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May 31, 2011

PV Micro Inverters and Optimizers: Not Just for Lazy Designers

by Joseph McCabe, PE

More and more solar electric installations are using AC micro inverters and DC to DC optimizer electrical balance of systems (BOS) components. This BOS gear goes directly on the back sides of PV modules providing higher valued electricity than output from the PV cells alone.

Two years ago I considered micro inverters as only necessary for lazy designs or bad installation practices.  I’ve changed my attitude towards these approaches after organizing two years of forums as the American Solar Energy Society (ASES) Solar Electric Division Chairperson. These forums brought together experts who compared and contrasted AC micro inverters and DC to DC optimizer BOS equipment.

PV panels previously could not be installed in partially shaded locations because shade over a small area of the panel would drastically reduce the power production of the entire PV system. Now, shaded systems can benefit from AC micro inverters because each PV module can operate independently, instead of at an aggregated system level. Miss-matched PV modules were previously binned before installations so that each string had similar performing modules. Now the new electrical BOS gear eliminates problems with under, or over performing modules.  More recently, I have learned about the cost reduction and performance enhancing promises of these distributed technologies.

These electrical BOS approaches have evolved substantially in the last few years, and have come a long way since the first failed introduction of micro AC inverters in the late 90's.

Micro-BOS Approaches

Micro electrical BOS components promise easier designs, lower installed costs, along with improving annual performance. Module level electrical BOS solutions for PV have many different flavors. All strategies promise to reduce the impact of individually miss-matched PV module performance over time, possibly reducing wiring and installation labor costs. Some products have communication strategies which help owners understand real-time performance and maintenance opportunities. Depending upon the project specifics, the levelized cost of energy could be reduced 20% or more.

AC micro inverters attempt to optimize efficiency by converting the DC voltage from PV modules into AC voltage that match the electrical grid’s specifications. This enables AC wires to be used, along with widely available AC electricians. Some DC to DC optimizers strategies boost the DC voltage to an optimal level. Others boost and / or buck (reduce) to maintain a specific DC voltage. There are parallel connections that add amperage, and series connections that add voltages. DC to DC optimizers raise the system voltage, lowering the wiring costs, but still need a box to invert the higher DC voltage to AC. Standard AC inverters are being optimized to work with DC to DC equipment.

Project specifics will determine which micro approach, if any, would be most appropriate. The trends are for residential systems to have AC micro inverters, and large systems to have DC to DC optimization.

The Shoot-Off Forums

At last year’s ASES Shoot-Off Forum, we had AC micro inverter companies in the same room with DC to DC optimizers comparing and contrasting their gear. This year we separated the forums into one AC micro inverter and one DC to DC optimizer group. Next year we will likely further divide the forums into companies that are shipping and companies that hope to ship.

This year’s forum included a presentation from the leading company shipping these types of solutions, Enphase Energy. Founded in 2006, they have shipped over 750,000 AC Micro Inverter units, with 25,000 installations in North America in the last 30 months. They have a 13% market share for US residential installations below 10 kW.  According to Enphase, micro inverters will be 11% of all world wide inverters by 2014, which means we need to keep a close eye on these market trends reshaping the PV industry.

For the first time in public, Ampt LLC presented their large-scale PV systems approach with their DC to DC optimizer technology. Ampt’s roots are intertwined with Advanced Energy Industries Inc. (stock symbol AEIS), which makes thin film deposition power conversion and thermal instrumentation equipment as well as PV power inverters. On May 3, 2010, Advanced Energy (AE) acquired all of the outstanding common stock of PV Powered providing AE with a full line of DC to AC Power Inverters. The Co-founder and Chairman of AE is Douglas S. Schatz. He is listed as an inventor on Ampt patents and is Chairman of Abound Solar (previously AVA Solar). A nice central station thin film PV solution is evolving from this AE / Abound Solar and Ampt relationship. In my option, thin films can benefit from these micro technologies because of the soft shape of the power curves and immaturity of thin film technologies in comparison to crystalline PV.

At the forum, SolarBridge Technologies announced volume production of their AC micro inverter including strategic partnerships with PV module manufactures. They are offering a 25-year warranty through their PV module panel integrators. This makes for a central warranty location, as long as the PV module companies stay in business. Matching module warranty with the micro gear is a very good marketing strategy. Very long mean time between failure (MTBF) numbers were presented by various companies, in the 400 to 500 year ranges. The high operating temperatures of this gear exposed to the heat of the sun make these MTBF’s highly questionable. The PV industry will surely become more savvy in estimating and marketing MTBF in the future.  

Other unique strategies were presented at the forum. eIQ Energy presented their parallel DC to DC optimizer including an integrated wiring harness solution made by Shoals Technologies Group. Tigo Energy explained how their DC to DC optimizer solution uses a combination of real-time module and string-level information to compute the optimal operating state of each PV module. There are many more micro approaches and business models being promoted in today’s micro electrical BOS space.

Future Competition

Be on the look out for two international leaders in traditional PV AC inverters to introduce micro inverters; Power-One (stock symbol PWER) and SMA Solar Technology AG (stock symbol SMTGF.PK/S92.DE).  In September 2009, SMA purchased OK4U, one of the original micro AC inverter technologies. Kaco New Energy Inc’s transformer-less inverter was shown as a partner for the DC to DC strategies in the forum, and like other existing inverter companies, will have good opportunities to customize their grid interactive technologies with micro technologies.

Beware, these micro technologies are highly duplicate-able. This means they will probably be championed by very intelligent electrical engineers from developing nations. I heard a rumour from this year’s Solarexpo conference in Verona that there was an Enphase knock-off from China, everything the same, except the very important aspect of quality.

Copycat designs will be enabled by National Semiconductor's May 2011 announcement of the availability of their integrated circuits (IC’s) for use in the design of PV system micro inverters, power optimizers, and charge controllers.  National Semiconductor ended its original June of 2008 SolarMagic business of selling complete micro components and calling it a “per-panel electronics solution that maximizes power output of multi-panel installations”. Now, they are backing up the supply chain to supply IC’s  instead of BOS components. Texas Instruments has been marketing PV power IC’s for a few years.  

The largest inverter companies, and the smallest companies enabled with computer chips from National Semiconductor and Texas Instruments are creating an exciting playing field for micro PV BOS solutions. All these approaches continue to put pressure on lowering installed PV system costs,  increasing the annual performance and increasing the market for less than optimal installations.  We will be seeing increased innovations from electronics integrated directly on the back of DC PV modules. It is all very exciting; the innovations, and our learning how they fit into the PV industry has just begun.

For more in formation on the American Solar Energy Society please visit ases.org and plan on attending the annual conference held in Denver May 13th 2012.

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 altenergystocks and can be reached at energy [no space] ideas at gmail dotcom.

No Disclosures.

May 30, 2011

Principal Solar's "Unique Roll-Up Strategy"

Tom Konrad CFA

Last week, the announcement that Principal Solar, Inc. was now available for public trading landed in my inbox.  It's currently trading under the symbol PSWWD.PK but will transition to PSWW.PK on June 23rd.  I went ahead and used the latter in our Solar Stocks list.

Principal Solar logo.pngThe press release was remarkable only for the lack of hard facts about the company, focusing instead on the bright future of the solar industry. But experienced investors know that an industry can have a bright future while the individual stocks tank.  A rising tide need not lift all boats. a rising tide could, in fact, smash most of the current boats against the rocks while new, more efficient competitors set sail at high tide.  That certainly has been the pattern in solar manufacturing.

Despite the fluff in the press release, I thought the Principal Solar strategy might be worth investigation.  They plan to concentrate on "rapidly advancing... solar energy through a unique roll-up strategy."  Since Principal is planning on rolling up solar developers and installers (as opposed to manufacturers) I thought that this was at least interesting in that there are few, if any solid  pure-play solar installation companies available to public stock investors.

Other developers I'm aware of are Envision Solar International (EVSI.OB), which designs attractive solar for parking lots, but lacked financial muscle when I looked at it a year ago, and California-based Premier Power Renewable Energy (PPRW.OB) and Real Goods Solar (RSOL) neither of which I have yet looked at deeply.  Not totally unique, then, but one of just a few publicly traded options.

Although the California firms are better established, I decided to take a deeper look at Principal.  The near complete lack of substance in the press release perked my interest, if only to see if I could unearth any information that might be useful in an investment decision.

I continued to find a lack of hard facts.  An inquiry to the company's PR firm confirmed that they have not released any financial statements, but they plan to release financial information mid-summer.  While reverse mergers like the one Principal undertook are notorious for their lack of transparency, the lack of any financial statements (even unaudited) takes opacity to a new level.  I declined an interview with CEO and former telecoms entrepreneur Michael Gorton.  No doubt Gorton is a great communicator and visionary, but I'm more interested in numbers.  Without those numbers, i.e. audited financial statements, I would not touch any company with the proverbial ten foot pole. 

When the numbers do emerge, it might be worth another look, but I'm not optimistic.  A scan of the management bios shows a lot of telecoms and IT experience but much less solar industry experience.  One of the four bullets in their "Core strategy" is "Establishing the Company as the market thought-leader by issuing thoughtful and timely White Papers and impactful press releases to the mainstream media."  In other words, a key part of their core strategy is public relations.  I much prefer dull companies that are poor at communicating their story but good at making money.

As they say in the company's home state of Texas, Principal Solar seems to be "All hat and no cattle."  Maybe that will change come mid-summer and the promised financial information, but I'm not holding my breath.

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.

May 29, 2011

The Solar Bears are Wrong

Dana Blankenhorn

There are a growing number of “solar bears” out there like Jim Chanos, a professional short-seller who is convinced China is poised for a 2008-style crash and who is also selling short stocks like First Solar (FSLR) and Vestas Wind (VWDRY.PK). (What does Chanos like? Would you believe Citibank?) (Picture from Wikipedia.)

Personally, I don't know whether Chanos is right about those stocks or not. First Solar is a popular short because it's the best-performing U.S. solar play. Fly high and the assumption is you'll fall fast.

But two big mistakes are being made here:

  1. People are confusing specific companies with the industry.  Costs per-watt in the renewable industry are continually going down. This makes picking a winner tough, but it is proof that there is serious upside to the sector as a whole. After all, what is happening with the price of fossil fuels? Most are up, way up. If your costs are declining and your opponents' are rising, you're winning.

  2. A lot of analysts are focused only on the outlook for grid-scale projects, and most projects aren't very big. You don't get big new plants without multi-year timelines and (often) subsidies. But small plants, even non-plants (like the cells on my sister's house) can add up. And with costs declining, growth is certain.

Measurements like those of Ernst & Young are especially misleading. “China widens lead over U.S.” reads the headline, but in fact the outlet there is only marginally improved, and outside the area of wind energy our outlook is actually stronger.

The outlook for wind and solar is further improved by things like GE's new mini-gas plants, which can take up for intermittent power sources while storage technologies develop. And for every company the stock pickers are dissing, like First Solar, there's always one they're hot for, like SunPower (SPWRA), which has just bought PowerLight Corp.

If you don't confuse companies with an industry, and if you broaden your outlook, you're going to find a lot to like in renewables -- a lot worth training and hiring for.

DISCLOSURE: None.

May 27, 2011

GE’s big bet on natural gas

Marc Gunther

General Electric Co. (GE) is betting big on natural gas.

The $150-billion a year company, whose power plants generate about one-fourth of the world’s electricity, today announced a new natural-gas power plant that it says is more efficient and flexible than any other in the market.

By phone from Paris, where the announcement was made, Steve Bolze, president of GE Power & Water, told me:  “This is about transforming the industry over the next five or 10 years.”

GEEnergyLogoGE says it invested more than $500 million in the new plant development. It will be manufactured in France and sold first in Europe and Asia, and then later in the U.S.

One key selling point of the new plant is its unprecedented flexibility: It can ramp up and down rapidly, and thus be easily combined with wind and solar power plants that generate electricity intermittently.

It’s also efficient enough to work as a generator of baseload power, Bolze said. Here’s a GE webpage describing the plant and its operation.

The new GE plant—dubbed the FlexEfficiency 50–is rated at 510 megawatts and offers fuel efficiency greater than 61 percent.  Competing plants burn natural gas at efficiency rates of 57 or 58 percent, Bolze said. Each percentage point of improved efficiency saves a utility about $2 million a year, he said. Capital costs are projected to be CapitaCosts should be somewhere “north of $450 million.” he said.

What this tells you is that, all other things being equal, natural gas has become the fuel of choice for the global electricity business. Wind and solar power can’t compete with cheap gas without government mandates, subsidies or a price on carbon. Nuclear is expensive and it is deemed riskier than ever, for better or worse, after Fukushima. Coal is low cost but dirty and, as a result, politically unpopular in western Europe and the U.S.

Speaking last week at a conference, GE’s CEO, Jeff Immelt, said : “It appears like we’re entering into a natural-gas cycle.”

GE didn’t announce any customers for the plants. The businesses that comprise GE Energy—GE Power & Water, GE Energy Services and GE Oil & Gas—employ about 90,000 people and generated $38 billion in revenues last year. GE is continuing to invest in wind and solar power, the company said.

GE FlexEfficiency50 Combined Cycle Plant

DISCLOSURE: None.

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


May 26, 2011

Solar Eclipse

Debra Fiakas

The chip makers dominate discussion of the solar energy sector.  Nonetheless, a passing comment in a recent blog post introduced me to an interesting company that seems to have been over looked in the solar story  -  Apollo Solar Energy, Inc. (ASOE:  OTC/BB).

Apollo produces tellurium, a little known chemical element that looks deceptively like tin.  It is typically a by-product of copper and lead mining operations, but can be found hiding beside gold as well.  While these are very common metals, tellurium is quite rare on earth.  Outer space is another story.

Although the primary use of tellurium is in metallurgy applications, Tellurium is used in cadmium telluride solar panels.  Commercial-grade tellurium, which is not toxic, is usually marketed as minus 200-mesh powder but is also available as slabs, ingots, sticks, or lumps.  There have been concerns that current supply sources for tellurium could not keep up with demand from solar panels.  Estimates of world production are sketchy at best.  A mash-up of U.S. Geological Survey data suggests world production is in excess of 200,000 metric tons per year.

More than 90% of tellurium is produced from anode slimes collected from electrolytic copper refining.  The remainder is derived from skimmings at lead refineries and from flue dusts and gases generated during the smelting of copper and lead ores.  It is not surprising then that tellurium is produced mainly in China, the United States, Peru, Japan, and Canada  -  the main copper producing countries.  

Apollo in China calls itself a refiner of tellurium and high-purity tellurium-based metals for specific segments of the electronic materials market, i.e. solar panels.  Apollo is sourcing its tellurium from Dashuigou mine located in Sichuan Province, China and another mine in Shimian, Majiagou.  Apollo touts the Dashuigou and Majiagou mines as the only two known deposits in the world in which tellurium is the primary mineral.  

Apollo’s refining operations are Chengdu, Sichuan Province.  The company says this facility could ultimately have the capacity to produce more than 300 tons of high-purity photovoltaic cell materials and 42 other types of electronic materials.

Despite a number of potential competitors already supplying tellurium to the market , Apollo appears to have had no problem in finding customers.  Apollo negotiated a five year supply agreement with First Solar (FSLR:  Nasdaq) in November 2010.  First Solar is among the largest producers of solar cells and panels in the world.  

Apollo reported $9.6 million in total sales in 2010.  The gross margin of 15.6% was insufficient to support hefty general and administrative expenses near $7.0 million.  Consequently, Apollo reported a net loss of $5.8 million.  Cash usage by operations was $1.0 million in the year 2010, suggesting the income statement paints an unnecessarily negative picture.  Stock-based compensation, a non-cash operating expense, was $3.6 million in the year.

ASOE is trading near its 52-week low, largely due to rapidly eroding confidence in China-based companies that have executed reverse mergers into U.S. public companies.  Nonetheless, we are adding Apollo Solar Energy to the Solar Group in our Atomics Index.

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.  ASOE is included in Crystal Equity Research’s The Atomics Index in the Solar Group.

May 25, 2011

The New Golden Age of Railroads

John Petersen

Did you know that both Warren Buffett and Bill Gates have billion dollar investments in railroads?

If so, did you ever wonder why?

For Mr. Buffett, it's an indirect investment through Berkshire Hathaway, which bought the Burlington Northern Santa Fe railroad outright in February of last year. For Mr. Gates, it's a direct 10.04% stake in Canadian National Railway.

The reason is simple. Railroads are the cheapest, cleanest and most energy efficient ground transportation networks in the world, which effectively guarantees them an increasingly important role as the world comes to grips with peak cheap oil.

Railroads aren't just a little more fuel efficient than long-haul trucking. They're up to four times more fuel efficient and getting better every year. A 2009 study commissioned by the Federal Railroad Administration reported that rail fuel efficiency varied from 156 to 512 ton-miles per gallon while truck fuel efficiency ranged from 68 to 133 ton-miles per gallon. According to the Association of American Railroads, U.S. freight railroads averaged 484 ton-miles per gallon in 2010, a 106% improvement over the industry average of 235 ton-miles per gallon in 1980. If we'd done that well with passenger cars, the fleet wide average would be up around 33 mpg by now.

Trucking is certain to remain a backbone element of the world's transportation infrastructure, however the pressure to move loads from the highways to the railways can only increase as oil gets more expensive and emissions regulations get more restrictive.

One of the most appealing aspects for investors who are interested in the rail transportation sector is a limited universe of Class I Railroads, which the Department of Transportation’s Surface Transportation Board generally defines as carriers with over $400 million in revenue. The following table identifies the seven Class I Railroads and provides summary data on their rolling stock fleets, route networks, revenues, incomes and market capitalizations.

5.25.11 Railways.png

While most alternative energy investments are subject to a good deal of volatility and uncertain growth potential, railroads are about as green as fundamental value investing gets and their growth rates should be stunning for decades to come. I'm not one to blindly follow investment gurus, but in this case I believe the long-term fundamentals couldn't be better. As we enter the age of cleantech, I believe we'll also be entering a second golden age for railway transportation.

Disclosure: None.

May 24, 2011

The Clean Fossil Fuel? Natural Gas Under Fire



By Christopher Mims


According to some of the most complete calculations available, when we use natural gas to generate electricity in an average power plant, it results in 40 percent less warming than if we generate the same electricity with coal. If we fully utilized the natural gas-fired power plants that already exist in this country, we could significantly reduce the amount of coal we’re burning practically overnight. What’s more, primarily because of access to new natural gas reserves, proved reserves of natural gas recently shot up to 284 trillion cubic feet – more than we’ve had on hand at any time since 1971.

It’s for these reasons, among others, that many experts and policymakers have proposed switching to natural gas as a “bridge fuel” to immediately reduce greenhouse gas emissions while we undertake the much larger and long-term project of ramping up the percentage of our energy generated from renewables, which is currently about 7 percent. (Most of the that renewable energy is hydroelectric and biomass, to boot.)

Still, there’s another side to the story: recent research on the lifecycle of natural gas, from the moment we remove it from the ground to the moment it’s burned, has challenged assumptions about its climate-friendliness. At base, economic and policy assumptions about whether we can use natural gas to reduce emissions in the short-term depend on what we know about the effects of its extraction and use on the atmosphere.

A controversial paper

Methane, the primary constituent of natural gas, is up to 100 times more powerful a greenhouse gas than carbon dioxide over a 20 year time horizon (though other studies have found it is 72 times more powerful). As many climate scientists have pointed out, it’s precisely these near-term warming effects that we want to avoid if we wish to avoid pushing the climate toward disaster.

Robert Howarth

Robert Howarth: The Cornell professor's paper shook the natural gas establishment.

This discussion was heightened last month when Robert Howarth, a professor of ecology and environmental biology at Cornell University, published a controversial paper arguing that natural gas from fracking has a greater net warming effect on the climate than burning coal.

Howarth and his co-authors argue that one of the main problems with methane is that, as a gas, it tends to leak into the atmosphere both when it’s drilled and when it’s transported. Hydraulic fracturing, or fracking, is the process by which wells are drilled into shale rock, then water and a mix of chemicals are injected at high pressure, to crack or “frack” the deposit, allowing natural gas to escape.

“If you look at the inventory of emissions of human-controlled methane from the U.S., 25-50 percent of it is from [the use of] natural gas,” says Howarth.

Capturing “fugitive” gas

Industry has a monetary incentive to eliminate these losses, at least during the drilling and initial distribution stages, but thus far it has been slow to do so. Granted, there are barriers to eliminating leaks. For example, when a new well is being drilled, gas storage infrastructure must also be built in advance in order to capture the gas that leaks during the drilling phase. The EPA has studied Reduced Emission Completions technologies, and concluded that on the average well, these technologies mean a higher up-front investment, but they pay for themselves after 3-5 months by capturing gas that would otherwise be lost. Still, at present they are rarely built.

Howarth came to the conclusion that when we use frack-produced natural gas to generate electricity, the net effect on the climate is worse than coal when looked at from the perspective of the next 20 years. (When looked at over the course of the next 100 years, natural gas comes out ahead of coal, because methane is removed from the atmosphere more quickly than carbon dioxide.) This distinction is crucial: as conventional natural gas wells in the U.S. decline as a proportion of our gas production, more and more of our gas will come from fracked wells.

Conclusions questioned

Howarth’s conclusions have come under fire from both scientists and industry.

Science is an iterative process, and Howarth himself admits that the data he used to determine the natural gas lost during the drilling process were sparse. Unfortunately, they’re the only data available.

The conclusion of scientists like Bill Chameides, Dean of Duke’s Nicholas School of the Environment, is that we simply don’t yet have enough information to determine the climatic effect of natural gas from fracking. That won’t change until academics and industry obtain better measurements of losses of methane during drilling.

Natural gas key to more renewables

What’s more, because natural gas power plants can be fired up so quickly, they play a unique role in the world’s electricity production system — they are activated when supply, as from renewables, is outstripped by demand.

“I would say that without natural gas, the grid will not be able to manage the variability and intermittency in power output from wind and solar plants,” says Paulina Jaramillo, a professor of engineering at Carnegie Mellon.

As executive director or the RenewElec project, which aims to increase the proportion of intermittent sources of renewable energy in the world grid, Jaramillo specializes in thinking about the transition off fossil fuels. She doesn’t believe we’ll be able to get more solar and wind on the grid without natural gas, precisely because the only alternative — storage mechanisms like batteries and demand-side management — aren’t far enough along.

Howarth believes that in the future, the major drivers of these human emissions of methane will prove to be use of natural gas, especially if we come to rely on it for an ever larger portion of our energy.

The good news is that it seems the effects of methane gas can be limited through action by industry. But the economics of drilling, mediated by the actions of regulators, will determine just how “clean” natural gas ultimately proves to be.

Christopher Mims is a contributor to Good, Technology Review and The Huffington Post, and is a former editor at Scientific American and Grist.org. He tweets @mims.

This article first appeared in the Txchnologist and is reprinted with permission.

May 23, 2011

The Best Peak Oil Investments: Maersk

Tom Konrad CFA

Containerized shipping is the most efficient way to move goods, but few ships are nearly as efficient as they could be.  One company is steaming ahead of the pack.

It seems obvious that more international trade increases greenhouse gas emissions.  After all, if we buy local products rather than products made halfway around the world, we will save all the carbon emissions required to ship them to us.  It also seems to make sense that rising fuel prices will lead to a decrease in international trade, as companies reduce fuel use by assembling things closer to markets.

This facile intuition can lead us to some very inaccurate conclusions.  The manufacture of materials typically accounts for far more of their embodied carbon than their transport, and the mode of transport will also have a big impact on embodied carbon.

Here is a chart showing the associated CO2 emissions of various modes of transport (source):
Air plane (air cargo), average Cargo B747
500 g
Modern lorry or truck
60 to 150 g
Modern train
30 to 100 g
Modern ship (sea freight)
10 to 40 g
With trucks emitting far more CO2 per mile than cargo ships, a consumer in Los Angeles will have lower emissions from transport of an iPad shipped in from China than he would if he could buy the same item assembled in Indiana. (That is, if Apple were to assemble iPads in Indiana.)

Contrary to the obvious assumption, rising fuel prices might actually cause the use of ships for freight, as manufacturers reduce fuel use not by shipping things shorter distances, but by relying more heavily on efficient sea freight at the expense of less efficient land- and air-based modes of transport.  Efforts to reduce carbon emissions might also end up increasing international trade and shipping, as countries with strict carbon emissions shift production (and emissions) to countries with less strict caps (or no caps at all.)

Ship Shape

While rising fuel prices and greenhouse reduction goals may end up favoring the shipping industry as a whole, they will also do a lot to re-shape the industry.  Fuel, after all, is not just a source of emissions for the shipping industry, it is a cost, so higher fuel prices mean that more efficient shippers will have a greater cost and profitability advantage.

There are many highly economical measures that a ship owner can take to improve the efficiency of their vessel, many of which were discussed in a panel on shipping at the Carbon War Room's Creating Climate Wealth Conference on May 4th.  According to Peter Boyd, the Carbon War Room's COO, there is the potential to save 30% of shipping fuel just by applying measures with paybacks of three years or less.  Such measures include hull coatings, sails, using fans to force air bubbles under the ships hull, making the ship ride higher in the water, and waste heat recovery from the ship's engines.  The economics of such measures are further improved because some ports give discounts or special privileges to more fuel efficient (and less polluting) ships.

The problem is that approximately two thirds of the shipping fleet is leased, not owned, by its operators.  This creates a split-incentive, because the ship owner (who would pay for the upgrades) does not get the benefit of savings on fuel consumption. 

Ship operators who own more of their ships will therefore have an advantage in terms of reducing fuel use.  The largest operator of container ships, A.P. Moeller-Maersk (Copenhagen: MAERSK-A,MAERSK-B), has such an advantage, since they own approximately half of the ships they operate.  Furthermore, Maersk has shown a commitment to fuel efficiency, providing data on all their ships (even the poorly performing ones) to ShippingEfficiency.org, doing retrofits on their existing fleet, and aggressively incorporating fuel saving technologies into the new ships they order.

Ship operators who lease most of their ships only have one easy option to save fuel: slow steaming.  Just as you get better gas mileage by driving 55 than driving 70, ships can also unlock substantial fuel savings with "slow steaming."  Maersk is also a leader in its commitment to slow steaming.  While any operator can choose to run its ships slower to save fuel, this, too, provides a hidden advantage for ship owners: Lowering ship speeds effectively lowers the global fleet's carrying capacity, increasing the demand (and prices) for ships.

Conclusion

If you, like me, believe that current high oil prices are not just a blip, you should also believe that shipping companies with a proven commitment to efficiency will outperform their peers in the years to come.  Since the shipping fleet takes decades to turn over, energy efficiency first movers will retain a long term advantage, even if other firms belatedly wake up to the advantages.

What is less clear is how the shipping industry as a whole will fare as a result of long term increases in the price of fuel.  Shipping will probably gain market share from less efficient modes of transport, but higher fuel prices may also cause the entire transportation pie to shrink.  This uncertainty suggests that a long position in Maersk (MAERSK-B) might best be hedged with a short position in a broad transport ETF, such as the iShares Dow Jones Transportation Average (IYT.)

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.

May 22, 2011

Japan Wants to be World Leader in Rare Earth Recycling

by Kidela Capital Group

[ED Note: This ties in well with John Petersen's article last week about Lithium-ion battery recycling.  In both cases, it's about price, and China's actions are making Rare Earths expensive.]

Necessity is the mother of invention and Japanese industry is discovering just how true that old saying is. Last year, a diplomatic spat between Japan and China led the world’s largest supplier of Rare Earth Elements (REEs) to suspend exports of Rare Earth oxides and other critical metals to its largest single client.

Japan, like the rest of the world, is almost totally reliant on Chinese Rare Earth (RE) exports and the China’s action, which came as a shock to Japanese industry, is a sentient warning for the rest of the world.  But just as Japanese industry parlayed the oil shortages of the 1970s into the development of a new world leading, fuel efficient automobile industry, Japan hopes to use this supply disruption as a catalyst to take the global lead in Rare Earth recycling.

There is some suggestion that Japanese industry anticipated supply interruptions and stockpiled Rare Earths and other critical metals as an ameliorative measure. This has muted the immediate impact of the short term shortages. Over the long term, Japanese industry has partnered with RE miners around the world to ensure a more reliable supply. But in the medium term, Japan is looking to cover shortfalls through improved technology and recycling.

Recycling proves expensive but profitable

Recycling is, however, extremely expensive. But, the irony of Chinese export restrictions is that it has driven up world RE prices to such an extent that alternate mining sources and recycling have become  viable. To be feasible on a large scale, however, the price of REEs may have to rise even more than we have seen over the last year.

“It is very costly to collect and accumulate scrap for recycling. Merits of scale don’t work with these metals.”
The Japan Metal Economics Research Institute

The government of Japan has been instrumental in getting the recycling of REs underway and has both instituted subsidies and facilitated inter-industry cooperation. The Japanese Ministry of Trade has provided a third of a billion dollars in subsidies, which has been used as seed money for some 160 projects worth $1.34 billion. That number will increase as the Japanese government is offering another 8.9 billion yen in subsidies in the next fiscal year. The Japanese have set a goal of reducing the amount of REs imported by its domestic industry by one third.1

Japan is also investing heavily in research. Scientists at the University of Tokyo recently succeeded in separating REEs from neodymium magnets through a new, much cheaper recycling process. And a joint project by Morishita Jintan Company and Osaka Prefecture University has created a recycling process using microbes to recover rare metals such as palladium and indium. There is some hope it can be used for REs as well.2

Rare Earths from old air conditioners to computers

A number of noted Japanese companies have taken on different challenges in the recycling of REEs. Shin-Etsu Chemical is working on new systems to recycle these elements from old air-conditioners. The company is also negotiating contracts with electronic appliance suppliers to set up ways of recovering used and old appliances.3

Hitachi is recycling RE magnets from hard disk drive motors, air conditioners and compressors. Typically, recycling REEs was performed manually using acids and other chemicals, which created its own set of environmental issues. But Hitachi has recently announced a new “dry” process, which relies on a new extraction material with a high affinity for Rare Earths.  Hitachi hopes to commence full recycling operations by 2013.4

Tokyo-based Showa Denko KK recently opened a plant in Vietnam to begin recycling dysprosium and didymium. The company, the world’s biggest producer of some components used in hard disk drives, makes 8,000 tons of Rare Earth alloys a year and has plans to output 800 tons at the recycling factory.5

Other companies have formed cooperative arrangements to take on the recycling test. Mitsubishi Materials has initiated recycling ventures with Panasonic Corp. and Sharp Corp., to examine the extraction of neodymium and dysprosium from washing machines and air conditioners.6

A revitalizing new industry

Dowa Holdings, one of Japan’s oldest mining companies, recently built a large recycling plant in Kosaka in order to extract REs and other critical and valuable metals from melted down electronics components. The company has been successful in reclaiming gold, indium and antimony and is hoping to soon have processes in place to capture neodymium and dysprosium.

Dowa is more open than many other few companies about its REE recycling processes. And its disclosures give some insight into the challenges facing recycling. Every day, Dowa’s plant at Kosaka takes 300 tonnes of recyclable materials that it sources from all over the world — computer chips, cell phone speakers and other vital parts from electronics – crushes them, and then incinerates them in a furnace. From that, only 150 grams of Rare Earths are recovered. Despite this meager recovery rate, Dowa claims it still makes a profit.7

Right now, this recycling plant is also providing jobs for Kosaka, a town that has seen its metal processing business dry up in recent years. From a wider perspective, both industry and government see recycling as valuable new industry, one that Japan can exploit and one in which it can become a world leader.

“It’s about time Japan started paying more attention to recycling Rare Earths. If we can become a leader in this field, perhaps China will be the one coming to us to buy our technology.”
Utaro Sekiya, Manager, Dowa RE Recycling Plant

—–

1 Japan seeks to cut rare earth usage by a third
2
Japan, Germany seek rare earth recycling as hedge
3, 6
New Push to Recycle Rare Earth Minerals
4
Hitachi Leads Rare Earth Recycling Efforts as China Cuts Access to Supply
5
New Push to Recycle Rare Earth Minerals
7
Japan Recycles Minerals from Used Electronics

May 20, 2011

A Profitable Smart Grid Penny Stock Aims for a NASDAQ Listing

Tom Konrad CFA

A NASDAQ listing could bring a quick profit to investors who buy now, but beware the business risk.

Ambient Corp. (ABTG.OB) offers an Internet Protocol (IP) smart grid communications platform to electric utilities.  So far, they have exactly one customer: Duke Energy (DUK).  Duke selected Ambient's X-series communication node solution, which flexibly gathers data from multiple smart meters and relays it to the utility.  For instance, in some cases Duke is using Ambient's nodes to gather data from both Echelon Corporation's (ELON) smart meters using data over powerline technology, and Badger Meter's (BMI) smart gas meters which use a wireless mesh to deliver data.

Based solely on its deal with Duke, Ambient became profitable in the last quarter of 2010, and gained more ground in Q1 2011.  Yet as readers following the American Superconductor (AMSC)/Sinovel (601558.SS) saga know, over-reliance on a single customer can be very dangerous.  You can't get much more reliant on a single customer than Ambient is on Duke.

That said, Duke Energy is not a hyper-competitive Chinese wind company with investments in any of the company's competitors.  They are a regulated utility, and, as such, their moves are more transparent and conservative rather than the enigmatic and abrupt.  Major changes in Duke's strategy come out of the regulatory process, and are part of the public record.  Regulators also tend to prefer a go-slow approach, which means client acquisition for companies like Ambient is slow and painful, but also that their clients are less prone to fund competitors and start refusing deliveries with little warning.

There are advantages to having Duke as a customer as well.  Duke has been a leader in smart grid deployment, and given the conservative nature of utilities, if a smart grid solution is seen to work well for Duke, other utilities will be more likely to adopt it than to opt for a technology that has not yet been widely deployed.  One potential market expansion may come from Duke's merger with the smaller Progress Energy.  But there is also the risk that Duke might switch to the technology from Progress energy's own smart grid project.  Overall, though, I think the merger will be good for Ambient, since their interoperability makes them a natural choice for a merging company trying to consolidate two systems.

Hoped-for NASDAQ listing

The single customer is the main reason to be wary of Ambient stock.  The reasons to be optimistic include the company's current profitability, strong balance sheet, and plans to aim for a NASDAQ listing.  The company's major shareholder, Vicis Capital, has given Ambient's board permission to conduct a reverse stock split to boost the company's current $0.08-$0.09 share price over the $4 threshold needed for a listing. 

The company is also working to raise their profile by retaining a PR firm, Elevate Communications of Boston.  I'm not sure when the firm was retained, but I received my first press release from them when Ambient released their 2010 results in February.  They contacted me again last week, although they did not respond when I requested an interview with the CEO in preparation for this article. [Update: I was contacted by Elevate in response to this article. They very much wanted to brief me on the company, but had not seen my email.] I mainly wanted to ask him about their prospects for finding other customers, and why nothing has come of the R&D effort with ConEd in 2007.  Assessing why past potential deals did not materialize might give some insight into Ambient's future prospects.

That said, the fact that Ambient only has one customer is old news. 

What's new news is that the one customer has become lucrative enough to push Ambient into profitability.  I'm not sure how much of the current profitability is due to stimulus-related smart grid spending by Duke, but I trust that it will likely continue for a few more quarters, if only because Ambient does not seem to be in a hurry to complete their reverse split and get listed.  So I'm betting that there will be at least a few more good quarters to get investors excited and give a quick return to those who get in now.

Other investors seem to think so, too.  The stock price found a bottom around $0.075 and started moving upwards since the positive Q1 earnings and revenue numbers.

ABTG chart

Conclusion

I think Ambient is worth speculating on at the current $0.09 stock price.  If they manage to find another big customer soon, I'd consider them a good long term buy, but as it is I'm more comfortable holding for less than a year to take advantage of the currently growing profitability and potential listing.

DISCLOSURE: Long ABTG.OB.

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.

May 18, 2011

First Quarter Earnings Omens and Bright Spots in Energy Storage

John Petersen

The first quarter earning season is usually boring because it follows 45 days after year-end earnings reports and significant changes are the exception, rather than the rule. This year, the energy storage sector has been a clear exception and every company I track, other than the amazing gravity defying Tesla Motors, is down from its March 31st close. The following table summarizes the performance of the stocks I track from June 30th of last year and March 31st of this year through yesterday's close.

5.18.11 Performance.png

While some of the declines can be attributed to transitory market volatility, others are more ominous. There are also some bright spots that point to significant opportunity. I'll briefly summarize the developments I consider important below.

Ener1 (HEV) is a company that's likely to face serious headwinds this year. In the first quarter they decided to write off their equity investment in Th!nk and booked $73.3 million in losses associated with the decision. As painful as these write-offs were, I believe we've only seen the first chapter. Th!nk is in the middle of a restructuring and Ener1 still carries $31 million of loans to and receivables from Th!nk on its balance sheet. Since restructurings are almost never kind to related party creditors, I believe a partial or full impairment of the remaining Th!nk accounts is likely later this year. I'm even more concerned about $10.7 million of intangible assets and $52.8 million of goodwill that arose from the accounting aether when Ener1 issued stock to buy a 19.5% interest in EnerDel and an 83% interest in Enertech. Intangible asset values of that magnitude are hard to justify in a profitable company. They're almost impossible to justify in a development stage company. In a worst-case scenario Ener1 could see 70% of its book value obliterated by additional asset impairments.

Valence Technologies (VLNC) won't report its year-end results till next week, but it looks like they may be losing an important customer to A123 Systems, which recently announced that it's been selected to provide battery packs to Smith Electric Vehicles. It's unclear whether A123 will get all of Smith's future business or if the two companies will both supply batteries. Regardless of the outcome it can't be good news for Valence which was hoping to finally break even after two decades of slow exsanguination. Since Valence is deeply under water from a balance sheet perspective, my outlook remains grim.

Altair Nanotechnologies (ALTI) has maintained a fairly stable market price on the strength of a pending investment from Canon Investment Holdings Limited. After yesterdays close, Altair announced that the closing date has been delayed yet again and that certain restrictions and penalty provisions in the original agreements have been modified or waived. While the outcome is far from certain, the short-term risks to Altair shareholders are not insignificant.

A123 Systems (AONE) is one of the bright spots for investors who believe that plug-in vehicles will become an important market force over the next few years. In late March it announced a public offering that provided about $254 million in new working capital. Roughly half of the financing came from sales of common stock at $6 per share and the balance came from subordinated debt that will be convertible at $7.20. On a fully diluted basis, the shares issued and issuable in connection with the public offering represent 27.5% of the company and imply a minimum market value of $6.32 per share. In the lithium-ion battery space, A123 strikes me as the only logical investment choice.

Axion Power (AXPW.OB) is a second bright spot that reported another quarter of solid execution. It confirmed that its second-generation automated electrode fabrication line has been installed and tested end-to-end, and is currently being tweaked to optimize dwell times. It also reported that a long awaited battery sale to Norfolk Southern was reduced to a purchase order. New disclosures confirmed that Axion has been working on HEV battery systems with a giant US automaker for the last year and that a pending DOE grant application names Axion as the prime contractor with the automaker, a research university and a national laboratory as named subcontractors. While a potential DOE grant in the $6 million range is not a company-maker, this is the first grant application I've heard of where an automaker agreed to share the marquee, much less share the marquee in a supporting role. My regular readers won't be surprised by these developments, but a one of a kind DOE grant will, if awarded, almost certainly draw significant attention from market participants who've never heard my name and don't know that Axion exists.

Exide Technologies (XIDE) won't report its year-end results till June, but it's a bright spot that has substantial short-term upside because it's still suffering the lingering effects of a rough patch it went through in 2008 and 2009. Based on their most recent earnings reports, Johnson Controls (JCI) and Enersys (ENS) are both trading for roughly 16x earnings and 0.8x sales. Exide, in comparison, is trading a 9x earnings and 0.3x sales. As market confidence builds and the weighing machine assumes supremacy over the voting machine, I have to believe Exide's stock price will gain 50% to 75% as it catches up with its peers.

The China Companies Group has been savaged over the last few months by the shamefully xenophobic logic that since some Chinese reverse merger companies behaved badly they must all be evil. They've been subjected to blistering attacks from acknowledged short sellers that take innuendo and conjecture to a whole new level. The problem, of course, is that writers like me can't jump to their defense without an on the ground due diligence investigation. I expect the pressure to continue until saber rattling law firms complete their investigations and either find substantive problems or abandon the crusade. Once the air finally clears, I think many will view the current turmoil as the buying opportunity of the decade.

Tesla Motors (TSLA) continues to defy common sense and gravity as the poster child for irrational exuberance. Its book value at March 31st was $168 million and its market capitalization at yesterday's close was $2.5 billion. In the most recent conference call management telegraphed plans to seek additional equity financing later this year. Last week I moderated an alternative energy panel discussion at a private meeting of money managers. The consensus was that Tesla would be able to raise additional capital, but not at a 15x premium to book. Investors in A123 were distressed when it conducted a public offering at a 25% discount to market that represented a 2x premium to book. I can't even begin to imagine how the Tesla stockholders will respond when irrational expectations hit the brick wall of new investor valuation metrics.

In early March I created two hypothetical $25,000 portfolios. My long fuel efficiency portfolio included JCI, Enersys, Exide, Maxwell Technologies (MXWL) and Axion. Given the poor performance of the sector over the last month that long portfolio was down 9.3% at yesterday's close. My short vehicle electrification portfolio included Tesla, A123, Ener1, Valence and Altair. It's currently in the green by 31% and without the gravity defying performance of Tesla, my gains on the short portfolio would have been much higher.

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

May 17, 2011

If Energy Were Free and Unlimited…

David Gold

As soon as gas prices rise, our nation becomes focused on energy.  When they drop again, it falls off most consumers’ radar.  Yet the importance of energy goes way beyond the cost of filling up your gas tank or paying your electric bill.  In often-extraordinary ways, energy is interwoven into absolutely everything that we need to live or that we love to do.  One of the most useful tricks I learned in engineering school is that to put any problem in perspective, it helps to ask what if things were at zero or infinity.  So, to put things in perspective, let’s ask the question…

 “What if energy were free and unlimited?”

·      People would be able to travel at bargain-basement rates.
Yes, the cost of land vehicle transportation, which is so much of the focus in the press, would drop by 25%-35%[i].  But, in addition, airline costs would plummet as much as 50%.  With this would come increased commerce and maybe even greater worldly understanding, as more people are able to travel.

·      The world’s growing shortage of fresh water would largely disappear.
A huge amount of energy is expended on the conveyance, pre-treatment, distribution and wastewater treatment.   Energy represents 30% or more of a typical municipal water facility’s expenses.[ii]  With free energy, water could affordably be produced in abundance through the highly energy-intensive processes of desalination, wastewater purification or even direct extraction of water out of the air.

·      Few in the world would go hungry.
Today, energy represents roughly 30-45%[iii] of the cost of the food we put in our mouths.  Farming, transporting, processing, packaging and retailing all consume tremendous amounts of energy.   The price of food would drop and the availability of food would skyrocket.  With free and unlimited energy, food could be grown affordably just about anywhere, given that water would be readily available and, where necessary, climate-controlled growing facilities would become inexpensive to operate.

·      Economic prosperity would reign.
The correlation between energy consumption and standard of living is strong.[iv]  Everything that we use consumes energy to be produced and transported.  For example, energy represents roughly 50% of ocean shipping cost and 40% of aluminum production cost. Impoverished people would have more food to eat and cleaner water, their homes would become more comfortable, and the price of almost everything they buy would go down instantly, boosting their quality of life.  


So, the next time you hear complaints about high gas prices for our cars, remember that energy affects much more than just the cost of your ride to work or trip to the beach.  With this perspective in mind, it doesn’t take much to figure out what things would look like in the opposite scenario, where energy becomes extremely expensive and scarce as fossil fuels diminish.  It isn’t a matter of whether we will move away from fossil fuel consumption; it’s a matter of over what time period and with how much economic, national security and environmental pain along the way.
The free market will most assuredly create more alternatives as energy prices rise.  If we could be confident that future increases in energy prices would be gradual over a long period of time and that global warming was not a concern, there would be little reason to take any particular action.  But history has already shown us that changes in fuel prices are unlikely to be gradual.  And the growing industrialization of major portions of the world such as China and India mean that world energy consumption is likely to grow roughly 50% over the next 20 years.
 This leaves little doubt about the direction of energy prices in a world dependent mostly on fossil fuels. From a venture capital perspective, it is this type of disruption that makes cleantech a compelling area for investment.  From a policy perspective, if we are faced with high energy prices for an extended period of time or if global warming creates environmental chaos, the negative impacts could be extraordinary and would impact virtually every part of our lives.   But, on the positive side, an expensive gas tank fill up would soon be the least of our concerns!

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

[i] Transportation:
o    Fuel costs alone are roughly 45% of airline operating expenses and that doesn’t include energy costs incurred for ground support vehicles or buildings used by airlines.
o    Driving a car would cost 25%-35% less per mile. (@ $3.50/gallon gas cost).
[ii] Water:
·       3% of all energy consumption used to move, treat water30% of municipal water agency expenses are energy.
[iii] Food:
·       17% of all energy consumption goes to creating and getting food to the grocery story. http://www.p2pays.org/ref/08/07686.pdf
·       As a result, roughly $240B per year is spent in the U.S. on energy costs related to food.
·       This equates to roughly $2,000 per family unit per year http://www.bls.gov/news.release/cesan.nr0.htm
·       Those same family units spend roughly $6,400 per year on food.
·       Thus, if energy were free, food could cost roughly 31% less.  Then there is the energy cost of getting the food home, preparing it, clean dishes and disposing of waste.
[iv] World Prosperity
·       Correlation to standard of living.
·       Shipping costs.
·       Aluminum costs.

May 16, 2011

Why Advanced Lithium Ion Batteries Won't Be Recycled

John Petersen

One of the most pervasive and enduring myths in the energy storage sector is that a robust recycling infrastructure for used lithium-ion batteries will be built before the wonder-batteries that are being manufactured today for the first generation of plug-in vehicles reach the end of their useful lives. In the worst case scenario, advocates suggest used lithium-ion batteries will be stockpiled until there are enough used batteries to justify the build-out of recycling infrastructure.

The numbers tell a very different story.

For several years the single minded obsession of all lithium-ion battery developers has been reducing costs to a point where using batteries as a substitute for a fuel tank makes economic sense. Most of the progress has come from substituting cheap raw materials like iron, manganese and titanium for the more costly cobalt and nickel that were used in first generation lithium-ion batteries. Unfortunately, when you slash the cost of the materials that go into a battery you also slash the value of the materials that can be recovered from that battery at the end of its useful life.

Using Material Data Safety Sheets from Powerizer and current LME Prices from MetalPrices.com, I've calculated the value of the metals that can be recovered from recycling a ton of used batteries and summarized them in the following table.

Battery Chemistry
Metal Value
Per Ton
Lithium cobalt oxide
$25,000
Lead acid
$1,400
Lithium iron phosphate
$400
Lithium manganese
$300

Given the extremely high metal value of used cobalt-based lithium batteries it seems strange that only one company in the world, Unicore of Belgium, has bothered to develop a recycling process. When you take the time to read and digest Umicore's process description, however, the reason becomes obvious. Recycling lithium-ion batteries is an incredibly complex and expensive undertaking that includes:
  • Collection and reception of batteries;
  • Burning of flammable electrolytes;
  • Neutralization of hazardous internal chemistry;
  • Smelting of metallic components;
  • Refining & purification of recovered high value metals; and
  • Disposal of non-recoverable waste metals like lithium and aluminum.
The process is economic when a ton of batteries contains up to 600 pounds of recoverable cobalt that's worth $40 a pound. The instant you take the cobalt out of the equation, the process becomes hopelessly uneconomic. Products that cannot be economically recycled can only end up in one place, your friendly neighborhood landfill.

Lead-acid batteries are the most widely recycled product in the world because they're 70% lead by weight, the recycling process is simple and a robust global recycling infrastructure already exists. Many leading lead-acid battery manufacturers including Johnson Controls (JCI) and Exide Technologies (XIDE) view their recycling operations as major profit centers that also insure continuity of raw materials supply.

Despite their extremely high metal value, cobalt-based lithium batteries are rarely recycled because process is so difficult and expensive.

In light of their appallingly low metal values, lithium iron phosphate batteries from A123 Systems (AONE) and Valence Technologies (VLNC), lithium manganese batteries from Ener1 (HEV) and lithium titanate batteries from Altair Nanotechnologies (ALTI) will never be reasonable candidates for recycling, which effectively guarantees that buyers will ultimately be required to pay huge up-front disposal fees – think tires with a few more zeros.

In the final analysis, the recycling mythology is just another glaring example of unconscionable waste and pollution masquerading as conservation.

Disclosure: None

May 15, 2011

Smale Scale Nukes

by Debra Fiakas CFA

The on-going crisis at one of Japan’s key nuclear power plants following earthquake and tsunami damage has everyone, even proponents of nuclear energy on edge. Previous nuclear accidents, such as the disasters at Russia’s Chernobyl reactor and the U.S.’s Three Mile Island, were traced back to human error. Now it appears regulators and operators of Japan’s Fukushima plant may have had some awareness that the plant design could not withstand the onslaught of a major tsunami. Again better human performance may have averted the situation that now threatens a breach of a reactor core.

Designers of nuclear plants have invented all sorts of ingenious means to minimize the threat of radiation leaks. They have provided to all contingencies - except human error. NuScale Power, Inc., based in Corvallis, OR, believes they have also found a way to minimize the fallout (pun intended) even if human error should occur.

NuScale has developed a modular, scalable light water reactor that is intended as a building block for a nuclear power plant. Each module would produce 45 MWe of energy through its own steam turbine. The system uses a convection process to transfer heat from water in the reactor system to water in the turbine system. Since no pumps are required to keep the reactor water circulating, NuScale engineers believe the design has a key advantage over power-dependent systems.

The company proposes to assemble a group of twelve modules for a 540 MWe power plant. Such a plant would be considerably smaller than conventional power plants that often feature reactors with 1000 MWe capacity. Herein resides another advantage touted by NuScale engineers. The smaller scale design has just 4% of the nuclear fuel inventory of a conventional reactor, putting significantly less radiation at risk per operating unit.

NuScale has several steps ahead of it to successfully put into operation a power plant based on its design. The company licensed technology from Oregon State University and has perfected the design enough to approach the U.S. Nuclear Regulator Commission for design certification. The company expects to submit a formal application in 2012. If the review process proceeds on schedule, the design should be approved by 2015. For the construction phase NuScale has already partnered with Kiewit Construction, which helped complete a detailed preliminary plant design and cost study. If all steps remain on schedule NuScale expect to have an operational plant by the end of 2018.

NuScale Power is a private company that has revealed few details about its financial requirements. We doubt the company is sufficiently well capitalized to execute fully on its business plan without external financing. Unfortunately, we expect such a round to be restricted to institutional or accredited investors. Nonetheless, it is worthwhile putting NuScale on our list of companies to watch in the nuclear sector so we added the company to The Atomics Index in the Nuclear Group.

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. NuScale Power is included in Crystal Equity Research’s The Atomics Index in the Nuclear Group.


May 13, 2011

The Rare Earth Supply Chain: Ores, Concentrates, Compounds, Oxides and Metals

REE Refining 101
by Kidela Capital Group

“There is a reason why the Rare Earths are called rare. They’re not called rare because they’re truly rare. They’re called rare because it’s very difficult to isolate these elements individually and it takes a lot of skill to do that.”
Constantine Karayannopoulos, chief executive of Neo Material Technologies1

Rare Earth Elements have become an indispensable part of modern life, found in everyday items like computers, camera lenses and high efficiency light bulbs to complex, emerging technologies in the optics, medical and defence spheres. But before these elements end up in your smartphone, they need to be transformed into highly processed, high-purity compounds, oxides and metals.  This is an expensive, time-consuming, and arduous process.  One of the consequences of having one country – China – holding a near monopoly on Rare Earth production over the past two decades is that around the world there is a general lack of processing expertise or knowledge on how to do this.

Here is a brief overview on what is involved in converting the raw material that comes out of the ground, into usable Rare Earth (RE) products.

Step 1: Mining the Ore

The first step is to mine the ore. These ores contain RE bearing minerals like bastneasite and monazite, but generally contain very low concentrations of the Rare Earth Elements (REEs) themselves.

Even a relatively high grade ore only contains about two percent Rare Earth Oxides (REOs),2 which at this stage are undifferentiated groupings of REs combined with oxygen. Depending on the grade, it can take anywhere from 6 to 86 tons of ore to produce a single ton of RE mineral product.3

Step 2: Producing RE Concentrates

The next step is to mill the ore, a process otherwise known as beneficiation or mineral dressing. Here, the ore is ground up to form fine particles (usually less than 1 mm or even less than 0.1 mm) using crushers and rotating grinding mills.4 The valuable minerals are then concentrated using such separation techniques as froth flotation, magnetic separation, and gravity or electrostatic concentration.5

The milling process produces a concentrate of RE minerals, which usually contains five or more times the original RE concentration in the mined ore.  The milling equipment – the crushers, grinding mills, flotation devices, and magnetic, gravity, and electrostatic separators – all have to be configured in a way that suits the type of RE ore being mined. No two ores respond the same way, which means every RE milling plant is different.6 And because transporting large volumes of RE concentrate is so expensive, the mineral dressing plant is almost always located very close to the mine where the ore is mined.7

Step 3: Producing RE Compounds

At this stage, the RE concentrate contains Rare Earths at a higher grade than the raw ore (up to five times as much), but it is still in the form if the original natural minerals.8 These minerals have to undergo chemical treatment to allow further separation and upgrading of the REEs.  This process – called cracking – includes techniques like roasting, salt or caustic fusion, high temperature sulphation, and acid leaching which allow the REEs within a concentrate to be dissolved.9

Because REEs are so similar to one other, what’s often produced initially is an undifferentiated REO product with large amounts of Light Rare Earths like cerium and lanthanum, and smaller amounts of the others according to their proportions in the ore mineral.

Processing techniques such as selective precipitation, ion exchange, and solvent extraction technologies are now required to remove most of the impurities and produce the desired combinations of RE compounds.

Once produced, these mixed RE compounds can be used on their own, for applications where any one of the REEs has the desired effect – for example, in the production of steel alloys, in catalysts, or as an abrasive for glass polishing.10 Alternately, they continue on to the next stage in the RE processing chain, as a higher grade, intermediate chemical compound that is now ready for additional refining. The nature of the final product of the chemical upgrading process depends on the exact composition of the mineral concentrate, market demands, and the size of the operation.11

The equipment used here – sophisticated analytical devices, furnaces, filters, and the vast array of collection, evaporation and clarification tanks required in ion exchange and multi-stage solvent extraction technology – are usually configured in a way that best suits a particular RE concentrate.12 Because each concentrate has a different combination of minerals, each RE workflow –– and a result each chemical upgrading plant – is typically unique.13

The chemical upgrading process generally eliminates most impurities and produces one or more kinds of mixed RE concentrate. If it contains a generally high amount of REOs (say, 50%), this product can transported fairly long distances without adding a great deal of cost to the commodity.14

Step 4: Producing RE Oxides

The major value-add relative to RE processing lies in the production of high purity RE oxides and metals.  But creating the 99.9% purity (or even higher) REs15 required to make phosphors, lamps, magnets, batteries, and other products that need REs to function efficiently, is not simple – far from it. Separating the REEs into their individual oxides may take 50 chemical tanks to separate Light Rare Earth Elements (LREEs), and up to 1,000 tanks of sequential solvent extraction to properly separate Heavy Rare Earth Elements (HREEs).16

The typical RE refinery uses ion exchange and/or multi-stage solvent extraction technology to separate and purify the REEs. These processes break the mixed RE compounds down through the exploitation of the subtle differences between the REEs.  It`s done by atomic weight­ – cerium, the first of lanthanides on the periodic table and the most abundant of the Rare Earths, is separated first. To get the more valuable HREEs like dysprosium, terbium and yttrium other REEs on the periodic table must be separated out beforehand.17

The refinery plant can be combined with the chemical upgrading plant described earlier, or it can be a stand-alone facility. As in the case of the other plants, the RE refineries are sized and configured to suit the unique composition of the feed material.18 For this reason, a plant designed to purify LREE compounds would normally have difficulty handling an increased proportion of HREEs.19

High purity Rare Earth Oxides are one product of the refining process. The composition of these REOs can vary greatly, since they are generally designed to meet the specifications laid out by end product manufacturers.20 A REO that suits one customers needs may not suit another.

Step 5: Producing RE Metals

The rapid advance of science and technology has led to some RE applications that require very high purities of individual REEs – as much as 99.99999 percent.21 For these applications,  multi-stage solvent extraction is generally used to refine the REOs into their essential metal form.  These Rare Earth Metals (REMs) can used on their own in end products, or combined with other elements to form alloys for advanced technology applications. Techniques such as optical or mass spectrometry are commonly used to help assess the purity of RE products.22

Upgrading Rare Earth ores to high-purity metals adds orders of magnitude to their value. For this reason, prices for mixed RE concentrates are generally much less expensive than for high purity Rare Earth metals.23

RE metals, or earlier stage products like an REO concentrate or mixed element compound, are now ready for use in the end product, be it a hybrid car, a BlackBerry, or the permanent magnet of Magnetic Resonance Imaging machine. It’s important to remember that it’s by no means a simple path from Rare Earth ore to any of the growing number of Rare Earth applications that we’ve come to depend on in this green, information age.

1, 3, 17 From mine to wind turbine: the rare earth cycle
2, 4, 5, 6, 7, 8, 9, 11, 12, 13, 14, 15, 19, 21 Extracting & Refining Rare Earths… Can some processes be centralized
10, 18, 22 Rare earths from supernova to superconductor
16 Critical Times for Critical Metals
20 From mine to wind turbine: the rare earth cycle
23 Rare Earth Processing in Malaysia: Case Study of ARE and MAREC Plants

May 12, 2011

Blue Mountain Disappoints; Nevada Geothermal Power Looks Like a Takeover Target

Tom Konrad CFA

Which company might snatch battered Nevada Geothermal Power out of the scratch-and-dent bin for a song?

When Raser Technologies (RZTIQ.OB) declared bankruptcy at the end of April, I shrugged it off.  I saw the writing on the wall for Raser in September 2009, when they failed to get a DOE loan guarantee.  But part of the letdown also had to do with resource risk: the company was producing consistently less power from their 10MW (rated) Thermo plant than expected.

Early in 2011, Ram Power (RPG.TO, RAMPF.PK) stock was clobbered when they announced construction delays and higher than expected procurement costs in their Nicaraguan San Jacinto-Tizate project, requiring them to switch drilling contractors.  In order to make up the extra cost, they recently priced a stock and warrant offering at an 80% discount to where the stock had stood at the start of the year.

Then Nevada Geothermal Power (NGLPF.OB, NGP.V) announced "lower than anticipated power production and a forecast gradual temperature decline" at their flagship Faulkner 1 geothermal plant at Blue Mountain.  They now predict that the 49.5 MW rated plant will produce only 35 MW (net) in 2011, and then decline about 2.5% per year.  Although NGP tried to soften the blow by also providing information about several of their other projects that are proceeding well, the stock sold off 50% on the day of the announcement, most likely prompted by the statement that they "will not be able to meet the terms of its loan with EIG Global Energy Partners (EIG)... and accordingly... the Company has begun discussions with EIG in order to make changes to the capital structure." 

Investors are clearly afraid of stock dilution as the result of the negotiations with EIG, and although the bad news at Falkner 1 probably does not justify the $30M drop in market capitalization that occurred the day of the announcement, the prospect of dilution tends to cause undervalued stocks to become more undervalued over time in a viscous cycle, since new capital raises usually happen in reference to the current (depressed) stock price.

goethermal E&P Companies stock chart

Takeover Target?

Nevada Geothermal's enterprise value (market capitalization plus debt) at the close on May 11 was $202 million.  The company has over 70 MW (net) of producing power plants, plus a number of other projects such as Crump Geyser, which is currently being developed in a joint venture with Ormat Technologies (ORA), in which Ormat is providing all the necessary cash to develop the project.  Even if we assume the value of these other projects is zero, the market is currently valuing the producing projects at less than $3/W installed.  While that might be a fair price for solar project with a 20% capacity factor, geothermal plants are baseload, and produce more than 4 times as much energy per MW as solar.

Both Ram Power and Nevada Geothermal look like bargains in terms of assets, although Ram looks like a less likely takeover target, having recently raised capital.  I would not be surprised to see takeover offers for NGP from better capitalized companies in the coming months. 

Ross Beaty, CEO of Magma Energy Corp. (MXY.TO,MGMXF.PK), which is soon to become Alterra Power Corp in a takeover of Plutonic Power Corp (PUOPF.PK) is one likely buyer.  Part of Beaty's justification for the Plutonic takeover was the scale to raise money for renewable energy development.  Taking over Ram Power or Nevada Geothermal in an all-stock deal would help him achieve this goal while increasing Alterra's revenue per share.  Before the Plutonic acquisition, Beaty said that his company was looking beyond the geothermal industry for accretive growth opportunities.  At current share prices, he might take a page from Oil companies' play book, and drill for opportunity on Wall Street (or King Street West, in this case, since both are listed on the Toronto Stock Exchange.)

If that's what Beaty has in mind, he may not lack for competition.  Ormat has $65M in cash on its balance sheet.  With Nevada Geothermal trading at a $29M market cap, why do expensive joint ventures like Crump Geyser with NGP, when they could buy the company outright to get access to its geothermal prospects?

Other deep-pocketed potential bidders are oil major Chevron (CVX), natural gas power producer Calpine (CPN) and the Italian utility Enel (ENLAY.PK), all of which have experience with geothermal.

Conclusion

I don't expect to recover my investments in Nevada Geothermal or Ram Power anytime soon, but given the current rock-bottom valuations, there's a lot of room for a bigger player to come in and scoop up the pieces for more than the stocks are currently trading for.

DISCLOSURE: Long RAMPF, NGPLF, MGMXF, PUOPF.

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.

See also: Oil Money Needed for Geothermal Projects.

Oil Money Needed for Geothermal Projects

By Dana Blankenhorn

Despite America's leadership in geothermal the industry remains in the “and” category. As in, “solar, wind, tidal, biofuels AND geothermal.”

It's an afterthought. (Picture from Evergreen State University.)

Why are geothermal companies having to organize politically to gain crumbs from the capital table?

The answer is pretty obvious, but no one seems willing to state it plainly.

The oil industry is holding back.

A recent Time Magazine article on renewables and oil investment makes it pretty plain. Total's bought into solar, Shell and BP into biofuels. Chile's state oil-and-gas company sold-out its geothermal interests to a specialty firm.  One of the bigger geothermal players, Raser Technologies (RZTIQ.OB), has just gone into bankruptcy.

What's holding up geothermal energy is an issue the oil business knows a lot about – drilling risks.  As Brian Harenza of of Hannon Armstrong, a geothermal financier, told Oilprice.com “There are a lot of providers of capital who are interested in start-up and operation, but no one wants to finance the drilling risk.”  Hannon Armstrong has united with an Icelandic bank to invest in geothermal, but they're having a tough time because they don't want to take on drilling risks.

What's missing? Oil industry expertise is what's missing. (Where's Sarah Palin when you need her? Drill, baby drill.)

Japan, for instance, should be the Saudi Arabia of geothermal, especially as hopes for a nuclear future fade in the Fukushima fall-out. Yet a recent New York Times piece on Japan was filled with excuses as to why this hasn't happened – hot water can run cold, you might bring up smelly hydrogen dioxide, drilling can cause earthquakes, and ryokans don't want competition for their resource.

But it's not a question of geothermal or solar, geothermal or wind. It's a question of geothermal and wind and solar and tidal projects or oil and gas and coal, which are guaranteed to keep getting more expensive and, in time, run out.

The Time story, which didn't take much note of geothermal, nevertheless ends this way. “If Big Oil can really start treating renewable energy the way it does potential drilling sites—as the source for future revenue—maybe it will earn an early end to the latest round of demonization.”

Instead of pressing Big Oil to put pennies into biofuels or solar start-ups, it's time to make their tax breaks contingent on serious investment in something we know is more abundant than even oil – that's the heat of the rocks beneath our feet.

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

Related stories: Geothermal Stocks Overview, Geothermal Companies Receive Cost Sharing Grants from DOE

May 11, 2011

Carbon War Room CEO: "Radical Incrementalism Will Fail"

Tom Konrad CFA

The Richard Branson-backed nonprofit, the Carbon War Room is a group that thinks big in the battle against catastrophic climate change.  They're only interested in attacking problems with the potential to reduce carbon emissions on the gigaton scale, that is reducing emissions by a trillion tons a year. 

No one nonprofit or even one multinational company can deploy the necessary capital to seize a fraction of the opportunities on this scale.  An annual gigaton of carbon emission reductions requires between $300 billion (Energy Efficiency) and $2 trillion (Solar PV) in up-front investment, according to Jigar Shah, the Carbon War Room's CEO and a solar business model innovator in his own right.

Instead, the Carbon War Room looks for overlooked opportunities to effect market transformation which will allow green entrepreneurs to thrive and rapidly scale profitable business models that also have the effect of reducing carbon emissions at the gigaton scale.  As these new opportunities grow and prove themselves, large companies and capital providers can step in to take advantage of the new profit opportunities, displacing less forward thinking incumbents as they go.

One such example of the Carbon War Room's efforts at shaking up old industries is their ShippingEfficiency.org initiative.  This site gives businesses shipping goods an idea of how efficient various ships are, so they can make their decision of which ship to use based not only on price, but on emissions.  Even though the ratings currently available are not perfect, with big shippers like WalMart (WMT) taking an increasing interest in the environmental impact of their supply chains, the greater transparency can only help the shipping industry to clean up its act. 

The Carbon War Room chose to work on catalyzing improvements in shipping in part because the sector had so far received very little attention, there is a suite of mature technologies for improving ships' efficiency with quick paybacks, and those solutions can potentially be deployed quickly to reduce carbon on a gigaton scale.

The Investing Angle

The Carbon War Room's criteria to choosing projects also make a lot of sense for a stock market investor trying to pick stocks.  Looking at sectors that other investors are ignoring is a good way to find undervalued stocks.  Focusing on technologies that are deployable today is a good way to avoid stocks about to head into the Valley of Death.  And quickly deployable technologies mean there is a large potential for profit growth.

I just returned from the Carbon War Room's Creating Climate Wealth conference in DC.  It was a working conference, where the attendees collaborate across disciplines to find new ways to catalyze profitable carbon reduction, and I've come back with a few ideas about how to create a little carbon wealth in the stock market.  I plan to share them with readers in future articles.

But first, a note about what to avoid.

Radical Incrementalism

I sat down for an interview with Jigar Shah on the second day of the conference.  One thing he told me should be taken to heart by all investors hoping to make a difference on climate change: "Radical incrementalism will fail."

What does he mean by the oxymoronic phrase "radical incrementalism"? Doing the same thing we've been doing all along, but in a slightly more efficient manner.  This simply does not produce the climate gains we need. 

In transport, the highly flawed CAFE standards are the best tool we have to increase vehicle efficiency, but more efficient vehicles (even if we ignore Jevons' Paradox) may reduce emissions per mile, but they don't get us anywhere as long as miles driven are rising.  The greatest potential lies in alternative transport: bike sharing, car sharing, and transit.

In agriculture, it has been extremely difficult to make even the smallest changes in how monoculture farms are run.  The greatest potential lies in containerized farming, which can produce fresh vegetables on the roof of the very same supermarket in which they will be sold, while lowering cost, reducing food-miles, and increasing freshness.

Trying to fit new technologies into old ways of doing things seldom works as well as we would hope.  The strongest force holding back a new, low carbon economy is our attachment to legacy business processes, not any lack of technology.  By catalyzing changes in business processes, low carbon technologies can be unleashed, creating wealth for the companies who embrace them while reducing greenhouse gas emissions.

You can't create great climate wealth without breaking a few paradigms.

May 09, 2011

Foundations don’t practice what they preach

by Stephen Viederman
 
Philanthropic foundations are like old-fashioned slot machines. They have one arm and are known for their occasional payout.

Although the term “mission-related investing” found its way into the lexicon of philanthropy decades ago, the finance committees of most foundations continue to manage their endowments like investment bankers. Their portfolios give no hint that they are institutions whose purpose is the public benefit. There is a chasm between mission – grantmaking – and investment. The logic of a synergy between the two has yet to take hold.

For example, number of reports circulated in the US and the UK in the last few years laid out ways that foundations can “win the war on climate.” The focus was entirely on grantmaking. None made any reference to the various ways that assets could be used to add value to their grantmaking.

My op-ed in the Chronicle of Philanthropy, pointing out the ways that assets could help “win the war” went unanswered by the authors of the reports and by foundations. Among the 25 biggest climate funders, very few have climate investments, and only one –the Jessie Smith Noyes Foundation — is an active shareowner on climate issues.

US philanthropy is a big enterprise with over $500 billion in assets. Unfortunately share ownership is not taken seriously. Investing to avoid predictable and preventable surprises is smart investing. Voting proxies and filing resolutions is an ownership obligation rarely exercised.

What I’m calling the Bermuda Triangle of foundation investing seems to swallow up discussions of assets as an instrument of change. On one side of the triangle is the board and investment committee; the second is the investment office; and the third is the consultant. Their views on finance, formed in the same business schools, see reality – the world as it is – as an externality, and intangible. Water availability and utilization, climate change, human rights, working conditions, diversity on boards are issues not factored into their investment decisions, which are made for the short-term, as if the future did not matter. In the foundation setting, as in their day jobs, their awareness is bounded by what they have learned with few incentives to change.

Little time is spent exploring new ideas, leading to what has been called “willful blindness.” And yet these same people after work and on weekends are often very eleemosynary, devoting their time and money to organizations seeking to remedy these issues. Vocation and avocation are split, as demonstrated by the philanthropy of Bill Gates and Warren Buffet. [Note from Marc: The LA Times highlighted the issue with respect to Gates in 2007. See Dark cloud over good works of Gates Foundation.)

Within the triangle outdated views of fiduciary duty prevail. The myth that mission-related investments will underperform remains pervasive. Maximizing alpha, the old-fashioned way, takes precedence over benefit to meet the public good, and to harmonizing investments and grantmaking.  In fact, these are complementary not conflicting activities. Michael Jensen and his colleagues at the Harvard Business School are studying organizational integrity, “that group’s or organization’s word being whole and complete.” The concept incorporates morality, ethics, and legality. Their model “reveals a causal link between integrity and increased performance, in whatever way one chooses to define performance (for example, quality of life, or value-creation for all entities).”

As president of the Jessie Smith Noyes Foundation in the early 90s I worked with my board to “reduce the dissonance” between our grantmaking and our asset management. We screened our portfolio, which was state-of-the-art at the time; filed a shareowner resolution with Intel in support of our grantee, the South West Organizing Project, as well as with other companies on environmental issues; voted all our proxies; and had our own social venture capital partnership seeking to invest in companies that were providing commercial solutions to the issues we were dealing with in our grantmaking. Our performance matched or exceeded the standard benchmarks we used to measure how were doing. And during the decade our payout averaged 7 percent each year, well above the IRS requirement.

Harmonizing mission and asset management, becoming whole, is an organizing concept to improve the practice of philanthropy. Though claiming integrity, foundations often fail the wholeness test. The pessimist sees the glass mostly empty, while the optimist sees it filling. The hopeful say change must occur, and it cannot come too soon.

Stephen Viederman is the former president of the Jessie Smith Noyes Foundation and an expert on sustainable investing. Since "retiring" Mr. Viederman's vocation continues to be Grandparenting. In addition to loving and caring for his own grandchildren, Grandparenting involves his active commitment to insure that they, and all children, have options to live a full and satisfying life in an equitable, just, peaceful and environmentally sound world.

This essay was originally published by Inflection Point Capital Management, and is reprinted with permission from the author. It came to our attention through a post on Marc Gunther's blog.

Stephen welcomes comments both here and directly at s.viederman@gmail.com.

May 08, 2011

Are Advanced Battery Technologies' Financial Statements Accurate?

Eiad Asbahi, CFA

In this article, I’m going to analyze Advanced Battery Technologies, Inc. (ABAT) and provide evidence that the company is inflating its financial statements.

This article summarizes key points that we have put together in a longer report available here (.pdf). An alternative copy for backup purposes is available here.

A video summary of the findings, along with discussions with certain customers, are available at the following links:

Our customer interviews feature recorded conversations with ABAT customers. After visiting one of ABAT’s plants, one customer called the facility “absolutely the biggest joke I’d ever seen”.

Some of our arguments have been discussed in prior Seeking Alpha articles by other authors, including here, here, here, and here. For instance, in our report, we discuss how ABAT’s SAIC filings show that the company’s actual revenue and profit are a fraction of what is reported in SEC filings. We also show that ABAT’s $20 million acquisition of a Shenzhen battery company appears to be a sham, and that ABAT paid $20 million in 2010 for an entity that they had previously bought in 2008 for $1 million, but had not disclosed to public investors.

In this article, we’re going to highlight new information that ABAT is inflating its financial statements, including:

  • A comparison of the profit margins of ABAT to 106 global battery makers as provided by Bloomberg and a list Chinese battery makers as provided by Research and Markets in its “Global and China Rechargeable Lithium Battery Industry Report: 2009-2010” industry report. ABAT shows the highest profit margins out of any global and Chinese battery maker, despite having no technological advantage, limited operating experience, an unrecognized brand name, and production facilities too small to claim economies of scale.
  • Site visits show underutilized facilities lacking in quality control. We hired investigators to visit both the Harbin and Wuxi facilities, and provide photos as well as commentary from our investigators in our report. Our investigators concluded that both facilities produce commodity, low-margin products that are highly unlikely to be generating industry-leading margins or return on capital.
  • Extensive discussions with customers and partners that confirm our beliefs that ABAT is fabricating its financial statements.

Impossible Economics

Selling a commodity product into a competitive market with no technological advantage is difficult. It's especially difficult for a small business without economies of scale, limited customer relationships, and no distinguished brand name. But ABAT purports to be not just surviving, but thriving with industry-leading margins and an ROIC that warrants explanation.

A company with an EBITDA margin of 45% in 2010 must have some uniquely special competitive advantage. Yet ABAT itself recognizes that it has no special technology for its main products. The following is taken from its 2010 10-k (.pdf):

The technology utilized in producing polymer lithium-ion batteries is widely available throughout the world, and is utilized by many competitors, both great and small. ZQ Power-Tech’s patents give it some competitive advantage with respect to certain products. However, the key to competitive success will be ZQ Power Tech’s ability to deliver high quality products in a cost-efficient manner. This, in turn, will depend on the quality and efficiency of the assembly lines that we have been developing at our plant in Harbin.

In choosing a set of comparable companies for ABAT, we’ll use companies listed by Bloomberg in its “Batteries/Battery Systems” industry classification.

The results are startling. In terms of EBIT margin, ABAT ranked #1 out of 106 global companies, with an EBIT margin of 39%, compared to 23% for the next closest competitor Exide Industries Ltd of India, a $40 billion revenue business.

click to enlarge

ABAT comps_Bloomberg

Out of the 106 companies provided by Bloomberg in the “Batteries/Battery Systems” classification, Bloomberg records the EBIT margins for 79 of them (the remaining companies’ margins are shown as “N.A.”). ABAT reports a 39% EBIT margin. Only three other companies report EBIT margins above 20%, one of which is NEWN, another suspect Chinese reverse merger company. Only 10 companies report EBIT margins above 15%. ABAT, a company with less than $100m of sales and a relatively tiny player in a commodity industry, is an extreme outlier in our analysis. ABAT also comes up top in other profit margin metrics, with the #1 ranking in EBITDA margin and #2 ranking in net income margin.

Out of the 106 companies provided by Bloomberg in the “Batteries/Battery Systems” classification, Bloomberg records the EBIT margins for 79 of them (the remaining companies’ margins are shown as “N.A.”). ABAT reports a 39% EBIT margin. Only three other companies report EBIT margins above 20%, one of which is NEWN, another suspect Chinese reverse merger company. Only 10 companies report EBIT margins above 15%. ABAT, a company with less than $100m of sales and a relatively tiny player in a commodity industry, is an extreme outlier in our analysis. ABAT also comes up top in other profit margin metrics, with the #1 ranking in EBITDA margin and #2 ranking in net income margin.

Is it possible that a company with only about 5 years of operating experience is generating higher margins than a company such as Energizer (ENR) with its 15% EBIT margins, based on the “quality and efficiency of the assembly lines”?

Perhaps it's ABAT's position in China and access to cheap labor that gives it such an amazing edge in the global arena. We can test this hypothesis by comparing ABAT to a handful of other Chinese battery manufacturers. The independent third party research organization Research in China publishes an annual report titled “Global and China Rechargeable Lithium Battery Industry Report”. In the 184 pages of the 2009-2010 edition, no mention is made of ABAT or its subsidiaries. The report does, however, make mention of China BAK Battery Inc. (BAK), BYD Company (BYDDY.PK), SCUD Group Ltd, and Tianjin Lishen, which generate respective revenue of $222m, $5,805m, $185m, and $295m.

Other Chinese battery manufacturers which are not active in the lithium polymer market can also be compared to ABAT. Examples include the Coslight Technology International Group Limited and Tianneng Power International Limited, with $352m and $330m of revenue respectively in 2009. Gross margins and operating profit margins for all six of these companies, as well as ABAT, have been summarized in the table below for the most recent available fiscal year:

Company Gross Margins Operating Profit Margins
China BAK Battery, Inc. 10.6% -9.7%
BYD Company 17.7% 7.3%
SCUD Group Ltd 18.1% 5.8%
Tianjin Lishen*
5.4%
Coslight Technology 26.6% 9.1%
Tianneng Power 28.5% 14.3%
ABAT 47.3% 39.0%

*This is a subsidiary of CNOOC (CEO) and financial statements were not readily ascertainable, although it is evident that the Research In China report is using numbers specific to Tianjin Lishen.

ABAT’s operating margin is nearly triple that of its closest competitor and six times that of the median operating margin of our Chinese battery makers.

Obviously, strong operating performance alone would not normally be cause for concern. But when a company is doing as well as ABAT, investors need to understand why or how. ABAT clearly states in its annual report that it has limited (if any) technological advantage, and is competing in what is predominantly a commodity market. We have spoken to a customer who has visited ABAT’s Harbin battery manufacturing plant, and he has stated that there was nothing uniquely special about the Harbin facility. We also hired investigators to visit the Harbin facility and their findings are discussed later in this article.

The founder of ABAT, Zhiguo Fu, established it in 2002 despite having experience in construction and real estate, as opposed to battery manufacturing (see here (.pdf)). Furthermore, this company didn't begin manufacturing until 2004 (see here (.pdf)).

ABAT has limited operating experience, an unrecognized brand name, and production facilities too small to claim economies of scale.

Yet it seems like no matter how we compare ABAT to its competitors, ABAT’s financial figures come out ahead despite the numerous causes for concern discussed elsewhere in our report.

Wuxi ZQ and Heilongjiang ZQPT Site Visit

As part of our investment research process, we sent an experienced factory inspector to both the Wuxi electric vehicle facility and the Harbin battery facility. What we found was not encouraging.

Summary points from the Wuxi visit included:

  • Out of four assembly lines, only three were operational.
  • Staff included 200+ workers, but only 20 are office workers, indicating likely weaknesses in R&D, engineering, QC, and sales.
  • Factory management indicated 20,000 unit sales for 2010, with prices ranging from $450-$920 USD. This compares to 90,000 units reported to us by ABAT VP of Finance Dan Cheng on a conference call, a number which can also be backed into using data provided in ABAT’s 10-k.
  • The facility does not have a motorcycle manufacturer’s permit issued by the Chinese government.
    • Management claims to use the VIN of a partner, which is illegal.
  • Our investigators’ greatest concern was the lack of quality control (QC).
    • No line inspector or inspection of finished products.
    • No inspection list attached to each bike.
    • No testing center inside the factory.
    • The facility lacked basic equipment to test different parts for new product development.
    • Motor speed and efficiency testing machines were present, but no noise, temperature, or salt-fog testing machines.
    • No incoming parts inspection.

Photographs of the Wuxi facility are available in our report.

As lacking as the facilities were in the Wuxi facility, the Harbin site visit was even more disturbing in light of the world-class margins and the company’s reliance on this facility to support the bottom line.

Our investigators concluded the following:

It appears that the Harbin plant is in operation, does produce cells, and has sales. The semi-automated processes… are more advanced than some of the battery companies of China, and far less advanced than battery companies of international standing such as ATL, Lishen, Samsung, LG Chem. It appears that they do some things well, and have some potential great strength, but appear to have limited ability and concepts in the marketing and sales of their product. Selling cells to packagers is a common business model for Asian battery factories, but not one that realizes as much profit. And I note that the CTO acknowledged that the packagers and trading companies were making the entire margin and he was not. Again, normal for Asian cell makers – but not a way to gain success.

A proprietary BMS (Battery Management System) is essential for a successful battery company in the Light Electric Vehicle space. And the lack of such is a major handicap for Harbin. It appears to me that this company has a tiny business selling Li Ma or LFP (Lithium Iron Phosphate) cells to packagers for use in low priced battery packages sold to the domestic China market. This is the least profitable business they could have. The LI-Polymer cells are apparently not really in production (the normal issue with Li poly) due to high cost of materials and resulting high cost of the cells making them uninteresting to most applications. The LFP cells cannot be exported due to patent issues… So the only apparent product for any significant sales would be Lithium Manganese cells, and for that to make money for Harbin they would, probably, need to develop their own BMS, become their own packager, and compete with Phylion, Zhenlong, AEE, MGL, LG Chem, Lishen, HYB, and others.

Conversations with ABAT Customers

Since Advanced Battery's inception, management has made numerous claims regarding relationships with suppliers, distributors, research partners, and other related parties. As part of our due diligence process, we attempted to contact most of the relevant parties that ABAT has mentioned having a relationship with. In many cases, the parties we have contacted have been nonexistent, non-locatable, unwilling to speak, or had something strongly negative to say about ABAT.

In multiple cases, we found customers who either came away from their visits to the company’s factories unimpressed or confident that the company was inflating its financial figures. In this section, we provide a recording with one such customer, but have concealed and modified his voice.

This customer had signed a contract to receive scooters from ABAT’s Wuxi facility in 2009. After receiving a defective product, the customer demanded to visit the Wuxi facility that had supposedly been manufacturing the scooters. During our conversation, the customer indicated that he had visited numerous other Chinese manufacturing facilities to which Wuxi could be compared, and he described the Wuxi facility as a “joke” multiple times. The facility was described as “four empty walls”, the inadequacy of which made him suspect Wuxi was some sort of distributor operation rather than a manufacturing facility. Furthermore, the customer stated that he thought about contacting the SEC to report ABAT for fraudulent claims made in press releases. He said that “none of the stuff they put out was accurate”.

Other customers we’ve been in touch with have voiced similar opinions of ABAT. For example, in 2010, ABAT touted an agreement to re-enter the US market, expecting to deliver 200,000 electric scooter units to All-Power America for $1.1 million. Only half the delivery was taken before serious issues surfaced regarding quality control and licensing. The following comprises one excerpt from the long conversation we had regarding these issues and more with an All-Power executive:

All-Power:

Every step of the way we had some serious QC issues… The licensing is the official word that we gave out to everybody because that was a very tangible problem that the retailer used to return the products. But licensing was a major part of it, they should have checked for licensing compliance before they sent it.

Prescience:

So Wuxi, which is the company that you got the cycles from, they sent you sh**** product, am I reading you right? I’m not sure if I follow you?

All-Power:

Yeah, and that caused a major loss of confidence with our customer. Plus, we missed a lot of deadlines, and the customer said “you missed a lot of deadlines plus you have licensing issues, we’re going to send you all of them back”. So they put them on trucks and sent them back. Now we’re stuck with the inventory that I don’t know how the hell to move.

Wuxi ZQ mentions additional customers in its February 3, 2010 press release and in this excerpt (.pdf) from ABAT's 2010 10K. We reviewed our diligence with many of these customers in our report.

Conversations with ABAT Partners

Alongside numerous ruined or strained customer relationships, we have also uncovered a number of failed partner relationships. In our report, we discuss our conversations with ZAP (ZAAP.OB) and Altair Nanotechnologies (ALTI), as well as our attempts to contact numerous other ABAT partners. Our conversations, as well as our inability to locate many of ABAT’s obscure or hard-to-locate partners, reinforced our belief that ABAT’s business is much smaller than its SEC financial statements indicate.

Conclusion

Our longer report elaborates on the evidence discussed in this article. Our evidence that ABAT is inflating its financial statements includes:

  • SAIC filings show that ABAT is reporting significantly lower revenue and operating losses to the authorities in China. For 2009, SAIC filings showed less than $2 million of revenue, compared to $64 million in SEC filings.
  • ABAT has unreasonably high margins in an established industry with strong competitors. The Company’s SEC-reported margins and return on capital are virtually impossible. Out of 106 global battery manufacturers as classified by Bloomberg, ABAT has the highest operating profit margin by a wide margin. When compared to six leading Chinese battery makers, ABAT’s operating margin is triple that of its closest competitor and six times that of the median operating margin of the comparable companies.
  • Site visits show underutilized facilities lacking in quality control. We hired investigators to visit both the Harbin and Wuxi facilities, and provide photos as well as commentary from our investigators. Our investigators concluded that both facilities produce commodity, low-margin products that are highly unlikely to be generating industry-leading margins or return on capital.
  • In December 2010, ABAT announced that it was acquiring a Shenzhen battery maker for $20 million. We believe this acquisition is a sham, and that ABAT paid $20 million in 2010 for an entity that they had previously bought in 2008 for $1 million, but had not disclosed to public investors.
  • Confirmation from former customers and partners that the company is likely a fraud. After visiting one of ABAT’s plants, one customer called the facility “absolutely the biggest joke I’d ever seen”.
  • Low quality auditors and high turnover. The company has had 4 auditors in the past 7 years, with no auditor being ranked in the top global 100 auditors at the time of hire.
  • Unqualified CFOs and high turnover. A CFO or auditor has resigned at least once a year. The company’s past three CFOs have included: (i) a company insider who has been general manager of the company’s main operating subsidiary since 2004, and is therefore not remotely independent, (ii) a 29-year-old who was formerly VP Finance at China Natural Gas, another fraud, and (iii) a candidate whose primary experience comprised of being a financial adviser at Smith Barney.
  • Continuous share dilution through secondary offerings, despite having more than adequate cash reserves. Through repeated share issuances, the company has grown its outstanding shares from 10.0 million following the 2004 reverse merger to 76.4 million today.

Disclosure: I am short ABAT.

Additional disclosure: Please read the full disclaimer at the end of our report.

Eiad Asbahi, CFA, is the founder and Managing Partner of Prescience Investment Group. Prescience is a research-driven, performance-oriented investment and advisory firm specializing in extensive, independent research on companies in order to develop unique insights and identify singular investment opportunities. Prescience manages a private investment partnership as well as separately managed accounts.  This article is reprinted with permission from the author.

May 06, 2011

Why Lithium-ion Batteries are Like Hippos in Pink Tutus

John Petersen

In recent years lithium-ion batteries have been portrayed as glamorous, sleek, sexy and hot – the stuff of adolescent fantasy and mid-life crisis. Reality is more like a surreal remake of the Dance of the Hours sequence in the Disney classic Fantasia where hippos in pink tutus gossip about overweight dancing elephants. Let's face it folks, there are no cheetahs in the battery ballet. While lithium-ion battery packs are smaller and lighter than their lead-acid counterparts, both types of batteries are ridiculously heavy substitutes for a fuel tank. The sad part is that whispers from hippos have convinced dreamers of all ages that energy is more valuable than power and diverted attention from the harsh truth that no current battery technology is cheap enough or light enough to make electric drive competitive with internal combustion.

Reduced to basics energy is a measure of the amount of electricity a battery can store while power is a measure of how quickly the battery can deliver its stored electricity. While energy applications typically cycle a battery once or twice a day, power applications usually cycle a battery dozens of times a day. Once you accept the idea that each charge-discharge cycle has a determinable value, it's easy to see why the payback from power applications usually exceeds the payback from energy applications by a wide margin.

Hippos in pink tutus want us to believe a new age of electric drive is just around the corner. But at last December's United Nations Climate Change Conference in Cancun, Secretary of Energy Steven Chu offered an entirely different and uncharacteristically blunt assessment:

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

In the simplest of terms, electric drive can't be competitive with internal combustion until somebody invents and commercializes an entirely new class of battery. In the meantime, the market will remain profoundly confused by snake oil suggestions that the cleantech revolution will mirror the progress that information and communications technology made over the last four decades. It's just not going to happen!

The miracle of the iPad isn't the result of better batteries. It's better electronics that do more work, but only use a small fraction of the energy the legacy technologies required. The eco-clerics and hopium pushers in our midst do not like these truths, but they're truths nonetheless.

In November of 2008 I created list of 13 pure play storage companies and promised to track their performance over time. Since then I've added five companies to the list (names in italics) and broken it down into peer groups to facilitate comparisons. My basic thesis was that investors who want market-beating performance should invest in companies that make objectively cheap energy storage products and avoid hippos in pink tutus. Since today is the 201st article in this series, it seems like a good time to take a look at how my thesis has held up over the last 2-1/2 years.

The price performance of the companies in my tracking list is summarized below. Prices have been adjusted for reverse splits where appropriate. The starting price for A123 Systems is its September 2009 IPO price. The starting price for New Energy Systems is the first reported closing price after its July 2009 reverse merger. Since trading in China Ritar Power is currently suspended, I've reported that stock as a total loss even though I believe such an outcome is unlikely.



14-Nov-08 05-May-11 Percentage
Cool Emerging Symbol Close Close Gain (loss)
Ener1 HEV $6.75 $2.13 (68.44%)
Valence Technology VLNC $1.88 $1.26 (32.98%)
Altair Nanotech ALTI $3.48 $1.43 (58.91%)
Beacon Power BCON $8.20 $1.59 (80.61%)
  Group average


(60.24%)





Cool Sustainable



A123 Systems AONE $13.50 $5.68 (57.93%)
Maxwell Technologies MXWL $6.50 $16.12 148.00%
Ultralife Batteries ULBI $9.08 $3.97 (56.28%)
  Group average


11.26%





Cheap Emerging



Axion Power AXPW $1.30 $0.77 (40.77%)
ZBB Power ZBB $0.93 $1.13 21.51%
  Group average


(9.63%)





Cheap Sustainable



Johnson Controls JCI $15.36 $39.47 156.97%
Enersys ENS $6.86 $35.54 418.08%
Exide Technologies XIDE $3.38 $9.59 183.73%
C&D Technologies CHHP $49.36 $7.60 (84.60%)
Active Power ACPW $0.40 $2.16 440.00%
  Group average


222.84%





Chinese Companies



Advanced Battery ABAT $2.13 $1.45 (31.92%)
China BAK CBAK $1.99 $1.49 (25.13%)
China Ritar Power CRTP $1.65 $0.00 (100.00%)
Highpower International
HPJ $3.50 $2.60 (25.71%)
New Energy Systems NEWN $2.00 $3.22 61.00%
  Group average


(24.35%)

Overall my tracking categories have performed about the way I expected they would.

The Chinese companies have suffered immense damage from widely disseminated rumors of flakey accounting and reporting practices that are based on conjecture advanced by short-sellers. While I would like to believe the Chinese companies can't all be as bad as the innuendo suggests, I don't have the time or the inclination to do the kind of detailed on-the-ground investigations I'd need before jumping into the middle of a dogfight. Therefore I'll be watching that drama from the sidelines.

My only bad pick was C&D Technologies, which reported an unexpected intangible asset impairment late last year and was forced into a restructuring that converted most of its debt to equity. Based on its recent earnings report it looks like C&D is well on the road to recovery and should outperform its peer group on a go-forward basis.

While Axion Power has been quite volatile and took a beating in 2010, I believe its poor performance was due primarily to supply and demand dynamics. In November 2008, Axion was an unknown company that traded by appointment. In late 2009 it closed on a huge private placement that more than doubled the number of outstanding shares. As the private placement purchasers sold their shares into the market, the price fell. For the twelve-month periods ended April 30, 2009, 2010 and 2011, the reported trading volumes were 3.5 million, 8.2 million and 50.3 million shares, respectively. In my experience, no public company can withstand that kind of selling pressure and volume ramp without at least a little suffering along the way.

Notwithstanding the painful supply and demand dynamics of 2010 and early 2011, my confidence in Axion has never been higher. Its disclosed relationships with blue chip companies in the battery, automotive and rail transport industries are very unusual for an OTC company. Those relationships, in combination with recent reports of a new partnership with a giant US automaker leave me convinced that 2011 will be a year of important developments as Axion completes performance testing of its PbC products, completes customer validation of its manufacturing and quality control systems and launches commercial production of PbC batteries. As great expectations become visible in the rear-view mirror, I believe patient stockholders will be pleased by Axion's price performance.

I've recently suggested that the decline in A123's market price is probably overdone and there should be some short-term upside in the stock. I also believe Beacon is about as close to the bottom as I'd care to call. While I’d like to see more meat on the bones, I think ZBB’s upside potential is far greater than its downside risk. I continue to believe hippos in pink tutus should be avoided.

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

May 05, 2011

WSTE Not, Want Not

Tom Konrad CFA

A truly sustainable economy would produce no waste: everything would be recycled or reused for some productive purpose.  We're a long way from that ideal today, but the rising cost of commodities makes recovering used material through recycling increasingly economic. Further, the rising cost of energy makes converting municipal and industrial waste into advanced biofuels or combusting it to produce electricity an increasingly economic option.

Attempting to guess which advanced biofuel technology will be successful strikes me as a fool's errand.  Why not instead invest in the owners of the feedstock?  While I don't know which technology will achieve commercial success, I do know that a technology which can turn trash into fuel will make the trash more valuable, benefiting the companies that haul the trash today.

Trash is already being turned into energy.  Companies like Waste Management (NYSE: WM) have been installing turbines to convert captured methane gas from landfills into electricity for years.  Companies like Covanta (NYSE:CVA), which operates more than 40 Energy-from-Waste facilities throughout the United States.  The commodities boom have makes metals and electronics recyclers like Sims Metal Management (NYSE:SMS) more profitable as raw materials become more expensive.

ETFs 

If you're interested in investing in this trend, you now have two choices.  Global X Funds recently launched the Global X Waste Management ETF (NYSE:WSTE), which joins the Van Eck's Market Vectors® Environmental Services ETF (NYSE: EVX), which was launched in October 2006.  WSTE has a slightly more diversified portfolio, with 28 holdings, compared to EVX's 22 holdings, although their top holdings are practically identical.  EVX has a lower expense ratio (after a contractual cap which expires on May 1, so it may rise), compared to WSTE's 0.65% expense ratio.  Neither has great liquidity, with EVX's trading $150,000 worth of shares on an average day over the last 3 months, while WSTE traded about the same amount on a recent day this week.  Prospective buyers should probably use limit orders.

If you're interested in trash as an investment, which should you choose?  For short term trades, I'd look to the one which settles out with the most liquidity after a few months.  For longer term holding you might do better by picking a few of the stocks most likely to benefit from rising commodity and energy prices: Each firm's top holding is medical waste company Stericycle (NASD: SRCL) which seems to have less potential to profit from these trends than Waste Management, Veolia (NYSE:VE), Covanta, Darling International (NYSE:DAR), and Sims, which appear just a little farther down the lists.

Building a sustainable energy future sometimes requires is to get our hands dirty. To do anything else would be a waste.

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.

May 03, 2011

Administration Lays the Groundwork for Hydropower Boom

Tom Konrad CFA

The US Department of the Interior, the Department of Energy (DOE), and the US Army Corps of Engineers are quietly laying the groundwork for a renewable energy boom that you might not expect.  What they've done is announce a memorandum of understanding to work together to support environmentally sustainable hydropower.

They're not talking about building new dams, which have questionable environmental benefit, but rather to remove barriers to developing cost-effective hydropower at existing dams and waterworks. 

Hydropower does not get much attention from investors.  In large part, that's because of the lack of growth.  As Energy Secretary Steven Chu said, "While hydropower is the largest source of renewable electricity in the nation, hydropower capacity has not increased significantly in decades."  This new initiative won't bring US hydropower growth up to the levels we've recently seen in wind or solar, but it should provide an opportunity for nimble renewable energy developers with some experience in hydropower to build profitable installations on Federal dams.

As I discussed in my overview of hydroelectric power in 2008, the main barriers to new hydroelectric facilities are complex environmental studies, permitting issues, and water laws.  That's what makes this new inter-agency cooperation so important.  With the three relevant Federal agencies working together to remove barriers to development on federally owned facilities, hydroelectric developers can be reasonably confident that their investments in planning will eventually bear fruit in new hydropower generation, and not be blocked at the last minute by unexpected red tape.

I see this as part of a pattern of the Obama administration promoting renewable energy by administrative means now that legislative action looks unlikely.  Other manifestations of this trend include the Administration's recent short-list of renewable energy projects to be given priority in the environmental review and public participation process, and the DOE's work marking out National Interest Electric Transmission Corridors.

Quite often, the barriers to clean energy are not financial, but rather the bureaucratic red tape put forward by a system that was designed for an outmoded energy paradigm.  In an era of limited budgets, attacking these important non-financial barriers makes both environmental and fiscal sense.

Not So Small Hydropower

It's not just the Feds who are pushing to tackle red tape for hydropower.  Colorado Governor's Energy Office (GEO) has a partnership with the Federal Energy Regulatory Commission (FERC) to streamline the permitting of small hydro projects in existing conduits in Colorado. The GEO expects that the first application to FERC will be filed in late April 2011, and the first permit will be issued by FERC in late July, and end after 20 applications.  FERC and the state of Colorado will then assess the outcomes and look for ways in which the lessons learned can be implemented in FERC’s regular processes.

Despite the name the potential for small hydropower in the US is quite large.  A 2006 Idaho National Laboratory report [PDF] found that approximately 5400 sites could be feasibly developed, enough to increase hydropower generation in the US by 50%, or an average production of 18GW, about the same as the total non-hydro renewable generation in 2010 (EIA data).

Stocks

A couple stocks that might potentially benefit: AECOM Technology Corp., (NYSE:ACM) which I previously wrote about here, and Plutonic Power (TSX: PCC), which I recently wrote about because of their likely merger with Magma Energy (TSX:MXY).

DISCLOSURE: Long PCC,MXY.

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

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.

May 01, 2011

Is Sinovel Planning to Replace American Superconductor?

Tom Konrad CFA

Sinovel's recent refusal to accept shipments from American Superconductor (AMSC) may be due to more than just a slowdown in the Chinese wind market.

Many of my best ideas come from readers.  When American Superconductor (AMSC) announced 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, my first thought was that Sinovel's reasons would likely remain an enigma for several months.  I did not write anything, knowing that anything I said would be mostly guesswork.  However, a couple persistent readers pointed out that AMSC had been one of my Ten Clean Energy Stocks for 2011, and so I should really follow up on this important news.

The result was my attempt to decipher the news announcements and press releases from Sinovel and AMSC last week.  While I felt I was able to provide a good picture of the background, I could only guess at the most important question: Is Sinovel just trying to work off excess inventory due to a slowdown in the Chinese Wind marke, or are they beginning to shift some of their business to other suppliers?

This question is crucial because Sinovel accounted for about three quarters of revenue in 2010, although the AMSC has been moving to lessen its dependence on the Chinese wind giant.  The worry is that if Sinovel were to find another supplier for the power converters AMSC sells, AMSC's considered goal of reducing their dependence on Sinovel may become a premature fait accompli. Then Sinovel's share of revenue might drop not because AMSC has other sources of revenue, but because they lose Sinovel as a major customer.

GT Electric

That brings me back to my readers, among whom were a hedge fund analyst and fund manager in Palo Alto.  Their fund is short AMSC, so they have two important incentives: They have an incentive to dig through the Chinese press to figure out what is going on, and they want US investors to find out about any bad news.  If they found any good news I don't know about, they kept it to themselves.

They found that Sinovel affiliate Dalian Guotong Electric (GT Electric) started producing frequency converters in 2010, and is ramping up production at the typical Chinese breakneck pace.  Sinovel owns a 22.5% share in GT Electric, giving them a strong incentive to prefer their frequency converters over AMSC's.

GT Electric's product website (Chinese only) is here, and much of the other information they found is in the August 2010 China Wind Power newsletter, which said GT's factory will be "capable of import substitution." 

GT does not have the capacity to replace AMSC yet, and Sinovel will likely want to have more field experience with GT converters before abandoning AMSC.  But the contract Sinovel signed with GT electric for 2011 gives them 4% of their total... in GT's second year of operation. 

Final Thoughts

I still believe that Sinovel will resume purchases from AMSC later this year, but I think it is unlikely that those purchases will grow in coming years.  Further, AMSC still needs to raise $100-$200 million to complete the (revenue-diversifying) purchase of "The Switch" I discussed in the previous article.  The fear of dilution will likely depress AMSC's share price over the next couple of months, meaning that I no longer think that AMSC is a good speculation where it currently stands in the $11.50 to $12 range. 

These events are unlikely to bankrupt AMSC, and I think many of the company's other businesses have great potential for growth, but from a very low base.  For now, I've sold my stake, but I will be looking for opportunities to buy again at lower levels. 

I may not be the only one looking for bargains.  I shot a quick email off to John Segrich, whose Gabelli SRI Green Fund (SRIGX) holds "a little" of the stock.  He thinks AMSC is a lot more interesting now that it has fallen so far, and speculates that it could be a buyout target for someone wanting to own the technology.

DISCLOSURE: None.

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.


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