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July 31, 2011

Aggressive New CAFE Standards; The IC Empire Strikes Back

John Petersen

Last Friday President Obama and executives from thirteen leading automakers gathered in Washington DC to announce an historic agreement to increase fleet-wide fuel economy standards for new cars and light trucks from 27.5 mpg for the 2011 model year to 54.5 mpg for the 2025 model year. While politicians frequently spin superlatives to describe mediocre results, I believe the President's claim that the accord "represents the single most important step we've ever taken as a nation to reduce our dependence on foreign oil" is a refreshing example of political understatement. After three decades of demagoguery, debate, dithering and delay, meaningful policy change has finally arrived, and not a moment too soon.

The economic impact will be immense – a staggering $1.7 trillion in fuel cost savings that will flow directly to consumers. As those savings begin to work their way through the economy and kick-start secondary fiscal multiplier effects, the boost to GDP will be closer to $7 trillion. I believe Friday's agreement will ultimately be seen as the biggest economic stimulus event in human history.

The following graph from a new White House report titled, "Driving Efficiency: Cutting Costs for Families at the Pump and Slashing Dependence on Oil" says it all.

7.31.11 Cafe Sandards.png

The most surprising aspect of this agreement isn't the aggressive goals; it's the fact that the auto industry has helped forge the goals and plans to achieve them by implementing "affordable technologies that are on the road today." The new goals are not based on the electric dreams of a Tesla Motors (TSLA). They're based on the automaker's hard-nosed evaluation of the cumulative gains that can realistically be achieved with existing ICE technologies like engine downsizing, stop-start idle elimination, turbocharging, optimized cooling, low friction, direct fuel injection and variable valve timing.

Individually the fuel economy gains from advanced ICE technologies will only be baby steps toward energy independence. Collectively they'll give American consumers passenger cars with lower well-to-wheels CO2 emissions than a 2012 Nissan (NSANY.PK) Leaf plugged into the typical wall socket. They'll change the world without a budget busting paradigm shift.

In early July The Boston Consulting Group released a new report titled "Powering Autos to 2020; The Era of the Electric Car?" that evaluated the combined potential of baby-step fuel efficiency technologies and considered their likely impact on wildly expensive and impractical proposals to convert the world's transportation infrastructure from liquid fuels to electricity. In the report BCG concluded that:
  • Conventional technologies have significant emissions-reduction potential, but OEMs will need to pull multiple levers simultaneously to meet emissions targets.
  • Advanced ICE technologies can reduce gasoline consumption by 40% at a cost to the consumer of $50 to $60 per percentage point of reduction – roughly half what BCG predicted three years ago.
  • Advanced ICE technologies are likely to become standard equipment worldwide during the next decade.
  • Electric cars will face stiff competition from ICE and will not be the preferred option for most consumers.
  • Battery costs will probably fall to about $9,600 per vehicle, but become increasingly uneconomic as the potential fuel savings per kWh of battery capacity plummets.
  • In addition to dismal economics, plug-ins will face substantial go-to-market challenges including battery durability concerns and the absence of adequate charging infrastructure.
In my view the BCG report is a must read for investors who want to profit from this fuel efficiency mega-trend and avoid heavy losses in vehicle electrification schemes that will become increasingly uneconomic over time. The fundamental flaw is simple. Today an EV with a fully charged 24 kWh battery pack can save a consumer the equivalent of 3 gallons of gas. By 2025, the savings will be closer to 1.5 gallons of gas. Even with falling battery prices the value proposition can only get more challenging with each passing year.

For the last couple years I've been cautioning investors that gee-whiz vehicle electrification technologies are transitory, a flash in the pan, and the biggest business opportunities in energy storage involve cheap, simple and effective baby-step technologies like stop-start idle elimination that will slash fuel consumption by 5% to 15% for a few hundred dollars. The BCG report and the newly announced fuel economy goals are yet another proof of that principle.

The future is all about getting more from less and has absolutely nothing to do with increasing consumption of one class of scarce natural resources in the name of conserving another.

While I can't identify the component manufacturers that will thrive from the widespread implementation of advanced ICE technologies like turbocharging, direct fuel injection and variable valve timing, picking the winners in energy storage is easy. Johnson Controls (JCI) and Exide Technologies (XIDE) will be the first beneficiaries as automakers upgrade their electrical systems to withstand the strains of stop-start idle elimination. As stop-start systems become standard equipment worldwide and the inherent limits of current AGM battery technology become obvious, more powerful energy storage solutions from emerging technology developers like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) will ascend to prominence if not dominance.

The new fuel efficiency standards are not an omen of doom for lithium-ion battery solutions from A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) which will no doubt gain a toehold among the 6% to 13% of consumers who say they'd purchase an environment-friendly car even if they had to pay a premium over the life of the vehicle. I'm just not certain how significant that toehold will be in light of the incontrovertible reality that less than 2% of consumers actually buy environment-friendly cars.

On balance I believe that survey-based uptake forecasts will be just another example of a painful lesson I learned in the biodiesel business – that individual buying decisions speak louder than surveys and the green in a consumer's wallet always takes priority over the green in his cocktail party conversation.

For several years the mainstream media, financial press and sell-side analysts have been publishing irrationally optimistic stories and reports about the end of the ICE age and the dawn of a golden electric era. On Friday the Obama Administration and the automakers put the world on notice that IC Empire is striking back and plans to bury the now generation of electric wannabes like it has all of their predecessors.

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

July 29, 2011

Are the Declines in Solar and Wind Stocks Structural, or Cyclical?

Tom Konrad, CFA

Last week, I asked three green money managers if they thought cleantech stocks, especially solar and wind sectors were near a bottom.  While they did tell me about eight cleantech value stocks, they were not ready to call the bottom.

Commoditization in Clean Energy

In response to my questions, Rafael Coven, the manager of the Cleantech Index (^CTIUS), which is the index behind the Powershares Cleantech Portfolio ETF (PZD,) told me that he and his colleagues at the Cleantech Group
"are continually reminded how fast certain sectors have product commoditization, where intellectual property isn’t strong enough to differentiate products sufficiently, then prices have been collapsing  even faster than we had anticipated.  This is true for smart power meters, solar panels, wind turbines, and most lighting products – especially LEDs. ... Sector growth doesn’t necessarily mean that many companies will make economic profits in LED lighting or solar PV."
In other words, Coven sees the decline in solar PV stocks to be a consequence of changing market structures.  If he is right, there is no reason to expect investors in sectors which have experienced the rapid commoditization to ever recover their losses.  Just because these stocks look cheap based on historic earnings, they could easily continue to fall.

Spencer Hempleman, a partner and clean energy portfolio manager at Ardsley Partners in Stamford, CT thinks similarly.  He says,
"[S]olar and wind have underperformed the more broadly defined cleantech sectors because China is subsidizing the manufacturing ramp of those industries and creating overcapacity.  Commensurate with pricing pressure due to the supply and demand imbalances are raising commodity costs like steel, silver, copper etc which pressures margins for solar and wind manufacturers throughout the value chain."
Other Structural Problems

Commoditization is not the only potential structural problem in clean energy.  I also corresponded last week with Robert Wilder, the manager of the Wilderhill Clean Energy Index (ECO) and the Wilderhill Progressive Energy Index (WHPRO).   The largest clean energy ETF, PBW is based on ECO, while the Powershares Wilderhill Progressive Energy Portfolio (PUW) is based on WHPRO.  Wilder and I were discussing why broad-based ETFs such as PUW and Coven's PZD had outperformed narrower clean energy indexes like PBW recently.  Wilder says,
"Indexes capturing broader themes simply had been able to avoid the narrow, sharp drop. A wider Index for say, cleaner technology with lesser green energy weightings would in a sense do 'better' the past couple years, while Progressive energy emphasizing efficiency and the smart use of dominant energy would do even 'better' than that."
PBW PZD PUW.png
In addition to the quick commoditization arising from the rise of Chinese manufacturers, Wilder and Hempleman also see structural problems for solar PV and wind in the reduction of subsidies.  Wilder says that the paring back of subsidies has quickened recently as "several governments are suddenly fiscally flat on their back. ... One-off events like Japan's nuclear crisis, or sharp doubling in oil prices, spotlight moves to new energy in places like Germany, but that alone is not enough to offset these partly structural near term structural forces."  Hempleman adds that "this is a major structural issue as many of the companies that compete in these sectors are highly levered and the barriers to entry are fairly low."

The Cyclical Case


While Wilder and Hempleman see the recent decline as mostly structural, Wilder also sees some cyclical causes.  He sees an analogy to semiconductor makers, which go through boom and bust as wafer makers over-expand, and then are forced to contract, but he sees the forces driving down solar, wind, LEDs, and geothermal in recent times as much more powerful than those in the semiconductor industry.

Garvin Jabusch, manager of The Sierra Club Green Alpha Portfolio, emphasizes more cyclical causes.  He sees a big driver of the decline in the solar and wind stocks to be the political shift against pricing in fossil fuels' externalities, such as the effects of global warming, increased health care costs caused by pollution, and the costs of going to war for oil.  He says "These costs have not been accounted for in the economics of fossil fuels, but if the international political economy is ultimately rational, sooner or later (preferably sooner) they must be. ... [E]merging scale and accurate pricing of combustion’s externalities will inexorably reverse this trend."

Hence, if politics is cyclical (i.e. mean-reverting or "ultimately rational") then political drivers for renewable energy will be cyclical as well.  And right now he sees the political pendulum swinging to the extreme detriment of renewable energy due to disinformation.  "Polls show that (in the U.S. anyway), this [disinformation] is working. Except for a very recent rebound in belief in global warming, the last two years have seen a general decline in belief in warming science among Americans, particularly but not exclusively among conservatives.  It’s hard not to notice that this period of declining belief has approximately corresponded to the period of declining valuation, and increasing short interest (some solar companies have had short interest as high as 30-40% of total float), among renewables."

Jabusch also scoffs a bit at the commoditization argument.  He says that, as the price of solar declines to the point where it becomes competitive with fossil fuels such as coal, "some of the same analysts who derided renewables’ expense now deride their inexpensiveness as 'commoditization' and 'margin squeezing' that means solar companies can’t make much money going forward. To me these guys are missing the point that the rapid, large reductions in the price of solar, which by the way show every sign of continuing, mean that solar will now begin to supplant coal far faster than anyone could foresee even five years ago."  
Gas and Oil vs
ECO and HAUL.png
Conclusion

I think it's fairly safe to conclude that both structural and cyclical factors have been at work in the recent declines of solar, wind, LED, and geothermal stocks.  For the investor, the question should be, "Have the structural factors and most of the cyclical factors been fully priced in?"  If so, these stocks will benefit as cyclical factors begin to reverse themselves.  If, however, the full effects of the structural problems in these industries have yet to be felt, then even a political and cultural shift back towards pricing in the full costs of fossil fuels may not be enough to make the current batch of solar and wind stocks profitable again.

For myself, I find the bears' structural arguments more convincing.  While I think Jabusch is right that the political pendulum will swing back in favor of the recognition of the very real harm done by the use of fossil fuels, the resurgence of the solar and wind industries in terms of volume may be a great boon to society yet still fail to return great profits to the current shareholders of solar and wind companies.  This is because a new, more clean-energy friendly political environment may draw in new competitors into these industries, further increasing pricing pressure, and preventing solar and wind companies from "more than mak[ing] up in volume what they’re losing in margins," as Jabusch predicts.

It is possible to do well by doing good.  As Rob Wilder points out, "an Index capturing global energy efficiency in transportation is well up" over the same period solar and wind have been down.  I think that's probably due to the fact that transportation efficiency competes with oil, and the price of oil is up 50% over the last two years. 
Solar, wind, geothermal, and electrical efficiency technologies such as demand response and LEDs compete with the marginal supplier of electricity, which in most of the developed world is natural gas, and the natural gas price has been very low since early 2009 compared to 2004-2008.  This is why many renewable developers are now focusing more on developing countries where it is possible to displace oil in electricity generation.

Fossil fuel prices are far from the only factor influencing clean energy stocks, but they seem significant.  If we want to know if the current price trends for renewable electricity and electricity efficiency technologies are structural or cyclical, we also need to know if the price trends for natural gas are structural or cyclical, which in turn depends on our assessment of the long term course of the shale gas boom.  If we want to know if the recent positive trends in transportation efficiency will continue, we need to decide if recent oil price trends are structural or cyclical.

Unfortunately, as with the trends in renewable energy, I think the recent trends in oil and natural gas have both structural and cyclical factors.  Which of those factors will dominate over the next two years is beyond this analyst's expertise to predict.  Over the long term, though, the trend for fossil fuel prices is likely to be up.

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.


July 28, 2011

Comverge, Diverge, or Merge?

Tom Konrad CFA

Comverge (COMV) has a great residential demand response business.  The company lacks focus, but the stock has significant upside as an acquisition target.

As part of my ongoing series on energy management companies (see these articles on World Energy Solutions (XWES) and EnerNOC (ENOC)) I spoke with Comverge CEO Blake Young.

The Comverge Advantage

Comverge is the strong leader in residential demand response (DR,) one of the most cost effective grid stability solutions.  Even within demand response, residential DR is an excellent niche, because working in the market for residential DR is much more difficult than for that commercial and industrial (C&I) DR.  For instance, World Energy Solutions CEO Rich Domaleski told me that his company leverages their market based energy sourcing platform to sell the other energy services, such as efficiency and DR.  Yet World Energy has no interest in entering the residential space: their focus is on large customers where they can make a significant profit from a single transaction, and they typically only consider customers with annual energy budgets over $500,000, or more than 100 times a typical household energy budget.  DR leader EnerNOC likewise focuses on large C&I customers for similar reasons.

Yet there is strong demand for Residential DR as well.  Although it's cheaper to achieve large reductions in peak demand at large electricity customers, many utility regulators have a mandate to allow all classes of customers to participate in utility programs.  In practice, this means that many utilities will pay more per MW for residential DR than they will for C&I DR, leading to higher margins for those companies able to provide residential DR cost competitively.  According to Young, Comverge ended 2010 with 41% gross margins on their residential business (57% of sales), but only 33% gross margins on their C&I business (43% of sales.)
 
In residential DR, Comverge places a switch and transmitter/receiver on mainly air conditioners and pool pumps, gathering DR capacity a kilowatt at a time. It takes 1000 houses to get 1MW. In commercial applications, one single steel mill’s DR capacity could be 50MW, the equivalent of 50,000 houses. Residential is harder to deploy, but once deployed, it is distributed and easily cycled. Commercial is bigger, but the DR company needs to deal with professional energy managers who are liable to shop around for the best deal, compressing margins.  And just like distributed generation, distributed DR has advantages for utilities in that they can address local stresses on the grid with local demand reduction.

Comverge's expertise in Residential DR grew out of 30 years of history selling equipment to utilities used in DR programs.  They launched their program to provide Demand Response as a service in 2003, and went public in 2007.  They've been able to achieve their leadership as a residential DR provider because they have a large number of scalable residential DR contracts.

The Stock Price

Given Comverge's leadership in the highest margin DR niche, it is rather surprising that the stock has performed so horribly since Young took the reins in February last year.  When I asked him to what he attributed the fall in the stock price, he told me that Comverge has "trended virtually the same as other companies in the space."

A quick look at the graph below will show you that that is an overly charitable description of the stock's performance, at best.  The only other pure-play DR company is EnerNOC, and while the two companies followed the same trends closely from their IPOs in mid 2007, a significant gap has opened up over the last two years. 

COMV Comparison.png
Image source: Yahoo! Finance

Since February 2010, EnerNOC shareholders have lost roughly half of their money, while Comverge shareholders have lost three-quarters of their investment.  If Young believes Comverge has trended "virtually the same as other companies in the space" during his tenure, he must consider Comverge's "space" to be companies in severe financial trouble.

Fear of Dilution

Comverge is not yet in severe financial trouble, so why has Comverge fallen to the level reached only in the depths of the 2008 financial crisis?  The answer, most likely, is shareholders' fear of further dilutive offerings.  Selling new stock to raise money is not always bad, but it is a problem if shareholders think it will be invested in less profitable businesses than the current one. 

Young's apparent complacency about the stock price seems to extend to a general complacency about the use of shareholder funds. 
 
Where does the capital go?  Young gave me the example of the recent PJM (a regional electricity transmission organization in the Eastern US) auction for the 2014-15 capacity year.  Comverge bid for and won 20% more capacity in that auction than they won in the 2013-14 auction.  Meanwhile, the market is becoming more competitive, with prices in the PJM auction having fallen 20% over the previous year, meaning that Comverge's expected revenue from the PJM market will be 4% lower in the 2013-14 year than in 2012-13, while they have to acquire 20% more MW.   Growth is good, but in this market Comverge is running just to stand still.  Those contracts tie up capital in the form of collateral which will be paid in penalties if Comverge does not meet its obligation to deliver those megawatts.  What's particularly ironic about this is that PJM introduced a new mechanism in this most recent auction to allow smaller players to bid without putting up as much capital, which Comverge did not take advantage of because they consider it too complex. 

Comverge has been investing in a lot of things other than what they are best at, which is residential DR.  Young told me that the company is aggressively pursuing C&I customers (the C&I share of revenues has been growing much faster than the Residential), as well as investing heavily in their IntelliSource software platform.  They recently also moved their former CFO to a newly created position as head of international operations, where Young says they are "looking very hard" at the Middle East, Africa, China, and South America.

While any of these strategies might make sense for a profitable company expecting maturation of its core business, Comverge is not profitable, and residential DR (as well as DR in general) has plenty of room for growth according to Young himself.

Comverge's experience with small residential customers might serve to give the company an advantage when working with smaller commercial businesses, but they don't have any obvious advantage with the large C&I clients, and they are pursuing those as well.

When I asked Young what competitive advantage they have in the C&I market, he spoke of their close relationship with their customers, and IntelliSource, which incorporates large amounts of data about the electricity use and control on the system to better predict how many MW of capacity they can deliver at any time.     He also says that many utilities like to work with a single demand response provider.  IntelliSource seems like more of an advantage with smaller customers.  Large customers' power usage naturally comes in larger blocks, so such detailed data, while useful, will be less relevant than with large numbers of smaller customers.  Yet the argument that utilities like to work with a single provider is a strong one, and justifies Comverge's presence in all parts of the DR market, even if they do not have a competitive advantage in large C&I.

Yet that argument does not justify the company's expensive participation in the competitive PJM market, which does not differentiate between DR sourced from residential customers, nor does it justify a move overseas.

What I'd prefer to see is a focus on growing the core business of working with utilities that do want a significant portion of their DR megawatts to come from residential customers, in order to maintain the company's profit margins at least until Comverge achieves profitability and there is a significant recovery in the stock price, which would lower the company's cost of funds.  Moving into more and more new businesses adds to overhead and moves this date out further and further.

Shareholder Discontent

The plummeting stock price and lack of focus have drawn the attention of a group of activist shareholders called SAVE, led by Brad Tirpak, whose provocative ideas about distributed solar's effect on utilities I wrote about in February.    Comverge's 2006 S-1 registration statement states that the certificate of incorporation "provide[s] for a classified board of directors, [which] could discourage potential acquisition proposals and could delay or prevent a change of control."  SAVE first needed to remove Comverge's classified board structure in order to gain influence at Comverge.

Tirpak sponsored a proposal on Comverge's 2010 Proxy which instructed the board to repeal the classified structure of the board and "complete transition from the current staggered system to 100% annual election of each director in one election cycle unless this is absolutely impossible," and also requested "that this transition is made solely through direct action of our board if feasible."  The proposal passed with 72% of the vote

In response, the board placed an amendment to Comverge's articles of incorporation on Comverge's 2011 Proxy Statement, which was designed to "implement over a period of three years the stockholder proposal to declassify the Board," and recommended that shareholders vote for the change.

SAVE saw this proposal as "a thinly veiled attempt to entrench Alec G. Dreyer as the Chairman of the Board for a further three years," because the board did not declassify through direct action (which would have been immediate) and implemented the proposal over three years, rather than immediately. 

The 2010 proposal was clear that legal constraints were the only valid reason not to declassify the board immediately and completely, so I asked frequent AltEnergyStocks contributor and IPO attorney John Petersen and Charles Knight, an attorney with Venture Law Advisors in Denver for their opinions.  Both told me that the board would not be able to declassify by direct action and a second vote would be required if the staggered system arose from the firm's certificate of incorporation, which Comverge's S-1 confirms is the case.  Knight also told me that companies often declassify "over time as the prior directors were elected for longer terms and are generally entitled to serve out their remaining terms if elected prior to declassification under a company’s bylaws." 

In other words, declassification over a period of three years, although slow, was declassification "in the most expeditious manner possible, in compliance with applicable law, to adopt annual election of each director."  Possibly the board could have called a special election of shareholders to declassify the board in 2010, shortly after the shareholder proposal passed, but that possibility was ruled out by the text of the 2010 proxy, which stated that the proposal would run on the 2011 ballot.

SAVE was successful in defeating the 2011 proposal to declassify the board over three years, urging the board to declassify immediately and "explore all strategic alternatives" (i.e. put the company up for sale.)  But this was a Pyrrhic victory, as the board cannot legally declassify immediately. 

By lobbying against the implementation of its own proposal, SAVE has damaged their own credibility, which makes management less likely to listen to them regarding potential mergers with other companies which might lower Comverge's cost of funds and produce an immediate return for Comverge's shareholders.  In our interview, Young was quite dismissive of SAVE and Tirpak, whom he seems to regard as minor annoyances. 

Value

Although I understand management's dismissal of Tirpak's efforts, I also agree that there would be significant benefit to shareholders in the company pursuing all strategic options.

Despite the lack of focus, Comverge has significant value, and at current prices would make an attractive takeover target for other companies in the space.  There is a clear appetite from large players for companies in the Energy Management space.  For instance, Johnson Controls (JCI) recently purchased the formerly OTC-listed EnergyConnect.  These companies have a lower cost of capital, and so can more easily afford the capital needed to participate in the DR space for large customers.

On measures of cash and current assets, Comverge appears well-capitalized, but much of this money is tied up as collateral.   The most recent quarterly report states that Comverge committed $17.9M in advance of the 2014-15 auction, funded from cash on hand and a revolver loan.  Young told me that they got "some" of this back after the auction, so call it $15M.  But Comverge's most recent balance sheet shows less than $27M in cash and $24M debt.  Was that a good use of so much of the company's liquidity?

Yet the company does have a strong backlog, including $532 million worth of future revenues through 2024 under existing long term contracts, and a contractual backlog for the coming year of $128 million as of the end of Q1.  At 35-40% gross margins, that's about $50M per year before overhead costs, but at $3.30 a share, Comverge's market cap is only $82 million.  Comverge would be worth a lot more to an acquiring company like Johnson Controls, or Siemens (SI), or ABB, Ltd. (ABB) that have strong balance sheets and have shown appetites for acquisitions in the smart grid space.  EnerNOC, which is profitable, could also see instant gains by eliminating much redundant overhead and gaining valuable expertise in the residential market.

Comverge Should Merge

At the current price of $3.22, Comverge is an attractive acquisition target, and would probably have $6-$8 worth of value to a better capitalized acquirer.  But investors who buy now are taking a real risk.  Although Young told me that he intends to break even in 2012, such predictions have an unfortunate habit of slipping, and have slipped at Comverge in the past.  The company seems to be aggressively investing in less profitable businesses that diverge from its main business and are not justified given Comverge's current high cost of funds resulting from the lack of profitability and the low share price.

Perhaps Comverge will achieve break-even in 2012 and profitability in 2013, as Young expects.  But I don't see how that will happen without either further diluting existing shareholders, or merging with a larger company that has a lower cost of capital.  Since Young and many of the board members are significant shareholders, I hope they see that it's too their own benefit to take the latter course.

DISCLOSURE: Long COMV, ENOC, JCI.
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.

July 25, 2011

Toward a More Stable Grid: New Technological Solutions for an Old Problem

By: Matthew Hoff

For power providers, grid stabilization has been a rising concern in recent years, especially because of the increasing use of intermittent energy sources such as wind turbines. Maintaining a stabilized energy grid is difficult because of the unpredictability of these intermittent energy sources. If wind turbines, for example, are supplying 5% of the overall power for the electric grid and the turbines stop moving because the air grows still, the grid has to find a way to kick into overdrive to compensate for this sudden decrease in energy. It's not as easy as it sounds.

Philip LeGoy, senior consultant of power plant design for Ireland’s Electricity Supply Board, says his country is regularly obtaining 25% of its electricity from wind. “If I’ve got 1000 megawatts of wind power,” he says, “it is a detrimental thing when it goes offline.”

When the amount of energy provided by wind turbines falls short of the amount of electricity needed to operate a city’s power grid, the grid has to work harder to balance the discrepancy between the energy needed and the energy being produced. Demand for energy fluctuates rapidly between high need and low need, and power plants often cannot throttle power output to accommodate sudden increases in demand without suffering major repercussions.

Poor grid balance and stabilization can result in high network losses, equipment overloading, unacceptable voltage and frequency levels, voltage instability and even outages. These repercussions are indeed detrimental, to say the least. In order to successfully harness, maintain and distribute vast amounts of power, the active and reactive power balance in a system must be controlled.

One solution to the grid stabilization issue is to build energy storage plants that connect to the electrical grid. Storage plants help stabilize the grid by quickly providing additional power during periods of high demand (when the intermittent energy source ceases to contribute electricity, for example). In order to accomplish this, the plants store energy during periods of low demand.

While elaborate storage systems have been developed over the years, these older technologies require a net surplus of power in order to generate and distribute the additional electricity. This is counterproductive. Older systems continue to place strenuous demands on power generation plants, causing additional and unnecessary degeneration. They also contribute to the production of harmful greenhouse gases.

Recently, a milestone in environmentally friendly, renewable energy storage was reached when Beacon Power (BCON) announced the opening of the world’s first grid-scale, 20MW flywheel energy storage facility, on June 21st. "We're very proud to have reached this technical and commercial milestone in building and operating the first grid-scale flywheel-based storage plant in the world," said Bill Capp, president and CEO of Beacon Power, which worked with Oztek Corp. for power control solutions to bring this vision to fruition.

Oztek, which has been developing and manufacturing advanced inverter, DC/DC, and motor drive controls since 1997, worked to develop vital software and essential control hardware technologies used to interface the large arrays of giant flywheels to the power grid.

The energy storage plant utilizes 200 flywheels, each weighing over 2,800 pounds, to store up to 20 megawatts of power that can then be transferred to the grid during times of high demand. In order to store energy, the flywheels rely on mechanical inertia. The flywheel is accelerated by an electric motor that doubles as a generator upon reversal, slowing down the disc and producing electricity. Since friction must be minimized in order to prolong the storage time, the flywheel is suspended in a vacuum and employs a sensorless permanent magnet motor drive. Oztek designed and supplied the sensorless motor drive as well as the grid tie inverter controller.

The grid tie inverter provides the interface between the flywheel and New York City’s main power grid. Unlike systems implemented in years past, the flywheel system is clean and energy efficient. A very small percentage of the power is lost as heat during transfer, and the system is able to respond to large demand changes in seconds.

“Oztek is extremely proud of its contributions to this milestone in sustainable, utility-scale frequency regulation services,” said Dave Zendzian, CTO of Oztek. “Developing hardware and software solutions to control the 2,800-pound flywheels, as well as operating hundreds of power inverters in parallel, has provided no shortage of technical challenges. Due to the high-power nature of the installation, many of the algorithms employed in the controllers needed to be designed using simulation coupled with design verification on smaller-scale hardware platforms. As such, there are always risks and challenges when you attempt to bring up the full-scale system. To see the system up and running at full capacity is very satisfying for all of us.”

Since New York City has a reputation for being one of the most energy-efficient cities in the world, it is sensible to unveil and deploy the new technology there. Stephen G. Whitley, president and CEO of the New York Independent System Operator, agrees. “New York's competitive marketplace for electricity provides fertile ground for energy innovations such as Beacon Power's flywheel system. It's great to see pioneering technology bringing new solutions to meet New York's energy needs."

Beacon's Stephentown energy storage plant is a new and highly effective answer to an old, stubborn problem, and Oztek’s sensorless magnet motor drive and grid tie inverter controls are essential components of this new power storage technology. Soon it will be common for intermittent energy sources to drain into highly efficient power reservoirs, and companies like Beacon and Oztek are leading the way. Thanks to their ongoing efforts, power providers will save on maintenance costs, and consumers will save on electricity. The environment, too, will reap the rewards

July 21, 2011

Eight Cleantech Value Stocks

Tom Konrad CFA

Three professional Cleantech money managers' top stock picks.

On Tuesday I published Money Managers See Value in Clean Energy Sector, but Hesitate to Call the Bottom based on my correspondence with Rafael Coven, manager of the Cleantech Index (^CTIUS), Garvin Jabusch, manager of the Sierra Club Green Alpha Portfolio, and Sam Healy, a portfolio manager at Lamassu Capital.  These three professionals were in strong agreement that many cleantech stocks are currently excellent value plays, even if cleantech and the market as a whole may have farther to fall, especially if the broader market continues to decline.

They like well capitalized stocks in sectors not prone to commoditization, that are not too dependent on government spending and incentives and which are currently trading at great values by traditional discounted cash flow measures.  Perhaps most surprising is that value investors can now find stocks worthy of their attention among stocks normally considered for their growth potential.

Here are their picks:

Solar Stocks

Although solar panel prices have been collapsing from the pressures of commoditization, Jabusch thinks several individual names are great values.  Here is what he says about three of his picks:

1. "LDK Solar (LDK) remains very cheap. It’s a profitable company ($2.28 earnings per share (EPS) last year) with above average long-term growth prospects but currently trading at only 70% of its book value, 80% of cash, and just 31% of its annual sales. Numbers like these are usually the domain of companies losing money that are likely to burn through their assets before reaching profitability, so it’s surprising to see this.

2. "Canadian Solar (CSIQ) is profitable ($1.27 EPS) and growing, but trading at 85% of the cash it has in the bank, 78% of its book value and only 23% of its annual sales.

3. "Renesola, Ltd. (SOL) trades at 68% book, 89% cash and 31% sales, yet is profitable (2011 EPS $1.28)."

Energy Services Stocks

I've been recently focusing on demand response and energy services companies in a series of articles based on CEO interviews. Sam Healy also likes the space.  He says,

4. "I think some of the demand response names, EnerNOC (ENOC) in particular, may be near its bottom, considering the cash on the balance sheet and the revenue visibility the equity price is low. Add in the increasing geographical diversification and increasing traction of the Energy Management businesses and you have a compelling growth story at a reasonable price. ENOC has acquisition integration risk, lingering FERC headline risk, and business risk as it expands its offerings, but at 15- 16 dollars per share I think that risk is already in the price creating an attractive risk reward story."

I recently wrote about EnerNOC here.  The other "demand response name" Healy is probably referring to is Comverge (COMV), which I recently looked at here

One future name I plan to cover in my series of CEO interviews is Ameresco (AMRC), but that may have to wait until the fall, as the CEO travels in the summer.  Coven likes

5. "Ameresco, because the market for energy-efficiency performance contracting is increasingly the only alternative that the MUSH market (Municipalities, Universities, Schools, Hospitals) have for energy efficiency improvements given limited state and local budgets. It’s an expensive way to achieve energy efficiency, but the customers have few alternatives."

Batteries

Coven's also says he's particularly bullish on

6. "Enersys (ENS) – still the best company worldwide for motive power batteries. Enersys is making progress in lithium batteries, but its lead-acid batteries are the best and proving far tougher to beat than most people expected."

Water Stocks

I don't generally follow water stocks, but these cleantech managers do.  Jabusch likes

7. "Chinese clean water play Tri-Tech Holdings (TRIT), trades at only two times cash, 92% of book, 77% of next year’s sales, has $1.53 EPS and is reporting 80% sales growth. Access to safe, clean water in China, and everywhere else for that matter, is a big deal and only getting tougher as populations increase and snowpacks decrease. It’s hard to see where TRIT isn’t far too cheap."

while Coven prefers

8. "Kadant, (KAI) a world leader in paper-recycling systems and technologies as well as industrial process water and energy efficiency is also well positioned to take advantage of Asia’s unquenchable demand for fiber."

Shorts

I also asked if they had any recommendations for possible shorts.  None of them were willing to name names, but Coven did say, "I think that there are a number of solar PV companies, “clean coal”, grain-based ethanol, and smaller LED companies that will wither away soon. These sectors are capital intensive, have cut-throat pricing, and the products are rarely sufficiently better than the competition. There are major consolidations coming in the wind turbine and solar PV markets to consolidate capacity and push down turbine costs – the market isn’t growing fast enough to support all the production capacity and the IP [intellectual property] and know how is spreading (legally and illegally) at great speed in Asia."

That perhaps explains the great values Jabusch sees in the solar names.  When it comes to traditional stock valuation, what matters are not the recent earnings and cash flows, but the future ones.  The near future for solar profits looks grim, the only question is if the current stock prices are even more grim than the future will be.

Conclusion

While there are great values currently to be found in cleantech and clean energy, it's also quite likely that a general market decline will produce even more great values.  I think it makes sense to start buying opportunistically, since many individual names have probably already seen their lows.  For instance, from my own list of ten clean energy stocks I thought were great buys last month, my long-time favorite New Flyer (NFYIF.PK/NFI-UN.TO) seems to have formed a bottom, and has risen from $7.69 when the article was published to $8.45 at the close on July 20.  Ambient Corporation (ABTGD.OB) has completed their expected reverse stock split in preparation for the NASDAQ listing which should allow a large number of new investors to consider the stock.  Comverge and EnerNOC, mentioned above, were also on the list, and have advanced 8% and 6%, respectively.

Just because these money managers are too cautious to call a bottom, that does not mean we have not already seen one.  Given the difficulty of timing the market, it makes sense to buy great values whenever they appear.  Yet it also makes sense to keep some cash on the sidelines, as more stocks will fall to great values if the recent decline continues. 

DISCLOSURE: Long ABTGD.OB, NFYIF, 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.

July 19, 2011

Money Managers See Value in Clean Energy Sector, but Hesitate to Call the Bottom

Tom Konrad CFA

Three green stock specialists see individual stocks at attractive values, but think it's too soon to call the bottom for the sector as a whole.

Last month, I wrote that I'm again finding clean energy stocks that I think are bargains, and listed ten.  I was not ready to call a bottom for clean energy, and in fact said I expected the market to get worse before it gets better, so investors should keep some money on the sidelines to wait for more opportunities to emerge.

In a little over a month since then (June 16 to July 18,) those stocks are up, on average, by 5.6% in dollar terms, while the largest clean energy ETF, the PowerShares Wilderhill Clean Energy Portfolio (PBW) is down 1.5% over the same period.  The top performer has been Alterra Power (MGMXF.PK), which is up 24% and the biggest loser has been Ambient (ABTG.OB), which is down 10%.  It's far too soon to declare victory, and I continue to feel all those stocks are cheap today, and that there is plenty of room on the downside for clean energy as a whole. 

But given that I can only follow a small fraction of the hundreds of clean energy stocks out there, I thought it would be interesting to see if other money managers who specialize in clean energy see the current market the same way I do, and what bargains they are finding, in the spirit of my article looking at clean energy money manager's top picks in the wake of the Fukushima disaster.  I intend to continue to do articles like this one based on other money managers' views, so if you are a professional money manager or analyst specializing in green stocks and would like to participate in the future, send me an email and I'll add you to my list.  You can also reply to the questions here by leaving your comments at the bottom.

This article is the first of a two part series looking into what they had to say.  This first article is about where they see the clean energy sector as a whole, and the second one will take a look at their picks. 

I corresponded with three money managers for this article.
Sector and Market Outlook

All three agree that it's too early to call a bottom.  They raise two basic concerns. 

First, it's simply very difficult to ever time the market.  As Jabusch puts it, "Even when industries become very undervalued, they can remain stubbornly low for some time," while Coven finds it hard to say due to "volatile overall market conditions." 

Coven went on to say "The correlation with global equity markets is still the [strongest driver] of stock performance and I certainly don’t think that global markets have bottomed nor are cleantech stocks as a whole independent from overall macro economic conditions." 

I think Coven's latter comment is interesting because we really have not seen a lot of correlation between the overall market and clean energy over the last couple years, with clean energy trending flat to down even as the market as a whole has risen.  If the overall market heads down from here, will clean energy stocks follow suit, or will they remain mostly decoupled?  I'm inclined to agree with Coven, which is why I have been focusing my picks on small and microcap stocks.  Recent research has shown that portfolios of small and microcap stocks have been better behaved during broad market declines than larger capitalization stocks, so I hope my move towards smaller stocks will somewhat insulate me from an overall market decline.

Healey echoes Coven's concerns about how the larger economic picture might affect cleantech.  He said many cleantech subsectors "have revenue generation that is tied in one way or another to government spending/incentives.  Until investors have better clarity as to what the government spending/incentive picture will look like after the European debt Crisis and US deficit plans have been worked out I can not confidently say any equity that benefits from government actions, either policy or financial incentives, has bottomed."

Finding Value

Despite the cautious tone, all three seem enthusiastic about the values now available in specific stocks and subsectors.   

Jabusch said, "we do believe that just as surely as all bubbles must eventually burst, all unreasonably oversold stocks must some time come back to their fair valuation. By "fair valuation" we mean at least to the old-school Benjamin Graham definition of net present value of the probable future stream of cash flows discounted at a reasonable rate, plus the property plant and equipment. We understand that this valuation method seems very conservative and even quaint by current thinking, but surprisingly, there are a lot of cleantech companies that look very cheap right now, even against this standard."

Coven went into more detail about how he would pick stocks in the current climate. 
We are also much more comfortable with well-capitalized companies, with broad product lines and strongly prefer those that can flourish with diminished government incentives which are bound to fall further.  This of course has us steering clear of all fuel cell and most biofuel companies for the moment.

We continually are reminded how fast certain sectors have product commoditization.  Where intellectual property isn’t strong enough to differentiate products sufficiently, prices have been collapsing  even faster that we had anticipated.  This is true for smart power meters, solar panels, wind turbines, and most lighting products – especially LEDs.  The LED market is going to be massive, but the number of new entrants and (particularly in China) and increased production capacity (mostly in China) has grown so much faster than demand, that prices are falling faster than they did for solar panels.  This will be good for adoption, but the LED market for general illumination (non-consumer electronics) is still nascent and won’t really takeoff until LED prices drop further.   Sector growth doesn’t necessarily mean that many companies will make economic profits in LED lighting or solar PV, but probably those with really great I.P. or the lowest cost manufacturing will.  The rest will die or struggle to survive.
Stock Picking Guidelines

Which clean energy stocks will
  • have strong intellectual property or other advantages that help them avoid commoditization of their products,
  • have great net present value of future cash streams, and
  • aren't tied to government spending/incentives? 
Stay tuned for these three managers' stock picks later this week. 

DISCLOSURE: Long MGMXF.PK, ABTG.
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.

July 17, 2011

Three Years of Seeking Alpha in Energy Storage

John Petersen

Today is the third anniversary of my blog on investing in energy storage. While the last three years have been profoundly troubled by a market crash, a slow recovery and more ups and downs than a roller coaster, energy storage has been surging to prominence as investors realize that batteries, products we all love to hate, are a critical enabling technology for wind and solar power, efficient transportation, the smart grid and hundreds of other applications that make life more pleasant. With each passing day it's increasingly clear that energy storage is an investment mega-trend that will endure for decades. Most of the smart money is still on the sidelines looking in, which explains the popularity of my blog. As the smart money transitions from analyzing opportunities to making investments, the sector should encounter rising tides that lift all boats.

Thomas Edison was the first to identify the biggest risk of energy storage investing a century ago when he complained:

The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing.

The problem isn't really the batteries, which haven't improved all that much over the last century. Instead, the problem lies in the fertile imaginations of investors, ideologues and demagogues who read about scientific discoveries in research laboratories, overestimate the value of those discoveries and then make a wildly optimistic leap from the reasonable to the absurd.

The two most common forms of batteries are carry-over relics of the 19th century. Lead-acid batteries have been around for 150 years and spiral wound batteries have been popular for almost as long. While battery chemistry has changed over the years and manufacturing methods have been modernized, the energy storage capacity of today's best batteries is only four or five times greater than the energy storage capacity of the batteries Edison complained about. Regardless of what you read in the paper or hear on the news, making a better battery is very hard work and the vast majority of exciting new discoveries never make it from the laboratory bench to the factory floor because they're just too expensive.

It's fun to daydream about the technical possibilities of portable power, but the market will only pay for cheap, reliable and safe portable power. The chasm between technical possibility and economic viability is both wide and deep.

Today's most common myth in energy storage is that exponential performance gains will be accompanied by rapidly falling prices. The current issue of Science includes an article titled "Getting There" that offers a classic example of how the mythology grows and spreads. The article's centerpiece is the following graph that compares the theoretical potential of battery materials and the best results obtained in working cells.

7.17.11 Science Graph.png

A quick read through the article and a glance at the graph would be enough to convince any reasonably imaginative person that a golden age of battery powered everything is just around the corner. The undeniable facts the article and the gee-whiz graph don't explain with any force are:
  • All lithium-ion batteries in commercial production are in the first category;
  • The performance differences between today's lithium-ion chemistries are minor;
  • Current technologies offer little room for improvement because the theoretical limits are absolute;
  • The first category are the only batteries we know how to manufacture in bulk;
  • All advanced battery technologies will require the development of completely new manufacturing methods and equipment;
  • All advanced technologies will require the construction of different infrastructure from the ground up;
  • All advanced technologies are five to ten years from production if everything goes right; and
  • The companies that own the best current technologies do not own their advanced counterparts.
In other words each step forward will make all the science and all the manufacturing infrastructure required for the prior generation of lithium-ion batteries obsolete. It's the epitome of creative destruction where the future poses an existential threat to the past, but the future can't leverage, build upon or even use the massive infrastructure investments of the past. Progress in IT was immense and rapid because every step along the path built upon and leveraged the past. Progress in energy storage is agonizingly slow because innovation that builds upon and leverages the past is rare.

In my first Seeking Alpha article, I wrote that the market prices for Ener1 (HEV) and Altair Nanotechnologies (ALTI) resulted in "nosebleed market capitalizations based on little more than dreams." In September 2008, I added Valence Technologies (VLNC) to my list of dangerously overvalued lithium-ion battery developers because like Jacques Cousteau it was under water to the tune of $68.4 million at mid-year. In October 2009, I added BYD Co. Ltd. (BYDDF.PK) to my list and wrote that it was "a classic example of why it's never a good idea to make investment decisions based on simple questions like "What did Warren do?" In November 2009, I added A123 Systems (AONE) to the list observing that it was "well up the hype cycle curve and approaching the Peak of Inflated Expectations." Last November, I added the magical gravity defying Tesla Motors (TSLA) to my list and suggested a paired trade that would short Tesla and buy Exide Technologies (XIDE). In every case the reader outrage over my criticisms was palpable. You'd have thought I was torturing kittens. Subsequent price performance tells a very different story. The following table summarizes the market price of each of these companies when I first openly criticized them, their closing price last Friday, and the percentage decline in the interim.

Company
Symbol
Initial Price
Friday's Price
Change
Ener1
HEV
$5.91
$0.79
-87.6%
Altair Nanotechnologies
ALTI
$7.92
$0.96 -87.9%
Valence Technologies
VLNC
$3.59
$1.03
-71.3%
BYD Co. Ltd.
BYDDF.PK
$11.12
$2.86
-74.3%
A123 Systems
AONE
$15.88
$5.68
-64.2%
Tesla Motors
TSLA
$30.80
$27.58
-10.5%

My record at picking winners isn't perfect, but I'm batting a thousand when it comes to identifying over-hyped stocks near the peak of inflated expectations.

Since I first criticized them, A123 and BYD have fallen to levels where they're beginning to look attractive for long-term investors who believe in the future of electric transportation and are not concerned about a looming glut of lithium-ion battery manufacturing capacity that will increase losses and force marginal manufacturers out of business without reducing material, manufacturing or finished battery costs. In spite of the happy talk from Silicon Valley and buy-side cheerleaders, Tesla hasn't even started to bleed. Ener1, Altair and Valence may survive, but only if they can negotiate massive capital infusions on terms acceptable to new money.

I've been bullish about the lead-acid battery sector for years because the major battery manufacturers including Johnson Controls (JCI), Exide and Enersys (ENS) have global manufacturing footprints, established product lines, strong customer relationships, billion dollar revenue streams and rust-belt market capitalizations. My favorite in the group is Exide because it trades at a significant discount to its peers and is well-positioned to out-perform market expectations on a go-forward basis.

In light of recent forecasts that stop-start idle elimination will be deployed in almost a hundred million cars over the next five years, I think JCI and Exide are facing a dream scenario where unit volumes remain stable but per unit revenues double and margins ramp sharply as customers gravitate to their premium AGM products.

My old company Axion Power (AXPW.OB) has not been a stellar stock market performer over the last couple years, but the delays have arisen from the stringent manufacturing and quality control requirements of it's principal potential customers. Since I can't remember another instance where huge companies like BMW and Norfolk Southern have publicly aligned themselves with a nano-cap technology developer that hasn't even launched its first product, I can live with delays that disappoint the market but please them.

The last three years have been a lot of fun and intelligent comments from knowledgeable readers have provided a balance and breadth that I could never have achieved on my own. New readers in particular may find it helpful to peruse my article archive, but be sure to spend enough time reading the comments to understand where the views of others differ from mine. I always try to explain the factual basis for my opinions and provide links to relevant source documents, but in the end I'm only human and I can only speak from the shoes I stand in. I want to thank everyone for their respective contributions, even those who haven't learned how to disagree without being disagreeable.

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

July 14, 2011

The Lithium-ion Battery Glut Will Be Massive

John Petersen

I hate being wrong, but Mother always taught us, "if you have to eat crow don't nibble."

In February 2010 I wrote an article titled "Why I Don't Expect A Lithium-Ion Battery Glut" that's shaping up as one of the worst predictions in the history of my blog. This week Lux Research published a report titled "Using Partnerships to Stay Afloat in the Electric Vehicle Storm" that has me convinced that the capacity glut in lithium-ion batteries will be massive for at least a decade.

I humbly and sincerely apologize to any readers who bought shares in lithium-ion battery developers based on my starry-eyed optimism for the EV battery market.

The basic premise of my February 2010 article was that while plug-in electric vehicles would almost certainly die a slow and agonizing death from the congenital birth defects that have doomed every generation of EVs to the scrap heap of history, booming sales of electric two-wheeled vehicles, or E2Ws, and Prius-class hybrid electric vehicles, or HEVs, would be enough to absorb the slack. With eighteen months of history to look back on, it's just not working out the way I thought it would.

As I expected, plug-in vehicles are drawing breathless reviews from the press and EVangelicals, and indifference or outright scorn from the car buying public. Automakers are toying with plug-in vehicle concepts that may go into production over the next few years if the plans aren't scrapped due to customer apathy, but they're all rushing to make new fuel efficiency technologies like stop-start idle elimination standard equipment. With the exception of Advanced Battery Technologies (ABAT) which makes both ebikes and the batteries that power them, E2W manufacturers are letting their customers decide and the overwhelming majority of E2W buyers are voting with their wallets and deciding that cheap and reliable lead acid batteries are better suited to their needs despite a little extra weight.

Can you believe it? Cheap is beating cool. Who could have predicted such an outcome in the depths of the worst financial crisis since the 1930s?

In all seriousness, Lux forecasts a catastrophic supply and demand imbalance in the lithium-ion battery sector over the next decade. On the supply side it predicts that global manufacturing capacity will ramp to about 21,000 MWh by next year (875,000 Leaf-class BEVs) and climb to almost 30,000 MWh (1.25 million Leaf-class BEVs) by 2015. On the demand side, Lux's optimistic case based on $200 oil predicts annual battery sales of about 6,000 MWh in 2015 (250,000 Leaf-class BEVs) ramping to 22,500 MWh (937,500 Leaf-class BEVs) by 2020. Under their more conservative $140 oil price scenario, demand won't hit 6,000 MWh until 2020. The low oil price scenario is aggressively ugly. Is it any wonder that France has recently withdrawn €100 million of subsidized loans for a planned Renault battery plant?

The Lux forecast is bad news for diversified first tier manufacturers like LG Chem, GS Yuasa, SB LiMotive, AESC, and Sanyo; terrible news for financially sound second tier manufacturers like Toshiba, Hitachi, and JCI-Saft; and an "existential threat" for emerging third tier battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Dow Kokam that were counting on transportation markets that are unlikely to develop.

Now you know why so many lithium-ion battery developers are suddenly talking trash about using their batteries for grid-scale storage. In the near future, that myth will be buried along-side its brother the electric car because the world's utilities can't possibly soak up 20,000 to 25,000 MWh per year of excess lithium-ion battery manufacturing capacity.

Last February, the Department of Energy released a comprehensive study on the economic potential of grid-based storage titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide." It was commissioned by the Energy Storage Systems Program and written by Jim Eyer and Garth Corey. Based on the conclusions of that study, which I discussed in "Grid-Based Energy Storage; A $200 Billion Opportunity," I cobbled together a table that identifies the principal grid-based energy storage applications, quantifies the potential national demand and quantifies the 10-year economic value for a kilowatt-hour of grid-based storage dedicated to an application. The table is mine, but the baseline numbers are Sandia's.

7.14.11 Grid Demand.png

The color coding in the table represents my attempt to segregate system value per kWh into cool technologies like flywheels, supercapacitors and lithium ion batteries, which are highlighted in blue, and cheap technologies like flow batteries, lead-acid batteries, compressed air and pumped hydro, which are highlighted in yellow. If you total up the potential demand for all of the blue highlighted applications and throw in the orange for good measure, you get to a likely US demand of 11,500 MWh spread over a period of several years. It won't make a dent in 20,000 to 25,000 MWh per year of excess lithium-ion battery manufacturing capacity.

Like bloggers, outfits like Lux want every dark cloud to have a silver lining and their new report is no exception. In addition to forecasting doom, gloom and bust for the lithium-ion battery space, it focuses on the expected development of a $300 million annual market for supercapacitors in the transportation markets. In that market, Lux identified Maxwell Technologies (MXWL) as the dominant competitor and took pains to observe that "For the numerous supercapacitor technology developers to gain market share in transportation, they will need to validate products with a clear edge over Maxwell's incumbent technology, and not rely on growing demand to create ripe opportunities for new entrants."

While I'm a fan of Maxwell's products and business potential, I'd be remiss if I didn't point out that its stock trades at 4.3 times book value and 3.3 times trailing twelve-month sales of $131 million. Even if you assume that Maxwell will walk away with the lion's share of the $300 million transportation supercapacitor market that Lux is forecasting for 2016, its upside potential will be limited as it negotiates the transition out of the valley of death and begins trading on the basis of sales, growth and profitability.

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

July 13, 2011

GE’s Mark Vachon: “Gas is massive”

Marc Gunther

How’s GE’s ecomagination  going?

I put that question today to Mark Vachon, who is vice president for ecomagination at General Electric (GE). He replied by talking about natural gas.

“The large macro trend of gas is massive,” he said. “Our oil and gas business will be a huge beneficiary.”

An abundance of shale gas in the U.S., and methane gas reserves in Australia present a wealth of opportunities for GE, which plays all along the supply chain for natural gas.

“We’re a massive player in gas exploration,” Mark said. “We have a water business that can deal with issues in the fracking process.” And, of course, GE sells lots of gas-burning turbines, including a new combined cycle power plant, currently available in Europe, that enables gas to be burned more efficiently and in concert with renewable energy. (See my June blogpost, GE’s big bet on natural gas)

But can you put “ecomagination and shale gas in the same sentence? Yes,” Mark said. GE will focus on making shale gas cleaner, “with technologies like zero-leak valves” and water filtration products like a mobile evaporator that is basically a truck (see below) “designed to enable on-site frac water recycling, reducing the volume of wastewater and fresh water that needs to be hauled to and from the project site.”

GE Mobile EvaporatorLike it or not, natural gas is the big story today in the energy business. This is good for GE. It’s probably good for the U.S., given our domestic supply. Whether it’s good thing for the climate is very much an open question. If cleaner-burning gas plants replaces dirty coal plants, they will bring meaningful but incremental progress towards a climate solution. If cheap, abundant natural gas stalls the development of low-carbon renewable energy, or discourages investment in new clean-energy businesses, that’s a problem. Chances are, it’ll do both.

I met Mark near the U.S. Capitol, where he was headed for meetings on energy security with House leader John Boehner, among others. He has overseen GE’s ecomagination portfolio for Jeff Immelt since last October. Ecomagination products include efficient aircraft engines and locomotives, appliances, and LED and CFL light bulbs as well as GE’s gas, nuclear, renewable energy and smart-grid businesses; they’ll generate $20 billion to $22 billion in revenues this year, Mark estimates. The 52-year-old exec, who has been with GE for 28 years, was previously President & CEO of GE Healthcare’s $9 billion Americas Region. He still lives in Milwaukee, where the healthcare business is based, but because one of his jobs is to make ecomagination more global, he has traveled this year to Abu Dhabi, Dubai, Israel, Europe, Australia and China, and he’s soon headed to Brazil.

So if the gas business is booming, where are the challenges in the ecomagination portfolio?

Nuclear’s an obvious one. The son of a nuclear engineer, Mark believes in the technology but says, post-Fukushima, that “it’s very clear, at least for the moment, that we’re in a hiatus.” But, he added, “the nuclear industry is very good at learning from its mistakes.”

Wind, too, faces short-term issues, he said: “It’s clearly challenged over the next couple of years.” Without clean-energy mandates or tax subsidies, wind struggles to compete with cheap natural gas. And there’s uncertainty about those subsidies, particularly in the U.S. where Congress is looking to manage budget deficits.

This past spring, GE made a major commitment to solar PV, drawing on technology developed at the National Renewable Energy Lab. Mark said the company will site a manufacturing plant in the U.S. to make the panels.

Does GE remain committed to ecomagination despite the gloomy policy environment in the U.S.? After all, Immelt put his reputation on the line by becoming a vocal advocate for climate regulations through the U.S. Climate Action Partnership. That didn’t end well.

“Business has to step up and act,” Mark said, nothing that GE plans to buy 25,000 electric cars for its own fleet.

“We are not going to wait for policy,” he added. Good thing.

DISCLOSURE: None.

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

July 11, 2011

Saviors and Saboteurs in Alternative Energy

John Petersen

Last week Societe Generale published a thematic research report titled "A new world order, when demand overtakes supply" which examines the macro-economic and demographic trends that will transform the global economy over the next 20 years. It mirrored the theme of Jeremy Grantham's April 2011 quarterly letter titled "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever" and did a great job of summarizing an issue I touched on in "How PHEVs and EVs Will Sabotage America's Drive For Energy Independence."

In the words of Societe Generale:

"So, while up until now less than one billion people have accounted for three-quarters of global consumption, over the course of the next two decades, the new Chinese, Indian, Indonesian, Latin American and African middle classes will bring an additional two billion consumers with similar needs and aspirations as today's North American, European and Japanese consumers." (Page 12)

"Beyond growth in demand for finished products, the most spectacular effect likely to be brought about by the stronger development of the emerging economies will be the enormous rise in demand for raw materials." (Page 14)

"A structural increase in raw materials prices is in fact an inevitable consequence of chronic resource insufficiencies, whether we're talking about industrial, energy or agricultural resources." (Page 19)

The following table from Mr. Grantham's quarterly letter summarizes China's current consumption of key energy, industrial and agricultural commodities as a percentage of total global consumption and drives the point home with the subtle clarity of a sledge-hammer.

7.10.11 China.png

If we've seen this kind of demand dislocation as a result of a few decades of growth in China, what's going to happen when the surging middle class populations of India, Indonesia, Latin America and Africa decide to show up for the dinner party? The answer, of course, is that we'll be thoroughly screwed unless we stop wasting time, money and materials on pipe dreams, toys and panacea solutions, and focus instead on finding relevant scale solutions to persistent global shortages of water, energy, food and every commodity you can imagine. We all face a clear, present and persistent danger that can’t even be addressed until we accept the entire ugly reality with all its vulgar implications!

One of the most disturbing conclusions in the Societe Generale report is that while per capita energy demand in advanced economies will remain stable at 5,463 kg of oil equivalent, or maybe even decline to 5,000 kg per person by 2030, global average demand will increase from current levels of 1,818 kg per person to 3,312 kg per person in the low case and 4,228 kg per person in the high case. All of the increased demand will come from emerging and developing economies.

Our fundamental problem is that per capita global production of energy resources is 100 to 200 times greater than per capita global production of the technology metals that underlie all alternative energy schemes. To make things worse, all of those metal resources have critical competing uses that cannot be set aside or ignored in the name of advocacy. At a recent grid-based energy storage conference in Brussels I used the following table to emphasize the point. The orange highlight quantifies available energy resources while the green highlight quantifies technology metal resources.

7.10.11 Energy vs Metals.png

The mathematically challenged optimists in our midst earnestly believe we can solve our energy problems with cool toys like wind turbines, solar panels, electric cars and other materials intensive energy schemes that fire the imagination but can never be sustainable. These aren’t solutions! They’re the energy and transportation equivalent of graphic novels and just a half-step removed from warp drive. In the final analysis, the dreamers who want to waste metals and other natural resources in the name of conserving coal, oil and natural gas are not saviors. They're unwitting saboteurs who can only make the problems worse!

Whether we like it or not, the only technology that has a prayer of generating enough new energy to satisfy even a small fraction of anticipated global demand is nuclear, a point that was forcibly driven home by Bill Gates in a recent interview at the WIRED Business Conference 2011. The naive idea that we can cut hydrocarbon consumption for the laudable goal of saving the planet is sophistry. Given a choice between freezing in the dark and burning hydrocarbons human beings will always choose the later because immediate personal need will always trump long term societal goals, especially fuzzy green goals.

I'm an unrelenting critic of obscene raw materials users like Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) that want to build a future out of making toys for our emerging eco-royalty because I've read about the French Revolution and remember how 'Madame Le Guillotine' put a uniquely sharp edge on popular discontent over conspicuous consumption. These business models are doomed to fail because they're diametrically opposed the needs of society.

The only alternative energy investments that stand a chance of survival, much less profitability, are basic efficiency technologies that slash waste and deliver real savings for every ounce of natural resource inputs. Nuclear power, idle elimination, fuel efficiency, demand response, building efficiency, ebikes, recycling and a host of other technologies that do more with less are the only possible future. Wind turbines, solar panels, electric cars and all of the other feel-good graphic novel schemes are merely pleasant distractions, a bit like Nero's fiddle.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock because Axion's disruptive third generation lead-acid-carbon battery technology uses 30% less lead to deliver impressive gains in power, cycle-life, charge acceptance and overall real world utility.

July 09, 2011

The Sector Information Technology Forgot

Tom Konrad CFA

Information technology has mostly passed the energy sector by... but for how long?

Information Technology revolutionized the way we buy things (Amazon, eBay), how we get information (Google, Wikipedia, the decline of newspapers), and how we interact with out peers (Facebook, Twitter, LinkedIn.)  Yet so far, it has had little, if any transformative impact on energy.  Tim Healy, CEO of EnerNOC (ENOC), the world's largest  third party provider of Demand Response to utilities and grid operators, thinks that's about to change.

Demand Response (DR) began decades ago with Interruptible loads and Interruptible rates, driven by simple economics.  It 's much cheaper to pay users to temporarily curtail usage during peak periods than is is to build new capacity.  Under Interruptible loads and rate, utilities give large customers favorable electricity prices in return for an agreement that the utility can turn off certain parts of their equipment (interruptible loads) or their entire power supply (interruptible rates) for a few hours per year in the event there is not enough spare generation capacity to meet demand.  My first encounter with DR came as far back as the late 1980's, when I was an undergraduate at Harvey Mudd College in Southern California.  At the time, the college was on an interruptible rate plan.  I don't recall any power outages because of the interruptible rate, most likely because I was not on campus at the time.  For an institution where most students and faculty are away during the hottest months of the year when Southern California energy demand peaks, an interruptible rate must have made a lot of financial sense.

But interruptible rates are limited in their application.  Most businesses and institutions are less able to compromise on power reliability.  That's where Information Technology (IT) comes in.  By selectively controlling machinery, lighting, and HVAC equipment, modern DR providers such as EnerNOC can wring better coordinated and targeted power reductions from facilities without disrupting mission-critical operations. 

Because types of energy use are so varied across institutional, commercial, industrial, and government sectors, there are few cross-cutting DR measures that apply everywhere.  Instead, EnerNOC works with each facility or business owner individually to identify the energy services they can do without for short periods of time, and connects those devices to monitor/controllers that feed into a central Network Operations Center (the NOC in EnerNOC) where aggregate load can be controlled as easily as any power plant.  One way to look at DR is as a virtual power plant, that can substitute for new supply-side resources such as gas turbines.  Such virtual power plants can not only shave peak loads, but improve grid stability in other ways as well.

Despite DR's long history, energy consulting firm KEMA estimated in 2007 that only 21% economic DR market was then operational, with the market potential growing along with overall load growth.  Different definitions of market sizing lead to different market penetrations, but all put market penetration at well below half.  The low market penetration arises from the idiosyncratic nature of different industries.  Demand Response at a supermarket chain looks a lot different from DR of agricultural irrigation.  EnerNOC recently purchased M2M Communications specifically because M2M's technology allowed EnerNOC into a novel and mostly un-penetrated market: agricultural irrigation operations. 

Data Driven Energy Efficiency

Although EnerNOC sees DR as their core product; DR also forms a strong platform to sell other energy services to clients.  Using IT to crunch the same data that are necessary for automated Demand Response can help pinpoint opportunities for cost-effective energy efficiency improvements.  That data can also be used to understand normal energy usage and negotiate the most favorable deal with energy providers, or help evaluate a company's carbon footprint.  These data-driven efficiency services help broaden margins, since they do not require that EnerNOC share the revenue they get from utilities with the facility owners.  According to Healy, pure play DR providers usually have gross margins in the mid 20s, while EnerNOC's are in the mid-40's. 

The World Scene

In sharp contrast to the vast majority of clean energy technologies, the United States has by far the most developed DR market, and EnerNOC is the leading player in that market.  While both Europe and Japan have been aggressive in promoting solar and wind power, they have much less demand response capacity, and now they are waking up to its advantages.  My colleague John Petersen recently returned from the Grid-Scale Energy Storage Conference in Brussels, and told me by email that the utility representatives "made it clear that the only economic grid storage in their view [is] pumped hydro" and that they spoke "casually as you please about 'load shedding' as a solution for variability." 

"Load-shedding" is utility-speak for temporarily cutting off power to certain lines.  If they are seriously considering load shedding just to cope with variability, they will want to sign up as many customers as possible for interruptible rates.  From there, it is only a small step to pursue full scale Demand Response, and since European utilities have little experience with this, it makes sense to call in a third party vendor such as EnerNOC.  Indeed, EnerNOC is beginning to expand internationally already.  In the first quarter of 2011, international revenues were 15% of total revenues, compared to less than 1% the previous year.  The majority of these revenues came from Canada, but other revenue outside North America grew from only $13K in Q1 2010 to almost $5M in Q1 2011.

To cope with the loss of power from nuclear generators shut down after the Japanese earthquake and tsunami, Japanese citizens have shown remarkable willingness to do without some electric services for the greater good.  While TEPCO has managed to bring more new supply online than initially anticipated, that still leaves the anticipated summer shortfall at between 3 and 4.3 GW.  Most of this will be met by conservation from Japanese residential and commercial users, and I expect the experience of manually turning down power consumption for the greater good will help prime the technophilic Japanese for more automated ways to control energy use, such as DR and other Smart Grid technologies.

Leading Vendor

Although many utilities pursue their own DR programs, those that choose (or are asked by regulators) to consider third party solutions seem likely to prefer a one-stop shop from a well established vendor to a collection of specific solutions from smaller vendors.  EnerNOC's current leading position and strategy of acquiring new technologies by acquisition as they become available seem likely to continue to be a source of strength going forward.  Their strong balance sheet with no net debt and positive cash flow and earnings not only give them the resources to continue to acquire new technologies to supplement their existing capabilities, but also give utilities confidence that they will be able to fulfill their obligations as a DR vendor.

Conclusion

As Germany and Japan come to grips with the reality of trying to quickly phase out nuclear power and replace it with variable resources such as wind and solar, they will also have a rapidly growing need for dispatchable resources to manage the variability of the new resources.  The application of IT to energy allows Demand Response and other IT-enabled Smart Grid technologies to deploy more quickly and cheaply than even natural gas turbines.  I expect EnerNOC to be among the leaders in this last wave of the IT revolution.

DISCLOSURE: Long ENOC.
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.

July 07, 2011

Drill for Geothermal Power in Developing Countries and on King Street

Tom Konrad CFA

Hezy Ram

Geothermal industry veteran Hezy Ram has worked in the industry for over three decades.  His career began with 28 years of experience at Ormat (ORA), where he was Executive Vice President of Business Development, after which he founded Ram Power Corp. (RPG.TO/RAMPF.PK) in 2009.  In February, he resigned as CEO of Ram Power shortly after the company warned of significant delays and cost overruns at a key Nicaraguan project, a move he says was motivated by irreconcilable differences with other board members and major shareholders regarding the company's strategy. 
Hezy Ram.png
Today, he has his own geothermal company, advising clients like drilling technology innovator Potter Drilling, and lesser known but equally deserving technology innovator Geotek Energy.  GeoTek's Gravity Head Energy System, which improves geothermal plant efficiency by eliminating parasitic loads, is less flashy than Potter's drilling innovations, but it should make many more geothermal resources economical by significantly increasing net efficiencies in the relatively near term.  Ram also serves on the board of Latin American and Caribbean Council on Renewable Energy.

I caught up with Ram at the 8th Annual Renewable Energy Finance Forum Wall Street (REFF), an event co-hosted by the American Council on Renewable Energy (ACORE) and Euromoney Energy Events, and followed up with him in a phone interview this week.  Ram sees a lot of potential for growth in geothermal power, but thinks the best opportunities are outside the US, while much current development is domestic.  He's looking at opportunities in developing countries himself.

High Oil Prices Create Opportunities for Geothermal Developers

In North America, current low natural gas prices are creating headwinds for geothermal by lowering wholesale price of electricity.  In places like Chile, Central America, and Africa, all of which have excellent geothermal resources, most electric generation comes from oil.  With oil around $100 a barrel, that means the cost of electricity exceeds 20 cents per kWh.  There, geothermal can be the low cost producer of energy, and need not rely on subsidies or Renewable Portfolio Standards to create demand.

John Anderson, Head of Power and Infrastructure Investing at John Hancock, also spoke at REFF and sees the best potential for clean energy in the developing world.  He said the most important question for renewable energy projects is, "Are you displacing oil?"  The advantage of displacing oil is not unique to geothermal, but where good geothermal resources exist, geothermal power is not only cheaper than solar and all but the best wind resources, but it's baseload power, and easier to integrate onto the electric grid.

Drilling on King Street

The other opportunity he sees is consolidation in the industry.  Like many industry observers (myself included; see this recent article on Nevada Geothermal Power (NGP.V/NGPLF.PK), Ram sees an industry ripe for consolidation.  He sees a sector currently at a low point in investor attention, and there is a lot of unrecognized value in geothermal companies. 

He also thinks that consolidation would be good for the junior public companies.  Speaking with the voice of painful experience, he describes the mismatch between investor expectations and the small plays and long lead times of geothermal projects.  The market expects regular news updates, but there is not much to say when you spend a year on permitting, while compliance and committee meetings are a distraction from running the company. He thinks only Ormat has the billion dollar scale to afford the distractions of being public.

The smaller geothermal players (Ram Power, Nevada Geothermal, Alterra Power (AXY.TO/MGMXF.PK), and US Geothermal Power (HTM)) would all benefit from the scale and cheaper funding that would come with consolidation.  Since three of the four are listed on the Toronto Stock Exchange, I like to call this strategy "Drilling on King Street," in homage to the oil and gas industry tradition of drilling on Wall Street when reserves get hard to find through traditional exploration.

Possible Consolidators

Which companies might start drilling on King Street?

The most obvious consolidators are those already in the geothermal industry.  I've been surprised that Ormat has not already made a move to acquire the cheap assets available on King Street, given that they have signed up for a more expensive joint venture with Nevada Geothermal just last year, but one reason for the lack of action may have been the financial position of the controlling Bronicki family.  On July 7, it was announced that the family is in negotiations to sell a large stake in Ormat's Isreali parent company, Ormat Industries (ORMT.TA) to cover debts.  If the sale goes through, holding company Shikun & Binui  (SKBN.TA) is expected to be the major shareholder.  Shikun & Binui describes itself as "a leading infrastructure, real-estate and environmental group," and already operates some renewable energy and energy efficiency projects internationally.  Israeli Analyst Shay Lipman said "Ormat combines excellently with Shikun U'Binui's portfolio."  Will other geothermal companies combine equally well?

In addition to internal industry consolidation, Ram sees two types of companies for which he thinks it makes sense. 

The first of these are the traditional drillers on Wall Street: Oil and Gas companies.  They have expertise with much of the same equipment and techniques used in geothermal, money to spend, and could benefit from the positive PR, such as that used by Chevron around their Philippine and Indonesian geothermal assets.

The other group he thinks might become interested is utilities, following the pattern with wind and solar, where companies like NextEra Energy (NEE) are large players.  NextEra used to be known as FPL Group after its utility subsidiary Florida Power and Light, but set up a large wind and solar development arm and re-branded itself to reflect the new focus on green power. 

Conclusion

Will a utility or an Oil and Gas major be the first to decide that the opportunities to pick up quality geothermal projects for little more than spare change on King Street are worth moving into a new (but related) industry?  I think Oil and Gas is more likely, since they are more accustomed to accepting drilling risk.  While Independent Power Producer Calpine Corp. (CPN) has significant geothermal assets, these were all acquired when they were already operating, not during exploration and development.

But the more important question for investors considering geothermal companies as an out of favor value play is: When will a consolidator appear?  Neither I nor Ram has the answer to that one.

DISCLOSURE: Long RAMPF, NGPLF, MGMXF, HTM.

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.

Inexpensive Grid Stability Solutions

Tom Konrad, CFA

With all the discussion of grid based energy storage for renewable energy integration, the two cheapest and most mature solutions are overlooked.  They are also the solutions most often overlooked by investors captivated by the story of clean technology.

A few years ago, I put together some graphs to show this as dramatically as possible.  I surveyed the available data on energy storage and other grid integration technologies for the costs of existing installations, and calculated average cost per installed kW (power), per installed kWh (energy) and round trip efficiency (the percent of energy lost through round-trip charging and discharging.)

The results are shown in the graph below.  Keep in mind that the data is a few years old at this point, and all numbers are approximate, since they are culled from a variety of different sources.  The graph shown is on a log-log scale, so a technology at the top of the graph is 10 times cheaper when it comes to delivering power to the grid than a technology on the horizontal line, and a technology at the far right is 100 times cheaper for storing energy than a technology on the vertical line.


The most cost-effective technologies are closer to the upper right hand corner of the graph, and have relatively large bubbles (high round trip efficiency.) 

Large Scale Energy Storage Technologies

The most talked-about energy storage technologies, Pumped Hydropower [PHES], Compressed Air Energy Storage [CAES], and molten salt thermal storage in conjunction with Concentrating Solar Power [CSP-Tower] can clearly be seen to outperform both batteries and flow batteries for energy storage applications.  Note that the numbers are approximate.  PHES is shown on my graph as slightly less viable than CAES, but the balance of opinion favors the economics of PHES.  The CAES bubble may overstate the viability of that technology: there are only two operational CAES plants, which leads to considerable uncertainly in the construction costs for future plants.  Similarly, the Economics of PHES may be understated.  Each Pumped Hydro site is unique and has its own economics, and the best sites are likely to be considerably better than shown.  Such sites will have existing reservoirs that can be raised and lowered at will to reflect current electricity supply imbalances.  I discuss PHES in more detail here.

Hydrogen [H2], flow batteries, and conventional batteries are simply to expensive to be viable as an energy storage medium except in situations such as remote power, where transmission, demand response, and PHES or thermal storage are impractical.  While the economics of large scale energy storage for Hydrogen compare well with those of molten salt thermal storage, the high cost of fuel cells makes hydrogen storage nearly useless as a power resource, and the low round trip efficiency means that much energy is lost transforming electricity back and forth in to hydrogen.  Large hydrogen tanks are relatively inexpensive to build, but filling and emptying those tanks is too slow a process to be practical as a grid based storage solution.

Yet all these solutions pale in comparison to the virtual energy storage provided by high voltage transmission.  When a region has excess electricity, it usually makes much more sense to sell it to a neighboring region that can use it than try to store the electricity locally.  Hours or months later, the same transmission line can be used to re-import the power when relative prices in the two regions reverse, making a transmission line to a neighboring region act as if it were a connection to a battery with infinite capacity.

Grid Stability (Power) Technologies

While the energy storage technologies on the right side of the graph are good for smoothing out long term imbalances between electricity supply and demand, short-term variations in supply and demand are best addressed by the cheap power resources towards the top of the graph.  The quicker the fluctuations that need to be smoothed, the more important it is that the technology be able to absorb or deliver power quickly, and the less important it is that a large amount of energy be stored for extended periods of time. 

Three highly effective technologies for producing quick bursts of high power but without much energy storage capacity are flywheels (currently in their earliest stages of deployment by Beacon Power (BCON)), Superconducting Magnetic Energy Storage [SMES] a technology provided by American Superconductor (AMSC) that has been shown to be able to maintain grid stability when events such as lightning strikes would otherwise overload the grid with large, sharp jolts of power, and ultra-capacitors such as those provided by Maxwell Technologies (MXWL) which are generally too expensive for grid based applications, but are beginning to find a niche in vehicles.  These technologies are not shown on the graph because I would need to expand the vertical axis multiple orders of magnitude upwards.

Among established technologies, Lithium-Ion [Li-ion], Nickel-Metal Hydride [NiMH] and Lead-Acid [PbA] batteries perform acceptably in remote grid stability applications where few other options exist, but all are eclipsed by the low cost and effectiveness of Demand Response. Demand Response is a suite of technologies which allow the utility to ask energy users to reduce their energy usage when the utility's generation capacity has trouble meeting current demand.  Like transmission, but unlike batteries, flow batteries, thermal storage, PHES, or CAES, the electricity storage provided by demand response technologies is virtual: when a customer temporarily turns up the thermostat in response to a signal from the utility, the use of energy to cool the building is delayed until after the event when the customer drops the thermostat back to its usual setting.  This avoids the cost of physical electricity storage, and makes Demand Response the most economical way to meet short-term spikes in energy demand (such as on hot summer days when air conditioning demand is high) and short term supply shortfalls, such as when power plants fail to come online at the scheduled time, or when power output suddenly drops.

The Bonneville Power Association's Hydropower Surplus

 Recently, a heavy snow pack and a quick melt have caused the Bonneville Power Association (BPA) to shut down wind power generation for several hours each night in the Colombia Gorge.  This has wind farm owners (who stand to lose Federal tax credits for energy production) heading to court.  BPA claims shutting wind farms is necessary, but wind farm owners claim that two inexpensive solutions exist to deal with the excess power: Unused transmission capacity to Canada and Southern California, and the possibility of paying customers to shift their energy consumption from daytime to nighttime hours.  Both these solutions would cost BPA money, while their current approach of refusing to accept wind power at night is free.  This is why BPA chose not to honor its contracts with wind farms. While this makes economic sense for BPA, it sets a bad precedent because it was poor planning on BPA's part to sign such contracts in the first place.  Should wind farm owners have to bear the financial consequences of BPA's bad planning?  If they had known that BPA would not honor those contracts, they might have spent their capital in other regions of the country where the most productive season for wind does not correspond with the most productive season for hydropower.

In my opinion, this ruckus is more about industry players jockeying for position, than about wind being too unstable for the grid or incompatible with salmon.  Both Demand-Response and Transmission are existing, cheap ways to deal with the potential power surplus, and no matter what the courts rule, Demand Response and High Voltage Transmission are both key in allowing wind to achieve its full economic and development potential.  In fact,  Tim Healy, CEO of Demand-Response firm EnerNOC in a recent interview, said his firm has been helping BPA shed some excess power duing nighttime hours by turning some of their customers equipment on when it might otherwise be off.

Investments

I've written extensively about transmission stocks in my "Strong Grid" series.  I included the two exchange-traded Demand Response companies, EnerNOC (ENOC), and Comverge (COMV) in my recent list of Ten Clean Energy Stocks I'd Buy Now, because their prices are looking very attractive.  I've already written about World Energy Solutions (XWES), and I spoke with EnerNOC CEO Tim Healy about his company last week in preparation for a this article.  I plan to follow that with articles about Comverge, and EnergyConnect (ECNG.OB), an OTC-traded demand-response provider.

DISCLOSURE: Long COMV, ENOC, BCON.

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.

July 04, 2011

Channel Problems Keep BIPV Out of the Money

Dana Blankenhorn

Building Integrated Photovoltaic (BIPV)  is often in the news.

There's a romance to it. Instead of having ugly solar panels on your house, your whole house could be an integrated solar system. It could use all the heat and light hitting it, from any angle, look like any other house, and pay for itself.

Pythagoras Solar, an Israeli start-up, says its solar windows, cells sandwiched in glass, can both lower heating and cooling costs while they generate electricity, paying for themselves in 3-4 years.

Pythagoras is private, but most publicly-traded BIPV plays are penny stocks, like QSolar an outfit I wrote about previously here. I don't recommend penny stocks as investments.

The closest to a pure play in this area that is publicly traded, by my reckoning, is Ascent Solar (ASTI). It's telling that they are not focused on the building trades, but on direct-sales to customers like the military, the auto industry, the space business, and custom manufacturers.

By contrast Konarka Solar
, whose Power Plastic is a very interesting BIPV product, is privately held with $150 million invested. Their product goes into tents and onto devices.

Suntech Power of China (STP) has gotten into the BIPV market with solar shingles. But notice that Dow Chemical, which announced its PowerHouse solar shingles to great fanfare last year, has yet to release them to the market.

Why has BIPV failed to launch? Distribution.

BIPV should be a natural home improvement offering. But Home Depot and Lowe's only sell products that are in scaled manufacturing and generate their own demand. Creating that demand starts with a long sales cycle, high margins, and a lot of hand-holding.

There are such businesses in the construction area. They are salesmen who call on architects, builders and people who specify what will go into new buildings. It's a long, hard slog to get people to sign on the dotted line. These outfits tend to be small and local.

The relative success of Toll Brothers, which created a “solar home” project called Toll Green with financing from SunRun last year, is one promising sign of what is to come. The growth of retailers such as Solar Home, which sell BIPV along with other energy-saving products, could also create a channel for the sector.

But here is the bottom line. Solar panel makers may have ugly products, but they have a distribution channel and available financing. Until such a channel develops in BIPV, it will be difficult to for the industry to launch.

No matter how exciting their product may be.

Dana Blankenhorn has covered business and technology since 1978. He covered the Houston oil boom of the 1970s, began making his living online in 1985, and launched the Interactive Age Daily, the first daily coverage of e-commerce, in 1994. He has written for a host of off-line and online publications including The Chicago Tribune, Advertising Age, and ZDNet. He has covered PCs, networks, telecommunications, cable technology, Internet commerce, the Internet of Things, Open Source and Health IT, He began covering alternative energy at his personal blog, Danablankenhorn.com, in 2007.

July 03, 2011

Energy Storage: A Turbulent Second Quarter Foretells Major Changes

John Petersen

The second quarter was a turbulent period for investors in the energy storage and vehicle electrification sectors. Johnson Controls (JCI), C&D Technologies (CHHP.PK) and the enchanted, mystical, gravity defying Tesla Motors (TSLA) were up a little. Everybody else was down as fear, loathing and uncertainty ran rampant and the congenital birth defects of EVs and batteries to power them proved to be insurmountable obstacles for all but St. Elon of Palo Alto, the patron saint of expensive toys.

While the second quarter wasn't pleasant for most of the companies I track, I draw some comfort from the timeless words of Barron Rothschild who advised 18th Century investors to "buy when there's blood in the streets, even if the blood is your own" and Warren Buffett who advised 21st Century investors to "be fearful when others are greedy and greedy when others are fearful." The following table tracks price performance in the energy storage and vehicle electrification sectors for the second quarter of 2011 and the twelve months ended June 30, 2011.

6.30.11 Performance.png

There were any number of events that troubled the market deeply during the second quarter including news that:
  • Th!nk Motors was heading into bankruptcy for the third and final time, which was disastrous news for its principal stockholder Ener1 (HEV);
  • Altair Nanotechnologies (ALTI) was having problems closing a strategic investment from Hong Kong;
  • Valence Technology (VLNC) was going to lose its sole supplier status at Smith Electric Vehicles;
  • The unburdened cost of goods sold at A123 Systems (AONE) kept climbing instead of plummeting;
  • Exide Technologies (XIDE) had decided to recognize $35 million of refinancing and restructuring costs in the fiscal year ended March 31st instead of carrying some of those costs into the current year;
  • China Ritar Power (CRTP.PK) had decided to terminate its SEC registration while other China-based companies with US listings wallowed in a fog of suspicion spawned by aggressive short sellers; and
  • Giggles over the prospect of using $1,000 per kWh batteries to store 10¢ per kWh electricity for the grid began to be heard from the utility sector.
My candidate for the most surprising event of the quarter happened a few days ago at JCI's 2011 Power Solutions Analyst Meeting. While JCI was the biggest recipient of Federal lithium-ion battery manufacturing support in the summer of 2009 when it shared a $299.2 million grant with Saft, JCI recently filed suit to dissolve that joint venture because Saft wants to stay focused on electric vehicles while JCI wants to look elsewhere for greener pastures. JCI is quick to observe that all automakers are developing a range of alternative energy powertrains, but it used the following graph to emphasize its view that the overwhelming majority of alternative powertrain vehicles produced over the next five years will use simple, cost effective and fuel efficient stop-start idle elimination systems.

6.27.11 5-year.png

It doesn't take much graph reading skill to see that cars with plugs wont even be speed bumps compared to the huge global market for stop-start systems.

As I review the stock price performance table I see a lot of risks and precious few opportunities. For reasons discussed in other articles I believe Ener1 is nowhere near done bleeding and Valence's market capitalization is unsustainable. While I'm not a fan of the lithium-ion battery producers, A123 is starting to look interesting because financing transactions that were fundamentally positive beat its market price into the ground.

Active Power (ACPW) has backed up a little and is now a mere 238% gainer since I recommended it at $0.72, but its management is executing well and there seems to be a lot more room to the upside.

In the lead-acid group most analysts are looking for a 25% upside in JCI, but I think the real sleeper stock is Exide. They bit a bullet and took about $35 million of one time charges in the last quarter of the fiscal year just ended, but that merely cleared the decks for future profitability. More importantly, they provided revenue and operating earnings guidance for the first time since emerging from bankruptcy. If their guidance is even close to accurate, it will come as a huge surprise to market watchers who got used to nothing but pain as Exide completed a multi-year restructuring. I won't be surprised by a double or even a triple over the next year.

I'm more confident than ever in Axion Power International (AXPW.OB) because the quirky market dynamics that forced the price down while the company was announcing world-class relationships with giants like Norfolk Southern and BMW seem to be coming to an end. The expected announcement of an important DOE grant for an Axion led team that includes a major US automaker, a research university and a national laboratory may be a tipping point. The DOE had planned to make the announcement last week and is apparently running late. Depending on which rumor you choose to believe, the news should be forthcoming sometime in the next two to four weeks.

For the last three years I've been cautioning readers that the market was acting like a voting machine in response to hype and that once reality set in, the lead-acid sector would represent unparalleled opportunity for long-term growth. The group has done well so far, but the real fun is just getting ready to start. Investors are finally realizing that the alternative energy revolution will take decades to unfold and the early winners will offer cheap solutions that conserve energy instead of cool solutions that waste huge volumes of non-ferrous industrial metals in the name of conserving a little oil.

In early March I created two hypothetical portfolios and funded each of them with $25,000 imaginary dollars. My long fuel efficiency portfolio that includes JCI, ENS, MXWL, XIDE and AXPW is down 10% at $22,502. In comparison, my short vehicle electrification portfolio that sold ALTI, AONE, HEV, TSLA and VLNC is up 35% at $33,906. My plan is to let both hypothetical portfolios run till September 6th and then prepare a six-month report.

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

July 02, 2011

10 Clean Energy Stocks for 2011: Q2 Update

Tom Konrad CFA

Some investors buy clean energy stocks because it's the right thing to do, others because we know that the diminishing availability and increasing environmental impacts of traditional fuels will eventually force society to adopt more sustainable solutions.  Cartoonist Scott Adams says we're all wrong, and we should invest in companies we hate

Although Adams' column is meant to amuse, rather than as investment advice, it's funny because he touches on two very important truths about investing.
  1. Although a few investors can outperform the market over the long run, the vast majority can't, and no one consistently produces superior results, year in and year out.  (One exception was Bernie Madoff, who was known for his unusually steady returns. We all know how that ended.)
  2. Investing because it makes you feel good is a fairly reliable way to get into trouble in the stock market.  If you are buying a stock because it makes you feel good, you're probably not alone.  All those investors buying to make themselves feel good are probably driving the stock price up beyond what the company is worth, which will be a long term drag on returns.
Both those truths are on display as I look back on the first half performance of my annual list of ten clean energy stocks.  After three years in a row of outperforming my clean energy benchmark, my winning streak seems likely to end in 2011.  So far this year, my benchmark PowerShares Clean Energy (PBW) ETF is down 13.4% for the year, while my ten picks are down considerably more, at 25.2%.  Meanwhile, the broad market was up 5.2%, as reflected in the Russell 2000 index.

The pattern of losses, while in part due to bad luck, also comes from ignoring principle #2: I included too many stocks I liked, despite the fact that they were fairly expensive on conventional measures. 
10 for 11 H1.png
The Good
 
The top performing stock in the list is IT solutions provider Telvent Git S.A. (TLVT), which I included in the list because of its smart grid and smart transportation solutions.  Energy management leader Schneider Electric (SBGSF.PK) has made an offer of $40 per share for Telvent which looks likely to go through.  For the second half of 2011, I will be replacing Telvent in the list with bus manufacturer New Flyer (NFI-UN.TO/NFYIF.PK) which is currently quite cheap because of investor uncertainty surrounding a change in the company's structure.  Although I thought New Flyer was too expensive (at $11.34) to include in this list at the end of last year, I now think it's a steal at $8.  Hence, for every share of Telvent in my model portfolio, I will replace each share of Telvent with 4.84 shares of New Flyer.  (4.96 = $38.90/$8.03, the ratio of the closing prices of New Flyer and Telvent on 6/30/11.)

The Boring

The two other winners are sustainable forestry company Potlatch Corp. (PCH), and environmental services company Veolia Environnement SA (VE).  Both produced modestly positive total returns, and seem excellent examples of how boring companies often do well.

Two companies that are down for the year, but roughly in line with the sector as a whole are Geothermal Heat Pump (GHPs) stock Waterfurance Renewable Energy (WFI.TO/WFIFF.PK), and Electric Transmission and efficient vehicle conglomerate CVTech Group (CVT.TO/CVTPF.PK).  CVTech seems to be down on lower first quarter revenues (despite higher profits.)  The revenue drop seems to be mostly weather-related, and the company's pipeline of work is healthy, with $14 million in new contracts being announced in June.

Waterfurnace stock is down from the start of the year because of narrowing margins despite increased sales in 2010.  Commodity prices have driven up component costs and the competitive marketplace for GHPs did not give Waterfurnace the market power to pass those costs on to customers.  Sales were down in Canada last year because of the end of that country's EcoEnergy Retrofit program.  That program will be re-instated this year, but so far it has only been renewed for one year, so the boost to sales will not be long term unless it is extended again.  The US GHP tax credit is currently slated to expire at the end of 2016, but given the current deficit reduction talks in Washington, this could conceivably be terminated prematurely.

I think all of these seem worth holding on to, and I've been buying more of CVTech and Waterfurnace at the recent lower prices.

The Bad

The two demand response companies, Comverge (COMV) and EnerNOC (ENOC) have been a big disappointment.  I've been trying to get a handle on why the stocks are down so much this year by doing a series of interviews with management of companies in the broader Energy Management industry.  So far I've written articles on World Energy Solutions (XWES) and EnerNOC.  When I interviewed EnerNOC CEO Tim Healy, I asked him what he thought.  He said, "I think people are overlooking the story for the next couple quarters," and that he has tremendous confidence about EnerNOC's medium to long term. 

I'll be talking with Comverge CEO Blake Young next week, and I intend to ask him the same question, but I think Healy got at the real problem: When I added these stocks to the list last December, I (like most investors at the time) was paying too much attention to the story of Demand Response, and not enough attention to the next few quarters.  The pendulum of investor attention tends to swing back and forth between the long term story and short term profitability, and the best time to buy a great story stock is when the company is being valued on current profitability.  So now is probably a good time to buy these two, if you do not already own them.

The Ugly

For my two geothermal picks, the first quarter had bad news for Ram Power (RPG.TO, RAMPF.PK), and Q2 held bad news for Nevada Geothermal Power (NGLPF.OB, NGP.V).  The former was poor drilling results, and the second was worse than expected resource productivity at Nevada Geothermal's flagship Blue Mountain property.  Although geothermal drilling is extremely risky, this was far more than the usual quota of significant bad news for the stock, and both have sold off sharply.  Both events significantly impacted the intrinsic value of the companies, bit I feel that this has been more than reflected in each stock's share price, as I discussed in May.

American Superconductor Corporation (AMSC) also had bad news in Q1, when they reported problems with their main customer Sinovel Wind Group (601558.SS).  I discussed this situation in detail in a series of three articles, the first exploring what Sinovel's action might mean, the second looking into Sinovel's motivations and speculating as to Sinovel's future actions, and the third an attempt to value AMSC given all the uncertainty in the midst of a delayed annual report filing.  At the current price of around $9 AMSC seems cheap, but while I have been tempted at several stages in this process to speculate on the stock, I decided in the end to stay out.  One thing that seems fairly certain was that AMSC management was not being completely frank about their relationship with Sinovel over the last half of 2010 and 2011 in that they were not discussing Sinovel's unwillingness to pay for product in a timely fashion.  Perhaps they were deluding themselves as well as investors, but in any case I've decided to stay away from a stock where I know I can't trust what management is telling me.

At $9, AMSC is so cheap right now that I'm going to leave it in my model portfolio, but I hope any readers who bought it because they were following my annual ten picks sold it around $12, the price at which I suggested getting out in May.

Conclusion

It's been a miserable six months for Clean Energy in general, and my picks in particular, and I don't see many signs of markets reversing the trend yet.  On the other hand, prices of many stocks are starting to look like good values, so patient value investors should seriously consider moving some money into the sector.  These ten stocks (minus American Superconductor) might be a good place to start.  Another would be my recent overlapping list of ten clean energy stocks I'm buying now

Sierra Club/Green Alpha Portfolio manager Garvin Jabush thinks Wall Street has irrationally turned its back on solar, so investors might also consider solar, although many companies will find their earnings undermined by the current PV module supply glut.  The question is, is Wall St getting carried away (on the downside) with the PV supply glut and falling subsidies story, and have prices already fallen far enough to discount all the future bad news?

Perhaps the group of investors who should be putting the most money into clean energy right now should be the growing chorus of high-profile Republicans who deny that climate change is even happening.  After all, didn't Scott Adams say that we should invest in what we hate?

DISCLOSURE: Long NFYIF,TLVT,RAMPF,NGLPF,WFIFF,CVTPF,COMV,ENOC

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

July 01, 2011

Growing Clean Energy Through Business Model Innovation

David L. Levy

Boston-based Zipcar (ZIP) raised $174 million from its Initial Public Offering in April 2011. It already has operates in 14 big cities and 230 college campuses around the United States, Canada and the UK, and is planning to use the new capital for market expansion. Zipcar is not a high tech business, and its success is not due to sophisticated technological innovation; rather, it’s an example of business model innovation. Zipcar reinvented the traditional car rental business by simplifying and reducing the costs for short-term rentals, and rebranding the service as green car sharing. They developed a distributed model of rental locations, an annual membership system, an all inclusive by-the-hour pricing structure, and online booking. Together these greatly reduce the cost and time needed to rent a car, while maximizing convenience. Indeed, most of the people I know who use Zipcar’s service are not ardent environmentalists, but enjoy the hassle-free approach and the easy parking.

While public policy and the media tend to focus on technological innovation as the key to addressing climate change and boosting clean energy, business model innovation (BMI) offers a path to rapid deployment of existing technologies. The concept was popularized and given its current acronym by Mark Johnson, Clayton Christensen, and Henning Kagermann in their Dec. 2008 Harvard Business Review article “Reinventing Your Business Model.” They point out that “Low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value of all carriers. Fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation.”

The potential for BMI in the development of the cleantech sector is only just beginning to be appreciated. Rob Day, a partner with Black Coral Capital in Boston, recently wrote about a new wave of startups that run lean and require less capital to scale up, so are less likely to founder in the infamous Valley of Death: “Some of this next wave of startups will be hardware, but many will be software and/or services…  Business model innovation will often be stressed over technological innovation.  They will sometimes marry energy-related market opportunities with Web2.0 and social media business models and platforms.”

A closer look reveals that BMI holds particular promise for unlocking the potential of clean energy and promoting economic competitiveness, investment and employment in high-cost regions. In addition to helping keep startups lean and capital efficient, BMI can develop systemic solutions that overcome some of the many market failures and institutional barriers to energy efficiency and clean energy. McKinsey’s famous Marginal Abatement Curve heralds the good news that about one-third of needed emissions reductions appear to have positive ROI with current technologies. The bad news is that about one-third of needed emissions reductions appear to have positive ROI – yet the necessary investments are not happening, due to these many hurdles. As with Zipcar, BMI provides ways to monetize the ancillary benefits of cutting emissions, and create business models that focus on features that people are willing to pay for.

BMI-based cleantech businesses are also more likely to keep jobs in high wage regions such as the US Northeast and California. Clean energy manufacturing jobs have been moving astonishingly quickly to China, even while there is still rapid technological evolution. Evergreen Solar (ESLR) and A123 Systems (AONE), both based here in Massachusetts, are cases in point. Business model innovation often focuses on software and services, developing strong relationships with customers and building on existing capabilities in the region, so jobs are more likely to stay local. These factors also help to create barriers to entry, protecting the business model. Zipcar’s network of parking spots, for example, negotiated over several years with hundreds of companies and local authorities, would not be easy to replicate.

Better Place is a powerful example of how BMI can overcome systemic barriers to technology deployment. The company is developing a national replaceable battery infrastructure for pure electric vehicles in Israel, Denmark, and elsewhere that transforms the business model for car ownership and fuel supply. Consumers buy a car without the expensive batteries, then contract with Better Place for battery replacement as a service, which is done in just a few minutes at a network of service stations. This model overcomes the physical limitations of batteries, in terms of range and charging time, and dramatically reduces the cost of new cars for consumers. As with Zipcar, governments are willing to subsidize the operation because it contributes toward reducing congestion and greenhouse gas emissions – again, monetizing ancillary benefits.

Energy efficiency and smart grid provide many opportunities for BMI. EnerNOC’s(ENOC) core business model, for example, is demand response and energy management, using sophisticated software and remote monitoring and control. Enernoc links the utilities, who are willing to pay for energy efficiency and for peak-period demand reduction, to a network of customers. Energy service companies like Ameresco (AMRC) are increasingly offering turnkey projects and performance contracts that reduce risks, capital requirements, and uncertainty for customers. Similarly, companies like Nexamp, Tioga Energy and Borrego offer renewable power purchase agreements based on DBOOM services – a complete package where the company designs, builds, owns, operates and manages the renewable energy installation, while the customer only pays for power.

Not surprisingly, then, these BMI-based companies are among the fastest growing businesses in the cleantech sector. Kevin Doyle, a Principal of Green Economy and Co-Chair of the New England Clean Energy Council’s Workforce Development Group, has pointed to the large number employment opportunities at a range of cleantech companies, a number of which are in energy services and software. As a result, they are not just looking for engineers, but also for a range of business and professional skills and expertise – which highlights the purpose of our new clean energy programs at the University of Massachusetts, Boston!

David L. Levy is Chair of the Department of Management and Marketing at the University of Massachusetts, Boston, where he teaches courses in international business, strategy, and business and climate change. He recently founded and is now Director of the Center for Sustainable Enterprise and Regional Competitiveness, which engages in research, education and outreach to promote a transition to a clean, sustainable, and prosperous economy. David’s research examines corporate strategic responses to climate change, the growth of the clean energy business sector, and the emergence of carbon disclosure as a form of governance. He was recently PI on a grant from the Massachusetts Clean  Energy Center to develop sustainability education programs. He edits the blog Climate Inc. on business and climate change.


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