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October 31, 2011

Trick and Treat: Energy loans under review, as Hallowe’en looms

Jim Lane

The Obama Administration got tricked, and handed out some bad energy loan candy.

Turns out that the Washington press corps, and House Republicans, were asleep on the job, too. Until the money ran out, that is.



We’re not sure if there’s been any more perfect timing for an Obama Administration announcement, than the news that it will start up an investigation of the DOE loan guarantee program just as Hallowe’en weekend got underway.

Hallowe’en, is of course, the time of disguise, the celebration of the macabre, and the ghostly return of the dead to haunt you.

Not a bad description, overall, for the Solyndra loan. But there was substantial evidence that the loan guarantee process was fundamentally broken, over two years ago.

“Today,” announced White House chief of staff Bill Daley, “we are directing that an independent analysis be conducted of the current state of the Department of Energy loan portfolio, focusing on future loan monitoring and management,”  “While we continue to take steps to make sure the United States remains competitive in the 21st century energy economy, we must also ensure that we are strong stewards of taxpayer dollars.”

Today. As in the end of October 2011. But, let’s rewind the tape two years.

The signs in 2009

On Friday, Politico reported that Rep. Cliff Stearns (R-Fla.), chairman of the House Energy and Commerce oversight subcommittee, said, “In August 2009, the staff on the Department of Energy indicated that Solyndra would go prophetically bankrupt in September 2011.”

Well, it is high Washington fashion this fall, even more popular than the latest from Lagerfeld, Chanel or Dior, to trash the Solyndra loan. It looks like “Obamacare meets Watergate Junior”, to a lot of Republicans on the Hill.

The fact that the US government doubled-down, by allegedly subordinating the loan to investments by a pair of hedge funds, during a Solyndra financial reorganization, is going to cost Energy Secretary a headache when he heads to a November 17th hearing on Capitol Hioll, and possibly more.

But House Republicans and the general media missed a lot of signals themselves, that something was awry in clean energy financing and funding, way back in 2009.

In 2009, we reported:

“$32.9 billion in total funding announced, including grants and loan guarantees. Impressive! But just $17.44 billion for the private sector, the street – nearly half of that in loan guarantees rather than outright funding. The rest of it went to government (although, some went in state block grants that may, in turn, have some portion that finds its way to the street; and some of that went to the utility sector, in which there are private companies). Seems to me that government announcing a grant to government is double-counting. Call me stupid – isn’t that just an allocation?”

Why did so much energy funding get funneled to electric and clean vehicles, not energy?

We warned that an awfully high percentage of the funding was being shifted into specific industries, for reasons we could not fathom:

“Electric and “clean” vehicle technology received $2.9 billion — that’s $500 million more than the entire support for the solar, biofuels, wind, hydro, and geothermal investments which are supposed to provide the renewable molecules and electrons to power said vehicles.”

Why did coal receive more clean energy treats than biomass and biofuels?

We noted that, somehow, the coal industry had received more funding than biofuels and biomass put together – this, in a clean energy financing round:

“Of the $32 billion, $792 million has gone directly to biofuels or biomass — 2.4 percent. That’s 29 percent less than went to coal – which I thought was the energy we were supposed to be transitioning away from, rather than investing in.”

How did researchers in DOE labs end up costing the taxpayer $500,000 per year, each?

In fall 2009, we noted that a program “to support at least 50 early career researchers for five years at US academic institutions and DOE national laboratories,” received more than nuclear energy R&D, so far this year, or hydroelectric power development, or fuel cell research.”

That program received $85 million for salaries and the expenses of the organizations that do the hiring. In all, it was $1,700,000 per researcher, or $340,000 per person per year. Interestingly, the university positions were for “summer salary and expenses” only. Only some of these positions — for DOE National Labs — were full time. Full-timers received $500,000 in funding, per person per year.

At the time, we pointed out that, according to salary.com, the average salary for an assistant professor in the United States is $62,654. Leaving $438,346 for DOE national lab “expenses”. Per person. Per year. That’s a lot of beakers.

And, we pointed out that it wasn’t exactly like a honeymoon for more exotic, fashionable projects like solar. Even as Solyndra was getting the come-on, a lot of projects were getting the shut out.

How macabre did energy financing get, and when did it get that way?

In 2009, Mike Carpenter, managing director of Energy Recovery Group in Oregon advised us, “My USDA Oregon rep sent me the contact information of 30 banks, all apparently designated USDA 90% guaranty, $10M – 3 of thirty responded.   One of the three followed up – we had a deal – all I have to do is:  Show 30% cash, 27 different documents, private and personal, and the killer, a separate, exclusive method or vehicle to pay for the project, not related to the project.  As a solar project, I need to show a 5-year payoff. I called the other 27 banks just to check – the FDIC answered twice, we aren’t lending any money, we don’t have anyone smart enough to analyze a solar deal, on and on.”

We decline to fall in with the general expressions of “shock and horror” on Capitol Hill that Solyndra failed. Even if it is Hallowe’en, and “trick or treat” is in the air. Or, is that “trick, and you’ll get a treat too”?

For us, there was enough evidence on the table in 2009 that any self-respecting auditor might have issued a “substantial doubt, going concern” notice on the Administration’s financing programs way back in 2009. That the broader media didn’t pick up on what was broadly distributed in trade media two years ago, tells you just about what you need to know about the state of the Washington press corps.

When the treats run out, it’s time to soap the windows

The fact that Congress didn’t pick up on any of this, until the loan guarantee program was just about over, the funding wells were dry, and there was no more lipstick left for pigs, tells you just about what you need to know about Washington itself.

Now and through November, the Washington press corps and the House of Representatives will shine its jack-o’-lanterns on the macabre world of the DOE and the Obama Administration’s energy financing goals and achievements. They may well find a landscape of activity that reminds one more of out-takes from Thriller than a well-run financing program. There’s bound to be dirty laundry mixed in with some genuinely good loans, and well-meaning goals.

But the afore-mentioned watchdogs might do well to drop the we-are-the-champions costumery this year, and tramp the streets of Washington wearing hair shirts — or at least the latest sleepwear, to reflect what they have been up to most of the past two years.

The Bottom Line: No Great Pumpkin, and rocks again

Treats for a lot of companies and individuals.

For the long-suffering public, saddled with bad loans, and still not end in sight to the dependence on foreign loans – as it is each year in It’s the Great Pumpkin, Charlie Brown: no great pumpkin in sight, and rocks in the Hallowe’en sack, all over again.

To all of the above, we offer the traditional Hallowe’en (and theater) greeting: Boo!

Jim Lane is editor and publisher of Biofuels Digest.

October 29, 2011

Electric Vehicle and Lithium-ion Battery Investing For Imbeciles

John Petersen

In their 1969 bestseller "The Peter Principle" Laurence Peter and Raymond Hull quoted a Latin-American student named Caesare Innocente who lamented, "Professor Peter, I'm afraid that what I want to know is not answered by all my studying. I don't know whether the world is run by smart men who are, how you Americans say, putting us on, or by imbeciles who really mean it." After watching the events of the last few weeks, I think most of my regular readers would agree that the imbeciles are clearly steering the ship.

Last March I went to the Geneva Motor Show on press day, which gave me a chance to see the cars up close and personal without fighting the crowds. While I'm generally skeptical when it comes to electric drive, I left Geneva convinced that the Fisker Karma was the most beautiful passenger car I'd ever seen. I even promised my inner geek that I'd secretly take one for a test-drive once production started. The last remaining hurdle was cleared in mid-October when the EPA issued its official fuel economy rating of 52 MPGe for the electric range of 32 miles and 20 MPG for gas powered trips using the 2.0 liter onboard generator.

I was crestfallen. How could something so gorgeous and green get such a horrible fuel economy rating?

The answer, it seems, is that when you put the Karma on a scale it weighs a few hundred pounds more than a Hummer H3 and a few hundred pounds less than a Cadillac Escalade. That's right folks: it's a 5,300 pound behemoth that was engineered in California with $169 million of ATVM loan guarantees from the Department of Energy. While most of the long-term economic benefits from manufacturing these shocking green monstrosities will be outsourced to Finland, at least the batteries will be made in the US by A123 Systems (AONE) which made a $23 million venture capital investment in Fisker to establish a strategic relationship and ensure the battery supply contract.

When journalists and political pundits questioned the reasonableness of the Fisker loan guarantee, the DOE explained:

"Fisker’s loan has two parts. In the first part, Fisker used $169 million to support the engineers who developed the tools, equipment and manufacturing processes for Fisker’s first vehicle, the Fisker Karma. That work was done Fisker’s U.S. facilities, including its headquarters in Irvine, California, which has 700 employees and plans to continue hiring. While the vehicles themselves are being assembled in Fisker’s existing overseas facility, the Department’s funding was only used for the U.S. operations. The money could not be, and was not, spent on overseas operations. The Karma also relies on an extensive network of hundreds of suppliers in more than a dozen U.S. states."

The sophistry of using taxpayer money to finance special project jobs in California while creating long-term manufacturing jobs in Finland is self-evident. The more troublesome questions in my mind are:
  1. How many $100,000 Karmas will Fisker need to sell to earn enough profit to repay $169 million in DOE loans?
  2. How many battery packs will A123 need to sell to Fisker if it wants to recover its $23 million investment?
  3. Is either outcome even remotely possible given the lackluster sales and margins that Tesla Motors (TSLA) has realized from its equally sexy and expensive Roadster?
This was clearly a series of deals negotiated by imbeciles who really mean it. The most outrageous part of the DOE's defense was the penultimate paragraph which says:

"Remember that plasma TVs, cell phones, personal computers and many other common products were once fabulously expensive luxury items, but quickly became a staple for middle class Americans. These price declines wouldn’t have been possible without the first, commercial scale marketing as premium products."

BALDERDASH! I expect that kind of bafflegab from EVangelicals but not from government officials.

There is no possibility that electric vehicles will ever deliver the kinds of cost reductions we witnessed during the information and communications technology revolution because the fundamental science is totally different. There is no Moore's law for the physics of moving a 2.65-ton vehicle down the road. There is no Moore's law for electrochemistry. There is no fairy godmother to increase global production of non-ferrous metals or control commodity prices. But instead of rationally discussing science, supply chains and energy economics, we have the DOE deflecting reasonable questions with the time-honored wisdom that "facts don't matter because the essence of political debate is the plausible boldly asserted."

A little over three years ago I started cautioning readers that Ener1 (HEVV.PK) was a disaster in the making. My cautions got more strident when Ener1 made a substantial venture capital investment in Th!nk Motors to strengthen their strategic relationship and retain a battery supply contract that was jeopardized by Th!nk's insolvency. While some readers took my words of caution to heart, many did not. This week they learned that analyzing battery and electric vehicle companies through rose colored glasses is a great way to end up with a stock that's listed on the Pink Sheets. While I generally like to be right, I hate being this right.

I wonder how the DOE feels about that $118.5 million ARRA Battery Manufacturing Grant they gave Ener1 in August of 2009.

My graph for this week is courtesy of Lux Research and appeared in their recent report "Using Partnerships to Stay Afloat in the Electric Vehicle Storm." The graph is particularly instructive because it overlays their forecasts for the electric vehicle and lithium-ion battery markets in a single graph.

10.29.11 Lux Graph.png

The yellow lines represent total demand for lithium-ion batteries in automotive applications through 2020 using three different oil price scenarios. The blue shaded area represents the total planned production capacity of the global lithium-ion battery industry for the same period. The inescapable conclusions are that (1) without $200 oil, growth in electric vehicle sales will be tepid at best and certainly not robust enough to justify nosebleed market capitalizations for companies like Tesla, and (2) the glut of lithium-ion battery manufacturing capacity will be a crushing burden for all but the most efficient and financially sound battery manufacturers.

While Pike Research recently reported that demonstration projects have deployed 538 MW of lithium-ion based storage on the grid, all of the facilities I've read about report power based on a 15 minute discharge. That means the demonstration projects have used about 135 MWh of batteries to date, or less than 1% of the expected annual capacity glut. While grid-based storage may have significant long-term potential, it's not a big enough short-term opportunity to make a difference.

The takeaway for investors who are willing to remove their rose colored glasses is that the industry leaders in the electric vehicle and lithium-ion battery sectors are run by imbeciles who really mean it and their companies are doomed to underperform the market for years. Molly Ringwald was Pretty in Pink, but it's an ugly color for stock listings.

Disclosure: None.

October 27, 2011

Obama Cleantech Stimulus: Bad Policy, Bad Politics and Bad for Cleantech

David Gold

The Solyndra debacle is no surprise to this cleantech venture capitalist. The inherent conflict between trying to get money out of the U.S. Treasury as quickly as possible to stimulate the economy and, at the same time, have government agencies that are ill-suited at making business decisions do just that was nothing other than a recipe for disaster.

Anytime a government program is giving money to the private sector with the intent of getting the money back, the program is doomed to failure.  Bureaucracies, politics and the lack of a profit motive simply don’t allow government to succeed in business.   Anyone who was surprised that politics played a role in the loan decision for Solyndra (and almost certainly other awardees) is very naïve.

Even if, by some miracle, the government could make good business decisions void of political influence, such programs are still doomed to failure because the public and media won’t allow for even one loan or investment to fail. In venture capital we make investments that don’t succeed and we fail often.  Yet, we are still successful on the whole.  Our successes more than compensate for our failures.  The government has no ability to operate this way.  Even if a program like the DOE loan guarantee could operate with an overall effective return (which I find unlikely anyway), its first failure would sink it.  The government can give away money, but it cannot effectively invest money in individual companies.

Solyndra won’t be the last default from the DOE loan guarantee program.  The huge amounts of money that will ultimately have been wasted in the cleantech stimulus – both in terms of loans that won’t be repaid and the stimulus’ failure to create any meaningful job growth when growth was most needed - is bad for tax payers. The negative PR and the future demise of cleantech policies that otherwise may have had broader bipartisan support is bad for cleantech.

In 2009, amid the euphoria of the Obama Administration’s cleantech programs, I wrote that the Administration’s cleantech stimulus was bad policy but good politics.  I was wrong… not only was the cleantech stimulus bad policy, it was bad politics too.  While the politics by which the Administration pushed through these ill-thought programs may have been deft, the ultimate political impact is clearly bad for both the Administration and cleantech itself.

Ultimately, we may look back at Solyndra as the dagger that burst the cleantech bubble.  The hype and euphoria are officially gone.  The long, hard work that will be required to diversify our energy base and increase energy efficiency wasn’t reduced when the government sent floods of money out the door to cleantech companies, and it won’t change now that the hype of those programs is gone.  The good news is that, like the Web and every other technology bubble, the real value creation comes after the bubble has burst.

So, let’s get back to work. 


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.

October 26, 2011

The Pending Solar Apocalypse -- Not!

Garvin Jabusch

The hysterics around recent solar industry announcements that in general profit margins are narrowing are, as usual with all things solar recently, completely overblown. "Is This A Death Spiral for Solar Companies?" might be my favorite histrionic headline.

White Dwarf Spiral.jpg
Artist's depiction of death spiral in binary star system J0806 with two white dwarfs destined to merge.  Image Source: NASA/Tod Strohmayer (GSFC)/Dana Berry (Chandra X-Ray Observatory)  

Yes, narrowing margins are making life difficult for smaller, higher cost producers. But this is and has always been a standard part of the evolution of any industry from niche to growth to mainstream. An undervalued name we own and that I’ve used as an industry representative example before, Canadian Solar (CSIQ), announced October 17 that, due to the rapid growth in the solar industry and emerging commoditization of some components, their overall profit margin is expected to shrink to 12% by year end 2011. Meanwhile, their industry is growing at 10 times the rate of the overall U.S. economy and will far more than make up in volume what it loses in margins. This is the normal progression with any new technology, and is usually considered a good thing. In fact, most mature industries operate -- profitably -- at or below 12%. Here's the Fortune/CNN 2009 list of profit margins by industry:

GAA
Issue date: May 4, 2009

As you can see, solar, even with its newly revised, lower, 12% margins would still rank 6th of 53 on this list (if it were included). And the truth is, as solar grows and grows, and panels become cheaper and cheaper, margins will continue to drop to 10% and below. But, again, the industry is maturing into a high-volume business wherein scale will more than compensate for this narrowing just as occurred in most of the above industries.  Yet when was the last time you heard a pundit claim that most of these industries was in a “death spiral?”  I would argue that with its booming growth, solar is a better long term investment than any of these "stalwart" industries that currently operate between 1% and 10% margin rates.

Also bear in mind that as panels become ever cheaper and margins narrow, solar is fast becoming the cheapest source of electricity of any kind. Extrapolation of current trends shows that solar will be the cheapest electricity in the world by 2018, latest. What happens to industry growth as that day approaches?

After CSIQ's announcement, its shares dropped another 13% to $3.00, which is less than one-fifth of their $16.03 per share in cash. Ridiculous. CSIQ was already priced at one-quarter of cash, like a company hemorrhaging money, not making it. So the reduction in margin announcement should hardly have had the effect that it did, so what the further decline represents for me is a buying opportunity.

Bear in mind that China has made a $313 billion commitment to green energy, primarily solar, over just the next four years (the U.S. commitment is trivial by comparison, no doubt thanks in part to some dangerously misguided calls for America to give up on solar altogether). The favored Chinese manufacturers of solar PV will thus have no problem maintaining liquidity much less solvency as the industry, predictably, matures and consolidates. This kind of large, rapid investment in solar PV manufacturing has resulted in global supply outpacing demand at the moment, which is one of the factors causing shrinking industry margins. However, we believe this is a temporary imbalance because we’re observing aggressive solar scaling, utility-scale and rooftop, in nations worldwide. More on that in a later post. 

As an aside, we disagree with current U.S. based efforts to sue China for solar panel price dumping. Dumping, which is defined as selling a product under production cost to capture market share, is not the same as out-competing, which has the same effect. If China has invested so much more in its solar capability that its cost of production is significantly lower than ours, so be it; the appropriate response is to invest in our domestic industry to make it more competitive. It will be interesting to see what the WTO concludes, but I don’t think the dumping case is necessarily clear. In any event, winning the case will allow the U.S. to apply tariffs to foreign solar panels, thus raising the cost for consumers, prolonging our dependence on fossil fuels (although that may be the point) and keeping energy prices higher overall.  

Again, solar is a booming growth industry that is adding jobs, revenue and profits worldwide (including here in America), that is going to keep growing, and fast, for years if not decades: how many of us are aware that already, solar employs 100,237 people in the United States and is booming, compared to coal's 80,600 and shrinking jobs? [Note: the coal jobs figure is from the U.S. BLS. The BLS does not keep track of solar jobs, but refers interested parties to The Solar Foundation’s “National Solar Jobs Census,” cited above.]

The trick for investors is to find the low cost manufacturers with access to capital and with already profitable business models. Solar as an industry is here to stay; investors who own the best solar companies now will be very pleased in the long run.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

Departure Of First Solar CEO Rob Gilette Another Sign Of Solar's Troubles

Clean Energy Intel

CstSte_6292_FS_CA_WB_M.jpg
First Solar's Blythe Solar Farm under construction

First Solar's (FSLR) stock price was hit hard yesterday, falling some 25%, as a result of the departure of CEO Rob Gilette. The stock has bounced today. However, the very volatile price action is simply a sign of the extreme nervousness and underlying weakness in the sector.

A number or readers have questioned my stance of being uninvested in the solar sector during the recent Solyndra-related market turmoil. Since I see solar as being a significant part of the long-term clean energy solution, this does raise some contradictions. Consequently, let me take this opportunity to run over some of the related issues.

First of all, the current oversupply and turmoil in the market will no doubt keep driving solar costs down. Over time the oversupply in the market should rebalance and solar companies will be able to healthily compete against fossil fuels at somewhere around grid parity. Agreed.

However, clean energy investors have the just as much right to manage risk and dodge bullets in the short-term as any other investors.

So, I first recommended getting out of all positions on Sept 2nd due to overall market risk - see here.

Since then, I've written a series of articles specifically about the affect of this political pantomime on the financing funnel available to solar developers. For example, see here and my most recent article on the issue here.

Back then, on September 2nd First Solar, for example, closed the day at $90.10. As I write, it is now trading at $49.66 - a decline of 45%. At last night's close that number was even worse.

That seems to have been a bullet worth dodging.

The next stage in this political pantomime will be the issue of the need to renew the 1603 Treasury grant program at the end of the year. The politics will make this very difficult. Thus the financing funnel for the utility scale sector's 24 GW pipeline will be constrained further.

This is, of course, all political farce - but unfortunately the affect on the ability of developers to finance their projects is very real.

Finally, on overall market direction - I think we'll get a decent deal out of Europe soon and the global stock markets will rally back - for a fuller discussion see here. That will probably allow solar to bounce back on good days.

However, I'd rather play that rally being long stocks that don't have the same headwinds. An outright SPY position probably makes more sense for now. In the current environment, if you're long solar you're not just betting on solar as a solution, you're betting on the politics. And I simply don't think that's a good bet to take.

Disclosure:  I am long SPY, and have no other 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.

October 25, 2011

2012: Game on for 13 biofuels contenders

Jim Lane

13 companies knocking on the door of greatness – will they make the grade?

13 companies. 5 already public – eight filing for IPOs. In the first category, Codexis, Amyris, Gevo, Solazyme and KiOR. In the second category, PetroAlgae, Myriant, Ceres, Mascoma, Genomatica, Elevance Renewable Sciences, Fulcrum Bioenergy and OriginOil.

They’ve shown what it takes to get to the threshold of great things – do they have the Right Stuff to succeed at scale?
The public companies

It’s been a good October for the newly public companies, after a miserable summer. Amyris (AMRS), up 15 percent last week.Solazyme, Inc. (SZYM), up 10 percent for the month to date. Codexia (CDXS) up 8 percent for the month. Gevo (GEVO), up 35 percent for the month. KiOR (KIOR), up 4 percent in the last two weeks.

biofuels charts.png

For the most part, valuation on these early-stage companies, is part perception, part reality. The value depends on how much you place faith in the business plan, the technology and the management. There’s not much by way of revenue, and nothing in the earnings department, for early-stage investing. That’s why it is potentially so lucrative.

But perception must give way to reality – and, actually, the public companies are happy for that. Hungry for it. Generally, they’ve been dumbfounded at the lack of investor enthusiasm through  a tough summer – because the companies have been building out their business plans as they told investors they would.

For Solazyme and Amyris, there was the expectation of new partners and new production capacity. Done. For Codexis, the expectation of a deal with Raizen in Brazil to expand into bagasse-based renewable chemicals., Done. For Gevo, it was time to sign up new capacity and work towards conversion of their first commercial-scale plant to isobutanol production. Done. For KiOR, it has been a time of building capacity – underway.

Pavel Molchanov, alt energy analyst for Raymond James, commented: “Following this rating change, KiOR becomes our third Market Perform-rated stock in the alternative fuels space.  The key difference is that our rating on our other two Market Performs – Codexis and Rentech – reflects fundamental concerns about their business models, as opposed to valuation.  Our top pick in the space – and, in fact, the only Strong Buy-rated stock in our alternative energy coverage universe – remains Amyris.  We have Outperform ratings on Clean Energy Fuels, Gevo, and Solazyme.”

Fair? The stocks have generally been performing, throughout the summer, poorly in comparison to the broad equities markets. The space between current prices and analyst-based target prices is reaching astonishing levels. Solazyme, a 46 percent discount to its target price; Gevo, a 38 percent discount. Amyris, a 34 percent discount.

Inflection points?

For Solazyme, their next major JV announcement,. For Amyris and Gevo, start-up of their Sao Martinho JV and Luverne plants, respectively. Rentech, completion of its Colorado-based PDU next year. Codexis, its first major commercial arrangement outside of the Shell universe, or clarification from Shell on its strategy and timing.

The disappointments for ethanol in 2008, biodiesel in 2009-10, and the performance of the public advanced biofuels stocks in 2011 has created a potentially chilling effect for the seven stocks that wish to move forward with their IPOs.

Grading the class of eight IPO hopefuls

The star students – the A’s. With the eight new IPOs, sentiment has been running strongest amongst observers for Genomatica and Elevance – the renewable chemicals story is playing well, we hear. Liked by investors? Higher product margins, less capital intensive path to scale.

A-minus. Ceres is considered a special case, being such a long-term play and a very broad investor base, should an IPO prove unattractive.

Incomplete. OriginOil (OOIL.OB) is too new to the IPO group to have generated substantial section.

Leaving PetroAlgae (PALG.PK), Myriant, Mascoma, and Fulcrum Bioenergy.

Looking like a gentleman’s C. Of the four, PetroAlgae is considered the long-shot, given the long time the company has been in the IPO mix without pricing, and given the large capital raise ($200 million) and somewhat complex ownership structure.

The Solid B’s. Myriant, Mascoma and Fulcrum are all – like most of these new IPOs – financing events rather than liquidity events for investors. The current owners are trying to get more cars on the freeway, not heading for the exits.

Fulcrum is financing its waste-to-energy project in Nevada. Chief appeal? A low-cost feedstock story, and a great emissions picture,. What could be finer than converting garbage to fuels? Myriant is financing a scale-up of its ambitions in succinct acid. Chief appeal? Like Genomatica and Elevance, they are capitalizing on the large, relatively high-margin markets. On the down-side, a number of companies chasing succinct acid and the ongoing question of whether any of these companies can produce product at parity with the fossil fuel-based incumbents.

Mascoma – well, consolidated bioprocessing hard been a high-flying cellulosic biuofuels technology for a long time. That’s its challenge – like PetroAlgae, its been out there raising capital for quite a while. What do we hear from investors. The scale-up challenges are still generally not well understood by the market, and the daunting capital intensive nature of the projects, has put a question mark on the company’s ability to continue to scale. It’s a very light question mark, given all the progress the company has made, but enough to dull their momentum in an unenthused market. Many observers thought that Valero’s $50 million investment commitment would tip the scales for the company – but a more dramatic downstream partnership announcement may be just the ticket for the company to move forward.

The bottom line

So, thirteen companies – the lucky 13? Well, we doubt that all of them will, in the very long-term, survive the coming consolidation in biofuels. But if they haven’t quite yet fully locked in first-mover advantage, they have their noses out in front of the pack.

Others in the mix? Companies like INEOS Bio, Dupont Danisco Cellulosic Ethanol and BP Biofuels with access to huge balance sheets have to be considered among any real list of the potential winners in biofuels. Plus hot technologies like LS9, Cobalt, Qteros, Mendel, and Sapphire, to name just a few, that have remained on the private side of the equation.

Jim Lane is editor and publisher of Biofuels Digest.

October 24, 2011

Politics Likely to Continue to Cast Shadow Over Solar

by Clean Energy Intel

Solar stocks have clearly been heavily affected by the political fall out following the Solyndra affair - and unfortunately the political debacle only looks likely to get worse. The Hill now reports that the Republicans on the House Energy and Commerce Committee are deeply focused on attempting to prove that the Obama Administration broke the law in restructuring the $535m loan guarantee it had granted to Solyndra.

Clearly, this is largely politically motivated and as such is only likely to remain so as we move deeper into the election season. However, from an investment perspective, the rights and wrongs of the situation are not so important as the simple fact that financing in this arena has now become heavily politicized.

As I have argued in previous articles, this cannot be good. In particular, one of the last areas of support for solar is the 24 GW US utility scale pipeline. This needs to be financed and on historical numbers each 1 GW requires as much as $4bn in loan guarantees, although not all projects are reliant on financing support. Nevertheless, the politicization of the required financing funnel is a real concern - for a more detailed discussion of the issues see my previous articles here and here,

This really has become a daily political pantomine and there is little point in going over every cut and thrust of the debate. However, a very clear statement made to The Hill by Rep. Cliff Stearns (R-Fla.), chairman of the House Energy and Commerce Committee’s investigative panel, should be taken as a clear warning to continue to be cautious with regard to this sector:

“Once we establish clearly that DOE broke the law, that will send a very strong message....... The next step after that is to see why [Energy Secretary Steven Chu] did it, and [whether it is] tied to the White House and President Obama’s inner circle,” Stearns said, referring to Chu’s decision to approve the restructuring agreement.”

Those quotes speak for themselves - expect more political fireworks.

Over the long-term, I have no doubt that significant growth in the solar industry is both likely and necessary if energy policy is to deal in any way with the multitude of pressures which it now faces. However, two clear concerns look likely to continue to cast a shadow over the sector in the immediate future:
  •     The obvious political fall-out from the Solyndra affair, as discussed above
  •     Oversupply and an inventory problem, which will take quite some time to unwind. The recent continued decline in polysilicon, solar wafer and solar module prices is clearly indicative of this continued problem - for more detail see here.

Solar players such as First Solar (FSLR), Sunpower (SPWRA) and SunTech Power (STP) are clearly undervalued.  However, given the difficulties created by the issues discussed above, they may well remain undervalued for quite some time. As I have argued in the past, this is a time to keep your powder dry and invest another day.

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.

October 21, 2011

Can the Geothermal Industry Overcome Challenges to Raising Capital?

By Jane Pater Salmon, Navigant Consulting

Geothermal energy presents baseload clean energy at a lower cost than many other renewable energy alternatives. Despite this compelling value proposition, long development horizons and the risks associated with exploration and drilling activities present hurdles to developing the country's rich geothermal potential. Financing projects that use conventional geothermal technology remains challenging in the uncertain economic environment.

In the past year, geothermal project developers used alternative strategies to overcome three common challenges to geothermal project finance. While the challenges for raising capital at the project level are consistent with those faced in previous years, they have become even more pronounced as investors' risk-tolerance remains low and capital constraints continue.

Three key challenges to raising capital for geothermal project investment have adversely affected developers in the past year.

  • Concerns about creditworthiness of smaller firms. The geothermal industry is a fragmented one, with many smaller companies holding portfolios of just a few projects. With fewer assets against which to secure loans, these smaller firms pose a more significant risk than firms with more diversified portfolios. Even though many of these companies are traded on public exchanges, their capitalization levels are relatively low compared to larger renewable energy technologies companies like Vestas (VWDRY.PK), First Solar (FSLR), and Iberdrola (IBDRY.PK).
  • Challenges securing debt with recourse to a single project. When conditions permit, developers prefer to secure project-level debt with no recourse to the company in the event of default. This "non-recourse debt" reduces the developer's risk in the event of default because the company's other assets are protected. Non-recourse debt, however, increases risk for lenders who generally have been unwilling to provide this type of loan in the past year. Lenders have sought more collateral to reduce the risk of loss.
  • Higher transaction costs at the project level. Geothermal projects that have reached at least the permitting stage in the U.S. are smaller in terms of capacity as compared to other renewable energy projects. With few exceptions, geothermal projects are in the range of 25 to 50 MW, while wind projects are typically at least 100 MW. Similar levels of due diligence and negotiation are required for investments at this scale, resulting in relatively higher transaction costs for geothermal projects.

As a result, companies developing geothermal projects in the United States have deployed a diverse set of strategies — fitting each company's unique circumstance and leveraging the available resources — to address these challenges.

Overcoming Concerns about the Creditworthiness of Smaller Firms

Well-known but smaller-cap geothermal firms have partnered with larger, more well-established firms. These partnerships provide smaller firms with the capital needed to move forward on their projects and in some cases, the credibility needed to secure financing. At the same time, larger firms benefit from the financial returns on the project and the strategic benefits of partnership.

Over the past year, both Nevada Geothermal Power and U.S. Geothermal deployed this strategy. Nevada Geothermal Power's (NGLPF.OB) 30-MW Crump Geyser project in Oregon is a joint venture with geothermal industry giant Ormat (ORA). With a vertically integrated business model and a long history of strong financial performance, Ormat was seen as an ideal partner for the growing Nevada Geothermal Power. By providing the cash needed to complete the project, Ormat gained access to a lower-risk return on a project that was further into the development cycle than others in its own portfolio. The partnership also provided both companies with the potential to consider future collaboration.

U.S. Geothermal (HTM)partnered with Enbridge to raise equity for its 23-MW Neal Hot Springs project in Oregon. This partnership brought Enbridge, a Canadian gas transportation and distribution company, its first geothermal investment. The partnership leveraged Enbridge's familiarity with the early-stage risk profile of geothermal development, which is closely related to that of oil and gas resources. It also provided Enbridge with the opportunity to experiment with investments in the renewable energy space at a much lower risk.

The creditworthiness of the Neal Hot Springs project was further strengthened by a U.S. Department of Energy Loan Guarantee, which backed a $97 million loan provided by the Federal Financing Bank. The loan represented the balance of capital needed to complete construction on the project. With the loan and the combined equity of U.S. Geothermal and Enbridge, the debt-to-equity ratio on the project was 75 to 25.

Addressing Challenges to Securing Debt with Recourse to a Single Project

Over the past year, geothermal developers have bundled combinations of their assets in order to leverage their equity investments with debt. In many cases, these assets are limited to a portion of those owned by the company but are broader than those assets tied to a specific project. This approach limits the amount of leverage developers have because the debt typically appears on the company's balance sheet. In exchange, however, developers have secured the capital needed to continue to develop the resources to which they have rights.

Gradient Resources (formerly Vulcan Power) and Ram Power (RPG.TO) have each used corporate assets as collateral to secure credit in order to continue development. Gradient Resources secured a $13 million loan from GB Merchant Partners, LLC, with the firm's geothermal drilling and cementing equipment. The proceeds from the loan enabled Gradient Resources to continue development of three projects in Nevada. This limited-recourse loan only put select assets at stake, but was unique in that the capital was not tied directly to the projects it will support.

In March 2011, Ram Power closed on a two-year $50 million credit facility providing additional working capital to support its portfolio of projects under development. The credit facility was secured by "unspecified assets" of the company but is not tied to a single project. In addition, the lenders retained rights to exercise warrants based on Ram Power's reliance on the credit facility. The warrants provide the opportunity for the lender to earn additional returns on its investment if it elects to exercise them.

Reducing Transaction Costs Associated with Project Finance

Bundling projects to reduce transaction costs benefits both the lender and the borrower. The lender benefits from access to a portfolio of assets used to secure the loan. The borrower benefits from lower costs of capital, in terms of both fees to lenders and any arranger as well as in terms of staff time committed to closing the deal.

Both Ormat and John Hancock Life Insurance Company took advantage of these benefits in an application to the U.S. Department of Energy (DOE) for a Federal Loan Guarantee. Ormat bundled three projects — McGinness Hills, Jersey Valley and Tuscarora — that total 121 MW, achieving a scale similar to those achieved by wind projects. Meanwhile, bundling diversified John Hancock's resource risk and development risk for projects in multiple stages of development. In June 2011, DOE conditionally awarded the bundle a partial guarantee of up to a $350 million loan.


Jane Pater Salmon is an Associate Director with Navigant. Her work focuses on strategic planning, market assessment, the intersection of business and policy, and the diffusion of innovation. Her recent geothermal projects include the development of a project finance guidebook for conventional geothermal projects and the analysis of business models for coproduced and geopressured resources. Ms. Salmon earned a BA in Government from the University of Notre Dame and graduate degrees in energy and business from the University of Colorado.

The Dawn of the New Algae: cleaning up and enriching biofuels, with biofuels

Jim Lane

Iowa algae and corn ethanol project points the way towards optimizing delivery of feed, fuel, carbon reduction.

In our 10-part series, the Bioenergy Project of the Future, based on extensive interviews with industry leaders, we outlined what is expected to be the multi-product, multi-input structure of biofuels and biomaterials projects in the future.

In step 1, we identified the acquisition of an existing first-generation ethanol plant as an appropriate base, because it had so many assets already in place, including a feedstock aggregation system, relations with growers and customers, rail lines, roads, water, power and so on.

In steps two through nine, project developers would add in a variety of inputs and outputs that would increase the product value, stabilize the input costs, and improve the carbon footprint and impact of the project.

2. Cellulosic biomass feedstock
3. Renewable chemicals
4. Advanced drop-in biofuels
5. Algal fuels and materials
6. Bio-ammonia
7. Renewable diesel
8. Lowest-cost waste feedstocks
9. Solar, wind and other renewables

Bioenergy Projects of the Future, today

The most complete realizations of that vision at scale, to date, are the POET Liberty Project in Emmetsburg, Iowa; the Gevo biobutanol project in Luverne, Minnesota; the Amyris (AMRS) SMA Indústria Química project in Brazil; and the Green Plains Renewable Energy (GPRE) project in Shenandoah, Iowa – in which an algal fuels and biomaterials project in underway in partnership with BioProcessAlgae.

The Green Plains project is by far the least-known of the three – given POET’s position as the largest privately-owned, dedicated ethanol producer, and given the deserved hoopla over Amyris’ and Gevo’s (GEVO) successful IPOs in the past year.

In the POET project, they have taken on the most direct route to the Bioenergy Project of the Future, by adding in  cellulosic biomass feedstock, and moving on to the production of fuels in 2013 when the 25 million gallons Project LIBERTY plant officially opens at scale.

In the Amyris project, they have established a joint venture with an existing 8.5 million tonne sugarcane ethanol project in Pradópolis, Sao Paulo state, Brazil, owned by Usina São Martinho. Starting in Q2 2012, Amyris and São Martinho plan for the joint venture plant to produce Biofene, a renewable hydrocarbon, which would be used as an ingredient in detergents, cosmetics, perfumes, industrial lubricants, and diesel. In their case, they are still testing out cellulosic feedstocks, but have added in renewable chemicals and renewable diesel to expand their high-value product portfolio.

In the Gevo project, they have acquired an existing corn ethanol plant as a base, and are busy converting that production over to isobutanol, which is scheduled to commence at-scale in March 2012. In the Gevo case, they have skipped over (for now) the addition of cellulosic feedstock, but likewise added in renewable chemicals and advanced drop-in fuels to diversify the product portfolio.

The Algae Option

Of all of them, the Green Plains Renewable Energy and BioProcess Algae project in Shenandoah is the first to reach step five of the multi-step transition we identified – which is to bolt-on an algal fuels and materials capability to an existing corn ethanol production system

It’s all still at relatively small-scale. The partners will have to prove they can sustainably produce, harvest and process the algae. But it’s significant in three ways, for sure.

First, it massively changes the carbon footprint and impact of a corn ethanol project. Almost one-third of the corn kernel, by weight, is transformed into carbon dioxide in the ethanol fermentation process, and the algae can remediate that usage by absorbing the CO2 in its own growth process. It’s not carbon sequestration – that’s different, because the algae itself will be utilized for fuels and biomaterials. But it is capture and re-use, or a second bite of the cherry, and dilutes the carbon impact by creating a second batch of fuels or materials for the same given bushel of corn.

(You may be wondering how they grow algae at all in the state of Iowa during the colder six months of the year, without using bioreactors that are simply too cost intensive. Ah, that’s where the process heat and steam that comes off an ethanol paint comes in handy.)

Second, it changes the economics of the corn ethanol project. Though it remains exposed to the commodity price swings in the corn market, except to the extent to which it can achieve fixed-price or partially-fixed contracts with growers – it is far less exposed to the commodity price of ethanol. Biodiesel, for example, comes into play, or other bio-based materials made from algae – omega-3 laden fatty acids, for example that make for rich protein.

More importantly, the economics of algae do not work unless a project is using the entire biomass – either for feed, to gasify for fuel, or to provide energy back to the system. So, making algae work as a feed system is important to the economics.

Third, making algae work as a secondary feed source can substantially add to the feed options available to the meat and dairy industries, that have been sore as heck in having to compete with ethanol plants for corn-based feed, and have been running a first class, textbook “fear, uncertainty and doubt” campaign against ethanol that has befooled and beguiled, apparently, most of the US Congress.

So – for many reasons, one of the big question marks is whether algae strains that can tolerate industrial gases will work as an animal feed.

The big question: will it work as animal feed?

So it is significant that, yesterday, Green Plains Renewable Energy and BioProcess Algae announced the successful completion of the first round of algae-based poultry feed trials. The algae strains produced for the feed trials demonstrated high energy and protein content that was readily available, similar to other high value feed products used in the feeding of poultry today.

The algae strains used in the feed trials were grown in BioProcess Algae’s Grower Harvester reactors co-located with Green Plains’ ethanol plant in Shenandoah, Iowa. The test was conducted in conjunction with the University of Illinois led by Dr. Carl M. Parsons, a leading expert in the field of poultry sciences.

“This was the first time we tested algae as a poultry feed-product and many of the qualities found were similar to high protein soymeal, but with higher energy content,” said Dr. Parsons. In addition to the high energy and protein content, the testing found amino acid profiles similar to existing feed components. The University of Missouri analyzed the results and provided an independent third-party validation.

“Based on these first-round tests, we will continue the development of this and other high-quality animal feed products from our algae. We will proceed with further testing for poultry and begin evaluating a replacement product for fishmeal,” said Tim Burns, Chief Executive Officer of BioProcess Algae. “We can now look into the opportunity to use algae as a ‘carrier’ for higher value products going into poultry feed such as Omega-3s.”

Next steps

So, there’s reason for increased optimism on the algal fuels and materials front. Next steps for BioProcess Algae include further feed trials, and more importantly, continuing to knock down the production cost. Their current costs, at the scale they are producing, are sure to be too high, but how fast they knock them down in their science of growth and engineering of a low-cost production system will be key. We expect that, if they had a path to parity with $80 oil already figured out, the public might well have heard about it.

For now, we stay tuned.

Jim Lane is editor and Publiser of Biofuels Digest.

October 20, 2011

Another Reality Check for EV Investors

John Petersen

Earlier this month Deloitte Touche Tohmatsu Limited’s Global Manufacturing Industry group rained all over the plug-in vehicle parade when they published the results of a survey of over 13,000 individuals in 17 countries that concluded:

"The reality is that when consumers actual expectations for range, charge time, and purchase price (in every country around the world included in this study) are compared to the actual market offerings available today, no more than 2 to 4 percent of the population in any country would have their expectations met today based on a data analysis of all 13,000 individual responses to the survey."

While Deloitte's conclusions didn't surprise me, they did clarify my thinking about the market for ultra-high efficiency vehicles and the changes I've been following for the last three years. While I'm usually pretty opinionated, this article will focus more on uncertain market dynamics that aren't clear today but will become self-evident over the next couple years.

The niche market for ultra-high efficiency vehicles has only existed since 2000 when Toyota (TM) introduced the Prius. For the first nine years, the only real contenders were hybrid electric vehicles. Beginning in 2008, we saw demand emerge for new classes of ultra-high efficiency vehicles including "clean diesels" and plug-in vehicles like the Tesla Roadster (TSLA), which was recently joined by the Nissan Leaf (NSANY.PK) and the GM Volt (GM). The common characteristic of all ultra-high efficiency vehicles is a price premium that ranges from $4,000 in the case of a clean diesel to $15,000 or more in the case of a plug-in.

The following stacked graph shows total US sales of ultra-high efficiency vehicles since 2000 and estimates 2011 sales based on sales through September 30th.

11.20.11 UHE Vehicles.png

Over the last three years, the niche market for ultra-high efficiency vehicles has basically stagnated, averaging about 3% of new car sales. While that number ties nicely to Deloitte's conclusion that plug-in vehicles would satisfy the expectations of 2 to 4 percent of the population, the more fascinating thing about the graph is that while the trendline for the ultra-high efficiency vehicle class isn't all that bad given the financial turmoil we've experienced since 2008, it's crystal clear that clean diesels and plug-ins are eating into the HEV market instead of attracting new converts to the ultra-high efficiency vehicle fold.

Logically it makes sense to me that only a small percentage of US car buyers would be willing to pay a $4,000 to $15,000 premium for an ultra-high efficiency vehicle, but we'll need to see at least a couple more years of data before drawing any definitive conclusions. Until we see a major upswing in the overall market penetration rate for the ultra-high efficiency vehicle class, however, I have to assume that plug-ins, clean diesels and HEVs will compete hammer and tong with each other for the 3% of the new car market that doesn't care about cost premiums and be politely ignored by the 97% of the market that thinks the green in their wallets is more important than the green in their cocktail party conversations.

Usually when I get to this point in an analysis, the EVangelicals start trotting out their subsidy arguments to justify the exorbitant costs. While a wide variety of subsidies and incentives have been adopted over the last couple years, I don't believe they have any long-term viability because the world has reached a tipping point where governments can no longer afford to throw public money at an ideology embraced by the 1% at substantial cost to the 99% who are finally taking to the streets in sheer unfocused frustration. While today's protestors lack the coherent goals that we had during the civil rights and anti-war movements of the 60s and 70s, public fury over government policies that benefit the new royalty at the cost of the masses is mounting and it's only a matter of time before people come to grips with the inherent immorality of taxing Peter to buy Paul a new car, particularly when Paul is part of the 1%. When you add in recent developments like a car dealer Congressman who fired an employee over the unauthorized purchase of a GM Volt for his dealership, I have to conclude that today's immense but wholly unjustifiable eco-bling subsidies will quickly become little more than footnotes in automotive history.

My favorite reader comments are the ones that breathlessly compare Tesla and other EV developers with Apple (AAPL). The comparisons are actually quite apt, but not in the way commenters intend. For the first 15 years that I used Apple's computer products they focused on the 3% to 5% of the market that was willing to pay a stiff premium for something different and clearly superior. The stock was one of the worst investments in the tech sector and those of us who loved Apple's computers spent a lot of time worrying that the company would fail. The dynamic didn't change until Apple rolled out its iPod line for the masses in late 2001. Since then serial successes with mass market products including the iPhone and iPad have Apple them the success story of the new millenium. The possiblilty that Tesla or any other EV developer will be able to make a comparable splash with four wheels, a massive battery and a 25 foot power cord is laughably remote.

The graph clearly shows that the ultra-high efficiency vehicle market has temporarily if not permanently flat-lined at a 3% market penetration. While it may be a fun place for technology geeks to marvel over the latest gee-whiz press release, it's not a market for serious investors because there's no upside unless the market penetration rates change significantly. For the next five years, the solid potential for market beating performance will be in un-loved battery industry stalwarts like Johnson Controls (JCI), Exide Technologies (XIDE) and Enersys (ENS) and emerging technology developers like Axion Power International (AXPW.OB) that are working on less dramatic fuel efficiency technologies for the 97% of the market that doesn't care about premium priced eco-bling and believes baby steps matter.

Since September 30th, the broad market indexes have gained an average of 6.7%. During that period JCI has gained 20.6%, Exide has gained 12.5%, Enersys has declined 0.4% and Axion has declined 1.9%. All four companies have rebounded convincingly from recent bottoms and appear likely to outperform the market on a go-forward basis.

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

October 18, 2011

Nissan Keeping Options Open: BEVs, Hybrids and Cheaper Fuel Cells

by Clean Energy Intel

Nissan Leaf and
Glider
Nissan Leaf (Left) & Landglider at the 2009 Tokyo Motor Show. Image source: Wikipedia / Tennen-Gas

Nissan and its sister company Renault have clearly made a commitment to 'advanced-drive' autos.

The facts speak for themselves:
  •     Nissan put the Leaf on the streets in December of 2010 - the first mass-produced, battery electric vehicle. Sales reached 15,000 units worldwide by September of this year.
  •     Nissan-Renault CEO Carlos Ghosn has said he expects sales of BEVs to make up 10% of the sales of new light-duty vehicles by 2020.
  •     The combined companies are investing $5bn in electric drive vehicle development.
  •     The two companies have said they will produce 8 different EVs by 2015.
Two new developments at Nissan illustrate the fact that the company is keeping its options open in terms of  which new alternative fuel technologies will in the end be the winners.

Firstly, Nissan has developed a new hybrid powertrain which, when released in 2013, will combine an electric motor with the new XTRONIC continuously variable transmission (CVT). The CVT itself is capable of improving fuel economy by as much as 10 percent because of 'modified parts, a smaller fuel pump and use of lower-viscosity oil, all of which cut friction by as much as 40 percent..... The system, paired with a 2.5-liter turborcharged engine, provides the power of a 3.5 liter engine but with much better city and highway fuel economy' according to a report by AutoObserver.

Nissan has of course been producing hybrids for some time - in the US with the Altima Hybrid, for example, and the Infiniti M35, which was released this July. Neither model has seen much success - mainly since the hybrid field is heavily dominated by the Prius.

Perhaps of more interest then, is Nissan's suggestion that the company has also built a fuel-cell stack for hydrogen fuel-cell electric vehicles (FCEVs) that provides more than double the power density of the fuel stack the company developed in 2005 at about one-sixth the cost. This from AutoObserver's report:

Nissan achieved this by changing the fuel cell stack's structure to cut its size in half while reducing the use of platinum and the total number of parts by 75 percent, the company said. The automaker said it also made cost- and size-cutting improvements to the fuel-cell stack's separator flow path, which separates hydrogen, air and cooling water with stamped thin metal plate.

The news that significant progress has been made in getting the amount of platinum used in fuel cells down is good news since the platinum content of the cells has been a major factor in keeping the fuel cell less than economical.

Perhaps hydrogen fuel-cell electric vehicles will make a renewed impact once again. The key is the ability of the various automakers currently on route to put FCEVs on the market by 2015 to get costs down. From this perspective, Nissan's news certainly raises an eyebrow.

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.

October 16, 2011

Occupy Wall Street and the Next Economy: Clamoring for Solutions

Garvin Jabusch

The Occupy Wall Street movement (OWS), now in its fourth week, is getting a lot of media attention. Opinions are divided. By and large, conservatives represent the protesters as 'a mob' (a notable exception is former governor of Louisiana and current GOP presidential candidate Buddy Roemer, who said on MSNBC that "politicians need to listen to these young people, it could change America"). Meanwhile, progressives view them as a justifiable, if not inevitable, reaction to the social inequity that results from a system rigged in favor of the ultra-wealthy.

Protesters in Zuccotti PaekIn their foundation document, the Declaration of the Occupation of New York City, OWS protesters say (among other things) that they object to the monetization of the American political process, where money talks and everyone else -- the 99 percent -- walks, even if that results in policies with horrific consequences for everyone but the wealthiest 1 percent.

And, of course, that is the true state of affairs in America. These "kids" are absolutely right. The U.S. has always been to some degree subject to the overreach of its richest citizens and, from time to time, the resulting inequity has become so egregious that the less-moneyed have taken to various acts of protest to register their indignation and to work for change. And in case you weren't aware, inequity is presently at an all-time high in this country. Nobel Prize-winning economist Joseph E. Stiglitz summed it up last May, in his seminal Vanity Fair piece "Of the 1%, by the 1%, for the 1%":

The upper 1 percent of Americans are now taking in nearly a quarter of the nation's income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

In their Declaration, the Occupy Wall Street protestors have rightly placed the blame for all of this on "corporations" (I would amend this to "some corporations with the aid of their bought congresspersons," and I bet most of the OWSers wouldn't disagree) and included a long list of grievances against them. For me, three of the charges are especially relevant.

1. "They determine economic policy, despite the catastrophic failures their policies have produced and continue to produce,"

Corporations do determine economic policy, mostly via their nearly complete control of policymakers. Leading economists believe that "skyrocketing inequality… is the result of public policies that have concentrated and amplified the effects of the economic transformation and directed its gains exclusively toward the wealthy. Since the late 1970s, a number of important policy changes have tilted the economic playing field toward the rich." The catastrophic failures, as in 1929, speak for themselves.

2. "They have donated large sums of money to politicians, who are responsible for regulating them."

This one, of course, was immeasurably exacerbated by the Supreme Court's 5-4 ruling, in Citizens United v. Federal Election Commission, that money is speech and therefore may be used as freely, and also that corporations are people, and therefore may exercise their right of free speech (cash) without limit. Further, via super-PACs and 501(c)(4)s, donations of any size can be made and spent anonymously. (I've been thinking that Green Alpha should run for governor of Colorado to see whether our company would, in fact, be definable as a "person.")

It's not-quite-amusing to note that former House majority leader Tom DeLay was this year sentenced to three years in a Texas prison for making large corporate donations that would today be legal. Citizens United gave corporations whatever remaining leash they needed to make sure Congress stays bought. An amount like $10 million, for example, is relatively small in the world of business (on a good day that buys maybe a small condo complex?) but in Congress it's enough to ensure the votes of every policymaker you need to make sure that, say, Big Oil gets billion-dollar subsidies or that coal companies can continue to remove whole mountaintops and poison West Virginia. Which brings me to my next point.

Using the levers derived from these actions and policies,

3. "They continue to block alternate forms of energy to keep us dependent on oil."

Here again, of course the OWS Declaration is right. How else to explain that a majority of the comfortably profitable public solar companies that we follow are presently trading at valuations less than the free cash they have in the bank?

How else can we explain that the main story around energy corruption in America is focused on the relatively small amount of money loaned to solar firm Solyndra? Pure political donation-driven kabuki. Or as Jeff Goodell put it in Rolling Stone:

…we're in the middle of a concerted campaign to demonize clean-tech entrepreneurs, one that fits into the grand narrative that fossil fuel apologists and shills have been pushing for several decades now: that America as we know it and love it runs on oil, gas, and coal, and that anyone who says otherwise is a liar, a communist, or a criminal. House Republicans are already using Solyndra's failure as an excuse to slash federal loans to clean energy start-ups, as well as plotting a carnival of hearings and investigations that will keep this story in the news for months.

It comes down to what FDR said, as he battled the inequalities of the Gilded Age that brought about the Great Depression: "We had to struggle with the old enemies of peace: business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob." We're up against greed, self-interest, and a tax code that's not fair -- where you and I pay more than the largest corporations. No, not just a higher percentage, more dollars. General Electric famously paid $0.00 in taxes for 2010 after earning net income for the year of $11.6 billion. The system is so rigged, that even if GE wanted to pay its fair share, say even 5 percent, to do so (or even to lobby to close the loopholes that allow it not to pay) would put it in an actionable position for acting against the financial interests of its shareholders.

It's pretty clear that we have to both change the tax code and get private money out of politics. Only then can true and free capitalism emerge. Only then will dollars chase companies with the best ideas and products, rather than those with the best connections and the largest political donations.

OWS, in short, is right. And we agree. That's why Green Alpha Advisors practices investment management wth a transparent process. We make our reasons for our portfolio positions clear, and we don't play games with synthetic assets such as credit default swaps or with computer tricks like high-frequency trading. We only buy companies whose business models both disrupt business-as-usual and represent the next, green economy. With the exception of a small percentage of speculative positions, we focus on companies with proven, profitable businesses (as opposed to nascent green tech that we wish would do well). We still believe in buy and hold, and reject the notion that the true value of good companies changes ten percent or more each day. That is, we're doing the job that investment managers are "supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow." (Quote from Matt Taibbi's advice to OWS.)

We believe investment management can be fair, clear, and work to promote rather than stifle a global economy that works in tandem with the world's ecology. Further, we believe that next-economy finance is the only path forward that won't result in both economic and ecological collapse (to the extent that those are even different), and that as such it is also the best long-term economic bet for investors, offering the best chance for competitive returns in an increasingly resource-scarce, warming, populous, and unequal world.

At Occupy Wall Street and around the country, people are clamoring for solutions. The rise of the solutions must surely follow.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

October 13, 2011

Trade Like It's 2008

Tom Konrad CFA

Three stocks I sold recently, and why.

Three years later, I'm still kicking myself that the severity of the 2008 financial crisis and stock market collapse took me by surprise

Not that I wasn't in good company.  If a majority of investors had been prepared for the crisis, it would never have happened in the first place: The overpriced CDOs and other securities which were a large part of the cause would never have become overpriced. 

But making excuses for past mistakes is not useful.  Learning from them is.  This time around, when the market began to again look overvalued in the latter half of 2009, I began hedging my portfolio, increasing that hedge as the overvaluation became more extreme over the last two years.  This has enabled me to opportunistically buy fundamentally sound, high yielding stocks among waste management companies, energy efficiency companiesrenewable energy power producers, and a solar balance of systems play over the last two months, because my hedges produced liquidity as the market fell.

I expect that the market has farther to fall, so my hedges are still in place, although I have not increased them to reflect my recent purchases. 

Despite the success of my hedging strategy (at least so far), last week I realized I was making one of the same mistakes I made in 2008: I had money tied up in companies that require functional financial markets to succeed. 

Any company which needs to raise money over the next year or two will almost certainly face significant share dilution in order to attract new capital.  Hence, I've taken the opportunity of this week's mini-rally to sell the companies I was holding that will need to raise new capital in the near future.  Even though these companies are already trading significantly below the value of their assets, shareholders are not likely to be able to realize the value of those assets if the companies cannot raise new funds and outside buyers do not appear. 

These companies are Comverge (COMV), EnerNOC (ENOC), and Nevada Geothermal Power (NGLPF.OB, NGP.V), which I said I was holding in my quarterly review of my ten clean energy stocks for 2011.  The parallels between 2008 and 2011 which I noted in writing that article, as well as some similar parallels noted by the Economist got me thinking about other parallels between the two years. That thought, in turn, led me to decide to dump these three stocks despite their current cheap valuations.
There's no law that says a cheap stock can't get cheaper, and when funding dries up, cheap companies that have to rely on external funding almost invariably get cheaper.  That's why I called 2009 the "Year of the Balance Sheet."  I now expect 2011 will also be a year of the balance sheet, and probably 2012 as well.  Which is why I've decided to grit my teeth and take my rather significant losses in these three stocks. 

I initially included Comverge and EnerNOC in my ten picks for 2011 because I was looking for smart grid stocks for the portfolio, and I did not see many others which looked like good values.  These two companies had fallen in late 2010, so they seemed relatively attractive.  When they continued to fall in early 2011, I began to buy them myself.  Nevada Geothermal was included because I thought a small rally in geothermal stocks starting in late 2010 was the start of something bigger.  The opposite turned out to be true, partly because of a raft of bad news at geothermal companies, not least at Nevada Geothermal.

In short, I let my enthusiasm for particular industries lure me into investments in particular companies.  Letting our enthusiasm for an industry or technology cloud our judgment about individual companies is also a common mistake in investing, especially among those of us drawn to clean energy. 

Lesson learned, I hope that admitting that mistake to myself (and you) will keep me from letting my enthusiasm for clean energy from doing my stock picking for me again.

DISCLOSURE: None.

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

October 12, 2011

Solar: Polysilicon Prices Accelerate To The Downside

by Clean Energy Intel

In a further sign of the continue supply-demand imbalance in the solar sector, weekly data from Bloomberg New Energy Finance suggests that the spot price of polysilicon, the raw material used in most solar panels, accelerated to the downside last week, falling at the fastest pace since June. Prices of solar wafers and cells also continued their decline:

'The average selling price dropped 5.8 percent on the week to Oct. 10 to $43.78 per kilogram, according to the latest results from the London-based research firm’s survey of contracts conducted from Oct. 3 to Oct. 10. The price of six- inch solar wafers dropped 3.3 percent to $1.74 each and multicrystalline photovoltaic cells slid 4.1 percent to 70 U.S. cents per watt of capacity'.

Solar continues to face difficulties regarding two clear concerns:

  •     continued oversupply in the sector, as evidenced by the new data from BNEF
  •     the ongoing political fall-out in the US regarding the investigations into the Solyndra affair - for a fuller discussion see here.
However, the price performance for now is likely to be broadly determined by the direction of the overall market. Having been very bearish last month, I have recently taken an overall bullish view of the S&P as a whole - for a full discussion see here.

As we move towards the end of the month, talk is likely to grow of a possible deal at the G20 on European debt - quite possibility backed by China in a significant way. This is likely to provide a sustained rally in the overall stock market. And if that is the case, it will no doubt drag solar with it. However, given the issues discussed above, on a risk-reward basis it would probably be better to play the potential rally ahead with exposure outside of the solar sector.

Disclosure: I am long SPY. I have no exposure in solar stocks.

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.

October 11, 2011

Solar Verticals and “Balance of System” Valuations

Garvin Jabusch

Tom Konrad has kindly provided an opportunity for me to contribute a response to his recent piece “Inverter Stocks: A Value BOS Play on Solar.” I’m grateful for the opportunity because it gives me the chance to discuss these stocks and along the way to clear up some misconceptions it seems may exist regarding Green Alpha’s portfolios and our vision of the next economy.

Tom wrote, for example, that “Garvin... has been making the case that the solar sell off is irrational on this blog since June, but his consistent bullish stance on solar has made me nervous of his recently disclosed solar holdings in the Sierra Club Green Alpha portfolio CSIQ, FSLR, JKS, LDK, WFR, and YGE.” It’s true that in various posts I have disclosed that Green Alpha ® Advisors is long all of these positions, and we are. However, when I disclose that "Green Alpha Advisors is long" a given stock, I mean to imply we hold it as a firm, across all our various portfolios, not solely in our Sierra Club Green Alpha Portfolio (SCGA). And while we in aggregate do hold all the solar names Tom listed, the SCGA in fact contains only two of them, and in composition is actually just a shade over 12% invested in solar manufacturers.

Our primary goal with our portfolios is to provide investors a well diversified basket of different technologies and approaches addressing civilization's emerging concerns around warming, constrained resources, and growing populations and affluence. Providers of these solutions exist all across economies in sectors from water to materials to green building to, yes, renewable energy. Here's the formal SCGA sector breakdown:

Industry

Sector

6/30/11 Weight

Energy

Solar

12.23%

 

Energy Storage

1.16%

Manufactured Materials

Advanced Materials

6.37%

Services

Raw Data & Analysis

10.03%

 

Education

3.94%

Infrastructure

Networks

3.36%

 

Utility Grid

5.48%

Products

Components

16.15%

 

Equipment

7.42%

 

Machinery

15.39%

 

Consumer Goods

13.16%

 

Cash

5.31%


Totals

100.00%


Tom’s conclusion that the SCGA may have been concentrated in solar is certainly understandable; my holdings disclosures have not been portfolio specific and I have been writing a lot about solar recently, to the point where it could appear that I don’t think about much else! As the allocation chart above shows, though, we believe in and practice a diversified form of green investing. We invest this way because we believe that in the next economy, all sectors and industries will need to be represented, so our investment approach is to select diverse companies that already work in our next economy models.

So I was a little concerned when Tom’s conclusion that the SCGA was essentially a solar portfolio led him to suggest that purchasing a solar-themed ETF would be simpler, since that advice could have the unintended consequence of driving folks from a diversified, well-balanced portfolio into a single solar silo, which of course would tend to be much more volatile. If your investment strategy is to hold a large basket of solar stocks, then in fact I agree with Tom, a solar ETF may be more efficient and inexpensive. But for those with a more broad goal of investing in green economy solutions across industries, a Green Alpha portfolio would be more appropriate.

[TK Note: My thought was actually that I'd prefer to hold a solar ETF to a basket of six solar stocks in order to gain exposure to solar in a larger portfolio.  But if I did not make that clear to Garvin, I'm sure I did not make it clear to other readers as well.  I agree that a diversified portfolio is far superior to a focus on solar stocks.]

To address the topic of Tom’s piece directly, we do like power conversion devices as an industry, and we do hold Satcon Technology Corp. (SATC) and two other inverter makers, across portfolios. On the risk side, we agree that inverters, while critical, are not big value-add products and that manufacturers could suffer from competition as a result of relatively low barriers to entry. But the world will need more inverters (and lots of them), so for us this segment of the renewables story is about scale, or which firm is making these devices at lowest cost. The other key risk, and here we again agree with Tom, is that China may decide to add this piece to its repertoire and link together the entire renewable energy chain in-country. But this risk may also provide opportunity if the Chinese decide to make these firms available to foreign investors via ADRs, as has occurred with many of their renewable-related firms. I also see the possibility that the larger solar PV manufacturers will buy or build inverter making divisions in house, thus ensuring supply, prices, and some margin control, making their value propositions that much better in the long run. And acquired companies, of course, usually receive a premium above spot. 

With renewables of all kinds growing rapidly worldwide, there clearly is a growing demand for components that can render useful the electricity derived from them.  And generally, we like Tom’s “balance of system approach,” and we share it. With respect to solar, we look for the bargains in companies all along the value chain from raw polysilicon providers, to panel encapsulate makers, to inverter makers (which are also used in stationary fuel cell power systems, a la Bloom Box) and others. We like SATC both because of its price competitiveness and its preferred status among many utilities. SATC recently announced, e.g., that they have provided over 100 MW of inverter to capacity to California utilities, including 75% of all Southern California Edison's inverter orders, more than any other provider.

With solar as a power source growing rapidly worldwide, it makes sense to own the best companies along all verticals, including inverters. But in my opinion, at this moment, the solar PV manufacturers themselves represent the best overall value: of 14 comfortably profitable solar PV stocks we track very closely, nine are trading for less than cash.   In a word, they’re ‘oversold.’

In case you're curious, I still absolutely think solar valuations are irrational. One of the two Sierra Club Green Alpha Portfolio solar names, Canadian Solar (CSIQ), is both profitable and growing, and, according to Thomson-Reuters, it has $16.04 in cash per share on hand, yet is trading at $3.53, or only 22% of cash. Effectively, that means one can buy that business for nothing right now. A profitable, growing company, in the world's fastest growing industry, that will provide a nearly 5-fold return if it merely appreciates to cash? Yeah, I stand by my conviction that it's crazy not to own that.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."

October 08, 2011

Lithium-ion Battery Stocks: Investment Opportunities or Subsidized Laggards?

John Petersen

I'm often critical of public lithium-ion battery manufacturers based on objective investment metrics including their financial condition, their results of operations, their potential markets and the fundamental soundness of their business plans, but I don't usually drill down into thornier issues like technical merit and business execution because those questions are out of my depth and in the words of Harry Callahan, "A man's got to know his limitations."

Every once in a while, however, organizations that are competent to evaluate those issues publish analytical reports that can help investors cut through the hype and make better investment decisions. The following “Innovation Grid” graphic from Lux Research that first appeared in a June 2011 report titled, "Using Partnerships to Stay Afloat in the Electric Vehicle Storm," is a fine example.

10.8.11 Lux Lithium.png

In the underlying report, Lux explained that they:
  • Evaluated the value of core technologies, the addressable market size, the competitive landscape, and IP position to rank companies along a vertical axis ranging from 1 (Low) to 5 (High);
  • Evaluated management strength, profitability, partnership value, overall momentum, and the surrounding environment to rank companies along a horizontal axis ranging from 1 (Low) to 5 (High);
  • Evaluated maturity by considering size, stage of development, and annual revenues to rank companies by dot size; and
  • Provided a subjective overall ranking ranging from strong caution to strong positive.
Lux developed the Innovation Grid hierarchy of lithium-ion battery producers because its market analysis indicates that global lithium-ion battery manufacturing capacity will exceed demand by a wide margin for the better part of the next decade. Accordingly, it believes the looming capacity glut will force an inevitable consolidation where a handful of dominant manufacturers survive while weaker market participants fail.

Since I didn't create the Innovation Grid hierarchy, I'm not going to argue about the relative technical and business merits of the various companies. My primary goal today is to observe that some winners of headline grabbing ARRA battery manufacturing grants in August 2009 seem to be technical and/or business laggards, including:
  • JCI-Saft, which was awarded $299.2 million dollars in ARRA battery manufacturing grants, recently became a wholly owned subsidiary of Johnson Controls (JCI), and is safely ensconced in the heart of mediocrity;
  • A123 Systems (AONE), which was awarded $249.1 million dollars in ARRA battery manufacturing grants but received mediocre grades for technical merit and sub-par grades for business execution; and
  • Ener1 (HEV), which was awarded $118.5 million dollars in ARRA battery manufacturing grants but received laggard grades for both technical merit and business execution.
All of them are apparently less attractive business opportunities than Advanced Battery Technologies (ABAT) which was savaged in a trio of articles from Variant View Research in March and April of this year, but is well positioned in the Lux hierarchy.

At Friday's close ABAT was trading at 30% of book value, 70% of annual sales and 1.9 times trailing-twelve-month earnings. If you want to own stock in a lithium-ion battery company ABAT seems like a far better choice than the subsidized laggards.

Disclosure: None.

The Microeconomics of Green Jobs

Tom Konrad Ph.D. CFA

Much fuss has been made about green jobs. Do they exist, and are more “brown” jobs displaced for every green one? Given all the political rhetoric, it’s not surprising that there is also considerable confusion about green jobs.

There should not be. While pinpointing the actual number of jobs created or destroyed by any particular policy will always be fraught, the underlying microeconomics are rather simple, and understanding those microeconomics can make it clear if a given policy will be a net creator or destroyer of jobs.

While there are many considerations that should be taken into account when forming policy, such as encouraging new technology which may allow future growth, and improving the health and well-being of citizens, I am going to restrict myself to the goal of promoting job creation and economic activity in this article in order to keep the discussion relatively simple. 

My conclusions should not be considered in a vacuum.  Many considerations, not just jobs, should be considered when forming policy.

 web-KLOSSNER-UCS2012calendarCOLOR.jpg
(Picture reprinted with permission from UCS / John Klossner)

Re-framing the Question

In order to avoid the rather pointless debate about the definition of a “green job” I will re-frame the question to one that I believe both sides would agree is more important (at least if they were able to put aside partisan bickering):

Does a particular green policy create more jobs than it destroys?

If a policy is both green (which I define as lowering our use of resources and/or environmental impact) and is a net creator of jobs, all parties should agree that it is a good policy. Green policies which destroy jobs, on the other hand will require further analysis as to whether the environmental and health benefits outweigh the economic losses, a question which requires putting relative value on various benefits, and cannot be resolved purely by economic reasoning.

Which Policies are Net Job Creators?

I’m aware of two mechanisms by which a policy can increase or decrease economic activity and hence number of jobs.

  1. Jobs can be created or destroyed by substituting labor for capital, energy, and/or other resources in production.
  2. If a policy increases economic efficiency, it will increase economic activity and create jobs. If it decreases economic efficiency, it will reduce economic activity and destroy jobs.

Substituting Labor for Energy or Capital

Marginal rate of Technical Substitution.

Image Source: Wikipedia

A basic tenet of microeconomics says that there is a tradeoff between capital, labor and natural resources such as energy in the production function. In particular, you can substitute capital for labor (by mechanization) or labor for capital (by using shovels and picks instead of bulldozers.) Now add energy into the mix, and you can substitute fossil energy for either capital or labor to attain the same production.

For example, a hybrid vehicle substitutes capital and resources (in the form of an electric motor and batteries) for energy (less fuel consumed to do the same work.) A bus substitutes labor (the bus driver) for capital, resources and energy (lots of cars and fuel consumed.) A green building substitutes labor (better architecture/construction) and some resources (extra insulation) for energy.

From this perspective, any policy that promotes the substitution of labor for energy will create green jobs, since you get more work and less energy consumed. Shifting people out of their cars and onto mass transit will create jobs because there will have to be drivers and people managing the transit system, where before no one was paid to drive. To the extent that the transit system can be paid for out of the reduced fuel costs and car ownership costs of the former drivers turned riders, the number of jobs created will be a pure economic gain.

Multiplier Effects

That brings us to the other major potential source of jobs from green policies: economic multiplier effects.

To the extent that green policies improve economic efficiency by overcoming economic barriers to cost effective green solutions, these policies will result in greater economic activity, and hence more jobs. The strongest critique of “green jobs” initiatives is that they simply shift economic activity from out-of-favor “brown” sectors to more politically correct green ones. Yet when a policy improves economic efficiency, it does not just shift jobs and capital around in the economy: it creates economic activity and jobs.

Not all green policies improve economic efficiency. For example, subsidies for not-yet-economic types of renewable energy such as wave power and solar installations may be justifiable on the grounds that they are helping to promote needed future technologies, but they probably come at a net cost to near-term jobs (even if they may create more jobs in the long term by allowing the creation of new types of businesses.)

On the other hand, policies to promote energy efficiency will be strong net creators of jobs, because the cost of energy efficiency is typically only a fraction of the cost of the energy saved. The very existence of opportunities to save significantly on energy bills at modest cost is proof that the energy market is inefficient. In an efficient market, all such opportunities would have already been taken.

After the energy efficiency measure has been installed, the cost savings can be used for useful economic activity, rather than wasted on unneeded fuel. This money will then spur additional activity and stimulate jobs.

Using Fossil Resources to Stimulate Growth is Like Stimulating Growth With Debt

Short term jobs (green or otherwise) should not be the only consideration when forming policy. A short term focus on jobs today can end up doing long term economic harm. For instance, if we spend too much borrowed money to create jobs today, the long term drag on the economy caused by paying back the debt will leave everyone worse off.

Economic growth fueled by the extraction of non-renewable resources is very similar to economic growth fueled by debt. When we extract these resources and use them, we increase economic activity today, but their non-renewable nature means that we lose the opportunity to extract and use them tomorrow. Hence, the economic stimulus today comes at the cost of an economic drag tomorrow, and the future economic drag will generally be larger than today’s stimulus, since improving technology should allow us to get more benefit from each unit of resource in the future.

Using renewable resources to stimulate growth does not have this problem: Tapping the wind or the sun for energy today does nothing to diminish the wind or sun tomorrow. Hence, to the extent a green job relies on renewable resources and a brown job relies on fossil resources, the green job should be preferred, even before taking the environmental benefits into account.

Policy Implications

If we only consider job creation, the focus on policy should be on creating jobs and economic activity, with a preference for green jobs, since those impose less of a cost on future economic activity than jobs based on extractive industries.

Green jobs can be created either by substituting labor for energy and capital, or by reducing energy waste so that the money previously wasted on energy can be put to more productive uses. For policy makers who wish to create green jobs, the implications are clear.

Green job programs should focus on two types of opportunities:

  1. Industries where labor can usefully be substituted for energy or capital, such as mass transit.
  2. Breaking down the barriers to energy efficiency which can stimulate economic activity by allowing money that would otherwise have been wasted.

The converse is also true: if the goal is to create jobs and stimulate economic activity, subsidies and other policies which encourage the substitution of capital and energy for labor should be ended, especially those subsidies which encourage the extraction of non-renewable resources which only create jobs today at the cost of future jobs.

The most cost effective policies for creating jobs will be those that break down the barriers to the adoption of cost-effective green technologies, especially energy efficiency. Ironically, most energy subsidies have gone into capital intensive sectors such as nuclear and extractive sectors such as oil and gas.

A very cost effective way to produce jobs would then simply be to remove subsidies from fossil fuels and nuclear energy and redirect them towards the most cost effective clean technologies.

Increased support for and promotion of public transit could do much more to reduce our dependence on imported oil than support for domestic drilling (which will only make us more dependent on imported oil in the future by using up domestic resources sooner) while also creating jobs.

Meanwhile, energy efficiency programs such as cash for caulkers can cost-effectively reduce energy bills and free up money for other sorts of consumption while also creating jobs in the depressed housing sector.

October 06, 2011

Solar: DoE Ends Loan Guarantee Program with Final $4.7bn in Approvals

by Clean Energy Intel

This past Friday, the 30th September, was the final day for approvals under the Department of Energy's 1705 Loan Guarantee Program. This was of course set up as part of the 2009 stimulus law and extended an existing Energy Department loan guarantee program.

Activity at the DoE under the program has also now of course become a highly political issue in the aftermath of the move by Solyndra into Chapter 11 - leaving the program exposed on its $535m loan guarantee, extended to the company in September of 2009.

In particular, Republican members of Congress have expressed concerns that the DoE, having allegedly failed to do proper due diligence on the Solyndra loan guarantee, would now rush through some final loan guarantee approvals before the Friday expiry of the program. You can read my original article on the likely negative affects of this political wrangle on solar stocks here.

Indeed, in the aftermath of the Solyndra announcement the DoE failed to move forward on two large loan guarantee applications:
  • On Wednesday the 21st, First Solar Inc (FSLR) said that their application for a $1.9bn loan guarantee for their 550 MW Topaz project would not complete the application process in time to beat the deadline.
  • On Friday the 23rd, a similar fate befell SolarCity's application for a $275m loan guarantee. The DoE blamed increased paperwork resulting from the Congressional investigation into the Solyndra decision. SolarCity's project, SolarStrong, would have put solar panels on the roofs of 160,000 military family homes.

However, despite the ongoing political debate the DoE earlier last week approved two new loan guarantees:
  • On Wednesday the 28th, the DoE approved a $727m loan guarantee for a 110 MW solar project sponsored by Tonopah Solar in Nye County, Nevada.
  • The same day, they also announced the finalization of a separate $337m loan guarantee for a Sempra Energy 150 MW project in Arizona.

Finally, on Friday the 30th, the DoE approved a final batch of loan guarantees or partial loan guarantees for solar projects for a total of $4.7bn:
  • Sunpower (SPWRA) was awarded a $1.237 bn loan guarantee for the company's California Valley Solar Ranch project in San Luis Obispo, California.
  • First Solar Inc (FSLR) received a $646 m loan guarantee for the company's Antelope solar generation plant in Lancaster, California.
  • First Solar Inc (FSLR) also received a partial guarantee on $1.46 bn for the company's Desert Sunlight project in Riverside County, California.
  • Prologis received a partial loan guarantee on $1.4 bn for Project Amp, which will put 752 MW of solar power on 750 existing rooftops across 28 states.
You can read the full details of all of these projects on the DoE's website for the loan guarantee program here.
These approvals are undoubtedly supportive for the companies concerned. However, the politics surrounding support mechanisms for renewable energy looks likely to intensify. In particular, as I discussed in a recent article here, Republican members of the House Energy and Commerce Committee are now pushing for Energy secretary Chu to testify personally before the committee.
Given that next year is a Presidential election year, it is very unlikely that this issue will calm anytime soon. Most importantly, the financing funnel for solar projects has also been supported by the Section 1603 Treasury Program, which is set to expire at the end of this year. The extension of the program now looks set to become a major election issue. Not a good sign.
The worrying point is simply that the 24 GW project pipeline in the US utility scale sector is one of the most significant remaining sources of support for solar demand in the aftermath of the pullback in Europe. There must be a concern that financing these projects is going to become more difficult as room for any further government support mechanisms dwindles. For a fuller discussion, see my original article on the issue here.
All of this suggests that it remains a good time to keep your powder dry and stay on the sidelines.
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.

October 05, 2011

10 Clean Energy Stocks for 2011: It's 2008 All Over Again

Tom Konrad CFA

Few investors have good memories of 2008, but when it comes to the performance of my annual model portfolio of ten clean energy stocks, I'm finding the resemblance to 2008 remarkably striking. 

The good part of that memory is that my picks are once again out-performing my clean energy benchmark, the PowerShares Clean Energy ETF (PBW).  The bad news is that "out-performance" means down 44% for the portfolio, compared to down 48% for PBW: a Pyrrhic victory.  Over the same period, the broad market Russell 2000 index was down 22%.  For 2008, the results were down 55% for the whole portfolio, compared to down 67% for PBW and down 42% for the S&P 500.  (I have used the Russell 2000 as my broad market benchmark for the last few years because I think it is a better match for the types of stocks I pick for the portfolio.)

10 for 2011 Q3.png
Four Nasty Surprises

This year has been a rough one for my ten clean energy stocks for 2011.  Not only has the clean energy sector greatly underperformed the broad market, but three of my picks have revealed bad news which sent their shares tumbling.  Ram Power (RPG.TO, RAMPF.PK) revealed drilling cost overruns at their flagship geothermal project in Nicaragua, while Nevada Geothermal Power (NGLPF.OB, NGP.V) revealed problems at Nevada Geothermal's flagship Blue Mountain property.

If that was not bad enough, American Superconductor Corporation (AMSC) keeps going from bad news to worse.  In Q1, they reported problems with their main customer Sinovel Wind Group (601558.SS).  I discussed this situation in detail in a series of three articles, the first exploring what Sinovel's action might mean, the second looking into Sinovel's motivations and speculating as to Sinovel's future actions, and the third an attempt to value AMSC given all the uncertainty in the midst of a delayed annual report filing.  Most recently, we learned that AMSC was the victim of cut-price industrial espionage and that the company is suing Sinovel.  All this is happening while the company's eponymous high temperature superconductor business seems to be on the cusp of rapid growth, but I have to wonder if the ongoing fallout from the Sinovel saga won't overwhelm this much smaller part of AMSC's business.

Also since my last update, one of the companies I had expected to add some stability to a portfolio with several risky stocks, Veolia Environnement SA (VE) gave us its own nasty surprise with lower guidance related to restructuring because of declining trash volumes, plans to downsize, and an accounting fraud in its US division. 

One bit of good news in Q2 was that energy management leader Schneider Electric (SBGSF.PK) made a buyout offer for IT solutions provider Telvent Git S.A. (TLVT).  Since this list is not meant to be an actively managed portfolio, I decided to substitute bus manufacturer New Flyer (NFI.TO/NFYEF.PK) for Telvent during my last update.  So far, that has turned out to be a bad move, since New Flyer fell with other clean energy stocks in Q3, while Telvent stayed flat at a few cents below the buyout price.

Strategy Going Forward

These annual model portfolios are not meant to be actively traded; I intend them for the use of investors who prefer to fire and forget.  That said, many readers, like me, prefer a more active approach, so what follows is my current trading stance on each of the stocks in the portfolio.

Hold

The two Demand Response stocks Comverge (COMV), and EnerNOC (ENOC), as well as the two geothermal stocks Ram Power (RPG.TO, RAMPF.PK) and Nevada Geothermal Power (NGLPF.OB, NGP.V) have all fallen to levels where they are trading considerably below their book value.  Any and all of these could be buyout targets at current prices.  Since the market decline began in late July, however, I have turned my attention to buying possible income opportunities on the cheap rather than distressed companies such as most these.  While I have not sold my stake in any of these stocks, I am not looking to buy anymore, either.

I have not looked closely at Potlatch Corp. (PCH) recently.  The company was initially included in the portfolio as an income-style investment, but given the large decline in other stocks, I have seen plenty of other income style investments at similar yields recently, so I have not been tempted to revisit this one.

Hold or Speculate

American Superconductor Corporation (AMSC) is a similar case although I have a much harder time determining what the company's value actually is.  As such, in July I bought some $10 Calls on the stock expiring in January 2013, a position which limits my downside but gives me a possible payoff if all the bad news is replaced by some good.  Since the stock has fallen considerably since the lawsuit news, I would be more likely to buy calls with a strike price of $7.50 than $10 if I were again in a speculative mood.

Buy

I currently am heavily overweight in Waterfurance Renewable Energy (WFI.TO/WFIFF.PK) and New Flyer (NFI.TO/NFYEF.PK).  I recently added significantly to my position in Waterfurnace at $15.50 and wrote about it here.  With the stock now trading around $17.60, I think it's worth buying if you don't yet have any, but investors who already have decent sized positions should probably hold off and see if the ongoing market turbulence creates another such opportunity below $16.

I last added to my New Flyer position at $0.61 (re-organization-adjusted).  Since it's still trading around there and pays a very healthy dividend, I'd be filling up a bus with this stock if I had not already.  New Flyer recently announced that their planned 10 for 1 share consolidation has been approved by shareholders, so the stock should be trading in the low $6 range after October 5, rather than the low 60 cent range.

Veolia Environnement SA (VE) looks attractive below $15 because of the large dividend yield and relatively stable waste management and environmental services business.  Recent problems seem well-reflected in the price of the stock, and I have orders in to buy more on any share declines.  I bought at $13.38 on Tuesday.

CVTech Group's (CVT.TO/CVTPF.PK) electric power maintenance and construction business continues to win contracts, but the stock has fallen because of a big drop in profits and revenues last quarter which management ascribes to the current climate of financial uncertainty.  I think investor fears are overblown since the company still has a large backlog, and the company's bread and butter business of power line maintenance cannot be delayed forever.   CVTech is currently trading under book value at $0.90 and a yield of over 2% which is well covered by both earnings and cash flow (the payout ratio is only 14%.)  I think this stock is vastly under-appreciated because of its small size and low trading volumes, and management seems to agree, since they initiated a normal course tender offer to buy back stock in August.  This is a non-distressed company trading at distressed prices.

Conclusion

Now is an excellent time to be acquiring stakes in dividend paying businesses with depressed stock prices due to the current financial uncertainty.  I think the crisis is far from over, however, so continue to keep some powder dry as more opportunities continue to emerge.

DISCLOSURE: Long NFYEF, RAMPF, NGLPF, WFIFF, CVTPF, COMV, ENOC, VE, 2013 AMSC $10 Calls

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

October 04, 2011

Micro-Hybrids – The Fuel Efficiency Innovation of the Decade

John Petersen

I've been writing about micro-hybrid vehicles and stop-start idle elimination since May 2009. It's a cheap and simple fuel efficiency innovation that turns the engine off while a car is stopped at a light and automatically restarts the engine when you take your foot off the brake. It's not gee-whiz sexy, but it can boost fuel economy by 5% to 15% in city driving and dramatically improve urban air quality by reducing idling. What could be more sensible?

When I first wrote about stop-start in "Why Advanced Lead-acid Batteries Will Dominate the HEV Markets," the only market forecast I could find came from Frost & Sullivan, which predicted that global micro-hybrid sales would ramp from 800,000 units in 2008 to about 10 million units in 2015, a superb growth rate by almost anyone's standard.

10.4.11 F&S Stop-start.png

By April 2010, expectations about the ramp rate for stop-start technology had increased significantly and the final rule release for new CAFE standards predicted that stop-start would be used in 42% of new US passenger cars by 2016. In its recent Power Solutions Analyst Day presentation, Johnson Controls (JCI) summarized automakers current plans and forecast a global penetration rate of 25 million stop-start vehicles per year by 2016, over 2-1/2 times the rate forecast by Frost & Sullivan in 2009.

9.27.11 Global SS.png

By 2020, JCI expects global stop-start vehicle sales on the order of 50 million vehicles per year.

Regardless of what you believe automakers and consumers should do when it comes to fuel efficiency, it's clear that the automakers are implementing stop-start at a fevered pace and the technology will become standard equipment over the next five years. In response to surging demand from automakers, JCI is ramping its manufacturing capacity for absorbed glass mat, or AGM batteries, from four million units this year to an estimated 18 million units by 2015. Other manufacturers like Exide Technologies (XIDE) are following suit and it won't be long before cars equipped with stop-start systems are saving more fuel per year than all HEVs, PHEVs and BEVs combined.

Baby steps and low hanging fruit are important!

Despite their fuel economy advantages, stop-start systems are very hard on the batteries that need to restart an engine ten or even twenty times in a typical commute and carry accessory loads during engine-off intervals. In the real world, stop-start systems work great when the batteries are new but quickly lose their functionality as the batteries age. The following graph from the Department of Energy's Idaho National Laboratory illustrates the problem with shocking clarity.

10.4.11 INL SS Economy.png

With brand new batteries the test vehicles had great fuel economy. As the batteries deteriorated over a few months of use, the bulk of the fuel economy benefits vanished.  At last September's European Lead Battery Conference, BMW and Ford explained the problem in a joint presentation that focused on dynamic charge acceptance, the ability of a starter battery to recover the energy used during an engine-off cycle and get ready for the next engine-off cycle. The key take-away from the BMW-Ford presentation was that today's leading battery technologies, including flooded and AGM batteries, are not well-suited to the extreme power and charge acceptance demands of stop-start systems.

For stop-start to reach its full potential, the auto industry desperately needs a better energy storage solution.

Maxwell Technologies (MXWL) and Continental AG developed the world’s first enhanced energy storage system for stop-start vehicles with diesel engines manufactured by Peugeot-Citroën. The system uses a supercapacitor module from Maxwell and an AGM battery from Continental to ensure that there will be enough power to restart the engine at the end of a stop-start cycle. While the Maxwell-Continental system is a significant advance over AGM batteries, it does not address the core issue identified by BMW and Ford, which is the ability of the battery to recover the energy used by a vehicle's accessories during an engine-off interval. It does a great job of carrying a 300 amp-second starter load, but does very little to help the battery recover from a 3,000 amp-second accessory load.

A123 Systems (AONE) developed a second enhanced energy storage system for stop-start based on its lithium iron phosphate technology. The one kilowatt-hour battery pack offers the cold cranking amps of a high quality lead-acid battery, the high charge acceptance of lithium-ion batteries and a weight reduction of about 20 pounds.

Axion Power International (AXPW.OB) is currently completing the development of a third enhanced energy storage system for stop-start vehicles based on its PbC technology, a lead-carbon hybrid that does not suffer from negative plate sulfation, the primary failure mechanism for both flooded and AGM batteries in stop-start applications. At last September's European Lead Battery Conference, BMW and Axion presented test data confirming that the PbC retained its dynamic charge acceptance through the equivalent of four years of use in stop-start simulation. In a recently published white paper, Axion released more detailed information on the performance of a dual-battery PbC system.

Currently, the market for stop-start energy storage systems is wide open and there is very little clarity about the types of systems automakers will ultimately choose for their vehicles. The following table summarizes the alternative approaches automakers are actively testing and evaluating, and provides a rough estimate of the cost of each energy storage alternative.

Enhanced flooded batteries
(single battery system)
JCI
Exide
$75
Enhanced flooded batteries
(dual battery system)
JCI
Exide
$150
AGM batteries
(single battery system)
JCI
Exide
$150
Dual battery - flooded starter battery with
AGM accessory battery
JCI
Exide
$225
Dual device - supercapacitor starter with
AGM accessory battery
Maxwell
Continental
$250
Dual device - flooded starter battery with
PbC accessory battery
Axion Power
$325
Lithium-ion battery
A123 Systems
$750

The emergence of stop-start as standard equipment presents a tremendous opportunity and a tremendous challenge for energy storage developers and manufacturers. Automakers are accustomed to paying $75 for a starter battery and there is intense pushback against dual battery systems and AGM batteries that will double the cost. Despite the automakers' resistance to cost increases, many have accepted the reality that they'll have to upgrade to single battery AGM systems or even dual battery systems that use an AGM battery for accessories and a flooded battery for the starter. To date only one automaker has made the decision to upgrade to a dual device supercapacitor and AGM battery system, however A123 systems has said that an undisclosed automaker has signed a production contract for its lithium-ion starter battery. The Axion system is currently being tested by BMW and several other automakers, but has not yet captured a design win.

I see the market for stop-start batteries as a knockdown drag-out brawl for the next couple of years. Consumers will not be happy with stop-start systems that offer great performance for a month or two and then deteriorate. While the automakers will resist upgrading to premium energy storage systems, customer demands coupled with constantly increasing regulatory pressure to improve fuel economy will force them to implement more sophisticated and expensive systems from Maxwell, A123 and Axion.

In the third quarter Maxwell gained 13% while the broader markets lost 13%. At yesterday's close, Maxwell had a market capitalization of $495 million and was trading at 4.7x book value and 3.5x trailing twelve month sales. Those metrics strike me as expensive compared to A123 Systems, which has a market capitalization of $381 million and trades at a discount to book value and 3.6x sales. Since it's still in the last stages of product development, Axion carries a very modest market capitalization of $42 million, or about 1.5x book value (after adjusting for bargain asset purchases) and trades at 4x to 5x anticipated 2011 sales.

While established lead-acid battery manufacturers like JCI and Exide will be the first beneficiaries of the stop-start market as their revenue per vehicle doubles and their margins triple, the energy storage system that offers the best combination of price and performance will ultimately win the lion's share of the market. While it’s impossible to pick a winner at this point, second, third or even fourth place in a $7 to $10 billion dollar market niche with no solidly entrenched competitors could be a company maker for any of the emerging technology developers.

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

October 03, 2011

Inverter Stocks: A Value BOS Play on Solar

Tom Konrad CFA

Think low solar panel prices drive a renewed boom in solar installations? Consider inverter companies as a way to play it.

I don't usually follow solar stocks because I think solar is just a little too cool, and the space is too well covered by other analysts for me to feel like I can offer new insights.  Nevertheless, the sharp decline in solar stocks this year has been tempting me to dip my toe in the golden stuff.  Since I'm no solar stock expert, I've been flirting with buying other people's picks. 

Garvin Jabusch of Green Alpha Advisors has been making the case that the solar sell off is irrational on this blog since June, but his consistent bullish stance on solar has made me nervous of his recently disclosed solar holdings in the Sierra Club Green Alpha portfolio CSIQ, FSLR, JKS, LDK, WFR, and YGE. With that many different stocks, I'd be tempted to take the simpler approach of buying a solar ETF such as Guggenheim Solar ETF (TAN) instead. 

Another way I've been tempted to invest would be to try the industry's low cost leader, First Solar (FSLR), an idea I talked about with Jeff Siegel of Green Chip Stocks at the Modern Energy Forum in Denver earlier this month.  Last Monday, Siegel put his thoughts on First Solar in writing, calling it "basically a $125 stock trading at $70."  (On Sept 30, FSLR closed at $63.21, basically half of Siegel's valuation.)

But I have not bought any of those solar stocks or ETFs.  Instead, I decided to sneak in the "back door of the solar market" by taking a couple of small positions in inverter stocks.

 Inverter Stocks

I first made the case for inverter companies as a way to avoid the hype in solar in 2007.  At the time I held Satcon (SATC), Xantrex, and Sustainable Energy Technologies (STGYF.PK).  I did well selling Satcon and Xantrex over the next year (Xantrex was bought out by Schneider Electric (SBGDF.PK)) and I think I sold Sustainable Energy at a loss when I was rationalizing my holdings during the 2008 financial crisis.

My past success with this "Balance of System" (BOS) approach made me look at the graphs of the current crop of inverter companies, now including market leader SMA Solar Technology (S92.DE/SMTGF.PK) which went public in 2008, and rivals Advanced Energy Industries (AEIS) and Power-One (PWER) which entered the inverter market more recently, in addition to the now-struggling SatCon.

The logic behind the BOS approach to solar is the theory that declining module prices will drive increased\ numbers of installations, while relatively inexpensive but essential components such as the inverter may benefit from the increased volumes without having to give up so much in terms of margins. The chart below, taken from the LBNL report Tracking the Sun IV, shows that inverter prices indeed held up well from 2007 to 2010, staying at a near constant 50 to 60 cents per watt for behind-the-meter systems.
  Behind the meter {V.png
Times are still hard for inverter companies, however, with Advanced Energy announcing that it will cut staff and shift some inverter manufacturing to China to reduce costs, and SMA cutting its outlook for 2011.  Nevertheless, SMA stuck to its operating profit margin target of between 21 and 25 percent, but down from historic margins of 30%. 

Inverter.png

The negative announcement from SMA has dragged SMA, Power-One, and Satcon down 30%, 34%, and 42% respectively over the last two weeks while the S&P 500 has fallen 7%, with Advanced Energy falling only 20% after taking earlier losses due to their own announcement referenced above.  Despite all this recent decline, only Satcon has fallen faster than the solar industry as a whole, as represented by the Guggenheim Solar ETF (TAN) over the last 6 months.

A Closer Look

The valuations were looking very attractive, so I decided to take a closer look at the stocks. Rafael Coven, manager of the Cleantech Index behind the Powershares Cleantech Portfolio (PZD) told me,
While I like the BOS play especially Back of Panel the overall plunge in the solar market is not good.  Moreover, PWER doesn't have, as far as I know, anything particularly outstanding or proprietary about its products.  I'm much more comfortable with SMA despite its big plunge.  SMA is the market and technology leader so I'd rather go with that since capacity and cost issues are key.  I’m not saying that any of them are great investments, just that SMA is a better company.
My initial preference was for Power-One, because of the much greater ease of buying the US-listed company, but I decided to take a close look at SMA as well because of Coven's comment.  I'm happy I did.

  • Satcon looks like a poor investment because it is the only one of the four with any debt to speak of, and it is unlikely to become profitable until 2012 at the earliest. 
  • Advanced Energy looks attractive on trailing earnings and a Price/Book ratio of 0.9, but the Book value may have to be written down because of the company's current restructuring, earnings are likely to fall significantly next year, and Free Cash Flow (FCF) seems low even compared to reduced earnings expectations.
  • Power-One looks very attractive based on current and consensus estimates of earnings, but the low FCF is a potential warning sign.
  • SMA Solar has slightly lower but still attractive trailing earnings, and even my 2011 estimate at the low end of the company's guidance is respectable.  Better yet, these earnings are supported by very strong Free Cash Flow, and the company recently paid a very healthy 3 Euro dividend, which, if maintained, would lead to a juicy 7.6% annual yield. 
  Inverter co stats.png
Conclusion

SMA Solar (S92.DE/SMTGF.PK) looks like an attractive income stock at current valuations, with the benefit of a large potential upside if PV modules prices continue to fall and lead to a new PV installation boom despite the recent incentive cuts in Germany and Italy.  Such a boom would be much more sustainable than previous solar booms, because it would be driven by solar prices approaching the price of retail grid electricity, and would hence be much less dependent on government subsidies.

As a potential downside, there is the possibility of new entrants into the inverter space adding to competition and eroding margins.  The advent of Micro Inverters, which Coven referenced in his "Back of Panel" comment is an opportunity for the inverter industry to maintain prices by adding more value, but they may also be an opportunity for new entrants (such as private EnPhase) to gain market share and increase overall competition.  The Chinese may soon decide that they want a home-grown inverter industry, and this possibility poses an ongoing risk to the current market leaders.  SMA has 40% of the solar inverter market for the same reason that German module makers used to dominate that part of the industry.  Could the inverter industry follow the PV module industry East?

For investors uncomfortable with purchasing foreign stocks, or unable to make a large enough purchase to be practical, Power-One (PWER) is the next best option.  I now have stakes in both companies.

DISCLOSURE: Long PWER, SMTGF.

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.

October 01, 2011

Energy Storage: A Bloody Q3 is Creating a Great Buying Opportunity

John Petersen

Tom Lehrer is frequently credited with a quip that perfectly summarizes my feeling about the financial markets in the third quarter, "Apart from that Mrs. Lincoln, how did you enjoy the play?" During the quarter we were given box seats to classic political opera in two acts. Act One was set in Washington DC while Act Two moved to Europe so we could hear the same tortured songs of woe in a different language. We all know the opera has to end with the immensely popular "Kick the Can Chorus," but we suspended disbelief, bought into the fear and held a massive liquidation sale. As a curtain call it looks like we've let our elected demagogues scare us into a new recession. Do you ever wonder if the system might work better if ballots included "None of the above" as an alternative and required the offices to remain vacant if nobody won a majority?

For the third quarter the Dow, S&P 500 and Nasdaq indexes were down an average of 13.1% and it was even uglier in energy storage where the best names in the business were beaten down by 35% to 50%. The following table summarizes the price performance of my tracking list for the year and the quarter ended September 30, 2011.

9.30.11 Price Table.png

It was a bloody time that's creating a great buying opportunity. While it's still a little early to buy the biggest companies in the sector, it's a wonderful time to do some homework, map out a strategy and prepare for the inevitable bottom.

For reasons I can't explain, several energy storage companies move in the same direction as the S&P 500, but react more violently to changing market sentiments. To illustrate the phenomena I've created a graph that compares percentage price movements for Johnson Controls (JCI), Enersys (ENS), Exide Technologies (XIDE) and Active Power (ACPW) against the S&P 500 using 10-day volume weighted moving averages instead of daily prices.

9.30.11 ST Comparison.png

While the pattern is less obvious over longer periods, the following graph that tracks the percentage price movements since April 1, 2009 shows that the pattern holds in both up and down markets, which suggests that buying storage at the next bottom should have a significantly greater upside potential than buying the broader market at the bottom.

9.30.11 LT Comparison.png

The next bottom may well be the buying opportunity of a lifetime as energy storage emerges as an investment mega-trend and the market realizes that cool has no place in an industrial sector where cost matters and the law of economic gravity reigns supreme. Core positions in Johnson Controls, Enersys and Exide Technologies are a must have for all serious storage investors. Depending on your risk appetite, more speculative companies like Active Power, Axion Power (AXPW.OB), Maxwell Technologies (MXWL) ZBB Energy (ZBB) and perhaps Beacon Power (BCON) also merit serious consideration.

For the last three years I've cautioned investors that the media circus around plug-in vehicles and exotic batteries was a transitory phenomenon driven by ill-conceived ideology instead of common sense. The upcoming recession will force the government and the markets to recognize that plug-in vehicles are unconscionable waste masquerading as conservation and a luxury no nation can afford, much less subsidize at relevant scale.

My last chart for the day compares the market capitalizations of my tracking list companies on September 30, 2009 and September 30, 2011. While Axion Power and Exide are far stronger today than they were in the fall of 2009, most of the companies that lost a lot of market value have also lost a lot of ground.

9.30.11 Two Year.png

The simple but undeniable reality is everybody wants better batteries but nobody wants to pay a premium price for them. The green in an ordinary consumer's wallet will always take priority over the green in his cocktail conversation. Manufacturers of objectively cheap products that can do the required work are certain to thrive over the next five years. Developers of exotic batteries for plug-in vehicles and other uneconomic applications are likely to follow the same tragic path as Ener1 (HEV).

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


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