Regardless of chemistry, advanced batteries are terrible things to waste because they require prodigious inputs of scarce mineral resources and are difficult, if not impossible, to recycle economically. They perform wonderfully when they're used to improve fuel efficiency in an HEV, but they perform poorly when they're used as fuel tank substitutes for a plug-in vehicle.

Future gas prices and battery costs will not change the fundamental truth that batteries are five times more efficient in HEVs than they are in plug-in vehicles. Batteries in HEVs eliminate the use of fuel while batteries in plug-ins can only add long tail pipes that substitute a mix of coal, natural gas and nuclear power for gasoline.

In the final analysis, plug-in vehicles are a luxury no nation and no investor can afford.

Disclosure. None

February 11, 2011

Outlook for Geothermal Energy Stocks in 2011

Tom Konrad CFA

My take-aways from the GEA Finance Forum

After a long time lost in the proverbial desert of high capital costs and few financiers willing to step up, a number of geothermal companies made breakthroughs last fall.  The Department of Energy (DOE) loan guarantees for geothermal power development began to come through, and financiers were beginning to step up. 

With this background, I entered 2011 feeling optimistic about the prospects for geothermal power companies, and even included two geothermal developers in my 10 Clean Energy Stocks for 2011.

So far, 2011 has not been kind to geothermal stocks

On February 9th, I had the opportunity to attend the Geothermal Energy Association's (GEA) Finance Forum in New York.  The main question in my mind was:
Will the rest of 2011 offer more positive news about successful financings of geothermal projects, or will the news be more political risk and construction delays?
Overall, I left with my optimism for geothermal stocks restored. 

The Good

HS Orka: I was one of several members of the press to question Iceland's President Grimmson about the rumors that the Icelandic government might force Ram Power to sell HS Orka back to the government.  He repeated the current party line that the government has no intention of seizing Orka, but mostly ducked the question, saying that Magma's President and CEO Asgeir Magnussun was the best person to answer the question.  But he did mention that Magma was engaged with a group of Icelandic pension funds in negotiations to sell a share of HS Orka. 

Later in the conference, Magnussun said his company was working on finalizing an agreement with the Icelandic government, in which they will agree with the government to amend the long term lease of the resource.  This should allow the government to save face before the populist protests.  Magnussun also said that he suspects some of the protesters are motivated not just by resource nationalism, but also by a wish to stop industrial development.  The driving force for Iceland's current industrial development is cheap renewable geothermal and hydro power, and if geothermal expansion can be delayed, so can Icelandic industrialization. 

Financing: It seemed like every other person I spoke to at the conference was from some financial company interested in funding the construction of geothermal plants.  It seemed clear that geothermal developers who have proven resources should be able to get the money to build plants. 

In  particular, there were the following encouraging developments:

  • Islandbanki and Hannon Armstrong announced a joint venture (to be called GeoBanc) to provide a full service, one-stop financial shop for geothermal developers.
  • Johnathan Zurcoff, VP of finance at US Geothermal (HTM) said his company hopes to close on its DOE backed loan in the next couple weeks.
  • John McIlveen Research Director at Jacob Securities pointed out the significance of Enbridge's 2010 deal with US Geothermal (HTM) to finance drilling and construction at Neal Hot Springs.  This deal was significant for two reasons.  First, the project was relatively early stage, with only two completed production wells, so the investment was riskier than the typical construction loan.  Second, it was significant because Enbridge is an oil and gas company.  He thinks we'll see one or two more large players from outside the industry entering into this sort of deal in 2011.
  • Jimmy Leung of Raymond James said he's currently working on a $184 million geothermal financing he expects to close in the second quarter of 2011.
In other words, there is likely to be a lot of money flowing into geothermal projects in 2011, and that should be good for the stocks.

Risks for Geothermal

That said, neither drilling risk nor political risk is going away.

It's a truism that geothermal exploration is considerably more risky than oil and gas exploration, simply because geothermal reservoirs are much more complex than oil and gas reservoirs.  Using a very broad brush and oversimplifying somewhat, geothermal resources are hot fluids moving through cracks in complex geologic formations with hydrothermal features such as vulcanism, while oil and gas are typically in fairly simple sedimentary formations where an impermeable layer caps a pool of fossil resources in a relatively permeable layer below.

Given the complex geology, drilling risk will continue to be a long term feature of geothermal exploration, and it is the first risk that comes to mind of many industry observers. 

Nor is political risk going anywhere.  Not only will there be continuing problems with resource nationalism, such as we are seeing in Iceland, but the United States is hardly a safe-haven, with Republican congressmen falling over each other to introduce bills to grab back any unspent ARRA money which could affect future DOE construction loan guarantees and the ITC cash grants.

On the other hand, if subsidies for geothermal are cut as part of budget cutting efforts, it will not be only geothermal, but many energy sectors.  Since geothermal is one of the most economically viable renewable energy sectors, it may even emerge relatively well off.  Finally, as John Pierce of Wilson Sonsini Goodrich & Rosati pointed out, the Republican-controlled House will be largely irrelevant to whatever legislation actually gets passed: it will be the Senate where the real decisions (if any) are made.

Conclusion

Drilling risk and political risk are nothing new for geothermal developers.  What is new is the emergence of a new class of financiers who are willing to step up and fund geothermal projects.  We saw the beginnings of this trend in 2010, and it looks like the trend will only accelerate in 2011.  This can't help but be good for the publicly traded geothermal developers who can't fund their projects internally (the only ones that can are Ormat and Calpine Corp. (CPN).

The four I currently own are Magma Energy Corp. (MXY.TO, MGMXF.PK), Nevada Geothermal Power (NGLPF.OB, NGP.V), Ram Power Corp. (RPG.TO, RAMPF.PK), and US Geothermal (HTM).  After what I learned at the conference, I've been adding to my holdings.

DISCLOSURE: Long MGMXF,NGLPF, RAMPF, and HTM.
 
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.

February 09, 2011

SolarWindow Story Deserves More Skepticism

Dana Blankenhorn

Back in December I wrote skeptically of New Energy Technologies Inc., (NENE) whose SolarWindow was written-up here in September, mainly as a result of this press release.

The press release drew press coverage, including an October mention by CNBC anchor Erin Burnett. I should add here Ms. Burnett has not done a Maxim cover shoot – the photo by the story is a fake.

But is the story a fake?

Since the fall NENE has been on a roll, rising in price from about 60 cents to over $1.60. NENE chart

The company says it has appointed a new CFO with an impressive resume.  (but noted it's not his full-time job). So after seeing yet-another mention of the company today I did a little checking.

Skeptics are not hard to find. The blog Sanity Defense used the phrase pump and dump for this company in November.  Stock Gumshoe laughed at the company's publicity and the author of its press materials. [Ed. note: See Tom Konrad's Oct 30 take here.]

NENE, it turns out, is not this company's original name. Until January 2009 it was known as Octillion, The name changed a few months after it appointed Harmel Rayat as its secretary-treasurer.

During the Internet Bubble Mr. Rayat ran an outfit called EquityAlert, which the SEC charged with being an e-mail “pump and dump” house. In 2007 Canada Stockwatch ran a “profile” of Mr. Rayat detailing several of his “deals” at which point Seeking Alpha ran a story titled “Stay Away from Octillion.” Other commenters have been more blunt – stay away from Rayat, they warn. 

So in 2007 Octillion, with Rayat at the helm, claimed to own solar patents which are New Energy Tech's business. But its July 2007 prospectus shows it only notes a license to commercialize patents held by the University of Illinois. Three years later the company was saying its technology came from the University of South Florida  – previous agreements were canceled for undisclosed reasons, according to Stock Gumshoe.

Rayat is listed in SEC documents last May as owning 43% of the company, through something called Alberta Ltd.  He recently sold over 36 million shares of NENE.  The sales were described in a filing last December.

If you're looking for Mr. Rayat, in other words, he's long gone. Flickr has a picture of him at a 2009 Vancouver restaurant opening. He looks happy.

NENE, meanwhile, keeps on logging the column inches. Here is a description of the company's latest demonstration at Gizmag, which doesn't seem aware that Octillion and NENE are the same outfit. Glass Magazine ran with the release too. The press release, published at the Penny Stock Blog, headlines this as the “largest solar window” yet shown and another step toward commercial development.

The current CEO is John Conklin, who is said to have a quarter-century of experience in renewable energy and industrial processes. But does he?

He is said to be founder of National Solar Systems LLC of New York – but that company is (according to the Web site linked from his profile) based in Saudi Arabia. He's also listed as founder of Tellurium Associates LLC. He calls it “an industrial and environmental process design and operations consulting Company.”  It's listed as an environmental consultant in a small commercial building currently available for sale at $32/sq.ft

Anyone starting to smell a rat, using our hopes and dreams to steal our money and reputation? I am.

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.

February 07, 2011

Entech Solar: Let the Sun Shine In

by Debra Fiakas
Smilers never lose
And frowners never win
So let the sun shin in
Face it with a grin
Open up your heart and let the sun shine in.

Age of Aquarius
The Fifth Dimension, 1969
Investors have not opened their hearts or pocket books for Entech Solar, Inc. (ENSL:  OTC/BB) despite its products that do indeed let the sun shine in, that is into commercial and industrial buildings through innovative tubular skylights.  Shares of Entech Solar are currently priced below a dime.  

Entech has also developed a concentrating solar module marketed under the brand name SolarVolt that converts the energy from sunlight into electricity.  The SolarVolt relies on a unique optical design that concentrates the sun’s rays toward an array of photovoltaic cells.  Because the solar input is concentrated the module requires 95% less silicon than conventional photovoltaic cells.  Accordingly, the SolarVolt’s cost/performance case is compelling  -  at least from a raw materials standpoint.

Unfortunately, Entech has yet to gain much traction in the marketplace.  Sales totaled $173,000 in the first nine months of 2010.  Consequently, the Company reported a net loss of $14.4 million in the period, largely on selling, general and administrative expenses.  Operations are using approximately $2.56 million in cash per quarter.  The Company had $1.7 million on the balance sheet at the end of September 2010, not enough to sustain operations through the end of the year.

It should not be a surprise that earlier this week CEO and Chairman of the Board David Gelbaum invested another $1.0 million in the company.  Gelbaum was given another 15.0 million shares for his generosity, bringing his ownership in the Entech to 46.9%.

Gelbaum founded the company with Mark O’Neill, who is the current chief technical officer, and Robert Walters, who is VP of Marketing.  Gelbaum’s background is in quantitative modeling of derivatives, so we will give him a pass on the weak performance in market penetration.  However, both O’Neill and Walters boast extensive experience in engineering and technical sales.

The Entech Tubular Skylight was introduced in January 2010, and contributed only nominally to 2010 sales.  Management still apparently holds out hope for improved sales volumes in the final quarter of the year.      

Concentrating solar technology is a seductive resolution to the high cost of solar photovoltaic power generation.  Earlier this year the Company elected to focus on the electricity-only model, leaving the thermal application to a time when market conditions are more receptive.  The SolarVolt was submitted for independent certification testing in September 2010, and the company has targeted mid-2011 for introducing a fully certified product to the marketplace.

ENSL may be a penny stock plaything for day traders today.  However, we suggest investors put Entech on their watch lists for news on the Company’s efforts to get certification of the SolarVolt concentrating solar module.  Certification may be that tipping point that triggers customer interest.


Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.  

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  ENSL is included in Crystal Equity Research’s Earth, Wind and Fire Index in the Solar Concentrating group.

February 06, 2011

Electric Vehicles and the Natural Resource Cliff

John Petersen

We all love to whine and complain about oil prices because we buy gasoline regularly and that makes the price changes obvious. To solve this overwhelming problem, myopic visionaries with rose colored glasses propose a simple solution – convert personal transportation from vehicles powered by oil to vehicles powered by clean, free and renewable electricity from the wind and sun. Like most fairy tales, it can't happen in real life which means it won't. This is not a technology issue. It's a raw materials issue and electric vehicles cannot solve the problem.

In the first three quarters of 2010, the world produced an average of 86 million barrels of crude oil per day. That works out to 0.65 metric tons, or 200 gallons per year, for each of the planet's 6.6 billion inhabitants. There's no doubt about it, oil is a scarce resource – at least until you compare it with metals that are two to five orders of magnitude scarcer. To put oil in its proper perspective, the following table summarizes global production data for several critical natural resources.

Natural
Global Production
Per Capita
Resource
(Metric Tons)
Production
Crude Oil
4,282,736,000
648.9 kg
Iron & Steel
2,400,000,000
363.6 kg
Aluminum
41,400,000
6.3 kg
Copper
16,200,000
2.4 kg
Lead
4,100,000
0.7 kg
Nickel
1,550,000
0.2 kg
Rare Earths
130,000
20 g
Lithium
25,300
4 g

For every thousand pounds of global oil production, we produce ten pounds of aluminum, four pounds of copper, one pound of lead, six ounces of nickel, a half-ounce of rare earth metals and a tenth of an ounce of lithium. No thoughtful investor can compare per capita production of oil and essential metals and rationally conclude that we can increase metal consumption in the name of conserving oil. The resource sophistry can't work in anything beyond technical puppet shows for lazy, impressionable or childish minds.

To make matters worse, metal prices are anything but stable. We ignore changes in metal prices because they're usually buried in the cost of other products. That doesn't mean that metals are a bargain compared to oil or that their prices are any more stable. The following graph tracks market prices for oil and three of our most important metals over the last 20 years. The trend lines are remarkably similar.

2.6.11 Commodity Prices.png

If we even try to significantly increase metal consumption in an effort to conserve oil, the inevitable supply and demand imbalances will quickly eliminate any advantage and simply make the situation worse. In the final analysis, any energy policy or business model that increases metal consumption in an effort to conserve oil must fail. We've already seen the disastrous results of using food to make ethanol for fuel. There will be blood if we follow the same foolish path with metals.

I am a relentless and unrepentant critic of plug-in vehicle hype and propaganda because any plan to use hundreds of pounds of metal to replace a fuel tank must fail. There aren't enough metals in the world to make a dent in global oil consumption and using scarce metal resources to make non-recyclable components like batteries and motors for plug-in vehicles can only make the problem worse. It's sabotage masquerading as a solution.

The only transportation technologies that stand a chance of survival in a resource-constrained world are those that use tiny amounts of metals to conserve large amounts of oil. Electric two-wheeled vehicles work as long as the empty vehicle weight is less than twice the passenger weight. For automobiles, resource effective technologies range from simple stop-start idle elimination at the low end to Prius class HEVs at the high end, although even these technologies can be marginal if the primary components are not easily recycled. The instant you add a plug the resource balance goes to hell in a handbag along with the investment potential.

All the political will, good intentions and happy-talk forecasts in the world cannot change the ugly facts. We’re driving toward a natural resource cliff at 120 mph and fiddling with the dials on the navigation system.

With the exception of Advanced Battery Technologies (ABAT) and Kandi Technologies (KNDI), which have the common sense to focus on entry-level two- and four-wheeled electric vehicles with minimal natural resource inputs, the entire electric vehicle sector is a bug in search of a windshield. It doesn't matter how cool the products are if there will never be enough affordable raw materials to make them in meaningful volume.

Several companies that I follow have no chance of survival when their business models are analyzed from a resource sustainability perspective. The list includes Tesla Motors (TSLA), Ener1 (HEV), A123 Systems (AONE), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI). In each case their products have extreme natural resource requirements and little or no end-of-life recycling value. They will compound our problems, not solve them.

Several other companies that I follow have good resource sustainability profiles because their products can make major contributions to oil conservation without putting undue strain on global metal production. My list of sustainable companies includes Johnson Controls (JCI). Enersys (ENS), Exide Technologies (XIDE), Beacon Power (BCON), ZBB Energy (ZBB) and Maxwell Technologies (MXWL). In each case their products have moderate resource requirements and high end-of-life recycling value.

There is only one energy storage company that can offer better performance and lower resource requirements in the same product – Axion Power International (AXPW.OB). Its serially patented PbC battery technology uses 30% less lead than a conventional lead-acid battery, boosts cycle life and dynamic charge acceptance by an order of magnitude, and retains the recycling advantages of lead-acid batteries, the most recycled product in the world. The unique performance characteristics of the PbC technology are proven and the principal remaining risk is further refining fabrication equipment and processes for Axion's carbon electrode assemblies. When Axion's equipment, processes and products complete the final stages of validation testing by its principal potential customers, the technology can be easily ramped to a global footprint within a few years for a fraction of the cost of other emerging energy storage technologies.

Axion has never been a stock market darling because its management speaks in the past tense and focuses on challenges overcome, milestones passed and goals accomplished. As a result of its low key approach to the financial markets, Axion carries a $54 million market capitalization despite the fact that its disclosed industry and customer relationships include East Penn Manufacturing and Exide Technologies, the second and third largest lead-acid battery manufacturers in North America, Norfolk Southern (NSC), the fourth largest railroad in North America and BMW, one of the most highly regarded automakers in the world. Any time a tiny company with a transition stage technology can quietly build relationships with several world-class companies, astute investors should pay attention.

Seven years ago I believed Axion had an honest shot at the big leagues. Today I think I may have set my sights too low. The progress I expect won't happen overnight, but it will happen long before we see a million plug-in vehicles on the road in the United States.

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

February 05, 2011

Throwing Corn off the Green Bus

Dana Blankenhorn

I am a big booster of alternative energy. Harvesting the wind, the Sun, the heat of the Earth, the tides – I'm there and NIMBYs be damned.

But I am increasingly having second thoughts about one type of green energy. Corn-based ethanol. (I would toss in sugar cane, too, but America doesn't grow enough to matter here.)

Corn ethanol was one of the first biofuels to find a market. Pushed by companies like Archer Daniels Midland (ADM) and Cargill, corn ethanol is now an integral ingredient in many blends of gasoline. It is compatible with gasoline and, its advocates say, it burns cleaner.

But corn is a row crop. That means it's planted in long rows. It's dependent on man for its survival. (If we didn't open the husks and spread the seed it would not exist.) Corn also takes nitrogen from the soil. It depletes the land. The way you sustain land for corn is by either spreading fertilizer every year or letting the land “rest” every so often, rotating it with soybeans or (better yet) some non-food crop such as a perennial grass.

Corn is also a food crop. The same process which leads to ethanol leads to corn syrup. Corn is an essential feed for livestock of all kinds. Corn ethanol competes with people and animals for corn.

All this makes corn an easy whipping boy for those who actually oppose renewable energy, like oil industry analyst Bob van der Walk.

“Using food for bio-fuels – especially in Western countries – is counter productive to keeping the price for those staples affordable, but that is exactly what is being encouraged by the proposed federal subsidies,” he writes.

He's right. Support for corn is the Achilles Heel of the alternative fuels industry. And it doesn't have to be that way.

As venture capitalist Vinod Khosla notes, concentrated hydrocholoric acid can break any plant material into its constituent parts, leaving it all available for use. Forest waste can be used to produce ethanol. So can switchgrass. Polyculture, growing several different kinds of plants in the same place, can become an economic source of cellulosic alcohol while reclaiming land row crops are making unusable.

The problem here is that cellulosic alcohol is not yet a proven technology. But that's a technical problem. It should not be a political one.

The political problem here is not with the farmer – not if he has economic alternatives to corn that can supply energy. The political problem here is with the processors, with firms like ADM that have married corn to green politics and don't want to change either business or political strategy. The processors are the financial support for politicians across the farm belt who are willing to stick their neck out for renewable energy. Remove that support and, it seems, their replacements would vote against us. Or they would.

It reminds me of the old “National Lampoon” cover from the 1970s – if you don't buy this magazine we'll kill this dog. The dog in this case is environmental politics, and ADM holds the gun.

It's time for that company to disarm.

Under CEO Patricia Woertz, there have been some indications the company wants to do just that. A former Chevron executive, Woertz talks a good game, but the company's stock has gone nowhere under her leadership and its prospects remain tied to the price of corn.

ADM has used government money for a demonstration cellulosic plant near its headquarters, and has worked with Purdue on research that would use all of a corn plant for energy production. But in this new game it's only one of many contenders. In corn it's king.

Is the best way to accelerate the move to truly renewable ethanol, to cellulosic alcohol, for the rest of the renewables industry to let ADM go?

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.

February 03, 2011

Battery Recycling Realities for Energy Storage Investors

John Petersen

One of the most fervently debated and poorly understood topics in energy storage is the subject of battery recycling. What percentage of the raw materials that go into a battery can be economically recovered from used batteries with existing recycling technology and infrastructure? While the details are quite complex, this article will offer a high-level overview of the economics of battery recycling for energy storage investors.

Lead-acid batteries are the most recycled products in the world. The process is both straightforward and cost-effective. When batteries arrive at the recycling plant, they're put through a shredder and then sent to a water bath. The shredded plastic floats to the top where it's cleaned and reprocessed like any other recycled plastic. The shredded metals sink to the bottom where they're transferred to a blast furnace for further processing. The output from the blast furnace is mostly molten lead with small amounts of copper and other metals that are skimmed from the surface for disposal or further processing. The lead is then poured into ingots and returned to manufacturers for use in making new batteries.

Because of the inherent efficiency of the recycling process, over 97% of all lead-acid batteries in the US and Europe are recycled and almost 80% of the lead used in the US comes from recycling rather than mining. Many major lead-acid battery manufacturers, including Johnson Controls (JCI), Enersys (ENS) and Exide Technologies (XIDE), operate company-owned recycling facilities for the dual purpose of protecting the environment and stabilizing their raw materials supply chains.

Nickel Metal Hydride [NiMH] batteries present a more complex recycling challenge than lead acid batteries. First the electrolyte is evaporated using a thermal process and the batteries are then shredded and put into a blast furnace. The output from the blast furnace is a simple alloy of nickel (~60%) and steel (~40%) that requires moderate post-recycling processing before the metals can be reused to make stainless steel. All rare earth metals in NiMH batteries end up in a slag that's either sent to a landfill or used for construction material.

Using material recovery estimates published by Umicore Battery Recycling and average annual metal prices from the US Geological Survey, I've calculated that roughly two-thirds of the raw materials that go into a NiMH battery are recoverable through recycling while one-third of those materials are lost forever.

Lithium-ion batteries are a couple steps beyond NiMH in terms of recycling complexity and cost. The closed loop Umicore recycling process that will be used to recycle batteries for Tesla Motors (TSLA) includes the following steps.
  • Step 0: collection and reception of batteries (worldwide, Hoboken (Belgium)
  • Step 1: smelting + energetic valorisation (in Hoboken, Belgium)
  • Step 2 & 3 : refining & purification of metals (in Olen, Belgium)
  • Step 4 : oxidation of Cobalt chloride into Cobalt oxide (in Olen, Belgium)
  • Step 5: production of Lithium metal oxide for new batteries (in South Korea)
The electrolytes, plastics and carbons used in lithium-ion batteries are burned off and destroyed in the recycling process. The output from the blast furnace is a complex alloy of cobalt (~37%), steel (~37%), Copper (~22%) and Nickel (~4%) that requires extensive post-recycling processing before the metals can be reused. The lithium and aluminum end up as slag that is either sent to a landfill or used as construction material.

Using material recovery estimates published by Umicore and average annual metal prices from the US Geological Survey, I've calculated that about half of the raw materials that go into a lithium-ion battery are recoverable through recycling while the other half the materials are lost forever.

In a press release last week Tesla announced a new battery-pack recycling program with Umicore. A related blog from Tesla's Director of Energy Storage Systems spoke in glowing terms of how the recycling would provide "a high margin of return." The claims may defensible in Tesla's case since (a) they use lithium cobalt oxide batteries and roughly 75% of the economic value recovered through the use of Umicore's process is attributable to the recovered cobalt, and (b) even $1 in recycling revenue would be a "high rate of return" when compared with the alternative of paying a landfill tipping charge. It's certain, however, that Tesla's potential recycling revenue won't be more than a low single digit percentage of the cost of a new battery pack. For chemistries like lithium-iron-phosphate from A123 Systems (AONE), lithium-magnesium-phosphate from Valence Technologies (VLNC), lithium-iron-sulfate and lithium-magnesium-oxide from Ener1 (HEV) and lithium-titanate from Altair Nanotechnologies (ALTI) that use cheaper electrode materials, recycling is likely to be a major cost burden instead of an insignificant revenue source.

Disclosure: None.

February 02, 2011

Power Integrations: Profiting from Efficient Electronics

Tom Konrad, CFA

With new climate legislation or a renewable portfolio standard unlikely now that Republicans control the US House of Representatives, progress on clean energy is likely to come mostly from action at the state level, and from regulation at agencies such as the EPA, rather than national legislation. 

Why Energy Efficiency Standards Make Economic Sense

One type of regulation that is fairly uncontroversial is improving energy efficiency standards, that is regulation of the amount of energy an appliance or other device can consume during normal use.  In an efficient market, regulation might bring non-financial benefits, but those benefits would come at a the cost of making the market less efficient.  However, if a market is not efficient, then regulation not only has the potential to bring non-financial benefits, it can also bring financial gains by making the market more efficient.  This is the case with efficiency standards: they not only save energy, they come with a net economic benefit.

For example, when you acquired your last mobile phone, it's extremely unlikely that the energy use of the wall charger even crossed your mind as a factor in you decision of which phone to buy.  Even if you had considered it, you probably would not have been able to determine what any given charger's usage profile was, and the amount of time and effort you put into determining your charger's energy use would have been prohibitive.  Your time would probably have been much more valuable than the energy you might save by buying a phone with an efficient charger.

For all these reasons, the free market does not provide an incentive to makers of phone chargers to expend any effort or money making sure their chargers are efficient.  Even if one cent of added cost to a phone charger would save the owner $1 a year in electricity, the rational manufacturer would choose not to spend that extra cent, because it would bring no benefit in terms of additional sales.

This is where regulation can bring a net benefit. While $1/year might not be a lot of money for an individual cell phone user, the number of cell phones sold each year is enormous, and the collective savings for society are substantial.  Business-minded conservatives can support energy efficiency standards because of the economic benefit, while environmentally minded liberals can support the energy savings and associated reduction in CO2 and other pollution. 

These facts have not been lost on regulators and legislators.  Congress passed the first National appliance standards in 1987, with several pieces of additional legislation passed by both Democratic and Republican controlled legislatures since then.  Currently more than 50 products are covered by a variety of highly cost effective federal standards, most of which were based on existing state standards.  Economic studies by non-partisan economic researchers have established the cost effectiveness of these standards to be at least 2.7 to 1 [source, pdf]. 

For every dollar spent complying with an efficiency standard, there has been a net benefit of at least $2.70.  From an economics standpoint, there is a strong case for tightening existing standards until the marginal benefit only slightly exceeds the cost of more rigorous standards, and also for expanding efficiency standards to other energy consuming devices.

Power Integrations (NASD:POWI)

A significant beneficiary of any trend towards increasingly efficient electronics will be Power Integrations, which I decided to take another look at after it showed up in my search for dividend-paying energy efficiency stocks.  The company is a leading supplier of high-voltage integrated-circuit (IC) based power conversion devices, with about 80% of the market for the most highly integrated power supplies. 

Historically, most power conversion was done with linear transformers.  Linear transformers, which convert power with coils of copper wire, are not only bulkier than IC transformers, they are considerably less efficient.  Typically, half of the power is lost in conversion, and sometimes as much as 80%.  With IC transformers, as little as 20% may be lost, at only about 30% in additional cost.  As copper prices rise and volumes increase, the cost advantage of linear transformers should decrease.  (Most of this information is from an article at The Economist.)

It's not just cell phones that require DC current to operate: nearly all electronics require some DC conversion.  Computers, DVD players, LCD televisions, microwaves, the list is practically endless.  That means there is plenty of scope to expand the market for efficient IC transformers as prices fall and regulators apply efficiency standards to more devices.  LED lighting also requires compact, efficient, power conversion, and Power Integrations highly integrated transformers are particularly well placed for this fast-growing market where space is often at a premium.  (Incidentally, the growth of the market for LEDs is driven not only by lighting efficiency standards, but also by the rapidly falling cost of LEDs.)

Valuation

The problem with all this growth potential is that the market already knows about it.  Over the last 5 years, revenues have grown at a 23% compound annual rate.  Going forward, the consensus prediction is 15% compound annual growth.  The most dangerous time to own a growth stock is when growth begins to slow, because not only do earnings repeatedly fail to meet expectations, but investors begin to re-evaluate lofty P/E ratios as their expectations of future growth fall.

Although Power Integrations has a commendably strong balance sheet, with no debt and a stratospheric current ratio of 6, it trades at a 22 trailing and 20 forward P/E ratio, and 3.5 times revenues (at the $37.32 close on Feb 1).  That's not bad at the historical 23% growth rate, but does not look so good if you're only expecting 15% growth going forward. 

Overall, I like the business, but this seems like a company to watch and buy after a negative earnings surprise or two (the last two quarters beat estimates by 15% and 8%.)  The long term fundamentals of the business are sound, so it makes sense to wait until other investors are depressed about the short term.

The company is expected to release quarterly earnings tomorrow.  If they miss the consensus estimate of $0.41 earnings and $70.2M revenue, I'd wait a couple weeks for the news to sink in, since the market tends to react more slowly to bad news than good.  If they beat estimates, which is more likely given the strong economy last quarter, I plan to just sit back and wait another three months.

Power Integrations: Profiting from Efficient Electronics was written for AltEnergyStocks.com.


DISCLOSURE:  No position.

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

February 01, 2011

Why I Believe in Thin Film

Analyzing Solar Stocks With False Assumptions Dana Blankenhorn

When most people think of solar energy, they see flat panels on a roof.

They don't think about thin film. They don't see it.

This is one of the many advantages of CIGS  and other thin film solar technologies. So what if its efficiency is half that of a panel? It conforms to the shape of the place where it lays.

Thin film can also be productized in ways no panel can. It can be turned into something retailers can sell or bloggers will drool over. Try doing that with a panel.

With the exception of the 800-pound Gorilla First Solar Inc (FSLR), it's true that we're still measuring the annual supply from these manufacturers in megawatts, figures utility companies can't (and often don't want to) hear, except as window-dressing or a source of subsidies. But changing that equation is as simple as getting the right product into mass production. (Skeptics should listen again to the words of former DEC CEO Ken Olsen. "There is no reason for any individual to have a computer in his home.")

Personally I think I've seen the future and it's thin.

Copper indium gallium (di)selenide is also not the only possible formula for a thin film. Sharp (SHCAY.PK) is looking at amorphous silicon, despite Applied Materials' (AMAT) failure with it. Maybe they will succeed, and maybe they'll fail too. The search for new materials will go on. (Like the man told Dustin Hoffman in The Graduate, "One word. Plastics.")

There is a ton of competition in this space. Analysts at Greentech Media recently wrote a list of just CIGS thin film companies for a story on one of them. Want to hear it? Solar FrontierQ-Cells (QCLSF.PK), Solyndra, SoloPower, MiaSolé, Wuerth Solar, Stion, GSP, Nanosolar. They can't all be wrong, can they?

And is that an exhaustive list? Far from it. Venture capitalists are funding more all the time, often on the promise of greater efficiency. While analysts at Greentech Media are very positive about companies like AQT Solar that can get into production fast and cheap, or SoloPower, with its claims of UL Labs approval, it's clear to me that this is the first mile of a corporate marathon.

Put it this way. How many PC makers from the late 1970s can you name? (Other than Apple.) In terms of this market, I don't even think we're at 1977 yet.

There are just so many directions in which improvement can happen with thin films. Efficiency, production cost, durability, materials cost, etc. It's true that the total power being supplied by CIGS right now looks pathetic next to standard panels, but the advantages are just too obvious.

That's why companies like Dow Chemical  and (now) Intel are putting cash into the space. Dow likes the idea of solar systems that go on with the roof, that in fact are the roof. Intel likes Sulfurcell, a German company that claims (as others do) that thin films can be as efficient as panels.

The way to look at this is not through the eyes of current production, or short-term profits. It's about the technologies behind the curtain, the new materials and techniques that can get that to market. A good venture capitalist will invest in 10 plays knowing only three will ever bring him any return, but in hopes that 1 of those three will be huge. That's the right attitude to have.

What does it mean when every roof, every wall, every tent and bleach blanket can be delivering solar power to its owner? Remember, electronics and many electrical devices are requiring less-and-less power every year.

More to the point, what does it mean to an industry that depends on long-term contracts for construction of panel systems if the wall can deliver just as much power for the cost of wallpapering? Or painting? That's a silly question today, but one that the people in this business should probably start thinking about.

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.


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