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June 29, 2011

The PV Module Supply Glut

Tom Konrad CFA

With project financing and plenty of photovoltaic (PV) modules, a shortage of projects with credible off-takers seems likely to lead to further falls in module prices.  How can investors best profit from this trend?

PV module prices have dropped 70% since 2008, when the financial crisis sent demand tumbling, with Chinese multicrystalline silicon module prices currently as low as $1.49 per watt, according to Bloomberg New Energy Finance's (BNEF) Solar Spot Survey.  In part, this was an example of “the Bubble giveth, and the Bubble taketh away.” For the three to four years ending in 2008, the long-term downtrend of PV prices, which had been driven by the learning curve and imporving technology, stalled due to strong demand. Then, when the financial crisis suddenly removed the availability of cheap financing, demand vanished, and prices plummeted.

Plenty of Money

Today, it's clear that financing is back. I recently attended the 8th Annual Renewable Energy Finance Forum-Wall Street (REFF), co-hosted by the American Council on Renewable Energy (ACORE) and Euromoney Energy Events.  At REFF, the room was packed with financiers ready to fund PV projects with credible developers and quality off-takers, such as utility Power Purchase Agreements (PPAs), solar and wind developers, and attorneys ready to draw up deals between them.  NotablREFF Wal St logo.pngy absent among attendees were any utilities or other large power buyers. 

I find the absence of power buyers telling.  Yes, there are utilities, businesses, and institutions signing PPAs with renewable energy developers, but it's a sign of the end-customer's market power that they don't need to come to networking events like REFF Wall St to get the word out.  Brian Matthay, VP Environmental Finance at Wells Fargo sees the distributed solar PV market as limited not by the supply of panels or finance, but by the lack of good deals.  For Wells Fargo, a good deal requires a quality developer, with experience and a strong balance sheet.

Wind is following a similar pattern.  According to Pat Eilers, Managing Director at Madison Dearborn Partners who spoke at the conference, the locations of new wind projects in the US is driven more by the availability of PPAs than the wind resource.  I even met a wind developer who is following a new model because of the lack of PPAs with favorable pricing, his firm is building wind farms to sell electricity into the spot market: They don't intend to sign a PPA until pricing becomes more favorable.

Plenty of PV Modules

Meanwhile, PV module supply continues to grow rapidly.  According to BNEF's projections, even an optimistic projection for PV demand is likely to fall short of supply in 2012 and 2013.

We last had a PV module oversupply in 2009, after the financial crisis destroyed many customers' ability or willingness to borrow leading to a rapid fall in demand.  Prices promptly fell, which in turn lead to a rapid resurgence in demand.  After falling short in 2009, demand slightly exceeded supply in 2010.  In other words, over a period of about a year, PV demand has shown itself to be remarkably elastic and quick to respond to falls in the price of PV.

Potential Sources of Demand

I expect the current and projected glut of solar modules will create lower prices and a new demand boom.  BNEF's projections for demand in 2012 and 2013 will likely prove to be too conservative, although many PV manufacturers will be unable to make a profit at the lower price levels.

Market power will shift from solar manufacturers to solar customers.  The biggest winners are likely to be end users, who will be able to get solar installations for much lower prices than ever before, and those solar installers able to reach out to the new classes of customers.

Where will the demand come from? According to J Andrew Murphy, Executive Vice President of NRG Energy, it will come from the maturation of the industry. He sees a growing customer awareness of electricity and where it comes from, many more companies such as Wal-Mart, Google (GOOG), and Whole Foods are not only investing in distributed generation themselves, but presenting it to their shareholders and customers as a value proposition. Those stakeholders, seeing that value proposition then see the value in adopting distributed generation, which usually means PV.

If there is a profitable opportunity in solar stocks, it will be in the stocks of developers able to adapt to the needs of the new classes of solar customers drawn in by rapidly falling prices.  I believe that solar manufacturers see this, and that's why many are integrating vertically down the value chain by buying up solar developers, such as Sharp's (SHCAY.PK) acquisition of Recurrent Energy, and First Solar's (FSLR) purchase of NextLight last year.

A more recent development was the merger of two of the strongest regional solar developers, when Real Goods Solar (RSOL) agreed to merge with leading Northeastern solar integrator Alteris in an all-stock deal. As prices fall, typical customers are more likely to want a brand they can trust and a one-stop shop for design, build, and financing.  I expect solar integrators such as Real Goods that have a history of successful acquisitions should do well, along with strong local brands.  But that does not mean that Real Goods' current high trailing P/E of 38 is justified.  Solar integration is a low margin business, and growth from all-share acquisitions such as that of Alteris comes at the price of dilution of existing stock holders.  As I concluded in my recent survey of solar industry integration, the industry is more likely to produce steady cash earners than high-margin, quickly growing high flyers.

Conclusion

While I expect the downstream portions of the solar industry to be solid earners over the next few years due to the rapid growth of the industry, that growth does not justify paying high multiples for a low margin business. If I had to pick a solar stock today, I'd be more likely to opt for the higher margin vertically integrated manufacturers which are currently trading at depressed prices due to the current glut.  My colleague Garvin Jabush considers Wall Street's current hatred of solar stocks to be irrational. It's not that he thinks module prices will not fall, but that such a fall in prices is more than adequately reflected in stock valuations.  I'm inclined to agree.

While Real Goods has only a 2.6% operating margin, and a 4.0% return on equity (ROE), it trades at a forward P/E of 11 based on 42% expected annual growth in revenue.  Among manufacturers, cost leader First Solar trades at an 11 P/E, but has a 28% operating margin and 19% return on equity, numbers which seem much better able to fund the 27% expected annual revenue growth internally.  Jabush's pick, LDK Solar (LDK), is also a vertically integrated manufacturer/developer, and has a forward P/E of a minuscule 2.9, based on no expected profit growth and 12% annual revenue growth, which can easily be funded by the company's 20% operating margin and 38% return on equity.

Stock
Forward P/E
Operating Margin
ROE
1 yr expected growth
RSOL 11
2.6%
4.0%
42%
FSLR 11 28%
19%
27%
LDK 2.9
20%
28%
12%

It's always useful to understand future trends in the market, but profits come from understanding the market's reaction to these trends, as well as the trends themselves.  Right now, investors seem spooked by solar manufacturers, even though many of these manufacturers have worked to integrate vertically along the supply chain making them less sensitive to shifts in market power along the supply chain. 

Too often, investors in Renewable Energy get carried away by a positive growth story, rushing to buy at any price.  This time, the opposite seems true, and it's the selling that seems to have gone too far.  I've never been a solar cheerleader, and have always been cautious about confusing the growth of the industry with opportunity for the existing companies.  Yet right now, many solar stocks seem priced for long term zero, or even negative growth.  That, to me, seems to be taking the case too far.

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

June 28, 2011

Johnson Controls Forecasts Enormous Stop-Start Growth

John Petersen

On June 27th Johnson Controls (JCI) hosted their 2011 Power Solutions Analyst Day and unveiled their expectations for the future of stop-start idle elimination systems. After noting that all automakers are developing a range of powertrains, JCI used this graph to emphasize their view that the overwhelming bulk of alternative powertrain vehicles over the next five years will have simple, cost effective and fuel efficient stop-start systems.

6.27.11 5-year.png

You don't see much about stop-start systems in the mainstream media because politicians and reporters are too enchanted with plug-in vehicles and other exotica to deal with mundane issues like purchase prices and payback periods, but JCI has made it crystal clear that its meat and potatos business over the next five years will be cheap, not cool.

JCI's estimates for market growth over the next ten years were equally impressive, particularly when you realize that the advanced energy storage systems required for stop-start generate twice the per unit revenue and three times the per unit margins of flooded lead-acid batteries. It's a manufacturer's dream come true, stable unit volumes with rapidly increasing revenues and margins.

6.27.11 10-year.pngIn their presentation JCI explained that the three key attributes of energy storage systems for stop-start are:
  • Cycling – reliable system charge/recharge cycles over time;
  • Useable energy – range of stored energy that can be used to optimize the system; and
  • Charge acceptance – rate of recharge to maximize opportunity capture.
It ties perfectly to a joint presentation from BMW and Ford at last fall's European Lead Battery Conference where the two automakers explained why the stop-start duty cycle is so hard on conventional batteries. In a normal vehicle, you start the engine at the beginning of the trip and turn it off at the end. In a car equipped with stop-start, the engine turns itself off automatically every time the car is stopped and restarts automatically when the driver takes his foot off the brake. While the difference between one start per trip and one start per mile is enormous, a more critical problem arises from the fact that stop-start systems require the battery to carry all accessory loads during frequent engine off intervals.

In the segment of the BMW-Ford presentation that quantified a typical stop-start duty cycle, the accessory load was 50 amps for 60 seconds, or about 3,000 amp seconds while the starter load was 300 amps for one second. In other words, the accessories accounted for a whopping 91% of total load. Their graph of AGM battery performance over time shows that charge acceptance (the downward curving blue line) plummets as the battery ages while the time required to recover from an engine off event (the upward curving red line) soars from 30 seconds to three minutes or more.

6.27.11 AGM Performance.png
Since all systems are designed to disable the stop-start functionality until the battery has recovered an acceptable state of charge, system efficiency falls off rapidly as the battery ages. The automakers want and need something better than AGM batteries, the principal solution that old line auto battery manufacturers like JCI want to provide.

The first advanced technology introduced for stop-start systems was developed by Continental AG in cooperation with Maxwell Technologies (MXWL) for use in diesel stop-start systems from Peugeot. In this dual device configuration an AGM battery carries the accessory load and a supercapacitor module carries most of the starter load. It insures a reliable engine restart, but can't do much about the bigger problem of accessory loads. Contiental and Maxwell expect that their system will be installed in up to a million Peugeot vehicles in the next three years. If the system works well for Peugeot and stop-start vehicle sales ramp as rapidly as JCI expects them to, implementation rates will probably be higher.

A second advanced technology solution for stop-start systems is a third generation lead-acid-carbon hybrid that's being developed by Axion Power International (AXPW.OB), which hopes to begin a commercial roll-out of its PbC battery later this year. In a joint presentation by BMW and Axion at last fall's ELBC, the performance differences were obvious. The graph that tracked PbC's performance over time using the BMW-Ford test protocol showed that charge acceptance (the flat blue line) stayed stable at 100 amps, or twice the charge acceptance of a new AGM battery, while recovery times (the flat black line) remained stable at 30 seconds.

6.27.11 PbC Performance.png

The BMW-Ford graph shows that AGM batteries fade very rapidly over the first 5,000 miles of use in a stop-start equipped vehicle. The BMW-Axion graph shows that the PbC offers optimal performance through 40,000 miles. In a recent presentation at the 2011 Advanced Automotive Battery Conference in Mainz, Germany, Axion unveiled an updated graph of follow-on testing through 80,000 cycles, or approximately eight years of use, with only modest degradation.

6.27.11 PbC AABC.png

I've been bullish about the future of stop-start idle elimination technology for a couple years. If the JCI forecasts are even close to accurate, I've been seriously understating the potential. Since JCI is the largest lead-acid battery manufacturer in the world and has a 36% share of the global automotive OEM and battery replacement markets, it will undoubtedly be the biggest beneficiary of the rapid worldwide implementation of stop-start idle elimination systems. The second biggest beneficiary will probably be Exide Technologies (XIDE), which is emerging from several years of tough restructuring and trades at a significant discount to JCI on a forward looking earnings basis. Emerging technology developers like Maxwell and Axion also have significant opportunities to grab a sizeable share of what's shaping up as $6 to $12 billion market niche. Their respective market capitalizations are summarized below:

Johnson Controls
JCI
$26.8 billion
Exide Technologies
XIDE
$569 million
Maxwell Technologies
MXWL
$442 million
Axion Power
AXPW.OB
$54 million

As former Axion director, I'm all too aware that it's a very little fish in a very big pond. I also understand why the PbC's extreme cycling performance and charge acceptance can be crucial to the future development of stop-start, a world-class fuel efficiency technology that's already being produced at scale and will become dominant in this decade. It's easy to dismiss my ramblings because I have a large stake in Axion. It's harder to dismiss BMW, a first tier automaker that joined Axion as a co-presenter at last year's ELBC. It will be darned near impossible to dismiss a big three US automaker that's apparently signed on as an Axion subcontractor in a pending DOE grant application.

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

June 26, 2011

Will Crystalline Solar Kill Thin Film?

A Conversation with Applied Material’s Solar Head Charlie Gay

by Neal Dikeman

I had a chance to chat today with Dr. Charlie Gay, the President of Applied Materials' (AMAT) solar division.  You may recall, we broke the story in the blogosphere 5 years ago about Applied’s entry into solar, which was anchored with a highly touted and very aggressive strategy for turnkey large format amorphous silicon and tandem cell plants called SunFab.

Charlie reminded me that when they began 5 years ago, they did so along two major thrusts:  The acquisition of Applied Films in June 2006 getting an inline coating system for deposition of silicon nitride passivation layers on crystalline and in parallel an internal project to adapt their large flat panel display manufacturing technology for photovoltaics.

They still like the large module format, for a simple reason, cost in the field for large scale solar farms is heavily about getting area costs down relative to power output.  I was excited for another simple reason, when major capital equipment developers get involved, manufacturing maturity is not far behind, it forces everyone to rethink scale in different ways.

After a huge initial splash outselling everyone’s expectations in that SunFab concept, many industry analysts later kind of wrote them off as flash in the pan when they were reported having problems as implementations came in slower and smaller and harder than expected on their SunFab lines a couple of years ago, and a saw a major restructuring in 2009. But they’ve had success with that product anyways, EVERYONE saw a major restructuring in 2009, and more importantly the original vision of leading solar into mass manufacturing is still going strong, now across a range of products and technologies in thin film and crystalline manufacturing equipment.  Let’s put it this way, in their annual report they call themselves the largest equipment manufacturer to the solar sector, they have $1.5 Billion in annual revenues in the Energy & Environmental division, which is heavily PV, and there are like 120 mentions of the word solar in their annual report, almost once per page.

So what I really wanted to talk to Charlie about was the future of PV manufacturing. He frames the future by drawing a mirrored parallel between photovoltaics and integrated circuit manufacturing, beyond just semiconductors:

  • In IC, dozens to hundreds of device architectures exist, but basically one material, silicon.
  • In PV, there is essentially one architecture: the diode, but dozens to hundreds of material choices.

But silicon has been the mainstay material of PV for a number of reasons.  So we got into one of my favorite topics, the manufacturing improvement potential in crystalline silicon.

His version of Moore’s law for solar runs like this:  the thickness of the solar cell decreases by half every 10 years.  Today it’s 180 microns thick.  The practical possibility exists to get down to about 40 microns, with some performance improvement by making it thinner, but we can’t go much below 40 without being too thin to absorb enough light.  This fits with other conversations I’ve had suggesting that over the past couple of years most of the major crystalline solar manufacturers were working on paths to take an order of magnitude out of cell thickness.

If this comes to fruition, crystalline can literally wipe the floor with the existing thin film technologies.  Basically think sub $1 per watt modules with the performance of high grade crystalline modules today.  And as cost per watt equalizes, that higher efficiency starts to really tell, as since Balance of Systems costs have fallen at 10-12% per doubling of installed fleet, compared to module costs falling at 18-20%, in a world where BOS increasingly matters, the old saw about lower area cost per unit of power installed starts to actually bite for once.  Think ultra thin high performance low cost large format x-Si modules with fancy anti reflective coatings and snazzy high grade modules with on module inverters or DC optimizers mounted on highly automated, low cost durable trackers.  Think solar farms approaching effective relative capacity factors of 2.5-3 mm kW Hours per year per MW on 25 year systems at $2-3 per Watt installed.  Possibly the only thing on the planet that could match shale gas.

In fact, the entire thesis of thin film as a business and venture capital prospect has been built on the premise that crystalline material costs were just too high to get to grid parity. I’ve got scads of early thin film business plans touting that.  That thesis is under extreme pressure these days. I’d submit that if the industry 7 years ago had really understood how much improvement could be had, we’d have saved billions in potentially stranded thin film development.

Charlie says there are about a dozen different paths for enabling 40 micron cells.  The most interesting approach to him is an epitaxial growth process on reusable silicon templates.  A process which grows a thin layer of silicon on top of a reusable layer of silicon, using perhaps one mm thick silicon templates, etching the surface, and directly depositing silicon from trichlorosilane gas.  The idea would be to rack templates into a module array, grow the cells in an oven to your 40 micron level, then glue the glass module to the back side, and then separate it off to form a “ready to go assemble” module.  The challenge is basically oven and materials handling designs that get it cost efficient in high volume.

In essence, all you’d be doing is integrating a silicon ingot growth process directly into a module. Instead of growing ingots, cutting thick wafers, forming cells, then building modules from them, you grow cells racked into their own module personally instead of growing ingots first.

Hella cool.  A process like that means using fairly manageable capital equipment and materials handling technology development in known device and module technologies we could literally rip the ever living guts out of crystalline manufacturing costs.  And there are 11 more paths to play with???

The way he thinks about it, on a broader perspective more people are working in photovoltaic solar R&D today, by his estimate some 70,000 researchers and $3 billion per year, than in all of the prior PV history.   And that means whereas perhaps five main innovations over 35 years drove almost all of crystalline PV manufacturing costs (screen printing, glass tedlar modules, adapting steel from tires for cutting wafers, silicon nitride processes, and fast metrology tools), in today’s world, Charlie thinks we see 5 equivalent innovations in PV manufacturing technology every 2 years.

So I asked him to comment on whether there were parallel cost-down opportunities for thin films or whether it is an also ran waiting to happen.  He thinks there are.  He mentioned organics.  I pushed back hard, as organics have been written off by almost everyone for never seeing yield or performance, so where does he see the opportunity?  He responded that he picked organics to keep me from narrowing the materials field prematurely to just A-Si, CdTe, CIGS, and GaAS.  Silicon just like carbon can surprise us, e.g. bucky balls, carbon nanotubes, and just because early materials had stability and process issues, doesn’t mean we’ve exhausted the opportunities.

He says what he wants us to recall is that we are currently operating in PV manufacturing today with the materials that were on the radar in the energy crisis from 1974-1980.  That is changing in the lab and universities these days.  And given time the results will surprise us.

He draws a parallel between photography and photovoltaics, both invented in 1839, both rely on sunlight acting on materials. In photography, people started off putting films on glass, then putting films on mylar, and running things continuously.  Implying that in solar, we’re still on glass c. 1890.

He said to think about the original Ovonics/Unisolar vision in thinking about how you get to high speed continuous processing with thin film (think paper manufacturing, where done roll to roll it’s far more consistent than one-offs can be done).  If that is still our ultimate thin film paradigm (got to love the chance to use the word “paradigm”), the stars are still in front of us with what thin film COULD do.  And while roll to roll has had significant materials technology and process control challenges for the current class of materials, let’s go back to the mirror parallel to integrated circuits, in photovoltaics, one main device, scads of material options.  Just a matter of R&D hours and time.

He markedly did NOT suppose that the current state of thin film devices could beat 40 micron crystalline silicon by themselves.  It’s worth considering that we may look back and find that thin film, CdTe and First Solar (FSLR) were the stepping stones to 40 micron crystalline, not the other way around.  Maybe my next question to Charlie is whether he and I should set up Neal and Charlie’s 40 Micron Solar Company of America yet. ;)

Neal dikeman is a founding partner of Jane Capital Partners LLC, a cleantech merchant bank whose clients have included the technology arms of multinational energy companies.  This article first appeared on CleanTechBlog and is reprinted with permission.

June 25, 2011

Is Energy Sourcing the Gateway Drug to Energy Efficiency?

Tom Konrad CFA

I recently interviewed Richard Domaleski, CEO of World Energy Solutions (NASD:XWES).  World Energy is a comprehensive energy management services firm whose core offering is extremely price competitive energy sourcing (that is, finding an energy provider to supply all of a client's energy needs at the lowest possible cost.) 
world energy logo.png
They achieve competitive sourcing using an electronic energy exchange designed to achieve much better price discovery in what is traditionally a very opaque market.  According to Domaleski, a recent KEMA study showed that only 7% of large commercial, industrial, and government customers are sourcing their energy online; the rest are using traditional brokered or paper-driven deals.  World Energy currently has about 5% of the market, leaving plenty of room for growth.  Among their current customers are the General Services Administration (the Federal Government's procurement arm), several state governments, General Dynamics Land Systems, and Brown University, to name a few. 

They also partner with Energy Service Companies (ESCOs).  ESCOs sign energy customers up to a "Performance Contract" under which the ESCO is paid a fixed fee in order to deliver a defined set of energy services (lighting and temperature levels, for example), and the ESCO makes energy efficiency improvements using their own capital to reduce energy use while still delivering the defined energy services.  The lower energy use quickly repays the ESCO's out of pocket capital cost, leading to lower (and stable) energy bills for the customer, and a healthy profit for the ESCO.

Domaleski says that 143 such ESCOs and other procurement companies now use World Energy's procurement platform to source their energy.  When I asked for names, he cited non-disclosure agreements but was able to say that one prominent one was SAIC (NYSE:SAI).  Yet adoption of World Energy's platform is not universal.  One prominent ESCO they pitched but did not convince is the leading pure-play publicly traded ESCO: Ameresco (NYSE:AMRC).

Is it Green?

Getting electricity and natural gas at lower prices may be a compelling proposition for World Energy's customers, but environmentally concerned investors should think twice before calling it green.  A lower price for energy is more likely to discourage than encourage energy conservation, and hence lead to higher, not lower energy emissions.  Energy sourcing may or may not include the sourcing of green power or Renewable Energy Credits (RECs.)  A REC is a way of accounting for all the green or environmental attributes of a MW of electricity.

World Energy draws a distinction between "physical green power" and RECs, with the former being produced from renewable sources on the same ISO as the customer, and the RECs often produced somewhere else in the world.  I don't think this is a very useful distinction, since the actual power produced is often not the same as the power consumed due to both proximity and timing issues.  A simple example of why this is so can be seen in the case of a supermarket that signs up for 100% locally produced wind power.  While a nearby wind farm will indeed be producing the same number of kWh as the supermarket consumes, the supermarket keeps its lights on and continues to run its refrigeration even when the wind is not blowing at the local farm.  In this sense, "physical green power" is just normal electricity with bundled RECs.

What really makes a REC (or "physical green power") green is additionality.  If the price of the REC is enough to ensure that a wind farm that would not otherwise have been built is indeed built, then the REC is additional.  World Energy's ability to extract the lowest possible price for RECs may work to undermine the additionality of those RECs.  After all, which is more likely to increase the chances of a wind or solar farm being built: a $10 REC, or a $20 REC?

Low Price as a Gateway Drug

Yet it's hard to see saving money as a bad thing, and I find World Energy's numerous ESCO partners very encouraging.  If World Energy's procurement platform enables ESCOs to offer potential customers performance contracts at lower prices, more such customers will sign up, and receive the energy efficiency improvements that are the ESCOs' bread and butter.

World Energy also offers energy efficiency improvements to their direct customers as well as helping those customers capture the utility incentives available for energy efficiency and Demand Response programs.  Demand Response companies like Comverge (NASD:COMV) and EnerNOC (NASD:ENOC) may use World Energy's demand response exchange, but also compete with them to sign up customers directly.  As with ESCOs, World Energy does not say which Demand Response providers use their exchange, but they did say that they have 20 leading providers signed up.

One of the most significant barriers to energy efficiency is simply the complexity of options on offer.  Although the internal rate of return on efficiency investments is very high, the absolute number of dollars available from energy efficiency is seldom enough to sell a facilities manager. Facilities managers seldom have an incentive or expertise to save energy, although this is improving as companies become more energy aware and make changes to employee incentives to fit the new goals.  Yet it is still generally difficult to get most facilities managers to give energy the attention it needs in order to capture the available energy savings.  Lower energy prices, on the other hand, are easy to grasp and communicate to higher-ups.  If World Energy and ESCOs working with them can offer a facilities manager a one-stop shop for both lower energy prices and additional energy savings, they'll be much more willing to take action, even with weak internal incentives.  One step World Energy has recently taken to make this decision much easier is their  strategic investment in Retroficiency a company whose technology will allow World Energy to conduct virtual energy audits for clients based on the detailed energy usage data they are already collecting.  This will allow facilities managers to easily identify the particular buildings in their portfolios most likely to benefit from more detailed energy audits and retrofits.

Other Businesses

World Energy also runs other trading platforms, most notably the platform for trading carbon credits under the Regional Greenhouse Gas Initiative (RGGI).  With New Jersey pulling out of the ten-state RGGI climate initiative, I thought it would be interesting to get Domaleski's perspective, but he was unable to comment due to a confidentiality agreement with RGGI.  This exchange is part of their Green green product line, which accounts for approximately 5% of World Energy's business and includes other environmental commodity trading as well as RGGI.

At the urging of a utility, World Energy has also recently launched a wholesale energy exchange.  This exchange enables utility and municipal customers to find the best price for power from World Energy's 500 suppliers.  This must be a useful service, because in the four years since the exchange was launched, they have signed up 70 large customers.  The company's Wholesale division accounts for roughly 15% of revenues.

Conclusion

The move to internet based energy sourcing seems like an inevitability, and World Energy has a powerful first mover advantage.  While online procurement of energy may not be green in and of itself, the savings on offer serve to get building managers in the door.  If World Energy or its ESCO partners can then include significant energy efficiency and green power in the mix, we have the formula for a significant shift towards a more energy efficient economy.

Walmart CFLs.jpgIn this sense, World Energy may be a lot like Wal-Mart.  Customers come in the door for low prices, but then find it easy to buy energy efficient products as well.

DISCLOSURE: Long ENOC,COMV.

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.  


June 24, 2011

The Alternative Energy Fallacy

John Petersen

In 2009, the world produced some 13.2 billion metric tons of hydrocarbons, or about 4,200 pounds for every man, woman and child on the planet. Burning those hydrocarbons poured roughly 31.3 billion metric tons of CO2 into our atmosphere. The basic premise of alternative energy is that widespread deployments of wind turbines, solar panels and electric vehicles will slash hydrocarbon consumption, reduce CO2 emissions and give us a cleaner, greener and healthier planet. That premise, however, is fatally flawed because our planet cannot produce enough non-ferrous industrial metals to make a meaningful difference and the prices of those metals are even more volatile than the prices of the hydrocarbons that alternative energy hopes to supplant.

The ugly but undeniable reality is that aggregate global production of non-ferrous industrial metals including aluminum, chromium, copper, zinc, manganese, nickel, lead and a host of lesser metals is about 35 pounds for every man, woman and child on the planet. All of those metals are already being used to provide the basic necessities and minor luxuries of modern life. There are no significant unused supplies of industrial metals that can be used for large-scale energy substitution. Even if there were, the following graph that compares the Dow Jones UBS Industrial Metals Index (^DJUBSIN) with the Amex Oil Index (^XOI) shows that industrial metal prices are more volatile and climbing faster than hydrocarbon prices, which means that most alternative energy schemes are like jumping out of the frying pan and into the fire.

6.23.11 Metals vs Oil.png

For all their alleged virtues and perceived benefits, most alternative energy technologies are prodigious consumers of industrial metals. The suggestion that humanity can find enough slop in 35 pounds of per capita industrial metals production to make a meaningful dent in 4,200 pounds of per capita hydrocarbon production is absurd beyond reckoning. It just can't happen at a relevant scale.

I'm a relentless critic of vehicle electrification schemes like Tesla Motors (TSLA) because they're the most egregious offenders and doomed to fail when EV hype goes careening off the industrial metals cliff at 120 mph. Let's get real here. Tesla carries a market capitalization of $2.8 billion and has a net worth of less than $400 million, so its stock price is 86% air – a bubble in search of a pin. Tesla plans to become a global leader in the development of new electric drive technologies that will use immense amounts of industrial metals to conserve irrelevant amounts of hydrocarbons. Even if Tesla achieves its lofty technological goals it must fail as a business. Investors who chase the EV dream without considering the natural resource realities are doomed to suffer immense losses. Tesla can't possibly succeed. Its fair market value is zero. The stock is a perfect short.

I won't even get into the sophistry of wind turbines and solar panels.

Next on my list of investment catastrophes in the making are the lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) that plan to use prodigious quantities of industrial metals as fuel tank substitutes, or worse yet for grid-connected systems that will smooth the power output from inherently variable wind and solar power facilities that also use prodigious quantities of industrial metals as hydrocarbon substitutes. Talk about compounding the foolishness.

I can only identify one emerging battery technology that has a significant potential to reduce hydrocarbon consumption and industrial metal consumption at the same time while offering better performance. That technology is the PbC® Battery from Axion Power International (AXPW.OB), a third generation lead-acid-carbon battery that uses 30% less industrial metals to deliver all of the performance and five to ten times the cycle life. There may be other examples, but I'll have to rely on my readers to identify them.

Humanity cannot reduce its consumption of hydrocarbons by increasing its consumption of industrial metals. The only way to reduce hydrocarbon consumption is to use less and waste less.  There are a world of sensible and economic fuel efficiency technologies that can help us achieve the frequently conflicting long-term goals of reduced hydrocarbon consumption and increased industrial metals sustainability. They include but are not limited to:
  • Better buiding design and insulation;
  • Smarter power management systems;
  • Telecommuting;
  • Denser cities with shorter commutes;
  • Smart transportation management to reduce congestion;
  • Buses and carpooling;
  • Bicycles and ebikes;
  • Shifting freight to rail from trucks;
  • Smaller vehicles that use lightweight composites to replace industrial metals;
  • Deploying solar and wind with battery backup for remote power and in developing countries;
  • Shipping efficiency technologies, such as better hull coatings, slow steaming, etc.; and
  • Recycling, recycling and recycling
My colleague Tom Konrad wrote a 28 part series on "The Best Peak Oil Investments." While I'm skeptical about the future of biofuels after suffering major losses in the biodiesel business, Tom's work provides an exhaustive overview of the energy efficiency space and a wide variety of investment ideas that have the potential to make a real difference. Since we can't simply take a couple of giant leaps into the future, we'll just have to get out of our current mess the same way we got into it – one step at a time.

We live in a cruel world. There is no fairy godmother that can miraculously accommodate the substitution of scarce industrial metals for hydrocarbons that are a hundred times more plentiful. We can and we must do better, but we can't solve humanity's problems until we accept the harsh realities of global resource constraints without the filters of political ideology and wishful thinking.

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

June 23, 2011

Wind Fall

Debra Fiakas

Angela Merkel’s coalition government may not have looked at the nuclear power question for anything more than a “cover your behind” solution.  Nonetheless, the wind industry sees last month’s decision to phase out Germany’s nuclear power generation industry by 2022 as  -  no pun intended  -  a windfall.  Policy makers say as much as half of the deficit left by the shutdown of nuclear power plants will need to be made up from other power sources, principally wind power.

This is no small undertaking.  A total of 21,607 wind turbines with an overall capacity of 27,214 MW were in service in Germany at the end of 2010.  To replace half of the nuclear power capacity going off-line by 2022, wind installations need to increase by as much as 40% by 2022.  German Wind Energy Institute (DEWI) reports that 1,551 MW of new wind power capacity was installed in 2010, well below goals for 1,900 MW installations.  The German wind power industry will need to maintain if not accelerate its current pace of development in order to meet Merkel’s nuclear replacement goal.  This means many new wind turbines sprouting up across the German countryside.

The most logical winner in this turn of events is Germany’s own Siemens AG (SI).  Siemens has dedicated considerable investment in developing its line of seven wind turbines models.  The company boasts 7,800 turbines installed around the world, producing over 8,800 MW of power a year.  For U.S. investors Siemen’s ADR has some appeal as it is priced at a multiple of 11.4 times forward earnings and offers a 2.8% dividend yield.  However, the stock trades not on its wind power business but on the relative strength of worldwide earnings against currency fluctuations and other macroeconomic factors.

Germany’s Nordex (NRDXF.PK) lays claim to first-mover status in the wind power world.  In 1995 with already a ten year track record in the wind business, Nordex was the first to put a megawatt system on the market.  Since its inception Nordex has installed more than 4,400 Nordex wind turbines with a total rated output of more than 6,500 megawatts in 34 countries around the world.  Of its large turnkey projects only a small portion are located in Germany.  Expect Nordex to make some aggressive moves to get a larger part of the domestic market.

Denmark’s Vestas Wind Systems (VWDRY.PK) is not in the least intimidated by the Siemens/Nordex home advantage.  That is because Vestas has installed over 43,000 turbines around the world with capacity to produce over 44,000 MW of power.  Over 5,800 of those turbines are in German and Vestas is likely to use its track record in Germany to get another big bite of the strudel so-to-speak.  That fact that Vestas does not report its financial results in the U.S. should not be a deterrent for U.S. investors.  The company provides financial information in English on its corporate web site.  Vestas ADRs trade on the Pink Quote system in the U.S. with fairly good volume and the bid/ask spread is reasonable.  Otherwise it is necessary to pick up shares on the Danish exchange.

For small-cap sector purists it will be necessary to consider at PNE Wind (PNE3.DE) and REpower Systems AG (RPW.DE).  Both are Germany-based wind technology companies that are likely beneficiaries of domestic wind power policies.  

With a knack for developing and installing wind power projects, PNE Wind recently broke into the U.S. market with the sale of a wind farm to Black Hills Power near Belle Fourche, South Dakota.  (As a native, I can vouch for the fact that there are a lot of Germans in South Dakota.)  

REpower Systems is another wind turbine producer with a full product portfolio that ranges from wind turbines with an output from 1.8 MW up to 6.15 MW and rotor diameters from 82 up to 126 meters.  It boasts the ability to install workable solutions even in areas with weak wind experience.

In scrutinizing these company’s investors will need to take a magnifying glass to cash flows and capital expenditures.  Even a whiff of inadequate resources for investment would be a tip to stay away from long positions.  Also a good look at product portfolios would be helpful as sites for eventual wind power installations are identified.  Not all turbines are created equal and some may not be the right configuration for Germany’s landscape.

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.  All stocks mentioned in this article are included in Crystal Equity Research’s Earth, Wind and Fire Index in the Wind Group.

June 22, 2011

A Guide to Geothermal Heat Pump (GHP) Investing, Part II

Chris Williams

In the previous post on understanding the geothermal heat pump industry, we addressed (1) what’s driving the growth in the GHP industry, (2) the advantages of GHPs and (3) what market segments are adopting the technology the fastest. In this article we will continue the discussion and address: 

4. The bottleneck’s to GHP continued and faster growth
5. Possible Investment targets within GHP
6. The 2 best opportunities for investment in public equities.

4. Bottlenecks: There are two major things holding back the GHP industry.

1. Technical knowledge. IGSHPA, The International Ground Source Heat Pump Association, has created a training certification to help spread the knowledge. HeatSpring Learning Institute, along with a number of other private and public education providers, is using the IGSHPA certification to build the base of industry professionals who can install geothermal.
2. Financing. Similar to the solar industry, the large amount of money upfront needed to install geothermal has impeded growth. Until the industry can figure out the financing, like the solar industry has with the PPA, growth will not be rapid. LVestus is a New Hampshire based company that is now offering a TPA, a thermal purchase agreement, and is addressing the financing issue.

If these two items are addressed, the growth of the GHP industry will be much faster than the 30% it has been for the last couple years.

5. How can you invest in this growth? Where is the opportunity in the GHP Industry?

In the solar industry, although it’s very volatile, it’s very easy to find a place to invest. There are a number of large, publicly traded manufactures that are pure plays FSLR, TSL, STP, just to name a few. There’s also a wide range of ETFs, or Exchange-Traded Funds.

The GHP industry is showing strong growth, it’s a sizable market, it’s based on solid technology, and demand will only increase over the next 30 years as our nation invests in upgrading our building infrastructure

With that said, let’s take a look at the products and services provided in every geothermal installation to see where the opportunities exist for investment.

Products and Services

  • Heat Pumps - HVAC condensing/evaporate units
  • Ducting Installation - Sheet metal and duct seal to deliver hot/cool air to the conditioned space from the heat pump
  • Grout - Cement or bentonite based compounds used in the installation of the ground loop
  • Pump Package - Standard pumps reconfigured for geothermal use to move water from the ground loop to the heat pump
  • Ground Loop - Simple high-density polyethylene (HPDE) plastic installed in th ground to extract or deposit BTUs from or to the heat pump
  • Design Software - Used for design of all sizes of systems
  • Drill Rig – Required for drilling and installing vertical ground loops

Other than the heat pumps, the rest of the products are nearly impossible to invest in because they are:
1. Very small companies that are not large enough to become public. This pertains to most design and installation firms as well as software companies. Loop Link Geothermal design software is a great example of this--they have great software used by many in the industry to design residential and light commercial systems, but it’s a niche play so the company remains small.
2. Commodity products. It is difficult to distinguish a commodity product’s use in geothermal applications versus other applications. For example, ducting and pump packages are used for hundreds of other HVAC applications, and it’s impossible to find a company that just sells “geothermal” ducting or pump packages--they do not exist.
 
6. The only opportunity to invest in GHP is in the heat pumps themselves.

Here is a review of the top heat pump manufacturers in the USA


After a review of GHP manufacturers, there are only three that are public and accessible. UTX and LXU are both large corporations where GHP probably represents less than 10% of yearly revenue. While UTX’s main business units are comprised of defense and aerospace, a minority interest is in the building industry through Carrier, where it has a stake in GHP manufacturing. LXU is less diversified than UTX and has two main business units--climate control and chemicals. The climate control group designs and manufactures a range of HVAC products including ground source heat pumps. WFI is the only pure play on the GHP industry.

Here’s a review of some basic metrics as of June 8th, 2011.


Ticker

Revenue

Stock Price

ROE

Beta

Dividend

Market Cap

UTX

54B

83.24 USD

18.66%

1.01

1.70

76B

LXU

609M

43.71 USD

41.5%

1.54

0

967M

WFI.TO

135M

22.69 CAD

67%

-

.83

27


In the end, I’d suggest that LXU and WFI are the only access routes to the GHP industry in public equities. Both ClimateMaster (LXU) and WaterFurance (WFI) are respected manufacturers within the industry and provide quality products.

After completing the analysis and looking at direct access to the GHP industry, I was surprised how decentralized the industry is for every product within the supply chain. Based on the number of products that go into every GHP installation, I would have thought it would be easier to invest in the industry. However, if you use Porter’s five forces analysis it becomes clear why the GHP industry is structure is so different from solar.  The GHP industry as a whole is highly competitive, very price sensitive, and built around commodities instead of proprietary technology or manufacturing techniques like we see in the solar industry.

If you’re really interested in taking advantage of the GHP industry, WFI and LXU seem to be your best options. While UTX is also possible, it’s much more of a defense/aerospace play than a GHP investment.

Chris Williams is an IGSHPA certified geothermal installed and  works with HeatSpring Learning Institute delivering world-class IGSHPA Geothermal Training, NABCEP Solar Training, and BPI Certification training to professionals who are installing, designing or selling renewable energy systems. Sign up for their newsletter here. Chris can be reached directly at cwilliams@heatspring.com or in the twitterverse @topherwilliams

June 21, 2011

A Guide to Geothermal Heat Pump (GHP) Investing, Part I

Chris Williams

According to the Solar Energy Industry Association (SEIA), in 2010 solar was the fastest growing industry in the US, growing at 67%. The geothermal heat pump (GHP) industry still grew quickly compared to the whole economy, but it only grew at a modest 32% compared to solar.

According to Solar Buzz, at the end of 2009, the global solar market was $38.5 billion with the US installing nearly 8% solar, or $3.1 billion of the world market.

PV Segmentation by Region
Source: Solarbuzz 2010
Marketbuzz

According to PMGO, an industry research firm,

“The total market for U.S. GHPs in 2009 is estimated to be about $3.7 billion dollars, including equipment and installation cost (and not reduced by government or other incentives). The dealer who sells the equipment typically installs it. PMG expects a growth rate of 32% to continue for a few years. By 2013, PMG projects the U.S. geothermal heat pump market to be in excess of $10 billion.”

The solar market and the geothermal heat pump market in 2009 were essentially the same size; however, while the solar PV industry is growing much quicker, both have strong positive outlooks.

Will the growth of the geothermal industry continue for the next 10, 15, 20 years, and can we invest in public equities like we can in the solar pv industry to benefit from this growth?

In this article, I will walk through an analysis of
1. What is driving the growth if the GHP industry
2. Why property owners and utilities are adopting GHPs
3. The market segments that are adopting geothermal the fastest
4. The bottleneck’s to GHP continued and faster growth
5. Possible Investment targets within GHP
6. The 2 best opportunities for investment in public equities.

For today’s article, we’ll focus on section 1 through 3.

1. What’s driving the GHP industry?

As good investors, let’s walk through a little industry analysis to get a sense for the geothermal heat pump space.

Geothermal is a reliable energy source and a solid investment that is more broadly applicable than solar because the technology is not susceptible to state policy, like solar pv. Put another way, the financial return that a GHP system provides to property owners is based more on the fundamental technology and the fuel it is displacing rather than government incentives. I’d suggest this means it is less volatile from an investment perspective than the solar pv industry.  

Geothermal heat pump HVAC systems are attractive because the technology is fundamentally sound and super efficient. A typical system is between 300% to 500% efficient--meaning for every unit of energy you put in, you harvest 3 to 5 more units. To understand more, download the Geothermal Survival Kit, written by Kevin Rafferty who co-authored the ASHRAE publication, “Ground-Source Heat Pumps” - Design of Geothermal Systems for Commercial and Institutional Buildings. The Department of Energy also has some great geothermal heat pump resources. ASHRAE is an “international technical society organized to advance the arts and sciences of heating, ventilation, air-conditioning and refrigeration.” (www.ashrae.org)

2. Here’s what you need to know about customer adoption of GHP as an investor:

Geothermal heat pumps offer a number of advantages over traditional heating and cooling methods to property owners, namely they offer the following:

  • Highly Reliable
  • Combustion Free
  • Virtually Zero Emissions
  • No On-Site Contribution to Global Warming
  • Local Availability (no fuel or transportation expense)
  • Electric utilities generally favor GHPs because they provide a stable base demand all year
  • Geothermal HVAC also very useful in gaining LEED certification all types of properties. Green building demand has been skyrocketing in recent years and GHPs can provide a significant number of points in the rating system. Learn more about Geo and LEED in this whitepaper: Let Geo LEED The Way


3. GHP Are Becoming the Norm in Some Applications

All day long at HeatSpring, we’re talking to contractors, HVAC professionals and drillers who are taking our IGSPHA geothermal training program because more and more of their customers are asking about geothermal. Many of our alumni have weathered the recession by investing in training and moving their business into this new segment. The residential market is the strongest in new construction, where the systems can be financed from day one. However, the retrofit market is still strong, especially if the building has an old furnace or leaky building envelope. Also, with large commercial or government projects, geothermal is becoming the norm because upfront costs are less of a consideration (like with residential customers) and lifetime savings and NPV are more important.

Chris Williams is an IGSHPA certified geothermal installed and  works with HeatSpring Learning Institute delivering world-class IGSHPA Geothermal Training, NABCEP Solar Training, and BPI Certification training to professionals who are installing, designing or selling renewable energy systems. Sign up for their newsletter here. Chris can be reached directly at cwilliams@heatspring.com or in the twitterverse @topherwilliams

Continue reading A Guide to Geothermal Heat Pump (GHP) Investing, Part II.

June 20, 2011

Investors Sweet on Second-Gen Biofuel IPOs But Caveats Remain


by Ivan Castano


Second-generation biofuel IPOs are all the rage this year with recent deals pricing well above initial expectations and a growing number of companies expected to tap the capital markets in coming months. But analysts caution some of these companies will have a hard time wooing investor interest unless they become more transparent about their accounts and future path to profitability.

"None of these companies will be earning much any time soon so investors want to see clarity and visibility about the enterprise story behind the companies," says Stacey Hudson, an analyst with Raymond James. "If they have a strong story and the right technology, there is definitely appetite out there. Investors have become more comfortable and knowledgeable for second-generation biofuel companies."

Certainly, investors have been keen to bankroll the latest IPO’s, sending their post-IPO valuations sharply higher. Late last month, algae-for-biofuels firm Solazyme (SZYM) priced its IPO at $18, the top of the initial price range and saw its shares jump 15% on its trading debut, raising $227m.

Rising Value

The last two deals before it - Gevo (GEVO)and Amyris (AMRS)- have seen their stock increase 32% and 83% respectively. Others including Codexis (CDXS), Metabolix (MBLX)and Syntroleum (SYNM), also performed well, helping the second-generation biofuels sector boost its market capitalization to $3.8bn in the past 14 months.

Eager to profit from this momentum, investment banks are scrambling to price deals before market sentiment changes with one senior IPO banker saying his firm is working on at least 18 potential deals. So far, however, the only well-publicized IPO hopefuls include Petroalgae (PALG.OB), Ceres, Myriant and Kior. Hudson expects Kior will do well because it has a "strong technology" and uptake partnerships. However, she says Petroalgae, which has been hoping to IPO since last year, may struggle because of "some week elements in its business model."

Caroline Taylor, an analyst at the Energy Biosciences Institute in Berkeley, says Ceres has a good strategy because it is a feedstocks company.  She said that establishing the feedstocks for advanced cellulosic fuels is crucial for commercial development, given that the largest cost associated with production is for the feedstock.

Standing Out in the Crowd

In the biofuels game, having an economically feasible business model is crucial at a time when many firms are struggling to make money amid soaring feedstock costs and falling oil prices. Kior's core business is transforming non-food biomass into so-called renewable crude oil that can then be refined to make a variety of gasoline and diesel blends. It says it can sell its crude oil at a much lower price than biofuel, which typically sells at $3-4 a gallon.

Meanwhile, Ceres, which hopes to raise as much as $100 million to expand its output of genetically modified crops to make biofuels, says it is developing sweet sorghum as an alternative to sugarcane to make biofuels. It is also working to improve corn and soybean yields as well as making other crops that can better tolerate drought and salt. Ceres also has some high-powered partnerships in place, including Monsanto, which is helping it research and develop some of its products.

Myriant, which is also eyeing some $100m in its flotation, makes "biocatalyst" technology for the conversion of renewable feedstocks into special chemicals including succinic acid. Petroalgae, meanwhile, sells a technology it claims helps improve the growth and harvest rate of plant micro crops or algae to generate proteins that can be used to make biofuels, animal feed and human food. While it hoped to IPO last year, the company has struggled to find the right window to come to market. Some say it's failure to attract investment from ExxonMobil, which sunk $600m into algae-to-biofuels rival Synthetic Genomics in July 2009, raised questions about the value of its technology.

Showing just how crucial technological differentiators have become in the industry, observers said Solazyme's success was primarily due to it's ability to grow algae in fermentation tanks without sun or photosynthesis processes, which are used by most rivals. In a recent report analyzing the upcoming IPOs, Raymond James states technology will be a make-or-break factor for the success of future second-gen biofuel IPOs. But so will other factors including a clear proof of concept, roadmap to profitability, strong strategic partners and adequate and inexpensive access to feedstock.

Ivan Castano is a freelance journalist based in Miami. His work has appeared in Thomson Reuters’ International Finance Review (IFR), Dow Jones’ Financial News, Euromoney, Trade & Forfaiting Review and a range of trade publications covering the capital markets, private equity, loan, credit and restructuring markets.

This article was first published on Renewable Energy World, and is reprinted with permission.

June 19, 2011

Wall Street's Irrational, Dangerous Hatred of Solar Stocks

Garvin Jabusch

For most of 2011, the stocks of solar power companies of all kinds, from providers of raw polysilicon to developers of finished utility scale plants, have been taking a beating on world and U.S. stock markets, partly because solar has been the industry most singled out for attack by bearish short sellers. I can’t describe this phenomenon any better than did Roberto Pedone in a recent column for thestreet.com:

Besides the banking sector post-2008 financial crisis, I can't think of a group that's as hated and despised as solar stocks…For whatever reason, this entire complex has become a favorite target of short-sellers. There are so many names in the solar sector that are heavily shorted that it's hard to find a name the bears aren't leaning all over. One famous and successful short-seller, Jim Chanos, has even made it publicly clear that he thinks the wind and solar stocks are a bunch of "hot air." 

"For whatever reason" indeed. Solar is hated in spite of being the fastest growing energy sector in the U.S. (67% 2010 growth; 66% growth just in the first quarter of 2011) and in the world (70% 2010 growth), and also despite its shares trading at very low valuations already.  Take for example Green Alpha ® Advisors' holding and China-based solar company LDK Solar (LDK). The company's shares have fallen from US$14.49 per share in February to $6.94 as of this writing. I can find no good fundamental reason for the decline: LDK's latest quarterly earnings came in at $.95 per share where consensus analyst expectations were $.86; the company has year-on-year sales growth of 202%, has a price-to-earnings ratio of only 2.22, plenty of cash on the balance sheet, and a price-to-book ratio of just .91. That's right, even if the company were closed and its assets liquidated, the cash generated at the yard sale would be greater than the current market cap, though the earnings should have value. LDK is the very definition of a "value" stock. Or, inversely, shorting any company this cheap, that's this fundamentally solid, and that's growing this fast is the very definition of "irrational." LDK happens to be one of our favorites, but it's easy to find similar valuation stories throughout the industry today. This trend would be odd enough on its own, but, simultaneously, other events in the story of global energy are unfolding.

While solar companies are being beaten up, the fossil fuels side of the energy supply is having a more fundamental, structural problem: oil demand has run ahead of our apparent capacity for production. Image 1, below, shows that total world oil reserves have declined significantly over the last two years (an exception being the U.S. strategic reserve, but that too may soon be tapped), which can only mean that the world is using oil faster than it's being pumped.

It's difficult to overstate how economically dangerous this is, since, see image 2 below, oil price spikes have preceded all recessions since 1970. Environment aside, this is why we need to bring more renewables online, to lessen our ridiculous economic vulnerability to oil prices. Referring to his chart (image 1) below, economist Gregor Macdonald writes: "[f]rom the latest IEA Paris Oil Market Report, you can see that starting in mid-year, total OECD inventories started a new decline. Moreover, the histograms in the below chart also show the difference to the five year average, which also illustrates the global stocks drawdown. This coincided by the way with a resurgent, mid-year advance in the price of oil from a low of $69 to $92 by [2010] year end."

  Green Alpha Advisors 1

Image 1: decreasing oil reserves since 2009 (Source: economist Gregor Macdonald from his blog gregor.us)

Macdonald concludes, "Unable to meaningfully increase global oil production to meet demand, the world ate through inventories. You have been warned."

Again, the drawdown in inventories and evidence of peak oil is alarming because spikes in oil prices crush economies. We've written about this many times, but this chart (image 2), compiled by Stuart Staniford, says it all: "since 1970, every single recession has been preceded by a runup in energy prices."

  Green Alpha Advisors 2

Image 2: price of oil relative to recession onset (Source: scientist Stuart Staniford from his blog http://earlywarn.blogspot.com)

Oil is expensive to the point that it is threatening the economic recovery, and due to demand exceeding supply, its price will most likely continue to increase, except, maybe, during oil-caused recessions. 

Meanwhile, on the electricity side, solar is quietly becoming competitive with average grid price (especially in sunnier climates) and is rapidly getting cheaper still. "Price per watt of solar modules (not counting installation) [have] drop[ed] from $22 dollars in 1980 down to under $3 today," according to Ramez Naam, in a great piece for Scientific American. And, as this trend continues, "in 2030, solar electricity is likely to cost half what coal electricity does today." I personally believe that solar's scale is increasing rapidly enough that Naam’s 2030 prediction will occur much sooner, by 2020 or so (the Institute of Electrical and Electronics Engineers says "within 10 years"), but whenever it happens, as solar comes into its full potential, it will become so cheap and plentiful that any type of fossil fuel will seem foolishly expensive by comparison, at least where electricity is the energy of choice.

  Green Alpha Advisors 3

Image 3: Historic and forecast price of solar electricity vs. US grid price averages (source: Ramez Naam in his blog for Scientific American)

But behind these macroeconomic realities, Wall Street's consensus opinion of solar stocks looms large. And, so far this year, the consensus has been extremely negative. Does Wall Street to some degree answer to the huge buckets of money represented by Big Oil? Yes. Is there therefore some effort underway to delay the inevitable solar powered future? Possibly, but suffice it to say that Wall Street at least has enabled a culture that, against all economic and climactic evidence, loves fossil fuels and still views renewables as “alternative.” (Anecdotal but interesting on this point, on May 4, 2011 CNBC reported on-air that Arizona's First Solar, Inc. (FSLR, a Green Alpha holding) missed their first quarter earnings, when in fact the company's earnings had beat expectations by 15%; the stock plunged 10%.)

Meanwhile, other folks are beginning to embrace the Next Economy. Smart oil money in Saudi Arabia is converting itself to massive amounts of exportable solar. "Converting" as in Saudi Arabia is hoping to develop the same quantity of solar electricity exports that it now enjoys via oil exports. As I discussed in my previous post, "Saudi Arabia exports about 2.7 billion barrels of oil per year, each containing the equivalent of 1,700 Kilowatt hours (kWh) of electricity for a total of 4.59 × 1012 kWh [or 49,500 GWh] per year, or the equal of about one quarter or the world's annual electricity demand." Using a standard PV average of 30 square kilometers per gigawatt hour (GWh) year, this means the Saudis would need 1.377 million km2 of solar panels to achieve their goal solely with PV. This is well over half the country’s total size of 2.218 km2! Now of course this is an extreme goal that the Saudis are unlikely to reach, and their efforts will no doubt also include concentrated solar thermal, but even a small fraction of this goal would provide every solar manufacturer on earth with years of order backlog. It’s worth noting that the Saudis are likely pursuing this policy to replace lost revenues as they deplete their oil reserves (and they’re using foreign petro dollars to do it). 

Elsewhere in the world, China has recently doubled down on its goal of 5 GW of installed solar capacity by 2015 to a new 10 GW goal. In Germany, they’re halting their solar subsidies repeal in order to meet their plan of replacing nuclear power with renewables (the end of German/European solar subsidies has been one of the short sellers’ chief arguments. Italy has just voted to scrap new nuclear plans as well, so they may also feel the need to keep their solar incentives; more broadly, the twilight of nuclear in general may have arrived). In Japan, a “proposed feed-in tariff would create guaranteed demand for all of the output from renewable energy projects” and companies are planning projects accordingly. Adding up the world’s PV solar plans in his “Plan B” review, Lester Brown reckons that “cumulative PV installations could reach 1.5 million megawatts (1,500 gigawatts) in 2020,” and goes on to say that “[a]lthough this estimate may seem overly ambitious, it could in fact be conservative, because if most of the 1.5 billion people who lack electricity today get it by 2020, it will likely be because they have installed home solar systems.” (Brown’s estimate could indeed be conservative; he was writing before the Saudis’ announcement).

Viewed simply in terms of potential growth as a slice of the world energy market, solar again appears set for massive growth. The Economist reported this week that as of 2010 "non-hydro renewables still check in at only 1.3% of global energy consumption." Since many local, regional and even a few national governments have set mid-term goals of 20% or more from renewables, it seems likely that solutions such as solar and wind have potential to grow 10 fold or more on policy basis alone.

You get the point by now. Aggregate solar power demand in the global economy is huge and growing.  Any way you slice it, the solar industry is currently very undervalued by analysts and traders, even though overdependence on oil is threatening to return us to recession. 

So, how do we judge Wall Street's treatment of solar stocks? Irrational? Obviously. Dangerous? Only if you fear for the economy. 

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

June 17, 2011

Maxwell Stakes its Claim in a $2.7 Billion Niche Market

John Petersen

Last Wednesday Maxwell Technologies (MXWL) announced the launch of a new ultracapacitor product that insures reliable engine starting for commercial trucks and other heavy vehicles. According to the Energy Information Administration, the existing US fleet includes 4.2 million heavy-duty diesel trucks. All of these vehicles are subject to strict anti-idling laws and regulations that strain their battery systems and increase the risk that the engine won't be able to start when it needs to. While a dead battery is a pain for the average consumer, it can cause a world of problems for a commercial truck that has to stay on schedule and can't afford the lost time or the out-of-pocket costs associated with a roadside service call.

6.17.11 Maxwell.png

The Maxwell solution is simple, but effective. They've packed twelve of their 3,000 Farad BoostCap ultracapacitors into a standard Group 31 battery case along with the necessary control electronics. Since heavy trucks frequently use four or more lead-acid batteries to power starting, lighting and accessories, the ultracapacitor pack is swapped for one of conventional batteries, wired directly to the starter and then connected to the rest of the electrical system. The installation is simple and can be done in less than an hour. Once the ultracapacitor pack is installed, it will assure trouble-free starting for the life of the truck even if the batteries get severely depleted. With an expected retail price of $1,299, the product should pay for itself in a couple of years by reducing the frequency of battery replacements, avoiding service calls that can cost up to $600 each and reducing downtime costs including late deliveries and spoilage of perishable products.

While Maxwell has not released specifics on its expected revenue per ultracapacitor pack, I'd have to guess that something on the order of half the retail price should flow back to Maxwell. With a national fleet of 4.2 million trucks and a revenue potential of $650 per vehicle, the addressable market works out to $2.7 billion. It's a niche market, but a very attractive opportunity in a transportation sector that truly needs a better energy storage solution for starter systems.

Maxwell was kind enough to share their preliminary marketing presentation with me and it clearly lays out the advantages. The ultracapacitor pack draws its energy from the other lead-acid batteries with a trickle charge that takes about 15 minutes and draws about 36 watt-hours of energy from batteries that have a combined capacity of roughly 3,000 watt-hours. When it's fully charged the ultracapacitor pack can deliver up to 1,900 amps of starting current and support up to three cold cranking events per charge. Since the system is ultracapacitor based, temperatures as low as -40° F will not impact performance.

While the product is an important milestone for Maxwell, it's also a great object lesson in how economies of scale work. The ultracapacitors Maxwell will use in the system are part of its K2 series. These are the same basic devices that Maxwell uses for its hybrid bus and wind turbine products. Each of the 12 ultracapacitors is roughly the size of a soda can, which makes integration into a compact starter pack relatively straightforward. The biggest reason Maxwell could afford to develop this product for the trucking industry is that it's already making millions of the basic ultracapacitor every year and the new starter solution is simply another use for a proven product that's already being manufactured at scale. As a result Maxwell was able to develop the product in-house and plans to take it directly to end-user and OEM markets without bringing in another manufacturer as a partner. It should enjoy a significant first mover advantage, retain a higher degree of control over its own destiny and enjoy higher long-term margins than it would if the product had been developed in cooperation with somebody else.

Last fall Maxwell's stock price ran from $12 to $17 in response to an automotive design win that will involve the installation of $50 BoostCap modules in up to a million new passenger cars over the next three years. When I compare the relative value of the two products and the fundamental end-user benefits of the two solutions, I have to believe the starter solution for heavy trucks will be an order of magnitude more important to Maxwell's top and bottom lines over the next few years.

This is a very important product announcement that the market seems to have missed.

Disclosure: None.

June 16, 2011

Ten Clean Energy Stocks I'd Buy Now

Tom Konrad CFA

Buying opportunities return to clean energy.

Two years ago I had a problem.  In the universe of clean energy stocks I watch, I could not find any that I thought were good values.  So I wrote an article saying "We're near the peak."

If you had been comparing that call to the performance of the broad stock market since then, you would have to conclude that I was ludicrously wrong.  The S&P 500 is up 40% since then.

If on the other hand, you'd been watching clean energy stocks, you would have found that the overall trend has been flat to down.  The PowerShares Clean Energy (PBW) ETF has basically been flat since then, while solar (TAN) and wind (FAN) ETFs are each down about 20%. 

Clean Energy Since 2009.png

I mention all this because I notice something new, that hasn't happened for almost two years: I'm again finding clean energy stocks that I think are bargains.  I think the sector and the market as a whole still have a lot of room to fall, but I'm encouraged to finally have companies to write about that I think are worth buying again.

Here are ten I've been buying, in no particular order.

1. New Flyer Industries (NFI-UN.TO) a bus manufacturer.  See article: Questions About Dividend Spook New Flyer Investors. Why I'm Buying.
2. CVTech Group (CVT.TO) a transmission and efficient vehicle company. See article: The Best Peak Oil Investments Meet the Strong Grid.
3-5. Comverge (COMV), EnerNOC (ENOC), which are demand response companies, and Ram Power Corp. (RPG.TO), a geothermal developer.  See article: Ten Clean Energy Stocks for 2011: Buying Opportunities.
6. Alterra Power Corp. (MGMXF.PK)  is a geothermal and hydropower developer, see: The Magma/Plutonic Merger.
7. Axion Power International (AXPW.OB) is a developer and manufacturer of PbC batteries: An Elephant Hunter Explains Market Dynamics
8. Nevada Geothermal Power (NGLPF.OB), another geothermal pick.  See: Blue Mountain Disappoints; Nevada Geothermal Power Looks Like a Takeover Target
9. Ambient Corp. (ABTG.OB) a smart grid stock.  See article: A Profitable Smart Grid Penny Stock Aims for a NASDAQ Listing
10.
Rockwool International A/S B (RKWBF.PK) an international insulation company.  No article yet, but it's mentioned here: Canadian Insulation Companies Likely to Benefit from Next Budget.

Ten Clean Energy Stocks for 2010

Four of these stocks (Comverge, EnerNOC, Ram Power, and Nevada Geothermal) were part of my annual New Year's list of ten clean energy stocks I liked.  At the time, I only owned the two Geothermal stocks, because I was having trouble finding anything I thought was a good value.  That original list has been doing horribly so far this year, in large part because of the dismal performance of these four stocks and that of American Superconductor (AMSC).  I've been following AMSC's very real problems closely, discussing the refusal of their main customer Sinovel (601558.SS) to accept shipments, the likely reasons behind that refusal, and attempting to value the AMSC under the assumption that Sinovel will resume accepting shipments, but not at their former pace and without future growth.

Ram Power and Nevada Geothermal also had real problems at their geothermal projects, but I feel that the market has vastly overreacted to both, making the pair bargains by almost any measure, and also potential takeover targets in my estimation.  If I were picking my ten stocks today, it would be the list above, with the three Geothermal companies underweighted relative to the rest to avoid putting too much money into one tiny sector.

All in all, it feels good not to be sitting on the sidelines anymore.  Blood is on the streets for a lot of decent renewable energy and energy efficiency stocks, and experienced market hands know that it is often the best time to buy. 

But keep some cash on the sidelines.  Right now, I expect the market will get worse before it gets better.  If I'm right, and you'll want to have cash available to take advantage of other opportunities that arise down the road.

DISCLOSURE: Long NFI-UN, CVT, COMV, ENOC, RPG, MGMXF, AXPW, NGLPF, ABTG, RKWBF.

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.

June 14, 2011

An Elephant Hunter Explains Inflection Point Investing

John Petersen

In "An Elephant Hunter Explains Market Dynamics" I discussed the two basic types of public companies; earnings-driven companies that are “bought” in top-tier weighing machine markets and event-driven companies that are “sold” in lower-tier voting machine markets. Today I'll get a bit more granular and show how "sold" companies usually fall into one of two discrete sub-classes that have a major impact on their stock market valuations.

As a starting point, I'll ignore the China-based companies that are listed in the US because their quirky metrics would only confuse the analysis. Then I'll break my tracking list of 14 public companies down into three sub-classes as follows:
  • Established manufacturers that have earned a competitive position in their target markets and are or have been stable and consistently profitable;
  • Transition stage manufacturers that have progressed beyond the R&D stage and are increasing revenues, but have not turned the corner to consistent profitability; and
  • Technology developers that are still in the R&D stage and have not completed a credible product launch or started to develop a predictable revenue stream.
In the following graph from Osawa and Miyazaki that summarizes the business dynamics underlying valley of death analysis, the established manufacturers are all beyond the crossover point between the valley of death and success as a business; the transition stage manufacturers are all between the product launch and success as a business; and the technology developers are all between research and product launch.

1.11.11 Valley of Death.jpg

The following table presents summary valuation data on each of the companies included in the three sub-classes. Dollar amounts are expressed in millions.

6.14.11 Peer Valuation.png

Established Manufacturers

When you consider the five first-tier companies including Johnson Controls (JCI), Exide (XIDE), Enersys (ENS), C&D Technologies (CHHP.PK) and Ultralife (ULBI), you'll note that all of them have long histories and established competitive positions in their target markets. While C&D and Ultralife are currently losing money, they have been profitable in the past.

In general, the members of the established manufacturers class trade on the basis of earnings, have an average price to book value ratio of 1.6 and have an average price to sales ratio of 0.5. While companies in the established manufacturers class usually trade within a reasonable range of their peers, you can occasionally identify special events in the past that are not likely to be repeated in the future. Examples include $48 million in nonrecurring charges reported by C&D for the year ended January 1, 2011 and $53 million in nonrecurring charges reported by Exide for the year ended March 31, 2011. Since both companies are emerging from their own versions of a rough patch, they merit special attention and have a good shot at substantially outperforming their peers in the established manufacturer class.

Transition Manufacturers

When you get into the transition stage manufacturers including Maxwell Technologies (MXWL), A123 Systems (AONE), Ener1 (HEV), Active Power (ACPW) and Valence Technologies (VLNC) the valuation multiples jump abruptly and the price to book and price to sales ratios are also far more variable than they are in established manufacturers class. For transition stage manufacturers, I've found that a far more useful metric is a measure I refer to as blue-sky; the difference between a company's reported book value and its total market capitalization.

Using the blue-sky metric, you'll see that the blue-sky premiums for all five companies are clustered around an average of $190 million. Once you know what thee blue-sky premium is for a peer group of companies you can use it to help select outliers that are significantly over-valued or under-valued compared to their peers. In the peer group of transition stage storage manufacturers, Maxwell is trading at a relatively rich valuation compared to its peers, but the premium seems to be justified by growth. In comparison, Valence is deeply under water from a book value perspective but maintains a high market price in spite of the ugly fiscal realities. The differences lead me to believe that Maxwell is a hold while Valence is a sell or even a short. At the low end of the spectrum, Ener1 is trading at a deep discount until you consider possible future impairment charges that would bring it into line with its peers by reducing reported book value and increasing blue-sky.

Technology Developers

The third class, technology development companies, includes Altair Nanotechnologies (ALTI), Axion Power International (AXPW.OB), Beacon Power (BCON) and ZBB Energy (ZBB). These companies have not reached the point of a credible product launch, although all of them are approaching a point in their development where a significant revenue ramp over the next couple years seems likely. Like the transition manufacturers, the price to book and price to sales ratios are far too variable to provide useful guidance, however the blue-sky premium which averages $20 million for the class can be a very useful tool and help in identifying outliers like Beacon which currently trades at a significant discount to the peer group.

Inflection Point Investing

At some point in their development, all companies either move up the food chain or drift down. I've found that the inflection point between being a transition manufacturer that's valued on the basis of expectations and being an established manufacturer that's valued on the basis of earnings can be a difficult and painful time for investors as management strives to meet the quarterly expectations in order to maintain or grow their stock price. While I don't foresee short-term inflection point for any of the transition stage manufacturers I track, Maxwell and Active Power are the closest and over the next couple years they will experience increasing pressure to meet profit expectations in addition to revenue expectations.

As an elephant hunter, the inflection point I've always liked best comes during the months immediately before and after a credible product launch. During this period the only things that matter are revenue and the market's expectations for future ramp rates. It's generally the time when blue-sky premiums climb from an average of $20 million to something closer to $200 million. It's usually hard to pinpoint a specific revenue level that marks the inflection point, but it's also safe to assume that the magic will happen somewhere between $10 million and $40 million in annual revenue. In my experience there's no other time in the life cycle of a company that offers higher medium-term appreciation potential.

Of the four technology developers I track, the two with the clearest visible paths to a substantial revenue ramp are Beacon and Axion. Beacon recently commissioned its Stephenstown frequency regulation facility and is planning to build a second facility in Pennsylvania later this year. The two facilities should generate annual revenues of $12 to $24 million, depending in large part on the final disposition of a pending pay-for-performance tariff proposal. While $12 million in revenue would likely keep Beacon in the technology development class for a while, approval of the pay-for-performance tariff would probably be enough to move it up into the transition class. Once Axion completes the validation and certification of its automated second generation electrode fabrication line and begins shipping products for demonstration testing by several first tier manufacturing customers, it should be well on the way.

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

June 12, 2011

Questions About Dividend Spook New Flyer Investors. Why I'm Buying

Tom Konrad CFA

If I could only own one stock, it would not be a stock.  It would be a Canadian "income deposit security:" New Flyer Industries which trades in Toronto as NFI-UN.TO and on the Pink sheets as NFYIF.PK.

Cyclical industry

New Flyer is the largest of the fiveNew Flyer marketshare.png suppliers of heavy duty transit buses in North America.  Unlike its competitors, New Flyer is focused solely on transit bus sales, parts, and service.  The company has industry leading technology, offering a full range of bus styles and propulsion systems, including  diesel, liquid or compressed natural gas, gas and diesel hybrids, electric trolley buses, and hydrogen.  They are currently developing a pure electric version.

Transit buses are a cyclical industry which is currently in a downturn.   Municipal transit agencies are the main customers, and bus manufactures' sales move in line with transit agencies' budgets.
Many transit agencies currently face budget cuts even as high gas prices stimulate demand.  That's because fare box collections typically only cover about a third of the costs of running a transit agency, the rest must come from local, state, and federal transfers.

Both New Flyer and their competitors have shed workers to better match their production capacity with lower demand, but the remaining capacity is still enough to keep the bidding for contracts very competitive. 

The Payout

The New Flyer income deposit security (“IDS”) consists of one common share and a C$5.53 principal 14% subordinated note.  The monthly distribution currently consists of a C$0.03298 cash dividend and a C$0.06453 interest payment on the note, for a total monthly distribution of C$0.0975.  At the closing share price $7.79 on June 10th, that's a 15% yield. 

Unfortunately, the increasingly competitive environment means the company will probably need to cut payments to IDS holders in the coming months.  New Flyer has made significant progress cutting costs and improving operational efficiency, yet an increasing tax rate and lower selling prices have reduced distributable income.  Distributable income has been roughly equal to IDS distributions over the last two quarters, while the long term average distribution was only 80% of distributable income.  Since the company's tax rate is set OT increase over the next year, and the competitive environment is unlikely to improve much before then, payouts will almost certainly need to be reduced.

Strategic Options

New Flyer's board is in the process of evaluating a number of strategic options, both to better cope with the cyclical nature of the industry and the unsustainable distributions.  On the recent May 13 conference call (MP3) they stated that they expect to announce their new strategic plan "in the next couple of months."  I take that to mean by the end July.  Including cutting the dividend, they are looking at acquisitions in adjacent industries with the intent of making their overall business less cyclical.  I take this to mean other types of buses, perhaps light duty transit or intercity motor coaches, or the acquisition of a parts and maintenance company.  Investor worries surrounding the upcoming decision seem to have driven the recent price drop from the C$11.50-12.00 range to the current price below C$8.

Any acquisition would put more pressure on company resources, so I consider it a certainty that the dividend will be cut.  The interest payment, however, cannot be eliminated unless the notes are called.  The first opportunity to call the notes will be in 2012, for 105, meaning that note holders would need to be paid C$5.8065 (which would have to be raised through other borrowing or the sale of stock), and IDS holders would still retain their equity interest in the form of a common share.

I can't predict if the company will call the notes, but the Q1 2011 book value per share was US$2.36 or C$2.32, so the combined book and principal value of an IDS is C$7.85, above the current stock price.  For a company that will almost certainly continue to pay the interest on the subordinated note until the notes are called,  this seems like a bargain.  The interest payment alone amounts to a 10% yield at C$7.79.  New Flyer should be able to remain current with these interest payments even if income falls another 30%, which I consider unlikely.

Past and Future Trades

NFI chart 2011.png
I last took an in-depth look at New Flyer in October 2009, when the stock was trading around $9 because the Chicago Transit Authority had delayed a large order and thrown off production.  I expected the company to work though these problems, and advocated buying at that price. 

Since then the stock rose as high as C$12 this February.  I began reducing my holdings when the price exceeded $11 mainly for rebalancing, which left me with the capacity to purchase more as the stock has fallen since March, making purchases at $10.50, $9, and $8.  I will probably make one more purchase if it falls as far as $7.  Despite the fact that the current price seems extremely cheap for an income investment, the overall uncertainly and current general market decline might conspire to drive it that low again.

No matter what the structure, New Flyer is an excellent value company at the current price.  I like the income security nature of the current structure, and would be happy to hold the New Flyer IDS at current prices even if the dividend is reduced to zero, but I'd also be comfortable if New Flyer converts to a more traditional equity structure.  If the current IDS were somehow converted into straight equity trading at the same price (C$7.79), the P/E ratio would be about 8, after taking into account the reduced earnings due to the loss of the interest tax shelter.  (This tax shelter arises because interest on the note is treated as an expense for tax purposes, while dividends would not be.) 

Although I expect the price to recover only slowly from whatever low it finds, I don't see any reason to delay my purchases until it is back on the upswing, since the current 15% yield seems an excellent compensation for my investment.

DISCLOSURE: Long NFYIF.

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.

June 10, 2011

Is the Solar Installation Industry Ripe for Consolidation?

Tom Konrad CFA

Solar installation is a low margin business with low barriers to entry, but consolidation may bring competitive advantages in some sectors of the market.

I recently took a look at Principal Solar (PSWW.PK), a reverse-merger solar developer roll-up play, and found it remarkably lacking in hard data.  But there are a handful of other publicly traded pure-play solar installer/developers, as well as vertically integrated solar manufacturers like First Solar Inc (FSLR) which have been developing projects with their own panels, and solar developer-operators like Etrion Corp. (ETRXF.PK).

The Shape of the Solar Installation Industry

While Principal may not be providing enough information at the moment to make an informed investment decision, I wanted to decide if the roll-up strategy made sense in the solar developer space.  To do that, I talked to two sources actively involved in the space: Stephen Irvin, the CFO of the privately held solar installer Namaste Solar in Boulder, CO, and Rick Coen, principal at Empower Solar Consulting, a company that manages solar projects for clients such as builders, real estate developers, and government entities who have a few of the necessary ingredients (such as capital or real estate) for a project, but lack the necessary technical or organizational expertise.

Together, Irvin and Coen paint a mixed picture of the industry for prospective developers.  At the small, residential scale, there are practically no barriers to entry.  There is a wealth of training material available, both in person and online which enables even a one-man contractor to become certified to install solar.  At the larger, commercial scale, the main barrier to entry is capital, not expertise.  According to Coen, there is a national trend towards the financiers owning the solar project, and consultants like Empower can manage the project for them, and bring together all the necessary expertise to develop a project from the initial site assessment to final commissioning. 

According to Irvin. the installer model looks a lot like a traditional contractor model.  Gross margins are thin, from 15 to 30%, with residential systems typically receiving larger margins than commercial.  Both see space in the current climate for a wide range of business models, driven by the immaturity of the industry and a wide diversity and frequent complexity of local codes and utility incentive programs that contractors must negotiate.

There are also advantages to scale.  According to Irvin, large solar developers such as privately held Alteris Renewables have the buying power to negotiate better prices on solar panels, a significant advantage in a thin-margin business.  Alteris was formed when private capital firm Riverside Partners rolled up a bunch of companies in the Northeast.  He sees a shift towards commercial and utility scale projects, which also favor large firms because they have the balance sheet to provide the bonding capacity that large customers expect.

Public Solar Installers

Based on the above discussion, I'd guess the sweet spot for a publicly traded solar developer/installers would be a large scale, regional company, focused on a promising region and possibly residential solar installations (because of the higher margins.)

Promising markets include California, the Northeast, and Hawaii.  The former two have strong incentives, while Hawaii's expensive electricity means that they are already close to grid parity.

Although not a complete list, here are the publicly traded installers I'm aware of:

Real Goods Solar (RSOL)
Real Goods calls itself a "leading residential and commercial solar integrator" which was bought by sustainable retailer Gaiam (GAIA) in 2000, but spun off again in 2008.  According to Irvin, they used the money raised in the IPO to "acquire 3 solar installers in California."  They also have a presence in Colorado, because of  Gaiam's presence there.

Real Goods reported
a gross margin of 28.9% and their seventh consecutive quarter of profitability in Q1 2011, showing the effectiveness of the large-scale residential focused model.  I think the company deserves deeper investigation.

Premier Power Renewable Energy (PPRW.OB)
Premier Power was founded in 2001 as the solar arm of home builder Premier Homes.  Now they call themselves "a leading North American and European solar power company providing high performance solar panel systems with consistently high quality for our commercial, agricultural, industrial, government, utility and residential customers."  Recent press releases show that they have been completing large scale projects in California and Italy. 

The company has a tiny $20M market cap, and an 8.2% gross margin on $87M sales.  They are marginally unprofitable, but they show positive cash flow and no net debt, yet with their thin gross margins, I don't anticipate a smooth or quick path to real profitability.

Principal Solar (PSWW.PK)
Principal Solar was discussed in detail here.  Investors should stay away until adequate financial information is available.

Envision Solar International (EVSI.OB)
I first looked at Envision a year ago, at which point they needed to raise capital to build their business.  They're now reporting a healthy 36% gross profit margin, but on minuscule revenues of $347 thousand.  An atypical solar integrator, the focus on licensing "solar trees" and other parking lot solar shading structures nationally.  This may account for the out-of line gross margins of a solar integrator, as they focus mainly on engineering and leave the sale of solar panels to third party installers.  However, given that their revenues are still a fraction of total expenditures (They lost $2.36M over the trailing twelve month period), these margins may not persist as they continue to scale their business.

Arco Energy Technologies Corp. (ART.V)
Arco was brought to my attention by J Peter Lynch after I wrote the initial version of this article.  I have not investigated the company, but here is their profile from their website.  "Acro Energy Technologies... is focused on the consolidation and growth of renewable energy companies, initially in the United States solar market. Acro Energy Technologies has initiated its acquisition campaign in the solar integrator market through its recent addition of Acro Electric, Inc., the 8th largest residential solar integrator in California. Also, it has closed an asset purchase agreement with Light Energy Systems in Concord, California. Acro Energy continues to actively evaluate suitable acquisition candidates across North America and Canada."

Conclusion

The examples of Real Goods and Alteris show that there is a role for consolidators in the highly fragmented solar installer industry.  But not all consolidators will succeed, and those that do are more likely to be steady cash earners, rather than high-flying growth machines.  Do not expect to see a Google of solar installers any time soon, if ever.

If I were to invest in a solar developer today, the only real option would be Real Goods.  I'd need to do more analysis before doing so, but the company's financial ratios and strength look promising.  My biggest concern would be valuation, since solar installation is a traditional low-margin business, but the glamour of solar is likely to attract unsophisticated investors drawn to the flame of solar's bright future.  At $2.42, Real Good is trading at a pricey 34 twelve month trailing P/E ratio, but an inexpensive forward P/E ratio of only 10.  Yet forward P/E ratios only have meaning when (possibly inflated) earnings expectations are met.

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.

June 09, 2011

Saudi Arabia to Become the Saudi Arabia of Solar Electricity

by Garvin Jabusch

A couple days ago Bloomberg reported the following: "Saudi Arabia plans to generate solar electricity equaling the amount of its energy from crude exports, Oil Minister Ali Al-Naimi said." Wait, what? That sounds like a ridiculous quantity of solar electricity. The article doesn't say quantitatively how much energy that is, so I did a quick check. Saudi Arabia exports about 2.7 billion barrels of oil per year, each containing the equivalent of 1,700 Kilowatt hours of electricity for a total of 4.59 × 1012 KwH per year, or the equal of about one quarter or the world's annual electricity demand.

Okay, so obviously solar electricity equal to the energy in all of Saudi Arabia's crude exports is far more than the Saudis could ever use, so maybe I'm misunderstanding the Oil Minister's meaning. Except, Bloomberg goes on to report that "Saudi Arabia, the world's largest oil exporter, has the potential by 2020 to produce enough solar power to meet more than four times global demand for electricity, al-Naimi said." Okay, so it appears they really are planning to ramp up huge. World leading huge. Region-or-more powering huge. A development plan this ambitious can only mean that Saudi Arabia intends to become a huge source of exportable electricity. 

Why would the world's largest oil producer wish to so quickly become the world's largest solar electricity exporter?  I'm sure the Saudi leaders, looking around their country, had a conversation that started with, "so, apart from our rapidly depleting oil reserves, what natural resource do we have that could be exploited on an equally massive scale?" The Saudis of course realize the only answer is sunlight. And knowing better than anyone that easy-to-retrieve oil is getting scarce, they have made the strategic decision to begin replacing it with their only other form of exportable energy, the only other source they can produce in abundance as massive, solar electricity. Saudi is making what in the medium to long term is the state-saving, obvious transition to the Next Economy. And they're doing it now while they're awash in enough oil capital to make it happen.

If I'm right about their plan to export ridiculous quantities of solar electricity, one of the next things we should see is investments into transmission capability (there are signs of this already, such as the huge new General Electric (NYSE:GE) power equipment plant, and plans for underwater power cables to Egypt). Is a quarter of global electricity demand within feasible transmission range of Saudi Arabia? The Saudis would seem to think so. Other things we'll begin to see are contracts with solar providers and rising demand for materials all along solar industry verticals. Solar stock short sellers: watch your backs. 

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

June 08, 2011

When Will the Geothermal Power Slump End?

By Dana Blankenhorn

Gas Letdown GeneratorOf all the energy harvesting technologies out there, geothermal remains the most maddening.

In theory, there should be more than enough energy below our feet to power our world, and it should be cost-competitive for a fraction of the investment needed in wind or solar.

In theory.

Right now, the extraction of geothermal energy in the U.S. remains tied to Nevada and California, where the heat is close enough to the surface and in stable enough formations that a drill can reach it without the heat dissipating quickly. This has caused investors to sour on companies like Ormat Technologies Inc., that once made Reno a hotspot for renewable energy.

In some ways, geothermal today is pretty boring, as with Ormat's Steamboat complex which provides Reno with base load power. Push water down one well, pull it up hot in another, run it through a turbine, extract the heat. Simple.

Turns out geothermal is really two industries.

The business of drilling into the Earth and extracting heat is waiting for Enhanced Generation Systems (EGS) technologies to prove themselves.

Google has invested $11 million in EGS, but in the way of a venture capitalist, not an investment banker. EGS needs better drilling techniques and it needs to become more cost efficient.

More ominously, EGS seems dependent on the same hydraulic fracturing techniques being pushed for natural gas, oil, and oil shale, which have become a red flag to environmentalists for the damage they can do to the water supply.

As a result Ormat  seems more active in the area of recovered energy generation (REG) than geothermal. An REG plant takes the unused energy from some other industrial process and turns that heat into electricity in the same way it would use Earth energy. Not as green, but it's the back-end, the cutting edge of the process, and the knowledge of how to do this efficiently is valuable.

These techniques could be useful in the oilpatch, which wastes tons of power in the form of briny wastewater. An SMU conference this month  will look into exploiting that energy, using existing infrastructure. Most speakers, like Suri Suryanarayana of Blade Energy Partners, and executives from GE and Pratt & Whitney, are interested in adapting existing products and techniques to the generation of electricity from oil industry waste.

One of the more interesting speakers will be Richard Langson, whose Gas Letdown Generator (GLG) (right) gets power directly from the pressure of natural gas wells at a price of just 4 kilowatts per penny. Gas fields, oil fields, petrochemical and industrial waste plants, and existing steam plants can all be making money using the GLG, he says.

But the GLG, if it's as good as Langson says, could be highly disruptive. It could turn go-generation systems like Ormat's into rather expensive horse-and-buggy systems, the Stanley Steamers of the 21st century.

It would be nice to report that there's a clear investment opportunity here, either in a publicly-traded geothermal company like Ormat, in an EGS play, or in a co-generation device like that of Langson. But it remains unclear which solutions will win.

What seems clear is that something will. Co-generation is going to go into every factory producing heat, as costs for extracting it keep going down, and the value of heat keeps going up. Oil companies are going to remain interested in geothermal technologies that approximate what they are doing now. Places with the largest supplies of easily-tapped Earth heat, like Japan,  are ripe for investment.

How or when remains a mystery.

June 07, 2011

The Fukushima cloud's (green, not silver) lining

By. Dr. John C.K. Daly

The ongoing tragedy of Japan's Daichi Fukshima nuclear complex will prove to be a boon for renewable energy in Japan, and astute investors should begin carefully to follow Tokyo's new priorities.

Before the March 11 twin disasters of a massive earthquake followed by a devastating tsunami, about 30 percent of Japan's electricity was generated by nuclear power, and Tokyo had ambitious plans to raise its market share to 50 percent over the next two decades, with renewable accounting for 20 percent, Japanese Prime Minister Naoto Kan told journalists earlier last month.

That optimistic policy is now in tatters, and Kan added, "However (following Fukushima), we now have to go back to the drawing board and conduct a fundamental review of the nation's basic energy policy."

Kan is now touting the government's "Sunrise Project," which has been moribund for the last seven years. The goal of the Sunrise Project is to reduce the cost of solar power over the decade to a third of current levels and to one-sixth by 2030 as an incentive for more people to install it.

At the 50th anniversary of the Organization for Economic Cooperation and Development in Paris Kan told reporters, "Japan will now review its basic energy plan from scratch and is set to address new challenges."

The scale of the government's turn away from nuclear and fossil fuel power is extraordinary, as currently renewable energy resources, such as solar and wind, only make up about 1 percent of Japan's total power supply. Even with hydropower, the ratio is about only 9 percent.

According to China Business the earthquake and tsunami halted production at most of Japan's giant solar power companies, including Kyocera (KYO), Sharp Corp ADR (SHCAY.PK) and Sanyo Electric (SANYY.PK) because of the subsequent lack of electricity. Prior to the earthquake China and Japan essentially shared the European photovoltaic (PV) market; since the earthquake analysts predict that Japan will lose one quarter of its market share.

The shift has already started, as The Nikkei business daily reported on Wednesday that Softbank Corp, Japan's third-largest mobile phone operator, has announced plans to assist in the construction of about ten 20-megawatt facilities, costing about 8 billion yen ($100 million) each. But, as in many Western countries dominated by the nuclear and oil industries, solar energy policies have up to now enjoyed fitful support in Japan, where pioneers such as Sharp Corp and Kyocera Corp have lost their lead to overseas rivals that received larger subsidies and lower production costs. Furthermore, the cost of solar panel installation in Japan is double that in Germany.

So, who will be one of the major beneficiaries of this policy shift towards reducing solar costs?

China, surprise surprise.

China now has over 400 PV companies and now produces approximately 23 percent of photovoltaic products used worldwide. Three years ago China produced 1,700 megawatts of solar panels, nearly half of the world production of 3,800 MW, of which 99 percent were exported. According to Huang Xinming, head of a research institute at JA Solar (JASO), a large Chinese solar power company, JA Solar has just developed a new technology that could cut the cost of producing silicon, an important material in manufacturing solar panels, by 60 percent.

Expect to see a flood of yen into China's PV industries; smart Western investors will head east as well, where the sun always rises.

Source: http://oilprice.com/Alternative-Energy/Renewable-Energy/The-Fukushima-Cloud-s-Green-not-Silver-Lining.html

By. Dr. John C.K. Daly for OilPrice.com. For more information on oil prices and other commodity related topics please visit www.oilprice.com

June 06, 2011

American Superconductor: Time to Catch a Falling Knife?

Tom Konrad CFA

What is AMSC stock worth?

AMSC Stock Chart

American Superconductor Corporation (AMSC) investors panicked yet again on June 1st when the company said it would delay filing its annual report, needing additional time to review its recognition of revenue from Sinovel Wind Group (601558.SS) in the last three quarters of their fiscal 2010 (July 2010 thru March 2011.) 

The stock promptly dropped another 20+% and is trading for around $8 as I write, down over 70% since the start of the year. 

The Story So Far

The delayed annual report should not have caught investors by surprise.  When AMSC first announced that Sinovel had not paid for previously delivered product and was refusing to accept deliveries in early April, it was fairly clear that some revenue recognition would have to be restated.  That, after all, was the main grounds for the several class action lawsuits which promptly sprang up.  So investors are selling simply because of the increased uncertainty of not having new financial statements, not because of new negative news.

The other piece of recent news was the announcement on May 24 that Daniel McGahn, AMSC's former President and COO, would be taking AMSC founder Gregory Yurek's place as CEO.  Although the board attempted to pass this off "as part of the CEO succession plan that has been discussed with the Board of Directors since late 2010", I'd be willing to bet that the succession plan in question was significantly accelerated due to recent events.  In any case, Yurek will stay on as board chairman, and McGahn is a company insider, so while this may represent a change in emphasis for the company, it's no revolution.

When I first looked at AMSC after the Sinovel announcement, I thought the company was a speculative buy below $12, but quickly changed my mind when I found out that Sinovel had been working to establish a China-based competitor to AMSC.  With the recent sell-off I'm looking at the stock again, but with the immediate risk of dilution as the company attempts to raise funds in order to complete their acquisition of
The Switch Engineering Oy ("The Switch"), it's difficult to point to any price as a bottom, even if the company's fundamental value is much higher.

Back of the Envelope Calculations

One reader suggested that AMSC's Dec 31 cash on hand of $4.79 might serve as a useful floor for the stock price.  However, that amount represents only $243M, and any amount not needed to maintain operations will almost certainly be used as part of "The Switch" acquisition.  The rest will either be raised in the form of debt, or additional share offerings.  At the current share price, I expect that management will attempt to fund the rest of the acquisition with debt, if they can find a bank or banks willing to make the loan. 

The company's book value per share was $9.86 on Dec 31, a number which represents the cost paid to acquire the company's assets, minus any depreciation.  Book value is a notoriously inaccurate guide to the current replacement cost of assets, and to the extent that these assets are dedicated to servicing the needs of Sinovel, they may in fact be worth much less than the company paid for them.  Hence, it is also difficult to place a floor under the possible stock price based on book value.

Finally, we should consider future potential earnings as an indicator of the company's value.  In the June 1st press release, AMSC said it "
currently expects to reverse the recognition of a material amount of revenue that it had included when estimating revenues of "less than $355 million."  With shipments to Sinovel having not yet resumed two months into fiscal 2011, I think it is reasonable to expect much lower revenues this year. 

My current guess is that Sinovel will again accept shipments from AMSC this year, but they will never return to former levels, and could easily decline over time.  I'm far from confident in this guess, but given that Sinovel previously accounted for 70% of AMSC revenues, I think a reasonable guess for revenue in FY 2011 would be on the order of $150M (not including revenues attributable to "The Switch.")  Those revenues will come from any resumption of sales to Sinovel, revenues to other customers (Sinovel was only 70%, after all) and growth, especially from AMSC's eponymous superconducting wire business.

If AMSC maintains their previous gross margin of 29%, $150M revenues will translate into an operating profit of $43M, or an EBITDA of $28M.  If overhead were not reduced from last year, net loss would be about $7M.  But the company is working to reduce overhead, and said that they had already reduced headcount by 10% in the June 1st press release.  Therefore, we can reasonably expect overhead to fall, leaving the company near break-even or at a tiny profit.

If AMSC does not achieve a significant profit in 2011 as I'm guessing, a reasonable way to value the company would be based on sales.  Here are the price/sales ratios of other publicly traded wind industry players:

Company
Price/Sales (ttm)
P/E (ttm)
Broadwind Energy (BWEN.OB) 1.15
42
Gamesa (GCTAF.PK) 2.79
129
Kaydon Corp (KDN) 2.55
22
Vestas Wind Systems (VWDRY.PK) 0.58
38
Zoltek (ZOLT) 1.23
N/A

Given the uncertainly currently surrounding American Superconductor, Broadwind and Zoltek are probably the better comparables than the established companies Kaydon, Gamesa, and Vestas, so I will use a prospective Price/Sales ratio of 1.0 to 1.3.  Using my $150M revenue estimate, we get a market capitalization of between $150M and $200M. 

The Switch acquisition was valued at
€ 190-million, or about $273M at current exchange rates, and was supposed to be immediately accretive to AMSC's sales. It seems reasonable that, to the extent that the acquisition can be funded without outside funds, it should increase AMSC's market cap.  Given AMSC's cash on hand at the end of the year of $243 million, I'm comfortable attributing another $200M market cap to The Switch, for a total market capitalization of between $350M and $400M.  This translates to a stock price of between $6.90 and $7.90. 

Conclusion

Given the uncertainty in all my guesstimates and calculations, it may already be time to pull the trigger on AMSC, given that the company seems relatively fairly valued even if we assume (as I did in my back-of-the-envelope calculation above) that most revenue from Sinovel is gone for good.  The recent response to their delayed annual report has the feel of panic selling. 

Yet panicking sellers do not pay much attention to valuations, back-of-the-envelope or otherwise.  Are you brave enough to try and catch a falling knife?

DISCLOSURE: Long Gamesa.  Considering a near-term purchase of AMSC.

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.  

June 04, 2011

An Elephant Hunter Explains Market Dynamics

John Petersen

Friday afternoon was a strange time for Axion Power International (AXPW.OB). After trading 200,000 shares early in the day, Axion filed $28 million mixed shelf registration with the SEC at about one o'clock and the fly on the wall reported the filing within minutes. It seems that some stockholders were spooked by the news and assumed that Axion would sell stock right away instead of waiting for the fall deal season. Their knee-jerk selling shoved another 1.1 million shares into the market in three hours and made Friday the second heaviest trading day in Axion's history.

When I saw the news I was pleased to learn that Axion plans to do its next funding round as a public offering instead of a private placement and is taking the necessary steps to make that vision a reality. I guess the big difference between me and the street is that I understand that filing a shelf registration statement is a lot like applying for a hunting license. It's the beginning of the financing process, not the end. Since I've never seen a financing transaction go from start to finish in less than 90 days, I don't believe a transaction is likely before September.

All in all, yesterday reminded me of a Norville Barnes line from the Coen Brothers comedy, The Hudsucker Proxy:

– "Relax, it's only natural in a period of transition for the more timid element to run for cover."

Elephant hunters live for times like these. They instinctively know that sellers make themselves irrelevant when they hit the sell button and from that point on the only thing that matters are the buyers because they're the ones who'll determine the future stock price. Since Friday afternoon was such a crazy time, I'm going to step out of my normal comfort zone, try to explain how markets for individual securities develop and function, and offer a bit of advice from a professional with 30 years in the trenches. I can only hope that somebody besides me will find the discussion interesting.

Stock markets are simple creatures that always obey the laws of supply and demand. Each trade has two sides – a willing seller and a willing buyer. When sellers outnumber buyers prices fall. When buyers outnumber sellers prices rise. When sellers and buyers are balanced prices remain stable. No matter what direction a stock is heading, the root cause always boils down to the balance between buyers and sellers.

There are two basic types of public companies; earnings-driven companies that are “bought” in the top-tier "weighing machine" markets and event-driven companies that are “sold” in the lower-tier "voting machine" markets. Bought stocks are well covered by analysts, trade on the basis of earnings, offer moderate to high levels of security and have predictable trading ranges that approximate fair value. Sold stocks draw little attention from analysts, trade on news and events, offer little or no security and tend to have volatile and unpredictable trading patterns. Both types of companies are essential to a healthy economy but they're not necessarily appropriate for every investor.

There are also two basic types of stock market investors; hot money and patient money. Hot money buys a security with a relatively short investment horizon and relatively modest performance goals. The archetype of hot money is the day trader who buys in the morning and sells before noon to pay for his lunch. Patient money, on the other hand, buys with a longer investment horizon and more ambitious goals. The archetype of patient money is Warren Buffett who takes forever to make an investment decision but almost never sells. Every investor needs to know his own style and pick his investments accordingly because the surest way to lose money is to invest patient in a hot stock or invest hot in a patient stock.

The most useful mental image I've found to describe a market for a particular company is three barrels sitting side by side. The barrel in the center represents willing sellers. The barrel on the left represents the hot money buyers. The barrel on the right represents the patient money buyers. Every time a sell order is placed, new shares move into the center barrel. Every time a buy order is filled, those shares move out of the center barrel and into either the right or the left hand barrel. Market makers will theoretically buy stock and hold it in inventory, but those inventories are rarely substantial.

6.4.11 Barrels.png

Elephant hunters are by definition patient. We buy stocks that are fundamentally sound, but unknown or unloved, and hold them until something happens that changes the market's perceptions and expectations and creates new buying demand. We avoid stocks that are favorites of the hot money crowd. Over time, as elephant hunters congregate in a particular stock, the patient money barrel tends to get very full while the hot money and willing sellers barrels tend to run dry. When those two cheap and easy supply barrels run dry and an event occurs that drives new buying demand, the market price must rise to a level where some of the elephant hunters are willing to lighten up and take a profit.

It takes years to learn how to screen stocks and figure out whether they appeal primarily to hot money or patient money. It can take decades to learn how to trade intelligently. Some tricks and tools that I've found useful over the years include:
  1. Divide the public float by the 3 month average trading volume. This calculation tells you the number of days required to trade the entire float. Companies that trade their entire float more than six times a year are usually hot money favorites. Companies that trade their float less than four times a year are usually patient money favorites.
  2. Track moving average volumes. Everybody watches moving average prices. In my experience a more useful tool is a medium- to long-term moving average volume analysis. My favorite periods are 50-days, 100-days and 200-days because they tend to eliminate the spikes, clarify the trends and isolate cases of consistent accumulation over time. If you can find a stock that has a relatively stable price and steadily increasing volume it's a sure sign that the elephant hunters are doing their thing.
  3. Look for upcoming events that will matter to outsiders. Between bulletin boards and financial websites investors can drill down into detailed information on almost any stock or sector that interests them. Unfortunately blogs like mine appeal to a very limited audience and the events that move stocks are ones that are important enough to draw the attention of people who've never heard of the "thought leaders" in a sector.
  4. Don't buy a stock unless you can write a full page on why you want to own it. Far too many investors fall into the trap of the hot tip or the neighborly advice without understanding what they're buying. If you can't write a detailed explanation of why you own a stock, you shouldn't own it.
  5. Don't buy more than you can sleep with. It's easy to fall in love with a story or an idea and we all develop odd emotional attachments to our favorite stocks. No investment is worth an hour of lost sleep.
  6. Take little profits on the way up. Nobody ever lost money by leaving something on the table for the next buyer. Some of my most painful losses over the years have come from reaching for the brass ring on my whole position. There is no better feeling in the world than buying a position, selling enough to recover your out-of-pocket cost, and swinging for the fences on the house's money.
  7. Devote as much effort to selling decisions as you do buying decisions. The financial press is full of stories about how a $10,000 IPO investment in WalMart would be worth a bojillion dollars today. The reality is that there are very few WalMart bojillionaires because most of the IPO investors sold too soon. The reason is people don't spend enough time analyzing selling decisions. Even if you have a big gain on a stock, profit for its own sake is the worst reason to sell because then you'll be left with a wad of cash that you have to put to work somewhere else. Making a pile on Company X and then losing it all on Company Y is a far more common story than most will admit.
  8. Remember Warren's Wisdom. "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and owns a substantial long position in its common stock.

June 03, 2011

Financial Innovation is Blowin' in the Wind

Tom Konrad CFA

Owning a wind farm is about to become a lot less risky.

Wind power is cheap, clean, uses no water, and emits no pollutants.  Yet wind is far from a perfect source of electricity, since the wind blows when and where it will. 

While wind power will never be as constant as baseload power, geographic diversification and better dispatch procedures can go a long way to mitigate the problems to utilities caused by wind's variability.  Yet wind farm developers and financiers are at the mercy of the weather in their particular location.  Not only does wind output swing significantly from day to day and season to season, wind output can also vary greatly from year to year.  Farm owners also have to worry that some of their turbines might need maintenance just when the winds are at their best.  This can lead to unpredictability of wind farm revenues, which in turn makes wind farms more expensive to finance.

Two recent announcements go a long way to solving these problems for wind farm developers and owners.

First, on May 19th, energy risk analysis leader 3TIER and weather risk management firm Galileo announced that they would be offering financial products to hedge the risk of wind variability.  With cash payouts based on 3TIER's leading wind resource data, Galileo can offer to mitigate the cost to wind farm developers for a premium which can be expected to be much less than the risk premium charged by project financiers who do not have the expertise to assess wind resource risk as well as Galileo and 3TIER, and who also seldom have large and geographically diverse enough portfolios of wind investments to accept such risks at a price that is affordable for many wind farm developers.

Second, General Electric (GE) announced on May 23rd that they will be offering production based availability (PBA) guarantees as an option for new and existing operations and maintenance contracts on all GE 1.5 and 2.5 megawatt series wind turbines.  Not only will this remove a level of risk and make wind farms cheaper to finance, but it is also likely to be a competitive advantage for GE Wind, which recently slipped into third place by market share behind Chinese manufacturer Sinovel Wind Group (601558.SS).  While first place Vestas Wind Systems (VWDRY.PK) might be able to offer comparable guarantees, I can't see bankers putting much faith in the strength of a production guarantee from the Chinese firm, especially after their recent dust-up with American Superconductor (AMSC).

Together, these two financial innovations could do as much to reduce the cost of wind power and increase the pace of wind farm development as years' worth of technical innovation developing better wind turbines.

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

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.

June 02, 2011

Trina Solar Factory Tour: Addressing Environmnetal & Quality Concerns

by Tor Valenza a.k.a. “Solar Fred”

This article is part of a multi-part series published at Renewable Energy World.  You  can read the other parts here: one, two, three, and four.

The Trina Solar (TSL) factory tour and testing facility tour is over. It took perhaps an hour, maybe less.

The next stop is a small auditorium where Ben Hill, Trina’s VP of sales, gives us a PowerPoint presentation that includes Trina’s history, market share, company philosophy, and their Formula 1 racing branding initiative. Afterward, Trina’s CEO, Jifan Gao, appears, and we are able to ask him questions through a translator.

What I want to know about is maintaining quality control, their sustainability practices, potential manufacturing in the U.S., not to mention how Trina will address solar PV commoditization. (Due to the long length of this post, I’m saving this subject for my next and final Solar Fred in China post.)

On Chinese Quality Concerns

Throughout my trip, I’ve heard nasty stories here in China about manufacturers taking shortcuts and not manufacturing to specs, especially for foreign companies moving their manufacturing here. My travels in Shanghai allowed me to talk to several people in a number of industries, and all had similar stories of shortcuts and poor quality from suppliers. If you check the comments section of my second China post, there are several solar examples from readers. However, based on this press conference and other outside reports, it’s clear that Trina doesn't have these issues. Why?

First of all, Trina is a Chinese company. That means they don’t need anyone to translate or facilitate anything, and they are well aware of problems with outside suppliers and QC manufacturing issues. Their solution to supplier QC is to, well…have as few suppliers as possible and to keep the remaining suppliers as close as possible. That is, Trina’s a vertically integrated company; from solar ingots to wafers to modules, they own it. So if Trina’s taking shortcuts, they’re only shortcutting themselves. The only thing they don’t supply is the raw silicon, glass, and a few other minor components, but even there, Trina is encouraging these suppliers to be manufacturing on campus or near their huge solar PV park in Changzhou.Trina factory

Beyond that, the company already scores high on outside benchmark tests, such as Photon International’s ongoing module output test of major PV brands. Trina’s 180w randomly selected module is in 4th place after two years of STC output. Plus, as mentioned in my last China post, Trina’s well known to be “bankable,” and banks have far better due diligence than our factory tour and press conference.

On Environmental Concerns

Making solar PV wafers and modules ain’t pretty. There are a lot of toxic, non-yummy chemicals and waste water in the manufacturing process that nobody would want added to their drinking water or crops. In 2008, there was a Washington Post report about a solar PV manufacturer dumping PV waste chemicals into the ground and rivers outside the solar factory, poisoning residents and farms.

To their credit, Trina is conscientious and transparent about their environmental efforts. They’ve reportedly invested more than $12 million in recycling programs, reduced electricity consumption in all workshops, switched to low-consumption lights, shortened cycle time for selected machines, and invested over $80 million in sustainable manufacturing. Part of that money went toward building a new waste water plant with a capacity of 10,000 tons/day, potentially recycling 60% of all water from the manufacturing process.

As to the overall carbon footprint per module, Hill tells us they’re in the process of calculating that figure. Once they know what that number is, Trina says it is committed to reducing it.

Finally, Trina is certified ISO 14001, which means they comply with some international environmental management standards. In addition, they’re a member of PVCycle for end-of-life module recycling, and according to the Silicon Valley Toxics Coalition, Trina scores an 89 out of 100.

On Building Factories Here…and There

In our press conference of 30 international reporters, Trina’s CEO, Jifan Gao, got the same question at least three times, including one from a Chinese reporter. The question: “When are you going to build a factory in my country?” Or, in the case of the Chinese reporter, the question was, “When are you going to build a factory in my region?”

It’s flattering to be so desired, no? In any case, Trina is a publicly traded company, so Gao’s (translated) answer was thoughtful, but vague enough not to move Trina’s stock price in any direction. And that answer was essentially that Trina is always assessing customer needs in each country.  If a particular market needs a new factory and Trina can swing it and produce modules at a competitive price, then they’ll build a factory there.

In other words, Trina’s open to building a factory in fill-in-the-blank-country/region—but there are currently no plans. For now, they have a total of 17,000 employees worldwide, 13,000 of which are in Changzhou, and they said their workforce is still growing globally.

I speak with other Trina executives later, who tell me that as much as customers want American energy independence, they rarely ask for a made-in-America panel. Price is their first consideration. Politicians who support or oppose solar policies don’t see it that way, of course. I’ll have more thoughts about this in my next and final China post.

Until then, UnThink Solar.

Tor Valenza a.k.a. “Solar Fred” advises solar companies on marketing, communications, and public relations. Contact him through UnThink Solar or follow him on Twitter @SolarFred.

DISCLOSURE: Trina is NOT a client, but did pay the expenses for me and about 30 other reporters to visit their factory.

June 01, 2011

Plug-in and Hybrid Locomotives; Another Sweet Spot for Axion Power

John Petersen

I'm a cynic and a heretic when it comes to plug-in vehicle schemes because most defy the laws of economic gravity and violate a cardinal rule that Ford engineers developed for the EcoStar light delivery vehicle program in the early '90s:

– The unloaded weight of a plug-in vehicle should never exceed 70% of its loaded weight.

Investors who pay attention to this simple rule can easily distinguish between pipe-dream vehicle electrification schemes that are nothing more than feel-good eco-bling and realistic vehicle electrification projects that make economic sense.

For the last few weeks I've been studying a technology partnership between Norfolk Southern (NSC) and Axion Power International (AXPW.OB) that is developing cost effective battery and hybrid electric drive retrofit systems for railroad locomotives. After extensive research I've decided that battery and hybrid electric locomotives are applications that even a heretic can love because:
  • Vehicle weight to cargo weight ratios range from good to extraordinary;
  • Expected payback periods are in the three to four year range;
  • Electric retrofits can avoid emissions abatement costs mandated by EPA regulations; and
  • Axion's PbC technology appears likely to overcome the battery problems that plagued earlier efforts.
Like e-bikes, stop-start idle elimination and hybrid electric vehicles, battery and hybrid electric locomotives are clean fuel efficiency technologies that just make sense.

The Green Goat


The first hybrid electric switching locomotive was introduced in 2004 by Railpower Technology and called the "Green Goat." It replaced the 1,750 hp diesel engine in a General Motors EMD GP9 locomotive with a 290 hp diesel generator and 60,000 pounds of lead-acid batteries that offered a combined power output of 2,000 horsepower. The Green Goat's core strengths were a $750,000 price tag that compared favorably with the $1.5 million price of a new switching unit and a battery dominant hybrid electric drive promised fuel savings of 40% to 60%. Subsequently, Railpower launched a smaller version called the "Green Kid" that offered a combined power output of 1,000 horsepower.

6.1.11 Green Kid.png

In a year long field trial by IDC Distribution Services, the operator of an inter-modal port facility in British Columbia, the Green Kid logged 3.6 million feet of switching operations over 2,347 hours, saved 10,450 gallons of diesel fuel, and reduced CO2, CH4 and N2O emissions by 53% compared to a conventional switching locomotive.

Initially, the Green Goat was well received and railroads including BNSF, Union Pacific (UNP) and Canadian Pacific (CP) ordered a combined total of 175 units. Despite the initial marketing successes, the Green Goat had significant battery problems and only 55 units were delivered before Canadian Pacific returned four units and canceled the balance of a 35-unit order citing unsatisfactory performance. The company went bankrupt in 2009 and emerged as a subsidiary of the RJ Coleman Co. that no longer builds the Green Goat.

The NS 999

In 2009, Norfolk Southern unveiled an experimental electric switching locomotive that it built in cooperation with the Department of Energy, the Federal Railroad Administration and Penn State University with the aid of a $1.3 million Federal grant. Unlike the Green Goat, the NS 999 draws all its power from an array of 1,080 lead-acid batteries that provide a power output of 1,500 horsepower. The project's goal was to demonstrate the feasibility of a plug-in battery powered locomotive that would eliminate direct rail yard emissions and save up to 50,000 gallons of diesel fuel per year.

6.1.11 NS 999.jpg

During initial trials with 80% of its batteries connected, the NS 999 "operated a full switcher shift, at one point pulling 2,200 tons of rail cars on an uphill track – without using a sanding system, which helps locomotives gain traction. After the shift, the four-axle locomotive had enough juice in its 12-volt batteries to run two more eight-hour shifts." Like the Green Goat, however, the NS 999 ran into battery performance issues that had Norfolk Southern evaluating lithium-ion batteries, nickel-based batteries and advanced lead-acid batteries in a matter of weeks. In June of 2010 Norfolk made its battery technology selection and recruited Axion Power to develop a new battery management system and integrate its disruptive PbC battery technology into the NS 999. The project is scheduled for completion later this year.

In addition to the NS 999 project, Norfolk Southern is working with Axion to develop a retrofit hybrid drive system for multi-purpose locomotives that will use 1,600 to 1,700 PbC batteries to improve fuel economy in long distance freight transportation. A prototype is expected by next spring.

The Battery Problem

The fundamental battery problem encountered by both the Green Goat and the NS 999 is a chemical process known as negative electrode sulfation. During discharge, a lead-acid battery's electrodes are partially dissolved and lead sulfate is created. During charging, the bulk of the lead sulfate gets dissociated and redeposited on the electrodes. In practice complete dissociation of lead sulfate never happens. Instead, a portion of the lead sulfate is deposited on the negative electrode in the form of hard crystals. As the number of cycles increases so does the level of crystallization. When the crystal build up is extreme, the battery fails. The following electron micrographs show how sulfation increases over time in a shallow-cycle partial state of charge environment.

6.1.11 Sulfation.png

The PbC Solution

Axion's patented PbC battery is a hybrid device that uses conventional lead plates for the positive electrodes and carbon electrode assemblies for the negative electrodes. The PbC is technically classified as an asymmetric ultracapacitor. Due to its unique architecture, the PbC does not experience negative electrode sulfation. It also offers significantly higher charge and discharge currents than a conventional lead-acid battery. In a shallow cycling environment like the Green Goat, prototype PbC batteries have demonstrated the ability to withstand tens of thousands of cycles without degradation. In a deep cycling environment like the NS 999, prototype PbC batteries have demonstrated the ability to withstand up to 2,000 cycles at a 100% depth of discharge without battery damage.

After several years of working with alpha and beta prototypes of its PbC electrodes and electrode fabrication processes, Axion is just now completing the installation, optimization and certification of its first commercial electrode fabrication line. While it has not launched a commercial product yet, that launch is expected later this year.

The Business Opportunity

North America's Class I Railroads operate a combined fleet of approximately 1,500 switcher units that each burn about 50,000 gallons of diesel fuel per year. The average switching locomotive is 30 to 40 years old and was manufactured during an era when emissions control regulations were far less stringent than they are today. As a result of new EPA regulations and a variety of state air quality initiatives, the railroads are under intense pressure to reduce N2O and particulate emissions in their switching yards, which are often located in heavily populated urban areas.

Based on a recent report to the California Air Resources Board, it appears that the cost of bringing an old locomotive up to current standards is roughly equivalent to the cost of converting an old locomotive from diesel-electric to battery powered electric. While an emissions abatement upgrade will improve fuel economy through the application of newer technology, a battery retrofit can eliminate all direct emissions and fuel consumption. Based on a current off-road diesel price of $3 per gallon and an estimated fuel consumption of 50,000 gallons per year, a battery retrofit should offer a payback period in the three to four year range. In comparison, the payback period for an emissions abatement upgrade will be closer to ten years. The long-term revenue potential of retrofitting a portion of the switcher fleet to run on batteries isn't a company maker, but it's a darned good start.

The Voting Machine

Over the last year Axion's stock price has stagnated in the $0.50 to $0.75 range as shares that were sold in December 2009 moved from relatively weak hands to stronger hands. While I've responded to countless comments and questions from readers, many have missed the crucial fact that Axion is focused on completing the development of its technology, rather than marketing a fully developed product. It's never had a marketing team and except for the odd technical presentation at industry events, its selling efforts have been non-existent.

Despite a lack of marketing for a development-stage product that wasn't ready for commercial use, Norfolk Southern found the path to New Castle because it was looking for a cost-effective solution to a critical performance problem that could not be solved with conventional lead-acid batteries. Based on its own technical evaluation of the prototype PbC batteries Axion was able to make in 2009, Norfolk Southern hired Axion to design and build a new battery management system that would facilitate the integration of PbC batteries into the NS 999. After about eighteen months of working with the technology, the refurbishing project for the NS 999 continues apace. If there was any substantial reason to believe the PbC would not stand up to the rigors of the NS 999, Norfolk Southern would have terminated its relationship with Axion long ago. The same can be said for BMW which also found the path to New Castle because it was looking for a cost-effective solution to a crucial performance problem that could not be solved with conventional lead-acid batteries.

In its last quarterly report, Axion disclosed that it had received notification from the Department of Energy that a grant application under the Vehicles Technology Program had passed the first round of criteria testing and advanced to the final round of review. In its last conference call, management told participants that the grant application identified Axion as the prime contractor, and included a top-three US automaker, a research university and a national laboratory as subcontractors. While details of the application will remain confidential until a funding decision is made, it appears that this time around a first tier US automaker has found the path to New Castle because it was looking for a cost-effective solution to a critical performance problem that could not be solved with conventional lead-acid or lithium-ion batteries.

Given the mainstream media's infatuation with lithium-ion batteries, the voting machine that is the market does not want to believe the PbC will be a disruptive energy storage technology. When I consider the growing parade of world-class companies that found the path to New Castle before Axion even had a product to sell, I have to believe there is more substance to the PbC than even I understand.

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


« May 2011 | Main | July 2011 »

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