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September 30, 2011

A New Way to Skin the Renewable Energy Cat

Tom Konrad CFA

It's not often that I come across a new type of renewable energy and think, "This could really work."  But that's what I thought when I heard the concept for the downdraft tower proposed by Clean Wind Energy Tower (CWET.OB.)

First, a couple caveats.  The concept is not new, it's been around 25 years in draft form.

The physics is simple.  Build a very tall, hollow tower in a hot, dry climate; cool the air at the top with a mist of water (even salt water will work), and capture the resulting energy from the downdraft with an array of wind turbines arranged around the bottom.  Most of the water is condensed at the bottom of the tower, and (since it has been effectively distilled) used as fresh water, a valuable commodity in the dry regions that are appropriate for downdraft towers.

Downdraft Tower.PNG
Because the tower needs to be extremely tall in order to make the downdraft strong enough to generate electricity economically, the tower also features vanes designed to direct prevailing winds down to the base to be captured by the same turbines.

The company expects that the combination of generation from prevailing winds and the induced downdraft wind will combine to give the tower a capacity factor in excess of 60%, much higher than typical solar or wind capacity factors, while most of the power will be produced in the afternoon and evening during spring, summer and fall, meaning that this power is likely to be more valuable to utilities than either wind or solar photovoltaic. 

The reason no one has attempted to build a downdraft tower before is that we did not have the technology to build a tall enough tower.  Now we do.  In particular, the Kroll self-erecting cranes used to build such skyscrapers as the Burj Dubai, along with other construction methods used to keep such extremely tall skyscrapers upright in strong winds and earthquakes.

I spoke briefly with Ron Pickett, CWET's President and Stephen Sadle, the firm's Chief Operating Officer at the Modern Energy Forum in Denver in early September, and I got the impression that the two men are used to success.  They, and two others of their team have worked together on four successful start-ups, from telemedecine to the incineration of municipal solid waste recycling.

This time they're thinking bigger: The commercialization of a new clean energy technology.  Although they are careful to stress that they are simply combining and commercializing proven technologies, I find it hard to believe that they will be able to raise the funding necessary to build their demonstration tower in the current environment.  Bond investors are generally unwilling to fund anything that seems even remotely new, a problem that might have potentially been overcome  by a program like the DOE loan guarantees, but it's unlikely that anything resembling that program will be authorized in the next few years considering the current Solyndra brouhaha.

I hope I'm wrong and they do get the money they need to succeed, since this downdraft tower concept has the potential to be a valuable addition to our clean energy arsenal, but at this point, I can't recommend small investors buy the stock.

DISCLOSURE: No Position.

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.

September 29, 2011

Fulcrum Bioenergy’s $115M IPO: The 10-Minute Version

Jim Lane

The first zero-cost feedstock biofuels company comes to the public markets with its IPO.

Like to see how this “Back the the Futuresque” technology unlocks value by converting household garbage into transportation fuel?

Here’s our 10-minute version of the IPO from Fulcrum Bioenergy.

In California, Fulcrum Bioenergy has filed an S-1 registration statement for a proposed $115 million initial public offering. The number of shares to be offered and the price range for the offering have not yet been determined. The company proposes to list under the symbol FLCM. UBS Investment Bank is the underwriter for the offering.

The company is currently ranked #45 in the world in the 50 Hottest Companies in Bioenergy. The rankings recognize innovation and achievement in fuels and are based on votes from a panel of invited international selectors, and votes from Digest subscribers.

Fulcrum becomes the 12th company to file for an IPO in the industrial biotech boom, which began with a successful listing on the NASDAQ by Codexis (CDXS) in 2010. IPOs by Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), and KiOR (KIOR) have followed. In recent months, PetroAlgae (PALG.OB), Myriant, Ceres, Genomatica, Mascoma and Elevance have also filed S-1 registrations for proposed IPOs.. Three in the past week, in fact.

Here’s the S-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Fulcrum model, opportunities for the intrepid investor, and some risks which we have translated from the ancient and original SEC into modern English.

Company Overview

Fulcrum produces advanced biofuel from garbage. Its business model combines a proprietary process and zero-cost municipal solid waste, or MSW, feedstock to provide them with what they term “a significant competitive advantage over companies using alternative feedstocks such as corn, sugarcane and other sources of biomass in the production of renewable fuel”. According to the filing, they have entered into long-term, zero-cost contracts for enough MSW located throughout the United States to produce more than 700 million gallons of ethanol per year; the core element of their technology, they confirm, has been demonstrated at full scale.

They intend to use a substantial portion of the IPO proceeds of this offering to fund the construction of its first commercial-scale ethanol production facility, the Sierra BioFuels Plant. At this facility, they expect to produce approximately 10 million gallons of ethanol per year at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits.

For a company that believes in waste, they sure don’t believe in large overhead. It’s a poster child for lean management in the development of advanced bioenergy. Employee headcount is just 17, at IPO time, with just 2 in research and development.

Development costs to date: net losses of $12.4 million, $16.5 million, and $18.0 million for 2008, 2009 and 2010, respectively and $13.8 million for the six months ended June 30, 2011. Total: $63.8 million.

The Technology

From the S-1: “In collaboration with a leading global engineering, consulting and construction company, we conducted an extensive review of more than 100 technologies and processes for producing large volumes of advanced biofuel and concluded that thermochemical technologies offered the most commercially viable solution. Based on this review, we developed a two-step process that consists of gasification followed by alcohol synthesis to produce ethanol from MSW. For the gasification step, we worked with InEnTec LLC, or InEnTec, to combine two gasification technologies into a single energy-efficient process to produce syngas from MSW. For the second step, we worked with Saskatchewan Research Council, or SRC, and Nipawin Biomass Ethanol New Generation Co-operative Ltd., or Nipawin, to integrate their thermochemical catalyst into our proprietary alcohol synthesis process to convert syngas to ethanol.”

The Market

The market-limiting factor for this biofuels process is not the overall demand for transport fuel, or ethanol, but the availability of MSW as a feedstock and the availability of sufficient tipping fees to ensure that arrival of zero-cost or negative-cost feedstock at the manufacturing facility gate.

From the S-1: “According to the EPA, annual MSW generation in the United States has trended upwards over the past several decades, increasing from 88 million tons in 1960 to 243 million tons in 2009. On average, each person in the United States generates approximately one ton of MSW per year. More than 85% of the MSW generated in 2009 was comprised of carbon- and hydrogen-based organic materials with latent energy content.

Waste collectors are charged fees for landfill waste disposal, which are referred to as tipping fees. According to the Waste Business Journal, the national average for tipping fees increased from $28.52 per ton in 1991 to $45.62 per ton in 2011, with considerably higher tipping fees in more densely populated regions.”

Based on the Fulcrum yields of 50 gallons per ton of MSW, the addressable US market is 12.15 billion gallons of ethanol.

The Strategy

Commence production at Sierra. They plan to commence construction of the first commercial-scale ethanol production facility by the end of 2011, with ethanol production expected to begin in the second half of 2013, at a total capacity of 10 million gallons per year.

Expand production capacity. They will use the the modular design of the technology to construct new, larger facilities quickly and efficiently, with future production capacity at 30- and 60-million gallons per year at future facilities. Such larger facilities would also lower both the capital cost per gallon and the fixed cost component of per gallon production costs (to as low as $0.90 per gallon), enhancing the economics.

Execute fixed-price offtake and hedging contracts. For each facility, we intend to enter into physical and/or financial fixed-price arrangements to lock in sufficient economics to cover a substantial portion of our fixed costs, including debt service.

Secure additional MSW contracts. Longer term, they intend to expand our business by entering into additional MSW feedstock agreements to increase the amount of resources we have available to supply our commercial facilities.

Explore new market opportunities. They may license the technology to third parties and/or partner with large strategic players, such as major oil and chemical companies, outside of the base model to build, own, and operate facilities within the United States.

The Commercialization Plan

Coming online in 2013 and located in the Tahoe-Reno Industrial Center approximately 20 miles east of Reno, Nevada, the cost of constructing the 10 million gallon Sierra project is estimated at $180 million, which will be financed through existing equity capital and proceeds from this IPO.

The State of Nevada currently has a demand for ethanol of more than 50 million gallons per year. Today, there are no ethanol producers in the state of Nevada, nor to our knowledge are there any slated for development other than Sierra.  The State of California currently has a demand for more than 950 million gallons of ethanol per year and imports 80% of its total ethanol supply .

Future locations will have capacities of 30 or 60 million gallons, and unsubsidized cash operating costs of less than $0.90 per gallon.

They have identified more than 20 potential site locations across the United States for future development, located in the 19 states in which they have contractually secured zero-cost MSW. They believe opportunities may exist to co-locate our facilities at sites with significant infrastructure in place, such as refineries, which could lower our per-gallon capital costs.

Fulcrum as it sees itself:  11 Competitive Strengths

Zero cost feedstock. We have executed feedstock contracts with some of the largest waste service companies in the United States that will supply us with sufficient feedstock, at zero cost, to produce more than 700 million gallons of advanced biofuel annually for up to 20 years. Our use of MSW at zero cost removes the largest, and most volatile, component of traditional renewable fuels production cost from our cost structure. We believe this provides us with a significant cost advantage over competitors paying for feedstock or utilizing purpose-grown feedstocks.

Transportation advantage. Significant volumes of MSW are generated near metropolitan areas, providing us with a transportation advantage compared to feedstocks harvested or grown in rural areas that must ultimately transport either the feedstock or the fuel to metropolitan areas.

Reliable supply. The United States generates more than 243 million tons of MSW annually, the majority of which is rich in organic carbon, providing sufficient feedstock for our process to produce approximately 12 billion gallons of biofuel annually.

Established infrastructure. By using MSW, we benefit from existing infrastructure for collection, hauling and handling. No new logistical networks would be required to transport the feedstock to our facilities.

No competing use. We produce advanced biofuel from a true waste product that has no competing use, is not sought after by food producers and has no impact on food prices.

Clear path to commercialization. Our first commercial-scale ethanol production facility is expected to begin production in the second half of 2013. We expect to construct additional commercial-scale production facilities across the United States that will be supplied with MSW under our existing contractual arrangements with Waste Connections, Inc. Our modular plant design not only significantly reduces scale-up risk, but will also allow us to construct new facilities and deploy our capital efficiently to capture a meaningful share of the ethanol market in the United States.

Proprietary process not dependent on yield improvement. Our process integrates a catalyst that converts syngas into ethanol, and we have demonstrated the success of this process at full scale at our demonstration facility. We believe our process will produce ethanol at net yields of approximately 70 gallons per ton of MSW, which we believe is sufficient for us to operate profitably in the absence of economic subsidies.

Business model built for long-term and sustainable profitability. We do not rely on government subsidies to make our product commercially viable. While we benefit from policies such as RFS2 and the LCFS, and will access incentives available for the production of our advanced biofuel, we expect our product to be sold on a cost-competitive basis with existing transportation fuels without any reliance on subsidies.

Flexible production process. We have designed our proprietary alcohol synthesis process to give us the flexibility to produce alcohols other than ethanol and take advantage of opportunities in other renewable fuels and chemical markets.

Benefits for our customers. Zero-cost feedstock; stable cost structure.   Access to domestically-produced advanced biofuel.  Large-scale development program.

Benefits for our MSW suppliers. A cheaper source of waste diversion than traditional landfill disposal. Extend landfill life at existing capacity levels.  Avoidance of methane gas emissions.

The Risks, Translated from SEC-speak

In SEC speak: We are a development stage company with a limited operating history, and we have not yet generated any revenue. We currently expect to begin constructing our first commercial ethanol production facility, the Sierra BioFuels Plant, or Sierra, by the end of 2011, and to begin production in the second half of 2013.

In English: We ain’t sold nuttin’, honey. Cause we ain’t built it yet.

In SEC speak: To date, the components of our process have been demonstrated or used separately, but we have not previously demonstrated the processes on a fully-integrated basis at a single location or on a commercial scale.

In English: “Salagadoola mechicka boola bibbidi-bobbidi-boo. Put ‘em together and what have you got? Bibbidi-bobbidi-boo.”

In SEC speak: We are currently in the process of negotiating a term sheet with the U.S. Department of Energy, or DOE, for a loan guarantee to fund a portion of the construction costs associated with Sierra. As a part of the loan guarantee process, the DOE and its independent consultants conduct due diligence on projects which includes a rigorous investigation and analysis of the technical, financial, contractual, market and legal strengths and weaknesses of each project.

In English: S-O-L-Y-N-D-R-A.

In SEC speak: In order to produce sufficient yields of ethanol to make our facilities economically viable, we will require large volumes of MSW feedstock. Though we have entered into long-term MSW feedstock supply agreements with waste companies to provide enough feedstock to produce more than 700 million gallons of ethanol annually at zero cost, deliveries by such companies may be disrupted due to weather, transportation or labor issues or other reasons outside of our control.

In English: “Keep America Beautiful” – throw lots and lots of litter in the general direction of Lake Tahoe, please.

In SEC speak: We will also apply to the State of California to have our ethanol certified under California’s Low Carbon Fuel Standard, or LCFS, which would make our ethanol eligible for the carbon intensity reduction credits that will be available under this program for reducing the carbon intensity of California’s transportation fuels.

In English: Not that California might actually pull the rug out from underneath any biofuels venture. Nah, never happen.

In SEC speak: As of June 30, 2011, our executive officers, directors and beneficial holders of 5% or more of our outstanding stock owned almost all of our outstanding voting stock. As a result, these stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.

In English: Ah, Skywalker, you will not be a full member of the Jedi Council at this time.

Financing to date

In 2007, James A. C. McDermott, the Managing Partner of USRG Management Company had contributed or made commitments to contribute $1.0 million to the LLC, for  6,741,573 shares of Series A convertible preferred stock.

In August 2007 and February 2008, they sold an aggregate of 14,000,000 shares of our Series B convertible preferred stock at $1.00 per share for an aggregate purchase price of $14.0 million.

In October 2008, they issued two Senior Secured Convertible Notes,  to USRG Holdco III and  Rustic Canyon Ventures III, with an initial maximum principal amount of $5.0 million for a maximum aggregate principal amount of $10.0 million, which accrued interest at the rate of 8% per year

In March 2010, they issued two new Senior Secured Convertible Notes to the same parties – the 2010 USRG Note and the 2010 Rustic Canyon Note, with an initial aggregate principal amount of $4.0 million.

In June 2010, the 2008 USRG Note and the 2008 Rustic Canyon Note were converted into 13,450,762 shares of Series B-2 preferred stock, in exchange for the conversion of $26.9 million in principal amounts and accrued interest owed on the notes.

In September 2011, the 2010 USRG Note and the 2010 Rustic Canyon Note were converted into 12,924,605 shares of Series C-1 preferred stock at $2.67 per share,  in exchange for the conversion of $32.5 million aggregate principal amount of our senior secured convertible notes and $2.0 million of accrued interest.

Also in September 2011, they sold, or expect to sell prior to completion of this offering, an aggregate of 29,216,738 shares of our Series C-1 convertible preferred stock at $2.67 per share for an aggregate purchase price of $78.0 million, including the conversion of the 2010 USRG Note and the 2010 Rustic Canyon Note.

Fair Valuation by the board of directors

November 1, 2007: $0.24

April 19, 2010: $0.41

June 27, 2011: $1.53

The bottom line

This is the first of the waste-to-biofuels companies to come to the public markets, which elevates the opportunity and risk for the investor in the absence of a benchmark IPO offering.

The company has spent $63.8M to date bringing itself to the cusp of commercialization, which is relatively cheap as advanced biofuels goes. Several companies have filed IPOs after racking up more than $100M in development costs to the point of constructing their first commercial facility.

Like most others (but not all) in this IPO wave, Fulcrum comes to the market with no revenues, and as a financing event rather than a liquidity event for existing shareholders. Having had most of 2011to raise capital, they have (after completing their 2011 pre-IPO financing) $49M in the bank as of June 30th.

Attractive aspects of this filing: zero-cost, locked in feedstock. Assuming we believe the cost estimates from the demonstration-level work that has proceeded to date, there’s not much that can go materially wrong in terms of the proposed production cost of $1.30 per gallon for ethanol.

Unattractive aspects: aside from the absence of a full-scale demonstration, there’s a high capital cost for this process (at the Sierra facility) of $18 per gallon of capacity – that’s more than nine times the cost of building out corn ethanol at scale – though corn ethanol producers (buying on the spot market) are looking at feds rock costs in the $2.50 per gallon range. Even assuming zero-debt and a 20-year life for the facility, the amortized capital cost of this facility will raise the overall fixed production cost to $2.20 per gallon on an unsubsidized basis, which leaves little room for profit at current spot ethanol prices of $2.50 per gallon and exposed at the CBOT current October 2012 ethanol futures price of $2.12 per gallon.

On the other hand, with its 75 percent GHG reduction, Fulcrum will not be competing head-to-head against, say, corn ethanol, but rather be competing within the cellulosic biofuels pool, which in the RFS is restricted to technologies that produce a 60 percent or higher GHG savings. There, the prices (given tight supply for some time to come) are expected to be higher.

Pools of risk: Aside from the aforementioned risks associated with the Sierra project, we have a sketchy, but not contracted out, pathway to future facilities.

The complete S-1 registration statement is here.

Jim Lane is the Editor and Publisher of Biofuels Digest.

September 28, 2011

US Still Net Exporter of Solar to China

by Clean Energy Intel

Following the announcement that CIGS solar start-up Solyndra had declared Chapter 11, I published an article suggesting that although this was clearly not good news, the overall solar sector in the US was still in relatively good competitive shape, with a healthy trade surplus with the rest of the world of some $1.9bn. You can read my original article here.

Although competition from China is intense, particularly in low-cost module production, the US remains a strong player across the supply chain as a whole - particularly in polysilicon production and the manufacture of the capital equipment required to make solar products. And China is the key customer in both of these areas.

As an update on this, GTM Research has provided a very interesting chart breaking down the components of the bilateral trade balance between the US and China itself - shown below:



All data relate to 2010. As you can see, the net bilateral trade surplus appears to be between $247m and $539m in favor of the US. The most significant flows in favor of the US firstly relate to solar capital equipment, of which the US exports between $708m and $1bn to China. Secondly, exports of polysilicon for solar use come in at around $873m.

Strong US companies like First Solar (FSLR) and SunPower (SPWRA) continue to offer good competition to Chinese players in modules in the rest of the world. And they are of course the leaders in the burgeoning US Utility Scale Solar market. However, as one would expect, actual module sales into China have been tiny - at only $17m.

As I argued in my previous article, mentioned above, the long-term health of the solar sector greatly depends on its ability to get costs down towards grid parity. In a pragmatic sense, a combination of US innovation and low cost Chinese manufacturing may well be the best way to get there. What is important is that during this process of creative destruction, the US maintains a healthy trade surplus in solar.

From an investment perspective, let me simply repeat the conclusion from my last article:

".....this probably means that in the process ahead towards a very competitive lower cost, higher volume market it's probably best to stick with the main low-cost Chinese players such as Suntech Power (STP), Trina Solar (TSL), Yingli Green Energy (YGE) and JA Solar (JASO), alongside US players with a strong market position such as First Solar (FSLR) and SunPower (SPWRA). The period ahead could be very difficult for second tier players everywhere.

Having said that, I currently have no positions in either solar or clean energy as a whole and will maintain that position until the macro environment becomes clearer - for more detail see here".

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

September 27, 2011

Plug-in Vehicles Have Been Weighed in the Balance and Found Wanting

John Petersen

A comment from maxkilmachina recently drew my attention to an article in the Proceedings of the National Academy of Sciences titled Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits. While it costs $10 to download the article and supporting documentation, I believe it's worthwhile for all serious energy storage and electric vehicle investors because the underlying study is the first comprehensive total cost of ownership analysis I've seen that includes both direct end-user costs and identifiable externalities like emissions, military and other indirect costs arising from oil consumption in the US. While all studies leave room to quibble, the bottom line conclusion is clear:

"[T]oday’s HEVs and PHEVs with small battery packs offer more emissions reduction and petroleum displacement per dollar spent with less of a need for new infrastructure and with lower uncertainty about future costs ..."

The detail is a bit dense for an investment blog, but two summary graphs from the article go a long way toward reducing glittering generalities to hard economics. They summarize the direct and indirect costs for five types of vehicles under three possible scenarios. The term CV refers to conventional vehicles with internal combustion engines. The term HEV refers to conventional hybrid electric vehicles. The terms PHEV20 and PHEV60 refer to plug-in hybrids with electric drive ranges of 20 km and 60 km, respectively (12.5 and 37.5 miles). The term BEV240 refers to a battery electric vehicle with a 240 km range (150 miles).

The first graph deals exclusively with unpriced externalities including emissions, military and global supply and demand impacts of US oil consumption. While bigger battery packs offer modest advantages in the wildly optimistic case of a zero emission grid, they're not as cost effective as HEVs and PHEV20s in either real world scenario.

9.27.11 Externalities.png

The second graph ties it all together in a unified total cost of ownership analysis that accounts for all direct and indirect costs including purchase price, fueling, maintenance and unpriced externalities. Once again, bigger battery packs offer modest advantages in the Pollyanna case but are 50% to 100% more expensive in both real world scenarios.

9.27.11 TCO.png

The message for investors is clear. When you cut through the hand waving and glittering generalities plug-in vehicles with big batteries have been weighed in the balance and found wanting. They promise the worst possible combination of facile emotional appeal and dismal economics. They can only be attractive to the philosophically committed or the mathematically challenged. As the ugly truth becomes apparent to congressmen, businessmen and consumers that are staggering under crushing debt burdens and facing an immediate need to balance revenues and expenses, the hype induced euphoria over companies like Tesla Motors (TSLA) that make plug-in vehicles and battery companies like A123 Systems (AONE) and Valence Technologies (VLNC) that make big battery packs for toys must fade because immutable laws of economic gravity won't permit any other outcome.

As a child of the 1950s I once believed Superman could leap tall buildings in a single bound. As a mature adult of the 2010s I know the only way to reach a mountaintop is by climbing a slippery slope one step at a time. When I consider the magnitude of the economic sophistry underlying current government policy, I'm not sure that I'd want to be a Congressman or Senator standing for election next year and explaining how subsidized toys for the politically favored eco-elite benefit the voting public. Green jobs that cost consumers money instead of saving it simply aren't worth having.

I'm a securities lawyer, accountant and investment writer, not a futurist. My only concern is whether a particular company will prosper over the next five years or struggle. Anything beyond that is unknown and to my way of thinking largely unknowable. While investors are constantly bombarded with shimmering mirage-like visions of what might happen in a decade or two, they're largely ignorant about the concrete steps automakers are taking today to improve fuel economy and reduce emissions now. The following graph is a great example because it shows how the auto industry is responding. It begins with 2010 plans for the rollout of stop-start technology, layers on new plans that were announced this year and offers a conservative estimate for likely future additions. Stop-start is only a baby step toward a more fuel-efficient future, but it's an immediate step that will save more fuel over the next decade than all HEVs and plug-ins combined.

9.27.11 Global SS.png

The first beneficiaries of the rapidly evolving implementation of stop-start as standard equipment will be established battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE) that will see their revenue per vehicle double and their margin per vehicle triple as automakers upgrade their starter batteries from flooded lead-acid to valve regulated AGM batteries. Second tier beneficiaries include Maxwell Technologies (MXWL) which has partnered with Continental AG to offer a system that pairs a supercapacitor module with an AGM battery to improve performance; A123 Systems which is offering a 1,100 watt hour lithium-ion battery for stop-start applications; and Axion Power International (AXPW.OB) which is completing the development of a third generation lead-carbon battery that promises lithium-ion class performance for stop-start applications at an advanced lead-acid price point.

It will be a horse race, or a knock-down drag-out brawl, as established manufacturers and emerging technology developers compete for their share of a $5 to $10 billion market that didn't exist three years ago. We probably won't be able to identify the ultimate winners with any degree of confidence for another three to five years. In the interim the stock prices of all the credible competitors are certain to climb because they're in the race for a major business prize. While it's hard to find much good in current market conditions, the stock prices for most of the credible competitors have recently been beaten down to very attractive levels. In a period of transition it's only natural for the more timid element to run for cover, but these are the days elephant hunters dream of when the broader market is distressed but the universe of likely players is small.

Talking about what the vehicle fleet might look like in a decade or two is fun for futurists but it's very dangerous ground for investors because of intervening business and technical risks, overwhelming and unavoidable natural resource constraints, the time value of money and the inherent unreliability of forecasts that extend for more than a few years. For my money, today's sure thing is far more attractive than a wildly uneconomic technological long shot.

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

UPDATE: I just received an e-mail message advising that the lead author of the PNAS report has posted a free copy on his faculty web page at Carnegie Mellon University.

September 26, 2011

Top 5 Things Cleantech Entrepreneurs Fail to Understand About Raising Capital

David Gold

After decades of venture capital investment, growth and exit, the traditional focus areas of venture capital (such as IT, web and software) have developed strong entrepreneurial ecosystems. A high percentage of start-ups in these traditional areas come to market with one or more experienced entrepreneurs or with a strong and active network of investors/advisors who have “been there, done that.”   They know what it takes to raise capital and to build a great fast-growing business.  Cleantech companies, however, are much more likely to be led by first-time entrepreneurs who often struggle to create an ecosystem of experience people around them.

As a venture capitalist, I review hundreds of business plans each year and physically meet with roughly a hundred entrepreneurs seeking capital.  I have the advantage of doing this through the eyes of someone who has been on the other side of the table, having raised venture capital for my own start-up before becoming a VC.  And while there are certainly numerous exceptions, there are themes I see across cleantech start-ups that are not specific to their technology or market but which nonetheless impede their ability to raise capital.  Here is the top five…

Technology is necessary, but not sufficient.

Many cleantech entrepreneurs are engineers or scientists.  Although not the result of a formal survey, my perception is that many more have PhDs than what you find in internet start-ups.  I don’t know if it’s a symptom of having achieved such a lofty degree, but many seem to believe that their phenomenal technology and their outstanding technical skills alone should justify an investment in their company.  It isn’t.  Weak entrepreneurs can take the most game changing technology in the world and drive it into the ground.  Conversely, outstanding ones can take a good, but not great, technology and make a world-class business out of it (anyone heard of Microsoft?).  So… in scientific terms, having compelling technology is a necessary but not sufficient condition for entrepreneurial success.  Human capital must always precede venture capital.

Your 50-page business plan is a waste of time.

Will someone please tell all the college business professors that the traditional business plan is a dinosaur!  No VC has time to read such a tome.   Nothing ever turns out completely as expected, so writing a long document as if it will prescribe the future is silly.  And by the time you finish investing the time to create such a detailed document it is most assuredly out of date.

Conversely, too little time is invested into building a robust spreadsheet financial model.  Not a static five-year P&L – that is almost useless.  Rather, what an early stage company needs is a financial model that can be used to run “what-if” scenarios, e.g. “What if our margins are less?”  “What if it takes us a year longer to get to market?”   A tool like this accepts that the future is uncertain and that entrepreneurship is about taking risk.  As an entrepreneur, which would you rather have, a 50-page wish or a model of your potential risks?

The thought process that goes into fleshing out the basic elements of a business plan (e.g, market, competitive advantage, go-to-market strategy, financial model, etc.) is what is paramount.  Entrepreneurs that recognize this look at their business strategy and financial model as planning tools more than as fund-raising tools.  And they realize that communicating the results of that thinking must be done concisely.

Eisenhower once said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Start-up businesses are no different.

A real advisory board isn’t just a list of cool names.

Some cleantech entrepreneurs get advice along the way that they should form an advisory board:  Get some people with cool experience and ask them if you can slap their names in your business plan.   That’s not an advisory board – it’s just a list of cool names. 

 A real advisory board not only has relevant experience and business contacts but also is actively engaged in the business, albeit on a very limited basis.  They meet regularly with company leaders, have provided concrete material assistance to the company and they have a specific personal interest in the company.  Such personal interest can take many forms, such as a stock option, a direct investment, a future executive role, prior significant personal relationship with a founder or clear strategic interest for their current employer. 

 Volunteer advisors who have no economic, business or personal connection to the company are cute.  They are like the parsley on your breakfast plate – they make it look nice, but add little substance and… at least for this VC… leave a bad taste in my mouth!

25% gross margins and growth to $20M in seven years aren’t exciting

At the highest level, there are three types of start-up companies.  There are high-growth businesses with venture potential.  There are downright bad businesses.   And there are steady growth businesses, which are not “bad” businesses – they just aren’t great venture investments.  
Venture capital funds are mostly 10-year partnerships.  We need to target businesses that we believe can generate huge multiples (typically 10x or more) on our investment in less than that timeframe so we get both liquidity and sufficient returns to make up for those investments that aren’t as successful.  That means companies that can use our capital to drive extraordinary growth, unfair competitive advantages and healthy margins yielding an exit return far beyond a simple discounted cash flow analysis on the business.

My second cousins are billionaires.  They built one of the first mail-order office supply companies to a dominant leader in its industry over 40 years (you can read their story in this book).  They never raised a penny of equity capital.  It was a great steady growth business that made them extraordinarily wealthy. Steady growth businesses can lead to phenomenal personal wealth, but that doesn’t make them good venture capital investments.

Last, but by no means least…raising capital is a social sport.

Quick quiz:  What is the single most important element of raising venture capital?  Your pitch deck?  Your technology?  No, no… your management team’s experience, right?  Wrong… it’s your relationships with potential investors.  Who you know is often more important than what you know in business.

The classic fund-raising mode for most cleantech entrepreneurs is to send their business plan to lots of funds, pitch at various cleantech business plan events and then wait to see who pursues them.   They let the VCs drive the process.  Few look at this as the sales process that it is.  Don’t spam slews of potential investors.  Rather, identify the funds that should be your top targets based on the investment interest they describe on their website.  Pursue them like you should a prospective customer: qualify them, identify their hot buttons and always be closing on a time-bounded next step with them.  And, as all great sales people know, getting an introduction is infinitely better than a cold call.

So, does that mean that only entrepreneurs who already have VC relationships can get funded?  No, but that sure as heck helps a lot!  And in this day and age, if you can’t get an introduction to me or another VC, you then you aren’t a very good entrepreneur.  There are almost 500,000 people who know somebody who knows me on LinkedIn and can get you an introduction.  Many VCs are equally well-connected – it’s part of what we do.  So, which business summary do you think I take more seriously -- the one that comes in from our website without an introduction or the one referred to me by someone I know?


And with that, you now have as a perk for reading my blog, a free roadmap for increasing your odds of raising capital from me!

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

September 25, 2011

Elevance’s $100M IPO: The 10-Minute Version

Jim Lane

Like to quickly understand the surge in renewable chemicals and one of the hottest companies in the hottest sector of the bioconomy?

Here’s our 10-minute version of the IPO from Elevance Renewable Sciences. Complete with the risks, translated into English from the original SEC-speak.

In Illinois, Elevance Renewable Sciences filed its S-1 registration statement relating to a proposed $100 million initial public offering. The number of shares to be offered and the price range for the offering have not yet been determined. The company indicated that it has apply to list the stock on NASDAQ under the ERSI symbol.

The company is currently ranked #15 in the world in the 2011-12 “30 Hottest Companies in Renewable Chemicals and Materials” rankings.  The rankings recognize innovation and achievement in fuels, and renewable chemicals or materials development, respectively, and are based on votes from a panel of invited international selectors, and votes from Digest subscribers.

With this filing, Elevance becomes the 11th company to file for an IPO in the industrial biotech boom, which began with a successful listing on the NASDAQ by Codexis in 2010. IPOs by Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), and KiOR (KIOR) have followed. In recent months, PetroAlgae (PALG.OB), Myriant, Ceres, Genomatica and Mascoma have also filed S-1 registrations for proposed IPOs.

Here’s the S-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Elevance model, some opportunities for the intrepid investor, and some risks which we have translated from the ancient and original SEC into modern English.

Elevance’s IPO: The 10-Minute Version

Based in Illinois, Elevance Renewable Sciences creates high value specialty chemicals from natural oils using a Nobel Prize winning technology. The company creates ingredients for use in personal care products, detergents, fuels and lubricants, among other applications.

Elevance’s proprietary patent-protected technologies transform renewable plant-based oils into specialty, high performance green chemical products without the environmental risks of traditional petrochemical solutions. Elevance’s innovative technology is based on the work of Nobel Laureate Dr. Robert H. Grubbs, who pioneered the olefin metathesis catalyst development at The California Institute of Technology.

Elevance was created on the premise that a high performance, renewable, capital  light, partnership-based business model will provide a unique market position based on a significant and sustainable advantage in the specialty chemicals market. The company has achieved rapid growth as a result and continues to focus on establishing unique partnerships and collaborations.

Markets: Specialty Chemicals

According to Datamonitor, the size of the global specialty chemical industry was approximately $706 billion in 2010. They currently estimate the addressable specialty chemical markets represent $176 billion in annual commercial opportunity. Specific targets include surfactants, lubricants and additives and polymers.

Markets: Intermediate Chemicals

They estimate that the total size of the oleochemical market was $38 billion in 2010. They estimate that the total size of the intermediate olefin market was $7 billion in 2008. This intermediate olefin market, on which they focus olefin production, consists of higher value olefins, specifically linear alpha olefins or linear internal olefins with ten or more carbon atoms.

The Technology

Their proprietary catalyst and process technology enables them to produce both unique specialty chemicals from biomass-based oils, including soybean, palm and rapeseed (canola) oil, with desirable functional attributes previously unavailable in the marketplace, as well as key intermediate chemicals that are in limited supply. These natural oils are available in liquid form in industrial quantities from a variety of geographic regions. These characteristics allow for low-cost transportation and storage compared to other renewable feedstocks such as industrial sugars, biomass and waste. Their ability to adjust inputs in real time allows them to take advantage of changes in feedstock prices and product demand.

Their specialty chemicals provide functional attributes that customers desire but that have not been commercially available at competitive prices.  Their intermediate chemicals are direct replacements for olefins and oleochemicals for which demand is growing and supply is constrained. Their ability to use a wide variety of natural oil feedstocks and to produce our intermediate chemicals in several regions can help our customers mitigate input cost volatility and reduce supply concerns.

The Strategy

Complete rapid deployment of multiple world-scale facilities. They expect to have three world-scale facilities by the end of 2014, with combined annual production capacity of approximately one million metric tonnes (2.2 billion pounds).

Develop new and existing market partnerships to accelerate growth and maximize profitability. To accelerate growth, they plan to continue cultivating strategic partnerships with: Cargill, one of the world’s largest agribusinesses; Clariant International, a leading global specialty chemicals company; Dow Corning, a global leader in silicone-based technology and innovation; Royal DSM, a global science-based company; Stepan, a leading producer of surfactants; and Wilmar. These partners provide Elevance with sales and marketing expertise, established distribution channels, technical know-how, product and application development expertise and manufacturing infrastructure.

Invest in research and development to enhance product performance characteristics. They intend to leverage the intellectual property portfolio to target solutions for customers demanding higher performance chemicals than those offered today. They plan to continue to develop new specialty chemicals with increased functional attributes, such as highly concentrated detergents and lubricants that enable better fuel economy.

Leverage feedstock flexibility to maximize margins. They continuously monitor the costs of various feedstock alternatives to take advantage of their imperfect price correlations to each other and to selling prices.

Green Discount, vs the Green Premium: Conversion Costs Compared to Alternative Routes to Comparative Products


Kerosene to N-Paraffin for Linear Alkyl Benzene Naphtha to Ethylene to Intermediate Olefins Elevance Process to Intermediate  Olefins





$/met. tonne $/met. tonne $/met. tonne
Utility $53 $164 $24
Direct labor $49 $74 $15
Fixed costs, excluding depreciation $42 $75 $24
Total conversion costs $144 $313 $63

The Near-term Commercialization Plan

Tolling. Their products are currently manufactured at commercial scale using tolling facilities, enabling them to validate their target cost of production for the biorefineries.

First commercial facility. Elevance is building an integrated biorefinery in Gresik, Indonesia, as part of a 50/50 joint venture with Wilmar International Limited, the largest global processor and merchandiser of palm, palm kernel and coconut oils. They plan to begin commercial operations at this facility by the second quarter of 2012. The Indonesia facility, at a total construction cost of approximately $30 million, is fully funded and currently under construction. The Indonesia facility will have an annual production capacity of 185,000 metric tonnes (400 million pounds), with an option to expand the annual production capacity to 370,000 metric tonnes (810 million pounds).

Second commercial facility. Elevance is repurposing an existing facility in Natchez, Mississippi into a 280,000 metric tonne (610 million pound)integrated biorefinery. The plan is to be operating in the second half of 2013.

Third commercial facility. By the end of 2014, they expect to be operating an additional world-scale facility in South America.

Overall, they expect construction of the first two facilities to cost $165 to $360 per metric tonne ($0.07 to $0.16 per pound) of annual production capacity compared to $920 to $2,300 per metric tonne ($0.42 to $1.04 per pound) of annual production capacity for conventional facilities.

Elevance as it sees itself:  8 Competitive Strengths

Proprietary technology. The proprietary metathesis technology platform is based on Nobel Prize-winning innovations in metathesis catalysis. The platform enables them to produce high-value specialty chemicals and direct replacement intermediate chemicals that are cost-advantaged compared to those available from conventional production methods.

High performance products. The specialty chemicals have unique and desirable functional attributes previously unavailable in the marketplace. They are currently commercializing products such as fuel additives and personal care products that have enhanced performance features. In addition, they have demonstrated our ability to secure a premium price for certain high performance specialty chemicals.

Low capital requirements. The biorefinery design requires less capital per unit of production than conventional technologies because of the following characteristics: (1) fewer major process steps; (2) lower operating temperatures and pressures; (3) limited production of hazardous and toxic by-products; and (4) the ability to integrate the process into existing industrial sites.

Low operating costs. Conversion using their process achieves lower unit-level production costs than alternative routes to comparable products because of the following characteristics: (1) more direct process, resulting in fewer conversion steps; (2) highly efficient and selective catalyst; (3) feedstock flexibility; and (4) lower operating temperatures and pressures, resulting in greater energy efficiency.

Established partnerships with industry leaders. They have developed strategic partnerships which provide us with sales and marketing expertise, established distribution channels, technical know-how, product and application development expertise and manufacturing infrastructure.

Feedstock flexibility. The primary feedstocks include palm, soy and rapeseed oils, though our technology has the flexibility to use many other natural oils. Their ability to adjust our inputs in real time allows them to take advantage of changes in feedstock prices and product demand.

Large and well-established end markets. The technology enables them to target a wide variety of end markets. They currently estimate the addressable specialty chemical markets represent $176 billion in annual commercial opportunity.

Rapid deployment of commercial production. They can rapidly deploy the technology because of: (1) an ability to repurpose or integrate into existing industrial sites; (2) a low capital requirement per unit of capacity; (3) existing and available large markets for the products; and (4) a relatively short engineering, procurement and construction cycle.

The Risks, Translated from SEC-speak

In SEC speak: We are an early stage company with a limited operating history and have incurred substantial net losses since our inception, including net losses attributable to our common stockholders of $14.9 million, $23.7 million and $33.6 million for the years ended December 31, 2008, 2009 and 2010, respectively. As of June 30, 2011, we had an accumulated deficit of $188.8 million. For the foreseeable future, we expect to incur additional costs and expenses related to the continued development and expansion of our business…anticipate continuing to incur losses for a period of time, and may never achieve or sustain profitability.”

In English: “We blew through nearly $200 million building either a transformative business or a money pit, we’re not 100% sure which.

In SEC speak: We have generated limited revenues from the sale of our products and we face significant challenges to developing our business.

In English: “Now that we think of it, not everyone in the world actually bought an Iridium sat-phone.”

In SEC speak: The specialty chemical markets in which we operate are subject to litigation regarding patents and other intellectual property rights. In addition, many companies in intellectual property-dependent industries, including the chemical industry, have employed intellectual property litigation as a means to gain an advantage over their competitors. Currently, Materia is defending against a lawsuit filed by Evonik Degussa, in which Evonik Degussa has alleged that Materia has infringed its U.S. patents relating to specific types of catalysts for olefin metathesis chemical reactions.

In English: “And now for the biotech fight song: Two, four, six, eight, litigate.”

In SEC speak: We may encounter significant delays, cost overruns, engineering problems, equipment supply constraints or other unexpected difficulties which could cause construction to cost more than we currently anticipate.

In English: “We may be just kidding about those low capital requirements.”

In SEC speak: We lack direct experience operating world-scale commercial biorefineries, and may encounter substantial difficulties operating such biorefineries or expanding our business. We have never operated a world-scale commercial biorefinery. We have only completed two commercial-scale toll production runs of specialty chemicals and intermediate chemicals utilizing our proprietary biorefinery technology using palm oil.

In English: “We hear that there’s a difference between running a lemonade stand and Minute-Maid.”

In SEC speak: The price and availability of our feedstocks may be influenced by general economic, market and regulatory factors and may be cyclical or volatile. The supply of feedstocks may be interrupted by growing season disruptions, low crop yields, crop disease, droughts, floods, infestations, natural disasters, farming decisions or governmental policies and subsidies. In particular, weather conditions have historically caused volatility in certain portions of the agricultural industry by causing crop failures or reduced harvests.

In English: “Any Biblical type events like you might expect from, say, global warming, could sink us.”

Financing to date

November 2007, sold to Cargill, 50,000 shares of our common stock and 843,645 shares of our Series A preferred stock in exchange for Cargill’s contribution of the NatureWax business and Cargill’s agreement to terminate certain license and other contractual rights it held under certain agreements between it and Materia; to Materia, 50,000 shares of our common stock and 843,645 shares of our Series A preferred stock in exchange for Materia’s assignment of all right, title and interest to the contributed NatureWax assets; and to each of the TPG Funds, 2,530,934 shares of our Series B preferred stock in exchange for approximately $45.0 million.

October 2009, March 2010 and August 2010, Elevance received $10.0 million in exchange for the issuance to the TPG Funds of $10.0 million in convertible promissory notes and warrants to purchase shares of our Series B preferred stock for $8.89 per share, for a total of $30.0 million in financing.

December 2010, issued 5,649,718 shares of Series C preferred stock in exchange for approximately $70.0 million in cash and $30 million in the conversion of long-term debt. Naxos Capital Partners S.C.A. SICAR, a Luxembourg-based private equity group, led the round with additional new investors including Total Energy Ventures International, the venture capital arm of French oil and gas company Total, joining TPG Star and TPG Biotech in the financing.

June 2011, investors purchased 2,556,238 shares of our Series D preferred stock in exchange for $50.0 million in cash. Naxos Capital Partners led the round which consisted of previous investors in the Company. In June 2011, the Company entered into an asset purchase agreement with Delta Biofuels, Inc. to acquire a biodiesel production facility in Natchez, Mississippi.

The bottom line

One of the best aspects of the renewable chemicals business is that companies like Genomatica and Elevance come to the public markets talking about green discounts, rather than a green premium. “Everyday low prices” is the ultimate in winning business strategies for a lot of companies – and they have rightly conceived of themselves as a refiner and partnered up with companies that have world-class sales & marketing capabilities for this sector.

Note the absence of the following in the Elevance business model: subsidy, tariff, mandate, incentive, tax credit, emerging market, or policy stability.

And there’s abounding evidence of the desire for green products in these established markets, from customers, so long as they cost and perform the same.

So, the are two big traunches of risk in this offering.

One, Elevance has filed its IPO before scale-up, and absent a major customer order. Scale-up itself poses a level of risk – not every industrial biotech process has performed at scale exactly as well as planned.

Two, there’s the feedstock risk. By working with palm, rapeseed and soybean oil, the company will be able to manage the arbitrage between the values in these segments, but it is exposed to long-term food sector demand for these oils, which may put the income statement substantially underwater should food oils become substantially de-linked from fossil crude oil, and result in unacceptably high prices for customers. Not to mention the potential for a continued de-linkage between natural gas and crude oil – and the chance that major discoveries in, say natural gas feedstocks, may put pressure on the pricing and margins.

Big concerns? Well, for the smaller investor, all concerns are big concerns because it’s tougher to hedge them out.  Fair to say that the big risks are relatively remote failure possibilities, that most renewables business have these sort of risks, and over time they diminish as peak oil, or peak natural gas, put more pressure on the petrochemical industry than the renewables industry.

The complete S-1 registration statement is here.

Jim Lane is the Editor and Publisher of Biofuels Digest.

September 24, 2011

Mascoma’s IPO: The 10-Minute version

Jim Lane

No appetite for 200 pages of IPO-speak in Mascoma’s S-1 registration statement? Here’s our 10-minute version.

In Massachusetts, Mascoma Corporation announced that it has filed an S-1 registration statement relating to a proposed $100 million initial public offering. The number of shares to be offered and the price range for the offering have not yet been determined, and the company has not indicated yet which exchange it will apply to for a listing of its shares.

Here’s the S-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Mascoma model, what might be tempting to potential investors, and the risks and pitfalls along the road to cellulosic ethanol riches. Yes, we’ve marched through the hours of brain-numbing legalese and disclaimers, so you won’t have to. Here’s the news you can use.

Mascoma’s IPO: The 10-minute version

It’s been a long journey for Mascoma to develop its technology, in the glare of attention from an adoring (and heavily invested) public, entranced by its revolutionary consolidated bioprocessing “magic bug”, which eliminates the need for costly enzymes in processing advanced cellulosic feedstocks into ethanol.

What is consolidated bioprocessing? A magic bug that simultaneously extracts simple sugars from cellulose and then ferments them into ethanol. As the company observed in it’s S-1: “In a 2006 report on biomass conversion to biofuels, the DOE endorsed the view that CBP technology is widely considered the ultimate low-cost configuration for cellulose hydrolysis and fermentation…Typically, biomass conversion processes require a collection of saccharolytic enzymes (cellulases and hemicellulases), which hydrolyze the carbohydrates present in pretreated biomass to sugars, and microorganisms capable of fermenting the liberated sugars into ethanol or other end-products. When the microorganisms both produce the necessary saccharolytic enzymes and ferment the liberated sugars to end-products, the biomass conversion process is called consolidated bioprocessing, or CBP.”

It needs a good pre-treatment for its feedstocks, which is partly why Mascoma acquired SunOpta’s cellulosic ethanol business and its pre-treatment technology last year. The CBP approach bypasses the need for costly enzymes, which currently are in the $0.50 (per gallon of ethanol) range and have been a key stumbling block in the race to make cellulosic biofuels.

The company signed its landmark commercialization deal with JM Longyear in 2008 with a goal of developing a 20 million gallon commercial-scale facility in Michigan, but has not yet commercialized – and the valuations on Mascoma’s stock have been on a downtrend in the past year, hovering at $3.75 in private capital raises, after reaching a high of $6.40 in 2009.

Under new CEO Bill Brady, the company has continued to improve its results, and has its operating costs down to a projected $1.77 per gallon, and has developed what it calls a “capital light” strategy for getting its CBP magic bug into business. According to its S-1 registration statement, it expects to commence construction in Michigan in the next 3-6 months.

But a new, nearer-term, even more capital light product has emerged – Mascoma Grain Technology, an enzyme-replacement product for conventional corn ethanol that Mascoma says can reduce costs by $0.01 to $0.02 per gallon for ethanol producers today, and could rise to 4% reductions in enzyme costs in the future. Given a 13 billion gallon market, that’s as much as $260 million in savings for the US corn ethanol industry – but the margins are razor-thin, and assume that Mascoma can stay ahead of companies like Genencor and Nozozymes on enzyme cost.

The Commercialization Plan

Phase 1: Mascoma Grain Technology.

From the S-1: “We plan to initially target the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product, that can be used by corn ethanol producers as a drop-in substitute for existing yeasts. We expect to begin selling this product in 2012.

“Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production, lowering production costs. Based on laboratory test runs and management estimates of ethanol production costs, we believe that our initial MGT product will reduce the cost of producing corn ethanol by approximately $0.01 to $0.02 per gallon.

“Based on laboratory test runs, we believe future generations of our MGT product will be capable of ethanol yield improvements of up to 4%.

Phase 2: Hardwood consolidated bioprocessing for fuels

From the S-1: “We expect that our first two hardwood CBP facilities will be built in Kinross, Michigan and Drayton Valley, Alberta. We anticipate construction of our hardwood CBP facility in Kinross, Michigan to start in the next 3 to 6 months and construction of our hardwood CBP facility in Drayton Valley, Alberta to start within 12 to 24 months.

Phase 3: Consolidated bioprocessing of multiple fuel and chemical products from multiple feedstocks

From the S-1: “Beyond corn and hardwood, we have already shown the flexibility of our CBP technology platform through the conversion into ethanol of a number of additional feedstocks in a laboratory setting, including corn stover, sugarcane bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum…we have demonstrated in a laboratory setting the production of propanol and fatty acids. These chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements.”

The Yields and Cost Improvements

From the S-1:
“The operating cost of $3.00 for 2009 is based on a hardwood to ethanol conversion yield of 52 gallons per bone dry short ton.

“The operating cost of $2.13 for 2010 is based on a hardwood to ethanol conversion yield of 67 gallons per bone dry short ton.

“The current operating cost of $2.00 is based on a hardwood to ethanol conversion yields of 71 gallons per bone dry short ton.

“The estimated operating cost of $1.77 [per gallon] for our planned hardwood CBP facility in Kinross, Michigan assumes that the facility is built to our specifications with a hardwood to ethanol conversion yield of 83 gallons per bone dry short ton, which is what we expect when the facility is fully operational.

“All of the operating cost estimates set forth in the table above assume a hardwood feedstock cost of $66 per bone dry short ton of hardwood.”

The Mascoma Markets: First generation ethanol

From the S-1: “According to the Renewable Fuels Association, or RFA, U.S. corn ethanol production increased from 3.6 billion gallons in 2005 to over 13 billion gallons in 2010, which represented a compound annual growth rate of over 30% for that period, and ethanol exports in 2010 hit a record high of 350 million gallons. As of 2010, over 200 ethanol plants existed in the United States. We believe this large and established industry presents a compelling market for our drop-in MGT yeast product.”

Second generation ethanol

From the S-1: “Of the 36 billion gallons of renewable fuels mandated by 2022, 20 billion gallons are mandated to be advanced biofuels (excluding 1 billion gallons of biomass-based diesel), with at least 16 billion gallons required to be cellulosic biofuels. The vast majority of ethanol consumed in the United States today is produced from corn and does not satisfy RFS2 advanced biofuels requirements. We expect the ethanol produced at our hardwood CBP facilities will be a cellulosic biofuel and we intend to capitalize on this mandated market.”

Challenges

From the S-1: “The market for renewable fuels and chemicals has evolved significantly over the past several years, with many companies seeking to capitalize on the growing market potential and the environmental benefits offered by these products. However, many challenges exist and we believe that companies will need to satisfy the following criteria to succeed in this market:

• Demonstrated and Validated Technology.
• Comprehensive, Integrated Process.
• Low Cost.
• Flexibility.”

Mascoma as it sees itself: 10 Competitive Strengths

The company cites 10 factors in its filing.

1. Proven CBP Technology. It has demonstrated the performance of our MGT yeast product and hardwood CBP technology as follows:

2. Validation of the performance of its initial MGT yeast product by ICM, Inc., the leading provider of engineering services to the ethanol industry.

3. Successful production runs using its hardwood CBP microorganisms, including more than 1,000 continuous hours of operating data on a fully-integrated basis at our demonstration facility in Rome, New York;

4. Validation of its hardwood CBP technology by independent engineers at the U.S. Department of Energy and by independent third parties; and

5. Proven commercial use of the core equipment used in its biomass conversion process, with the front-end pretreatment equipment traditionally used in the pulp and paper industries, and the back-end distillation equipment used in the fuels and petrochemical industries.

6. Comprehensive and Efficient Biochemical Solution for Biomass Conversion. Mascoma contends that no other solution for biofuels and chemicals from multiple feedstocks that covers the full spectrum of the biomass conversion process, including pretreatment, hydrolysis and fermentation.

7. Low All-in Cost Solution. CBP is distinct from other, less integrated configurations, in that it alleviates the need to purchase most of the expensive enzymes associated with most other ethanol production methods while also improving yields.

8. Capital-Light Path to Revenue Generation. The commercialization of its initial MGT yeast product is not dependent on any meaningful capital expenditures. The hardwood CBP commercialization strategy is based on collaboration with third parties to fund, build, develop and operate the facilities.

9. Feedstock Flexible and Adaptable Technology. Beyond corn and hardwood, Mascoma has demonstrated in a laboratory setting the ability to convert corn stover, bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum.

10. Deep Domain Expertise. Mascoma believes believe that its business is differentiated by our ability to leverage the deep domain expertise of an exceptional and distinguished group of executives, scientists and partners.

Commercialization and Grant Partners

JM Longyear. In December 2008, Mascoma and Longyear formed Frontier to develop and operate an integrated commercial-scale cellulosic fuel production facility in the state of Michigan. As of June 30, 2011, we had a 75% ownership interest in Frontier and Longyear owned the remaining 25%.  The operating agreement was amended in June 2010 to provide that Longyear will contribute the land at a date to be determined by the board of Frontier on or after January 1, 2012, upon commencement of development at the site.

The U.S. Department of Energy. In October 2007, Mascoma entered into a $4.3 million DOE grant agreement for the development of an organism for the conversion of lignocellulose to ethanol. As of June 30, 2011, Mascoma has received $4.1 million in proceeds from the DOE under this grant. In September 2008, the company entered into a $20 million grant agreement for the construction of an industrial scale fermenter system and the design, construction and operation of an integrated cellulosic ethanol plant for transforming locally grown mixed hardwoods or switchgrass into ethanol. As of June 30, 2011, Mascoma has received approximately $16.5 million.

The BioEnergy Science Center. In June 2008, Mascoma entered into a subcontract with UT-Battelle as one of more than a dozen participants in the BioEnergy Science Center, or BESC, supporting the multi-year effort to overcome recalcitrance of cellulosic biomass to conversion. BESC will provide up to approximately $6.3 million to fund our portion of the project. As of June 30, 2011, we have received $5.1 million from BESC. The contract lasts through 2012.

The Michigan Strategic Fund. In December 2008, Mascoma entered into a grant agreement with the Michigan Strategic Fund for the planned hardwood CBP facility in Kinross, Michigan, for up to $20 million. As of June 30, 2011, Mascoma has received $12.1 million from MSF.

The New York State Energy Research and Development Authority. In October 2007, Mascoma entered into a grant agreement NYSERDA, to build and operate a biomass-to-ethanol demonstration plant in Rome, New York. In connection with this grant agreement, we were awarded a grant of up to $14.8 million, to be paid in installments upon certain milestones. As of June 30, 2011, we have received $13.8 million.

The Province of Alberta, Canada. In March 2010, Mascoma entered into an Agreement with the Province of Alberta, Canada for the development of a planned commercial cellulosic ethanol facility in Alberta, Canada. Under this arrangement, Alberta will provide up to $0.8 million in funding to be used exclusively for this project.

Proposed Projects

• Kinross, Michigan: The hardwood CBP facility in Kinross, Michigan is expected to be a 20 million gallon per year facility.

• Drayton Valley, Alberta: The hardwood CBP facility in Drayton Valley, Alberta is expected to be a 20 million gallon per year facility that will produce ethanol, as well as coproducts such as renewable electricity and purified xylose.

In addition to Kinross and Drayton Valley Mascoma has identified additional potential development sites in the Great Lakes region and Alberta.

Financing along the way

From inception in 2005 through June 30, 2011, Mascoma funded operations primarily through $105.3 million in proceeds from the sale of preferred equity securities, $10.0 million in proceeds from the sale of convertible notes, $20.0 million in borrowings under secured debt financing arrangements, and $34.5 million in revenue.

As of June 30, 2011, cash, cash equivalents and short-term investments totaled $12.1 million.

Series A. In March 2006, Mascoma sold an aggregate of 5,000,000 shares of Series A preferred stock at a price of $0.80 per share for gross proceeds of approximately $4.0 million.

Series A-1. In September 2006, Mascoma sold an aggregate of 5,000,000 shares of Series A-1 preferred stock at a price of $1.00 per share for gross proceeds of approximately $5.0 million.

Series B. In November 2006, Mascoma sold an aggregate of 11,241,573 shares of Series B preferred stock at a price of $2.67 per share for gross proceeds of approximately $30.0 million.

Series B-1. In October 2007, former shareholders of Celsys Biofuels, Inc., or Celsys, received shares of Mascoma Series B-1 preferred stock, with an aggregate fair value of the shares of $5,250,000 at the time of issue.

Series C. Between February and April 2008, Mascoma sold an aggregate of 9,531,250 shares of Series C preferred stock at a price of $6.40 per share for gross proceeds of $61.0 million.

Series D. In August 2010, Mascoma issued 2,702,883 shares of Series D preferred stock at a price of $3.75 per share in connection with the conversion of 2010 Notes.  In August 2010, Mascoma also issued 11,268,868 shares of Series D preferred stock at a price of $3.75 per share to SunOpta in connection with the SunOpta acquisition.

In January 2011, Mascoma sold 1,333,333 shares of our Series D preferred stock at a price of $3.75 per share for gross proceeds of approximately $5.0 million.

In August 2011, Diamond Alternative Energy, LLC, or Valero, exercised a warrant for 1,333,333 shares of Series D preferred stock at an exercise price of $3.75 per share for gross proceeds of approximately $5.0 million.

Financial results along the way

Mascoma has generated $34.5 million in revenue along the way, primarily government funding for R&D. They have not yet commercialized their MGT corn ethanol technology or the hardwood CBP process.

The accumulated deficit as of June 30, 2011 was $118.722 million.

The net loss was $30.4 million, $38.3 million and $25.7 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $14.8 million for the six months ended June 30, 2011.

Valuations along the way

Fair Value Per Share, from the S-1:

February 29, 2008 $2.94
October 31, 2008 $2.86
October 31, 2009 $2.95
August 31, 2010 $1.97
June 30, 2011 $2.93

The Risks, translated from SEC-speak

In S-1 speak: We have a limited operating history, a history of losses and the expectation of continuing losses.
In English: “We have spent all of Vinod Khosla’s investment, and would like to spend your investment too.”

In S-1 speak: In order to sell any of our MGT yeast products to corn ethanol producers we must obtain regulatory approval, and any delays in receiving approval could have a material adverse effect on our business, financial condition and results of operations.
In English: “Dad, can I borrow the car? I’ll be getting my license soon, I hope.”

In S-1 speak: “We have no experience applying our CBP technology to the production of renewable fuels or chemicals at commercial scale and our management has limited experience in the renewable fuels and chemicals business, and as a result, we may not be successful in commercializing our hardwood CBP technology.”
In English: “We could be a blockbuster. On the other hand, we could be Blockbuster.”

In S-1 speak: “The market for renewable fuels and chemicals may not develop as anticipated.”
In English: “If they mess with the RFS, we own a pub with no beer.”

In S-1 speak: Our stockholders’ deficit, recurring net losses and history of negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2010 with respect to this uncertainty.
In English: “We’re down to $12 million in the bank and, er, we lost $14 million in the first half.”

In S-1 speak: We have a history of material weaknesses in our internal control over financial reporting, including a material weakness that remains unremediated at December 31, 2010. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.
In English: “Oops, we hired Goofy as our bookkeeper a while back. But we fixed it, sort of.”

In S-1 speak: We may not be able to enforce our intellectual property rights throughout the world.
In English: “Technology piracy? Never heard of it.”

The bottom line

Mascoma is the first company primarily chasing cellulosic ethanol and consolidated bioprocessing, to file for an IPO in quite some time, so this is an important one in every way. There are two aspects to this filing. The near-term commercialization, and the long term in hardwood consolidated bioprocessing.

Near-term. Mascoma Grain Technology – hmmm, those are thin margins and no announced customers. That’s a toughie. The Valero investment in January may well signal that a customer may emerge there.

Long-term. $1.77 per gallon on an operating basis – well, we are not sure we are seeing a completely capitalized cost here – in industry terms, operating cost generally does not include the capital expenditure. But if we added 50 cents a gallon, or even $1.00 per gallon for the capex (assume $7.50 or $15 per gallon in construction, spread over 15 years), the numbers aren’t half bad at all. If the cellulosic biofuels credit survives a while at anywhere near the lofty $1.01 it is at today, that’s purty darn good. But we’re guessing on the capex. It would be nice to have that spelled out.

Upside opportunity. There’s room for improvement in that cost of $66 per dry ton for hardwood.

In the absence of announced customers or partnerships for MGT, or a strong pre-treatment revenue stream, investors may be tempted to continue to focus solely on the cellulosic biofuels business.

In that realm, Digest readers have been hugely strong fans of consolidated bioprocessing for a long, long time, and the numbers continue to look strong, and the timelines continue to point toward commercial volumes of cellulosic ethanol in the 2013-14 time frame, at affordable prices.

The complete S-1 registration statement is here.

Jim Lane is the Editor and Publisher of Biofuels Digest.

September 23, 2011

Two High Yield Energy Efficiency Stocks with a Free Call Option on Housing

Tom Konrad CFA

It's no secret that the housing market is in the doldrums.  New housing starts in August fell to an annual rate of 571,000, and fewer homes were under construction since record keeping began in 1970.  This has taken a toll on energy efficiency stocks in the housing sector, leading to some very attractive pricing in two of my favorites.
WFI PFB.png
Waterfurnace Renewable Energy (WFI.TO / WFIFF.PK)

I've long been fan of Waterfurnace, an Indiana-based manufacturer of ground source and water-source heat pumps.  A note from a reader Wednesday prompted me to poll my list of green money managers to see what they thought about the stock when it was trading at $17.50, since I could see little reason for the decline beyond the general cleantech sell-off and Waterfurnace's low liquidity.  I'm glad I did, as the company promptly fell another $2 on Thursday.

sc[1].TO&p=D&b=5&g=0&i=t22803122878&r=1103

While heat pumps have traditionally mostly been used in new construction, the company has done a "very good job shifting to the replacement market," according to Brad Tirpak of Locke Partners.  Tirpak sees Waterfurnace as a high yield stock with a "free call option on housing," meaning that if housing does recover, we can expect to see significant price appreciation.  

Waterfurnace has also been cushioned from the housing downturn by its "deals to provide systems to the military and other larger entities, partially through its partnership with Johnson Controls (JCI)," according to Garvin Jabusch, chief investment officer at Green Alpha® Advisors. He also likes the company's international distribution and the vertical integration of its systems and controls.

There are downsides for this company though.  Rafael Coven, the manager of the Cleantech Index which includes Waterfurnace as a component (about 0.55% of the index), sees problems in the highly competitive nature of the industry, the stocks poor liquidity, the prospect of reduced subsidies for energy efficiency, and narrow geographic scope (Waterfurnace sells almost exclusively in the US and Canada.)  Coven thinks the company "would be a much better fit inside a bigger HVAC or water heating manufacturer, such as Electrolux, or AO Smith."

All that said, I was buying aggressively on Thursday because of the over 5% dividend which is still covered by earnings and cash flow despite the horrible housing market.  While a cut in Federal subsidies for energy efficiency would certainly hurt the stock, energy efficiency subsidies tend to gain much more bipartisan support than renewable energy subsidies because conservative arguments that renewable energy is too expensive simply do not apply to energy efficiency measures such as ground source heat pumps.

PFB Corporation (PFB.TO/ PFBOF.PK)


If anything, PFB Corporation is even more closely tied to the North American housing market than Waterfurnace.  The vertically-integrated manufacturer of insulating building products such as Structural Insulated Panels (SIPs) and Insulating Concrete Forms (ICFs) sells mostly to the green building market in the US and Canada.  I profiled the company in detail here. The downturn has cut PFB's revenues, with Sales having dropped from a peak of $83 million in 2007 to $66 million in 2009 and 2010.  Despite this drop, PFB has managed to remain profitable with enough income and cash flow to support the C$0.06 quarterly dividend, which makes for a dividend yield of just under 5%.

sc[1].TO&p=D&b=5&g=0&i=t48542022572&r=7783

Part of PFB's resilience has been its presence in the green building and high end sector of the housing market, both of which have been relatively robust during the downturn.  The company's large presence in Canada has also helped, as Canada's housing market has borne up better than that in the US. 

Earlier this year, PFB used their strong financial position to expand its market share by acquiring Idaho-based Precision Craft Homes, positioning the combined firm for rapid growth when the housing market eventually picks up.

In addition to the dividend, PFB  has an ongoing share buyback program funded with the company's cash from operations.  In the first six months of 2011, the company purchased 7250 shares for an average price of $6.07.  While these purchases remain small, they have increased in the third quarter, most likely in response to the fall in the company's share price to well below book value of $6.37.  The company's purchases of stock should help provide a floor for the share price near current levels.
 
Data From Yahoo! Finance, Waterfurnace & PFB Corp financial statements
Key Statistics
Waterfurnace PFB Corp
Share Price $15.62 $5.15
Dividend per share
$0.88 $0.24
Trailing 12 month EPS
$1.16 $0.29
Operating Cash Flow/share $1.09 $0.40
Free Cash Flow/share $0.96 $0.28
Book/share $3.08 $6.37
Debt/Equity 24% 22%

Conclusion

I find both of these stock to be extremely attractive at current prices, given the large dividend streams, low debt, and the potential for significant gains when the housing market eventually begins to recover.  That said, both stocks are very illiquid.  This liquidity probably contributed significantly to the current buying opportunities, but it also means that buyers should be cautious about bidding, and stick to limit orders to ensure that they get the prices they expect.

DISCLOSURE: Long WFIFF, PFBOF.

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.

September 21, 2011

Jinko Collapses 28% Amidst Environmental Crisis


by Clean Energy Intel


Shares in JinkoSolar Holdings (JKS) fell a full 28% yesterday after the company was forced to idle its manufacturing facility in Haining following three days of protests over allegations that the facility has been polluting the local river.

The difficulties relate to one of the company's wholly-owned subsidiaries, Zhejiang Jinko, and the company has now admitted that the local environmental protection authority is investigating the allegations that the company has been discharging hazardous waste into a river:

"There have been reports that Zhejiang Jinko Co., Ltd. ("Zhejiang Jinko"), a wholly owned subsidiary of JinkoSolar in Haining, Zhejiang Province, China, discharged hazardous waste into a river, prompting local residents to protest at its facility from September 15 to September 17, 2011. The local environmental protection authority is investigating the incident. In response to the concerns of local residents and in full cooperation with the local government's investigation, Zhejiang Jinko has suspended operations at its facility in Haining until the impact of any potential environmental damage has been assessed and remedied. An initial investigation conducted by the local environmental protection authority indicates that the pollution may have been caused by the improper storage of waste containing fluoride".

You can read the full Press Statement here.

Following the protests over the weekend and the onset of the investigation, JinkoSolar has now closed the plant, which has a 1.1 GW capacity in solar cell production. Jinko's main operations are at its Shangrao facility, where it produces silicon ingots, silicon wafers and final solar modules. The impact of the closure of the Haining plant is mainly therefore on wafer to cell production and the company intends to bring in a third-party cell producer via a 'tolling' facility. JA Solar, for example, has a decent business in solar cell 'tolling' for outside module manufacturers. Beyond the environmental and image costs of this crisis, that will certainly hit Jinko's margins.

The company has, however, said that it expects the plant to be shut down temporarily for only a few days. Much will no doubt depend on the result of the investigation. However, clearly the last thing that the solar industry needs is to be seen as a cause of pollution.

I continue to have no positions in solar or clean energy in general whilst the overall macroeconomic environment seems difficult - for a recap, see my article on general market risk from the beginning of the month.

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

The Hypocrisy of Solar Energy's Critics

Garvin Jabusch

The fossil fuel apologists in the U.S. are of course relentless in their criticism of the solar energy industry. Now with the JinkoSolar (JKS) fluoride spill, though, their hypocrisy is on full display. Earlier this month, they started talking about how Solyndra's failure means the whole solar concept is flawed (it's not), and how solar doesn't work (it does) and how it's not competitive (it is). Now, JinkoSolar, having spilled fluoride into a river in Haining province, China, is the new whipping boy. The issue though isn't that solar's manufacturing processes use some toxic chemicals (we knew that) but that heavy rains caused Jinko's wastewater containment facilities to overflow into the river. I imagine this is both because the rain was an unusual, unforeseen event and because China lacks the regulatory and enforcement structure to adequately prevent accidents.

Here's where the hypocrisy comes in. By and large, solar detractors are ideologically the same people who like the idea that "the EPA will have doors locked and lights turned off," the same people who fail to address the far more toxic U.S. coal industry that routinely releases far more dangerous substances than fluoride, such as arsenic, lead, and mercury (not just in burning coal but also in the mining process, which has also experienced toxic spills). They're the same folks who don't mind or ignore small matters like BP using the carcinogen Corexit -- illegal in the UK -- to disperse oil in the Gulf of Mexico.

Not that we by any means think a fluoride spill is okay or that China shouldn't adopt and enforce better regulations to prevent this kind of release; on the contrary. But the pattern is clear. Solar's detractors don't care at all about whatever environmental limitations the industry may have (and we would argue that those limitations are few and small compared to those of fossil fuels), but they are desperate to jump on anything that can help them pronounce solar power inferior or even useless.

So let's keep the issues of safety, relative green merits, and economic effectiveness separate. Regarding regulation, we at Green Alpha ® Advisors are in favor -- insofar as regulations are fair and exist to protect the well-being of the public. Not all regulations are beneficial. To be honest, within the financial services industry, there are regulations that we believe are preventing our company from expanding business as rapidly and into as many areas as we'd like. But certain basic safeties and rights must be ensured, or things get bad in a hurry.

If we want to know what a nation without some form of workers' rights looks like, we only need to look at recent labor standards in Saipan or at the U.S. before the horrific Triangle Shirtwaist Factory fire finally inspired adoption of labor rules. And if we want to know what our air and water will be like without environmental regulations, let's look at China's deadly air and other issues. We don't need to experiment with total deregulation In the U.S. -- we already know what it looks like.

The arguments for solar's effectiveness are equally simple. Solar works, it is growing fast, creating jobs, and getting cheap enough to soon rival and surpass coal electricity in cost per watt. It is, in many forms, the future of electricity on this planet. Yes, its manufacturing process uses chemicals, which again we knew. So do most industries, many far worse. Solar, if we view the whole process end-to-end, is so much less toxic than coal that even discussing the "dirtiness" of solar by comparison is a joke that would be funny if the resulting coal perpetuation weren't so deadly and causing climate change. There is no such thing as a perfectly clean, byproduct-free manufacturing process. What we mean by "clean tech" is that, even with its limitations, solar is still far cleaner than the fossil fuel alternatives.

So, the Jinko Solar fluoride leak shows us two things: Solar, even at its worst, is better than coal and that, yes, we do in fact need at least minimal regulation of toxics and enforcement of their release into our air and water. The attempt to now brand solar as dirty and ineffectual is dishonest and misleading, and represents a desperate and ultimately vain attempt to paint it as economically inferior.

It continues to amaze me that in the minds of its detractors, solar does not benefit from normal economics. That is, as solar products get cheaper, people will be installing it in ever bigger and more diverse chunks, resulting in the kind of rapid growth that should be good news for investors.

Jinko Solar, even with its current problem, is a good example. Analyst consensus estimate on Jinko Solar is still "outperform," which might surprise some who have been misled to believe that 'solar is over,' but to me it seems like an easy call. Jinko, set to make $3.71 per share in 2012, has a price to earnings ratio of .84, a price to book of .31, and is trading at only 55% of cash on hand. The US $5.00 per share Jinko is slated to make this year alone is almost equal to its share price. Will the fluoride spill significantly dent earnings? Hardly. The plant will be reopened "within the next few days," and is one of Jinko's two manufacturing facilities. I suppose that the event could be damaging to Jinko's bottom line if the company were hit with large punitive fines, but given the above mentioned lack of regulatory enforcement in China, the fine was only set at US$73,625.03, or six-hundredths of 1% of this year's earnings.

Solar is the best, net most clean, and ultimately cheapest source of power we know of today (and its base source input (sunlight) is free, unlimited, and enormously powerful). It's been growing as an industry at a 40 percent compound annual growth rate over the last 10 years, it is America's fastest growing industry at over 100% in 2010, and it shows no signs of slowing.

All the negative sentiment around solar, present for a while now and currently aided by recent events (events that would have been rated minor, if even noticeable, in almost any other industry), is only presenting stock-buying opportunities. The economics of solar are inevitable and will provide great shareholder return in time. The relatively clean nature of the power derived from solar is a great and ultimately required additional upside. For investors, though, the green part isn't even the main show.

Garvin Jabusch is chief investment officer at Green Alpha® Advisors, LLC and manages the Green Alpha Next Economy Index, a portfolio of leading Next Economy companies.
 
This article was first published on his blog Green Alpha's Next Economy on September 20, 2011.

September 20, 2011

Westport: Likely Beneficiary Of A Potential Quadrupling Of US Natural Gas Vehicles Sales by 2016

by Clean Energy Intel

Companies with significant exposure to the market for natural gas transportation have obviously received a lot of attention recently following the announcement last week of a co-marketing agreement for LNG transportation between oil major Shell (RDS-A) and Westport (WPRT), a provider of natural gas engine technology.

This makes the release of Pike's new annual global sales forecasts for natural gas vehicles particularly timely and worth a look.

According to Pike Research, there are currently 12.6 million natrual gas vehicles (NGVs) in the world. These are mainly located in Latin America, the Middle East and Africa. Meanwhile, annual sales of NGVs reached about 1.9 million globally in 2010.

Pike's research suggests that sales will now grow significantly going forward, reaching 3.2 million by 2016 - a jump of 68%. Most importantly, Pike believes that the key driving force will be fleet owners looking to cut down on their petroleum bills. As a percentage of total global sales, commercial NGVs are expected to rise from 59% today to 65% by 2016.

For the US, Pike sees sales growing even faster. From a fairly low base of 8,400 in 2012, sales are expected to quadruple to 33,000 vehicles by 2016. Moreover, some 90% of the NGVs sold in the US in 2016 are expected to be for commercial use. Clearly, this would be a significant market for a company like Westport.

The market for NGVs in the US is currently limited, particularly in terms of personal transportation, by the large costs associated with building natural gas stations. The following numbers from AutoObserver highlight the issue:

"As of Sept. 1, there were 901 CNG stations and 45 liquefied natural gas (LNG) stations in the U.S., compared to about 2,600 propane stations, more than 2,400 E85 stations and almost 3,200 publicly accessible electric-vehicle charging stations, according to the U.S. Energy Department's Alternative Fuels and Advanced Vehicles Data Center (AFDC). There are about 125,000 conventional gas stations in the U.S".

However, the task of providing an LNG station network for commercial trucking fleets is not quite so onerous since it can be effectively focused on the main trucking corridors. This provides Pike with more optimism on their commercial NGV forecasts for the US.

All of this is certainly supportive for Westport of course. And this is particularly true in the light of the company's recent agreement with Shell. You can read a fuller discussion and assessment of the implications of this agreement here, with a further update here.

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

September 19, 2011

ReneSola Share Repurchase Program Starts Slowly

by Clean Energy Intel

Late last month, I discussed the fact that in another sign of the undervaluation in the Solar sector, the Board of Renesola (SOL) had authorized a $100m share repurchase program. On the day of the company's announcement, its stock price was down 66% on the year. You can read more detail on the original share repurchase program and the related shareholder rights program here.

As a follow-up to the original announcement, Renesola has now released details of the progress that has so far been made in executing the program. The Company itself has purchased 645,424 American Depositary Shares (ADSs) for a value of $1.9m using Tuesday's closing price. In addition, the company's CEO Xianshou Li has also purchased an additional 1,071,540 ADSs. Again at Tuesday's closing price that would be a total value of $3.2m.

Clearly, the company has a long way to go if it is to put the full $100m to work. And the press statement, which you can read here, indeed suggests that they may be willing to do so. Given that the company currently has a market cap of only $249.5m, that is not an insignificant amount of ammunition.

Mr. Xianshou Li, ReneSola commented, "At present, we believe our stock is considerably undervalued. We believe our fundamentals are strong, and our business has been bolstered by our new Virtus wafer technology and increasing in-house production of polysilicon. Moreover, we maintain a positive long-term view on the solar industry as a whole, despite near-term fluctuations and challenges. Our swift move to repurchase our stock demonstrates our confidence in the long-term success of our business. Should the opportunity arise, we will continue to utilize our strong cash position to repurchase our shares in order to maximize shareholder value and reaffirm the market of our leadership position in wafer and solar manufacturing."

The arrival of these share repurchase programs at Renesola and also at JA Solar (JASO) is indeed another sign of the undervaluation in the sector. However, as I have discussed previously, I took profits on all of my positions in my clean energy portfolio at the end of last month. I continue to believe that it is better to stay on the sidelines for now given the difficult macroeconomic and global environment - more on that here. As long as the overall market is under pressure and the investment community is focused on macroeconomic and budgetary concerns, Solar is likely to struggle. Better to keep your powder dry for now. There will be plenty of time to get involved again once the global environment clears.

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

September 18, 2011

The Shell-Westport Deal - Demers Interview Underlines the Risk For Clean Energy Fuels

by Clean Energy Intel

Following the deal between Westport Innovations (WPRT), provider of natural gas engine technology, and Shell (RDS-A) on a co-marketing agreement for natural gas solutions for the trucking industry in North America, Westport CEO David Demers gave an interview on CNBC's Mad Money.

You can read more about the original co-marketing deal here. The bottom line is that this commitment from a major oil company will no doubt spur the use of natural gas in the transportation sector. However, it may well represent simply too much competition for the smaller Clean Energy Fuels (CLNE). Again, see more detail here.

Following the announcement, Westport CEO Demers' interview on CNBC only served to underline each of these two main conclusions, as the quotes below make clear. You can view the full interview, including all quotes given below, here.

What is most striking in terms of Demers' comments, is his repeated suggestion that customers have been waiting for the entry of an oil major to assure them that long-term availability of natural gas fueling would be there:

"The question we get from everybody, whether they're in trucking or rail or mining, is well is this sustainable. Can we really see the fuel that we need, in the scale that we need, in the price we need for decades into the future to justify a move of this whole economy into a new fuel".

The implication that the good work previously being done by Clean Energy Fuels alone had not been enough is fairly clear:

"And I think that people have been waiting for a move from one of the majors and this move from Shell is clearly the starting gun for a whole new energy era".

Demers put forward a good case that Shell has the presence to make the shift towards natural gas in the trucking sector start to happen:

e experience, the technical expertise, its going to give people a lot of comfort that this is not a big scary, risky move to go into this new fuel".

Shell is of course starting out by offering natural gas from 2012 in selected Shell Flying J truck stops in Alberta Canada. Initially the LNG will be supplied by third parties. However, by 2013 Shell expects to be producing LNG at the company's Jumping Pond gas processing facility. Moreover, the agreement with Westport is for North America as a whole and if Shell's move in Alberta is successful they will no doubt roll out LNG availability in trucking corridors across the States.

Thi "Shell has clearly got a lot of ability to help make this transition easy for fleets. They have the billing systems, the credit card, the networks, ths will also spur the natural gas transportation market as a whole. However, this level of competition will no doubt limit the growth of a much smaller company such as Clean Energy Fuels, which simply does not have the capital to compete in terms of infrastructure roll-out.

As I argued in my previous article on the issue, T. Boone Pickens and Clean Energy Fuels have done an excellent job in putting the case for natural gas trucking before the market. However, in the end Shell may well just represent too much competition for a relatively small pioneering outfit.

On the other hand, the news is unequivocally good for Westport. At present, I have no positions in my clean energy portfolio due to a negative view of the risk in the overall stock market (more detail here). However, from a long-term perspective Westport looks set to grow its business very strongly. Further weakness in the overall market in the period ahead may very well provide a good entry point in this stock.

Disclosure: I have no positions in the stocks discussed.
About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund..

Shell Deal Great For Westport But Not For Clean Energy Fuels

by Clean Energy Intel

Westport Innovations (WPRT), provider of natural gas engine technology, received a major boost following the announcement of a co-marketing program with Royal Dutch Shell (RDS-A). Understandably, Westport itself rose 19.4% on the day. Perhaps less understandable was the 13.2% rise seen by Clean Energy Fuels (CLNE).

The agreement between Westport and Shell launches a co-marketing program in North America aimed at providing an integrated commercial solution for customers in the natural gas vehicle field. You can read a full description of the program in the press statement from Westport here. In essence, the agreement aims "at providing customers a better economic case when purchasing and operating liquefied natural gas–powered vehicles (LNGVs) by consolidating key value chain components such as fuel supply, customer support and comprehensive maintenance into a single, user-friendly package".

Key quotes from the press statement from each of the two companies point to the intended strength of the agreement:

Firstly, David Demers, CEO of Westport Innovations said: “As a result of this initiative, we believe the use of natural gas as a fuel for transportation will accelerate. The North American launch is an important first step with Shell and we look forward to the continued proliferation of our advanced technology products and integration services.”

“We at Shell believe that natural gas, because of its abundance and strong environmental profile, is a destination solution in the transportation fuels space. This alliance with Westport will allow us to bring these benefits to market in a way that I believe can potentially transform fuel consumption in the heavy-duty vehicle segment for years to come,” said José-Alberto Lima, Shell Vice President for LNG & Gas Monetization.

The fact that an oil company is putting its muscle behind natural gas as a fuel for the trucking sector is unequivocally good for the future of natural gas transportation. It is also clearly very bullish for Westport, particularly since the agreement is intended to apply 'initially in North America', implying that if successful it could be rolled out elsewhere. The Shell deal also follows on Westport's success in securing an agreement with GM over the development of natural gas engines. 

However, the 13.2% rise in Clean Energy Fuels is more questionable. The company's strategy was largely based on rolling out a natural gas refueling infrastructure before the mainstream oil companies moved into the market, hopefully aided by the passage of the Natural Gas Act. Unfortunately, voting on the Natural Gas Act was postponed last year and it has yet to pass. And now Clean Energy Fuels faces serious competition. 

Since Westport provides natural gas engines, it makes little difference to the company's strategy who provides the natural gas fueling infrastructure. All that it important is that trucking companies will be assured that the infrastructure will be there. If, however, Shell is going to roll out such an infrastructure across the main trucking corridors, there is less of a clear roll for the much smaller Clean Energy Fuels.

One final point is worth noting. CLNE's backer T. Boone Pickens and the company's CEO Andrew Littlefair have both disposed of a reasonable amount of stock in the company recently. Most significantly, in the three days between August 30th and September 1st Mr Pickens sold 1,319,488 shares for a total value of $17,632,200. 

T. Boone Pickens and Clean Energy Fuels have done an excellent job in putting the case for natural gas trucking before the market. However, in the end Shell may well just represent too much competition for a relatively small pioneering outfit.  

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service produced by a retired hedge fund strategist who also manages his own money inside a Clean Energy investment fund.

September 17, 2011

After Solyndra and Evergreen, Welcome to the Age of Solar PV Commoditization (And 5 Things You Can Do About It)

by Tor Valenza a.k.a. “Solar Fred”

It’s official. With the bankruptcies of Solyndra and Evergreen, two solar panel companies with unique premium solar PV technologies, the Market — with a capital M — hath spoken: “Solar PV manufacturers, we, the purchasers of solar PV, do hereby care more about price than any fancy innovation. Just give us the best quality panel for the lowest $/watt, thank you very much.”

String ribbon doesn’t matter. Cylindrical CIGS film doesn’t matter. Even made in America doesn’t matter unless it's at a competitive price.

Apparently, all the Market wants to know are the basics:

  • Is it solar PV? You know, electrons, the photovoltaic effect, hooked to an inverter? Cool.
  • Are you backed by some bank that I’ve heard of? A government’s bank is fine. Yes? Excellent. My bank is now happy and will approve my loan. Merci.
  • How much? Is that your final answer? I’ll get back to you.

Naturally, this is an over simplification. I would add that I believe there are tiers of commoditization today. Name brands on the stock market that are deemed “bankable” by the grace and due diligence of some large or government-run bank will command the highest prices, but not much higher over brands you’ve never heard of and backed by unknown banks. Have a lot of space? Lower efficiency thin films will also be commodiitized in its own tier.

In short, low $/watt price, financial confidence, and long term viability are now the default prerequisites for volume global sales. That’s great for solar installers and making solar PV more affordable and price competitive with fossil fuels, but what about the solar PV manufacturers?

Without any breakthrough manufacturing innovations, Solar PV companies may have to survive on loans and thin profit margins in order to survive what's bound to be a year or two or three or longer of industry consolidation. (Another solution may be mergers and acquisitions, but hush! Let's not go there for now.)

So the end of Solyndra and Evergreen have unveiled the age solar PV commoditization. Now what? How will solar PV companies compete and profit when the market price goes down below a buck/watt? Will panels one day be moved to the Chicago commodities exchange alongside pork bellies, oranges, and wheat?

No. That will never be the case for many reasons, but sad to say, PV companies have not been able to make the case — within market tiers — that their brand matters more than price. I've read and heard of pointing fingers at China, but there's going to be a bottom for them too. At a certain point, they too will start to worry about rock-bottom prices feeding their operations (and stock holders and loans).

Now, I love this industry. And as much as I want solar to kick coal and gas in the pants when it comes to price, I also want PV manufacturers to thrive and profit so that there is robust competition and choice.

And so, as usual, I not only offer my usual Solar Fred warnings and perspective above, but I also offer solutions:

1)   The only innovation anyone cares about now is low price.  The Wal-Mart mentality ain’t going away any time soon, especially with this American and global economy. Everyone’s pinching pennies and worried about tomorrow's cash flow, so the only innovation your solar engineers should be working on is how to make reliable, conventional, solar PV panels for the least expensive price. Period.

2)   Added values matter, but only if they’re included in the same competitive price. Are you working on sleek black beauties? Do you have some kind of panel failure insurance plan? Are you the cleanest, greenest, clean-tech company in China or anywhere? Wonderful, but don’t expect anyone to pay much extra. If that were the case, Evergreen would still be in business. String ribbon may have been eco-friendly, but the Market refused to pay more for that benefit.

3)   American made panels may now be competitive—but only at the same price. I’ve personally noticed an American jingoism from consumers and installers. In the age of solar pv commoditization, price will remain king, but if you can offer a Made-in-America panel at the same price as a tier one foreign made panel, my bet is that American installers will choose the American-made brand. Naturally, don’t forget to highlight this U.S.-made fact in your marketing. That being said, Solon (SGFRF.PK) and SolarWorld (SRWRF.PK)just shut down two U.S. factories, so it's not an easy or perhaps cost effective solution — at least not yet. (See #1.)

4)   New government policies may make or break you. Get political. Decent demand is keeping a lot of PV companies above water right now, and some of that demand is driven by these record low PV prices and the threat of rising fossil fuel prices. However, if the EPA is (further) gutted and we have a pro-fossil fuel new president in 2012, solar will become less competitive with fossil fuel and nukes. Without the 1603 grant program and 30 percent ITC, solar will survive, but grow much slower. Therefore, pay your dues and support SEIA, Vote Solar, IREC, SolarTech, and any other organization that supports solar jobs, growing the industry, and educating politicians. Political leadership matters now more than ever.

5)   Build a trusted brand. Obviously, as a solar marketing consultant, there’s some self interest here, but honest: In the new age of solar commoditization, it’s more important than ever to create an army of solar brand loyalists. Given relative equal quality and price, it’s up to your company to create solar fans through exceptional customer service and communications. Chicken soup is on every grocery store shelf in America, but people have different feelings and will often pay more because of their trust in Campbell’s or Progresso health or taste benefits. People will pay more for and defend their Harley-Davidsons. There are Mac people and there are Microsoft people. There are Ford F-150 lovers and Dodge Ram die-hards. This kind of enthusiasm can happen with solar too, whether it's commercial, utility, or residential. “Trust” is the key word here. Learn about your customers and learn how to build brand trust, and then it won’t be such a coin flip for the $/watt panel that an installer chooses. Instead, it will be a very conscious choice. It will be "I like and trust that solar brand. I recommend it because...” There's already a little bit of that out there. Now, in the age of solar commoditization, there needs to be much, much more.

As I stated in my previous post on REWorld, despite the loss of Solyndra and Evergreen, I’m confident that our global industry will survive and thrive. For solar PV manufacturers, now is the time to genuinely UnThink Solar.

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

September 16, 2011

Evergreen Solar and Solyndra Fail: Is Wall Street's Hatred of the Solar Industry Still "Irrational?"

Garvin Jabusch

Much has been made this week about the nearly contemporaneous bankruptcy filings of two American solar companies, Silicon Valley’s Solyndra and Evergreen Solar (formerly ESLR) out of Massachusetts. These two had something in common: Both made different types of photovoltaic (PV) panels and both were more expensive than average PV. These two firms did not fail because they manufactured in America, or because solar itself is untenable (on the contrary), but primarily because they were deploying advanced technology that ultimately could not find enough of a market to achieve the scale required to become profitable.

It's just capitalism. 

Many perceived in advance that, while interesting, the niche solar technologies made by these companies might well price them out of a competitive market before they could reach anything like the scale needed to get their costs down. In Solyndra’s case, they were making advanced thin films, using a newer chemical deposition technology, and pioneering the cylinder-shaped (as opposed to flat) panel modules, all of which added up to more cost per watt of capacity.

At Evergreen, hopes were high that the company’s proprietary “String Ribbon Technology” PV systems could ultimately produce electricity more cheaply than conventional panels. But custom technology means custom manufacturing equipment, training, process, and a lot of other stuff that adds to costs not shared by the competition. If String Ribbon had increased PV efficiency enough to overcome these costs, the outcome may have been different, but as it went, “taking technology from the lab to the marketplace proved to be more expensive than originally projected.”

Solyndratubes

Image: Great in the lab, but too expensive in the real world: Solyndra’s PV idea. (source: Solyndra.com)

Personally, I feel like both companies gave new ideas a great try and I’m glad they made the effort: trial and error of new approaches is the lifeblood of technological and thus economic progress. More failures among smaller-scale, niche technology solar firms may very well follow; solar as an industry will continue to grow. 

Of course companies fail all the time in this world, and it doesn’t logically follow that the underlying industries are somehow fatally busted. General Motors only continues to exist via the largesse of U.S. taxpayers, and in a world of true capitalism, GM would be gone. But that does not mean the car industry is irredeemably flawed. The same can be said of solar, not that you’d know from media coverage of the two recently failed firms. Media Matters has a nice roundup of some of the more negative press, including this factually-bankrupt gem: "on Fox Business, Chris Horner of the Competitive Enterprise Institute claimed that the solar companies 'are not responding to demand -- they are providing something that doesn't work.'"

How could the products of America’s fastest growing industry not be working? And more importantly, why would one (much less a patriot) wish to disparage solar, now growing at 100 percent a year, the brightest growth prospect right now in the U.S., in a time when every job added is critical?

Solar will be a huge part of the world’s energy future and the best-run companies stand to become huge, economy-defining enterprises. As rapid as current growth is, from the standpoint of world energy requirements and what technology has the power to meet them at lowest cost, I feel confident in concluding that solar is just getting started. So yes, I still feel that the wholesale derision and short-selling of the entire industry is, as I have written before, “irrational.”

And at this point, let me be clear: by “irrational” I mean from a solar stock valuation point of view. Because the solar haters do in fact have financial motivation, but their reasons are about sustaining the run of fossil fuels, where their investments are already vested and entrenched. Naturally, in addition to doing whatever they can to promote oil and coal interests, solar’s disparagers also believe it makes sense to thwart any challenges to fossil fuels’ present hegemony.  Solar, which for now is showing the most promise among renewables in that it has the ability to scale almost indefinitely and will one day soon produce power far more cheaply than can fossil fuels (which will never be rid of the expense of pulling stuff from the ground), is the likeliest threat to fossil fuels and so is first and most squarely in the crosshairs. Facts about whether solar works or is profitable are only relevant from oil’s or coal’s point of view insofar as they reveal their likeliest competition.

Not that there isn’t other negative news in the solar sector.  Previously I wrote “consider China-based solar company LDK Solar (LDK). The company’s shares have fallen from US$14.49 per share in February to $5.15 as of this writing. I can find no good fundamental reason for the decline: LDK’s latest quarterly earnings came in at $.95 per share where consensus analyst expectations were $0.86; the company has year on year sales growth of 120%, has a price-to-earnings ratio of only 1.58, plenty of cash on the balance sheet, and a price-to-book ratio of just 0.54. That’s right, even if the company were closed and its assets liquidated, the cash generated at the yard sale would be 46% greater than the current market cap, as though the earnings have no value [metrics updated].”

Unfortunately, LDK has recently given ‘fundamental reason’ for a share price slip, as described here on seekingalpha.com:

“LDK managed, in one announcement on Thursday, to blow up their whole year.

They had reported Q1 earnings about three weeks before the end of Q2, so it seemed that their guidance for Q2 should have been stable. Unfortunately that was not the case. They drastically cut Q2 module and wafer shipments, revising a projection of 200-plus MW of module sales down to 80 MW of sales for Q2. (In the Q2 conference call, I remember the management proudly announcing how module sales were strongly rising each month.)” 

Yikes. Bad news and with very little notice. No doubt this provides fodder for solar’s detractors, but two things: first, we believe LDK still has good long term potential. The company still has good metrics overall, is possibly the lowest cost provider of solar modules in the world, and is renowned for its excellent political connections, including the backing of the Bank of China. Furthermore, its stock is so undervalued, that even with the terrible guidance, it’s still a bargain for what you’re buying; it was just that much more undervalued before. Yes, this news means that LDK’s 2011 earnings per share may drop to as far as US$1.20, a big drop, but the company is still making the $1.20 yet trading at values usually reserved for companies rapidly losing money and in danger of failing. (I’ll note here that we’re not the only team to keep our buy rating on LDK.) Second, all industries get downside surprises; it doesn’t mean their concept as a whole is flawed.

Indeed, in the same month of news of the failures, there were more indicators that the growth of the solar industry continues. Headlines like “JinkoSolar [JKS] profit shines on market expansion drive” are the inverse of an Evergreen or Solyndra. A cursory search of solar industry headlines reveals items like Jeffries raising First Solar (FSLR) shares from ‘Hold’ to ‘Buy’ and increasing the company’s target price from $115 to $132, insiders at MEMC Electronic Materials Inc. (WFR) have purchased 339,000 insider shares, Yingli Green Energy (YGE) said its most recent quarter’s net income nearly doubled (to US$58.1 million, or 36 cents per share), from the previous years’, easily beating Wall Street forecasts, etc.

So in sum, it’s clear that as with any industry, finding and short selling the weaker companies may well be a profitable venture, but to wholesale short an entire industry, much less a growing one, is, again, irrational.

Specific example of one not to short? Green Alpha ® Advisors’ holding Canadian Solar (CSIQ). For 2010, earnings per share (EPS) were $1.16. EPS estimates are $1.30 in 2011; and $1.50 in 2012. Nice growth. Yet, even with these earnings their ratios are pitifully low: share price to sales is only 0.13; price to earnings (P/E) is only 4.51; price to book is only 0.46 – extremely inexpensive for a company with its fundamentals. CSIQ is the very definition of a “value” stock. Shorting any company this cheap, that’s this fundamentally solid is not something a prudent money manager should be doing.

Yes, there are earning surprises and outright failures in the solar industry. For investors, the approach should be careful due diligence to pick the profitable, growing, best managed companies, to own more than one (preferably a basket of the best ones), and to look for buying opportunities on dips.

Disclosure: Green Alpha ® Advisors is long CSIQ, FSLR, JKS, LDK, WFR, and YGE. We never did hold Solyndra and have not held ESLR since July, 2009.

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

This article was first published on his blog Green Alpha's First Economy on 9/6/11

September 15, 2011

It's Time to Kill the Car Culture, Drive a Stake Through Its Heart, and Electrify Mobility

Tom Konrad CFA

Stop debating the viability of electric cars, and work on fixing our broken transportation paradigm.

My friend and colleague John Petersen has it in for the electric car.  Recently he wrote a summary of his anti-electric car views, entitled "It's Time to Kill the Electric Car, Drive a Stake Through its Heart and Burn the Corpse."  Did I mention he also has a flair for the dramatic? 

Many electric vehicle (EV) advocates, or "EVangelists," as he calls them, have tried to refute his arguments.  One of the more coherent attempts was "Tesla and the Future of the Electric Car,"  which I recently reprinted as a guest article on AltEnergyStocks.

Innovation

I personally find both arguments incomplete.  Petersen has a strong libertarian streak, and the thought of wasteful subsidies drives him to distraction.  EV subsidies top his list of pet peeves, although he's curiously a fan of government meddling in the transportation market when it comes to CAFE standards.  The EVangelists often correctly point out that Petersen is overly pessimistic about innovation, but they focus too much on the potential of innovation to reduce the price and increase the durability of vehicle battery packs.  Yet even the true battery experts are skeptical of the rapid advances in batteries EVangelists predict.  I find both sides to be too focused on "winning" the argument when what we all should be doing is trying to overcome the very real economic barriers to EV adoption.

Like the EVangelists, I believe in the power of innovation.  But it is the nature of innovation to appear where it is least expected.  Battery technology will advance, but the innovations which reduce our dependence on fossil fuels for transportation need not be innovations in battery technology.  Innovations to our mobility system have the potential to reduce the use of oil far more quickly than than improvements in batteries, even while battery innovation will continues.  Such innovations are likely to include potential better battery chemistries and manufacturing, as well as improvements in the rest of the battery, such as better separators, or other changes most of us have not yet thought of.

Systems Thinking

Those battery innovations we can foresee will only bring marginal improvements to battery performance.  As energy efficiency professionals know, giant qualitative improvements come not from replacing a building's components with more efficient ones, but by redesigning the whole system with energy use in mind.  The same is likely to be true in our transportation system: just replacing internal combustion engines (ICE) with electric motors leaves all the potential gains from system improvement on the table.

To get some idea what sorts of system changes may be effective, it helps to understand the costs of our current car paradigm, and why simply replacing the ICE with electric drive alone is unlikely to lead to the widespread adoption of EVs.

Most of the objections to electric cars, and certainly Petersen's, focus on the up-front cost of the car, and the difficulty of paying this back based on the lower operating costs of an electric car.  The key to understanding EV economics (or "EVconomics") is that compared to the cost of the fuel a gas tank holds over its lifetime, it is practically free, while the cost of a rechargeable battery is comparable or even greater than to the cost of all the electricity/fuel it will hold over its useful life.  While ICEconomics is all about the cost of fuel, EVconomics is about getting the most out of the expensive battery, while the cost of the electricity to charge it is relatively unimportant.

EVconomics

A car battery which is only recharged at night will be fully cycled no more than once daily, and probably much less if the car is not driven to its full range every day and may stay in the garage some days.  Because of this, it seems unreasonable to expect an electric car battery to go through more than 300 full charge cycles a year, while 200 full cycles per year is probably closer to the real world average for cars charged only at night.  Since EVs get between 2 and 6 miles per kWh, while gasoline vehicles (not counting hybrids) get between 15 and 40 mpg, I will use as an approximation that 1 gallon of gas can be displaced by about 8 kWh.  That means that each kWh of a battery pack will displace approximately 25 gallons of gas with 200 kWh, and at most 38 gallons of gas with 300 kWh in a year's use.  The following chart shows the number of annual savings expected for each kWh of an electric car's battery for different driving/battery recharging intensities. 
 
EV battery
paybacks.png

If electric cars are to become truly mass market, they will need to accommodate drivers who normally only use half of their potential range a day, and don't drive some days (for about 100 full charge cycles per year, represented by the yellow line) as well as the most intensive users with 300 or more full charge cycles per year.  The yellow line only reaches breakeven over five years with the most optimistic (many would say unrealistic) battery improvement scenario, and then only with gasoline prices doubling to $9 a gallon, meaning that EVs will not make sense for casual drivers any time in the foreseeable future.

EVconomics of the Urban Commuter

Yet even EVangelists do not consider causal drivers to be ideal electric car users.  They tend to focus on the urban commuters.  Such urban commuters have regular commutes that allow them to use most of their battery range on a near daily basis (300 full charge cycles per year, represented by the middle green line on the chart.)  For this group, a five year payback can be achieved if we assume battery prices falling to a more believable $750 per kWh and gas prices rising to a not-incredible $4.80 per gallon.  Yet such intensive usage might reasonably be expected to shorten battery life, meaning that a shorter three year payback might be needed to make the electric car economic. (Note that a battery's life depends not only on the number of times it is cycled, but the depth of those cycles, and how long it is kept at full charge.  Keeping a Lithuim-ion battery at full charge or fully depleted can be particularly damaging.)  A three year break-even would require either a battery cost breakthrough and gas at $5.20, or significant battery improvement and gas at $7.50 per gallon, which seems possible, but is not likely in the next few years.

In other words, without daytime recharging, significant increases in the gas price and significant reductions in battery prices are required to make electric cars economic for even the most intensive drivers.  Only with daytime recharging and average usage of more than a full charge cycle per day (500 full charges per year) do EVs begin to make economic sense with current ($4) gas prices and ($1000/kWh) battery prices.  Current prices lead to a five year breakeven at 500 full charge cycles per year, although some increase in the gas price or reduction in battery prices will probably be needed to accommodate the reduction in battery lifetime that would come from such intensive usage.

Societal Benefits and Costs

At this point, it would be easy to conclude that Petersen is right, and EVangelists are high on "hope-ium," since massive improvements in battery economics or massive increases in the price of gas would be required to make EVs economical beyond the small niche comprised of vehicles that can be recharged frequently.

That conclusion would be premature, as it only considers the economic benefit of fuel savings as a possible motivation to buy an EV.  If we were only motivated by economics, no one would ever buy a sports car, let alone a Hummer.  (Admittedly, no one is buying Hummers anymore, but there was a time in the early 2000s when they were wildly popular.)  Most people buy vehicles because of what the vehicle says about them, not for the economics. 

In addition to non-fuel economic benefits such as the possibility of using EVs for grid services such as frequency regulation, and the much lower maintenance costs of EVs (bye-bye oil changes and brake pad changes, not to mention trips to the gas station.)  Even if EVs are not lower cost than ICEs, they do a good job lowering the volatility of fuel costs, which can be a significant help in budgeting, as monthly expenses will not swing wildly with the price of gas.

In terms of societal benefits of electric vehicles over conventional vehicles, there are
  • advantage that electricity is produced from domestic sources, leading to increased economic growth
  • the reduction of conventional pollutants in our cities leading to better health,
  • less noise pollution
  • the ability to use our existing electricity infrastructure more intensively and so get more value out of it
  • The potential to reduce the cost of renewable electricity integration.
On the other hand, EVs come with some cost as well.  Lowering the unit cost of driving will encourage more of it, and while more driving brings marginal benefits to the driver, it also comes with costs to society.  Societal costs of driving include
  • traffic congestion
  • pollution (even if a vehicle is charged with renewable electricity, that electricity could have been used to reduce the use of fossil electricity if it had not been used for driving)
  • traffic accidents leading both to property damage and injuries/fatalities
  • increased road maintenance and construction costs
  • The potential increases in the cost of electricity infrastructure (these may be minimal with smart charging, but could be substantial without it.)
Why Not Natural Gas?

I'm not swayed by arguments that it makes sense to subsidize natural gas vehicles in preference to EVs because they currently are a more economic solution.  Natural gas vehicles are a band-aid "solution" to the problem of peak oil, as they depend on a limited fossil resource.  Natural gas vehicles only delay the day we will have to transition to renewable transportation fuels, and so the necessary infrastructure for refilling natural gas vehicles will only delay the day that we shift to a truly sustainable transportation infrastructure.

It makes sense for society to subsidize a technology to the extent that society benefits from that technology.  Natural gas vehicles lack some of the societal benefits of EVs (the potential to lower the cost of renewable electricity integration, reduced noise,) and have more societal costs, namely an increase in the price of natural gas which will be a consequence of increasing demand.  As such, the case for societal subsidies for natural gas vehicles is much weaker than the case for subsidies for EVs.

The Right Sort of EV Subsidy

To the extent that the societal benefits of electric vehicles outweigh the societal costs, it makes sense to subsidize their adoption.  Nevertheless, there are much better ways to do this than to subsidize the purchase of vehicles.  Such subsidies will maximize societal benefit from EVs, not the benefits to individual EV owners.

Any intervention to favor EVs should focus on maximizing societal benefit, not benefits to individual users.  From my discussion and chart above, it is clear that there are at least three possible paths to broad EV affordability:
  1. Increased gasoline prices would make EVs more practical by increasing the incremental savings of using electric drive
  2. Breakthroughs in battery manufacturing and technology would increase EV affordability by reducing the cost of batteries.
  3. Increased deployment of charging infrastructure would allow EV owners to recharge more often and receive more benefit from each kWh of battery pack.  This would in turn make EVs with smaller battery packs more practical, and bring down the overall cost of EVs.
  4. Funding EVs for public use.
We'll need to make significant progress on multiple fronts before EVs are truly competitive with fossil fueled vehicles.  Note that direct subsidies for the purchase of plug-in vehicles are not in my list. That is because the benefits of such subsidies flow directly to the EV buyer, but do much less for society as a whole. 

Increasing Gas Prices

Since driving carries external costs to society (congestion, pollution, accidents, and road maintenance), raising gas prices through a gas or carbon tax not only helps to make electric vehicles more affordable, it makes ICE drivers internalize some of those societal costs.  Yet since many of these negative externalities of driving are common to all cars, including EVs, gas taxes are not the most efficient way to address these externalities.  A much better way in terms of economic efficiency would be charges based on Vehicle Miles Traveled (VMT), since fuel efficient vehicles (including EVs) create just as much congestion, road wear, and as many accidents as inefficient ones.  The best argument for using gas taxes instead is simply that we already have the mechanism in place, and therefor gas taxes would be easier to implement than VMT charges.  Gas taxes have the side effect of encouraging EV ownership, but they do nothing to address the societal costs of congestion, accidents, and road maintenance.

On the other hand, in the current political anti-tax climate, raising gas taxes is probably a non-starter, even if it were done in a revenue-neutral way with the increased revenues being used to reduce other, less economically efficient taxes.  VMT charges might actually be more politically acceptable, if they replaced existing flat fees (such as vehicle registration and insurance.)

Battery and EV Research

Scientific and technical breakthroughs often hold significant benefits for society as a whole, while investors are seldom able to capture much more than a small fraction of the benefits.  Hence, it is easy to justify public funding of research into advanced batteries, since better, cheaper, longer lasting batteries will benefit all of society.  Such research funding is likely to be money much better spent than subsidies for individuals buying plug-in vehicles.

Charging Infrastructure

As I demonstrated in my analysis of EV economics above, frequent charging can greatly improve the economics of EVs.  More frequent charging requires neither uncertain technical breakthroughs nor politically intractable increases in gas prices.  Subsidizing the deployment of a network of public charging stations also has much broader benefits than subsidizing EV purchases, because public charging stations benefit current and future plug-in vehicle users, not just the individual EV owner who receives a rebate.

Charging stations on the fringes of the network bring benefits to plug in vehicle owners even if they are never used, because the existence of a nearby charging station gives an EV owner the confidence needed to overcome range anxiety, and hence use more of a vehicle's battery capacity on a given trip, and since such charging points are unlikely to recoup their costs through usage fees, subsidizing charging stations at the edges of the network is easy to justify because their societal benefits are high while their profit potential is low.

One charging infrastructure stock is ECOtality (ECTY), afavored electric car investment of Jeff Siegel at Energy and Capital.  Although I think electric vehicle infrastructure is the right sort of investment for society, I'm less sure buying this stock is the best idea for stock market investors.  The company has little debt, but is rapidly burning through cash, and seems to be a long way from profitability, with a -127% operating margin (i.e. they are losing more money on every sale than they get in revenue, even before paying for overhead.) 

That said, ECOtality's prospects would be greatly helped if government did the right thing and shifted electric vehicle subsidies to infrastructure rather than the purchase of cars.  But my faith in government doing the right thing these days is quite low, given the incredible level of partisan bickering, ideological grandstanding, and incredible idiocy which were recently on display in Washington in the form of a game of fiscal chicken played with the possibility of default by our so-called leaders on Capitol Hill in the debt ceiling debate.

Public Vehicles

If we are going to subsidize EVs directly, it makes much more sense to subsidize EVs used by as many people as possible, rather than those owned by individuals.  EVs in public transit make a lot of sense in this regard, since the benefits of lower operating costs flow not to private individuals, but to the all the users of public transit.

The other advantage of electric vehicles for public transit is that many are well suited to electrification.  Electrification of rail and trolley bus routes is economic on more heavily traveled routes, as many trains can share the same electric infrastructure.  Such routes could be extended short distances at fairly low cost by adding batteries to trolleys and electric locomotives to increase their range onto less frequently used routes without electrification.  When these trains or trolleys return to the electrified portion of the route, the batteries could be recharged while the bus or locomotive was still in service, allowing many charge cycles per day, making this sort of EV economic even at current battery prices.

Giving car-sharing services such as Zipcar (ZIP) incentives to use EVs may also make sense since these vehicles are typically rented by the hour and return to a limited number of fixed locations where charging points can be located.  Measures to encourage e-bikes among bike-sharing services make sense using a similar logic.  Although e-bikes have more associated emissions than traditional muscle-powered bikes, the electric assist on e-bikes opens bicycle commuting to the less physically fit who might otherwise choose to use a car.  If even one e-bike ride in five displaces a car journey, there will be a net benefit in terms of congestion and emissions.

Conclusion

Electric drive technology, especially batteries, has not yet reached a point where EVs make economic sense when compared to traditional hybrid electric vehicles or ICE cars.  Until it does, the primary drivers of EV adoption are likely to be the intangible benefits to EV owners.  Like sports cars and SUVs, EVs are most likely to be bought by individuals who like what EV ownership says about themselves.  In this situation, it makes no more sense to subsidize the individual purchase of EVs than it makes sense to subsidize the purchase of granite counter tops.

Yet current economics of EVs do not mean that government cannot or should not take useful measures to promote the transition from ICE to electric drive.  Just because today's EV technology is not economic in the context of our current transportation paradigm does not mean that EVs have no potential.  Appropriate policy can ensure that EVs both suceed and are a benefit to society as a whole.  Nudges such as VMT fees which reduce the societal cost of driving and encourage the use of alternative transport which is more suited to electric drive are one example of such policies. 

There are many useful niches for electric drive technology in vehicles that can be charged more than once a day, and better charging infrastructure and support for battery research can make useful contributions to making electric drive an economic and practical part of the solution to the challenge of peak oil which can also help with the challenge of climate change by aiding with the integration of variable renewable energy into the electric grid. 

September 14, 2011

NREL Researchers Prove the Law of Diminishing Marginal Utility in Electric Drive

John Petersen

In the most under-reported cleantech story of the year, researchers from the National Renewable Energy Laboratory have used an impressive array of computational and modeling tools to prove that the Law of Diminishing Marginal Utility, which holds that the first unit of consumption of a good or service yields more utility than the second and subsequent units, doesn't have a loophole for plug-in vehicles. The penultimate slide from an NREL presentation at Plug-in 2011 says it all – and proves beyond doubt that cars with plugs are less effective at saving fuel and reducing emissions than conventional hybrids and other simple fuel efficiency technologies.

9.15.11 NREL Slide.png

At the individual vehicle level, the diminishing marginal utility of batteries is self-evident the moment you understand that the first 1.5 kWh of batteries in a Prius-class HEV slash fuel consumption by 33% but it takes a whopping 22.5 kWh of additional batteries to eliminate the other 67% with a Leaf-class BEV. The reality just gets uglier when the analysis moves to a societal level where cars with big batteries can only sabotage national efforts to reduce dependence on imported oil and cut CO2 emissions. They're the poster child for conspicuous consumption and the elevation of style over substance. Even researchers from the NREL who wanted to reach a contrary conclusion couldn't make a rational resource sustainability argument. The best they could manage without sacrificing intellectual integrity on the altar of eco-orthodoxy was to conclude that lithium supplies won't be constrained for a couple decades, which somehow makes the diminishing marginal utility of batteries more palatable. Lithium may not be an issue for a couple decades, but it's far from a permanent solution. While the NREL didn't mention them, other non-ferrous industrial metals pose more immediate concerns, particularly when you understand that metal prices are more volatile and increasing more rapidly than oil prices.

6.23.11 Metals vs Oil.png

I didn't reprint the NREL graphic because it's news. Regular readers of this blog already know the facts. I reprinted the graphic because it's in a form that even a Congressman or Senator can grasp, particularly a Congressman or Senator who's under the gun to slash wasteful spending and try to get the economy back on a sustainable track. No matter how you define the disease, plug-in vehicles are not a cure, or for that matter a band-aid. There are solutions that can make a substantial difference in national fuel consumption and CO2 emissions, but they're boring efficiency technologies including Prius-class HEVs, mild hybrids like GM's eAssist and even stop-start systems that simply turn the engine off while you're waiting for a stop light. Taxpayer subsidized toys for eco-royalty are not going to work because even if prices fall, fawning acolytes of electric drive can never overcome the diminishing marginal utility of big batteries.

I've been a careful observer of Federal energy policy and panacea energy solutions since my graduation from law school in 1979. Over the years I've watched policy lurch from one game changer to the next and recoiled in horror at the devastation changing policies and priorities have repeatedly wrought on investors who were foolish enough to buy the latest dream. At this year's EIA Energy Conference John German, a Senior Fellow and Program Director for the International Council on Clean Transportation closed his presentation with the following slide.

9.15.11 German.png
While ancient stock market lore is easily forgotten, it's important to remember that fuel cell companies like Ballard Power (BLDP) and Plug Power (PLUG) and ethanol companies like Pacific Ethanol (PEIX) lost more than 99% of their once lofty market values when ambitious technology du jour dreams collided with economic reality. Without a clear exemption from the law of diminishing marginal returns Tesla Motors (TSLA), A123 Systems (AONE), Valence Technologies (VLNC) and other companies that want to replace fuel tanks with big batteries can't possibly avoid the same fate. The surprise winners over the next few years will be stodgy old-line battery companies like Johnson Controls (JCI) and Exide Technologies (XIDE) and emerging technology developers like Axion Power International (AXPW.OB) that understand the green in a customer's wallet is more important than the green in his cocktail party conversation.

Mark Twain said, "history does not repeat itself but it rhymes." William Martin wrote, "In America, we wake up in the morning, we go to work and we solve our problems." We use the tools that are readily available to us and we remain willing to adopt newer and better tools when they prove their merit in a free market and become commercially available at reasonable prices. The time for dreaming is over. We need to wake up, down a pot of coffee, go to work and solve our problems with sensible, affordable and sustainable solutions like compressed natural gas, stop-start idle elimination and a host of conventional fuel efficiency technologies.

Sometimes I wonder whether the world is being run by smart and cynical ideologues who are putting us on, or by economic imbeciles who believe their own hype.

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

September 13, 2011

Tesla And The Future Of The Electric Car

guest post by Clean Energy Intel

A debate has once again been raised with regard to the future of clean technology and in particular the electric car. Whilst many of the issues on which this debate is based are genuine, they in fact fail to get to the heart of the matter. It therefore seems worthwhile to address some of central issues directly.

The Global Problem of Oil’s Monopoly in the Transport Sector

At the heart of the matter is the simple fact that a number of threatening global issues cannot be dealt with unless we end the effective monopoly of petroleum products in the transportation sector:

  • Economic security – the monopoly position currently enjoyed by oil leaves the global economic cycle very exposed to the gyrations of both the oil price and political instability in the Arab world – an arena which continues to be very volatile. It is no co-incidence that the recession and financial calamity of 2008 was preceded by a sharp rise in the price of oil or that the same has been true of the softening of the recovery this year. Oil is the only strategic commodity capable of having such a disruptive impact on the economic cycle and frankly the world’s oil reserves are largely concentrated in hands which don’t necessarily appear to act in favor of stability.
  • National Security – oil’s monopoly position ensures a continued flow of funds into the national economies of nations who are not particularly friendly to the interests of the US or western democracy as a whole.
  • Global warming and associated abnormal weather patterns. I have no wish to get embroiled in the current debate over climate science. However, the risks are clearly there whether or not we fully understand the processes at work. Most importantly, climate science predicts not just a warming of the planet over time but more importantly a proliferation of abnormal weather patterns – more frequent occurrence of droughts and floods etc. That is exactly what we are seeing. If climate science is correct these disruptions will continue to get worse. I don’t believe that the precise interactions at work here can be definitively proven. Only time will tell. However, all the risk is that this is another factor likely to increasingly influence both policy-makers and consumers.

I don’t feel the need to argue the precise detail related to each of these points. The fact of the matter is simply that, taken together, they represent inordinate risks to the global policy environment – risks which we largely face because we accept the monopoly position enjoyed by oil in the transportation sector.

No matter which way you look at it, one or other of these issues will keep rearing their head until we address them. As we have seen this year, developments on a global scale will simply keep bringing us back to the essential dilemma that oil’s monopoly needs to be dealt with.

That will continue to influence both policy-makers and consumers. The pressure on these issues may die down for a while – but only until the next oil shock or some other calamity. Consequently, time and again we will be brought back to the fact that we have to allow and encourage a free market in alternatives to oil in the transportation sector.

The essential point to understand is simply that these issues will keep coming to the forefront of the policy agenda until dealt with – and that both policy-makers and consumers will increasingly move towards solutions.

Resource Scarcity and Replacing Oil as a Strategic Commodity

The problem is of course that given the all-pervasive use of oil in the transport sector, it is extremely difficult to find a single technology or commodity capable of replacing it on its own. This is particularly true in the face of the growing demands on the earth’s limited resources which are rising relentlessly due to both population growth and the shift in global incomes towards poorer populations. Whilst the later factor is of course desirable, it produces an inexorable rise in global demand.

These factors have of course been prominent in creating the very need for clean technology and the related need for an end to oil’s monopoly in the transport sector. However, they also suggest that we are likely to face supply constraints across a range of commodities going forward – particularly those related to new demand for high-tech solutions.

These issues are extremely important and point to a number of conclusions:

  • It would be a grave mistake for anyone in the green community to see the electric vehicle or any other single technology as a simple solution to the problem of the way in which we fuel the transport sector.
  • It would be an equally grave major mistake for governments to try to pick winners or force a single solution to these problems. The end result would likely be alternative supply constraints and difficulties.
  • We need to let the free market do its job.

And this brings us to the heart of the matter. The problem with oil is not simply that it is a limited natural resource with an associated highly volatile price. Many other commodities face the same problems. What makes the problem with oil significantly different is that it is in a monopoly position as the sole strategic commodity in the transport sector.

Where the free market is allowed to function properly, the pricing mechanism creates proper resource allocation and usage, alters the pattern of demand and generates demand for alternatives, stimulating investment and innovation. It’s not perfect but it works. It gets the private sector moving on the deliverance of solutions.

Conversely, there are massive barriers to entry in terms of refueling the transport sector and this does not allow the market to flexibly adjust to supply constraints and use a multiplicity of solutions in order to spread demand across a range of resources.

The bottom line is that governments get themselves into trouble when they pour money speculatively into specific solutions. It’s not the government’s role to pick winners. However, it is the government’s job to act against monopolistic barriers to entry and to ensure a free market. That’s what needs to be done with regard to oil’s monopoly role in the transport sector.

The electric car has a role here. Not as the single solution to the problem but rather as one of a range of potential solutions. The most rational path forward is to break down the barriers to entry, allow free competition and let the market do the rest. A few steps forward seem appropriate:

  • Greater use of natural gas in the trucking sector. The Natural Gas Act would aid the roll-out of natural gas filling stations across specific trucking corridors.
  • The Open Fuel Standard Act. For the cost of merely $100 per vehicle, new cars can be produced with the capacity to take ethanol, methanol and other biofuels as they are developed. Again, simple free competition. Open the market, innovation will do the rest.
  • The role of the electric vehicle is clear. It is certainly not to entirely replace oil. However, it can add an alternative source of power. This is the only way we can spread demand in the transportation sector across a range of finite natural resources. Plug-in hybrid electric vehicles (PHEVs) in particular when combined with the Open Fuel Standard will allow competition between various forms of liquid fuels and electricity. Let the consumer decide.
  • Greater use of electricty as a clean energy solution also requires that we move towards cleaner technologies in power generation itself. Increased use of natural gas to meet base load requirements, combined with a 33% Renewable Energy Standard such as that in place in California would seem like a reasonable step forward.

What is clear is that the issues of population growth, the spread of income growth to the world’s poorer nations and the resultant demand growth, mean that oil simply cannot continue to play its current role for the rest of this century. The solution is not to force the march on any one single alternative. It is to break down the barriers to entry and allow the free market to provide a range of solutions. This is the only way to deal with the very real problems of resource scarcity that we face in the years ahead.

The Forces Behind Electrification Are Already in Play

Most importantly, it appears that the factors behind the increasing development of various forms of EV alternatives are already in play. The single most important factor has probably been the new CAFE standards here in the States. These will help produce more fuel-efficient vehicles based on the internal combustion engine (ICE). However, automakers appear to have realized that in order to make the grade they will have to innovate and adopt a greater use of EV technology across their respective model ranges.

This has, for example, led recently to a number of announcements in the EV field from General Motors (GM), clearly pointing to the company’s commitment to moving forward:

  • The announcement of a battery pack deal with A123 Systems – see here
  • The announcement of a plug-in hybrid Cadillac ELR, based on the Converj.
  • The announcement late last week of a broadening of the company’s collaboration with LG – see here.


What is becoming clear is that we are likely to see a range of approaches and battery sizes. The most interesting is probably Toyota’s (TM) approach with the plug-in Prius, which will have a small Lithium battery capable of covering some 13 miles or so. Nevertheless, it is competition at the fuel pump. Combined with an Open Fuel Standard, this has the potential to be the car of the future. Or certainly one of them.

Battery Efficiencies and Cost Reduction

Opponents of clean energy and the electric vehicle for some peculiar reason like to show charts of the improvement in disk capacity or CPU speed in the IT industry compared to, for example, battery energy density. The purpose is no doubt to illustrate the point that the laws of chemistry do not allow electric batteries to provide the kind of exponential improvements in efficiency as seen in the IT industry and described by Moore’s Law. Whilst this is true, it is also entirely irrelevant. There is absolutely no reason to expect battery technology to replicate the efficiency gains of the IT world. Most importantly, such efficiency gains are not exhibited by the internal combustion engine nor in any other technology that electric batteries or clean technology actually competes with in the real world. So let’s leave the wonders of the IT industry aside and focus on the realities of energy and the transport sector.

It is nevertheless true that the electric batteries currently in production are certainly expensive and have not in general managed to breach the question of range anxiety without significant cost or a back-up generator. So where will the improvements come from? Let me focus on a few significant points:

  • Any analysis based on the reputed cost structure faced by A123 Systems (AONE), which puts at battery costs at $1,000 per kWh, is not particularly insightful in a discussion of the future of the EV market as a whole. Developments in the overall EV market will clearly be driven by the more efficient producers, of which A123 Systems is currently not one.
  • Tesla’s (TSLA) Model S appears to have significant potential to alter the metrics in the EV market. The company has of course not released cost details of its new battery packs. However, the company has provided literature suggesting that on a $ per kWh basis the battery pack of the Model S is down to 42% of the cost of the original battery pack for the first version of the Roadster. The Roadster Sport had already gotten those costs down to 69%, so the gains continue to be impressive. The further expected gains are no doubt based on the Custom 18650 automotive cell in development with Panasonic.
  • That is why Tesla appears to be able to suggest that when the 300 mile version of the Model S is released next year it will cost somewherearound $75,000. There appears to be a demand for such a luxury EV and those metrics start to offer an interesting option in the luxury car market.
  • Efficiency gains that have been made elsewhere should also be recognized. For example, the new Ford Focus BEV has a 70-mile single-charge range, similar to that offered by the Nissan Leaf. However, the company claims that its 23 kwh battery pack can be charged with a Level 2, 240-volt charger in 3-4 hours - almost twice as fast as the Leaf.
  • Looking forward on a more medium-term basis, potential advances will no doubt come from new innovation related to alternative battery technologies – particularly related to Vanadium for example. Again, it is not necessary to try and pick winners. It’s simply the case that competition will spur innovation. These new technologies are of course a threat to lithium battery specialists such as A123 Systems. However, they are nothing but a potential boon to a company such as Tesla, who is not tied to a particular battery system and who could work with whatever a Panasonic or alternative can provide in the future most cost effectively.
  • Perhaps the most significant point is that further gains, particularly in lower end commuter-orientated EVs and PHEVs, are likely to come from other production advances outside of battery technology. A critical issue is likely to be weight-shedding and related new materials for example. This is no doubt the key to GM’s expanded relationship with LG Group. GM had previously been collaborating with LG Chem on the battery packs for the Volt and the Ampera. However, the company has recently announced that the relationship between the two companies will be expanded to involve LG Group as a whole. This will allow the Korean company to offer its expertise in other areas, particularly related to 'vehicle structures and architectures'. See more detail here. And Tesla of course is already working with aluminum in order to get the weight of the Model S down.
  • Finally, the introduction of Level 3, 480-volt chargers is also significant to the potential growth of the EV market. This will be particularly true once they are installed where they are most needed, across the nation's Interstate highways - as is for example planned with regard to the Pacific Coast Green Highway. These Level 3, 480-volt rapid chargers can provide a 19 kwh charge to a Leaf for example in 30 minutes. Some other EVs can be charged more rapidly. Drving from LA to the Canadian border in a Tesla will be a breeze.

All of this suggests that in fact there is no slow crawl ahead when it comes to overall efficiencies for EV vehicles. Most importantly, such efficiencies in terms of the performance of the cars as a whole will not be limited to efficiencies in battery technology.

What to Invest in: Tesla
  • As discussed above, Tesla (TSLA) is a low cost player in terms of the company's battery power train technology - despite being well placed in the luxury market.
  • The company has developed a significant brand name.
  • When the Model S is first produced in 2012, sales appear likely to go well. The company already has customer orders for some 5,550 units.The company's target of 20,000 unit sales in full year 2013 seems reasonable.
  • Tesla has an ongoing relationship with Toyota and seems likely to play a significant role in the roll-out of Toyota's EV program. The suggestion is that the two companies are currently negotiating over a $1bn deal - more detail here.
In my disclosure below, I have stated that I own no stock in any of the companies discussed. This is simply because, having had a reasonable month in difficult conditions, I decided to use Friday's rally to lock in profits on my clean technology portfolio. I intend to use any weakness into September to buy back my positions in stocks such as Tesla.

Finally, the bottom line is that the global issues discussed above will keep bringing both policy-makers and consumers back to the same questions. There is only one answer. It's time to break oil's monopoly in the transportation sector - and to put our trust in the free market and American innovation.

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service produced by a retired hedge fund strategist who also manages his own money inside a Clean Energy investment fund.

September 08, 2011

Chaos Theory, Financial Markets, and Global Weirding

Tom Konrad Ph.D. CFA

In my bio, I usually state
My study of chaos theory led to my conviction that knowing the limits of our ability to predict is much more important than the predictions themselves, a lesson I apply to both climate science and the financial markets.
Despite having written about financial markets and clean energy stocks regularly since 2006, I have never before explained in print what I meant by that.  This summer's heat wave and stock market turbulence illustrate how my intuition about chaos theory informs both my understanding of the climate and the stock market.

Chaotic Systems and Feedback

Poisson Saturne AttractorThe definition of a chaotic system I use is any system in which a tiny change in initial conditions can lead to a large change in results.  Most chaotic systems are chaotic because they contain positive feedback.  Positive feedback tends to amplify trends over time, while negative feedback tends to reduce trends over time.  Complex systems such as climate and the financial markets have both positive and negative feedback. 

In the weather, we can see positive feedback when a series of hot, sunny days create a static high pressure system which keeps storms from moving in to cool things off.  When a storm does move in, you can get positive feedbacks cooling things off.  National Weather Service forecaster Daryl Williams said the following about a storm which broke the summer heat wave in Oklahoma: “It's kind of feeding on itself, cloud cover and rainfall cools the air and the ground.” (italics mine.)

In stock markets, financial bubbles grow with the help of several types of positive feedback.  One such is "The specious association of money with intelligence," as John Kenneth Galbraith described it in his short and very readable book on bubbles, A Short History of Financial Euphoria: Financial Genius is Before the Fall.  When we see others make money in a stock market rise, we tend to think they must have been smart to have known when to get in.  If we made money recently by buying stocks, we tend to think we are smart for having done so.  In both cases, we're more likely to think that buying stocks is a smart thing to do, even if the profits were just dumb luck.  Collectively, this leads to more buying, which further raises prices.  Even if those price rises are justified in the beginning, the positive feedback can carry them up far beyond any level justifiable by the value of the underlying companies.  Many other positive feedbacks such as the wealth effect, relative valuation methods, and the increased ability to borrow against inflated asset prices operate in financial bubbles and bull markets.  In contrast, fundamental and value investors produce negative feedbacks by buying when prices have fallen and selling when prices have risen.

As with weather, external shocks to the system can reverse even these self-reinforcing trends, as we recently saw when the US's political paralysis around the debt ceiling debate and Europe's inability to effectively deal with their debt crisis recently ended the two year bull market in July.
 

Lorenz AttractorStrange Attractors and Regime Change

Highly complex systems which have both positive and negative feedbacks tend not to be chaotic all the time, but rather exhibit chaotic behavior only some of the time.  The system will behave quite predictably in a deceptively regular fashion for a while, but then shift with little warning into another mode of behavior that is also regular and predictable, but seems to follow a different set of rules.

Such behavior can be mapped with simple chaotic systems and often exhibits a pattern called a Strange Attractor, tow of which are pictured with this article.  As the system moves through such a strange attractor, it will often stay in one set of the rings curves shown for an extended period, before jumping to another set after an unpredictable period.

In the weather, we see this sort of behavior with extended heat waves, cold spells, or periods when it is hot in the morning followed by an afternoon thunderstorm.  Such patterns persist for days or weeks, but then quickly end to be replaced by a new pattern or a period of less predictable weather.

In the stock market, we have bull and bear markets.  In bull markets, good news is greeted with euphoria and strong stock buying, while bad news is discounted or ignored.  In bear markets, the opposite is true: good news is often ignored, while bad news leads to repeated bouts of selling.  In his excellent but somewhat inaccessible book, The Alchemy of Finance, George Soros describes how he tries to spot such tipping points or regime changes as they happen.  Much theoretical work has been done to understand and model such changes, but the lesson I draw from chaos theory is that recognizing such changes in hindsight may be simple, but predicting them in advance is and will continue to be extremely difficult.  That's probably why Soros did a much better job describing market regimes than explaining how to spot them. 

Nassim Taleb also addresses regime change in chaotic systems in his book The Black Swan.  His Black Swans are events which cannot be predicted solely by studying the past.  Such events occur, he says, because the rules we infer from the observation of events never contain the full range of possibilities.  He applies this lesson to societal events, personal experiences, and financial markets-- all of which are chaotic systems.  There are also climatic Black Swans.

Global Weirding

If you accept that the world's climate is a chaotic system characterized by a strange attractor and a large number of climate regimes such as ice ages and warm periods, you should also accept that the relatively small changes we are making to the atmosphere have the potential to shift the world's climate into a new regime where the weather patterns humanity is familiar with are replaced with a new set of patterns that we've never seen before in human history. 

We are already aware of a few positive feedback mechanisms with the potential to amplify the effects of climate change, such as the ability of a release of methane from arctic permafrost and clathrates to rapidly accelerate global warming, or the disruption of the North Atlantic current due to melting polar glaciers.  Such scenarios are chilling enough, but the knowledge that climate and weather are a chaotic system raises the possibility of yet unknown mechanisms that might create rapid climactic shifts.  In a chaotic system, the past is not always a reliable guide to the future.  Climactic past performance is no guarantee of future climactic results.

"Global Warming" can sound somewhat comforting.  "Climate Change" can sound clinical and distant.  A better description is "Global Weirding:" the climate is not becoming a warmer version of what we're used to, it's becoming an entirely new system, with a new set of patterns that will surprise anyone expecting a version of the old climate regime.

Conclusion

There is only one climate, while there are hundreds if not thousands of financial markets operating at any one time.  Financial markets also operate on a much more compressed time scale, with bubbles and busts compressed into a few short years or decades.  Ice Ages, on the other hand, last tens of millions of years. 

This difference financial markets and climate in number and scale means that we know much more about the chaos of financial markets than the chaos of climate.  We've probably already seen most possible financial market regimes in at least one of the thousands of financial markets, from tulip bulbs to CDOs, that have operated over the course of human history.  Although the rules of markets change with new technology and communication, the basic rules of human psychology which govern these regimes have not.  To paraphrase Mark Twain, financial history may not repeat itself, but it does rhyme. 

Climactic history may also rhyme, but we've not yet read a full line of the poem: We don't know what it will rhyme with.  Ice ages and warm periods often last tens of millions of years.  Given the infrequency of shifts between one climactic regime and another, it's quite likely that the new climactic regime we are heading into will be unlike anything that has prevailed during human history, and possibly unlike anything in the geologic record.

The benefit of the slow pace of climactic history is that we do have a few years or decades during which we will be able to influence the path of global weirding. 

In a chaotic system, a tiny change today can lead to a large change in future outcomes. 

What tiny change are you making?

September 05, 2011

Dividends and Value Among Renewable Energy Power Producers

Tom Konrad CFA

Almost every stock market sector fell significantly in late July and August this year, and such market declines send me searching for value stocks paying good dividends which I can hold for the long term.  In mid-July, I found some decent values by sifting through the trash, but I was less enthused by the value proposition of conglomerates involved in the clean energy space.  Today I'll take a look at a group of companies you might expect to be good income producers: renewable energy power producers.  These companies operate wind and solar farms, hydroelectric, geothermal, and biomass power plants, as well as cogeneration and recovered heat facilities.

They typically also develop such renewable energy facilities, but here I've chosen to focus on the ones that already have significant capacity under operation, as opposed to the ones which are tilted more towards development, because I'm interested in companies that have a chance to produce a significant income stream from dividends.  Although some of these also have regulated utility operations, I've chosen to focus on independent power producers because regulated utilities tend to have a high proportion of fossil fuel assets.

Renewable Power Producers

The seven companies I've found that meet these criteria are:
  1. Algonquin Power and Utilities Corp (AQN.TO/AQUNF.PK), which owns hydroelectric, wind, landfill gas, cogeneration, and biomass generators, as well as some regulated water and wastewater utilities and an electric distribution business.
  2. Boralex (BLX.TO/BRLXF.PK) develops and owns wind, hydroelectric, solar, and biomass generation, as well as natural gas cogeneration facilities.
  3. Innergex Renewable Energy (INE.TO/INGXF.PK) owns 20 run-of-river hydroelectric plants and 3 wind farms, and is developing more hydro, and wind, as well as a solar farm.
  4. Capstone Infrastructure Corp (CSE.TO/MCQPF.PK) owns gas cogeneration, wind, hydroelectric, biomass and solar farms in Canada, and operates a district heating facility in Sweden
  5. Northland Power (NPI.TO/NPIFF.PK) owns wind farms, wood biomass, gas combined cycle and cogeneration plants mostly in Ontario.
  6. Brookfield Renewable Power Fund (BRC-UN.TO/BRPFF.PK), an owner of hydroelectric and wind farms.
  7. Ormat Technologies (ORA) is the vertically integrated geothermal industry leader, and also develops and owns recovered energy generation worldwide
  8. Covanta Holding (CVA) owns several energy-from-waste facilities in the US an Canada as well as a California based insurance company.
Below, I have compared the dividend yield, earnings yield, operating and free cash flow (OCF and FCF) yields, as well as Equity to Debt and Equity to Price ratios.  The last two ratios have been inverted from their traditional forms (Debt/Equity and Price/Book) and scaled by a factor of 10.  I inverted them so that larger numbers would reflect better value as with the other measures, and the scaling makes them easier to compare on the graph.
Power Producers.png

Many of these companies (Boralex, Capstone, Innergex, Northland, and Ormat) exhibit large negative FCF because of heavy investment in new generation facilities, so OCF probably gives a better comparison of these companies' ability to generate cash from existing facilities, while FCF gives a better idea of the companies' ability to pay dividends without raising additional funds.  Capstone and Innergex's dividends (9.5% and 13.64%) seem at first glance too high to be sustainable based on the ratios here, so much more research would be warranted before I would consider investing in either of these.

The Best Options for Income

Investors looking for current income will want to avoid those companies with large negative free cash flow.  Algonquin Power and Brookfield Renewable Power both offer healthy dividends and have strong balance sheets with low Debt to Equity (high Equity/Debt) ratios and trade at modest Price to Book (Equity/Price) ratios.  Both also seem to have the earnings and cash flow to maintain payouts given the flexibility afforded by their modest use of debt.

Value Stocks

Investors looking for value stocks will be attracted to Boralex, with its high Earnings yield and a Price to Book ratio of 0.7, despite the lack of dividend.  Boralex may be somewhat volatile, however, given its relatively heavy use of debt, with more than twice as much debt as equity.

Conclusion

In the absence of retail Climate Bonds, Algonquin Power and Brookfield Renewable Power look like good options for the income investor wishing to add some clean energy to his or her portfolio, while Boralex deserves further research as a possible value play, so long as the current low price does not turn out to be the product of deeper financial problems.

DISCLOSURE: Long AQUNF.

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.

September 02, 2011

Axion Power is Poised to Dominate Energy Storage for Stop-start Idle Elimination

John Petersen

After eight years of rarely speaking above a whisper, Axion Power International (AXPW.OB) has found its voice, taken the scientific wraps off its PbC® battery technology and shown potential customers, competitors and investors that it's carrying a big stick and is poised to dominate energy storage for stop-start idle elimination – a cheap and sensible fuel efficiency and emissions reduction technology that's expected to grow at spectacular rates for the rest of the decade as shown in the following forecast of battery demand in vehicles equipped with stop-start systems.

6.27.11 10-year.png

In a new white paper on dynamic charge acceptance that's available in the Investor section of its website, Axion has thrown down the technology gauntlet and shown why flooded and valve regulated lead-acid batteries from Johnson Controls (JCI), Exide Technologies (XIDE) and others aren't good enough for today's stop-start systems and won't be good enough for even more demanding second generation systems. In the process it's also shown why a dual device system from Maxwell Technologies (MXWL) and Continental AG (CTTAY.PK) that combines a supercapacitor module with a valve regulated AGM battery can't be an optimal solution either.

The basic problem is that stop-start systems require their batteries to operate at a partial state of charge and conventional lead-acid batteries rapidly deteriorate if they're not kept fully charged. There's a fundamental mismatch between the needs of the application and the capabilities of the battery. With flooded lead-acid batteries the deterioration is obvious within weeks. With valve regulated AGM batteries it takes a few months. As the battery deteriorates, the mechanical systems just stop working. Stop-start systems that lose their functionality over a few weeks or a few months because of feeble batteries aren't efficiency technologies at all - they're greenwash. Automakers desperately need a better solution, but it has to be easy to manufacture, easy to scale and cheap enough for a price sensitive mass market.

In simple terms, the PbC is a battery-capacitor hybrid that loves operating at a partial state of charge and doesn't deteriorate rapidly with age. While the basic chemistry is pure lead acid, Axion replaces the lead-based negative electrodes found in conventional batteries with carbon electrode assemblies that eliminate battery deterioration and pave the way for second-generation systems that will offer even better performance. Since the white paper does a fine job of explaining the science, I'll focus on the business dynamics that favor rapid launch and widespread implementation of the PbC technology.

The PbC offers 10x the dynamic charge acceptance and 20x the cycle-life of conventional lead acid batteries for one reason – it's a third-generation device that takes valve regulated AGM battery technology to a whole new level. While the science underlying the PbC technology was patented in 2002, the challenge was developing production methods and equipment that could leverage existing manufacturing and distribution infrastructure instead of replacing it. Axion spent eight years developing PbC electrode assemblies that can be used as plug-and-play replacements for the lead-based electrodes used by battery manufacturers worldwide. The last step is earning OEM certification for its automated electrode manufacturing processes. Once the OEM's have certified Axion's electrode manufacturing processes, it will be easy for an AGM battery manufacturer to substitute PbC electrode assemblies for their conventional lead electrodes and offer a better battery to customers without having to requalify their factories or their products.

Unlike other battery manufacturers that want to build new factories and develop new customers, or wrestle business away from entrenched competitors, Axion plans to pursue a platform technology strategy where it will focus on manufacturing a high value component for sale to existing manufacturers that want to offer a better product to current customers. Axion's strategy was lifted from the Intel playbook. They don't care who manufactures the battery for a particular customer as long as it uses Axion's electrodes. With a strong intellectual property estate that will keep new entrants away from its sandbox, Axion is well positioned to forge a variety of cooperative relationships with battery manufacturers worldwide.

The only battery technology on the market that can offer comparable performance in stop-start applications is lithium-ion. While lithium-ion developers like A123 Systems (AONE) are actively developing products for the stop-start market, their batteries are more expensive than the PbC and harder to scale because they can't leverage existing infrastructure. They also suffer from significant cold weather performance issues and have limited potential for future cost reductions while the PbC is at the upper left-hand corner of the learning curve. There's a reason that first tier battery buyers like BMW and Norfolk Southern publicly aligned themselves with the PbC technology before there was a PbC product.

In his seminal book The Innovator's Dilemma, Dr. Clayton Christensen uses the term disruptive technologies to describe low-cost innovations that satisfy new customer needs, improve over time and eventually displace established technologies. The following graph illustrates the phenomenon.

9.2.11 Disruption.png

If you believe Dr. Christensen's theory it's impossible to believe that lithium-ion batteries that were developed for the most demanding uses will be the ultimate winner in energy storage for stop-start idle elimination. Technologies simply do not transition downstream from high quality uses to low quality uses. Disruptive technologies always start at the bottom and work their way to the top. Given a choice between embracing the PbC technology and working with Axion or losing critical market share to more expensive lithium-ion products, the lead-acid battery industry will do the only sensible thing.

At yesterday's close Axion had a $48 million market capitalization and a serially patented technology that holds the price and performance keys to a multi-billion dollar market. The math seems obvious to me. In less than two weeks Axion will present at the Rodman & Renshaw conference in New York. It's stock had a strong run in February and March of this year after similar presentations at lower tier cleantech conferences sponsored by Piper Jaffray, Jefferies and Kaufman Bros. While the first run was crushed by selling pressure from a couple of large stockholders, cumulative trading data leads me to believe that the willing sellers are effectively out of stock and can't cause a comparable reversal of the next run.

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

September 01, 2011

Ameresco (AMRC): Clean Energy One-Stop Shop

Tom Konrad CFA

Contrary to common belief, the greatest barrier to the adoption of clean energy is not the cost.  In many cases, cost is not a barrier at all: it's an advantage.  That's because energy efficiency measures are usually so cost-effective that they not only pay for themselves, they can often pay for the addition of flashier clean energy technologies such as solar and wind.

For institutions in the Federal and MUSH (Municipalities, Universities, Schools, and Hospitals) sectors, the main barriers are lack of capital and expertise.  Lack of capital arises because such institutions traditionally consider energy to be an operating expense, not a capital expense, while clean energy projects usually require an initial capital expenditure in return for ongoing energy savings.  Lack of expertise arises simply because finding the best energy solutions is far from simple.  Although there are many simple measures that an interested amateur can take, the greatest savings come from considering buildings and other facilities as integrated systems, not as collections of isolated measures.

Energy Service Companies

Ameresco, Inc. (NYSE:AMRC) was founded in 2000 as an independent, one-stop shop to help Federal and MUSH institutions overcome these barriers.  Last week, I interviewed Ameresco President and CEO George Sakellaris as part of my series of articles on energy service stocks.  Sakellaris pioneered this Energy Service Company (ESCO) model while working for New England Electric System to help industrial customers reduce their power usage in 1979.  Before founding Ameresco, he founded another leading ESCO, Noresco in 1989, which is currently owned by Carrier, a division of United Technologies (NYSE:UTX).

I first became interested in the ESCO model (also known as performance contracting) in 2007, when I heard about it as part of a Western Governor's Association Workshop on Efficient Buildings.  Then, as now, most ESCOs are arms of larger technology companies, like Noresco mentioned above, or are part of energy companies and utilities.  Other publicly traded companies with ESCO arms include AECOM (NYSE:ACM), Honeywell (NYSE:HON), Chevron (NYSE:CVX), Consolidated Edison (NYSE:ED), Constellation (NYSE:CEG), Eaton (NYSE:ETN), NextEra (NYSE:NEE), Johnson Controls(NYSE:JCI), Schneider Electric (Paris:SU.PA/SBGSF.PK), and Ingersoll-Rand (NYSE:IR).

In contrast, Ameresco is independent of any equipment manufacturer or energy company, leaving them technology-agnostic and able to approach the solution from the customer's perspective.  This independence, along with previous customer satisfaction and Ameresco's wide expertise allows the company to win bids such as the $795 million contract to build biomass cogeneration and heating facilities at the Department of Energy's Savannah River Site in South Carolina over the course of 19 years.  According to Sakellaris, Ameresco won this contract (the largest renewable energy performance contract so far in the United States) without being the lowest cost bidder because of their expertise and independence.   He also says Ameresco can compete on price because of low overhead.

Financial Results

The combination of a strong brand and expertise along with low overhead have contributed to strong results.  Annual revenue has grown steadily from $278 million in 2006 to $618 million in 2010, with second quarter revenue up 17% on a year earlier, matching the last five year's compound annual growth rate (CAGR).  Over the same period, earnings per share have risen at a 21% CAGR.  At the current stock price of $10.34, AMRC has a trailing P/E ratio of 14.35, which is modest considering the consensus 20% long term expected growth rate.

Ameresco also has good liquidity, with a current ratio over two.  I would normally consider its Debt to Equity ratio of 1.3 a problem, but much of this debt is project debt which will be transferred to project lenders upon project completion and acceptance by the Federal government.  If this project-related debt is removed from the calculation, the Debt to Equity ratio falls to a quite conservative 0.37.

Although multiple analysts reduced their price targets for Ameresco after the last conference call, the reason they gave was not any deterioration of Ameresco's business, but rather a decline in price of most companies in the sector, meaning that most investors are no longer willing to pay as much for a dollar of earnings or revenue than they were just a few months ago. 

Growth Strategy

Sakellaris told me that he plans to grow using only internal resources without taking on any more debt or issuing additional equity.  Ameresco has and will continue to grow both organically and by acquisition using funds provided by operations. 

In general, it makes sense to be wary of growth by acquisition in public companies, since it often leads to a lack of focus and can distract management from the core business.  That seems not to be the case for Ameresco, which takes a very strategic approach to acquisitions, and only acquires firms that either can expand the range of expertise the company can offer to clients, or allow the company to enter new geographic markets, such as their recent purchase of Applied Energy Group, which allowed them to expand their offering to utility customers.

One type of company Sakellaris says they will never acquire is equipment manufacturing firms, in order to maintain the advantage of being an independent integrator of technologies from all suppliers.  Nor is he interested in buying Demand Response (DR) providers such as Comverge (NASD: COMV) and Enernoc (NASD: ENOC), both of which were previously covered in this series, and whose stocks have fallen enough to look like attractive acquisition targets.  Although Ameresco does provide DR as part of their offerings, it's not a driver for their business.  He sees a "conflict between energy efficiency and demand response" because properly implemented energy efficiency measures reduce the scope for DR.  As he puts it, "More effective air conditioning is better than cycling air conditioning."  To be able to cycle an air conditioner off during peak times without significant thermal storage, the unit will have to be over-sized for its purpose in order to bring the building back to the expected level after the demand event is over, and over-sized units cool less efficiently.

When the company has cash but lacks acquisition targets that meet these criteria, they invest it in renewable energy projects, such as landfill gas, where they extract landfill gas, clean it, and deliver it to local customers for heat and electricity generation.  These projects typically pay back the invested equity in three or four years.

Governmental entities accounted for about 86% of Ameresco's revenues in 2009 and 2010.  Sakellaris is confident that the whole ESCO industry has only penetrated about 20% of the opportunity in the sector, citing a McKinsey study which estimated the potential of this market at $520 billion of performance contracts by 2020, and the market continues to expand as new technology leads to new energy saving opportunities.  The ESCO industry is doing only about six to seven billion dollars worth of contracts a year, leaving plenty of room for growth. 

Company Structure

One worry I had about the company was the company's governance.  Sakellaris completely controls the company through his ownership of all of the company's class B shares, which have privileged voting rights, as well as through his posts as President, CEO, and Chairman of the board.  Purchasers of this stock are buying into Sakellaris' vision for the company.  While the board has an independent nominating committee, which Sakellaris is not on, and he says he obeys the directions of the board and would not block a candidate put forward by the nominating committee, shareholders are essentially putting faith in his self-restraint.

I came away from my conversation with Sakellaris feeling that he is a dedicated entrepreneur who wants nothing more than to make his company an extremely "successful and sustainable enterprise", and that he was being honest when he told me that he kept voting control of the company when he took it public last year in order to be able to negotiate the best possible price in case the company is sold. 

But the company will not be lost without him.  Although he is 65, he is still healthy, but that has not stopped him from making sure the board has an adequate succession plan.  While Ameresco has grown through acquisition, it held on to the leaders of many of the acquired companies, several of whom now run Ameresco's divisions, and four of whom Sakellaris believes would be able to run Ameresco in his absence.  Their continued presence at Ameresco does a lot to ease my worries not only about succession issues, but also gives me some assurance that Sakellaris is a good leader, since such capable people would not have stayed if he were a tyrant.

Conclusion

Ameresco seems to be a well run and sustainable company.  In the short term, the ESCO business may be hurt by government spending cuts, but in the long term, budget pressure will make Ameresco's services all the more necessary.  The ESCO business model is also helped by current low interest rates, because the lower the interest rate, the more energy efficiency and renewable energy measures become economic, and the more business Ameresco can do for a single client. 

Although Ameresco is not nearly as cheap in terms of assets as some of the other energy services firms covered in this series, it is more profitable, and a decent value given its earnings and growth prospects.  I recently bought shares in the low $10 range, and will be looking to acquire more if the broad market implosion makes this current good value an absolute bargain.

Thanks to Rafael Coven of the Cleantech Index, Jeff Cianci of Green Science Partners, and Garvin Jabusch of Green Alpha Advisors, for contributing to my research for this article.

DISCLOSURE: Long AMRC, 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 obtained from sources believed to be reliable, but not guaranteed.


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