« February 2011 | Main | April 2011 »

March 30, 2011

Clean Energy M&A: Is the Glass Half-Empty or Half-Full?

Dana Blankenhorn

Some reporters are calling the latest PwC Renewables Report a sign of a “renewables frenzy,” in that the number of merger deals in the space climbed to 530 last year, from just 319 in 2009.

But is it?

The total value of all deals in the space, according to the same report, actually fell sharply, to $33.4 billion from $48.8 billion. Major indexes like the Wilderhill New Energy Index and the PowerShares Global Clean Energy ETF (PBD) both fell in value last year, even while the average stock was rising in value.

There are many reasons for doing a deal. Growth is one, scale is one, fear of failure another. And lumping co-generation, biomass, wind, solar, and hydro deals into one pot called “renewables” is a big mistake, in my view, because each of these sectors faces its own challenges and has its own outlook.

The market for wood pellets from Confluence Energy, just acquired by Viridis Energy (VRD.V) in Canada, is very different from the markets served by the coming Alterra Corp. (MGMXF.PK), a merger I covered early this month.

Similarly, the environment faced by a solar energy acquisition outfit like Principal Solar (KPCG.PK), which just went public through a pink sheets merger, is nothing like that faced by Next-Alternative, a maker of carbon-nanotube batteries, controllers, and a fuel emulsifier which just trumpeted an offer of $100 million (which it rejected).

Fact is, renewable energy is a whole collection of sectors, each with its own dynamic, each at a different stage of its market development. Wind turbines, for instance, are clearly understood, not highly subject to disruptive entrants (someone who can double the wind's output), and so fairly mature. Solar energy is much less so. There are a whole related set of industries – materials and tools and sales channels – that is each unique unto itself.

The PwC report, and the way it was released (sent via email to clients with no press release posted on the company Web site as of this morning), seems designed to feed the hype. “Deals up 66%,” “confidence returns” and “strong year” are the words I'm reading in the headlines.

But is that the reality? Personally, I don't see this as an M&A business right now. I see a lot of opportunity for financing, I see a lot of new investments in untried technology, I see a lot of contracts connecting projects to the grid, most of them based on some sort of guarantee.

What do you think? Does the industry really need a hot M&A pipeline to make money? Or do the investment bankers need us more than we need them?

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned 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.

March 29, 2011

Ten Clean Energy Stocks for 2011: Buying Opportunities

Tom Konrad, CFA

The geothermal and demand response stocks in my annual portfolio of ten clean energy stocks for 2011 have fallen significantly since the start of the year, making this an excellent time to buy.

Every year since 2007 I've been publishing a list of ten renewable energy and energy efficiency stocks that I think will do well over the coming year.  For 2008-10, my list outperformed my clean energy benchmark.  This year so far looks like it is going to break my streak, but there is a very bright silver lining: I now think four of my picks are screaming buys. 

When considering clean energy stocks, I try to follow a contrarian strategy of focusing on sectors with relatively mature technology and relatively little investor attention.  This year, I put particular emphasis on the established smart grid technology, Demand Response, as well as one of the most economical but least talked about forms of renewable electricity, geothermal power.  These two sectors are responsible for all of the portfolio's decline this year, but I still like their prospects, and the reduced stock prices have me buying the demand response companies, and expanding my positions in the geothermal power stocks.

Ten Clean Energy Stocks of 2011

The following table and chart show how each of the picks has performed so far in 2011.

Company (Ticker)
% Change 12/31/10 - 3/18/11
Q1 Dividend
Waterfurance Renewable Energy (WFIFF.PK) Energy Efficiency
Comverge (COMV) Demand Response

EnerNOC (ENOC) Demand Response

CVTech Group (CVTPF.PK)
Grid/Efficient Vehicles

Telvent Git S.A. (TLVT) Smart grid/Smart Transport

Potlatch Corp (PCH) Biomass
Nevada Geothermal Power (NGLPF.OB)

Ram Power Corp. (RAMPF.PK)

American Superconductor Corp. (AMSC) Grid/Wind

Veolia Environnement SA (VE) Conglomerate

Portfolio return
PowerShares Clean Energy (PBW) Benchmark

Russell 2000 (^RUT)

Q1 Returns

Demand Response

I'm quite puzzled at the poor performance of demand response companies EnerNOC (ENOC) and Comverge (COMV) so far this year.  Demand response companies make money by helping utilities reduce electricity loads through agreements with electricity customers when the utility has trouble meeting demand with available generation capacity.

The news for Demand Response companies has been quite good, with the Federal Energy Regulatory Commission (FERC) recently establishing a landmark ruling which will require utilities to pay demand response companies as much as electricity generators are paid for power capacity.  Each market operator must implement this rule by July 22nd, and the resulting tariff changes should open up many new opportunities for demand response companies.

Earlier this quarter, EnerNOC was accused by grid operator PJM of market manipulation, but the case was later dismissed by FERC as having no merit, which is the best outcome EnerNOC could have hoped for.

Both companies had negative earnings surprises for the fourth quarter, with Comverge losing 38 cents compared to the 2 cent lost expected by analysts, but this loss was entirely due to one-time charges, most importantly a goodwill impairment charge. 

Regular readers may recall the asset impairment charge that eventually crushed C&D Technologies (CHHPD.PK) last year. The company is now recovering after a massive debt-for equity swap, with some bottom-fishers sitting on healthy profits of up to 100%, but shareholders who bought early in the year remain far underwater.  (I bought too early, but also added to my position at the bottom.  Overall, I'm in the red, but not deeply.) 

The reason Comverge is not likely to follow the same path as C&D is because Comverge has excellent liquidity, with no net debt and enough cash to fund operating losses and investment for a year or two.  EnerNOC is in an even stronger position, being profitable with $6.16 in net cash per share on the balance sheet.

I've purchased shares in both Comverge and EnerNOC since the favorable FERC rulings, and have been pleased to be able to do it at lower, rather than higher, prices.

Geothermal Power

The 35% decline in Ram Power Corp. (RAMPF.PK) is partly explained by large cost overruns in the company's flagship San Jacinto-Tizate project in Nicaragua, and the subsequent resignation of CEO Hezy Ram.  The most recent news for the Nicaraguan project has been good, with positive drilling results under a new drilling contractor, and the $20M in extra costs and project delays seem insufficient to account for knocking over $100M off the company's market cap since the start of the year.

Nevada Geothermal Power (NGLPF.OB) has also seen a decline since the start of the year, but the most significant news was NGP's purchase of geothermal assets in California's Imperial Valley from Iceland America.  I suspect that the decline arises mostly from sympathy with other geothermal stocks.

I'm still optimistic about geothermal power in 2011.  Since the start of the year, I've maintained my already large position in Nevada Geothermal, and added to my positions in Ram Power, US Geothermal (HTM), and Magma Energy Corp. (MGMXF.PK). Magma is no longer a pure-play geothermal company, having recently agreed to purchase run-of-river hydro developer Plutonic Power Corp (PUOPF.PK), but run-of-river hydro also conforms to my strategy of focusing on cost-effective renewable energy sectors that have not yet reached the awareness of most investors.


I've been frustrated with the high valuations of most clean energy companies for well over a year, so it's nice to see several of them coming down to prices where I'm comfortable buying.  If that means that my annual list of ten clean energy stocks does not beat its industry benchmark this year, I'll consider it well worth it (with apologies to anyone who bought the list at the start of the year.) 

The year is still young, and these stocks seem very cheap to me.  Although they're currently trailing my clean energy benchmark (PBW) by 7%, there are still three quarter to reverse that trend. 


Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

March 28, 2011

Our Energy Bubble

Tom Konrad CFA

Our energy policy looks like a bubble.  

Bubbles are a social phenomenon at least as much as they are a financial phenomenon. 

  • At the top of bubbles, participants ignore glaringly obvious risks.  In October 2007, Meredith Whitney pointed out the almost glaringly obvious fact that Citigroup was paying out more in dividends than it was earning in profits (i.e. it was being run like the US government, but without a friendly Federal Reserve to bail it out by printing money.)  She said that Citigroup would need either to raise capital, sell assets or slash its dividend -- possibly all three. That's what happens when you spend more than you earn, yet other Wall Street analysts were dismissive of "the easiest call [she] ever made" (as she called it.)
  • Critics are ostracized.  Remember how Warren Buffett was ridiculed because he did not "get" the Internet? This allows the "in" crowd to ignore warnings from those not caught up in the mania.  During the housing bubble, if you told someone you were a renter, not a homeowner, you were greeted with looks of puzzlement and/or pity.  If you went on to explain that you thought the rental yield on homes was much too low to justify valuations, people would start to look around for the men in white suits to take you away.  (I know this from personal experience.)
  • Participants enjoy financial success far beyond what their skills or efforts should reasonably justify.  That financial success imbues bubble participants with an aura of infallibility.  We tend to think "He made a lot of money in real estate/internet stocks/tulip bulbs, so he must be a smart person, and I should be doing what he is doing."   Think of all the people who grew rich (and full of themselves) flipping houses during the mid-2000's.  And then think of the even greater number of people who emulated them, only to get into the housing market in 2007, right before it started heading down.
  • "This time it's different."  The internal logic of the bubble creates its own reality.  People don't question when a single tulip bulb costs as much as a middle-class home, or when a strawberry picker earning $15,000 a year can get a loan to buy a $750,000 home.
Alan Greenspan was wrong.  It's not impossible to spot bubbles before they burst.  What's hard is going against the consensus, when everyone around you is ignoring the risk that should be obvious, causing you to question your own reasoning; when they are making money hand over fist for seemingly no effort, telling you they've found a "new truth" and ridiculing you if you don't agree, that's when you've spotted a bubble.


I introduced this article by saying bubbles are a social phenomenon.  As a social phenomenon, they don't have to be financial: The same dynamics of group behavior can also lead to bubbles that don't necessarily manifest themselves in asset prices, but they're still real, and they still bear the very real risks of financial bubbles.

I believe we're in just such a bubble now.  To me, it's glaringly obvious.  Like Meredith Whitney said about her Citigroup call, it's the easiest call I ever made:

We can't keep using traditional energy sources and expect the economy to grow forever.

In other words, our society and economy are built on an energy bubble.  Oil powers our transportation system, and coal, natural gas, and nuclear power our electrical infrastructure.  All of the signs outlined above are there.

Ignoring risks

How many nuclear disasters like the ongoing one in Japan, and the earlier ones at Chernobyl and Three Mile Island will it take us to realize that nuclear generated electricity is picking up quarters in front of a steam roller?  Yes, the risks of nuclear failures are absurdly low, but the consequences of such failures are absurdly high, and the pools of spent fuel that we still have not agreed on a permanent home for are tempting targets for any ambitious terrorist.

Why do the people who are trying to convince us that shale gas extraction is safe spend so much time talking about the economic benefits?  Isn't that a lot like someone trying to sell you a tranche of a highly rated MBS in 2007 saying "sure, it's safe, the yield is 100 bps higher than any other security with a triple-A rating from S&P?"  Shale gas fracking has only been going on commercially for five years.  Perhaps it is safe, when done properly, but why, exactly, do we expect it to always be done properly?  Before putting our faith in environmental regulators to ensure that shale gas extraction is done properly, we should consider the plight of the financial regulators overseeing mortgage backed securities in the last financial crisis.

And then there is Climate Change.  We know that burning fossil fuels emits CO2.  We know that CO2 levels are rising rapidly.  We know that we're burning a lot of fossil fuels.  We have known since the 19th century that CO2 traps heat in the atmosphere.  We know that so much Arctic sea ice is melting that countries are squabbling over newly accessible Arctic oil and natural gas reserves.  Yet the number of Americans worried about Climate Change is falling, and not a single Republican on the House Energy Committee will say that Climate Change is real

Critics are Ostracized

I don't believe that each of the 31 Republicans on the House Energy committee necessarily thinks that Climate Change isn't happening.  They are not stupid, they simply are all politicians, and if being ostracized and forced out of the "in" group is dangerous in any profession, it's dangerous in politics.  Politicians know which way the wind blows, and this level of consensus in the face of basic science is one of the surest signs of the bubble mentality.

Participants enjoy financial success beyond what their skills and effort merit. 

The US consumes about 22 percent of world oil production, so we're certainly participants in the bubble.  We have the highest living standards in history, higher than any other country.  Yet are we smarter than our grandparents, or our immigrant ancestors who came from all over the world?  Do we work harder than an Asian laborer in a factory doing 12 hour shifts seven days a week in order to send a little money back to his family?  If you resent the implications of those questions, you now have a visceral understanding of how hard it is to escape the bubble mentality when you are already caught up in it.  When you're making money or enjoying cheap energy today, it's very hard to look at the long term costs of your actions.  This is the same reason that the United States has so much trouble getting our deficit under control.  We all want the US to live within its means, but support vanishes when it comes to cutting Social Security, Medicare, or Defense Spending.

"This time it's different"

Whether you believe the oil and other fossil fuels in the ground got there over millions of years of heat and pressure on organic matter, or were put there by God during creation, there is only so much of it in the ground to extract. 

We started extracting the easiest, most accessible reserves, and now the only easy oil that's left is in the unstable Middle East.  In the rest of the world, we're left with drilling in increasingly difficult and risky situations, such as deep water (as the Deepwater Horizon oil spill and the consequences for BP's stock price demonstrated, .)  The rising price also reflects the lack of oil prospects that are cheap and easy to extract.  Yet the discussion about what to do about rising oil prices revolves around "how can we drill for more oil?" not "how can we use less oil?"  Richard Nixon promised in 1977 that "gasoline will never exceed $1.00 a gallon" and the United States has been striving for Energy Independence ever since.  It has not worked: in 2005 we imported twice as much oil as we produced.

EIA Oil Production and Imports

The progress towards energy independence we've made since 2005 is almost entirely due to reduced consumption (see chart.)  Despite over three decades of effort to increase domestic oil production, production has declined.  Nevertheless, if you listen to the popular debate, the implication is still that the secret to energy independence is trying harder.  Trying harder is not going to more than double our oil output when we've been trying harder for over three decades and we're now producing less than we did in 1970.

What to Do About It

During the 2007 Housing Bubble, the smart investors were buying credit default swaps (CDS) on mortgage backed securities.  During the Internet bubble, they were scooping up REITs yielding 15% or more. 

I'm a stock guy, and I didn't (to my regret) buy any CDS's in the last bubble, but I was one of those buying REITs in 1999 and 2000.  This time around, I'm buying Green Stocks: Renewable Energy, Energy Efficiency, Efficient and Alternative Transport companies that will be selling the services that help us shift away from traditional energy sources like oil, coal, natural gas, and nuclear.  But like most bubbles, it's a lot easier to see the Energy Bubble happening than it is to predict when it will burst.  Hence, it's important to buy the stocks of companies that can survive (or even thrive) in the current environment, yet still benefit from the end of the current Energy paradigm. 

Just buying green stocks is not going to allow our Energy Bubble to deflate safely, but it should cushion the fall for those of us who do, and we'll also have the comfort of knowing that the companies we invest in are doing just a little to build the beginnings of a post-bubble energy infrastructure.

This article was first published on Forbes.com Green Stocks blog.

DISCLOSURE: No Positions.

Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Four Green Money Managers' Top Stock Picks

Green money managers' stock picks after the Japanese nuclear crisis.

Even as the nuclear disaster in Japan unfolds, it's clear that the world's energy industry will be forever changed. Russian reactors were never considered safe, but a Japanese to have a nuclear meltdown is an entirely different story.

Market Reaction

Since Monday, nuclear stocks and ETFs have been plummeting. As of Wednesday night, The Market Vectors Uranium + Nuclear Energy ETF (NYSE:NLR), the iShares S&P Global Nuclear Energy Index (NASD:NUCL), PowerShares Global Nuclear Energy Portfolio ETF (NYSE:PKN), and the Global X Uranium ETF (NYSE:URA) are down 17%, 14%, 16%, and 29% respectively.

Yet we still need energy, and when the dangers of traditional energy once again rise in our awareness, the safety of renewable energy gains appeal. Over the same three days, the most liquid of the Clean Energy ETFs, the Powershares Wilderhill Clean Energy ETF (NYSE:PBW), the First Trust ISE Global Wind Energy ETF (NYSE:FAN), and the Guggenheim Solar ETF (NYSE:TAN) gained 1%, 2%, and 11%, respectively, even as the S&P 500 fell 3%.

The market thinks that the outlook for clean energy in general and solar in particular, has improved greatly. This makes sense, because as the Japanese rebuild their energy infrastructure, they will stay away from nuclear, and focus on electricity that's safe, and quick to deploy. Green energy fits the bill.

Stock Picks

If green energy will do well in general, which stocks will do the best? I emailed my contacts among green investment fund managers, and asked them each to pick one stock they thought was particularly well positioned. Here are their picks.

Garvin Jabusch: LDK Solar

Jabusch manages the Sierra Club Green Alpha Portfolio. He thinks that, in the long run, solar will be the big winner, followed by wind. His top pick is LDK Solar (NYSE:LDK), which his fund holds. He also blogs about green investing, and has just finished an article on Japan, Nukes, and Solar.

John Segrich CFA: Capstone Turbine

Segrich manages the top-performing Gabelli SRI Green Growth Fund (SRIGX). Like many contrarian investors, he's not great at following instructions (I asked for no more than three sentences), but he has interesting things to say:

The big beneficiary in the aftermath of the Japan nuclear crisis will be natural gas related companies. In particular Japan is likely to rebuild generation infrastructure with natural gas and in particular liquid natural gas (LNG). The pushback against nuclear will not necessarily be the boon to renewable that many are suggesting. Renewables are not failsafe in a disaster scenario (look at how many solar panels were shattered in the quake) and they cannot replace baseload power. Gas is the logical and cleanest and safest solution and we would expect Japan, Italy, and Germany to build more gas vs increase emphasis on renewable. … one interesting way would be to look at companies whose business model is gas based and can handle local based generation with rapid deployment:

Capstone Turbine (NASD:CPST) makes gas powered microturbines that can be locally installed and can provide immediate efficient and clean power generation for stand alone facilities (hospitals, schools, hotels, critical infrastructure) – we are already seeing deployment on infrastructure in the US to provide constant, reliable, failsafe power. I would expect to see adoption of these solutions for rapid deployment in disaster areas such as Japan at the moment to provide critical power on a local level as needed. Longer term, integrating these turbines as a backup/distributed power solution also makes sense for future emergency planning.

Sam Healey: MEMC Electronic Materials

Sam Healey manages a Cleantech stock portfolio at Lamassu Capital. He thinks MEMC Electronic Materials (NYSE:WFR) has two chances to benefit from the disaster. First, the nuclear renaissance stalls, it will boost to the Solar industry, and MEMC will benefit. By year end WFR will be vertically integrated from Poly [silicon] production through installation via Sun Edison and will be able to capitalize on any global expansion of solar power. Second, and more important in the near term, Japan accounted for 10-20% of the global Poly manufacturing of Semi[conductor] Wafers. Therefore, MEMC, will be able to gain share in the near term as it absorbs some of the demand for Semi Wafers, and perhaps will also have better pricing. MEMC does have one plant in Japan that is currently off line as a result of the earthquake.  The plant does not produce raw poly but was one of MEMC's 8 plants that manufacture 300 MM wafers and 1 of 3 MEMC plants that engage in wafer polishing and slicing.  The risk is that they will not be able to replace this production at their non Japan plants.

Tom Konrad CFA: NGK Insulators

My own pick is NGK Insulators (Tokyo:5333, Pink:NGKIF). NGK has fallen along with the Japanese market, but stands to benefit from the rebuilding of the northern Japanese grid. NGK's manufacturing is located in the central and southern part of the country, so the company should not have been too badly hurt by the earthquake and tsunami. NGK also sells the most mature, high capacity grid-based electricity storage technologies: the Sodium-Sulfur (NaS) battery. Especially on a small island like Japan, electricity storage is very helpful for integrating the variable power from solar and wind, and the Japanese are likely to favor this home-grown technology over foreign rivals.

Solar, distributed Natural gas, Electric grid & storage: they could all be winners. What do you think? The comments are open. I've also started a poll.

This article was published on Tom Konrad's Green Stocks blog on March 18th.

DISCLOSURE: No Positions. I did not ask the money managers interviewed if they own their picks, but we can assume they do.

Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

March 27, 2011

An Elephant Hunter's Thesis for Axion Power

John Petersen

Last Friday I breathed a sigh of relief as my core position in Axion Power International (AXPW.OB) regained the price level it established in the first quarter of 2010. The last 12 months have been a stockholder's worst nightmare as supply and demand dynamics pushed Axion's stock price down into the $0.50 range and kept it there. Since it looks like new buyers have finally eaten their way through the excess supply, now seems like an opportune time to unwrap my crystal ball and lay out an elephant hunter's thesis for Axion's stock price outlook over the next few months.

Axion went public through a reverse merger in December 2003. Like many reverse merger companies, its market was illiquid in the early years and the stock traded by appointment. The following table summarizes the reported annual trading volume during Axion's first seven years as a public company. It shows the total reported volume for each year and the percentage derived by dividing the reported volume by the fully diluted common shares outstanding at year-end.

Shares Traded
243,255 1.8%
325,882 1.9%
1,092,755 4.6%
835,030 3.3%
1,888,865 5.4%
7,176,200 8.5%

So far this year, Axion's cumulative trading volume is 18.4 million shares. That means 2011 is likely to be the first time in its history that annual trading volume will exceed 50% of the issued and outstanding shares, a level of activity that most investment professionals believe is required for a healthy liquid market.

In December 2009 Axion closed a $26 million private placement that is properly classified as a venture capital investment in public equity, or VIPE, transaction. Four purchasers including Blackrock, the Special Situations Funds, Manatuck Hill Partners and one individual, bought 31.4 million shares in blocks of 7.2 to 8.8 million shares each. In addition, 47 small funds and individuals bought 14.4 million shares in smaller blocks. The offering was priced at $0.57 per share and the 45.7 million shares that were sold in the offering represented about 55% of the company.

In a September 2010 study of 1,655 VIPE transactions between 1995 and 2008, the authors reported that VIPE investors typically buy at a 47% discount to market, which meshes well with my experience that large private placements are typically priced at a 50% discount to market. The reasons for the deep discount are obvious. In a market transaction, an investor will buy a few hundred to a few thousand shares with the expectation that he can change his mind, liquidate and move on whenever he feels like it. In a VIPE transaction, an investor cannot have any reasonable liquidity expectations for months or even years. In cases where several large investors participate in a VIPE transaction, the liquidity assessment is performed at the transaction level, rather than the investor level. In cases where there's a big gap between historical trading volumes and the size of the VIPE transaction, the discount will usually be more than 50% to offset the liquidity deficiencies.

If one assumes that 50% was a proper discount for Axion's VIPE transaction where the investors bought shares that represented six and one-half years of historical trading volume, the transaction should have put a $1.15 baseline trading value on Axion's stock. If one assumes that a 60% discount would be more appropriate in light of the liquidity deficiencies, a baseline trading value of $1.50 per share would have been more reasonable. Those two numbers bracket the range – $1.15 on the low end and $1.50 on the high end – that I believed Axion's stock would trade in when I wrote a December 2009 article titled "Why I'm Thrilled by Axion's Financing Transaction."

While I believed in December 2009 that Axion's stock price would stabilize in the $1.15 to $1.50 range, and it did exactly that during the first quarter of 2010, liquidations that were unrelated to business fundamentals began in the second quarter and continued into the summer. As a result, the price was beaten down to an all time low of $0.46 before stabilizing in the $0.60 range by year-end. Since then, the stock price has doubled.

3.27.11 AXPW Chart.png

I've always believed the plateau from February through April 2010 represented fair value and the slump that began in late April was based on supply and demand dynamics instead of business fundamentals. While Axion's stock price was swooning, the following key corporate and regulatory events were unfolding.

March 30, 2010 Annual Earnings Release
April 1, 2010 The EPA and NHTSA adopt new CAFE standards for cars and light trucks
May 5, 2010 Announced upgrade to first generation electrode line and plans for second generation line
May 18, 2010 Announced presentation at 2010 Advanced Automotive Battery Conference & Symposia
June 9, 2010 Announced development program with Norfolk Southern Railroad
September 20, 2010 Announced joint technical presentation with BMW at the European Lead Battery Conference
February 14, 2011 Announced foundation patent on PbC electrode assembly
March 8, 2011 Announced order for $3.5 to $8 million of flooded batteries
March 8, 2011 Confirmed first quarter commissioning of second generation electrode line

A couple of these events were nothing short of extraordinary.

Many small companies in the battery and power electronics space decide to develop their own battery management system expertise, but I'm not aware of another situation where a transportation giant like Norfolk Southern hired a micro-cap company like Axion to develop a battery management system as the first step in a project geared toward the potential retrofit of a portion of its diesel electric locomotive fleet to hybrid diesel electrics.

Many small companies in the battery space are engaged in development projects with automakers, but the identities of the automakers are closely guarded secrets until the automakers announce a production decision. Several recent reports that other battery manufacturers have won production contracts from automakers but declined to publicly identify their customers are prime examples of the normal course of business. I've spent several months searching for a comparable example of a joint technical presentation by an automaker and a battery developer at a major industry conference. So far my effort has been unsuccessful.

Axion was not dealing with a normal market in 2010 and is just now getting back to the baseline trading value it established in the first quarter of 2010. While it's hard to say what the 2010 developments would have been worth in the in the context of a more normal trading market, I think most people who invest in small company stocks would have expected at least a double from the Norfolk Southern and BMW relationships and perhaps a good deal more.

I don't know what the fair value of Axion's stock is or where the price will go from here. However my experience with small companies in the valley of death has taught me that over the long-term market prices tend to oscillate around a fair value line, but only touch fair value as they transition from one extreme to the other. In cases where the market price has been undervalued for an extended period of time, the next stage is a roughly equivalent overvaluation for a similar period of time. If you want to assume that $2.40 would have been a reasonable fair value in December 2010, you can pretty well count on an eventual peak in the $4.20 range. If you believe $2.40 would have been low in a normal market then your outlook for the next peak should probably be higher.

Over the last year I've been frank in expressing my opinion that Axion was undervalued. As long as the market price was within spitting distance of the price paid in the 2009 VIPE transaction, it was easy to take that position. Now that Axion's market price has returned to a level that represents reasonable parity with the 2009 VIPE pricing, we should begin to see how the market values the events that have transpired over the last year. Axion's year-end earning call is scheduled for Thursday of this week and I'm hoping management will add color to their recent disclosures and better explain their outlook for the coming year.

I wrote this article because several readers have asked me what my expectations are for Axion's future stock price. While I don't usually make price predictions, I thought a detailed explanation of my opinions and outlook would be more valuable than stony silence. I will probably be more restrained in my future discussions of Axion's market price, but the elephant hunter in me thinks the fun is just beginning.

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

March 26, 2011

Company Failures Are Not Industry Failures

Dana Blankenhorn

Nearly all the big computer companies of the early 1970s have since gone out of business. Remember the BUNCH? Burroughs, Univac, NCR, Control Data, Honeywell (HON)? The first two became Unisys, the last three are still around, but none is a real factor in the computer industry as it exists today. Betting on the BUNCH in 1971 would not leave you in the chips in 2011.

Digital Equipment, Data General, Wang, Amdahl? All gone. Along with nearly every company that made PCs in the 1970s save one – Apple. International Business Machines Corp. (IBM) didn't get into the PC market until 1981. Until then they thought it not worth their time.

Point is failure is common in a fast-growing market. Most of the early auto makers failed. It's perfectly natural.

That's the way you have to look at the recent problems with Evergreen Solar (ESLR) and Energy Conversion Devices (ENER). Evergreen has been written about here several times. The doomsayers are all over ENER like bears on a picnic basket.

They're not looking at reports ENER has a hot new patent involving “the deposit of microcrystalline semiconductor materials” on thin film.  Think of that as something you might find in a box at the garage sale afterward. Maybe someone will get a bargain on that.

Fast-growing markets are also fast-moving ones. When technology can change on a dime, when financing conditions and channels are always in flux, there is going to be a high failure rate.

That's one reason I don't own any solar stocks. (I also don't want the ethical risk.)

And it's one reason those who follow the space are desperate for secure leadership to develop. They want to see an IBM in this space, and many have anointed First Solar Inc (FSLR) with the title. Personally I don't think its lead is nearly as solid or secure as IBM's was in 1971, and even IBM went through a lost decade between that time and now. The company was late to the PC party and fumbled away its early lead in PC software to Microsoft. You can lose money on anything.

What matters is not the fate of any single stock, but the progress of the technology and that of the whole industry. That industry is growing, rapidly. It has been doing so for years. It should continue doing so. That industry is hiring. It has been hiring for years and will continue to hire.

But look at the resume of any tech executive you see in the next few weeks, getting hired by some up-and-coming start-up. What you're going to see on that resume are a lot of jobs, at a lot of companies, many of which no longer exist.

Would that keep you from investing in the Internet?

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned 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.

March 24, 2011

Clean Energy Stocks to Fill the Nuclear Gap

Tom Konrad, CFA

If the Japanese use less nuclear power, what will take its place?

I'm astounded by the resilience and discipline of the Japanese people in response to the three-pronged earthquake, tsunami, and nuclear disaster, perhaps in large part by my cultural roots in the egocentric United States, where we seem to have forgotten the virtue of self-sacrifice for the greater good. 

Yet while Japanese society has shown itself to be particularly resilient, the Japanese electric grid is much less resilient.  According to International Energy Agency statistics, Japan produced 258 TWh of electricity from nuclear in 2008, or 24% of total production. 

The situation seems to be mostly stabilized at the Fukushima Daiichi reactor complex, but according to the March 23rd update on the reactor status at Fukushima from the Japan Atomic Industrial Forum, Reactors 1, 2, 3, and 4 have all suffered damage, had their fuel rods exposed for some period, and/or had seawater pumped in for cooling.  It seems unlikely that any of these reactors, with a 2.8GW total generation capacity will ever be returned to service.  Assuming that these reactors normally operate at a 90% capacity factor, these four reactors would have accounted for an annual electricity production of approximately 22 TWh, or 2.5% of total production. 

At the very least, these 22 annual TWh will need to be replaced with other sources or by improved energy efficiency, and the disaster will likely shift Japan (and much of the rest of the world) slowly away from nuclear power, with fewer new plants built, and fewer old ones being granted extensions in their permits to operate.

Outside Japan, regulators are likely to require additional safeguards on new nuclear generators, as well as be more strict when considering the extension of operating permits for existing older plants.  This will increase the already high cost of nuclear power, and further slow the construction of new plants. 

Energy efficiency, conservation, and other forms of energy generation will have to fill the gap.  Which will benefit most?

The Conversation So Far

Over the last few weeks, I have read innumerable prognostications about how Japan and the rest of the world will fill the energy gap.  I asked several clean energy money managers for their top post-Fukushima stock picks, which are published on my Green Stocks blog at Forbes.  I also posted a quick poll to see what sectors readers thought would benefit (see chart.)Poll results

Opinion is strongly divided, especially among my poll respondents, perhaps in part because I allowed respondents to vote for as many as three sectors, since I'm fairly confident that more than one sector will benefit.

Perhaps the most vocal contingent is the group that is arguing that solar will benefit.  Two of the green money managers I asked for stock picks chose solar stocks (MEMC Electronic  Materials [WFR] and LDK Solar [LDK].)  Among the pundits, AltEnergyStocks' solar expert Joe McCabe was quick to see benefit for solar.

Yet even our own bloggers can't agree.  A few days after McCabe's post, our battery expert John Peterson wrote,

The nuclear reactors that have recently gone off-line in Japan and Germany accounted for roughly 125 TWh of electricity production last year. In comparison, global electricity production from wind and solar power in 2009 was 269 TWh and 21 TWh, respectively. In other words, we just lost base-load power that represents 43% of the world’s renewable electricity output. The gap cannot possibly be filled by new wind and solar power facilities.

John thinks oil, natural gas, and coal are the only energy technologies able to take up the slack. 

John Segrich, manager of the Gabelli SRI Green Growth Fund (SRIGX) also told me "The big beneficiary in the aftermath of the Japan nuclear crisis will be natural gas related companies."  (His stock pick is Capstone Turbine (CPST), because the company's microturbines can provide immediate, clean, and efficient distributed generation.

Market Reaction

The market seems to think solar, natural gas, and wind will all benefit.   While the natural gas exchange traded notes (ETNs) are based on baskets of commodity futures, while the solar and wind exchange traded funds (ETFs) are baskets of stocks, the gains in all three over the 10 days following the crisis are surprisingly similar (see chart.)
ETF returns 3/10 thru 3/21

Can the solar bulls and the natural gas bulls both be right?  Yes.  As John Petersen pointed out, the amount of nuclear power going offline is large compared to the current installations of renewable energy.  Hence, if renewable energy were to fill only part of this gap, it would still amount to significant industry growth, while leaving a lot of room for growth in fossil fuels.

Linear vs. Geometric Growth

However, I fell John is far too dismissive of the growth potential of renewable energy, while he completely neglects the potential of energy efficiency to fill part of the gap. 

First, he compares the nuclear generating capacity going off-line to current installations of renewable energy, noting that it is half of current installed capacity.  If renewable energy were on a linear growth curve, such a comparison would be valid.  However, renewable energy installation has often grown exponentially in the past, and can still do so.  While it takes ten years or more to permit and build a nuclear reactor, utility scale wind and solar farms are typically built in three to 18 months. 

Between 2004 and 2009, grid connected PV capacity increased at an average annual rate of 60%.  Over the same period, wind installations grew at the relatively leisurely but still impressive compound annual rate of 26% (see chart.)
World wind installed capacity

If we assume that combined wind and solar capacity continue to grow at a (slower) annual 25% rate, then replacing 43% of the world's current renewable output will take all of 19 months.  Replacing that capacity with nuclear or coal would take much longer, because nuclear and coal plants take so long to construct.


While Petersen's critique of renewable energy installation rates are not supported by the facts, his later points regarding wind and solar variability are salient.  He points out that energy storage is currently well suited to smoothing minute-to-minute variation, an important function because it greatly reduced the strain on the rest of the electric grid.  He is also correct that batteries cannot cost-effectively provide the tens of hours of storage that a wind or solar facility would need to mimic a baseload or dispatchable resource.

Geographic Dispersion

Perhaps because Petersen is a battery expert, he missed non-storage solutions to the variable output from wind and solar farms.  The most important of these is geographic dispersion.  Geographic dispersion in solar and wind is akin to diversification in a financial portfolio, but much more effective because of much lower correlation in electricity generation, and because correlation falls with distance.

First, wind and solar power tend to be negatively correlated simply because, in most locations, wind tends to be strongest when the sun is weak (early morning, late evening, during storms, and at night.)   In finance, there are very few negatively correlated asset classes, and those assets that are negatively correlated with the market tend to produce minuscule or negative returns, which would be the equivalent of an electrical load in the grid analogy.

Hence, there are great benefits in diversification, and long distance transmission is the key to supplying these benefits.  This idea is backed up by numerous studies demonstrating the benefits of geographic diversification, and also widely acknowledged by experts in the field, as I discussed in a recent article on ABB Ltd. (ABB).

While geographic dispersion cannot produce baseload power, baseload power was always an artificial construct in the first place.  An ideal power source would produce power that corresponds to demand: Electricity production would fall at night and peak on hot sunny afternoons (as it does from geographically dispersed solar arrays), not stay at a constant rate.

The Japanese Grid

For such a small country, the Japanese grid is not well interconnected.  The Northeast and West of the country operate at different frequencies, and are connected only by two relatively low capacity frequency converter facilities.  This is a large part of the reason that Tokyo (in the Northeast, as are Sendai and Fukushima) is suffered rolling blackouts after the quake: the relatively unaffected West was unable to supply the Northeast with significant electricity through these two weak links.

In order to benefit from the geographic dispersion which makes high wind and solar penetrations practical, Japan will need a more robust electric grid.  It would be an incredibly daunting task to build significant new transmission in densely populated Japan, if it were not for a state of the art technology ideally suited to both transmitting large amounts of electricity over long distances with low line losses, and for running those links underwater.  This technology is High Voltage DC (HVDC) transmission.

Japan currently has two underwater DC links, and the two frequency conversion stations using similar technology.  These facilities were built in the late 1900s, with technology provided by Japanese companies such as Mitsubishi.  The leading providers of modern HVDC are ABB Ltd. (ABB) and Siemens (SI), two companies that might stand to benefit if the Japanese decide to learn the lessons of the Sendai/Fukushima tragedy and build a more resilient grid based on strong links and safe, diversified electricity generation.

The First Fuel

Wind, solar, natural gas, and new grid links will take at least a year or three to replace the lost generation at Fukushima, and in the meantime, there is only one energy resource that can take up the slack.  That is energy efficiency and conservation, often called the first fuel because it is the least expensive resource available. 

Japan is already a leader in energy efficiency, but the discipline with which they are handling the disaster convinces me that they are ready to "renew their commitment to energy efficiency," as Nobel Prize winning economist Joesph Stiglitz said in a March 19th interview with Barrons.  Deployment and grid stability of energy efficiency and conservation can be enhanced with the use of smart grid technology.  Smart grid technology (such as demand response) can also aid in the integration of variable resources such as wind.

Filling the Gap

Much depends on how Japan decides to rebuild, but whatever they do their priorities will probably be:
  1. Quick to deploy
  2. Low cost
  3. Improve grid safety and stability
  4. Not greatly increase reliance on foreign imports
Energy Efficiency meets all four goals.  Many energy efficiency stocks are local operations, but suppliers of highly energy efficient components, such as Power Integrations (POWI) should be well placed to benefit.  Investors' focus should be on companies with industry-leading technology that the Japanese will not be able to source locally.

Wind is quick to deploy and inexpensive when compared to natural gas generation based on expensive liquified natural gas (LNG), but there will be a limited number of sites available in densely populated Japan.  Most likely, we will see an acceleration of Japanese plans for offshore wind power.  This should help wind companies with offshore turbines, and possibly integrate nicely with a build-out of a Japanese underwater HVDC grid, similar to the proposed Atlantic Wind Connection for the US.

An underwater HVDC grid makes sense, and if Japan sees this sense, ABB and Siemens are the most logical beneficiaries.

Solar power is not cheap, although it is much less expensive and faster to deploy than new nuclear power, and the high prices of imported LNG should not make it cost prohibitive as a solution.  Global suppliers of PV should all benefit, as the increase in demand allows them to charge somewhat higher margins than they would otherwise.

Grid Based Energy Storage will need to increase along with wind and solar to help accommodate local fluctuations in power output, but it is easy to overestimate the market for this.  It's typically not low cost, but grid based storage (at least when it takes the form of batteries) is quick to deploy, improves grid safety and stability, and does not greatly increase the reliance on foreign imports. Petersen just published a good overview of grid based storage applications here, including the US-listed stocks he thinks are well positioned for this opportunity.  One Japanese company he does not mention is NGK Insulators Ltd. (NGKIF.PK), a vendor of the Sodium sulfur batteries, the technology which currently has the greatest installed capacity for battery-based grid storage.  This was my top pick for a stock to benefit from the rebuilding of the Japanese grid.

It might make sense to build some grid based storage at the sites of existing Japanese nuclear reactors.  When the grid and back-up generation gave out at Fukushima, the battery backup kept the plants safe for 8 hours.  Grid based storage systems cycle their state of charge over time, so if a future disaster knocked out both grid power and backup generators at a nuclear plant co-located with grid based battery storage, most of the time the grid based storage would be able to supply some extra power to the nuclear plant, and keep the cooling systems operating longer than it could with dedicated battery backup alone.

Natural gas will also see a boost, especially in the short term, now that Japan must run existing gas fired generation harder to make up for the loss of the nuclear plants.  In the longer term, suppliers of gas turbines will probably see some increase in demand.  Given the high price of LNG, there will be an emphasis on particularly efficient means of converting natural gas into electricity.  Segrich's Capstone Turbine (CPST) is one, especially when used in combined heat and power operations.  For even more efficient conversion of natural gas to electricity, the Japanese may turn to solid-oxide fuel cells, such as those sold by FuelCell Energy (FCEL). Both these companies' products can be used in natural gas powered buses, and so may benefit if bus buyers shift away from diesel in favor of natural gas.

Geothermal Power has, as usual, received some lip service as a possible beneficiary.  Japan is on the ring of fire, with good geothermal potential.  The country already had 547MW of installed geothermal generation in 2000.  Geothermal also has the advantage of being baseload, often operating with capacity factors of 95%, even higher than nuclear.

However, geothermal plants take four to six years to construct, which means that new geothermal (unless it involved installing upgraded turbines or bottoming cycles at existing plants) will only make a small contribution to fill the gap left by lost nuclear generation in the near term.  Companies that might possibly benefit in the short term are vendors of binary cycle turbines (i.e. Ormat (ORA) and United Technologies (UTX)) to be used as bottoming cycles at existing plants.


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.

March 23, 2011

Greenshift Corp: Putting the Squeeze on Corn

Debra Fiakas

After a series of bankruptcies laid the U.S. ethanol industry on its back a few years ago, the survivors got the message  -  become economically viable or go out of business.  The industry has been scrambling to adopt new processes that utilize other non-food materials or at least get more out of the corn that has been the mainstay feedstock for the U.S. ethanol industry.  

Enter Greenshift Corporation (GERS:  OTC/BB) with its corn oil extraction process and a new step in the corn-ethanol production process.  Greenshift may change the economics of corn-ethanol production by giving producers new revenue streams.  

In the U.S. corn-ethanol industry the dry mill process is most typical with the whole corn kernel going into the fermentation stage.  After the fermentation process that turns the sugars in the corn kernel to ethanol, the leftovers or “corn stillage” are usually put through water extraction and drying stages.  The dried by-product called distillers grain is sold as animal feed.  Cattle or hog finishers are only to happy to get distillers grains since the protein content is near 30%.

However, distillers grains also has a high fat content  -  12% to 15%.  Greenshift’s corn oil extraction process removes corn oil from the corn stillage, providing ethanol producers another revenue producing by-product.  The corn oil can then be sold as biofuel feedstock or as an alternative animal feed ingredient.  What is left in the stillage goes on through the usual water extraction and drying process.  Greenshift claims its process removes as much as 80% of the oil from the corn stillage.

Greenshift has managed to license its process to a half dozen or so ethanol and corn handling concerns, including most recently Marquis Energy for its Wisconsin ethanol plant.  Marquis previously licensed the Greenshift technology for its plant in Illinois.  Green Plains Renewable Energy, Inc. (GPRE:  Nasdaq) is also a licensee.  In a recent letter to shareholders, Greenshift CEO Kevin Kreisler predicted that current license agreements would be sufficient to bring the company to break-even at the operating level.  

As rosy as the story might sound, GERS is only for the most risk tolerant investor.  The stock is trades more than 70 million shares per day at a price that is well under a half penny.  Those of us who need to sleep at night might wait until Green Plains has implemented the Greenshift technology.  Green Plains expects to complete deployment by the end of March 2011 and claims the change could enhance operating income by $15 million to $19 million per year.  If Green Plains is able to make good on its claims, it could be a good reason to look more carefully at GERS.

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.  GERS and GPRE are included in Crystal Equity Research’s Beach Boys Index in the Ethanol Group.  


March 22, 2011

Grid-based Energy Storage: Widely Misunderstood Challenges and Opportunities

John Petersen

The most widely misunderstood subject in the field of energy storage is the potential for grid-based applications. They fire the imagination because the grid is so pervasive and the need is so great. They also present immense challenges to storage technology developers because the fundamental economic value per unit of grid-based energy storage is very low. While the subject of grid-based storage provides rich fodder for media reports and political posturing, the reality bears little relation to the perception. On March 9th, Lux Research published a sorely needed reality check in a new report titled "Grid Storage – Islands of Opportunity in a Sea of Failure," which concluded that "Amongst the sea of possible scenarios, there are few combinations that offer an acceptable payback, while endless potential pitfalls exist."

Lux analyzed the business scenario for 14 emerging energy storage technologies across 23 applications to identify the best investments for utilities, transmission operators, independent power producers and building operators in California, Germany, and China. The report was based in large part on data from a December 2010 study published by the Electric Power Research Institute, "Electricity Energy Storage Technology Options – A White Paper Primer on Applications, Costs and Benefits." While the Lux report and the EPRI study both offer detailed insight for institutional investors that are contemplating investments in energy storage, they're too detailed for individual investors who are mainly concerned with managing their personal portfolios.

The first thing individual investors need to understand is that while global electric power generating capacity is roughly 4,000 GW, total installed energy storage capacity is less than 128 GW, or 3.2% of generating capacity. The second thing they need to understand is that substantially all of the existing storage facilities are pumped hydro. The following graph from the EPRI report provides additional color on how much installed capacity really exists for the exciting new energy storage technologies the press is gushing over.

3.22.11 Global Storage.png

While EPRI's installed capacity graph should be enough to make cautious investors pause to check their assumptions, another graph from the EPRI report is far more useful. It shows the estimated size of the potential market for 15 key energy storage applications on the horizontal axis and then shows the maximum price per kWh of storage capacity an end-user would be willing to pay on the vertical axis. The red annotations are mine.

3.22.11 Grid Markets.png

Wholesale frequency regulation, the application that's getting the bulk of the media attention, is shown on the left-hand side of the graph. It's the primary target for cool storage technologies like flywheel-based systems from Beacon Power (BCOND) and lithium-ion battery based systems from Altair Nanotechnologies (ALTI), A123 Systems (AONE), Ener1 (HEV) and others. Despite the media's excitement, the reality is wholesale frequency regulation represents less than 1% of potential demand for grid-based storage. The other 99% can only be served by cheap energy storage technologies. Less than a half of the potential market will ever be addressable by manufactured energy storage devices. The rest will remain out of reach without widespread deployment of pumped hydro, compressed air and other large-scale electro-mechanical systems.

There's little question that the potential markets for manufactured energy storage devices in grid-based applications are big enough to support several successful companies. They're just not as easy as the media reports would have us believe. Wholesale frequency regulation in the US is probably limited to something on the order of 400 MW, which works out to about $1.6 billion in domestic revenue potential. The bigger prize is the $16 billion of potential demand for manufactured systems that can be installed at a price point of $500 to $1,700 per kWh. Globally, those target markets are closer to $5 billion and $50 billion, respectively.

Of the electro-chemical energy storage technologies discussed in the EPRI report, conventional and advanced lead-acid batteries and flow batteries usually offered the best cost profiles for the work of transmission and distribution upgrade deferral in both fixed and transportable formats. The economics remain challenging when you include the costs of containerization, interconnect equipment and control electronics, but they are within the realm of reason. Once you get beyond short-duration frequency regulation, however, cool technologies don't stand a chance of being competitive.

The universe of publicly traded US companies that can respond to the need for cheap grid-based energy storage is small. It includes Enersys (ENS), Exide Technologies (XIDE), and C&D Technologies (CHHPD.PK)  in the established manufacturer ranks with Axion Power International (AXPW.OB) and ZBB Energy (ZBB) in the emerging company ranks. Cool technologies will probably continue to claim the lion's share of the headlines, but cheap technologies will almost certainly claim the lion's share of the revenues and profits. From an investor's perspective, those are the only metrics that really matter.

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

March 21, 2011

Autodesk and the Future of Sustainable Design

Joel Makower

If you start with the premise that many of the solutions to our global sustainability challenges require smart design and systems thinking, it doesn’t take long before you find your way to Autodesk (ADSK). The 29-year-old design software company has made a series of impressive moves into the sustainability realm over the past few years. It’s one of those largely unheralded companies creating the tools used by architects, designers, manufacturers, and — most recently — cleantech entrepreneurs to produce the next generation of greener, cleaner, more efficient products.

Over the past year or so, I've had the opportunity to meet with or interview several members of Autodesk's sustainability team as well as its CEO, Carl Bass, on a number of occasions. Along the way, I have become increasingly impressed with how the company hasn’t merely expanded its offerings to help design professionals achieve sustainability goals, but has also set out to elevate the sustainability knowledge and capabilities of design students and professionals, from high schoolers to seasoned engineers.

Autodesk makes a suite of 2D and 3D design software tools commonly known as CAD, for computer-aided design. Its flagship product, AutoCAD, along with the more advanced tools that integrate with AutoCAD, is the standard design software in architecture, engineering, and construction firms; manufacturing environments, such as industrial machinery, tool and die, automotive, and consumer products; and media and entertainment companies. (Autodesk software has been used in the special effects of dozens of movies, from “Alice in Wonderland” to “X-Men.”)

Starting a few years ago, as green building grew from the margins to the mainstream, Autodesk began integrating components to help architects, engineers, and designers perform “whole building” analysis, optimize energy efficiency, even aim for carbon neutrality. It developed Building Information Modeling, or BIM, software, which allows architects, engineers, construction professionals, facility managers, and owners to break down barriers and bridge communication between design and construction teams, with the goal of optimizing buildings and creating predictable outcomes. Autodesk began using its own facilities as a living laboratory to gain real-world experience. “The idea is to use our own operations as a testing ground for prototyping new products, new features, new workflows that would serve our customers and rapidly green, in this case, existing buildings,” Emma Stewart, senior program lead for the Autodesk Sustainability Initiative, told me.

No Green Button. Those efforts created a gateway into sustainability for Autodesk that has spread beyond buildings to designing everything from products to cities.

Sarah Krasley, a product manager in Autodesk’s Manufacturing Industry Group, works with the company’s industrial customers to help embed sustainability. “We have customers in building products,” she explains. “We have customers who are designing apparel. We have customers that are designing consumer packaged goods. The myriad of sustainable design objectives across those industries is vast, and we realize that there is no green button. That is, there’s not one simple sustainability tool that you can put into a CAD system and solve everybody’s problems. So we’re doing a lot of exploration at where sustainable design comes up in the workflow, and where it’s most meaningful.”

One outcome of that exploration was a partnership announced last fall with Granta Design, a developer of materials databases, that combines Autodesk's Digital Prototyping technology with Granta's materials information technology to enable industrial designers, mechanical engineers, and others to more easily create products through sustainable design.

At the other end of the spectrum is a partnership with CDP Cities, a project of the Carbon Disclosure Project, which has worked to standardize carbon reporting and risk management. Now CDP is working to do the same with municipalities, from Beijing to New York. Autodesk partnered with CDP to standardize the software platform for how cities are tracking, managing, and reducing their carbon risk over the next 40 years, explains Stewart. “So all of a sudden, Mayor Bloomberg and his team are able to look out at New York City and understand the resource flows of energy, waste, water in a way they’ve never done before, and map that against the way sea level will rise over the next 40 years, and then make financial decisions accordingly.”

Class Acts. The city-level partnership exemplifies one of the things I find most interesting about Autodesk: It invests in educating the marketplace, seeding future customers with free or low-cost versions of its software. This isn’t unique to the sustainability space, but sustainability may be where it’s needed most. To limit sustainable design to the relatively small population of engineers, designers, and architects who already “get it” misses a vast opportunity for both the company and the planet.

Autodesk has more than 1.5 million students in its Education Community, which allows students, both undergrads and grads, to download and test-drive free software and other tools. The idea is that students learn their craft using Autodesk software and, of course, want to use it in their professional lives, too.

Those students, it seems, hadn't been learning much about sustainability in their studies. “The thing that kept coming up as we made new software innovations is that there are a lot of people who are not even familiar with the terminology around sustainable design, and are not familiar with how to take these high-level concepts and break them down into steps that are actionable,” Dawn Danby, Sustainable Design Program Manager at Autodesk, explains. “If we’re going to start building new solutions for doing all kinds of energy analysis or materials analysis, people need to understand why this stuff matters and have a context for it. We’re very aware that the hundreds of thousands of mechanical engineers every year who are being released into the marketplace are about to make very significant resource decisions.”

In response, Danby and her team last year launched the Autodesk Sustainability Workshop, a series of free online instructional videos. They’re short, clever works, produced by Free Range Graphics, the team that created Annie Leonard’s wildly popular viral video, The Story of Stuff, and its growing spinoff projects. Danby herself stars in the segment on Whole Systems Design, with sustainability education guru Jeremy Faludi leading most of the others. It’s a terrific public service and a fun way to learn, even for us non-designer types. (Autodesk also sponsored AskNature.org, a free portal for architects, designers, and engineers on bio-inspired design, produced by the Biomimicry Institute, on whose board I sit.)

Seeding the Market. And then there’s the company’s Clean Tech Partner Program, which aims to pretty much give away suites of software — about $50,000 worth — to hundreds of cleantech start-ups. Entrepreneurs submit an application, explain what they’re doing, and get a complete suite of Autodesk software for a nominal fee. The program started two years ago in the U.S., then spread to Europe and, most recently, to Japan. Again, the idea is to seed these startups with Autodesk tools, with the hopes that they’ll become paying customers as they grow.

“In the short term, [sustainability] is the most pressing problem we face as a society, and I think it's important that we do things to help solve the problem,” Autodesk CEO Carl Bass told me recently. “And I think a lot of the innovation is going to come from small companies.” Along the way, Bass has become a frequent speaker at cleantech conferences and an articulate advocate for cleantech entrepreneurs. (You can watch excerpts from an interview I did with Bass, below. I’ll be interviewing him again, onstage at the Green:Net 2011 conference in San Francisco, on April 21.)

As I said, much of these activities remain unheralded in the wider world of green business; Autodesk isn’t typically one of the companies that springs to mind when people name sustainability leaders. In some ways, that’s what I like most about Autodesk: a company that quietly is building the foundation for a sustainable future, creating tools and partnerships that are fundamentally changing the way things are designed and built. We may never see buildings or products that boast anything along the lines of “Autodesk Inside,” but in some respects, our sustainable future could well be labeled exactly that.

For more than 20 years, Joel Makower has been a well-respected voice on business, the environment, and the bottom line.  He has been called "The guru of green business practices."  This article was first published on his blog, and is reprinted with permission. 

March 20, 2011

Peak Oil Risk in Muni Bonds

Tom Konrad CFA

Bargain hunters looking for opportunities in muni bonds should be mindful of peak oil.

Meredith Whitney predicts a wave of defaults in municipal (muni) bonds, followed by indiscriminate selling and potential buying opportunities for some.  She's been widely criticized for the prediction of defaults, but I'm a lot more interested in the prediction of the market's reaction. 

With tax-free, AAA-rated munis currently yielding more than comparable taxable Treasury bonds, they seem at least a relative bargain already.  I would not call it outright panic, but I'd expect there are be some bargains to be had.  Yet muni bonds' relative illiquidity and high brokerage commissions make short term trading in munis inappropriate for most investors.  If you are in a high tax bracket, and want long term income, they often make sense when held to maturity.  Yet if you intend to hold a muni bond for five to twenty years, it's all the more important that the interest on offer fully compensate for the risk of default.

Types of Muni Bonds

I spend most of my time analyzing stocks, so I'm not going to claim I can find those muni bond bargains that are probably out there, but I'm pretty confident I know a couple places not to look. 

If you want to understand the risks of a muni bond, you need to know what revenues back up the bond you're interested in.  If those revenues are safe, then so is the bond.  General Obligation (GO) bonds are backed by tax rolls, which may be able to be raised if a municipality gets into trouble... provided the citizens would not rather have their municipality default and take the consequences.  Revenue bonds, on the other hand, are backed by the revenue of the project they were issued to finance (The Obligator.)  Obligators can be water and waste water utilities, toll roads and bridges, hospitals, airports, transit authorities, or universities:  The obligator can be any enterprise that a municipal borrower undertakes that has its own identifiable revenues.

Risks to Obligator Revenues

There are any number of risks to these revenues.  For instance, CERES recently released a report (PDF) highlighting the risks of diminishing water supplies to muni bonds, discussed in this recent Renewable Energy World podcast.  It's not only water utilities that face risks of diminishing water supplies, but even GO bonds could be affected if there is not enough water in the future to support a population large and vibrant enough to repay the bonds.

Climate risks may also play a role.  In addition to water scarcity exacerbated by climate change, increasingly powerful hurricanes do not improve the credit worthiness of cities in the hurricane belt.  Rising seal levels will also add costs for flood protection in coastal cities, and larger floods will do the same for cities on major rivers.  That could affect GO bonds, or the bonds of city water and sewer systems.

Probably the largest near-term resource risk for muni bonds is peak oil.  Rising oil prices will do most of their damage to car-dependent communities, and so exurban and rural GO munis may be much riskier than they appear.  Diminishing car traffic could easily undermine the economics of toll roads and bridges at the same time as it increases maintenance costs by increasing the cost of asphalt.  Municipal parking garages also seem risky.

Airports are also at risk, particularly small ones.  A recent New York Times article looked at how small airports are increasingly feeling the pinch as higher fuel costs drive up airfares at small airports (which are served by smaller planes using more fuel per passenger) faster than at large ones, and travelers increasingly choose to drive to larger hubs for fares.  As regional airports close, larger airports may gain somewhat, but will it be enough to offset overall air traffic declines?  And as smaller regional airports close, will that begin to undermine the appeal of air travel altogether, leading many people to take fewer trips or travel by bus or train?

Winners as Well as Losers?

Some munis might be helped.  As noted above, large airports might gain revenue at the expense of small ones, although that seems a risky bet if peak oil leads to a long term overall decline in air travel.

Transit authority muni bonds seem more attractive. Transit powered by electricity, such as subways, much rail transit, and trolley buses have the added advantage of fuel costs that are largely uncorrelated to the price of oil.  If such transit authorities benefit from increased ridership as commuters look for alternatives to increasingly expensive cars, their bonds should be much safer than many investors expect.  I've long been an advocate of investing in mass transit stocks as a hedge against peak oil.  Muni investors have an advantage over stock investors: they can get exposure to transit authority revenues through municipal bonds.


The muni bond market is large and varied, and there are many other factors to consider in addition to resource constraints.   With many investors already selling, there are probably bargains to be had.  Yet today's municipal bargains may still become tomorrow's screaming deals, especially with more downgrades coming.   I think there's more room for the indiscriminate selling Whitney talks about.  When I see that, I'll be looking for munis backed by municipal transit authorities of large cities outside the hurricane belt. 


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.

March 19, 2011

The Brew Barons: Masters of advanced fermentation, driving the redefinition of biofuels: Pt 2

Jim Lane

Will the new fermentation technologies completely shatter preconceptions about biofuels and bio-based products – and redefine the way in which Western Civ approaches the production of fuel, food, feed, and fiber? The new Brew Barons are working hard to make that so.

See part 1 of  'Brew Barons', here.


The LanzaTech process increases industrial energy efficiency by capturing waste gases (CO, CO2) and converting them to valuable fuels and chemicals. LanzaTech provides an opportunity to produce large volumes of low carbon fuel and chemicals at low costs using a countries own resources, reducing dependence on foreign imports and GHG footprint.  Simply utilizing the available steel mill waste gases, LanzaTech could produce more than 30 billion gallons of ethanol per year.  This would have a significant impact on the global energy landscape.

Two weeks ago, LanzaTech signed a memorandum of understanding with Posco, a Korean conglomerate with interests in steel, power, energy, engineering and construction, to convert the steel maker’s flue gases to ethanol and other value added products. LanzaTech uses its gas fermentation technology to produce ethanol and also 2,3-Butanediol (2,3-BD), a key building block used to make polymers, plastics and hydrocarbon fuels. It has investment from K1W1 (New Zealand), Khosla Ventures (US) and Qiming Venures (China) as well as funding from the New Zealand and US governments.

LanzaTech CEO Jennifer Holmgren commented, “This means that LanzaTech is now working with 2 of the top 5 global steel manufacturers (some would say the #2/3). From my perspective this shows the traction that the LanzaTech technology is receiving in the market place and the potential impact that our technology is likely to have in the coming years.  We are creating a nice pipeline of commercial projects so that as we get to scale – we don’t do it one commercial production facility at a time but multiple commercial production facilities in parallel with a variety of partners globally.”

In January,  IndianOil and LanzaTech signed a Memorandum of Understanding to collaborate on a demonstration of LanzaTech’s proprietary gas fermentation technology collaboration in a technology demonstration at one of the India Oil refineries. that will enable IndianOil to produce fuel grade ethanol.


The cryptically-named LS9 uses a e.coli-based fermentation to convert of renewable plant biomass into advanced biofuels that are drop-in compatible with the existing infrastructure.  The same technology platform enables the production of a diversity of high-value chemicals.

Last month, LS9 announced the initiation of a second development and commercialization partnership with Procter & Gamble.  This additional partnership draws on LS9’s unique technology to broaden the portfolio of renewable chemicals to be used in P&G’s consumer products. It followed a $30M series D financing round led by BlackRock that came just as the company reached #4 in this year’s 50 Hottest Companies in Bioenergy.

In 2010, LS9 announced a major scientific breakthrough that will significantly lower the cost of producing “drop‐in” hydrocarbon fuels that are low‐carbon, sustainable and compatible with the existing fuel distribution infrastructure. This breakthrough has allowed LS9 to accelerate its technology and demonstrate alkane production at pilot scale.

In the article “Microbial Biosynthesis of Alkanes” published in Science magazine, a team of LS9 scientists announce the discovery of novel genes that, when expressed in E.coli, produce alkanes, the primary hydrocarbon components of gasoline, diesel and jet fuel. This discovery is the first description of the genes responsible for alkane biosynthesis and the first example of a single step conversion of sugar to fuel‐grade alkanes by an engineered microorganism.

Biofuels Digest profiled LS9 most recently in “LS9 raises $30M, adds BlackRock – what does it mean?”


The unique technology developed by Mascoma Corporation uses yeast and bacteria that are engineered to produce large quantities of the enzymes necessary to break down the cellulose and ferment the resulting sugars into ethanol.  Combining these two steps (enzymatic digestion and fermentation) significantly reduces costs by eliminating the need for enzyme produced in a separate refinery.  This process, called Consolidated Bioprocessing or “CBP”, will ultimately enable the conversion of the solar energy contained in plants to ethanol in just a few days.

In January, Mascoma announced that Valero Energy  has joined as an investor in the company. Further, Mascoma, Valero, and Mascoma’s operating subsidiary, Frontier Renewable Resources, (jointly owned with J.M. Longyear) have signed a non-binding letter of intent to support the construction of Mascoma’s 40 million gallon cellulosic ethanol plant in Kinross, Michigan.  Groundbreaking on the project is slated for later this year.

Under the terms of the letter of intent, Valero would potentially invest up to $50 million of the equity required to finance the project through Frontier Kinross LLC, a subsidiary of Frontier, and would enter into an off-take agreement for the project’s ethanol production. As further support of the project, Valero will provide project development and construction oversight services.

Frontier will use hardwood pulpwood, which is selectively harvested, naturally regenerated, and is an underutilized, abundant resource in the area surrounding the Kinross biorefinery. Mascoma’s 200,000 gallons of cellulosic ethanol per year demonstration facility in Rome, New York, has demonstrated the viability of the technology over the past two years and sets the stage for the commercial facility.

Mascoma recently announced the acquisition of SunOpta BioProcess Inc. (SBI), a world-leading fiber preparation and pretreatment company, creating a company with comprehensive capabilities for converting non-food cellulose (wood chips, energy crops and organic solid waste) into ethanol and high value co-products. With the addition of SBI and Valero, Mascoma has now covered the entire process of commercializing cellulosic ethanol, from raw materials supply, to pre-processing, through Mascoma’s CBP process and into final distribution.

Novozymes (NVZMY.PK)

Novozymes’ core technology for the biofuels industry is enzymes that break down different types of feedstock into fermentable sugars for conversion into ethanol.  Within this area, Novozymes develops solutions for two distinct types of ethanol technology: cellulosic ethanol and starch-based ethanol.

Novozymes cellulosic ethanol work is the largest endeavor the company has ever undertaken, with over 150 scientists dedicated to the effort.  Not only is Novozymes’ developing and offering the leading enzyme solutions for cellulosic ethanol technology, but we have also expanded our research focus into optimizing the pretreatment, hydrolysis and fermentation process steps.

In 2010 Novozymes launched the first commercially viable enzyme for the cellulosic ethanol industry, Cellic® Ctec2.  The 1.8X average performance improvement over a variety of feedstocks is enabling our partners to reach a commercially viable enzyme cost window and overall production costs.  We have also worked with many of our partners to help optimize their process technology in order to lower enzyme use cost and find the right balance in process tradeoffs to lower capital and operating costs.

As the world leader in bioinnovation, Novozymes produces enzymes that optimize the conversion of grains such as corn, barley, wheat and other starch raw materials into ethanol. Unrivalled in their performance and ease of use, our enzymes enable higher yields, faster throughput and lower processing costs. Our tailored solutions – including custom enzyme blends – match the specific needs of our customers’ processes for liquefaction, saccharification, fermentation enhancement, and viscosity reduction.

Novozymes’ enzyme solutions provide robust performance on a wide variety of feedstocks. Cellulosic ethanol employs biomass feedstocks such as corn stover, wheat straw, sugarcane bagasse, woody residues, switchgrass, etc. For starch-based ethanol, the primary feedstocks are corn, barley, wheat, sugarcane, etc.

OPX Biotechnologies

OPXBIO is a Colorado-based company using biotechnology to convert renewable raw materials into biochemicals and biofuels. Applying its proprietary EDGE™ (Efficiency Directed Genome Engineering) technology, it will manufacture bio-based products that are more economical and sustainable than petroleum-based alternatives.

OPXBIO’s first product will be bioacrylic, which will be the chemical equivalent of petroleum-based acrylic, which is currently an $8 billion market that is growing at 4% per year. OPXBIO intends to produce bioacrylic at a lower cost ($0.50/lb) than petroleum-based ($0.65 – 0.75/lb today) and will commercialize bioacrylic through a joint venture with the first plant being operational in 2014.

OPXBIO’s second product is biodiesel, which it is working on through a $6 million grant from the U.S. DOE ARPA-E program. The company is partnered with the National Renewable Energy Lab (NREL) and Johnson Matthey to biologically produce biodiesel through fermentation from carbon dioxide and renewable hydrogen.

OPXBIO’s EDGE technology allows it to optimize the microbe and bioprocess 1,000 to 5,000 times faster than traditional genome or microbial engineering, and it is extremely robust allowing OPXBIO to work on multiple products and utilize numerous feed stocks.


POET doesn’t get enough attention for its market-leading efforts in deploying enzyme-based cellulosic ethanol. Its 25 Mgy Project LIBERTY complex, which is now scheduled to commence construction in early 2012, awaits the outcome of a loan guarantee application from the DOE. But POET has been a leader in pushing the limits of fermentation technology in first-generation ethanol as well. It can produce up to 3.0 gallons of ethanol per bushel of corn with its proprietary BPX technology. BPX also reduces energy needs for fermentation by 8 to 15 percent compared to other ethanol production processes.

Last month, POET reported that farmers are now allowed to deliver bales of biomass to the company’s storage site in Emmetsburg that will supply the company’s future cellulosic ethanol plant. When operational, the facility will accept 300,000 tons of biomass but for now, area farmers harvested 56,000 tons of corn cobs, leaves, husks and some stalk this fall.

Farmers had been waiting to deliver the biomass to POET while guidelines for the U.S. Department of Agriculture’s Biomass Crop Assistance Program (BCAP) were finalized. Farmers on last week began completing the application process, and they started delivering bales soon after.

Last August, POET commenced construction of a new 22-acre biomass storage facility that will house up to 23,000 tons of biomass bales. The facility will form part of the Project LIBERTY complex. Meanwhile, potential suppliers of biomass to the plant have received  $100,000 in incentive payments towards establishment of their own harvesting systems. Farmers associated with the POET project will start the collection of a 56,000 ton harvest of corn cobs and light stover, which will be used as feedstock for the Project LIBERTY facility.

The facility will eventually consume 300,000 tons or more of biomass, which according to POET’s released figures could be sustainably harvested from a 468 square-mile area. By contrast, a 100 Mgy corn ethanol plant can be sustained by a 325 square-mile area using POET’s process.


Qteros’ CBP platform is based on its broadly protected, feedstock-agnostic micro-organism, the Q Microbe.  Qteros’ near-term feedstock strategy includes corn stover, wet distiller grains (WDGs) and bagasse processed at cellulosic ethanol facilities that are co-located with existing corn and sugarcane ethanol plants. Longer term, Qteros plans to focus its strategy on greenfield facilities processing energy crops (e.g., sorghum and energy cane) which represent the greatest opportunity for global commercial scale production of cellulosic ethanol.

The Q Microbe is one of Qteros’ key competitive advantage as the organism possesses the native ability to hydrolyze a broad array of biomass and efficiently ferment all sugars into ethanol.  As such, Qteros is optimizing a micro-organism with native biological capabilities versus attempting to engineer one from scratch. Specific ethanol-producing attributes of the Q Microbe include: The preferential digestion of oligomeric versus monomeric sugars which significantly reduces pretreatment severity; the natural production all enzymes required to digest biomass; and a natural ability to simultaneously co-ferment all C5 and C6 sugars, thereby streamlining unit operations and reducing costs. Additionally, the Q Microbe is an anaerobic organism which minimizes production-related contamination risks associated with aerobic production processes.

In January, Qteros and Praj Industries announced  a strategic partnership to accelerate commercialization efforts for industrial-scale cellulosic ethanol production.

Under the agreement, Qteros and Praj will collaborate on a highly focused, multi-year development program with the objective of rapidly developing and commercializing Process Design Packages (PDPs) that enable cellulosic ethanol production using Qteros’ Q Microbe-enabled CBP platform and Praj’s technology and expertise in the conversion of biomass to ethanol. This unique licensing model serves to provide both a highly efficient and low-cost solution to the market, while also allowing Qteros and Praj to deploy their capital in an efficient and leveraged manner. Importantly, the companies plan to retrofit Praj’s existing pilot plant in Pune, India with Qteros’ technology platform, which will then become the foundation for accelerated production scaling as part of its commercial planning.

At the same time, Qteros announced that it closed the initial $22 million tranche in its Series C financing, with an undisclosed group of new and existing investors. The completion of this $22M financing is expected to provide sufficient funding to accelerate the Company’s development and commercialization plans.


The company generally shies away from promoting itself as an algal biofuels company, because it focuses its messaging around its products rather than its process – same, by the way, as Budweiser.

Biggest news lately – a partnership with Qantas to develop renewable jet fuels, and the widely-circulated expectation that Solazyme will file its S-1 registration form for an IPO by the end of March.

The Qantas deal? Solazyme announced that it has begun a collaboration with Qantas, to pursue the potential for commercial production of Solazyme’s microbial derived aviation fuel, Solajet, in Australia. This represents the first collaboration in the Asia-Pacific region to explore the use of Solajet in commercial aviation.  There is currently a six billion liter a year demand for aviation fuel in Australia.

Qantas is also working with another US company, Solena, to determine the feasibility of using MSW for production of biojet fuel.

Solazyme’s unique renewable oil production process uses microalgae to convert biomass directly into oil and other biomaterials, a process that takes a matter of days and can be performed in standard commercial fermentation facilities cleanly, quickly, and at low cost and large scale. Its renewable oil and bioproducts technology has manufactured tens of thousands of gallons of oil -  in fact in 2010 alone we will produce approximately 100,000 gallons of oil.  Solazyme’s latest technology breakthrough on tailoring the oil by carbon chain length and saturation offers a distinct advantage to its partners in the fuels and chemicals industry.  The oils that Solazyme produces can act as replacements for fossil petroleum and plant oils and compounds in a diverse range of products from renewable chemicals to cosmetics and food ingredients.

Solazyme made the decision several years ago to grow heterotrophic algae in the dark and harvest renewable oils – and have become the unquestioned leader in the quest to make an integrated biorefinery commercially successful in the production of renewable oils for fuels, foods and other bio-based products. Along the ways they’ve racked up an impressive array of partners, and won contracts to supply biofuels to the US Department of Defense. More importantly, in every way, they have personified throughout their organization what it means to be an advanced bio-based company – in the ways that they have triumphed, and in the ways they have faced adversity.”


The company’s technology is called MixAlco – an advanced bio-refining technology used by Terrabon’s experienced staff of chemical engineers to convert low-cost, readily available, non-food, non-sterile biomass into valuable chemical precursors such as organic acids, ketones and secondary alcohols that can be processed into renewable hydrocarbon fuels.

The biomass used as feedstock includes biogenic municipal solid waste (MSW), sewage sludge, forest product residues such as wood chips, wood molasses and other wood waste, and non-edible energy crops such as sorghum.

Terrabon can produce mixed secondary alcohols (a mix of isopropanol, 2-butanol, 3-pentanol, 2-pentanol, etc), green gasoline, green diesel and green jet fuel.  At the moment Terrabon is focusing on producing green gasoline and jet fuel.

In January, Terrabon revealed that it has exceeded its goal of producing 70 gallons of renewable gasoline per ton of MSW using its patented acid fermentation technology, MixAlco, paired with CRI/Criterion’s renewable fuel catalyst technologies. The company’s demonstration plant in Bryan used cafeteria waste and paper shreddings from Texas A&M University for the trial.


Verdezyne is a privately held company developing and commercializing novel genetically engineered microorganisms for use as “factories” to manufacture chemicals and fuels, using renewable feedstocks. Verdezyne’s unique microorganisms permit greener, cleaner and more cost effective production of chemicals and fuels as compared with traditional methods. The Company is commercializing its technology through partnerships with leading chemical and fuel manufacturers.

Verdezyne is a product-focused company that is leveraging its technology platform to optimize the metabolic pathways, microorganisms and fermentation processes that enable economical production of renewable fuels and chemicals, focusing in this stage of development on biobased adipic acid (a platform chemical), and bioethanol, made from C6 sugars, C5 sugars (biomass, cellulosic sugars), plant-based oils, by-products from plant-based oil processing, paraffins


ZeaChem combines the best of biochemical fermentation and thermochemical processes into a hybrid process that achieves 40% higher yield than other cellulosic processes. ZeaChem’s patented biorefining process uses an acetogen – a naturally occurring species of bacteria adapted to digest the tough carbon chains of cellulose – to extract the maximum amount of energy available from the feedstock. ZeaChem offers the highest yield, lowest production cost and lowest carbon emissions profile of any known biorefining process

ZeaChem’s patented process offers the highest yield, at the lowest cost, with the lowest fossil carbon footprint of any known biorefining method. Incorporated in 2002, ZeaChem is headquartered in Lakewood, Colorado and operates a research and development facility in Menlo Park, California.

ZeaChem’s 250,000 gallon per year demonstration scale cellulosic biorefinery is currently under construction in Boardman, Oregon.

In December, ZeaChem obtained a guaranteed maximum price, under the Engineering, Procurement and Construction agreements with engineering firm Burns & McDonnell, for construction of its demonstration cellulosic ethyl acetate and ethanol plant in Boardman. The company also announced that it has secured full construction funding for the core facility. The $25 million grant from the U.S. DOE will be used to fund the independent front and back-end cellulosic process components, enabling ZeaChem to produce fuel grade ethanol as well as intermediate chemicals from non-food related biomass.

The core unit of the biorefinery is currently under construction at the site location in Boardman and foundations are being poured, and the company will begin producing 250,000 gallons (annually) of cellulosic ethanol in 2011.

Jim Lane is the Editor and Publisher of Biofuels Digest.

March 18, 2011

Epic Changes Are Coming in the Electric Power, Transportation and Energy Storage Sectors

John Petersen

Epic is the only word I can use to describe an evolving tragedy that killed tens of thousands of people, inflicted hundreds of billions in property damage, destroyed 3.5% of Japan's base-load power generating capacity in a heartbeat and will cause recurring aftershocks in the global electric power, transportation and energy storage sectors for decades. While I'd love to believe the worst is behind us, I fear the times of trouble have just begun.

Since it's clear that Japan will have to turn inward and serve the urgent needs of its own population first, the following direct and immediate impacts seem all but certain:
  • Lost electric power from Japan's ruined nuclear plants must be replaced with oil, natural gas and coal because alternative energy technologies like wind and solar can't possibly take up the slack;
  • Cleanup and reconstruction must increase total Japanese demand for liquid motor fuels;
  • Japanese demand for industrial metals and construction materials must skyrocket; and
  • Crushing limitations on Japan's base-load power generating capacity must:
    • complicate supply chains for equipment, components and materials from Japan;
    • increase the cost of Japanese exports;
    • increase demand for all types of electric efficiency technologies;
    • increase demand for HEVs and other fuel efficiency technologies;
    • increase demand for grid-based energy storage systems; and
    • force utilities to shed non-essential loads and abandon their support for plug-in vehicles.
Some years from now, I expect to see rows of headstones in the EV graveyard that read "Lost to the Tsunami."

While I'm still trying to puzzle my way through the primary, secondary and tertiary impacts, it's a virtual certainty that nuclear power will be immensely unpopular even if things go spectacularly well in Japan. Switzerland has suspended pending applications for two planned nuclear plants and anti-nuclear activists are on the offensive in France. Germany just declared a moratorium on nuclear power and ordered the "temporary" cessation of operations at seven reactors that were built before 1980. Other jurisdictions, including earthquake prone California, can expect immense public pressure to follow suit. In time things will stabilize at a new normal, but that new normal will be very different from the normal that existed two weeks ago.

Some readers will be offended by my offhand dismissal of wind and solar as viable solutions. Others will be enraged by the suggestion that utilities will abandon their support for distributed and inherently unpredictable power demand from plug-in vehicles. All I can say is that reality is inconvenient that way. Japan just lost 7.6 gigawatts of base-load capacity. The German moratorium slashed their base-load capacity by 8.3 gigawatts. As the nuclear dominoes continue to fall, the strain on power grids everywhere will get far worse than any of us can begin to imagine. The last thing the world needs in times of plummeting base-load capacity is rapid expansion of demand. We simply can't have it both ways.

Nuclear power plants typically operate at 90% of nameplate capacity while wind and solar operate at something closer to 25% of nameplate.  The nuclear reactors that have recently gone off-line in Japan and Germany accounted for roughly 125 TWh of electricity production last year. In comparison, global electricity production from wind and solar power in 2009 was 269 TWh and 21 TWh, respectively. In other words, we just lost base-load power that represents 43% of the world's renewable electricity output. The gap cannot possibly be filled by new wind and solar power facilities.

There is no question that Japan will be forced to use conventional fossil fuels to replace its destroyed nuclear plants and unless its residents choose to endure extreme hardship for the sake of principle, Germany will be forced to do the same. Comparable power shortages will arise in every industrialized country that decides the risks of vintage nuclear plants outweigh their benefits. When you start stripping base-load power out of the grid, plug-in vehicles become wildly extravagant. My cynical side is tickled that Armageddon Entrepreneurs will finally be forced to choose between stoking fears over (A) imported oil and turmoil in the middle east; (B) global warming; and (C) nuclear power plants. My practical side foresees an immensely difficult time when reality finally sinks in and people are forced to come to grips with their own wasteful behavior. The panacea possibilities were washed away in the tsunami. Now we have to get serious about conservation and abandon the childish notion that we can waste one class of natural resource in the name of conserving another.

Over the last few months the mainstream media has been abuzz with stories about high-profile demonstration projects that will use battery-based systems to help stabilize the grid and smooth power output from wind and solar installations. As usual, the mainstream is getting it wrong and creating expectations the energy storage industry can't possibly meet.

A classic example of overblown media hype is Southern California Edison's plans to spend $55 million to demonstrate a battery-based solution from A123 Systems (AONE) that will provide 32 MW of power and 8 MWh of energy to smooth power output from the Tehachapi wind complex. The following graph from the California ISO highlights the variability issue that's the bane of alternative energy facilities everywhere.
3.16.11 Wind.png
While the new energy storage system will probably do a fine job of smoothing minute-to-minute variability, it will be absolutely worthless in the context of Tehachapi's average daily power production swing of over 200 MW. Tehachapi needs several gigawatt hours of storage, not a few megawatt hours.

I'm convinced that grid-based energy storage is an immense opportunity, but it won't be in the form of the headline grabbing projects the media is fixated on today. Two weeks ago the Pacific Northwest National Laboratory published a review of "Electrochemical Energy Storage for Green Grid" that describes the need for grid-based storage, identifies the leading storage technologies and explains the baseline economic requirements. Copies of the PNNL review are available from the American Chemical Society for $35. If you own stock in a battery company or are thinking about investing in one, it's the best $35 you'll ever spend.

In their discussion of storage economics, the authors said:

"Cost is probably the most important and fundamental issue of EES for a broad market penetration. Among the most important factors are capital cost and life-cycle cost. The capital cost is typically expressed in terms of the unit cost of power ($/kW) for power applications (e.g., frequency regulation) or the unit cost of energy capacity ($/kWh) for energy applications (e.g., load leveling). The life-cycle cost is the unit cost of energy or power per cycle over the lifetime of the unit.

...  In the authors' opinion, the cost of electricity storage probably needs to be comparable to the cost of generating electricity, such as from natural gas turbines at a cost as low as 8-10 ¢/kWh per cycle. Thus, to be competitive, the capital cost of storage technologies for energy applications should be comparable or lower than $250/kWh, assuming a life cycle of 15 years or 3900 cycles (5 cycles per week), an 80% round trip efficiency, and “zero” maintenance. A capital cost of $1,250/kW or less is desired if the technology can last 5 h at name-tag power. ..."

A123's demonstration project at Tehachapi will cost $1,720 per kW and $6,880 per kWh for a 15 minute solution. It's a highly profitable project for A123, but light-years from cost-effective. The same is true of another high profile project where Ener1 (HEV) will sell power quality systems with a combined capacity of 3 MW and 5 MWh to the Russian Federal Grid for $40 million, or $13,300 per kW and $8,000 per kWh. These projects are great headline events, but they'll never be the basis for a sustainable business.

In February and March of last year I wrote a series of articles that focused on grid-based storage. The first summarized a study titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide" that was commissioned by the DOE's Energy Storage Systems Program and conducted by Jim Eyer and Garth Corey. For that article, I calculated an average economic benefit for each of the 17 grid-scale storage applications discussed in the report and then used those averages to calculate the potential demand in MWh, the potential economic benefit per kWh and the potential revenue opportunity for storage system manufacturers. The following table summarizes my results.

The color coding is simply my attempt to separate high-value applications that need objectively cool technologies like flywheels, supercapacitors and lithium ion batteries from low-value applications that need objectively cheap solutions like flow batteries, lead-acid batteries, compressed air and pumped hydro. The bottom line is that revenue opportunities in grid-based storage will be 90% cheap, 8% cool and 2% in-between. Any way you cut it, the lion's share of the revenue opportunity will flow to companies that manufacture objectively cheap storage solutions. There will be niche markets in the $1 billion to $6 billion range for cool technologies like flywheels, supercapacitors and lithium ion batteries, but those niche markets will pale in comparison to the opportunities for cheap energy storage.

Until last week, I believed global demand for grid-based storage would ramp slowly over the course of a decade. Today it's beginning to look like grid-scale storage will rapidly eclipse all other potential markets. The universe of companies that can effectively respond to urgent global needs for large-scale storage is very small. It includes General Electric (GE), Enersys (ENS), Exide Technologies (XIDE), and C&D Technologies (CHHPD.PK)  in the established manufacturer ranks, and Axion Power International (AXPW.OB) and ZBB Energy (ZBB) in the emerging technology ranks. Companies like A123, Ener1, Active Power (ACPW), Beacon Power (BCON) and Altair Nanotechnologies (ALTI) will undoubtedly have exciting revenue opportunities, but the cost of their products will exclude them from the competitive mainstream.

In November of 2008 I wrote, "what I initially described as a rising tide is now looking more like an investment tsunami as a handful of micro-cap and small-cap companies gear up to compete for $50 to $70 billion of rapidly developing annual demand for large format energy storage systems." While it took a real tsunami to bring things to a head, I'm more convinced than ever that every company that brings a cost-effective energy storage product to market over the next few years will have more demand than it can possibly handle. EVs may be dead men walking but grid-scale storage looks like the opportunity of a lifetime.

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

March 17, 2011

Renewable Energy Standards: Savvy or Silly?

David Gold

State renewable energy standards have gained momentum over the past decade with 29 states having put in place various types of standard mandates and five more having implemented voluntary standards (34 total).  Now the federal government is looking to get into the game with a bi-partisan bill (S. 3813) aiming to set a minimum national standard. Renewable energy standards certainly feel good, but do they really provide the best path for achieving their goals?  The existing renewable energy standards are savvy in finding a way to reduce fossil fuel consumption and carbon emissions while simultaneously being politically palatable to a broad array of people.  But they are a bit silly in their formulation. 

            The popular momentum behind renewable energy standards, I suspect, is driven by the fact that for most consumers, there is no obvious downside.  There is no explicit tax or fee paid to the government as a result of such standards, and the actual cost to the consumer of such standards is far from black and white.   It’s easy for a person to feel good about asking the utility company to generate more electricity from renewable energy sources, and most people don’t immediately correlate that with a cost to themselves. 

But what goals are we trying to achieve with renewable energy standards?  Many would quickly respond, “Reducing global warming.”  Others would say, “Reducing our dependence on fossil fuels.”  And those who deal with risk might say, “Diversifying our energy base.”  In addition, politicians sometimes imply that such standards increase our national security.  However, given that our nation sits on huge supplies of coal and natural gas that provide about 70% of our electricity production (vs. only 5.5% from petroleum, which we mostly import), connecting renewable production of electricity to national security is a bit silly.  Case in point, the recent spike in oil prices will have little impact on the cost of electricity in most of the U.S.  

The way that virtually all the state renewable energy standards are structured is that they establish a minimum percentage of electricity generation that must come from specified renewable energy sources by certain timeframes.  An energy source that is not on the list won’t count towards the standard.  And this is where, while well-intended, current renewable energy standards fall short.  The standards almost look like a popularity contest for the technologies with the most hype or longest track records.  As you can see in the bar chart below, there are a large number of potential sources of renewable energy that would be acceptable under the standards of only a relatively small number of states.   And this would be true irrespective of whether that technology might be a more cost-effective alternative.

Summary of State Renewable Energy Standards

(From U.S. DOE)




Organization Administering RPS




Arizona Corporation Commission




California Energy Commission




Colorado Public Utilities Commission




Department of Public Utility Control




DC Public Service Commission




Delaware Energy Office




Hawaii Strategic Industries Division


105 MW

Iowa Utilities Board




Illinois Department of Commerce




Massachusetts Division of Energy Resources




Maryland Public Service Commission




Maine Public Utilities Commission




Michigan Public Service Commission




Minnesota Department of Commerce




Missouri Public Service Commission




Montana Public Service Commission

New Hampshire



New Hampshire Office of Energy and Planning

New Jersey



New Jersey Board of Public Utilities

New Mexico



New Mexico Public Regulation Commission




Public Utilities Commission of Nevada

New York



New York Public Service Commission

North Carolina



North Carolina Utilities Commission

North Dakota*



North Dakota Public Service Commission




Oregon Energy Office




Pennsylvania Public Utility Commission

Rhode Island



Rhode Island Public Utilities Commission

South Dakota*



South Dakota Public Utility Commission


5,880 MW


Public Utility Commission of Texas




Utah Department of Environmental Quality




Vermont Department of Public Service




Virginia Department of Mines, Minterals, and Energy




Washington Secretary of State




Public Service Commission of Wisconsin

*Five states, North Dakota, South Dakota, Utah, Virginia, and Vermont, have set voluntary goals for adopting renewable energy instead of portfolio standards with binding targets.


Opponents of renewable energy standards argue that the standards will inevitably increase the cost of electricity, thereby hurting our economy and lowering our standard of living.  There is merit to this thesis in the near-term, given that most of what the various standards define as renewable energy sources cost more to produce electricity  than the fossil fuel alternatives.  In addition, most renewable sources are intermittent and may not be available during peak load times, thereby requiring investment in energy storage, increased demand load management capabilities or dispatchable generation to effectively manage high percentages of renewable energy on the grid – all of which cost additional money. 

Number of States Accepting Various Types of Energy as “Renewable”


*Hydro:  Highly limited in most states to exclude new large-scale hydro
**Waste Heat Regeneration: Two states allow Combined Heat and Power systems only

***Nuclear is somewhat addressed in S.3813 where it is eliminated from the denominator in calculating the percentage of renewable energy generated.

Data compiled from various sources on state renewable energy standards

Opponents also argue that the free market should be allowed to pick the most cost-effective energy sources.  If one does not believe that any of the three aforementioned goals are critically needed, then such a pure free market approach would make sense.  But the free market can fall short when there are externalities that have significant negative impacts on individuals or on the nation as a whole.  If such externalities are not reflected in the economic incentives that drive company decisions, the free market will generally ignore the negative consequences. (For a related discussion, see my post “Cleantech Economics 101”.)  Numerous historic examples exist such as acid rain, asbestos and lead paint.  And our electrical infrastructure is more than just another industry; it is infrastructure as critical to our economic commerce as roads, airports and railroads – infrastructure that is used by every business and every consumer every single minute of every day.  Thus, for those of us who do believe that the goals are very important, the basis for renewable energy standards is sound. 

However, the restrictive and prescriptive nature of the established renewable energy standards serve to bolster opponents because they eliminate the ability of the utility company to utilize the most cost-effective alternatives.  Going back to the goals of these standards, it must be asked why any specific technology should be named.  If the goal is to reduce carbon emissions, reduce fossil fuel consumption and/or diversify our sources of electricity production, then shouldn’t any technology that achieves this goal be acceptable?  Why should waste heat regeneration into electricity, gasification, and many other technologies that may ultimately be better solutions be excluded in so many states?  Why would demand management (energy efficiency) not be an acceptable means in most states for achieving at least the first two goals? 

And even in the light of the earthquake disaster in Japan, why shouldn’t nuclear as an option? It clearly achieves those three goals and, unlike most of the other options, can be used as base load. It would be easy to run from nuclear in light of the Japanese nuclear crisis that was caused by a record setting earthquake.  But we should not forget that there is rarely a free lunch.  Nuclear still has proven to be much less deadly than our most common form of electrical generation (i.e., coal plants), which releases more radiation than nuclear plants.  In the end, I suspect that far fewer people will die as a result of radiation exposure in Japan than from the direct effect of the earthquake and tsunami themselves.

Beyond outright cost, one of the biggest challenges with most renewable energy is that it is intermittent and cannot provide base load.  The world needs options for base load to bridge from where we are today to the (hopefully) disruptive break through in energy technologies of the future.   Part of the reason we don’t have even safer nuclear power is the lack of significant demand for new nuclear power.  This is as much an inhibitor of innovation of newer and potentially much safer designs (such as Thorium reactors and liquid metal cooled reactors which have the potential of fail safe designs, much lower half life of waste materials and low proliferation risks) as would be the lack of demand for solar or wind on those industries.  All current renewable energy sources have negative environmental impacts and risk – none is perfect (more on this in a future post).  Given that a perfect solution is likely out of our reach for the foreseeable future, our goal should be to strive for overall improvement in our energy base.  To that end, utilities should have the flexibility to implement various energy production methods that achieve the goals as well as technologies that reduce energy consumption.

Allowing greater flexibility would decrease the near-term costs to businesses and consumers by allowing utility companies to choose the most cost effective solutions that meet the goals.  In addition, it would further broaden the net of political support for such standards.  One way this flexibility could be achieved would be by allowing utilities and businesses a clear path to obtain approval from their public utilities commission for new technologies under renewable energy standards.  Any technology that achieves the goals of carbon emissions reduction, fossil fuel consumption reduction, and energy source diversification should be allowed.  Renewable energy standards shouldn’t be about supporting a specific technology or industry.  They should be about reducing the risk of global warming and increasing the robustness of our electric infrastructure in the most economical way possible.

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

March 16, 2011

The Brew Barons: Masters of advanced fermentation, driving the redefinition of biofuels: Pt 1

Jim Lane

Will the new fermentation technologies completely shatter preconceptions about biofuels and bio-based products – and redefine the way in which Western Civ approaches the production of fuel, food, feed, and fiber? The new Brew Barons are working hard to make it so.

The Regents of the University of Washington generally only admit under conditions of duress – waterboarding is typically employed – that I graduated from their institution. At issue? What they felt was an inappropriate level of focus on beer and other fermentation products as a subject of personal discovery disguised as undergraduate research.

They’ve been laughing in Seattle since I left, but unintentionally I may just have the last laugh. It may be the case that fermentation, in its modern incarnation, may indeed be the key to saving Western civilization from itself.

Is there enough energy, food, fiber and feed for all? Advances in industrial fermentation – a/k/a an incredulous “you’re making what? from what? using what? – will be the key to answering that question.

The stars of this drama are using everything from sorbitol to steel waste gases, grass clippings, pulp mill black liquor, sludge, cane trash, vinasse, leftover chili, and potato peels that never found a home.

They are using two basic strategies – fermenting liquids and, more unusually, fermenting gases too. Most are fermenting liquids; companies utilizing gas-phase fermentation, like Coskata, LanzaTech and IneosBio, are just now proceeding towards demonstration at scale.

Their microorganisms have become so focused and well trained that they are creating phosphate-free detergents, ethanol, organic acids, diesels, gasoline, base and novel chemicals, even synthetic anti-malarials. Just today, Codexis (CDXS) announced that it has developed a process to capture CO2 from coal-fired power flue stacks by fermenting the waste gases.

Intriguingly, researchers from Cornell this week reported, in “Bacterial Community Structures Are Unique and Resilient in Full-Scale Bioenergy Systems” (Proceedings of the National Academy of Sciences, Feb. 22, 2011), analysis of 400,000 gene sequences of the microbes in the sludge at nine Budweiser facilities that treat wastewater in bioreactors. Anheuser-Busch InBev recoups 20 percent of its heat energy use through the methane produced by these nicrobes, saving the company millions of dollars every year. The intrigue: the Cornell engineers are looking to prevent methane production by the microbes, and instead, to shape the bacterial communities to produce carboxylates, which are a precursor to the alkanes found in fuels.

“We are going to shape these communities so they start making what we want,” said Cornell’s Largus Angenent, associate professor of biological and environmental engineering.

Now that’s the, ahem, spirit. That’s the outlook that why these fermentation-meisters are responsible – along with the Kings of Catalysis – for shaking up the world in a very positive way.

The new Brew Barons

They are the new Brew Barons. In an earlier age, they might have been content to make White Lightning, or craft brews. Today their targets are jet fuel, renewable gasoline, renewable diesel, ethanol, a boatload of renewable chemicals, plus feed grains, food oils, pharmaceuticals, nutraceuticals, and more.

One thing is for sure. Based on the advances they are making, anyone who begins a sentence with “biofuels are…” isn’t up on the science. They are too turbulent to be characterized – too fast-moving to be catalogued or pigeon-holed. The nature, potential, and value of biofuels are changing nearly as rapidly as feedstocks in a fermenter.

Who are they? Let’s look at some of the best and the brightest.


An interesting approach. Algenol are utilizing algae to make starches, which they then ferment into ethanol.

Algenol Biofuels and Dow Chemical are in the process of constructing a $50 million pilot algae biofuels plant in Freeport, Texas. The plant will be located with Dow’s existing chemicals complex, and will supply CO2 as well as land for the pilot algae facility. Dow said that it was interested in Algenol’s ability to use algae to produce ethanol, which could be used as a base for making ethylene, which is in turn a feedstock for many types of chemicals. The plant is designed to produce 100,000 gallons of ethanol per year at a target price of between $1.00 and $1.25 per gallon, according to CEO Paul Woods, who added that groundbreaking is expected to commence this year. Traditionally, chemical companies have been using natural gas as an ethylene feedstock.

Amyris (AMRS)

It was an unheralded IPO – a lot of people passed on it at $16, now the stock is riding at $32 less than six months later, and the company just received this week its first purchase order for Amyris renewable squalane. The order was generated through collaboration with Amyris’s partner, Soliance, a leading green ingredient provider to the cosmetic industry based in France.

Last week, Amyris announced that it had completed multiple runs of its fermentation process using its engineered yeast to produce renewable farnesene, in 100,000 and 200,000 liter capacity fermenters. These runs were completed through contract manufacturing operations in North America and Europe.

The results of these fermentation runs, including yields, were consistent with previous runs at smaller scale. Amyris expects to commence commercial production of Biofene in the second quarter of 2011 and ramp production through manufacturing arrangements with entities including Biomin and Tate & Lyle.

In addition, Amyris and Grupo São Martinho, a leading sugar and ethanol producer in Brazil, have commenced site preparation on their joint venture production facility at Usina São Martinho. All of these facilities will utilize fermentors with capacities ranging between 100,000 and 600,000 liters.

Amyris is building an integrated renewable products company by applying its industrial synthetic biology platform to provide alternatives to select petroleum-sourced products used in specialty chemical and transportation fuel markets worldwide. They genetically modify microorganisms, primarily yeast, and use them as living factories in established fermentation processes to convert plant-sourced sugars into potentially thousands of target molecules. Their first commercialization efforts have been focused on a molecule called farnesene, which forms the basis for a wide range of products varying from specialty chemical applications such as detergents, cosmetics, perfumes and industrial lubricants, to transportation fuels such as diesel.

They have developed genetic engineering and screening technologies that enable us to modify the way microorganisms, or microbes, process sugar. By controlling these metabolic pathways, they design microbes to serve as living factories, or biorefineries, to produce target molecules that we seek to commercialize. Their platform utilizes proprietary high-throughput processes to create and test as many as 1,000 yeast strains a day in order to select those yeast strains which are most efficient. They first developed and applied our technology to create microbial strains to produce artemisinic acid, a precursor of artemisinin, an anti-malarial therapeutic. This work was funded by a five year grant awarded by the Bill & Melinda Gates Foundation to the Institute for OneWorld Health. We have granted a royalty-free license to this technology to sanofi-aventis for the commercialization of artemisinin-based drugs.

Bluefire Renewables (BFRE.OB)

BlueFire often gets overlooked because they are not using enzymes for the crucial hydrolysis step, and missing out on the attention that is generated by companies like Codexis (CDXS), Genencor and Novozymes (NVZMY.PK) for their enzyme customers. But fermenting their acid hydrolysis brother indeed they are, and operating a successful, proven technology for a number of years now.

Next step – they are awaiting loan guarantees – like Fulcrum, BP Biofuels, POET and a number of others – in order to proceeed with their Fulton,Mississippi-based cellulosic ethanol project. The facility will be engineered and built by Wanzek Construction, Inc., a wholly owned subsidiary of MasTec Inc. (MTZ) , for a fixed price of $296 million which includes an approximately $100 million biomass power plant as part of the facility.

In recent months, BlueFire had also announced the securing of 15-year offtake and feedstock contracts with credit worthy partners, and has thereby became the first advanced biofuels company to secure all three legs of the requirements generally associated with DOE loan guarantees. BlueFire is working with both the USDA and DOE loan programs, and over the past three years has secured $88 million in DOE grants.

Last month, BlueFire Renewables announced that Lincoln Park Capital Fund will invest up to $10 million in the company.  Upon signing the agreement, LPC invested $150,000 in BlueFire as an initial investment under the agreement at $.35 per share together with warrants to purchase an equivalent number of shares at an exercise price of $.55 per share.  BlueFire intends to use the proceeds of this transaction for general corporate purposes and to aid in the closing of additional financing for the Fulton project.

Cobalt Technologies

Cobalt Technologies is commercializing cellulosic biobutanol, a versatile platform molecule for the renewable and profitable replacement of petrochemicals and petroleum.  The Company’s technology efficiently converts diverse non-food feedstocks – initially, hemicellulose extracts from woody biomass and sugar cane bagasse – into biobutanol.  Cobalt will offer complete systems for biomass power facilities and retrofitting pulp and paper plants with a cost-effective biorefinery module, taking advantage of benefits of co-location (feedstock supply, logistics, permits) while enhancing overall facility returns.  Feedstock for the biorefinery will be low-value hemicellulose extracted from woody biomass (or bagasse) that otherwise would be burned for energy.

Biobutanol can be used as is in paints, coatings and other chemical products, a 1.2 billion gallon, $6 billion market.  It can also be converted via known chemistry into a wide range of high value products, including 1-butene, isobutene and butyraledehyde derivatives, replacing petrochemicals and accessing a 67 billion gallon, $300 billion market, and full performance jet fuel and diesel.  Biobutanol can also be blended with gasoline, diesel and ethanol to reduce emissions.

Engineered to achieve low costs through high productivity, energy efficiency and the use of low-cost feedstock, Cobalt is making biobutanol and its derivatives a cost effective substitute to petroleum-based materials.

Codexis (CDXS)

Codexis’ platform is based on proprietary directed evolution biocatalysis technology.  Codexis manufactures industrial biocatalysts for use in creating faster, more efficient and environmentally-friendly manufacturing processes and industrial scale in the bioindustrials and pharmaceuticals markets.

At the ARPA-E Energy Innovation Summit this week in Washington, DC, Codexis will announce significant progress towards developing economical, commercial scale technology to reduce carbon dioxide emissions from coal-fired power plants.  The program is supported by an ARPA-E Recovery Act program grant.

The grant supports development of custom enzymes to decrease energy needed to capture CO2 from coal-fired power plants.  Enzymes developed by Codexis under the grant have been shown to be functional and stable in relatively inexpensive and energy efficient solvents for 24 hours at temperatures up to 75⁰C.  Use of these solvents with fully developed enzymes is expected to reduce the energy needed to capture CO2 within the plant by 30%.

These reductions are possible through development of customized carbonic anhydrase (CA) enzymes, or biocatalysts.  CA is an enzyme which catalyzes the transfer of carbon dioxide in nature – for example, CA enables carbon dioxide to be released from blood into the lungs during respiration. However, the natural enzyme does not function at the high temperatures and harsh industrial conditions in coal-fired power plant flue gas.  In research being presented this week, enzyme performance has been improved by about 100,000 times over natural forms of the CA enzyme.

Biofuels Digest profiled Codexis most recently in “Resistance is Futile: Codexis and the chase for low-cost cellulosic feedstocks".


Coskata was in the news most recently with the securing of a massive (though conditional, subject to closing) loan guarantee from  the USDA that will power the company towrds its first commercial demonstration.

It’s an intriguing technology (that finds itself currently entangled in a lawsuit with INEOS), that employs a three step process: gasification, biofermentation, and separation. During gasification, the feedstock is thermally broken down to form synthesis gas (syngas). During the second step, fermentation, the syngas is sent to a proprietary bioreactor where patented microorganisms consume the gas and produce ethanol. The last step of the Coskata process uses conventional distillation and dehydration technology to separate the ethanol from the water, resulting in pure, fuel-grade ethanol.

Coskata’s feedstock flexible process can utilize virtually any carbonaceous feedstock, including energy crops such as: switchgrass and miscanthus; wood chips, forestry products, corn stover, bagasse and other typical agricultural wastes; municipal solid waste and industrial organic waste like petroleum coke.  Their feedstock flexibility allows for enormous geographical and economic advantages over other fuel technologies.

Coskata’s hybrid process, combining gasification and biofermentation, leads to several competitive advantages in terms of efficiency, affordability, and flexibility.

Coskata’s highly efficient hybrid technology allows for one of the lowest costs of production in the industry.  Their microorganisms are specific to ethanol production and our technology has the ability to extract the entire energy value of the feedstock. Finally, they are not dependent on expensive enzymes or chemicals and pre-treatment costs are significantly lower than any non-gasification based technology available today.

Second, Coskata’s ethanol conversion process is one of the most feedstock flexible technologies among advanced biofuel startups and is able to create a high quality fuel from virtually any carbon-containing material. This feedstock flexibility also leads to geographic flexibility, allowing the company to build facilities virtually anywhere around the world where feedstock is available.


Known primarily in the biofuels neck of the woods as an enzyme supplier, Genencor picked up a 2010 Biofuels Digest Award for the development of its C5 BioIsopren platform for use in the production of branched chain hydrocarbons, C10 gasoline; C15 biodiesel and jet fuel blend stocks that they collectively refer to as BioIsoFuels.

Isoprene is an important commodity chemical used in a wide range of industrial applications ranging from the production of synthetic rubber for tires and coatings to use in adhesives and development of specialty elastomers.  Current production of isoprene is derived entirely from petrochemical sources.  There is an increasing global need for more isoprene and a simultaneous environmental imperative to reduce green house gases, both of which can be achieved by a high efficiency fermentation based process for polymer grade isoprene production.  BioIsoprene™ will have broader commercial applications beyond the biochemical uses of isoprene in synthetic rubber, adhesives and specialty elastomers.  As a C5 hydrocarbon, BioIsoprene™ has inherent fuel properties and represents a key biobased intermediate that can be converted to a drop-in transportation fuel additive using chemical catalysis to C10 and C15 biobased hydrocarbon fuels, thus addressing performance gasoline, jet fuel and biodiesel markets.

Genencor develops enzymes and enzymes systems that enable starch as well as a wide range of cellulosic biomass processing to deliver fermentable feedstocks for use in the production of biochemicals and biofuels.  Feedstocks may include; corn, wheat, rye, barley, sorghum, triticale and rice. They  develop biological systems capable of producing biobased chemicals from a wide assortment of feedstocks including refined sugars from starch and biomass-derived feedstocks.


Genomatica’s technology is used to make major intermediate and basic chemicals in a direct, one-step process. This one-step process means fewer processing steps, lower capital costs, greater efficiency, and reduced overall cost. We are able to go directly from renewable feedstocks to the product of interest, as demonstrated with their recent partnership with Waste Management (WM). Genomatica’s technology offers sustainable chemicals at lower costs than petroleum-based alternatives.  The unique integration of technologies cuts years and millions of dollars of R&D investment from developing bio-based processes for making low-cost chemicals.  The organisms and complete manufacturing processes for  Genomatica’s targeted products are developed with high productivity due to our platform.

Their platform has been proven through an astonishing 2.5 year timeline to pilot production for1,4-butanediol, or BDO; and through $20 million of industry and government collaborations. The platform allows them to cost-effectively perform high-throughput ‘in-silico’ (computer-based) design and testing of highly-optimized organisms, manufacturing processes and economics. This results in more efficient, focused lab work, much faster product development and time to commercial-scale manufacturing, lower-cost production, and de-risking of the process.

Gevo, Inc. (GEVO)

Another celebrated IPO – Gevo just debuted at $15 not too long ago, but is already trading at a 30% premium, riding the NASDAQ currently at $19.71 after flirting briefly with $22.

Gevo has two proprietary technologies that combine to make it possible to retrofit existing ethanol plants to produce isobutanol, a four carbon alcohol which serves as a  hydrocarbon platform molecule.  We have developed a robust industrial scale yeast biocatalyst to produce isobutanol without typical byproducts operating at parameters equivalent to commercial ethanol producers.  The second piece of technology is a separations unit that operates continuously and removes isobutanol during fermentation.  This helps reduce distillation requirements, thereby reducing process energy consumption.

Gevo will produce isobutanol, a four carbon alcohol that can be dehydrated using well known technology to isobutylene, a C4 hydrocarbon.  Isobutanol has 30% more energy content than ethanol and can be blended into gasoline without modifying automobile engines.  Isobutanol is a low RVP blendstock and less soluble in water than ethanol.  It can be transported in pipelines and be dispensed in existing retail pumps.  Isobutanol is a biofuel that carries a RIN value of 1.3 and It can be an advanced biofuel from corn if it achieves a 50% GHG reduction.

Isobutanol also has a market as a chemical solvent.  The opportunity for isobutylene spans many C4 markets in jet fuel, paraxylene, PET and other multi-billion dollar applications in fuels, synthetic rubber, chemicals and plastics.

Gevo has a number of off-take agreements and has announced non-binding letters of intent to supply Total for gasoline blendstock; United Airlines for biojet; Lanxess for butyl rubber; and, Toray industries for p-xylene.


INEOS Bio was most recently in the news with the groundbreaking at its 8 million gallon per year advanced bioenergy facility in Vero Beach, Florida. The facility will also produce up to 6 MW of renewable power from municipal solid waste and yard and wood residues, enough to power more than 4,000 residences. INEOS New Planet BioEnergy is a joint venture between INEOS Bio and New Planet Energy, which received a $50 million grant from the DOE last year towards construction of the INEOS New Planet demonstration plant.

The INEOS Bio process is a combined thermochemical and biochemical technology for ethanol and power production.  It is comprised of four main steps:  (1) feedstock gasification, (2) synthesis gas fermentation (3) ethanol recovery and (4) power generation.  The process utilizes a patented fermentation process, where cleaned, cooled synthesis gas is converted selectively into ethanol by a naturally occurring anaerobic bacteria.  The process has been under development for 18 years.

Last June, INEOS Bio received a $10.8 million in grants from the Department for Energy and Climate Change and the Regional Development Agency One North East towards the construction costs  of its waste-to-ethanol BioEnergy Process Technology project at the INEOS Seal Sands site in the Tees Valley. The 7.9 Mgy (30 million liter) project will also produce 3 MW of renewable power and will be completed in 2012. The plant which will utilize 100,000 tonnes of municipal solid waste (which it will convert at a 25 percent yield) will create 40 permanent and 350 construction jobs, and will become the base of a larger commercial INEOS Bio plant that will open in 2015.

Part II of 'Brew Barons' is here.
Jim Lane is the Editor and Publisher of Biofuels Digest.

March 15, 2011

Energy Dominoes From Japan

Joe McCabe

Energy amazes me; the ramifications from elementary school physics of converting potential energy into kinetic energy.  It's happening everywhere around us, and can have far reaching ramifications. An example is the potential energy in the form of pressure built up under Japan in plate tectonics before the recent earthquake, turned into land shaking, country moving, tsunami creating kinetic energy that reaches across the world. There are other forces, lets call it society energy, that can create financial shock waves in the energy industry including political, religious, and inaccurate supply curve assumptions.

Energy Industry Domino Effect

The energy industry is prone to frequent unexpected events that change its entire structure.  Domino effects magnify and spread the effects of events.  A chain reaction occurs when a small change causes a similar change nearby, a pattern that repeats leading to large scale changes, much like one falling domino triggering the fall of an entire room full of edge balanced dominoes. Middle East political changes could not have been predicted to the extent of change seen in the last few weeks. There will be more change in the Middle East, no longer will dictatorships and rule by force be sustainable possibly due to small amounts of energy used by tweets and Facebook users. The financial ramifications in the Middle East have been seen in recent increases in the price of oil. The domino failures of the Deepwater Horizon oil well disaster will make oil more expensive and harder to reach. The nuclear fear, whether justified or not, will change energy policy in Japan and elsewhere.

We have experienced events recently which will compound to help change our energy future towards converting solar energy into electricity and, more specifically, photovoltaics (PV).

For example, the California Energy Crisis of 2001 helped spark investments in system level solar electric solutions at the California Energy Commission under the Public Interest Energy Research Department. These vertically integrated system solutions projects were recognized by the US Department of Energy (DOE) as a good use of public funds when they replicated the concept across the country in the Solar America Initiative. The DOE continues this system level approach with the SunShot Initiative, the most recent program to further reduce the cost of electricity from solar. As these system costs continue to fall, conventional costs will continue to rise.

Oil will be needed to support Japan after the recent earthquake disaster. Russia has promise energy industry support to Japan, the easiest of which to implement is fuel. Clean up is going to take lots of horsepower from fuel.  The Japanese electrical grid will be without electricity from nuclear generators for quite sometime. Bloomberg reported that Tokyo Electric is still seeking government approvals for a full restart of the Kashiwazaki Kariwa nuclear power plant (five reactors at 1,067 MW and two at 1,315 MW for a total 7,965 MW), which was shutdown after being damaged by an earthquake in 2007. The company posted its first loss in 28 years after it was forced to buy fossil fuels at record prices to make up for the lost nuclear output.


California will need to revisit its approach to re-licensing nuclear plants after the Fukushima nuclear accident. Imagine evacuating the area around the San Onofre California nuclear energy plant (two reactors, at 1,172 MW and 1,178 MW, completed in 1983 and 1984 respectively), with the prevailing but constantly changing winds blowing inland towards Orange County and Los Angeles just 70 miles away.

Nuclear licensing will be revisited for Diablo Canyon Nuclear Power Plant, which is owned by Pacific Gas & Electric (PCG), aka PG&E. It is not in as populated an area as the San Onofre nuclear plant, but San Luis Obispo California is very close to Diablo Canyon.  The maximum output of this power plant is 2,240 MW.  The Diablo Canyon plant was recently re-commissioned with new steam generators after 25 years of operating. Somewhat alarmingly after considering the recent Japanese earthquake, a January 2011 PG&E report outlines a previously unknown potential volcanic fault located 1 km off shore of the Diablo Canyon Power Plant.  Recent licensing procedures are investigating extending the life expectance of the Diablo Canyon nuclear plant. An Unusual Event was declared at 1:23 AM PT on Friday March 11 at Diablo Canyon, apparently in response to tsunami warnings. Again, representing energy industry domino effects from events thousands of miles away.  

We now know that our assumption that a 9.0 Richter scale earthquake could not happen is false. And the dominoes falling because of that earthquake (Tsunami, power outages, backup systems failures), demonstrate the fragility of our energy systems.

Oil and Solar

Previous high oil prices created  the first bubble of solar stocks in the summer of 2008. Sunpower (SPWRA) reached its highs in December of 2007 and First Solar (FSLR) briefly topped above $300 around the same time that oil was peaking. Over the past month, that trend has been inverted, with oil rising as solar stocks have fallen. I'm not predicting another solar bubble, but I expect solar stocks will see a steady rise for well executing companies.

M&A activity will continue with Evergreen Solar (ESLR) a prime candidate. They have a good brand, unique approach to utilization of silicon without cutting with saws and the associated losses. The market cap of Evergreen with their associated MW/year capacities makes it a nice acquisition when including their intellectual property at current low share prices.

A sad but interesting visual during the tsunami news coverage in Japan was seeing a house float by that had PV modules across what was once the south facing roof. While this specific building had obviously experienced a disaster, the energy supply from the PV being distributed did not cause a societal disaster.

Rising oil prices and increased attention towards the risks of nuclear energy in the ring of fire will increase alternatives to conventional energy production.

As our mistaken assumptions about the security and sustainability of traditional energy sources fall like dominoes, alternative energy businesses become more and more attractive.


Joseph McCabe is a solar industry expert 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. McCabe has a Masters Degree in Nuclear and Energy Engineering.
Joe is a Contributing Editor to Alt Energy Stocks and can be reached at energy [no space] ideas at gmail dotcom.

March 14, 2011

Ten LED Stocks, and a Wildcard

Tom Konrad CFA

Clean Edge says the
phase-out of incandescent light bulbs is opening the way for low-cost LEDs.  These are the stocks to know.

Federal regulations are flipping the switch on our love affair with incandescent light bulbs.  Research firm Clean Edge's just-released Clean Energy Trends 2011 says this opens the way for a clean energy trend to watch: With compact-fluorescent light (CFL) bulbs the only legal competition in much of the world, Light-Emitting Diode (LED) bulbs need only the arrival of an affordable replacement for the standard 60 watt bulb in order to be met with "an immediate rush of policy-driven demand."

What is an "affordable" 60 watt replacement? Lighting Science Group (LSCG.OB) began providing a 40-watt replacement LED bulb through Home Depot for $20 in May.  Netherlands based Lemnis offers a 60-watt dimmable replacement for $25 online.  That's still high.  With CFLs selling for $3 or less each, the many advantages of LEDs (instant on, no mercury, cold tolerance, dimmability, and slightly better energy efficiency) are not enough to overcome the high first cost barrier.  Clean Edge quotes Lemnis CEO Warner Phillips, who thinks large chunks of the market will start shifting at $15, and the entire mass market will start to shift at the psychologically critical $10 price point.  He expects to see these prices in the next one to three years.  Lighting giant Philips (PHG) is predicting that LEDs will take 50% of the lighting market by 2015.

One to three years is about the right time frame for a stock market investment based on predicted future trends.  Getting in sooner often means your money is tied up longer than it needs to be, while investors who wait too long often find that others have bought first and already driven up the stock price.  I personally think the $10 LED bulb that can truly produce as much light as a 60 watt incandescent will take much closer to three years than one, and 50% by 2015 seems a bit optimistic to me as well.  I'm not rushing to get in, but I think the time to get in will be soon. 

Here are the stocks I'll be considering:
  • Lighting Science Group (LSCG.OB), mentioned above, has the advantage of selling retail products, and so may also have the advantage of capturing retail investor attention quickly.  They also retrofitted every Starbucks in California with LEDs last year.
  • Aixtron AG (AIXG) produces the equipment used for creating LEDs, meaning that the company's sales should lead those of LED bulbs.
  • Cree Inc (CREE) was a pioneer with early high-efficiency white LEDs.  Recently the company has been struggling with strong competition from Asian semiconductor manufacturers, but some observers think the stock has fallen far enough to look attractive again.
  • Epistar Corporation (2448.TW), is a Taiwan based manufacturer of LED chips and wafers that partners with customer to produce LEDs customized to their specific applications..
  • Neo-Neon Holdings (1868.hk) calls itself the world's largest traditional and LED decorative lighting manufacturer, and considers itself a front-runner in white LED manufacturing.
  • Nexxus Lighting (NEXS) is an LED integrator producing LED fixtures, and other lighting products for a wide range of specialized applications.
  • Philips (PHG), a diversified electronics giant with a strong presence in LEDs and efficient lighting which they augmented when they bought LED company Color Kinetics in 2007.
  • Rubicon Technology Inc (RBCN) makes monocrystalline sapphire and other crystalline products for light-emitting diodes and other applications.
  • Veeco Instruments Inc. (VECO) produces customized LED and solar process equipment.
  • Universal Display Corp. (PANL) makes organic light emitting diodes (OLEDs) for the display and lighting industries.  OLEDs are much less expensive than standard LEDs, although they cannot yet acheive comparable brightness.  We're unlikely to see OLED 60w bulb replacements any time soon, but they are behind the most energy efficienct TVs and monitors.  I'm writing this article using an [O]LED display from LG which I believe contains PANL's technology.  It's amazingly thin, and has great performance in terms of sharpness, response time, viewing angle, and contrast.
  • Vu1 (VUOC.OB) produces not LEDs, but a rival highly-efficient, mercury free lighting technology called Electron Stimulated Luminescence.  I include them as a wild card, since they also stand to benefit from the phase-out of the incandescent bulb.
Which are the best buys?  If you're betting on a rapid take off of LED manufacturing, I think the equipment suppliers are probably the most attractive stocks in this sector, so take a look at Aixtron and Veeco.

UPDATE: I just came across a new LED company that I missed.  SemiLEDs Corporation (LEDS) went public last December.  The company makes blue, green, and ultraviolet LED chips.

DISCLOSURE: No Positions. 

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

March 11, 2011

Shale Gas: If this is such a good deal why are you selling it to me?

Jim Hansen

That is the question many buyers of shale gas assets should have been asking themselves over the last few months. This week’s news that shale gas high roller Range Resource was selling its Barnett shale properties reinforced our view that there is major trouble brewing in the shale gas business. Upstreamonline reported that “…Range Resources Corporation said it will sell almost all of its Barnett shale properties to a private company for $900 million…”

Then of course there is the number one shale gas play cheerleader of them all, Chesapeake Energy. Just last week they announced the sale of gas properties in the Fayetteville shale to BHP Billiton. BHP Billiton is sitting on a pile of cash after its failed attempt to takeover Potash Corp. of Saskatchewan last year so they just couldn’t resist the siren call of shale gas’s either. In Chesapeake’s case they managed to get BHP Billiton to hand over $4.72 billion in cash.

shale Gas Plays

For Chesapeake the BHP Billiton deal follows on the heels of other deals done over the last year to either sell property or joint venture the risk to someone else. The reason given for the Chesapeake sales was to focus on the higher margin oil business. They didn’t mention that it might also be a move to get out of debt laden land speculation based on a questionable shale gas model.

Here is an example of Chesapeake’s confidence in shale gas; “CHK will fund shift to liquids-rich plays by decreasing gas drilling…” (Chesapeake investor presentation, Feb. 2011) Remember to look at how companies spend their money and not at what is cranked out from the public relations office. An example is this industry sponsored web page expounding on how compressed natural gas (CNG) would give the U.S. “Freedom from Foreign Oil”. If that is true why is Chesapeake shifting to liquids?

So if shale gas was going to make the U.S. energy independent why would companies like Chesapeake and Range Resources be making these moves? Is it possible the game was never about the gas to start with…?

Most important though is that there will be opportunities in natural gas; just not until more money is drilled away.

There are still other troubles ahead for shale gas production.

The New York Times: “Over the past nine months, The Times reviewed more than 30,000 pages of documents obtained through open records requests of state and federal agencies and by visiting various regional offices that oversee drilling in Pennsylvania. Some of the documents were leaked by state or federal officials. Here, the most significant documents are made available with annotations from The Times.”    The NYT has an animation of hydraulic fracturing that helps understand the process available here.

Is this a game changer for shale gas? Maybe not but then maybe shale gas isn’t the game changer it is hyped as either.

Jim Hansen is an investment advisor at Ravenna Capital Management based in Seattle, Washington. He has spoken at the ASPO-USA national conference as well given other public and academic presentations. His weekly report The Master Resource Report is available online.

DISCLOSURE: Clients and Advisors of Ravenna Capital Management do not currently hold positions in CHK or RRC

March 10, 2011

Must Renewable Energy Be Diversified?

Dana Blankenhorn

Most renewable energy companies specialize.

Solar companies do solar. Wind companies do wind. Geothermal companies do geothermal. Biomass companies do biomass.

But a small Canadian merger challenges that assumption.

Magma Energy (MGMXF.PK), a geothermal company, said it will spend about $100 million in stock to buy Plutonic Power (PUOPF.PK), which has wind and hydropower projects, and ambitions to get into solar. The combined companies will go by the name Alterra Power.

Both companies are based in Vancouver.

Size really does matter, crowed Magma CEO Ross Beatty on a conference call announcing the deal. Their merger presentation calls the resulting company "a dominant renewable power developer in Canada."

True, but is this truly size?

Plutonic has only two projects operating at present, with three more under construction. The solar play is, for now, an ambition.

What the deal may really speak to are the prospects of the geothermal industry. "Geothermal is a small energy sector and has real limits to its growth since it only occurs in specific places on earth and many of the world's best geothermal assets are already developed," Beatty said on that same conference call.

Is that true? Last time I heard the Earth was round, and its thermal assets are beneath all of us.

What Beatty is doubtless referring to are the current requirements of geothermal plants. They need to be relatively close to warmth, so they can reach it at low drilling cost, but they can't be so close that the ground they are drilling through will be unstable, prone to earthquakes.

The question I'm asking of my friends in the business today is, then, are these limits absolute? We can drill miles down into the Earth, and slant that pipe so it goes horizontally. We already do this for natural gas. Why not for heat? And I know you don't want to tap directly into magma (despite the company's original name) but aren't there ways to tap heat that don't require absolute stability?

The floor's yours on this one.

There's a second question asked by this merger. Should renewable energy companies specialize in one form of energy, or is consolidation in the whole space inevitable? What is really gained by combining wind, solar, hydro and geothermal assets under one corporate umbrella, other than financing power?

Good questions for this week of the Renewable Energy World show in Tampa.

DISCOLSURE: No positions.

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.

March 09, 2011

Codexis aims to stand out from the biofuels crowd

Marc Gunther

Biofuels development at Codexis headquarters in Redwood City, CA.

In the overcrowded biofuels business, it’s hard to tell the pretenders from the contenders.

Every company claims to possess breakthrough technology that is just about ready for commercialization. Just ask Algenol, Amyris (AMRS), Bluefire Renewables (BFRE.OB), Coskata, Genencor, Gevo (GEVO), LS9, Mascoma, Novozymes (NVZMY.PK), Range Fuels, Synthetic Genomics (which is funded by ExxonMobil) and Terrabon. In the last couple of years, I’ve taken a look at Poet, (See Poet, seeking patronage), Qteros (Qteros: Turning mud to big money) and Solazyme (Gee whiz, algae!), among others.

Today, I’ll turn my attention to Codexis (CDXS), which, like its rivals, has a beautiful website, big ideas and very little in the way of commercial production of a biofuel not made from food. That’s the problem here — a sustainable biofuel such as cellulosic ethanol, which is ethanol made from the wood, grasses or the non-edible parts of plants, always seems to be a few years away, despite the hopes of venture capitalists and politicians.

It was back in 2007, after all, Congress mandated that the U.S. use 100 million gallons of cellulosic ethanol yearly by 2010, and 250 million gallons by 2011. Congress, alas, can’t mandate technological progress or persuade algae to grow faster, no matter how much money it throws at the problem, so neither target will be met, not by a long shot. For a skeptical view of the biofuels biz, see Robert Rapier’s blogpost, Cellulosic Ethanol Reality Begins to Set In. A former ConocoPhillips exec and a chemical engineer, Rapier doesn’t think that “large-scale commercialization of cellulosic ethanol will ever be viable.”

Alan Shaw

Alan Shaw

And yet…many scientists, investors and corporate executives, including some in the oil industry, believe strongly in biofuels, which brings us to Codexis. Shell has invested $350 to $400 million in Codexis, according to the company’s CEO, Alan Shaw, who spoke with me this week in Washington. “It’s the largest privately funded biofuels program in the world,” Shaw told me.

Codexis also has partnerships with Merck and Pfizer, because its enzymes can be engineered to produce pharmaceuticals, and with Alstom (AOMFF.PK), which is using Codexis technology to capture carbon dioxide emissions from coal-fired power plants.

“Our model is to work with Big Brother,” Shaw said.

Codexis (CDXS), which was spun out of a biotech firm called Maxygen in 2002, went public last April. The company reported $107 million in revenues in 2010, with most coming from Shell, which, in effect, is outsourcing its biofuels R&D to Codexis. The company isn’t making money yet and the stock’s down by about 20% since the IPO.

If I’d taken biology and chemistry in college, I might be explain to explain Codexis’s technology in a sophisticated away. Here’s the best I can manage: In brief, the company rearranges the DNA of enzymes–which are proteins that speed up or slow down chemical reactions–in order to make new industrial processes possible and make existing processes faster, cleaner and more efficient than conventional methods.

In Codexis’s biofuels business, that means turning feedstocks like sugar cane bagasse and leaves, wheat straw, woody biomass, or waste from pulp and paper mills into sugars that can then be fermented into ethanol.

Shaw does not believe that using corn or sugar as feedstocks makes long-term sense for the biofuels business. He’s surely right about that. The environmental benefits of corn ethanol are questionable at best, and groups including the American Meat Institute, the American Jewish World Service, the Competitive Enterprise Institute and moveon.org (strange bedfellows!) all oppose further federal subsidies for corn ethanol.

Sugar, meanwhile, costs more than $700 a ton, which makes the economics of turning sugar cane into ethanol very challenging. Prices will only raise as the world’s population grows, Shaw says. Instead of turning sugar into ethanol, why not find ways to take biomass with no food value and turn it into sugar?

That’s Codexis’s approach, of course. In Canada, Codexis is working with Iogen, which has been making cellulosic ethanol from wheat straw in a small demonstration plant since 2004. In Brazil,  Codexis is working with Cosan (CZZ), the world’s largest sugar and ethanol company, and Royal Dutch Shell, which have formed a joint venture called Raizen. They’ll focus on sugar cane bagasse, leaves and stalks, none of which are edible.

Shaw told me that he expects to see Codexis’s technology used in pilot plants in Canada this year and Brazil next year.

And when will the technology be commercialized?

“You’re talking about hundreds of millions of dollars of investment,” Shaw said. “Large scale, I think we’re looking at 2015.”

In the long run, there ought to be a future for sustainable low-carbon biofuels. Even if the automakers electrify most or all of their cars, clean transportation fuels will be needed to power planes, trains and ships.

What’s more, no industry wants to be dependent on oil forever–not even the oil industry.


Marc Gunther is a contributing editor at FORTUNE magazine, a senior writer at Greenbiz.com and a blogger at www.marcgunther.com.

March 08, 2011

Two Stocks For Grid Storage - ZBB Energy and Axion Power

John Petersen

On March 4, 2011 the Pacific Northwest National Laboratory published a comprehensive review of "Electrochemical Energy Storage Technologies for Green Grid" that is a must-read for serious investors who want to understand the technical and economic intricacies of the energy storage sector. It explains why storage is a key enabling technology for wind and solar power, the smart grid, efficient transportation and a legion of high-technology manufacturing and service enterprises that can't survive without reliable power. It also explains why energy storage is an investment mega-trend that will endure for decades. While I normally try to provide links to materials that are available for free, this particular review is only available from the American Chemical Society website and their charge for non-members is $35. If you own stock in a battery company or are thinking about investing in one, it's the best $35 you'll ever spend.

Conceptually, a battery is nothing more than a bottle that stores electricity. The term "energy" describes the total amount of electricity you can put into the bottle. The term "power" describes how quickly you can empty or fill the bottle. The basic problem with energy storage is that batteries are thousands of times more expensive than the electricity they store. You may be able to buy a kilowatt-hour (kWh) of electricity for a dime, but a battery to store that much electricity will set you back $150 to $1,000. Once you include battery depreciation in the equation, the cost of electricity from a battery is always higher than the cost of electricity from a wall-socket. If you only need to store a few watt-hours of energy for a cell phone or laptop computer, convenience will usually outweigh battery cost. If you need five, ten or twenty thousand watt-hours of battery capacity so that you can use electricity from solar panels at night or drive a plug-in vehicle 40 to 80 miles, battery cost quickly becomes a major issue, if not an insurmountable obstacle.

In its report, the PNNL explains that capital cost and life-cycle cost are the most important and fundamental issues in the energy storage sector. Capital costs are usually expressed in terms of dollars per kilowatt ($/kW) for power applications and dollars per kilowatt-hour ($/kWh) for energy applications. Cycle-life cost is calculated by dividing the sum of the capital cost and expected maintenance costs by the number of cycles a battery can deliver over its useful life. In general, the authors of the PNNL report believe the following attributes are essential for grid storage applications:
  • Capital cost of $250 per kWh or less;
  • Long calendar life (e.g. > 15 years);
  • Long cycle-life (e.g. > 4,000 deep cycles);
  • High safety standards; and
  • Low maintenance costs.
It's a tall order and most energy storage technologies fall short of the mark. The following graph from the PNNL report shows the estimated capital cost per cycle of various storage technologies before project financing costs, operation and maintenance costs, and replacement costs.

3.8.11 Storage Costs.jpg

After studying the PNNL report in detail, I believe flow battery and lead-carbon battery technologies have the best shot at meeting these high standards in the short term. Others will no doubt disagree. The only way for a serious investor to make an informed decision is to download the report, study the PNNL observations and draw his own conclusions.

There is one publicly-held pure-play energy storage company in the flow battery space. ZBB Energy (ZBB) is the owner of a zinc-bromine technology that was invented by Exxon, developed by Johnson Controls and ultimately sold to ZBB. Over the last few years, ZBB has developed a modular system architecture for its technology and successfully completed a three-year validation test by Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO). ZBB has also devoted considerable resources to an open-platform power management system that facilitates the integration of diverse power sources and diverse energy storage device types to meet the needs of a particular customer. ZBB has been a poor market performer since its IPO in 2007 and currently trades at one-fifth of the IPO price. Its market capitalization of $33 million is the lowest of the 18 pure-play energy storage companies I follow. ZBB hasn't had a particularly strong balance sheet for several years and it will need to raise additional capital. Given the proven status of its technology and its low market capitalization, I believe ZBB has limited downside risk and attractive upside potential.

The section of the PNNL report that I found most illuminating was their discussion of lead-acid batteries in general and lead-carbon batteries in particular. While I've been writing about lead-carbon battery technologies for a couple of years, the PNNL review is the first major report from a national laboratory that does not require A to B to C analysis to integrate information from several sources. The following schematic from Furukawa Battery shows the three primary lead-acid battery electrode configurations that are presently being developed.

3.8.11 LAB Configurations.jpg

In its discussion of conventional lead-acid batteries the PNNL report noted that lead-acid has historically suffered from limited cycle life (e.g. 1,000 cycles), limited depth of discharge (e.g. less than 30%), low round-trip energy efficiency (e.g. 50% to 75%) and low charge acceptance capacity (e.g. 7% of the one hour discharge rate). In combination, these technical factors have made large-scale applications problematic from an economic perspective.

The first innovation PNNL discussed in the field of advanced lead-acid batteries involves the use of carbon additives to improve cyclability while inhibiting the formation of hard lead sulfate crystals on the negative electrodes. In the graphic, a carbon additive design will replicate the conventional lead-acid battery configuration shown on the upper left. Johnson Controls (JCI) and Exide Technologies (XIDE) are both actively developing carbon enhanced lead-acid batteries in both flooded and absorbed glass mat, or AGM, form factors. Both companies claim performance improvements of 100% or more, which can reduce the capital cost per cycle by 50% or more.

The second innovation PNNL discussed is an asymmetric lead-carbon capacitor that uses a carbon electrode assembly to replace conventional lead-based negative electrodes. In the graphic, an asymmetric lead-carbon capacitor is shown on the upper right. The key advantages noted by PNNL include a higher operating voltage for the cell as a whole, greater utilization of negative electrode capacitance, the elimination of negative electrode sulfation and reduced swings in acid concentration. The asymmetric lead-carbon capacitor was patented in 2001 and is owned by Axion Power International (AXPW.OB) which has trademarked the name PbC® and filed a suite of protective patents around the core technology. In exhaustive performance tests over the last three years, Axion has demonstated that the PbC battery:
  • Offers a depth of discharge of up to 70%, as compared to 30% for conventional lead-acid;
  • Offers stable round-trip energy efficiency of 85%, as compared to 50% to 75% for conventional lead-acid;
  • Offers cycle life improvements of 400% or more;  and
  • Offers dynamic charge acceptance rates that are a 10x improvement over conventional lead-acid.
In combination, these unique features of the PbC battery can reduce capital cost per cycle by an order of magnitude and make the PbC the most cost-effective electrochemical storage system in the industry. Axion's PbC battery is almost ready for commercial roll-out. The company has taken delivery of its second generation electrode fabrication line and expects to commission the line by the end of this month. Once the line is commissioned, potential customers who have been testing first generation products for over a year will need to conduct extensive process and equipment validation evaluations before placing orders. Barring unforeseen difficulties, that process should be completed this year. Axion has enough capital to finance its activities over the next year, but will need additional capital to build new electrode production capacity if demand for its product develops. Given the unique attributes of the PbC technology and Axion's relatively low market capitalization of $70 million, I believe Axion has limited downside risk and attractive upside potential.

The last innovation PNNL discussed in the field of advanced lead-acid batteries was the Ultrabattery, a half-measure developed by CSIRO that represents an improvement over conventional lead-acid batteries but does not offer all the performance advantages of the PbC. In the graphic, Ultrabattery is shown on the bottom. The PNNL report was the first detailed discussion I've seen of the Ultrabattery technology and it highlights a couple of issues that strike me as potentially problematic. During a discharge cycle the Ultrabattery does not begin to access the capacitance of its carbon electrode until the lead electrode has been depleted. Likewise during a charge cycle, the carbon electrode charges first which results in significant hydrogen production at the lead electrode.

Several lithium ion battery companies including A123 Systems (AONE), Ener1 (HEV) and Altair Nanotechnologies (ALTI) have sold high profile demonstrations of their technologies in grid- connected applications. After reading the PNNL report I'm more convinced than ever that these demonstrations will not turn into sustainable businesses until those manufacturers are able to overcome a variety of hurdles relating to system cost, safety, durability and cycle life. They may be successful, but when I compare their market capitalizations with the market capitalizations of ZBB and Axion, I have to believe that the greater upside potential lies in the companies with the lower current market capitalizations.

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

March 06, 2011

Alice in EVLand – Cracks in the Looking Glass

John Petersen

In his 2006 State of the Union Address, President George W. Bush said:

"Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology."

What a crock of balderdash! If you compare US fuel prices with those in other industrialized countries, gasoline is a screaming bargain and the same can be said for electricity. It's not the energy we use that's a problem. The problem is the immense amount of energy we waste, and that problem will keep getting worse until higher prices force us to change.

The world can't stop using oil without immeasurable suffering. Since we can't simply quit, the best we can do is accept the ugly truth that we're all wasteful petroleum gluttons who need to cut our consumption to more sensible levels. You don't cure drug addiction with better and cheaper drugs, and we can't cure our oil addiction with magic technologies mandated by Congress. We must accept personal responsibility and change our wasteful habits instead of blaming others or looking for a painless solution. In the final analysis, the solution to our problems is visible in every looking glass we pass.

Three weeks ago I wrote "Alternative Energy Technologies and the Origin of Specious," an article that examined the serial failures of panacea energy policies that promised independence without pain. Since then I've seen a number of reports that strike me as cracks in the EVLand looking glass, including:
  • A February 28th earnings release from A123 Systems that reported 69.2 million watt-hours of battery shipments, $73.8 million of battery sales, and $94.3 million of production costs for the year ended December 31, 2010; which pencils out to an average customer price of $1,067 per kWh and an average production cost of $1,363 per kWh.
  • A March 2nd report from hybridcars.com that cumulative sales of the GM Volt and Nissan Leaf for the first two months of this year were a whopping 756 units, as compared to cumulative HEV sales of 42,726 units.
  • A March 3rd Bill Ford Jr. interview at the ECO:nomics Conference where he characterized the Volt and Leaf as "talismanic vehicles" and expressed grave reservations about meaningless sales projections, the lack of charging infrastructure and the grid's ability to support electric vehicles if they ever became mass market products.
Many readers assume that I have an irrational hatred of electric vehicles and the companies that make them when in truth my only concern is whether those companies are good investments at current prices. During his recent presentation at the United Nations Climate Change Conference in Cancun, Dr. Steven Chu, the Secretary of Energy, said:

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


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

When Dr. Chu tells the world that battery manufacturers won't have a competitive product unless their prices fall into the $300 per kWh range and A123's annual earnings release reports that their production costs overshot that goal by a whopping $1,000 per kWh last year, I don't see a lot of upside potential. When a poorly capitalized company like Tesla Motors trades at 11.5 times book value and 20.4 times last year's sales I wonder what the markets are smoking. When more than half of Ener1's equity is in mushy balance sheet categories like intangible assets, goodwill and investments in money losing subsidiaries, I can't help but think back to the asset impairment charges that crushed C&D Technologies last year. I'm completely baffled by the valuation disconnect at Valence Technologies which is upside down to the tune of $67 million but sports a $243 million market capitalization.

I hate to be the bearer of bad news, but these companies are just starting their journey into the valley of death. They may survive the trek, but their bloated stock prices can't. The EV dream may be beautiful, but for the next decade EV investments will be ugly as sin.

Each of us knows that we need to go on a petroleum diet, but none of us is willing to starve in the process. For the next decade, at least, the only real solution will be aggressive steps toward increasing fuel efficiency. Observant investors saw the writing on the wall when the EU and the US adopted stringent new CO2 emissions and fuel economy regulations that will start taking effect this year. I saw the impact last week in Geneva where the press headlines gushed over grand plans for plug-in cars but the vehicles on display proved that manufacturers are turning to diesel and natural gas fuel systems, direct fuel injection, dual clutch transmissions and stop-start systems as their mass market solutions. We all know that actions speak louder than words. I'm here to tell you the automakers' actions don't have plugs.

Two weeks ago I identified a list of five fuel efficiency stocks that should outperform the market by a wide margin over the next couple years because the die is cast and the solutions are being implemented today. To keep things interesting, I'll use last Friday's closing prices to formalize that list in a hypothetical $25,000 long portfolio structured as follows:

Company Symbol Shares Investment
Johnson Controls JCI 121 $4,998.51
Enersys ENS 139 $4,984.54
Maxwell Technologies MXWL 281 $4,993.37
Exide Technologies XIDE 431 $4,995.29
Axion Power AXPW.OB 6,172 $4,999.32



I'll also use last Friday's closing prices to formalize my long-standing and oft-repeated position on vehicle electrification with a hypothetical $25,000 short portfolio structured as follows:

Company Symbol Shares Investment
Tesla Motors TSLA -200 -$4,990.00
A123 Systems AONE -599 -$4,995.66
Ener1 Inc HEV -1,428 -$4,998.00
Altair Nanotechnologies ALTI -1,953 -$4,999.68
Valence Technology VLNC -3,144 -$4,998.96



In coming months I’ll revisit both hypothetical portfolios on a regular basis and either gloat or eat crow as the circumstances dictate. It will be fascinating to see whether the cracks in the looking glass spread or heal themselves.

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

March 05, 2011

Choosing The Right Clean Energy Mutual Fund or ETF

Tom Konrad CFA

If you want to invest in renewable energy and energy efficiency with just one fund, this is what you need to know.

Over the last few months, I've written an extended series of articles looking at clean energy mutual funds and clean energy exchange traded funds (ETFs)

Defining Clean Energy

For my purposes, a clean energy fund is one that primarily invests in companies involved in renewable energy, energy efficiency and conservation, efficient and alternative fuel vehicles, and companies that are part of the supply chain for any of the above sectors.   

Many of the mutual funds I looked at also invest in environmental services/waste management, recycling, water, and natural gas utilities. Waste management, recycling, and water each fit rather well into the clean energy context: Municipal solid waste is an excellent source of renewable biomass, recycling saves energy and so can be seen as an energy conservation measure, and water is inextricably linked to energy in many ways.  Some would argue that natural gas (because it burns cleaner than other fossil fuels) and nuclear power (because it produces few greenhouse gas emissions) should also be included as clean energy.  I don't generally consider either clean, because the extraction of both natural gas and uranium can (and often does) cause great harm to the environment, while the storage of nuclear waste and the occasional nuclear accident also pose serious environmental threats.  If you disagree with me about natural gas, you're in luck, since some of the mutual funds I looked at include natural gas companies in their portfolios.  If you disagree about nuclear power, you might consider taking this article with a grain of salt, or perhaps adding a nuclear ETF such as the Market Vectors Nuclear Energy ETF (NLR) or the iShares S&P Global Nuclear Energy Index (NUCL) to the stock or mutual fund pick that you arrive at after reading this article.

Previous Articles

This article is intended to condense the information from my previous series in a useful fashion. Readers who want to see my reasoning or more depth can find it in the original articles, listed here:
  1. Costs of Clean Energy Mutual Funds
  2. Sector Breakdown of Clean Energy Mutual Funds
  3. Past Performance of Clean Energy Mutual Funds
  4. Stock Picks from Clean Energy Mutual Funds
  5. The Effectiveness of Active Management in Clean Energy
  6. Interview with the Manager of the Top Performing Clean Energy Mutual Fund
  7. Clean Energy ETFs in Depth
  8. Clean Energy Mutual Fund and ETF Tax Efficiency
How To Choose

The major factors to consider when selecting a clean energy fund are
  • Which fund is likely to produce the best performance?
  • Given my intended holding period and investment size, how much will the costs reduce the fund's performance?

In terms of the best performance, I found the data convincing that good active managers can produce superior results (see article #5.)  The best performing fund by far was the Gabelli SRI Green Fund class AAA (SRIGX)

For those of you who are convinced by statistical analysis, one of my more mathematically sophisticated readers, Tucker Gilman at RainFrog Ethical Investment Partnership, did a non-parametric statistical analysis of the thirteen clean energy mutual funds and ETFs with three years of performance data I mentioned in article #5.  Here is a graphical representation of his results:

Nonparametric analysis of fund performance
The horizontal axis is time (in trading days), while the vertical axis is fund performance.  The fact that the red line (which is SRIGX) is above the gray area means that we can be 95% confident in a statistical sense that SRIGX's past out-performance is not do to just luck, and we should instead take it to be an indication of manager skill.  For funds inside the gray area, we can't say with any statistical certainty that their performance arises from luck or skill.

I generally take statistical analysis with a healthy dose of skepticism, even when the methods in question seem sound to me (as they did in this case.)  Statistical analysis can tell us what has already happened, but unless we know why it happened, we can't know if the performance will persist.  In order to get a better idea how he achieved these results, I interviewed SRIGX's lead manager, John Segrich CFA.  Here is what he said about his stock selection process:
We start with the industry and attempt to understand the entire value chain. ... Through this process we look for areas of constraint in the value chain as investing in those often is quite profitable due to better pricing, margins, and profits. We then establish where we want to have exposure on a global basis – maybe we want exposure to the Chinese wind market but not the European market. After that, stock selection comes down to fundamental analysis and valuation. We also try to incorporate issues such as regulation, currencies, and other macro issues like credit availability.
This is a description of solid analysis, with the attention to detail that can give a manager an advantage in any sector where there are not too many others doing the same sort of analysis-- Or at least not too many others who are better at it.  As more and better managers enter and become familiar with the sector, Segrich's team's advantage is likely to erode, although not completely and probably over a period of years.  As the fund grows, it will also be less able to quickly enter and exit positions, so a larger fund size may also weaken their advantage.

For an investor who wants a clean energy fund, and who agrees that a superior manager has the opportunity in this young and frequently misunderstood sector to produce superior results, the Gabelli SRI Green Fund is the clear choice based on a track record that is much better than any other fund.  This choice should be re-assessed after two to three years, or if SRIGX hires new managers.  But don't dump the fund just because of one year of under-performance: Although manager skill can make a real difference, there is always considerable luck involved in investing. 

Investment Costs

When I wrote most of these articles, I thought that the expense ratio of SRIGX was the highest of all the funds I considered.  This was due to a mistake on my part when I did not look at the prospectus for the fund's class AAA shares (which are no-load), but instead looked at the multiclass prospectus, and so confused the load class A shares with the no-load class AAA shares.  This goes to show that you should not base any investment decision solely on what you read in an investment blog, even this one.  It never hurts to do your own research.

At 2.01%, SRIGX's annual expense ratio is high when compared to most mutual funds, but in-line when compared to other no-load funds in the category.  A self-directed investor should only consider buying the class AAA shares, SRIGX, which are available through most mutual fund supermarket platforms (I checked three online brokers.  SRIGX was available through Charles Schwab and E*Trade, but not through Interactive Brokers.) 

High expense ratios among clean energy mutual funds are in large part due to low assets under management.  The largest funds charge the lowest expenses.   Assets under management are rising rapidly at SRIGX as new investors and advisers take note of the Gabelli fund's excellent track record.  Based on the third quarter numbers for the Gabelli Green fund I used in November, they reported only $12 million in assets under management.  The more recent year-end numbers show assets under management at $20.8 million, a 73% growth in three months.  Higher assets under management will allow the fund managers to spread their costs over more investors, so if this growth continues, we can expect the Gabelli fund to lower their expense ratio to something more in line with the larger clean energy funds in coming years.


Many investors will find a 2.01% expense ratio hard to stomach.  For them, ETFs are the best choice.  Among the ETFs, most have comparable expense ratios of around 0.6-0.7%, but when you consider other costs such as liquidity, internal trading costs, and tax efficiency, the Powershares Wilderhill Clean Energy Index (PBW) stands out as the lowest cost for short term (less than 1 year) investors because of its high liquidity.  For longer holding periods, my top choice is probably the Powershares Cleantech Portfolio (PZD), because it has what I consider to be the best allocation between clean energy sectors as well as global diversification. 

My preference for PZD may strike some readers as ironic, as I recently took Rafael Coven, the index manager behind PZD, to task for saying that the better tax efficiency of clean energy ETFs when compared to clean energy mutual funds is "very significant."  Rafael's job is to manage a cleantech index, not to investigate the subtleties of ETF and mutual fund costs.  As far as I can tell, his index is the best currently tracked by an ETF.  The other indexes typically have much higher turnover ratios, and high turnover ratios undermine the cost advantage of clean energy ETFs.

The Clean Energy Fund For You

To make it as simple as possible, here is a table that should cover most investors decisions on what to buy:

If you...
Then buy
Are buying for less than 90 days or plan to trade actively
Want to make small, monthly investments or are buying longer term
Plan to hold long term and refuse to pay a 2% expense ratio or don't think managerial skill is likely to persist PZD

Still not sure which is the best choice for you?  Leave a comment, describing why you don't fit into the categories of investors above, and I'll try to create a category and fund pick for you.

DISCLOSURE: No Positions. 

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

March 03, 2011

Growing Fears of PV Module Oversupply in 2011

Andrew Williams

London, UK --  On the back of last year's record demand, there are growing concerns that photovoltaic (PV) module supply is set to outstrip demand throughout 2011, leading to significant oversupply in the industry. But are these concerns founded? And if they are, what impact might the oversupply have on the global PV industry?

2011 Forecast

According to analysts at UK-based IMS Research, Photovoltaic (PV) module production capacity increased by nearly 70% over the course of 2010, reaching nearly 30 GW by the end of the year.  Looking ahead, IMS anticipates that 35 GW of annual capacity will be reached within the first half of 2011, despite installations in the same period being predicted to reach no more than one fifth of that amount.

“Demand for PV grew quickly throughout the second half of 2009 and 2010, driving installations in 2010 to reach more than double the previous year.  Most suppliers implemented aggressive capacity expansion plans throughout the year,” says Sam Wilkinson, Research Analyst at IMS.

“Following some reductions and amendments to incentive schemes in Europe, installations will not continue to grow at this rate and demand will not be sufficient to support all of this new capacity,” he adds.

Although in general agreement about the prospects of an oversupply in 2011, other analysts are more cautious about its likely extent.  Adam Krop, Vice President of Equity Research at Ardour Capital Investments believes that the bankable supply of modules will be around 25 GW by the end of 2011 - compared to a conservative estimate of 17–18 GW of demand.  

“While this appears to be a significant oversupply, these numbers are not a great ‘apples to apples’ comparison,” says Krop.

“The 25 GW of supply is based on statements of capacity build from individual companies, but keep in mind these are year end goals, so ramp timing plays a big role.  While nameplate capacity for the industry could be 25 GW, we should discount that number for an adjusted annual run-rate as the lines ramp,” he adds.

Krop also expects some higher cost capacity to be decommissioned in Europe and says that some Chinese capacity plans could be postponed or scaled-back as well.

“[The] real question is how much a supply-demand imbalance will affect pricing and margin structures.  We are incorporating 10-15% price declines for module manufacturers based on a more competitive pricing environment,” he says.

Strong Policy Impact

Although the chances of a global oversupply of PV modules occurring in 2011 will depend on a number of factors, one of the most important is likely to be the ongoing levels of government financial support for the sector in key markets.  In particular, policy developments in Germany, Italy, France, Spain and other European countries have the potential to significantly affect overall global demand.  Given recent trends in policy, it is a fair bet that, as the cost of solar continues to drop, we can expect some additional Feed-in-Tariff (FIT) reductions.  

“If [there is] an oversupply situation in 2011, it will be due to lower demand [as a result of] subsidy cuts in Europe.  The supply side is easier to control as it is a matter of cutting capital expenditure.  Neither is good for stock prices,” says Krop.

“We also need to take into consideration the anticipated growth in China, the US and other markets,” adds Gil Forer, Global Cleantech Director at Ernst & Young.

“But, the retroactive limiting of the number of hours [for which] PV can receive incentives in Spain [and] the retroactive taxes in the Czech Republic, have damaged investor confidence in those countries and caused banks to become more cautious on the sector overall.  This could potentially have long lasting negative effects on financing cost, which is a key input variable for the industry,” he adds.

Forer’s prediction is that, as more supply comes online, it is likely that prices for modules will moderate further, improving the economics in those countries with stable incentive schemes, low cost of capital and/or high insolation, thus increasing uptake.  

“So, overall there is not one global answer, [instead it] will vary market by market,” he says.

For Forer, any growth market is likely to experience frequent, and often rapid, supply and demand adjustments.  However, what makes PV unique is that it relies heavily on policy support, which can change according to political priorities and ability to absorb costs.  

“As more and more segments and geographies enter grid parity, we would expect the market to become less volatile over time.  That said, the increase in capacity, especially coming online in Asia is quite large,” he says.

Impact on Industry

So, what impact might the widely predicted oversupply have on the global PV industry?  For Forer, whilst any oversupply is likely to be temporary, it will be enough to hurt high cost producers.  

“Companies with strong brands and strong customer channels will be less affected.  Most at risk are high cost producers that are not operating at scale and with weak brands,” he says.

“As we saw during the financial crisis, which was followed by oversupply, bankability was key and could again become a more differentiating factor,” he adds.

Further up the supply chain, tier 1 suppliers, typically favoured by the market, remained sold-out throughout much of 2010 – meaning that tier 2 suppliers were able to capitalise and grow shipments significantly.  As a result, both Tier 1 and Tier 2 suppliers have quickly added new capacity going into 2011.  The outlook continues to be good for Tier 1 suppliers, who continue to see high demand for their products in 2011.  

“With a greater proportion of demand served by these Tier 1 suppliers in 2011, Tier 2 suppliers are likely to see less demand for their products, this is likely to result in some competitive pricing and lead to price declines across the industry,” says Wilkinson.

For some, it is quite possible that oversupply, and the ensuing drop in prices, will drive out some of the smaller, higher cost players.  

“Low cost leaders such as Yingli (YGE), Trina (TSL)and First Solar (FSLR) should be in the best position, but again, an oversupply situation would bring multiples and stock prices down across the board,” says Krop.

“Consolidation and mergers of capacity is not likely in my opinion.  Capacity will continue to be built and shifted into China, Malaysia and Taiwan, while technology and branding will be focused in key regions [such as] Europe and the US,” he adds.

 Andrew Williams is a freelance journalist based in Cardiff, Wales, UK. His work has been published in a wide range of publications including The Guardian, The Ecologist, Green Futures, 24 Housing, Professional Broking and Strategic Risk. As well as writing for Renewable Energy World, he also writes regular articles on renewable energy for Wind Energy Update and CSP Today.  This article is reprinted with permission from Renewable Energy World.

« February 2011 | Main | April 2011 »

Search This Site

Share Us


Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner

Subscribe by RSS Feed


Certifications and Site Mentions

New York Times

Wall Street Journal

USA Today


The Scientist

USA Today

Seeking Alpha Certified

Seeking Alpha Certified

Twitter Updates