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April 28, 2011

Dilution for Dummies – Why A123 Systems is Undervalued

John Petersen

Bartenders are smarter than most investors because they know what dilution is and they never get it wrong. Unfortunately, the markets have made such a bogeyman out of the word 'dilution' that public companies often suffer extreme backlash from financing transactions that should have existing stockholders on their feet and dancing in the aisles.

Today I'll try to clear up some of the profound confusion that runs rampant in the minds of retail investors.

Every bartender knows you can't dilute a beer by adding a shot of whiskey. The boilermaker is always stronger. The same is usually true when a public company sells new stock for cash. The company is stronger and better funded after the transaction than it was beforehand. Frequently, however, the existing stockholders recoil in terror from a vague threat of  dilution and bail out instead of celebrating.

For astute investors, these are great buying opportunities.

Most readers know I'm rarely bullish about A123 Systems (AONE), or for that matter any pure-play lithium-ion battery developer. Since I believe that it's critically important for my readers to understand what dilution is, I've decided to break away from tradition, jump to A123's defense, and explain why A123 is a far better risk today than it's ever been.

Every IPO prospectus is filled with dire warnings of dilution because IPO investors always pay a price per share that's higher than the book value of the stock owned by the pre-IPO stockholders. In A123's IPO, its pre-offering book value was $2.34 per share, the IPO investors paid $13.50, and its post-IPO book value was $5.13 per share. Investors who bought stock in the IPO were the whiskey and they suffered dilution of $8.27 per share. The pre-offering stockholders, on the other hand, were the beer and the book value of their shares increased by $2.79 each through the magic of corporate finance.

During its first 15 months of operations A123 suffered a series of expected operating losses and by December 31, 2010, the summary year-end balance sheet in its Form 10-K looked like this:

Cash and equivalents
$ 216,841
Working capital
Total assets
Long-term debt
Capital lease obligations
Stockholders' equity

On March 28, 2011, after its stock closed at $7.82 for the day, A123 announced concurrent underwritten public offerings for $125 million in convertible debentures and 18 million shares of common stock. The stock price fell to $6.35 per share within three days because somebody somewhere whispered the word dilution and the stockholders went into a panic.

On the morning of April 1st, A123 announced that the stock offering would be priced at $6 per share and the debentures would be convertible at $7.20. Both offerings were well received and A123 ultimately sold 20,184,067 shares of common stock and $143.75 million in debentures. The net cash proceeds of the offerings were $253.9 million. After giving effect to the offering proceeds, a pro forma summary year-end balance sheet would have looked like this:

Cash and equivalents
$ 515,741
Working capital
Total assets
Long-term debt
Capital lease obligations
Convertible subordinated debentures
Stockholders' equity

At December 31, 2010, each of A123's common shares had a book value of $3.77. After giving pro forma effect to the offering each of A123's common shares had a book value of $4.04. Just like we saw in the IPO, the new investors were the whiskey and they suffered dilution of $1.96 per share while the pre-offering shareholders were the beer and the book value of their shares increased by $0.27 through the magic of corporate finance. If you take the analysis a step further and assume the debentures will ultimately be converted, the value accretion to the old shareholders will be closer to $0.70 per share. More importantly A123 is now in a position where it has plenty of cash to complete the build out of its facilities and pursue the development of its business. I thought it was a masterful piece of corporate finance work.

The stock market, however, interpreted the facts differently. As soon as retail investors began reacting to the dilution bogeyman the stock price tanked. Over the next two weeks the market price of A123's stock plunged to a post-offering low of $5.29. It finally broke back up through the $6 threshold on Tuesday.

The easiest way to prove the silliness of the over-reaction is to note that A123's market capitalization was $826.4 million at the close of business on March 28th. The offering added $253.9 million in cash and $110.2 million in stockholders' equity to its balance sheet. Because of the market's over-reaction, its current market capitalization is $766.5 million.

At the end of last year A123 had some serious financial weaknesses that jeopardized its ability to finance ongoing losses and continue its planned expansion. The offering obliterated those weaknesses and left A123 in a very strong position. If its stock was fairly priced prior to the offering, the post offering market capitalization should be at least $936.7 million ($826.4 million in pre-offering market capitalization plus $110.2 in additional stockholders equity), or $7.44 per share.

A123 has a first quarter conference call scheduled for May 9th and I won't be surprised if its revenues and earnings fall short of expectations, but if you liked A123 Systems at $7.82 you should love it in the $6.00 range.

It's a far better investment today than it was a month ago.

Disclosure: None.

April 27, 2011

An uNclear Future

25 years on from Chernobyl: Nuclear’s unclear future, and the on-going renaissance for alternative energy stocks

Karl L. Mitchell, Ph.D.


On April 26th, 1986, the world’s worst nuclear accident occurred at the Chernobyl nuclear power station in northern Ukraine.  The blast spewed a cloud of radioactive fallout over much of Europe, causing many hundreds of thousands to flee from their homes in Ukraine, Belarus and western Russia.  25 years later we are facing the only other level 7 event on the International Nuclear Event Scale; at Fukushima, Japan.  Although less immediately catastrophic, it has resulted in the evacuation of hundreds of thousands of people, and the human and economic impact in such a densely populated country will be profound.  More broadly, the impact on government energy policies amidst a climate of rising energy costs and concerns about the impact of fossil fuels on the environment is likely to be significant, with major shifts in public opinion resulting in reductions to many nuclear programmes.  Setting aside the environmental and safety concerns, it seems that the scene is set for a radical shift towards alternative energies based on an integrated distribution of energy sources and grid upgrades.  The technology required already exists and is implemented, and alternative energy industries have been investing massively in order to sustain already high rates of growth.  The challenge is to maintain this expansion, which is good news for alternative energy investors.

Chernobyl and its effects

The consequences of the Chernobyl nuclear disaster were massive.  Dealing with this incident has cost an estimated 18 billion rubles, and contributed to the crippling of the Soviet economy in the late 1980s and collapse of the government.  Death estimates range wildly, from 4000 (the World Heath Organisation, WHO [1]) to 200,000 (Greenpeace [2]) and even 985,000 (a Russian publication [3]).  These differences may be explained in part to different methods; Reports with higher figures looked more at unexplained anomalies in deaths and diseases, whereas the WHO figures were focusing more on deaths where the causal relationship – either directly during the disaster, or later as a result of cancers - could be defined.  Bias may also play a role.  Greenpeace certainly have an agenda.  However, despite being a well-regarded UN-affiliated organization, the WHO, who throughout most of the 1950s were clearly against nuclear power, have an agreement with the International Atomic Energy Agency dating from 1959 that grants the IAEA the right of prior approval over any research it might undertake or report on to the IAEA; In short, giving veto to an agency whose goals include to “seek to accelerate and enlarge the contribution of atomic energy to peace, health and prosperity through the world”.  In any case, whether the figures are four thousand, one million, or somewhere in between, the human and economic consequences of this nuclear incident were massive, and it seems appropriate to remember those lost on the 25th anniversary and consider the relevance of those events today.

The Chernobyl event is one of only two considered to be a level 7 event on the International Nuclear Event Scale.  The other is the on-going Fukushima incident which, although it is less serious in many ways as it does not appear to have caused any deaths directly, will have comparable and profound long-term effects.  As with Chernobyl, it has resulted in the evacuation of hundreds of thousands of people, and the economic consequences on as small and densely populated a nation as Japan will be great.  But is incident an anomaly?  Perhaps it’s the last great nuclear incident?  Certainly the context, a magnitude 9 earthquake, is very rare.  For many years now, nuclear proponents have been saying that nuclear power is “safe”, and more that it is an economic necessity in the face of rising fuel prices and shrinking fossil fuel reserves.  These same people argue that it couldn’t happen in America, despite Three Mile Island’s partial meltdown and numerous smaller incidents since [4].

Since 2007, the number of active nuclear reactors in the world has actually shrunk.  In 2010 the world had ~440 reactors, accounting for ~14% of the world’s electricity demand (~2628 TWh); of these, 104 are in the United States, providing 19.6% of the supply (807 TWh) [5].  This compares with about 30% in the European Union.  A look to the future suggests that, in order to accommodate the expansion of demand for electricity and replace fossil fuel power stations, the world would need to a few thousand new power stations, several hundred of which would be in the United States; and so even if nuclear power stations were an order of magnitude safer, level 7 nuclear events are still going to happen. So, how safe would they need to be, from natural disaster, from terrorism and from human fallibility?  Can we really protect against every possibility, no matter how refined the power plant design?  Do you really want one in your backyard?  For the vast majority of people, the answer to the last of these questions is “no”, and this has only been exacerbated by Fukushima.

What are our options?

But, for a moment, let’s set aside the very real safety concerns and consider the main argument espoused by nuclear protagonists, that it is simply an economic and environmental necessity; CO2 production rates need to be reduced for the good of our environment, peak oil is near if not already passed, coal and natural gas reserves are going to shrink in the future, and alternative energies are simply not financially viable.  But is all of this true?  Certainly fossil fuel supplies will eventually dwindle and, despite a small number of detractors, anthropogenic climate change appears to be a very real phenomenon supported by almost all scientists that are not funded by the oil industry.  But when it comes to viability in the free market we have to look at simple economics.

A recent report of the U.S. Energy Information Administration sought to estimate the unsubsidized costs of energy production for 2016 in the United States from different sources, including capital costs, operation, maintenance and transmission, based on current prices and trends [6].  It found that, of those methods available, “Advanced Nuclear” would likely cost around $113.9/MWh.  This is more than most many of the alternatives, including coal.  Note that these are production costs, and do not take into account health and environmental costs, which may be significantly greater for some sources [7].  Of alternative energy sources, geothermal, which is viable around the Pacific Rim, comes in at $101.7/MWh, hydroelectric at $86.4/MWh, wind at $97.0/MWh, and biomass at $112.5; all of these are cost-competitive with nuclear today.  Solar energy, which is the most abundant source on Earth, came in at $210.7/MWh (photovoltaic) and $311.8/MWh (thermal).  However, these figures are coming down more rapidly than any other form of energy production.  The cheapest available energy source is Advanced Combined Cycle Natural Gas at $63.1/MWh, at a whopping 45% cheaper than nuclear.

Of course, all of these figures have their uncertainties.  Nuclear power costs are almost impossible to predict due to uncertainties in requirements for long-term storage of waste and the costs of incidents.  The estimate for entombing the Fukushima power plant alone is $12bn, which is comparable to the entire Price-Anderson fund [10], the effective indemnity cap for major nuclear incidents in the United States.  If the U.S. were to experience a single level 7 incident directly, the costs would not be met, and hence current nuclear policy artificially lowers the costs of nuclear.  Fossil fuel industries have high environmental and health costs [7], which are difficult to account for.  This is not to state that alternative energies are problem free, and there are cost-increasing factors.  Wind is a highly variable form of energy production [8,9], requiring both a wide distribution of turbines [9] and development of pumped storage plants (a technique that is already in use worldwide) to smooth out supply.  Solar is also variable, especially from night to day, and is not well suited to higher latitude, cooler regions.  Geothermal only works near volcanic zones and can cause local subsidence and minor earth tremors.  Taken on their own, none of the clean alternatives are an ideal solution to world energy problems, but our energy needs could easily be accommodated using a combination of solar (both power plants and rooftop installations), wind farms (widely distributed) and geothermal (near volcanic zones), together with smart grid solutions and large scale pumped storage facilities to smooth out supply.  All of these technologies exist already, and just need to be implemented on a broader scale.  

Furthermore, in the context of Fukushima, the highly regulated nuclear industry is almost certainly going to be under greater scrutiny, increasing safety demands and insurance costs, and a “Not In My Back Yard” mentality.  This will inevitably result in a rise in costs at a time when alternative energy production costs, some of which are already cheaper, are generally decreasing.

It is true that nuclear power stations are fast to implement and bring online.  However, alternative energy installations do not have to be massive power plants with a huge up-front capital costs; In fact, many can be established by individuals and local communities.  In southern states such as California, an increasing trend is to lease solar panels for your roof at rates that undercut local grid prices; In fact, in many places its even possible to generate an excess, selling it back to the grid for a profit.  In Texas, a local cotton farmer, Cliff Etheredge, led his community to establish the Roscoe Wind Farm, currently the largest wind farm in the United States.  By spanning the 627 wind turbines across the edges of farmers’ fields over four counties and 100,000 acres, 400 land owners share in royalties of 781 MW of electricity production, equivalent of a modest sized nuclear power station, bringing in a needed boost to the local economy.  If this project were to be extended across farmlands throughout the United States (over 2 billion acres), a simply extrapolation shows that it could provide more than the nation’s electricity needs (over 17 TW rated capacity). 

Some large-scale investment will be necessary, however.  The national grid system of the United States needs a major overhaul, to reduce the considerable transmission losses and to balance the loads from more supply-variable solar and wind energy generation.  The Tres Amigas project [11], to link the three primary interconnections, shows great potential here, and seems to be a no-brainer.  Also, the 21.5 GW of pumped storage capacity also needs to be increased by at least an order of magnitude, in order to smooth out the remaining supply.  Such broad scale projects may need to involve the government, as national infrastructure costs are difficult to implement in the fragmented energy industry.

While alternative energy costs continue to decrease compared with fossil fuels, existing power stations will remain in service, and potentially more natural gas power stations will be built; They are cheap running, produce far less CO2 than coal or oil and, if shale reserves can be tapped safely, which is unclear at present, may end up providing the backbone of energy production for the next few decades. 

At the moment, many wind and solar stocks in particular are undervalued relative to P/E ratios and anticipated growth, largely due to market volatility and uncertainties in the near future; Recent decisions regarding subsidies in Italy and Germany hit solar stocks particularly hard.  Chinese solar [e.g. LDK, JKS, JASO, SOL, TSL, DQ, HSOL, CSUN] and wind [MY] stocks typically have P/E below 10, and PEGs below 0.5, and many U.S. stocks in the same areas remain competitive [e.g. SPWRA, SOLR, PWER, SATC, AMSC].  Even the powerhouse of the solar world, First Solar [FSLR], has a quarterly earnings growth in excess of 10% and a PEG of 0.63.  Compared with almost any other industry these are impressive figures.  Geothermal Energy stocks [ORA, CPN, HTM, NGLPF.OB] also show great potential [12], despite the relatively long implementation timescales.

Critics of alternative energy solutions point out that these industries rely on government subsidies and tax breaks in order to fuel their growth, but the same argument applies to nuclear power in the United States [13], and also to oil [14].  Given the falling costs [15] and rate of growth [16] of alternative energies, in the face of rising energy prices, such subsidies should become less relevant over the next few years, and in many cases are simply not required to match grid parity.  Their purpose for the time being is to act as a stimulus for faster growth in the light of growing demands for clean and independent energy, rather than a means of facilitation.  So, as far as alternative energy stocks are concerned, I’m in it for the long haul.  It will undoubtedly be a bumpy ride, as changing government policies, such as we’ve seen coming from Italy and Germany, will result in volatility, but their growth in the mid-to-long term seems assured, and the current low valuations seem to provide a very attractive entry point.

All opinions contained within this article are the author’s own, and in no way reflect the policy or opinions of his employers.  This article was written and researched in the author’s own time.
   Short: with anyone who argues in favour of building a nuclear power plant on an Earthquake zone.

[1] Cardis, E. et al. ,“Cancer consequences of the Chernobyl accident: 20 years on”, J. Radiol. Prot. 26 127 doi:10.1088/0952-4746/26/2/001.  For a summary of findings, see http://www.who.int/mediacentre/factsheets/fs303/en/index.html.
[2] “The Chernobyl Catastrophe: Consequences on Human Health”, Greenpeace, 2005. http://www.greenpeace.org/international/Global/international/planet-2/report/2006/4/chernobylhealthreport.pdf
[3] Yablokov, V. et al., “Chernobyl: Consequences of the Catastrophe for People and the Environment”.  Annals of the New York Academy of Sciences. 2009.  (a translation of a 2007 Russian publication).
[4] “Nuclear reactor accidents in the United States”.  Source: http://en.wikipedia.org/wiki/Nuclear_accidents_in_the_United_States.
[5] “Resources & Stats: U.S. Nuclear Energy Plants”, Nuclear Energy Institute, 2011.  Source: http://www.nei.org/resourcesandstats/nuclear_statistics/usnuclearpowerplants/.
[6] “Annual Energy Outlook”, U.S. Energy Information Administration, 2011.  Source: http://www.eia.doe.gov/oiaf/aeo/pdf/2016levelized_costs_aeo2011.pdf
[7] Epstein, P. R. et al., “Full costs accounting for the lifecycle of coal”, http://onlinelibrary.wiley.com/doi/10.1111/j.1749-6632.2010.05890.x/pdf, Ann. N. Y. Acad. Sci. 1219, 73-98, 2011.
[8] Peterson, J., “Gone With The Wind – Debunking Geographic Diversity”, http://www.altenergystocks.com/archives/2011/04/gone_with_the_wind_debunking_geographic_diversity_1.html, April 21st, 2011.
[9] Konrad, T., “Petersen's Wind Power Paradigm Paralysis”, http://www.altenergystocks.com/archives/2011/04/petersens_wind_power_paradigm_paralysis_1.html, April 24th, 2011.
[10] “Price-Anderson Nuclear Industries Indemnity Act”, Wikipedia article.  Source: http://en.wikipedia.org/wiki/Price–Anderson_Nuclear_Industries_Indemnity_Act
[11] Murray, J. “U.S. unveils plans for giant renewable energy hub”. Source: http://www.businessgreen.com/bg/news/1804299/us-unveils-plans-giant-renewable-energy-hub, 19th October, 2009. Also see http://tresamigasllc.com/ and Giberson, M., "Tres Amigas Proposes Three-way Transmission Link", http://www.altenergystocks.com/archives/2009/11/tres_amigas_proposes_threeway_transmission_link.html, November 11, 2009.
[12] Konrad, T., “Geothermal stocks overview”.  Source: http://www.altenergystocks.com/archives/2010/10/geothermal_stocks.html
[13] Koplow, D. et al., “Review of selected nuclear tax subsidies in the American Power Act”, Memorandum, http://www.earthtrack.net/files/uploaded_files/Nuclear%20Tax%20Subsidies%20in%20APA_June%202010.pdf, 17th June, 2010.
[14] Kocieniewski, D., “As Oil Industry Fights a Tax, It Reaps Subsidies”, New York Times, http://www.nytimes.com/2010/07/04/business/04bptax.html, July 3rd, 2010.
[15] Groom, N., “Solar module price could drop 20 percent in 2011”, http://www.reuters.com/article/2011/04/20/us-sharp-idUSTRE73J6C720110420, April 20th, 2011.
[16] “Who’s Winning the Clean Energy Race? Growth, Competition and Opportunity in the World’s Largest Economies”, The Pew Charitable Trusts, http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Global_warming/G-20%20Report.pdf, 2010.

Brightsource: New Tech is Filled With Failure

Dana Blankenhorn

If there is one thing I've learned as a tech reporter it is that failure is common, but what we learn from failure can often lead to greater success.

Back in 1984 I was asked to help write the manual for a start-up called The Promise. The Promise would offer home banking, home shopping, and information services, delivered to your PC.

The Promise failed almost before the lights went out on the press conference. It was at least a dozen years too early. There was no Internet, and I worked on a double-floppy IBM PC.

Fortunately its owner knew how to make lemonade from lemons. Recognizing that his programmers had just created a general-purpose engine for Electronic Data Interchange (EDI), he eventually turned that company into $6 billion.

Don't confuse the fate of a company with that of a technology. Sometimes the technology is being applied in the wrong way. Sometimes the company is trying to run before it can walk.

That's the important lesson in the Brightsource IPO. Brightsource is trying to go public because its private investors, including Google, can't take it past its Ivanpah solar mirrors project, a $1.6 billion effort to build utility-grade solar technology using mirrors in the California desert.

The project is risky as all get out. There are lawsuits aimed at stopping it , there are questions over whether they can get the thing built, and how they're going to maintain it.

It is, in tech parlance, a “moon shot.” High risk, high potential reward.

Personally I'm guessing FAIL. This is really old technology, it's scaled beyond what makes sense, most of the management team has more gray hair than I do.

But it's not my money, and in the end the fate of the company makes much less difference to the industry than analysts think. Solar power doesn't have to come from ginormous installations hundreds of miles away. Projects don't have to be utility-scale in order to work. Brightsource is building the tech equivalent of a Cray 1 computer  – it's interesting, and it might work, but in the end it's a niche product, and there are other ways of doing the same thing.

None of that means I'm rooting against Brightsource. If they're able to make a business with solar mirrors, that's great. But the credibility of the industry is not on the line here. And the lessons being learned in the attempt could prove invaluable down the road, both to the people running Brightsource and the rest of us.

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.

April 26, 2011

The Brightsource IPO: By the Numbers

The article first published at this URL was originally attributed to Dana Blankenhorn by my mistake. It was in fact written by Katie Fehrenbacher, Editor at GigaOM and Earth2Tech. You can find the original article here: http://gigaom.com/cleantech/brightsource-energys-s-1-by-the-numbers/.

The article I had intended to publish is here: http://www.altenergystocks.com/archives/2011/04/brightsource_new_tech_is_filled_with_failure.html

My apologies, Tom Konrad, Editor, AltenergyStocks.

April 25, 2011

The Cadmium Telluride Solar Factory Race

by Joseph McCabe, PE

Solar manufacturers are racing to build the next cadmium telluride (CdTe) photovoltaic (PV) factory in the United States. Three major CdTe on glass factories in the US have been recently announced each with a unique starting point. Abound Solar has won a US DOE loan to support a new 640 MW/yr facility in Tipton, Indiana. General Electric (GE) recently announced buying Primestar. They indicate that they will be building the largest PV manufacturing facility in the world. Finally First Solar has announced a 250 MW/yr facility to be built in Mesa City Arizona near Phoenix.  Let’s take a closer look to see which one of these factories might have the best advantage to be in the lead to generate revenue.  

First Solar
As the largest manufacture of PV modules in the world, First Solar Inc (FSLR) is the defending champion.

First Solar has produced so many factories, it almost seems like their real product is factories, not solar panels. They indicate a total manufacturing capacity of 1.5 GW/yr (that is gigawatts per year) at the end of 2010. They have plants in Perrysburg, Ohio, Frankfurt/Oder, Germany, and Kulim, Malaysia. They plan to increase manufacturing to 2.9 GW/yr including additional facilities in Vietnam and the United States by the end of 2012. They are well capitalized, and will finally be manufacturing in Arizona with a 250 MW/yr factory, where the corporate headquarters is located. Don't blame First Solar on the long delay to manufacture in Arizona. Arizona has a backwards micro-economic energy policy. They import their fuel while exporting their dollars. With the 3,739 MW Palo Verde nuclear power plant dominating the electrical generating landscape of the state, solar energy has been a hard sell even with all that sun. The CdTe technology is very appropriate for the hot Arizona climate because of First Solar’s advantageous temperature coefficient in comparison to crystalline silicon PV technology. While Arizona has been debating solar for the last ten years, First Solar was building factories all over the world. This new facility is expected to take one year to build. Can Abound or GE build a factory and create markets faster?

Abound Solar
Privately held Abound Solar is the young colt with a rich patron.  In December 2010 Abound Solar closed on a long-anticipated $400 million loan guarantee from the U.S. Department of Energy (DOE) to fund the expansion of the company’s manufacturing capacity. They have an existing facility located in Loveland, Colorado with a nameplate capacity of 200 MW/yr.

Having a loan from the US DOE might seem like a great opportunity. However, getting the money and building the factory might take longer than anticipated. The first PV company announcing such an award was Solyndra, a copper, indium gallium and selenium (CIGS) thin film on tubes of glass PV technology. DOE had announced the Solyndra loan guarantee in March of 2009; however Solyndra failed to complete their initial public stock offering. With major delays, Solyndra indicates their annual production run rate will be approximately 200 MW/yr per year by the end of 2011, effectively eliminating them from this race.

Abound Solar, originally named AVA Solar, comes out of Dr. Sampath’s laboratory at Colorado State University. They have a few market channels for the PV product and have been exhibiting at trade shows for a couple of years.

General Electric's (GE) deep pockets might make the company seem like the odds-on favorite. But history has shown what GE can, or can't do, when they buy PV technology. In 2004, GE purchased Astropower at bargain basement prices. At the time, Astropower had a nice niche to purchase scrap silicon and produce well respected solar modules. Astropower filed for bankruptcy in February 2004, and then GE purchased all the assets for $15 million. GE never really capitalized on that PV investment. With that purchase came a residential PV shingle called the Astropower Gecko shingle. Before PowerLight had developed the SunTile (now the SunPower SunTile), Gecko was in the market and getting lots of California attention as a replacement to concrete tile roofing that made electricity. Have you heard of Gecko lately?

GE could have what Clayton Christensen describes as the Innovator’s Dilemma described in his book titled the same. The subtitle explains the book “When New Technologies Cause Great Firms to Fail”. GE was not able to capitalize on the Gecko PV roofing technology, nor the well-respected Astropower modules. One sunny note is the leader of the GE Solar organization, Danielle Merfeld, Director of the Solar Technology Platform at GE. She is an extremely technologically and business savvy person able to jockey any PV technology to a successful finish line. If she doesn’t succeed with GE due to the Innovator's Dilemma, she will eventually succeed at another PV company.

GE has been a majority equity owner of PrimeStar Solar since 2008. In March of 2010, GE announced an expanded relationship with Primestar, located in Arvada, Colorado with an existing 30 MW/yr nameplate capacity CdTe factory. Then in October 2010 GE and Solar Frontiers, a CIGS PV on glass technology, made a surprise announcement of a technical and commercial agreement indicating problems with the Primestar relationship. Apparently with the new April 2011 GE announcement that it was buying Primestar, this Solar Frontiers deal might not be going as well as expected. This most recent GE Primestar news announcement indicated they will build the largest CdTe factory in the world, but did not indicate the specific location.

BP Solar
Today’s handicappers will do well to remember how British Petroleum (BP) lost to First Solar in the last race.  Before BP failed with the Deep Oil Horizon platform they had failed at CdTe. Opened in 1998, they closed their Fairfield, California CdTe plant in 2002, right about the time that First Solar was introducing its product to the market. First Solar’s IPO was in November of 2006 priced at $20 a share. Is there such a thing as corporate hindsight where directors can be held accountable for missing the potential $12B capitalization that First Solar now commands? BP was supposed to stand for Beyond Petroleum; now perhaps it stands for Beyond Prosecution. BP had decided that thin films were not going to be successful and eliminated all their investments. More recently they have closed their US PV crystalline silicon factory in Frederick, Maryland. BP Solar is an unfortunate scratch in today’s manufacturing race.

My Bet
Important factors this time around will include the ability of the thin film tool makers to execute on the factory orders, and if any one of them are caught in a Japan material shortage due to the tsunami after effects.

So who is going to win this race? My trifecta bet says First Solar to win, Abound Solar to show, and GE to place: It will not be a photo finish.  

Disclosures: Long FSLR

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.

April 24, 2011

Petersen's Wind Power Paradigm Paralysis

Tom Konrad CFA

I published my rebuttal to John Petersen's recent article "" on November 1st last year.  It was titled Alternative Energy: The Paradigm is the Problem

That article had two parts.  The first part focused on electric vehicles, and argued that the problem with the electric car was not electric propulsion, but the car paradigm.  I concluded that electric propulsion makes considerably more sense for electric bikes, trains, and buses.  John clearly understood that section, because he published an article just last week "," showing how a recent report from Lux Research confirmed my ideas that electric bikes, and heavy vehicles (delivery trucks, buses, and train locomotives) would be the dominant electric vehicles for the next decade.

Trapped in an Invalid Paradigm

The second part of my Paradigm article was headed "Wind and the Grid," and it appears that John stopped paying attention at this point.  He certainly missed the sentence where I said "critiques of wind power's variability implicitly assume that nothing can be done to make the electric system more accommodating to wind, when in fact there is much that can be done," as well as the steps I outlined to address the problem.

Let's dissect how John's paradigm leads him to invalid conclusions.

John analyzed wind production data from five widely dispersed regions, finding that his model grid produced less than 12.5% of rated capacity 18.5% of the time, less than 6.25% of rated capacity 1.6% of the time.

That sounds pretty bad, doesn't it?  He clearly thought it was bad, because he concluded, "wind power will never be stable or reliable enough to serve the needs of an industrialized society."

I find this conclusion a little hard to swallow.  If he had said "never be stable or reliable enough to serve all the needs of an industrialized society," I would not have a problem with his statement.  But he's trapped by the paradigm that says the only useful electricity is either always on (baseload) or dispatchable (on-demand.)  Even with geographic diversification, wind and solar are neither, but they do serve the highly useful function of allowing us to conserve precious dispatchable resources (hydropower, some biomass, natural gas, energy storage, and demand response) to fill in the gaps when they are not available.  This function does not serve all the needs of society, but it does free up valuable resources to serve those needs at other times.

Rated Capacity: The Wrong Yardstick

John's use of "rated capacity" of wind farms to measure shortfalls in production is also an artifact of the conventional power paradigm that exaggerates the lows in wind power production.  With baseload resources such as coal and nuclear, which are often operating at full rated capacity, measuring output in comparison to rated capacity makes a certain sense, although even coal would not stand up to the test that Petersen expects wind to pass.  A typical coal plant has a capacity factor of 80% to 90%.  About 10% of the time, the coal plant is not operating at all (it may be down for maintenance, coal supplies may be delayed, or there may be some mechanical problem which forced it to shut down.)  By Petersen's apparent logic, if coal plants are not operating at all 10% of the time, they must not be stable or reliable enough to serve the needs of an industrialized society. 

This, of course, is bogus.  Coal plants are useful, because most of the shutdowns are predictable enough that other resources can be made available to fill the gap in electricity supply.  With planning, coal plants can even be shut down during periods when seasonal electricity demand is low, and electricity production from wind is high. 

Wind is less predictable than coal, but weather is not random, especially over large regions a few hours in advance.  With good weather prediction, the gaps in wind power can also be filled with other resources.

Maximum Production

Returning to "rated capacity," wind power produces on average between 20% and 40% of rated capacity, while a coal plant's average production (capacity factor) is between 80% and 90%.  Comparing actual production to average production might bias the numbers in favor of wind, just as comparing actual production to rated capacity biases the numbers in favor of coal.  A fairer comparison falls in between: comparing actual production to maximum production.  For dispatchable and baseload resources, maximum production and rated capacity are the same.  For a diversified portfolio of variable resources, maximum capacity is considerably lower than rated capacity. 

For the portfolio of four widely dispersed wind turbines I discussed in my article "" the maximum production was 93% of rated capacity.  That was for a portfolio of four widely dispersed turbines. 

Petersen collected much better data than my own, so I asked him for a copy of his spreadsheet.  He gathered wind production data for five widely dispersed regions, each of which contains hundreds of turbines.  Over such a large region and so many turbines, maximum production will be far below the rated capacity of the system.  In particular, the maximum production from his 16 GW-rated supergrid was only 7 GW, well below half the rated capacity.

Compared to the maximum output of 7 GW, the electricity production from Petersen's supergrid looks much more stable.

Supergrid Jan 2010.png
Supergrid July 2010.png
The two graphs above show distributions of the wind power production during six hour intervals over the two months for which Petersen collected the data.  I created them by sorting each month's worth of intervals by total power production during the interval.

As we can see from the graph, wind power production in January is fairly well behaved.  Minimum production was 900 MW, or 13% of the system's maximum production.  July production falls well short of 1 MW for two six hour periods, when it is 468MW and 356MW, or 5% and 7% of maximum production.  While these lows in production are not good, comparing them to notional rated capacity (more than twice maximum production) creates the illusion of a much greater shortfall in production than actually exists.

Below, I've prepared a histogram of wind output for Petersen's supergrid.  I found the relative consistency of wind output in January 2010 particularly striking, with wind production being between 3 GW and 4 GW over 40% of the time.
Supergrid Histogram.png


Variable resources like wind cannot substitute for dispatchable power, but they can produce valuable energy cheaply when they are available.  The less variable the wind power resource is, the less dispatchable power is needed to back it up, and the most economical way to reduce variability is geographic diversification.

To see just how effective geographic diversification can be, compare the above histogram of the wind power output of Petersen's supergrid with the equivalent histogram below of one of the supergrid's five components: the wind output from the Bonneville Power Association (BPA) region.

BPA Histogram.png
If we want to see large-scale integration of inexpensive wind power, producing no global warming emissions and requiring no water, we'll also need to greatly enhance our electric grid.  Wind power investors should also be transmission investors.

Data & Charts

The spreadsheet I used to create all the charts above is available here as an Open Office spreadsheet and here in Excel.

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.

April 22, 2011

American Superconductor: Reading the Tea Leaves

Tom Konrad CFA

American Superconductor (NASDAQ:AMSC) dropped 52% since their profit warning on April 6th.  Is it a screaming bargain, or does it have farther to fall?

AMSC Chart

Two readers asked me to take a look at American Superconductor Corporation (AMSC) after the company issued a profit warning on April 6th.  Although the stock was included in my list Ten Clean Energy Stocks for 2011, (which has produced more buying opportunities than profits so far this year) I did not own the stock in any of my managed portfolios, and so the research had to take a backseat to taxes. 

I spent a few hours catching up with the company this week, and, now that it's trading below $12, I consider the stock a good, if very speculative, buying opportunity. 

What Happened

On April 6, AMSC shocked investors with an announcement that their largest customer, the Chinese Wind Power company (and the world's second largest wind turbine manufacturer) Sinovel (601558.SS) had refused shipments, and not yet paid for some previous deliveries.

The first hint of problems had come three weeks earlier, in the press release announcing AMSC's "The Switch" Acquisition  on March 14th.   In that release, the company said that organic growth would slow, and 2010 revenue would be at the "lower end" of the previous $430-$440MM guidance range.

At this point, AMSC management most likely knew there was a problem, but may still have expected Sinovel to continue paying for deliveries.  Sometime in the next three weeks that changed.  In the profit warning they said that Fiscal 2010 revenues (through March 31st) would be $355MM, a full $75MM (17.5%) lower than the previous estimate.  Since AMSC's revenues in the first three quarters had been $313MM, they were saying that 4th quarter revenues would be 64% below previous guidance, and they would show a quarterly loss.

AMSC also said that they expected that Sinovel would continue to refuse deliveries until the company had run down inventory in a slowing Chinese wind market before accepting future shipments.

Without the expected revenue from their largest customer, analysts now expect that AMSC will need to raise between $100MM and $200MM in order to complete The Switch buyout.  This is somewhat ironic in that one of the main reasons for the acquisition was to diversify AMSC's revenue and make them less reliant on a single customer (Sinovel.)   The need for that revenue diversification is now even more obvious, but it leaves investors wishing that AMSC had done more to diversify, sooner.

As is to be expected with any large negative surprise, the class action lawyers have leapt into action, with Levi & Korsinsky filing on April 15, and Wolf Haldenstein Adler Freeman & Herz LLP on April 18th.

Although wind is the largest part of AMSC's business, and Sinovel is by far their largest customer, the company does have other business.  Their eponymous superconducting wire seems to be gaining traction in more markets, with RenewGrid reporting that AMSC superconducting wire was used in Electrical Substation in China on April 21st.

What's Next?

In the short term, the need to raise capital for "The Switch" acquisition will put pressure on the stock price, most likely leading to excellent buying opportunities.  But knowing if those buying opportunities will appear when the stock drops below $12, as it is as I write, or possibly at much lower levels greatly depends on what is really happening at Sinovel.

If the company is right that Sinovel will resume accepting shipments after they have worked off their excess inventory, then we might expect revenues to return to previous levels, and possibly even grow.  If, on the other hand, Sinovel decides it no longer needs AMSC as a supplier, they may not be a significant source of revenue for AMSC at all going forward.  These scenarios account for the wide range in analyst's revenue expectations for 2011: between $160M and $456M. 

If the low estimates are correct, AMSC has much farther to fall.  If, on the other hand, Sinovel reduces its inventory in a quarter or so, and then begins accepting (and paying for) shipments at something near the previous pace, we may see revenues for FY 2011 somewhere near the higher end of the range.

In either case, confidence in AMSC management has suffered long term damage, and so we cannot expect AMSC to trade at the same multiples at which it was trading at the start of the year.  If we assume that FY 2011 revenues will be $350-$400MM, and give the stock a 30% discount on previous Revenue multiples, the stock should be worth $20-$23.  If we expect only $160MM revenues with the same discount, then the stock is  worth $9 or even less.

Since I think the more optimistic scenario is more likely, the stock seems like a good speculative buy below $12.  More cautious investors might consider buying calls rather than buying the stock outright.  I'm doing a little of both.


DISCLAIMER: 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.

April 21, 2011

Gone With The Wind – Debunking Geographic Diversity

John Petersen

Earlier this month I wrote a pair of articles (here and here) that questioned the reasonableness of the near universal assumption that the wind is always blowing somewhere and wind power infrastructure with a wide enough geographic dispersion would offer a relatively stable power output. I presented graphs from the Bonneville Power Administration and a study by the John Muir Trust that raised substantial doubt in my mind. The articles drew a well-reasoned response from my colleague Tom Konrad (here).

While many commenters understood the point I was trying to make, many others argued that the sample areas were too small or they didn't fairly test the geographic dispersion theory. Since I hate unresolved questions, I went looking for a better answer and found it in historical wind power production data from five power authorities:
Most people would agree that a sample of five major systems spread over 17 timezones and two hemispheres has enough geographic diversity to provide a reliable basis for analysis. To simplify the process I took the following steps:
  1. I downloaded detailed production data from each power authority for the months of January and July 2010 and then calculated an average wind power output for each six hour interval;
  2. I then calculated a maximum and an average power output for each system during January and July 2010;
  3. I used the average power output of the systems to calculate a conversion factor that would bring all five systems up to the average power output of the BPA;
  4. To compensate for time zone differences I shifted Australia by three intervals (6 hours each) the BPA by two intervals and Alberta and Ontario by one interval; and
  5. I constructed a stacked graph to show what the combined power output of the five systems would be if they were each built-up to the point where their effective production capacity was equivalent to the BPA.
While the model is not a perfect representation with spot on accuracy, it's certainly close enough to provide a reasonable representation for the purpose of testing the geographic dispersion theory. When all the calculations and adjustments were done, my model wind supergrid produced the following combined output for the month of January 2011.

4.20.11 January Wind.png

It produced the following combined output for the month of July 2011.

4.20.11 July Wind.png
Overall, the model wind supergrid would include over 16 GW of installed capacity. In January 2010, it would have had 16 intervals where it was unable to provide 2 GW of reliable power and two intervals where it was unable to provide 1 GW. In July 2010 it would have had 30 intervals where it was unable to provide 2 GW of reliable power and two intervals where it was unable to provide 1 GW.

My undergraduate degree was in accounting and while my first two articles on this topic were only enough to raise a question about the fundamental validity of the geographic dispersion theory, I believe a five power authority model that's about as dispersed as anyone could imagine does far more than raise an inference.

It proves the theory of geographic dispersion is complete and unadulterated balderdash! The harsh reality is that wind power will never be stable or reliable enough to serve the needs of an industrialized society.

I continue to believe that investments like the First Trust ISE Global Wind Energy Index ETF (FAN), the PowerShares Global Wind Energy Portfolio ETF (PWND) and a host of publicly traded wind power stocks should be avoided.

Disclosure: None.

Top Performing Clean Energy Funds in 2010

Tom Konrad CFA

When Bloomberg New Energy Finance (BNEF) released their clean energy league tables for 2010, the top of the list was my favorite exchange traded fund (ETF), the Powershares Cleantech Portfolio ETF (AMEX: PZD), with an annual return of 7.6%. Second place was the Winslow Green Growth (WGGFX) mutual fund (7.4% return), which is one of what I consider to be the three best clean energy mutual funds. But the one I consider to be the best, the Gabelli SRI Green Fund (SRIGX) was nowhere to be seen, despite the fact that it returned 12.1% in 2010. The third is the New Alternatives Fund (NALFX). (There's more about why I like these clean energy funds here.)

The discrepancy arises because BNEF and I track different lists (my clean enenrgy mutual fund list is here, and the ETF list is here.) My lists include only US-traded funds, while BNEF's is global. BNEF also restricts their list to funds that are at least 50% exposed to clean energy. According to a conversation I recently had with John Segrich, SRIGX's manager, he had mostly moved out of renewable energy companies last year because he was bearish on the sector. This turned out to be a wise move, since most clean energy companies had large losses in 2010, with the Wilderhill New Energy Global Innovation Index (NEX) falling by 14.6% in 2010.

Although still invested in clean energy, Segrich has been holding more resource plays, such as recycling companies, like Horsehead Holding Corp. (NASDAQ:ZINC) and Globe Specialty Metals (GSM), which provides silicon metal to the Photovoltaic and Aluminum industries.

Defining clean energy companies can be tricky, and most industry observers such as BNEF use lists of technologies. I prefer to focus on companies that stand to benefit from increasing resource scarcity and potential, while reducing both global warming and other forms of environmental degradation.

The lack of focus on pure clean energy helped both SRIGX and PZD in 2008. Rafeal Coven, the adviser to the underlying index for PZD, noted that the poor performance of most renewable energy stocks in 2010 was a major reason why Cleantech Index-based funds (such as PZD) significantly outperformed their peers.

Will that trend repeat in 2011? Time will tell, but it pays to understand that the differences between clean energy sectors are often greater than their similarities. In 2010, often overlooked energy efficiency stocks returned 19%, outshining solar stocks (-25%) and blowing away wind stocks (-37%.)

When choosing the best clean energy mutual funds and ETFs, I've long used a a large exposure to energy efficiency as one of the most important criteria. When doing a home energy upgrade, the rule is to “Eat your Energy Efficiency vegetables before indulging in a solar power dessert.” The same rule applies when building a clean energy portfolio.

This article was first published on Tom Konrad's Green Stocks blog at Forbes.com.

DISCLOSURE: No positions.

DISCLAIMER: 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.

April 19, 2011

Why Energy Storage Investors Must Understand Economies of Scale

John Petersen

One of the most seductive and dangerous stock market myths is the immensely popular but demonstrably false notion that the rapid cost reductions and performance gains we enjoyed during the information and communications technology revolution will be repeated in the age of cleantech. The persistence of the mythology is astonishing when you consider that the entire history of alternative energy proves that cost reductions and performance gains are extraordinary events, rather than common occurrences. Investors who buy into economies of scale mythology without carefully considering the fundamental differences are in for a world of disillusionment and pain as they watch their portfolio values erode.

Everybody above the age of twelve has heard about economies of scale – they're the reason products tend to get better and cheaper over time. Most of us, however, don't take the time to consider the forces that give rise to economies of scale. As a result, we blithely assume that experience in one sector will carry over to another. Unfortunately, it's not that simple.

Wikipedia identifies the following basic economies of scale:
  • Purchasing economies – bulk buying of materials through long-term contracts;
  • Managerial economies – increasing the specialization of managers;
  • Financial economies – obtaining lower-interest rates and having access to a wider range of financial instruments;
  • Marketing economies – spreading the cost of advertising over a greater range of output in media markets;
  • Manufacturing economies – taking advantage of larger scale in the manufacturing function; and
  • Experience economies – learning by doing.
Each of these factors reduces long run average costs (LRAC) and shifts the cost of production down and to the right.
4.12.11 Economies_of_scale.png
The ugly truth most investors fail to recognize is that economies of scale occur in specific companies and diminish as a company or product matures. While specific companies can benefit from economies of scale that drive their production costs down, industries frequently suffer from diseconomies of growth and competition that drive production costs up while product prices are falling – a combination that invariably compresses profit margins. The principal diseconomies include:
  • Constraints on raw material and component availability;
  • Cannibalization of market opportunities by competing firms;
  • Duplication of efforts on "secret sauce" differentiation within product classes;
  • Ownership of critical technological advances by emerging market participants;
  • Economic gravity, which favors cheaper products over more costly alternatives; and
  • Human inertia, which favors established products and practices.
When I was young, the best performing battery technology was lead-acid, which had specific energy in the 30-50 watt-hours per kilogram range. The next step was nickel cadmium (NiCd) batteries with specific energy in the 45-80 wh/kg range. Then came nickel metal hydride (NiMH) batteries with specific energy in the 60-120 wh/kg range. Today's pinnacle of performance is lithium-ion batteries with specific energy in the 90-190 wh/kg range.

My inner optimist considers a four-fold improvement in battery technology and calls it progress. My inner pragmatist compares a four-fold improvement in battery technology to a billion-fold improvement in information technology and knows that something is very different. Our need for better batteries was no less urgent than our need for better electronics. In fact, many of the companies that drove gains in electronics were also active in the battery industry. Where progress in IT was immense, the battery industry was basically stagnant. Even the cast of Sesame Street can look at these facts and say with confidence “One of these things is not like the other.”

The reasons for the disparity are really quite simple. Where electronics are governed by the laws of physics, energy storage is governed by the laws of chemistry. When you make an electronic device smaller you reduce its material content and improve its performance at the same time. When you make an energy storage device smaller, you get fewer chemical reactions and less storage potential. More importantly, battery manufacturing is a mature industry and we use the same basic processes, equipment and product architecture today that we used 35 years ago. Albert Einstein taught that “doing the same thing over and over again and expecting different results” was insanity. There’s a lesson there for investors.

While it would be an oversimplification to suggest that the only major differences between battery types are changes in the chemistry manufacturers put into their can or pouch, it wouldn't be gross oversimplification. In many cases energy and power are declining as manufacturers try to optimize safety and cycle life. The major performance gains the world so desperately needs are not going to arise from minor modifications to chemistry in a can. If they arise, they'll come from entirely new approaches based on fundamentally different chemistries, manufacturing processes and product architectures.

In the lithium-ion space there is precious little substantive differentiation between the various chemistries and form factors. There are differences, but they're usually fine tuning to optimize energy, power, safety or cycle life. In general, the chemistries with the highest energy and power have the lowest safety and cycle life. Conversely, manufacturers who are willing to dial energy and power down a notch have been able to realize impressive safety and cycle life gains. When it comes to manufacturing costs, however, nobody has a significant advantage over the old line lithium-ion battery producers like Sony, Panasonic-Sanyo and LG Chem who've been in business for decades and have already optimized their economies of scale. Any way you look at it, new market entrants like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) will be playing catch-up ball for years.

The lead-acid space is a lot like the lithium-ion space when it comes to product differentiation. Leading lead-acid battery manufacturers like Johnson Controls (JCI), Enersys (ENS) and Exide Technologies (XIDE) produce high quality products that are basically fungible commodities. While there are modest differences, there's nothing that's truly unique about any of their products.

To the best of my knowledge, Axion Power International (AXPW.OB) is the only publicly held battery technology developer that's doing something completely different. Where its competitors are fooling around with additives that offer modest improvements in cycle-life and charge acceptance, Axion is replacing traditional lead-based negative electrodes with patented carbon electrode assemblies that boost cycle-life and dynamic charge acceptance by 1000% or more. The chemistry stays the same, but the electrode fabrication methods are completely different and so is the final device – a hybrid that's half battery and half supercapacitor and can be assembled on any conventional AGM battery production line.

Axion's carbon electrode assemblies have never been manufactured on a commercial scale. Its first generation electrode fabrication line produced enough electrode assemblies to support its testing, demonstration and validation projects with automakers, railroads and other potential customers, but the production capacity and quality control were not high enough to meet customer needs. Last month, Axion completed the installation of a second-generation automated electrode fabrication line that promises to significantly improve both. Axion is currently engaged in manufacturing process, quality control and product performance validation with its potential customers. Until that work is completed, a design win or production contract would be premature. Once Axion introduces its first commercial product, it will be at the top left-hand corner of the total cost curve. As near as I can tell, Axion is the only battery manufacturer in the world that has a reasonable opportunity to realize true and significant economies of scale in its future operations.

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

April 18, 2011

Kaydon: Profits Behind the Scenes

Debra Fiakas

Most investors when they consider the alternative energy sector think about the big solar photovoltaic manufacturers or the ethanol producers.  Engineering firms like Kaydon Corporation (KDN:  NYSE) rarely come to mind.  With special expertise in fluid processes, Kaydon is an indispensable partner in a variety of alternative energy projects such as wind, renewable diesel and ethanol plants.

The company earned a 12% net profit margin on $4645 million in total sales in the year 2010.  As impressive as that might be the really bright spot in Kaydon’s financial picture is its ability to generate cash  -  $93.9 million in 2010.  This implies a cash conversion rate of 20.2%.

Kaydon is not a high profile company with flashy investor relations outreach.  Its corporate web site is static and is directed primarily toward customers who might happen by looking for custom bearings or rings and seals.  Perhaps this customer-centric orientation is why Kaydon is growing in a field that is challenging for others.

The company just announced a key acquisition in German adding springs and dampers to the product line.  Kaydon is buying HAHN-Gasfedern GmbH for an undisclosed sum.  HAHN-Gasfedern is doing approximately $20 million in annual sales and is reportedly profitable.  The new product line should be interesting to customers all across Kaydon’s base in the energy, renewable energy, pharmaceutical and other process manufacturing industries.

The stock is selling at 23.5 times trailing earnings and 20.8 times forward earnings, suggesting analysts following the company see earnings growth ahead.  The consensus rating at this time is hold.  However, we believe investors should consider company’s like Kaydon that have been consistently delivering profits for a play on the alternative energy industry.  KDN also offers a 2.0% dividend yield at the current price level, suggesting that even at even with a forward earnings multiple near its growth rate, the stock offers value.

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.  KDN is included in Crystal Equity Research’s Earth, Wind and Fire Index in the Wind Group.

April 17, 2011

Who's Winning the Clean Energy Race?

Tom Konrad CFA

Highlights from a report on Clean Energy investments from the Pew Charitable Trusts.

The Pew Charitable Trusts just released their report on Clean Energy, finance, and investment in the Group of Twenty (G20) economies in 2010 [pdf].

I had the opportunity to review a pre-release version of the report. Some 2010 trends they discovered were encouraging or exciting, some were disappointing. I also had the chance to speak to the director of Pew's Clean energy Program, Phyllis Cuttino, about the report. Here are the highlights from the report and our discussion.

Clean Energy Sectors

  • Total Clean Energy investment in 2010 was $243 billion.

    • Up 30% over 2009

  • Solar Photovoltaic (PV) installations grew 53% over 2009

    • 17 GW of solar was installed in 2010

    • Distributed solar (defined as installations smaller than 1 MW) doubled to $56 billion, accounting for 26% of MW installed

    • PV hit grid parity in southern Italy due to high electricity prices and good insolation.

  • Wind grew 34%

    • 40 GW added in 2010

  • Biofuels slumped

    • Lowest investment since 2005

    • Some markets are oversupplied with conventional biofuels

    • Next generation biofuels are not ready

  • Solar thermal was not tracked by the report.

    • Concentration Solar Power (CSP) and direct use solar thermal (for water, space, and process heating) were not included

    • I mention this because these are much more significant sectors than marine power, which was included in the report, and given the Pew center's goal of providing information to policymakers to help them make better informed decisions, I'm hoping they will take the hint and include these important sectors in their next report update.

  • Energy Efficiency and Transportation spending did get some mention in the report, but the numbers were incomplete

    • Energy efficiency is hard to track because it's difficult to determine what is efficiency spending, and what would have been done in the normal course of business.

    • The report only covered Transportation stimulus spending, not private sector investment.

  • Geothermal Power was also not tracked. Again, I hope they correct this oversight in next year's report. What is not measured is often ignored.

Country Rankings

  • China took the lead in clean energy investment in 2010, displacing Germany.

    • China led in public financing (stock market) of clean energy companies.

    • Accounted for 50% of all manufacturing of solar modules and wind turbines.

  • Germany retained second place, mostly due to strong performance in installations of distributed solar.

  • The United States fell to third in total investment.

    • Investment in wind power dropped 50% from 2009 levels

    • Retains lead in venture capital and private equity investment, accounting for 73% of the G20 total

    • Accounted for 2/3 of all identifiable investment in Energy Efficiency, but this number is not particularly meaningful due to the difficulty of tracking energy efficiency spending. According to Cuttino, this is probably in large part due to the US playing catch-up. I think it is also due to the differences in how energy efficiency is implemented around the world, with the US putting more emphasis on incentives while other countries rely on regulation and higher energy prices to drive investment. The US model results in a higher level of identifiable investment, but has been less effective at driving overall efficiency.

  • Italy was in fourth place, because of a large rise in distributed solar projects

    • I expect PV growth in Italy should be expected to remain robust because they have hit grid parity, as mentioned above

  • Japan was much farther down the list in 11th place, almost entirely based on PV installations. As the Japanese understandably question their dependence on nuclear, they will want to accelerate their adoption of clean energy, in order to produce as much domestic energy as possible without the risks of nuclear power.

    • Over the last 5 years, clean energy capacity in Japan has grown at a 45% annual compound rate.

    • Small distributed installations grew at a 69% annual rate.

    • A 25% annual growth rate in investment was all that was needed to achieve 45% annual capacity growth because of falling prices.

    • Solar PV dominated Japanese clean energy investment in 2010.

    • Japan has ambitious targets to source 28 GW of solar and 5 GW from wind by 2020. I expect them to adopt even more ambitious targets as a result of the nuclear crisis.

    • With 3.5GW of installed solar, it would take 3 years for Japanese solar installations to grow enough to produce as much energy as the 2.8 GW of damaged nuclear reactors at Fukushima Daiichi at current growth rates, even after assuming an 18% capacity factor for solar.

    • If all clean energy continues to grow at the current 45% compound rate, Japan will add 11.7 GW of capacity in 2011. Much of this will likely be biomass and wind, so the average capacity factor will be considerably higher than for clean energy just from solar, meaning that this new clean energy generation should be enough to replace the electricity from damaged reactors more than twice over in just one year. Those who think clean energy cannot replace nuclear power should reconsider.

What I Hope For in the 2011 Report

  • Tracking Solar Thermal and Geothermal investment.

  • More complete tracking of investment in alternative and efficient transportation

  • Some measure of the effectiveness of clean energy investment

  • A better methodology for tracking energy efficiency, perhaps by tracking how quickly a country's energy intensity falls.

I also asked if they were looking into what makes an effective clean energy policy in more detail, and Cuttino told me they are working on a report on the non-financial barriers to clean energy investment. I'm very much looking forward to that.

Lessons Learned

  • Feed-in Tariffs are one of the most effective methods of both encouraging Clean Energy installations and developing a clean energy industry.

  • If a country wants to develop clean energy manufacturing, it should first develop a domestic market.

  • Germany, China, and India have all successfully followed this model.

  • The United States is failing badly largely because of inconsistent government support for clean energy.

  • Research and development follow manufacturing. There has been an increasing stream of clean energy engineers migrating to the opportunities in China.

  • Transportation investment has largely been ignored in the past, but Cuttino believes that the current administration understands the importance of this critical sector.

    • Cuttino had recently attended CERA Week, and told me that even oil executives who would not utter the phrase "Peak Oil" were calling for increased vehicle efficiency and incentives to reduce oil consumption. John Hess of Hess Corp. (HES) was calling for a $1 per gallon gas tax and a $10 per ton carbon tax.

Clear and consistent policy support for clean energy have long been lacking in the United States. Until we make a firm commitment to the energy of the future, we will continue to be trapped by our addition to the energy of the past. Our dynamic Venture Capital helps incubate world-beating technology, which US companies would have the opportunity to commercialize, building new, world-beating industries if they had a reliable domestic market to sell into. As it is, the United States is simply the source of the great ideas behind the products that the rest of the world will be selling to us for decades to come.

This article was first published on Tom Konrad's Green Stocks blog.

DISCLAIMER: 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.

April 15, 2011

Lux Research Confirms that Cheap Will Beat Cool in Vehicle Electrification

John Petersen

On March 30th, Lux Research released an update on the vehicle electrification market titled "Small Batteries, Big Sales: The Unlikely Winners in the Electric Vehicle Market" that predicts:
  • E-bikes and micro-hybrids carry minimal storage, but compensate with high volume. E-bikes show strong unit sales, as they sustain a 157 GWh storage market totaling $24.3 billion in revenues in 2016. Micro-hybrids benefit from increasingly stringent emissions limits, supporting 41 GWh and $3.1 billion in storage sales.
  • Hybrid electric vehicles (HEVs) like Toyota's Prius grow steadily while PHEVs and EVs are at the mercy of external factors. Both PHEVs and EV sales are sensitive to oil prices, but catalyze growth for Li-ion batteries, along with HEVs powering a $2.3 billion market in our base case scenario.
  • Advanced lead-acid batteries will dominate the storage market now and in the future, resulting in a 165 GWh and $16.1 billion market in 2016.  Lithium-ion follows, showing strong growth from 4.1 GWh and $2.7 billion in 2011 to 32.2 GWh and $11 billion in 2016.
Since the report echoes several themes I frequently discuss in this blog, it seems like an opportune time to back away from the minutiae and revisit the broad opportunities for growth in the vehicle electrification sector.

The basic drivers of all vehicle electrification initiatives are the desire to break the economic stranglehold of increasingly expensive petroleum, reduce CO2 emissions and improve air quality in big cities. The major countervailing force is the economic reality that consumers will not sacrifice the flexibility and reliability of internal combustion engines for a more expensive alternative that doesn't offer a compelling value proposition. Governments and EVangelicals are pushing hard for flashy EV solutions with miserable economics, but Lux believes cheap will beat cool over the next five years.

Electric Two-wheeled Vehicles

In Lux's view, the runaway winner over the next five years will be e-bikes – the most energy efficient transportation in the world. It expects battery sales for e-bikes to double from $12 billion in 2011 to $24.3 billion in 2016. While roughly 85% of today's e-bikes use lead-acid batteries because they cost less, Lux expects lithium-ion batteries to garner an 18% market share in China by 2016, which implies a global market share of closer to 30%. As an avid cyclist who understands the impact of extra weight on a bicycle, I think Lux's market penetration forecast for lithium-ion is low. Lead-acid may retain its dominance in China, the world's biggest e-bike market, but I'm convinced that lithium-ion will be the battery of choice in North America and Europe where e-bikes are rapidly gaining ground.

Lux expects a limited market for e-bikes outside of China, but I think it's a market that could surprise people who haven't really considered the mobility needs and transportation budgets of young adults and cost-conscious commuters. E-bikes are not an all weather solution, but on a pleasant day a $1,000 e-bike is far more attractive than alternatives that cost thirty to fifty times more and can't come close in the fun per mile category.

I've been following Advanced Battery Technologies (ABAT) for a couple years and have been impressed by its cost control and business strategy. It began as a low cost manufacturer of commodity lithium-ion batteries and then expanded into e-bike manufacturing. It's growth rates and profit margins are impressive enough that I've often said ABAT is too cheap to be cool. ABAT's stock price recently tumbled by over 40% when Variant View Research, an acknowledged short seller, published three "hatchet-job" articles that were highly critical of its operations, financial reports and corporate governance. Since I don't want to jump into the middle of a dogfight, I'll simply note that ABAT is the only publicly held pure play in the e-bike space and seems to have a bright future as a vertically integrated manufacturer of e-bikes, the most popular electric vehicles in the world.


The second biggest market over the next five years will be micro-hybrids, conventional internal combustion vehicles that simply turn the engine off when the car is stopped and restart the engine when the driver takes his foot off the brake. In an earlier report titled "Micro-hybrids: On the Road to Hybrid Vehicle Dominance," Lux forecast that the micro-hybrid market would grow from three million units this year to 34 million units a year by mid-decade. The primary drivers of growth will be strict new European CO2 emissions rules and ambitious new CAFE standards that will be phased in over the next few years. According to Lux "micro-hybrids sit in an enviable position as a cost effective approach to improve fuel efficiency, since their start-stop and regenerative braking capabilities can be implemented in the OEMs' current stable of vehicles, without the more drastic redesigns needed to create a full EV, PHEV, or HEV." Overall, Lux believes the market for advanced batteries in micro-hybrid vehicles will grow from $495 million this year to $3.1 billion by 2016.

Competition in the micro-hybrid battery space is intense and diversified. Johnson Controls (JCI) and Exide Technologies (XIDE) are both offering a variety of advanced lead-acid batteries for micro-hybrids that range from enhanced flooded batteries to valve regulated absorbed glass mat batteries. With their global manufacturing footprints, established OEM relationships and proven manufacturing competence both companies should benefit from impressive growth in OEM battery sales over the next five years.

While advanced lead-acid batteries currently dominate the micro-hybrid battery market, there is a growing body of proof that advanced lead-acid batteries are ill suited to the demands of micro-hybrids. In a 2007 Journal of Power Sources article, a team of battery researchers from Ford described the problem as follows:

"Charge acceptance, particularly at low temperatures, is a battery requirement that determines the charge balance of the power supply system. The more the battery has to contribute to supplying electrical loads, the more essential it becomes that it can be recharged quickly. ... [A]dvanced HEV applications will require good charge acceptance in a dynamic discharge/charge micro-cycling operation. We call this feature dynamic charge acceptance (DCA). In the particular case of lead/acid batteries, DCA capability is extremely sensitive to the short-term previous charge/discharge exposure of the battery."

At last September's European Lead Battery Conference in Istanbul (the ELBC) Ford and BMW jointly proposed a new battery testing protocol for micro-hybrids. Under the protocol a 60-second engine off cycle will require 39,600 watt-seconds of energy. Of that total, 36,000 watt-seconds will be used to support accessory loads during engine off interval and the remaining 3,600 watt-seconds will be used to re-start the engine. Until the 39,600 watt-second discharge is recovered, the stop-start system will be disabled. Since a disabled stop-start system can't save fuel by turning off the engine at a stoplight, dynamic charge acceptance is rapidly emerging as one of the important battery performance requirements for micro-hybrids, if not the most important one.

The big drawback of using enhanced flooded batteries and AGM batteries in micro-hybrids is that their dynamic charge acceptance degrades over time. While a new battery needs about 30 seconds to recover from an engine-off event, it can take three minutes or more when a battery's been in service for a year. Since city driving typically offers one or two engine-off opportunities per mile, pushing the battery recovery time from 30 seconds to three minutes or more has a very negative impact on fuel economy.

The following graphs come from the BMW-Ford presentation at the ELBC and show how the dynamic charge acceptance of an AGM battery degrades over time. The graph on the left shows what happens if the generator is disabled for seven seconds after restart to maximize the engine power available for acceleration. The graph on the right shows what happens if the generator kicks in immediately. The downward curving blue lines show the amount of current the battery can accept as the number of stop-start cycles increases. The upward curving black scatters with red overlays show the time required for the battery to regain an acceptable state of charge. The simple summary is that both batteries performed poorly and lost most of their dynamic charge acceptance capacity in a matter of months.

4.13.11 VRLA.png

While advanced lead-acid batteries are currently the best available choice for micro-hybrids, their market dominance is vulnerable because dynamic charge acceptance is so critical. As the market matures, I believe automakers will choose batteries for micro-hybrids on the basis of detailed cost benefit analysis that includes lifecycle fuel economy. When all costs are accounted for, I believe emerging energy storage technologies will gain the upper hand.

Three advanced battery developers have disclosed alternative approaches to the micro-hybrid market.

The first design win from Peugeot-Citroën went to a three-component system from Continental AG and Maxwell Technologies (MXWL) that combines an AGM battery and control electronics from Continental with a small supercapacitor module from Maxwell. In this system, the AGM battery carries the 36,000 watt-second accessory load and the supercapacitor picks up the 3,600 watt-second starter load. While this three-component approach will reduce battery strain by shifting the starter load to the supercapacitor, it can't eliminate the gradual loss of dynamic charge acceptance in the AGM battery that does the yeoman's share of the work.

A second design win from an undisclosed OEM has reportedly gone to A123 Systems (AONE), which has been testing a lithium-ion micro-hybrid battery solution for the last few years. Given the charge acceptance characteristics of A123's lithium-ion chemistry, I believe its stop-start solution will perform well and avoid the dynamic charge acceptance issues that plague advanced lead-acid batteries. The big questions will be cost and cold weather performance. Until A123 releases more details on its micro-hybrid solution, it will be hard to assess its competitive position.

The third contender for a share of the micro-hybrid market is Axion Power International (AXPW.OB), which is working with several automakers and has progressed far enough in its relationship with BMW that the two companies made a joint technical presentation at last year's ELBC. While it's not unusual for an automaker to enter into a development contract or supplier relationship with a micro-cap, I'm not aware of another case where an automaker shared the podium with a battery developer at an industry conference. A more surprising development was a brief conference call reference to a grant application under the DOE's Vehicle Technologies Program that Axion filed as a co-applicant with a major automaker. To the best of my knowledge, this is the first time an automaker has joined in a DOE grant application with a component developer. While the details remain sketchy, the DOE plans to make its award decisions by late June and fund in the third quarter.

Axion is not currently producing PbC batteries for commercial sale to customers. It has recently installed a second-generation automated production line for its patented carbon electrode assemblies and is engaged in manufacturing process, quality control and product performance validation activities with potential customers. Until that work is completed, a design win or production contract will remain out of reach.

EVs, PHEVs and HEVs

While Lux forecasts that EVs, PHEVs, and HEVs will command a solid chunk of storage revenue because of their high per vehicle battery costs, Lux doesn't "expect EVs or PHEVs to take the world by storm, and sees steady but not explosive growth from HEVs." Lux said that consumer acceptance of the GM Volt and Nissan Leaf is "anything but a certainty" and noted that early results indicate only 40% of the non-binding pre-orders for the Nissan Leaf are turning into purchases. It cited high battery costs as a major obstacle to making electric vehicles cost effective. Overall Lux believes that light and heavy PHEVs will depend on high oil prices and "EVs will disappoint in all scenarios." As a product class, Lux predicts that battery sales for EVs, PHEVs, and HEVs will grow from $710 million this year to $2.1 billion in 2016. Since there are so many competitors in the EV, PHEV and HEV markets, it's hard to pick likely winners and I'd rather watch from the sidelines.

Heavy Vehicles

The last class of vehicles considered by Lux was delivery trucks, city buses and railroad locomotives. It forecast that sales in the heavy vehicle segment would grow from $110 million in 2010 to $642 million in 2016. A number of energy storage technology developers are active in the heavy vehicle segment including:
  • Maxwell, A123, Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC), which are actively marketing energy storage systems for hybrid and electric buses and delivery trucks; and
  • General Electric (GE) and Axion Power, which are developing battery systems for hybrid locomotives and retrofit solutions for the existing locomotive fleet.
While there are too many competitors to pick likely winners in the highway vehicle markets, I'll continue watching the railroad market with interest because the existing locomotive fleet includes 24,000 units nationwide and implementing hybrid drive in a train is relatively simple because of the ability to mix and match conventional diesel locomotives and retrofitted electric locomotives to meet the power and recuperative braking needs of a specific load and route.

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

April 14, 2011

How to Measure the Next Economy?

Garvin Jabusch

In search of a sucessor to the Global Industry Classification Standard

The Global Industry Classification Standard (GICS) is the framework within which finance types organize companies and their stocks into industries and sectors. You've heard the names for these groups many times: energy, transportation, materials, commercial services, etc. These divisions have been useful in attempting "to enhance the investment research and asset management process for financial professionals worldwide" (mscibarra.com, 3/2010). And, for a while, GICS did a decent job of keeping portfolio managers, investment advisors and their clients reasonably well organized in their thinking about diversification and risk.

But that was then.

GICS was created by S&P and MSCI Barra to reflect their indices (such as the S&P 500), but, since these indices are largely comprised of companies created during the late 19th- and 20th-century economies, GICS, perhaps understandably, defines energy essentially as "burning something to get power." There are other legacy issues with GICS as well but, for now, I'll focus on energy.

Here at Green Alpha ® Advisors, in addition to managing the Sierra Club Green Alpha Portfolio, we manage a Next Economy (green) index of public equities we call the Green Alpha Next Economy Index or GANEX. Take a look at our old GICS based sector weights in this table:

Green Alpha Advisors ® Next Economy Index, GICS based sectors, 12/31/10

GICS Sector Average Weight

These are important because the way GICS forces us to classify our holdings is pure 19th century. Notice there's nothing in our energy sector. Our published top 25 holdings as of 12/31/2010 included such names as First Solar, Inc. (FSLR), and Vestas Wind Systems (VWDRY.PK). And the unpublished part of the portfolio contains many more companies in solar, wind, wave, turbine, and geothermal power. Yet, according to GICS, we have no exposure to the energy sector at all. None. All our power-related holdings fall under either "industrials" or "information technology." Really? I get how some of these could be manufacturing but, come on, these days there's so much more to power than burning fossilized hydrocarbons. (In addition, this skewing of reality means the "industrials" and "information technology" sectors in our index now appear more weighted than they really are.)

So, for a next-economy index, using GICS sectors actually misrepresents portfolio characteristics, completely contrary to the stated goals of the GICS. Some portfolio managers have addressed this problem by artificially classifying their renewable energy holdings under "Oil and Gas." This approach makes it clear that there is energy representation in a portfolio, but it's clearly a temporary fix for a deeper, structural problem.  

We launched the Green Alpha Next Economy Index (GANEX) largely because there was no economy-wide, cross-sector, cross-industry, all cap index that reflected the true state of what we call the "next," or eco-efficient economy. There was no way to accurately measure the alpha (outperformance) of a green portfolio, because there was no systemic beta (recognized representation of the green economy as a whole). Before we founded Green Alpha Advisors, during the years we ran the Sierra Club Stock Fund (a large cap green portfolio), we had to benchmark ourselves against the S&P 500. And for most of our tenure there, we did outperform that index. But the question was put to us again and again by institutional prospects: "Okay, you're beating the S&P 500, but what about other green portfolios? What about performance versus a benchmark that isn't overrun with hydrocarbons and legacy manufacturing?" It's a good question and it ultimately led to the genesis of our firm and the GANEX. The GANEX, in turn, can and does serve as an indicator of the performance and progress of the next economy.

So, when it came time to present a sector breakdown for our portfolios, we found ourselves in the familiar place of having no way to accurately compare our portfolio to the world at large. We were stuck using legacy tools in a new world. Put simply, GICS regards "energy" as the combustion of oil, coal, and natural gas, and subsequently its schema lacks accuracy and depth. So, in addition to attempting to define the next economy with our index, we now find ourselves needing to define new sectors by which the new economy (and energy in particular) can be better evaluated.

It's time to move on, so, presented herewith: our first shot, back-of-the-bar-napkin attempt at a new paradigm: New sectors, next-economy classification.





  • Renewable energy
  • Energy storage
  • Solar thermal, wind
  • Generators, turbines
  • Batteries, PVs and UPS

Legacy Energy

  • Hydrocarbon-based fuels for electricity and transport
  • Oil, coal


  • Raw, sustainably harvested materials
  • Recycled and otherwise repurposed materials
  • Raw data
  • Recycled wood, steel, paper, waste water
  • Food
  • Livestock feed
  • Satellite data feeds


  • Man-made materials
  • Technology, R&D
  • Pharmaceuticals
  • Nanotechnology
  • Smart Glass
  • Building materials


  • Networks
  • Telecom
  • Distribution
  • Transportation
  • Smart grid
  • Data transmission and management
  • Mail delivery


  • Components
  • Equipment
  • Machinery
  • Hardware
  • Meters, sensors, controls
  • LEDs and light systems
  • Electric motors, cars
  • Consumer electronics


  • Systems
  • Education
  • Finance
  • Retail
  • Software
  • REITs
  • Hospitals
  • Media

Clearly this has to be developed further, notably with a lot of subgroups. But we think it's a good first step toward reflecting the next economy as it is and as it will become. We also like to think it's a little closer to plain English than the current system and can therefore help demystify finance and close the gap between advisor and client.

Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.

April 13, 2011

The Water Food Energy Climate Nexus (Pt. 1)

by Eamon Keane

“Before the world’s fossil fuels are finally exhausted, it is likely that their extraction will require an unimaginable amount of water”

Gérard Velter, general manager of Veolia Water for Africa, Middle East and India


“When measured in calories, the energy market is twenty times the food market. So if governments would replace only 10% of global energy consumption with first-generation biofuels, they in the same stroke would double agricultural water withdrawals”

Peter Braebeck-Letmathe, Chairman, Nestle Group


“The share of biofuels in total use of coarse grains is projected to increase until 2015, reaching 13%”

UN FAO Agricultural Outlook 2010-2019


“The area currently under cultivation is 1.5 billion hectares, so if all that extra land could be used it would represent an increase of one-third. In fact a lot of it either should be left alone for environmental reasons or would be too expensive to farm.”

The Economist special report on feeding the world

Given the above quotes, it is a wonder that most energy outlooks pay only cursory attention to the interrelationship between water, food, energy and climate.  Signs of stress in the water-food-energy complex are visible in the record high food prices, dropping water tables and the need for cooling in power plants is on vivid display in northern Japan. Do you know how/if it will affect your investments? Maplecroft's water security index shows nearly the entire Middle East and North Africa, the origin of much of the world's oil, as under extreme risk of water scarcity. There’s a nice graphic in the World Economic Forum’s Global Risks 2011 which highlights some of the water-food-energy interactions in Figure 1.  I’ll try to concisely address them in this series.

energy water food nexus

Energy-Water Nexus

Figure 2 shows the water required to extract and refine energy, while Figure 3 shows the energy required to make different forms of electricity. The water needed in primary extraction of oil, gas and coal is not that significant, however it depends on local availability. For instance in China’s Shaanxi Province, the coal reserves cannot be tapped due to lack of water. The plan is to desalinate sea water and pump it uphill for 600 km: “We need water, and the sea can provide it”. 

The oil industry uses some 220 mb/d of water for enhanced oil recovery, for an average of about 3 mb/d water per mb/d oil. This is about 0.3% of global water use (4,500 bn m3/year or 77,500 mb/d). In some cases this will be the reinjection of the water cut, however where steam injection is used, the quality is required to be higher. For fossil fuel extraction, the issue is not the absolute volume of water but the environmental pollution that inadequate environmental care can cause. An estimated 12,000 miles of waterways are adversely affected by abandoned coal mines in the US. Shale gas uses relatively low volumes of water, but a few cowboy fraccers could lead to the contamination of rivers or groundwater and so close regulation is required.

The elephant in the energy-water nexus is biofuels, with irrigated corn requiring up to 100,000 litres per GJ. Converted to oil, this is an impressive waste of 3687 mb/d water per mb/d of oil equivalent, or 4.8% of the world’s water consumption. This is the number one reason why first generation biofuels are doa once governments recognise water constraints.

water for energy

Power generation uses significant quantities of water. Due to the massive volumes of water used in open loop cooling in old designs of nuclear and some fossil fuel power plants, in 2005 41% of American water abstraction (withdrawal from a water source) was used to cool power plants. The operation of open loop nuclear plants requires this steady flow of water, or else they must shut down. Only 3% of US water is actually consumed by power plants, the rest returned to rivers slightly warmer. Hydro plants evaporate large quantities of water/MWh. New power plant designs can significantly reduce power generation water consumption through a range of technologies, such as hybrid cooling systems. This has significantly reduced the water requirement of the 100 MW Tonopah solar tower plant in Nevada that recently got the go-ahead, with water consumption a key constraint.

water for electricity

Part 2 will look at the food-water nexus.

April 12, 2011

Why Geographic Diversification Smooths Wind Power

Tom Konrad CFA

Canadian weather data shows the variability-smoothing potential of a robust continental electric grid.

Intelligent skepticism is valuable to me as an investor when it makes me question my assumptions.  When I'm wrong, it makes me find out sooner (and hopefully get out of a bad trade sooner, or never get into it.)  When I'm right, I emerge with my thesis tested, which leads to the confidence needed to stick to a trade when the stock market voting machine moves against me in the short term, before it comes around in the longer term.

Over the last month or so, John Petersen and I have been going back and forth regarding the potential to smooth wind power output.  Most recently, he latched onto a study and some graphs from the Bonneville Power Association which he felt demonstrated that geographical dispersion does not work.  He wrote, "I am unwilling to assume that integration across multiple regions will do the trick without seeing a compilation and overlay of the hard data from those regions and a plan that lays out how the interconnections will work."


Actual wind output data is usually kept private by wind farm operators and utilities, so instead I turned to publicly accessible wind speed data.  I found data in usable form from Canada's Weather Office.  I then selected four widely dispersed Canadian weather stations which had hourly historical data available, and copied the wind speed data into a spreadsheet for the week of April 1st to 7th, 2011.  In selecting weather stations, I chose one each in British Colombia, Yukon Territory, Newfoundland, and Nunavut that seemed to have enough wind to be suitable locations for wind farms.

Wind Power CurveI then converted these wind speeds into simulated power output using a wind power curve, shown here.   This takes the wind speed data, and replaces it with the likely power output (expressed as a percentage of rated output) for a wind turbine.  Wind turbines don't produce any power at very low wind speeds, ramp up quickly to their full rated power output as wind speed increases, and cut off suddenly to protect themselves in extremely high winds.

Over the week selected, the simulated wind output from my four weather stations was basically uncorrelated between the widely dispersed sites, as you can see from the following correlation matrix:

Dease Lake (AUT) British Columbia Argentia (AUT) New-
MAYO A (Yukon) Cambridge Bay A Nunavut Wind 4 Sites ERCOT North ERCOT 2010
Dease Lake (AUT) British Columbia
1 -0.05 -0.03 -0.19 0.35 0 0.02
Argentia (AUT) New-

1 -0.06 -0.15 0.53 -0.04 -0.09
MAYO A (Yukon)

1 0.10 0.49 0.07 -0.10
Cambridge Bay A Nunavut

1 0.40 0.01 -0.12
Wind 4 sites

1 0.01 -0.16

1 0.74
ERCOT 2010


The "All 4 sites" column represents the sum of the simulated output from the four sites, while the ERCOT North and ERCOT 2010 columns contain demand statistics for the Texas grid for the same week in 2010 (I did not know where to find 2011 data.)  ERCOT North is one of eight Texas sub-regions.  I'm using ERCOT data for load simply because that was the load data I found most readily available.

Note that the correlation between "All 4 sites" and each individual wind site is approximately 50% in each case.   This is what we would expect if the wind sites were truly independent and uncorrelated.

ERCOT North is similarly highly correlated with ERCOT because not only is it is part of the larger region, but because the distances involved are smaller and because electric loads tend to be much more highly correlated across regions than weather patterns.


The low correlation in wind output is key because when low or uncorrelated variables are added, the deviation of the average of all the variables is lower than the deviation of the individual variables.  The calculations are simplest for uncorrelated variables, but diversification has some use whenever variables are not perfectly correlated. 

In the case of n uncorrelated variables with the same standard deviation s, the standard deviation of the average of all n is s / sqrt(n).  Since I am using 4 basically uncorrelated sites in this example, the standard deviation of the average of all four sites is approximately half the standard deviation of each of the individual sites, as shown in the blue bars of the following chart and table.

Variability measures

BC Newfoundland Yukon Nunavut Wind 4 Sites ERCOT North ERCOT (2010) load
Std Dev 36% 48% 35% 39% 19% 11.4% 11.1%
min 0% 0% 0% 0% 7% 55% 59%
max 100% 100% 100% 100% 100% 100% 100%
avg 35% 41% 40% 60% 48% 80% 79%
Percent = 0 30% 55% 27% 19% 0% 0% 0%

Not Baseload

A quick glance at the following chart showing wind output from the four sites demonstrates that while there may be some value to diversification, we're not talking about anything like baseload power here.  It's not necessary for wind to produce baseload power in order to be effectively integrated into the grid.  Aggregate wind power needs only to be reasonably predictable and not so volatile that utility systems cannot keep up.  After all, utilities have been coping with variations of demand, which is neither entirely predictable, nor flat.
Hourly output
The following chart compares the output from the average volatility simulated wind site (Cambridge Bay, in British Columbia) with the output from an average of all four sites, and ERCOT load data from Texas. 

wind vs ERCOT
Here it is clear to see that the average wind output (blue line) is much less volatile than the wildly swinging green line.  If we wanted to reduce average wind output volatility to the same level as we see in the ERCOT North demand curve, it would require 12 uncorrelated wind sites [39.5% / sqrt(12) = 11.4%], or a larger number of partially correlated sites.  Given my experience with the data so far, I think it would not be difficult to find a sufficient number of partially correlated sites within Canada, and the exercise would be simple if the area were expanded to cover both the US and Canada.

Such a large grid would have the added benefit of smoothing the volatility of demand.  We see this on a small scale when comparing the volatility of the ERCOT North sub-region to ERCOT as a whole, but, as with weather, correlation in demand curves will fall with distance due to different working habits, industries, weather conditions, and time zones. 

Lower volatility in overall demand compared to local demand would free up dispatchable resources to help compensate for the remaining volatility of wind output.

In the Real World

In theory, we can reduce the volatility of wind output to less than the volatility of demand by building a North American continental grid.  In practice, such a grid is unlikely to be built anytime soon.  But we do not need a continental grid to achieve many of the benefits of diversification. Shorter connections, especially when chosen to maximize differences in weather patterns can be of great benefit in smoothing wind output and demand. 

Complete lack of correlation is not necessary to reduce overall volatility, although there would be benefits in not only siting new wind farms to maximize power output, but to also consider the correlation of local winds to the output of other wind farms and local electric demand.  Such steps could do much to reduce the strain that the variability of wind puts on the electric grid, and in the end allow greater wind penetration.

The addition of solar resources can also greatly reduce the overall variability, given that solar output is somewhat correlated with demand and not particularly correlated with wind.  The output of solar sites tends to be much more correlated with that of other solar sites than for wind, but solar sites are not completely correlated, since output varies with cloudiness, latitude, orientation, temperature, and solar technology. 

The fact that summer electric loads tend to peak in the evening just as the sun is setting can also be alleviated with transmission and planning.  The output of West- and North-west facing panels is more correlated with load, and, even without storage available from technologies such as Concentrating Solar Power, traditional PV panels in the desert Southwest are producing power long after the sun has set in New York.

Conclusions for Investors

Wind farms are currently overly clustered in areas with good wind and access to transmission.  As a result, we see graphs of actual wind output that are much more variable than the technology need be inherently. 

While electricity storage is effective for smoothing short term volatility in electric supply and loads, long distance transmission, especially High Voltage DC transmission is the most cost-effective technology for smoothing long-term variations.  Prospective wind investors should also be considering companies involved in building, maintaining, and supplying transmission, especially leading HVDC suppliers Siemens (SI) and ABB (ABB). 

Calculations and Data

For those interested in my data and methodology, I have uploaded the spreadsheet I used for my calculations to Google Docs in both native Open Office Calc and MS Excel formats.

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.

April 11, 2011

Canadian Insulation Companies Likely to Benefit from Next Budget

Tom Konrad CFA

On March 22, the Conservative Canadian federal government released its proposed 2011 budget. The biggest news about the budget is not what is in it, but the fact that it is likely to lead to a no-confidence motion in Parliament, and bring about a new election. 

One provision of the conservative budget is the C$400 million ecoEnergy Retrofit program was included in the budget as a sop to lure support from the New Democrat party, but proved insufficient to gain their support.

Canadian insulation manufacturers hailed the inclusion of the home insulation program in the budget. Stephen Koch, Executive Director of the insulation industry association, NAIMA Canada, said, “We are pleased to see the renewal of the ecoENERGY program. It is an important tool that will help with economic growth and recovery in Canada.”

I followed up with Koch about the prospects for ecoENERGY in the next budget after the election.  He replied,

"I would be highly surprised if the next federal government did not reintroduce something like the ecoEnergy program. The Conservatives are saying that if that are elected, they would introduce the same budget.  The Liberals have also revealed a platform supporting a similar program, and the NDP also supports it.

"The only concern I see is the length of the program. I believe it must
be at least two years minimium and the requirement of mandatory label of
the energy efficiency of a home be mandated as disclosue to the buyer
should be implemented after the two years."

All the major Canadian parties support the program because Energy efficiency measures help economic growth twice. Like any expenditure, they create economic activity, but they also have the added benefit of saving homeowners more money than they cost on energy bills. This money can then be spent on other goods and services, providing a second boost to the economy.

Canadian Insulation Stocks

When ecoENERGY (or a similar) reinstated, Canadian insulation companies should get a boost along with the economy, although that boost will be limited if the program is for only a year.

The five members of NAIMA Canada are CertainTeed Corp., Johns Manville, Knauf Insulation, Owens Corning, and Roxul, Inc. Knauf is privately held, while Johns Manville and CertainTeed are divisions of the much larger conglomerates Berkshire Hathaway (BRKA) and Saint-Gobain (CODGF.PK), respectively.

For green investors looking at insulation as an energy efficiency play, the two stocks to know are pure-play insulation manufacturers Owens Corning (OC) and Rockwool International (RKWBF.PK), the Danish parent company of Roxul.

Owens Corning is well known in North America for its ubiquitous pink fiberglass insulation, but also makes a wide range of insulation and roofing products.

Rockwool was founded in 1909 number 10 on Forbes’ list of the world’s most respected global companies in 2007. Rockwool makes a range of insulation for buildings as well as marine and offshore environments,

One other company which benefited from ecoENERGY last time around was Waterfurance Renewable Energy (WFI.TO/WFIFF.PK). In Waterfurnaces's 2010 annual report, the company specifically mentioned the end of the ecoRNERGY retrofit program in 2009 as one factor leading to slow sales growth in 2010.
Unless extended for more than a year, Canada’s ecoENERGY program will probably not make more than a few percent of difference to either company’s bottom line, but its inclusion by a conservative party in Canada’s deficit-fighting budget, and its support across the political spectrum demonstrates that insulation is one green measure that makes both political and economic sense even when budgets are tight.

More energy highlights of the Canadian budget are here.


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.

April 09, 2011

Another Reality Check for Wind Power Investors

John Petersen

Last Wednesday I stirred up a hornets nest with an article titled "A Reality Check for Wind Power Investors" that included two graphs from the Bonneville Power Administration, or BPA, which manages a four state, 300,000 square mile service region that's home to over 40% of the installed hydro capacity and roughly 12% of the installed wind capacity in the US.

The first graph tracks the BPA's regional load and power production from hydro, thermal and wind facilities over the last seven days and shows why the region is one of the largest power exporters in the country.

4.9.11 BPA Load.png

The second graph provides stand-alone tracking data for wind power in the BPA region over the last seven days.

4.9.11 BPA Wind.png

My concern was that the BPA graphs clearly contradict widely accepted notions that:
  • Wind turbines will generate on average 30% of their rated capacity;
  • The wind is always blowing somewhere and geographic dispersion will eliminate instabilities;
  • Periods of widespread low wind are infrequent; and
  • The probability of very low wind output coinciding with peak electricity demand is slight.
Until I saw the BPA graphs I assumed that wide geographic dispersion of facilities would ameliorate the erratic nature of wind power. The graphs proved my assumption wrong. Once it became clear that broad regional dispersal wasn't enough, I began looking for comparable data on a nationwide basis and couldn't find it – ANYWHERE.

Yesterday, Jack Lifton pointed me in the direction of a March 2011 "Analysis of UK Wind Power Generation" that was commissioned by the John Muir Trust, Britain's premier wildlands conservation charity, and found that:
  1. Average output from wind in the UK was 27.18% of capacity in 2009, 21.14% in 2010, and 24.08% between November 2008 and December 2010 inclusive.
  2. There were 124 occasions from November 2008 through December 2010 when total generation from the windfarms metered by National Grid was less than 20 MW from an average capacity of over 1,600 MW.
  3. The average frequency and duration of a low wind event of 20 MW or less between November 2008 and December 2010 was once every 6.38 days for a period of 4.93 hours.
  4. At each of the four highest peak demands of 2010 wind output was low being respectively 4.72%, 5.51%, 2.59% and 2.51% of capacity at peak demand.
The study's most startling conclusions were that:
  • The nature of wind output has been obscured by reliance on “average output” figures. Analysis of hard data from National Grid shows that wind behaves in a quite different manner from that suggested by the study of average output ... or from wind speed records which in themselves are averaged.
  • It is clear from this analysis that wind cannot be relied upon to provide any significant level of generation at any defined time in the future. There is an urgent need to re-evaluate the implications of reliance on wind for any significant proportion of our energy requirement.
While the complete set of 28 monthly tracking graphs that accompany the UK Analysis are less colorful than the BPA's, the erratic and wholly unreliable character of the UK's wind resource is remarkably similar to the BPA's resource.

4.9.11 UK Load.png

My undergraduate degree was in accounting and I understand statistics well enough to know that data from a single region does not disprove the theory that geographic dispersion of wind facilities will solve the intermittency problem. However, my accounting professors taught me that when two substantial samples from regions as diverse as the UK and the Pacific Northwest leave room for reasonable doubt, prudence requires a larger sample and a more granular analysis.

The idea of geographic dispersion is so inherently plausible that it's accepted without question. What if it's a lie? We know it doesn't hold water in the BPA region and we know it doesn't hold water in the UK. The raw data almost certainly exists. Compiling the hard data into a national landscape would require little more than an Excel spreadsheet, particularly if we assume away the need for a robust and flexible interstate transportation grid. The only reason I can imagine why nobody has published results from such a study is that the results are dreadful and they disprove the theory.

I would love to be proven wrong on this point because my preliminary conclusions are damned inconvenient. The time for platitudes and calm assurances from advocates and promoters is past. We need detailed analysis of hard day to day data if we ever hope to have a sensible energy policy that works in the real world.

In light of the clear data from the BPA and confirmation from comparable analysis in the UK, I continue to believe that investments like the First Trust ISE Global Wind Energy Index ETF (FAN), the PowerShares Global Wind Energy Portfolio ETF (PWND) and a host of publicly traded wind power stocks should be avoided like the plague.

Disclosure: None.

April 08, 2011

ABB Group – A Cleantech Company?

Tom Konrad CFA

Power and automation giant ABB, Ltd. (NYSE:ABB) was named Cleantech Corporation of the Year at the Cleantech Forum in San Francisco. The company has been focused on acquiring start ups in the cleantech space for the last couple of years, with two significant ones in 2010: Ventyx, a provider of IT systems to utilities, and Baldor Electric, the premier supplier of high-efficiency motors in the US.

I very much like ABB's approach to cleantech. I'd even written about Baldor as a good way to invest in energy efficiency earlier in 2010 just a couple months before the buyout announcement.

While ABB is touting its eco-sheik acquisitions in smart grid (Ventryx, Trilliant) and Electric vehicle charginA Diamond in the Roughg (Ecototality), they seldom mention one of the best reasons for a clean energy investor to be interested in the company: ABB has long been a leading supplier of electric transformers (this one was outside my former house in Denver), substations, and high-voltage DC transmission.

Despite all the talk of grid-based energy storage, the least expensive solution to the variability of wind and solar power is geographic dispersion, according to Leo Casey, Chief Technology Officer of Boston-based inverter company Satcon Technology (NASD:SATC.)

Any investor familiar with the concept of diversification will agree. The farther you travel, the more the weather changes. So the output of dispersed solar and wind plants are less and less correlated the farther you spread them. By connecting them with a robust grid, you've built a diversified electricity generation portfolio, which will be much less volatile than an undiversified portfolio of local wind or solar generation.

So congratulations, ABB. You deserve the recognition... both for the shiny new acquisitions, and for the less pretty, but absolutely necessary power businesses you've always been known for.

This article was first published on Tom Konrad's Green Stocks blog.


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.

April 05, 2011

FLIR: Another Dividend-Paying Energy Efficiency Stock

Tom Konrad CFA

FLIR Systems' (FLIR) IR cameras save energy not just by spotting leaks, but by spotting intruders in the dark.

When I published my list of dividend paying energy efficiency stocks in January, I missed one, and it is a long-time favorite.  FLIR Systems (FLIR) business is focused around thermography, and I picked FLIR as a stock likely to benefit from the stimulus in March 2009 because FLIR's cameras are used by energy raters.

 FLIR weekly
FLIR did benefit from the stimulus, rising 56% by the end of 2009 from the $21 price when I made my call, but the stock has been basically flat since then, despite continued earnings and cash flow growth, and the declaration of a $0.06 (0.8% annual) dividend which was first paid in February, just two weeks too late to be included in my dividend paying energy efficiency stocks list.  The dividend corresponds to a 13% payout ratio, meaning that 87% of the company's earnings will be retained for continued acquisitions, stock buybacks, and investing in the business. 
Capital Flows


I first became interested in FLIR in 2007, when I expected the use of thermography to grow rapidly in the likewise growing business of energy rating.  Given that stimulus funding for energy rating will be running out this year, it seems likely that growth from this end of the business will slow, at least in the near term.  Over the longer term, I expect the energy efficiency side of the business to remain robust because falling prices and better resolution will rapidly open new markets, and thermography remains one of the most effective ways to help the non-professional understand the importance of heat loss. FLIR missing insulation.png It's one thing to tell a homeowner that their insulation is poorly installed.  It's quite another to show them in an image like the one to the right.

Nor is thermographic imaging solely a tool for convincing homeowners that there is a problem.  By simplifying the detection and diagnosis of not only problems with insulation, but a long list of residential, commercial, and industrial systems, much time, money, and often energy is saved in fixing those problems. 

One unique application of thermography is FLIR's Gas imaging cameras.  These can help detect leaks of powerful greenhouse gasses such as Sulfur Hexaflouride (used in electric transformers) natural gas, and several other dangerous and expensive industrial chemicals.


FLIR's major competitor in thermal cameras is Fluke, a division of Danaher (DHR).  I talked to representatives of both Fluke and FLIR at Building Energy 11 in Boston on March 9th and 10th. (I went to conduct a workshop on clean energy investing.)  I asked both of them the same question: If I were an energy rater, why should I buy Fluke's camera over FLIR's, or vice versa?  The Fluke rep's line was that Fluke "builds tools" and that I could expect a Fluke camera to be more rugged and not break, and this is something I should be willing to pay a little more for.  The FLIR rep said simply that their camera offers better resolution at a lower price point, and comes with a 2 year warranty. 

I found FLIR's sales pitch far more convincing than Fluke's.   That's one of two reasons this article is about FLIR, not both FLIR and Fluke.  The other reason is that thermography is such a tiny part of Danaher's business that it's not material from an investing perspective.

Commercial Vision Systems

I used to think that the main reason for energy efficiency investors to be interested in FLIR was the company's Thermography division (26% of 2010 revenues,) but discovered another application while talking to the FLIR representative.  The company's Commercial Vision Systems division (21% of 2010 revenues) is promoting their security cameras for cost-effective intruder detectionSecurity camera image.  Because the cameras use thermal imaging, they don't require lighting to spot the body heat of intruders at night, which is where the energy savings come in.  The ability to eliminate security lighting allows FLIR's security cameras to be installed at comparable costs with conventional systems, while saving the electricity which would otherwise be used to light unoccupied areas, as well as reducing light pollution.

The commercial division also supplies cameras for traffic monitoring, a service which fits well into my "Smart Transportation" peak oil investment theme.

Government Systems

Despite the many energy saving applications of FLIR's products, socially responsible investors may have a problem with investing in the company because slightly over half of FLIR's revenue comes from their government systems division, which provides vision systems for military and homeland security applications.  It's unlikely that FLIR's products are going to kill anyone, but they help aim, and it should be acknowledged that military customers are a significant source of revenue.

Moral objections aside, FLIR's military business is healthy and growing much faster than Defense budgets in general.  I'm certainly not a defense expert when it comes to stock analysis, but it seems to me that as defense budgets are slimmed, the trend to use more and more sensor and reconnaissance technology should continue, in order to better target the firepower which is still in the budget.  So while this part of FLIR's business may not be environmentally green, it should continue to add green to the bottom line.


The consensus for FLIR's expected growth over the next five years has fallen to 15% per annum, compared to 25% annual growth over the last five years.  That's still a respectable growth rate, but makes the trailing P/E of 21 and the forward P/E of 16 seem a little high at the current stock price of $32.  I'd like to see the price in the high 20's before I'd be completely comfortable buying the stock, but that would not require much of a pullback.  At the right price, FLIR will be a valuable addition to a green (if not socially responsible) portfolio.

DISCLOSURE: No Position. 

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

April 04, 2011

Some Realism on Shale Gas

shale gas Eamon Keane

shale gas shale gas Shale gas is back in the news recently after Obama hearted the shale gale in his energy speech ("Recent innovations have given us the opportunity to tap large reserves, perhaps a century's worth of reserves...in the shale under our feet,"), and Daniel Yergin (full disclosure: he wrote The Prize) has a lengthy piece in the WSJ along with an interview in which he says a bunch of stuff.

It turns out that the US and Canada also had a 100 year supply of natural gas in 2001: "Natural gas is also plentiful. An estimated 2,449 trillion cubic feet of reserves in the United States and Canada is enough to meet today's demand for 100 years."

In the interim there was a panic in 2005:

We need to declare a national crisis," Andrew N. Liveris, the chief executive of the  Dow Chemical Company, said in recent testimony before the Senate. Dow, the nation's largest chemical maker, has shut 23 plants in the United States in the last three years in places like Somerset, N.J.; South Charleston, W.Va.; and Elizabethtown, Ky., as it shifted production to Kuwait, Argentina, Malaysia and Germany, where natural gas is cheaper.

"Call it demand destruction," Mr. Liveris said. "Dozens of plants around the country have closed their doors and gone away, and are never coming back."
"There's still a shortage of drilling rigs. We skipped a generation-and-a-half of rigs in the United States."

Now we're back to 100 years of supply, and have returned to the feast stage of the feast-or-famine natural gas cycle. Unless this time is different, then the NG scene will not always be this rosy. This 100 year statistic which was derived from the Potential Gas Committee's (PGC) 2009 report. Nowhere in the PGC's press release was a 100 year figure mentioned, but the intense need for journalists to find a soundbite gave birth to the centennial stat. These articles gave none of the caveats that the PGC's director gave in the release:

"Dr. Curtis cautioned, however, that the current assessment assumes neither a time schedule nor a specific market price for the discovery and production of future gas supply. “Estimates of the Potential Gas Committee are ‘base-line estimates’ in that they attempt to provide a reasonable appraisal of what we consider to be the ‘technically recoverable’ gas resource potential of the United States,” he explained."

I thought I had clarified the situation in an article a year ago, although apparently not, and a frequent rejoinder to any talk about renewables or [insert x] remains to point to the "abundant" shale. More discerning types will know that when it comes to energy, it is the flow that is much more important than the stock. To that end, it will be noted that the flow of the other NG components is decreasing, and hence if shale lives up to expectations, the outcome will merely be a very gradual increase in total gas production.

aeo 2011 natural gas supply

There's a reasonably large if. The chief critic is Art Berman, much maligned for his skepticism. The main disputed variable is the decline rate of wells, which is dictated by the "b-exponent". It has a major influence on the economics of shale as shown by a slide from one of Art's recent presentations:

art berman graph

If the levelised cost of shale is closer to $8/MMBtu, this will have a large bearing on the competitiveness of renewable generation, since the natural gas price accounts for approximately 75% of the levelised cost of nat gas fired generation. As the recently released World Economic Forum's Green Investing 2011 shows, onshore wind in some cases is competitive with nat gas, and a significant increase in gas costs would mean that many more locations would be:


The Green Investing report introduces an interesting new term "Policy Premium" to indicate "the amount governments overpay for renewable energy generation above the rates required for investors to earn a standard return". This premium is very high in the US relative to other countries, which if reformed and coupled with a higher gas price would be doubly positive for onshore wind.


I'd suggest that there is still energy policy after shale gas, and rather than going full retard about it solving the world's energy problems for the next 100 years, hopefully bets will be hedged.

April 03, 2011

The Magma/Plutonic Merger

A Great Deal for Plutonic Shareholders, Not bad for Magma

Tom Konrad CFA

As a shareholder of Magma Energy Corp. (MGMXF.PK), I'm reading through the joint information circular [PDF] on the proposed merger of Plutonic Power Corp (PUOPF.PK) and Magma to form "Alterra Power Corp." I'm not thrilled with the merger, although I plan to vote for it, now that it's arranged.

Overall, I think the merged Alterra will be a stronger company than either company alone. Both companies are in capital intensive niche Renewable Energy industries, so the added scale and diversification of Alterra should better enable the merged company to borrow money to finance projects at lower rates. Obtaining financing at favorable rates is essential to the profitability of renewable energy projects.Statistics

My misgivings about the merger arise from the price. Magma shareholders will have a controlling stake of 66.5% of the merged company, with current Plutonic shareholders owning the balance. Plutonic shareholders are being paid a 32% or 17.5% premium, based on pre-merger market capitalization or book value, respectively. That would be a normal buyout premium, except that Magma was a much stronger company, and so Plutonic shareholders also gain more as part of the merged entity. Although the two companies work in different renewable energy industries, their projects have much in common. In addition to raising finance, environmental permitting, grid interconnection, and negotiating with utilities are crucial to the success of any renewable power producer, and a larger company with more projects may be able to make more effective use of employees with specialized local knowledge or skills in these areas.

Before the merger, I considered Magma shares a good buy, but I would not have bought Plutonic shares, because the company would have needed to either do a deal like this or raise money in the next year or so. This put Magma in the stronger bargaining position, and so I would have liked to see a smaller premium paid for Plutonic shares. That said, since two thirds of Plutonic shareholders will need to vote for the merger in order for it to be a success, this premium is probably necessary to gain sufficient support. Passage by Magma shareholders is a virtual certainty, since the owners of 38.7% of Magma shares have already committed to vote for the deal, and only 50.01% support is needed.

As a Magma shareholder, I think the deal is acceptable, and will be a way for Magma to pursue opportunities for growth beyond Geothermal power, part of the company's current strategy. I also like Plutonic's Run of River and Pumped Hydroelectric assets, although until this proposed merger, I was unwilling to buy the company's shares because I felt its balance sheet wasn't strong enough.

Overall, I'm in favor of the deal. Too bad they couldn't have come up with a better name. Apparently "Alterra" means "Other Earth" or "Other land" in Latin, but it doesn't do much for me. I liked both Plutonic and Magma better.

Plutonic shareholders will gain an instant 32% premium on their shares, while the shareholders of both companies can look forward to steadier growth.


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.

April 01, 2011

Energy Storage: A Great Quarter For The Cheap Team

John Petersen

The first quarter of 2011 was great for shareholders of companies that are developing or manufacturing cheap energy storage products like lead-acid and flow batteries, but it was miserable for shareholders of Chinese battery manufacturers and companies that are developing cool energy storage products like lithium-ion batteries. The following table tracks stock price performance in the energy storage sector for the first quarter of 2011 and for the twelve-months ended March 31, 2011.

3.31.11 Price Performance.png

The big winner for the quarter was Axion Power International (AXPW.OB), which seems to be recovering well from the intense selling pressure that kicked in about this time last year. The big winner for the twelve-month period was Active Power (ACPW), which is up 262% over the last year and up 1,027% since I bought it at $0.26 in December 2009. I knew I should have held onto Active Power longer.

The following summary table shows how my five tracking categories performed compared to broader market indexes.

3.31.11 Summary Perf.png

My final table provides a summary of the key financial metrics I like to focus on when performing a high level forward looking analysis of the companies I track.

3.31.11 Financial Data.png

For companies with a history of losses, the first number I focus on is working capital. If a company can't cover expected losses for the next year and make planned capital investments with available funds, it will almost certainly be forced to seek new financing and that can be difficult in a turbulent capital market. The seven companies that have clear working capital issues are identified with a red X in the working capital adequacy column. Altair Nanotechnologies (ALTI) and A123 Systems (AONE) have recently announced follow-on stock offerings that punished their stock prices while fortifying their balance sheets. Others will no doubt follow suit.

A second key metric is the difference between a company's market capitalization and its book value, which is commonly referred to as blue-sky. Public companies normally trade at a premium to their book value because intangible assets like technologies, human resources, industry experience, customer relationships and the like usually have no balance sheet value. When the blue-sky premium is out of line on the high side, it's a warning flag. When the blue-sky premium is out of line on the low side, it can hint at upside potential. While peer group comparisons aren't always reliable, they can provide useful guidance.

Many investors spend a lot of time obsessing over quarterly results, but I believe trailing twelve-month numbers provide a clearer picture of how a company is performing because they smooth quarter-to-quarter changes in the business cycle and make it easier to spot companies that are performing better than their stock.

In my Cheap Sustainable Companies category, Exide Technologies (XIDE) is trading at a far more attractive valuation than either Johnson Controls (JCI) or Enersys (ENS). The price disparity is understandable because Exide is just now emerging from a couple of rough years. On a trailing twelve-month basis Exide is trading at 10.7 times earnings while JCI and Enersys trade at PEs of 18.6 and 19.6 respectively. A similar disparity shows up in the price/sales ratio where Exide trades at 0.3 times sales while JCI and Enersys are at 0.8 and 1.1 respectively. Since experience has demonstrated that the market prices of comparable companies tend to clump in the same range, I believe that there's a 50% to 100% upside in Exide over the next 12 months.

As a group I tend to think the Chinese companies have been unfairly brutalized over the last year. There have been a few high profile problems with Chinese companies and those problems have cast a pall over the entire sector, but the battery manufacturers as a class seem to be well managed and profitable. Unfortunately the complexities of legal structures that work under both Chinese and American law are confusing to many. Moreover, cultural and language differences frequently put foreign companies at a distinct disadvantage in the US market and there are professional traders on the short side who seem intent on tarring the many with the faults of the few. As a result, Advanced Battery Technologies (ABAT), China Ritar Power (CRTP) and New Energy Systems (NEWN) are all trading at roughly four times trailing twelve-month earnings. I believe there are significant opportunities in this group for investors who are willing to dig into the details and look beyond the cultural differences.

The next twelve-months will be fascinating times in the energy storage sector as technology developers introduce a variety of products and ramp up demonstrations and deployments. I expect good things from Axion Power (AXPW.OB) as it begins a series of demonstration projects in the automotive stop-start, hybrid locomotive and stationary markets. While it's a decidedly unpopular position, I continue to believe that cars with plugs will have a hard time meeting lofty market expectations. While their working capital positions are terrible, Beacon Power (BCON) and ZBB Energy (ZBB) seem to have more upside potential than downside risk and may be good speculations.

One final company that intrigues me is C&D Technologies (CHHPD.PK). Their stock price was savaged last year by intangible asset impairments and an NYSE delisting that forced a debt restructuring. Their current market capitalization of $125 million strikes me as low given the amount of debt that was eliminated in the restructuring and the rough numbers I've cobbled together from their historic SEC filings. The picture won't be clear until they file their annual report later this month, but it looks like C&D has emerged from the restructuring in fine form and may offer significant opportunity to investors who are willing to spend some time digging.

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


Tom Konrad, CFA

Apple takes on Google in Silicon Valley rivalry to save the world... first.
Recently appointed Apple (NASD:AAPL) senior VP of Energy Lester Coulson is unimpressed by Google's (GOOG) efforts to solve climate change. 

"Google has been trying to make renewable energy cheaper than coal for more than three years now, and we haven't even seen a Beta version!" Coulson admonishes.  "Sure, they've made a few headlines by investing in EGS and planning to string wires up and down the Atlantic coast, but after investing $100 million, is renewable energy cheaper than coal (RE<C) yet?  No, and it will be years before it will be if Google is the only Silicon Valley company working on it.  We at Apple believe that the world's energy problems are too severe, and the threat of climate change too acute to be left to the likes of Google to solve."

Apple's plan, instantly dubbed "EE=C", is to make energy efficiency cool.  "It's all about the interface," explains Coulson. "Google is a software firm, but Google is attempting to fix renewable energy.  Renewable energy is a hardware problem, and that's why it takes so long to fix.  We at Apple know better.  We're going to apply our unique skills to solve the problem of climate change though software, in the way that only Apple can.  Unlike renewable energy, energy efficiency is already cheaper than coal.  The problem is, people find energy efficiency unsexy or confusing, or maybe they don't like those twisty light bulbs, so they don't adopt it even when it could save them money.  We have an App for that."

"iEnergy won't just be cool, it will be easy."

How is Apple going to change people's attitudes about energy efficiency?  They claim their software will allow people, companies, and even governments to manage their energy use with a slick graphical user interface (GUI).  Saving energy will be as easy as downloading a hit single from iTunes... and twice as addictive.  "Our interface and Apps are going to make energy efficiency cool," Coulson raves. "First, we're going to rename energy efficiency: We're calling it iEnergy.  That should double its popularity overnight.

"iEnergy won't just be cool, it will be easy.  Saving energy used to require all sorts of dirty engineering and crawling into dark corners with an insulation blower or a caulk gun.  We've changed that: With Apple iEnergy, you can cut your energy use by as much as 50% with a simple, graceful stroke of your finger on your iPhone or iPad.  Finally, we're going to raise the price.  Our studies show that people think of energy efficiency as cheap, and cheap is definitely uncool.  With Apple iEnergy, the more energy you save, the more we charge.  How cool is that?"

Google is taking the threat seriously.  A Google insider, who spoke on condition of anonymity, said: "Apple has really stepped over the line with this one.  Saving the world is Google's turf, and we're not going to take this incursion lightly.  People should think carefully about letting Apple manage their energy use.  Have you tried using an iPod with music from anywhere but iTunes?  Or changing the battery?  I hate to think what might happen if someone using Apple's software tries to install solar panels or even a light bulb bought anywhere other than the Apple Store."

Furthermore, Google takes their own (if no one else's) intellectual property rights seriously.   Google's lawyers have sent Apple a cease-and-desist order regarding the name "EE=C" claiming it is a transparent attempt to profit from Google's branding of "RE<C". 

Apple shares were up 3.1% in aftermarket trading.  Google shares traded flat.

« March 2011 | Main | May 2011 »

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