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November 29, 2011

Bagasse – the Big Prize

Jim Lane

Like MSW? You’ll love bagasse. Lot of the advantages of waste, and there’s a lot more available.
 Heaps of bagasse, covered with blue plastic, outside of a sugar mill in Proserpine, Queensland.  Image via Wikipedia.

Sugar’s the new oil, DOE Secretary Steven Chu is fond of saying. Codexis agrees, but argues that sugarcane residue (instead of competing for cane syrup) is the path to the real riches.

Petroleum – we all know what it is, but what does the word actually mean? It’s a mash-up from Latin and Greek. Petra+oleum. It means “rock-oil”.

What makes that etymology factoid significant is that, to find oil, you generally find the rock first. Unlocking the oil from the rock – that’s the magic from which all value flows.

Then, there’s bagasse.

So, as Steven Chu says, when the oil runs out, the sugar goes on.

You can extract sugar from a lot of things. Things that generally cost too much to begin with, or are in short supply (compared to the vast demand for oil), like corn starch, or wheat, or cellulosic wonderstuff.

Then, there’s bagasse. That leftover residue at the sugar mill after squeezing out all the cane juice.

Exciting enough that Cobalt recently signed an agreement with the 10th largest global chemical company, Rhodia, to pursue a fast track program to evaluate, design, and build 30,000 – 75,000 ton plants based on Cobalt Tech’s technology to transform  South American bagasse into butanol.

Now, a lot of the excitement about Brazil has centered around the cane syrup, not the bagasse.

Pshaw, says Codexis [NASD:CDXS] CEO Alan Shaw.

The problem with the easy sugars


Shaw grabs a magic marker and begins to scribble out the equations on a white board in Redwood City. “It costs $275 a ton for the sugar,” as he pencils out the conversion from sugar carbohydrates to hydrocarbons, “and you lose up to 60 percent in the conversion. You need 3-5 tons of sugar to make a ton of diesel, once you have blown off all the oxygen. No one is going to pay more for your diesel because it is renewable. Acrylic acid, adipic acid – now there you have some good margin to work with. But not diesel fuel.”

Now, the spread between the cost of Southern pine and the cost of diesel fuel is pretty wide. Somewhere in the $70 per ton range compared to, say, $800 per ton for diesel fuel. So, there’s something to be said for gasification, so long as the hydrogen to carbon balance is optimal. But even there, Shaw sees problems.

“There’s nothing wrong with the OPEX [operational expenditures], with almost any of the advanced biofuel companies. It’s the CAPEX [capital expenditures].” He’s right, of course. Coming up with $200-$400 million checks for first of kind technologies, which usually means securing something on the order of $200-$350 million in project debt. Well, that’s proven to be a tall order for the early stage companies, by and large.

The winners, so far: low cost feedstock, capital

To date, the projects moving forward have had relatively strong loan guarantees (INEOS Bio, POET, Abengoa [ABGOY.PK]), or been backed by immense balance sheets (BP). The other projects getting through have featured zero-cost feedstock (e.g. Enerkem), are small demonstration projects mainly financed with government grants, or are conceived as low-cost bolt-ons to existing technology (e.g. steel mills, ethanol plants).

Zero-cost feedstock. Hmmm, we’ll come back to that.

A handful of cellulosic biofuels technologies are banking on a licensing model, and going no farther on their own balance sheet than demonstration scale. Some of those are engineering firms, like the Beta Renewables JV that is part owned by Italy’s giant engineering firm M&G through its Chemtex subsidiary.

The goal of the demonstration? To convince customers that the technology works, and to convince themselves to guarantee that technology will work. Knowing that any customer will demand a performance guarantee, and if they don’t, their bankers will.

Widening the window to success, narrowing the path to failure

But there’s something else. That’s broadening the conditions for success. These days, its not at all impossible – in fact it’s almost commonplace to design a technology at bench scale that achieves the rate, titer and yield needed to make cellulosic biofuels successful.

But there’s the problem of temperature. Distillation is at high temperature, by its nature, you are separating products by using differential boiling points. But enzymes, generally, don’t like those high temperatures. Narrowing that temperature differential saves energy – lots of it.

But its more than that. By widening the conditions at which cellulosic biofuels can succeed, it widens the range of choices for the engineers. Easier to use off-the-shelf parts, for example. Easier to tolerate conditions than have to design expensive work-arounds. Easier to have a hotter pre-treatment process.

That’s been a goal of the Chemtex-Codexis partnership – to broaden the conditions, as well as to create a library of enzymes that feature heightened rates of activities.  So that enzymes not only work effectively in some narrow range that only a biologist could lovingly maintain, they work in the broad range suitable to massive fermenters with variable “weather conditions” inside.

Is Shell a possessive, or permissive, partner?

How does Shell view these activities from Codexis – don’t they have everything wrapped up in terms of biofuels that comes from the Codexis labs?

“It’s a question for our partners at Shell,” says Shaw. “But we know that their abiding interest is in developing the lowest opex and capex for their cellulosic biofuels business, and having a ‘most favored nation’ status with respect to the winning technology. A stronger Codexis means they are less likely to have to wait, and have more opportunities for wealth creation, no matter how we reach a solution that solves the problem, at scale.”

Next stop for the technology? Well, expect to see it in Brazil sooner than later. Sugarcane is 1/3 sugar, 1/3 bagasse and 1/3 tops and leaves, in round numbers. As mechanical harvesting brings the tops and leaves off the fields and into the mix, it can release the bagasse for higher value creation opportunities, than simply burning it to generate power, as happens today.

Given a 50-mile radius, says Shaw, there are opportunities for utilizing up to 60,000 metric tones of bagasse, per project, in the nearer term, and up to 100,000 MT in the future.

$600 billion, by the numbers

That bagasse is already paid for, aggregated at the mill. You can make $3 fuels or $6 chemicals from it, with feasible margins on either. Say, at 100 gallons per tonne. And there are more than a billion tonnes of bagasse available from the land that the Brazilian government has approved for cane cultivation. So, somewhere north of $600 billion in value, just in the bagasse.

Which is where the value really lies, says Shaw. The cane sugar, he says, is too exposed to the food markets and commodity speculation. But no one eats bagasse, and you need advanced technology to unlock the value. That’s a barrier to entry that preserves value, he says.

And right now, its an advanced technology that’s affordable priced.

The path less travelled: KiOR


Take KiOR [NASD:KIOR], for example, an outstanding technology using Southern pine to make cellulosic biofuels, at scale, at impressive margins. It’s $250 million per pop for a KiOR plant, the feedstock costs $72 per bone dry ton, and there are a couple of hundred million tonnes available. It’s a value proposition that has a lot of investors salivating. You get Haley Barbour and Vinod Khosla as your partners – not bad at all. Costs you $1.6 billion to own that seat at the “future of energy” table. You get about 1 percent of, say, Facebook, for that.

Compare Codexis. The feedstock is already paid for in the cane harvest, there are ultimately more than a billion tones available. You get Shell and M&G as your partners. Costs you $160 million to own that seat.

Now, KiOR’s model – build, own, operate, will control more of the value-chain, and more of the margin. But you could just about buy Codexis (at today’s “affordable” share prices) for the money that Khosla and friends pumped into Range Fuels. Now, that may well prove to be one of the most affordable seats at the Final Table in the World Biofuels Scale-Up Shootout  that will ever come around. It’s what the US spends on oil imports in, say, a six-hour stretch.

Rewind to Apple 2002?

It’s Apple 2002 promise, at Apple 2002 prices. Now, can Alan Shaw and team pull it off? At Codexis, they think so – do you think so? We’ll continue to watch the space closely.

DISCLOSURE: The author has no positions in the stocks mentioned.

Jim Lane is editor and publisher of
Biofuels Digest.

November 28, 2011

Time to Buy One of the Best Peak Oil Investments

Tom Konrad CFA

accell-logo[1].gif The Euro crisis rolls out a bargain in the stock of a leading e-bike manufacturer.

A little over a year ago, I concluded a 27 part series looking into non-oil stocks that might benefit from rising oil prices by picking what I thought were the four best stocks I had found in the process.  I had not yet bought any of the stocks picked because, as I said at the time,

I personally do not yet have a position in any of these stocks because I expect the stock market to continue to decline in the near term.  I'm waiting to make my purchases (of a possibly slightly different set of peak oil stocks) at even more attractive valuations.

It took a bit longer for the market to fall than I expected.  Now it has, especially in mainland Europe.  This is a good thing for bottom-fishers seeking peak oil stocks: With high gas prices, limited domestic oil supplies, and a realistic attitude towards climate change, Europe is far ahead of the US in spawning companies that will be able to survive and flourish in a world of constrained oil supplies.

The Four Picks

One of my "four best" peak oil stock picks was a Chinese company with a NASDAQ listing.  The other three were European.  The Chinese company was Advanced Battery Technologies (ABAT), which I liked because of their e-bike business and apparent cheap valuation.  I did not foresee that the company would be one of many Chinese companies accused of cooking their books.  The allegations have not been proven, but ABAT has also not been able to provide enough information to clear its name, so the stock has fallen by two thirds since I wrote the article, but I'm only interested in investing in companies with financial statements I can trust, so I'm no longer watching the stock.


The best performing of the four picks is London-listed Stagecoach Group (SGC.L), an operator of rail and bus services in the UK and North America.  Stagecoach is up about 50% since last September, but I did not participate in the gain because I was waiting for a pullback.

In between these two lie Dutch bicycle manufacturer Accell Group (ACCEL.AS), and German commuter and high-speed rail supplier Vossloh AG (VOS.DE).  Both of these companies did well through the middle of this year when the Euro crisis began to heat up, and now they're both below their levels from when I originally wrote the article.  Last week, I took a position in Accell stock, because I like the current valuation (at 12.74 Euros.)  With the crisis continuing, there is still room for further declines, but I feel like there is currently enough blood on the streets to take an initial position, despite the ongoing uncertainty.

Accell Group

Accell Geographic.png Accell Group is a Europe-centric manufacturer of bicycles, bike parts, bike accessories, and fitness equipment.  The stock trades on the Amsterdam stock market with the symbol ACCEL.  The company owns a wide portfolio of national and international bicycle brands, and the company's strategy is to buy and cultivate brands that are or can be leaders in their respective national or functional niches.  The company's annual report lists 18 "main" brands with focuses on everything from bikes for kids (Loekie), to high-quality bikes and e-bikes in the Netherlands (Koga-Miyata), to bike parts suppliers like Junker and Brasseur.  If there is an underlying theme among the brands it is attention to research in innovation combined with sophisticated distribution and marketing. 

Accell's current strategy is to reemphasize the lackluster fitness segment, while putting greater emphasis on higher margin e-bikes and sales outside its core European markets.  Europe's high fuel prices and compact cities have led to a cycling culture and a rapid adoption of e-bikes, giving Accell an early advantage in developing the sorts of e-bikes that appeal to commuters. 

This e-bike expertise is why I see Accell as a good peak oil stock: As higher fuel prices lead motorists to seek other modes of transit, e-bikes allow people at all levels of age and fitness to participate in bicycle commuting.  Accell has the experience selling to bicycle commuters to understand the features they want.

Accell Segments.png
  Accell maintains a high but variable dividend yield by setting the dividend at approximately 40% of net profits each year, and allowing shareholders to opt to take the dividend either in shares or cash.  Nearly half of all shareholders opted to take the dividend in additional shares in recent years (48% in 2010, 44% in 2011).  This both allows the company to offer a high (6.7%) dividend yield and to reinvest substantial cash in the business.

Stormy Europe

Both management and analysts following the company expect 2011 sales and earnings to exceed those in 2010, despite a disappointing third quarter.  In Q3, poor weather in the company's core European markets depressed sales, while the economic storm clouds emanating from the uncertainty around the Euro are making dealers reluctant to build up stocks of next season's models.  One bright spot was Germany, where demand remained strong, driven by increased purchases of Accell's more expensive e-bikes displacing purchases of conventional bicycles.

All this uncertainty drove the share price down sharply last week until, at Euro 12.76 the company is trading at only 7.6 times expected 2011 earnings and 1.25 times book value.  With a current dividend yield of almost 7%, I'm comfortable buying and holding this stock through the ups and downs of the European market.

Accell yield.png
Further, although Accell's core European markets may be hurt by the fallout of the Euro crisis, I feel that much of that damage is already priced into the stock.  Accell's growth markets are in the rest of the world, and a falling Euro will only make it easier to increase exports.

All in all, now seems like a great time to take Accell for a spin.


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.

Stop-start Idle Elimination Crossed The Chasm While Everyone Was Distracted

John Petersen

John Lennon once quipped, "Life is what happens to you while you're busy making other plans." A classic example of the phenomenon is the quiet emergence of stop-start idle elimination as standard equipment on new vehicles while politicians, pundits, the media and mechanical monkeys beat the drum and played the kazoo for the amazing EV sideshow.

Stop-start is more than a vague promise of hope and change. It's a reality that's sweeping through the auto industry today and will conserve more gasoline in 2013 than all of the worlds HEVs and plug-in vehicles combined. It's proof positive that a huge number of baby steps cover more ground than a couple of giant leaps.

Stop-start is one of the most sensible ideas you can imagine. Turn off the engine while a car is stopped at a light and then restart the engine when the light changes. In heavy traffic, this simple economy feature can improve gas mileage by 5% to 15% while eliminating emissions from idling vehicles. It's a win for the driver, a win for the environment and a win for the people on the sidewalk who don't have to choke on exhaust fumes. There are no losers and no hidden costs.

While early versions of stop-start technology date back to the '70s, the first modern stop-start systems were introduced by Peugeot-Citroën in 2006 and BMW in 2008. What began as a modest baby step with little or no fanfare is taking the auto industry by storm. In its 2011 Power Solutions Analyst Day presentation, Johnson Controls (JCI) used the following graph to show how automakers plan to implement stop-start as standard equipment over the next five years. The subtext of their presentation was "we sure didn't see this one coming."

9.27.11 Global SS.png

Regardless of how you judge the merit of an automotive efficiency technology, a production ramp from zero vehicles in 2005 to planned production of 15 to 22 million vehicles a year by 2015 is extraordinary. While most investors don't even know that stop-start exists, the technology has already crossed the chasm and is certain to have a significant impact on the future earnings of a handful of public companies that are currently trading at huge discounts from their 52 week highs.


Stop-start is a classic disruptive technology; a simple baby step that opens the door to improvements in fuel economy that nobody even considered a few years ago. The only fly in the ointment is the reality that yesterday's automotive batteries are simply not durable or robust enough for the immense electrical loads stop-start systems require them to carry.

The battery problem is easy to understand. In a conventional car the battery starts the engine when you leave for work and it has to recover enough charge during your commute to restart the engine when you head home at night. With a stop-start system, the battery has to start the engine when you leave for work, carry the accessory loads during engine-off intervals, restart the engine on demand, and recover its state of charge as quickly as possible in preparation for the next engine off opportunity. The pattern repeats on the trip home. The following table highlights the differences in battery duty cycles for a 15-mile commute with an average of one engine-off event per mile.

Initial engine start
500 Amp Seconds
500 Amp Seconds
Engine-off accessory loads

45,000 Amp Seconds
Engine restart loads

4,500 Amp Seconds
One-way battery load
500 Amp Seconds 50,000 Amp Seconds
Round-trip battery load
1,000 Amp Seconds
100,000 Amp Seconds

Think about the table for a minute. An optimized stop-start system requires 100 times the work from its battery; two full orders of magnitude. This is not a simple problem with an easy fix.

Recent studies from BMW and Ford show that flooded lead-acid batteries start to degrade in a matter of weeks and more expensive AGM batteries start to degrade within a couple months, but the batteries don't simply die. Instead, their charge recovery time increases from 30 seconds with a new battery to four minutes or more after a few thousand miles. Since stop-start systems disable themselves until the battery regains an appropriate state of charge, longer charge recovery times make the mechanical systems less efficient and eat into potential fuel savings. In many cases, stop-start systems lose most of their functionality within six months. It's sure to become a huge problem when pollution control inspectors start testing for stop-start functionality. Finding a solution now is a major challenge for both automakers and the battery industry.

In an effort to compensate for the shortcomings of conventional lead-acid batteries, automakers are upgrading from flooded batteries to AGM batteries, or to dual battery systems that use flooded batteries for starter loads and AGM batteries for accessory loads. The first big beneficiaries of these battery upgrades will be Johnson Controls and Exide Technologies (XIDE). Both companies are building new AGM battery manufacturing capacity at a blistering pace and it's easy to see why. Historically the automakers spent about $60 per car on a flooded starter battery. AGM batteries in comparison cost about $120 and dual battery systems cost about $180. Anytime a manufacturer can double or triple its per vehicle revenue and widen its margins by selling premium products wonderful things happen to the income statement. So far the income statement impact has been small because production volumes have been small. Over the next couple years the impact will become dramatic and it's already baked in.

While AGM batteries and dual battery upgrades are the best the automakers can do with current technology, they're a still a compromise and there's a growing recognition that the automakers need a more durable solution for the basic stop-start systems they're selling today and a more powerful solution for the advanced stop start systems they want to sell tomorrow. That dynamic has created a compelling business opportunity for two technology developers whose products can integrate easily with existing battery manufacturing infrastructure and are better suited to the demands of stop-start systems.

The first advanced energy storage system for stop-start was introduced last year by Maxwell Technologies (MXWL) and Continental AG. It combines a supercapacitor module from Maxwell with an AGM battery from Continental to provide the extra cranking power required by stop-start diesels from Peugeot-Citroën. The dual device architecture complements current automotive battery technologies instead of competing with them. Shifting the starter loads to the supercapacitor slows the rate of battery degradation and extends AGM battery life by up to 30%. It's not a perfect solution because it can't address the accessory loads that are over 90% of the problem, but it's clearly a step in the right direction with a product that's available today in relevant scale.

A second advanced energy storage system for stop-start is the PbC® battery from Axion Power International (AXPW.OB). The PbC is an asymmetric lead-carbon capacitor that replaces the lead-based negative electrodes in a conventional AGM battery with carbon electrode assemblies. The end result is a hybrid device that offers extraordinary charge recovery times while eliminating negative electrode sulfation, the principal failure mechanism of conventional lead acid batteries. Like the Maxwell supercapacitor module, the PbC complements current battery technologies instead of competing with them because the PbC electrode assemblies have been designed to work as plug-and-play replacements in any AGM battery plant. The PbC hasn't scored a design win yet, but extensive data generated in over two years of bench and vehicle testing by first tier automakers shows that the PbC is a very promising solution for basic and advanced stop-start systems.

A dark horse energy storage system for stop-start vehicles was introduced this year by A123 Systems (AONE). This one kilowatt-hour lithium-ion battery pack offers the cold cranking power of a quality lead-acid battery, the exceptional charge acceptance of lithium-ion and a weight reduction of about 20 pounds. While A123 has not released pricing information on its Nanophosphate® Engine Start Battery, its average unburdened cost of goods sold for the quarter ended September 30th was $1,015 per kWh. Even with significant future economies of scale, I believe it will be difficult for lithium-ion batteries to compete effectively in the low-end stop-start market because automakers must carefully weigh the trade-off between battery cost and fuel savings. As you move to the high-end market with very heavy accessory loads, the A123 solution could be compelling.

Stop-start creates an unusual business dynamic in the battery industry because the additional revenue from doubling or tripling the battery capacity of every new car leaves plenty of room for the old line competitors and the new technology entrants to thrive. The following table provides summary market capitalization and stock price data on the five companies that are likely to compete in the stop-start market.

11.27.11 Data Table.png

There isn't a stock in the table that I wouldn't feel good about buying at current prices.

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

November 24, 2011

Bernstein and Ricardo Report: Cheap Will Beat Cool in Vehicle Electrification

John Petersen

On September 26, 2011, Bernstein Research and Ricardo plc published a 450 page analytical report titled, "Global Autos: Don't Believe the Hype – Analyzing the Costs & Potential of Fuel-Efficient Technology," which combines best in class securities research from Bernstein with the deep automotive expertise of Ricardo, a global leader in engineering, product innovation and strategic consulting. The result is the most comprehensive, detailed and eminently reasonable forecast of short-, medium- and long-term trends in advanced automotive powertrain technology that I've had the pleasure to read.

It's devoid of axe grinding or cheer-leading and simply describes how the auto industry is likely to evolve over the next couple decades. The key takeaway is two themes I regularly stress – Cheap Beats Cool and Baby Steps Rule.

Since the "Black Book" is far too detailed and comprehensive to adequately explore in a blog like mine, I think the best approach will be to summarize the key conclusions and explain how the expected evolution of powertrain technology will impact the companies I write about.

Overview. Bernstein and Ricardo are bullish on gasoline and advanced diesel technology, but cautious on the near term or medium term prospects for electric vehicles. They believe advanced automotive technologies must be affordable before logical consumers will buy new-generation vehicles in significant quantities. They have concluded that improvements to conventional engines will be key over the next 10 to 15 years and HEVs will become viable on a large scale by 2020. They believe near-term mass market adoption of electric vehicles is unlikely given the tough financial comparison with ever improving combustion engine vehicles. While premium-priced plug-ins may become viable earlier, by definition they will be niche products.

Conventional engines can meet 2020 regulatory targets at low cost. While widespread adoption of several emerging technologies including downsized engines, turbocharging, advanced fuel injection, stop-start idle elimination, advanced transmissions and other technologies that reduce rolling losses will be needed to meet regulatory targets, a shift to more expensive hybrid and electric drive technologies is unnecessary and unlikely. Except for Nissan-Renault, automakers' electric drive ambitions point to high-profile concept cars coupled with vaguely modest production plans.

Current HEVs and Plug-in Vehicles have much higher TCOs than conventional powertrains. Bernstein and Ricardo estimate the total cost of ownership, or TCO, of a conventional C-segment car at €21,300 ($28,400) over a typical four-year ownership period for the first purchaser. Without exception electric powertrains fail to offer any cost savings with HEVs costing approximately €1,650 ($2,200) more over four years, PHEVs costing approximately €4,500 ($6,000) more over four years and EVs costing approximately €10,800 ($14,400) more over four years.

Aggressive downsizing and modest electrification will be needed after 2020. To move from niche to volume production, PHEVs and EVs require a breakthrough in battery performance (energy and power density) and cost to overcome range anxiety and TCO concerns. While aggressive downsizing and modest electrification will be required from 2020 on, Bernstein and Ricardo believe the auto industry can meet regulatory targets with a 10% market share for HEVs, a 4.5% market share for PHEVs with small battery packs and a 4% market share for full BEVs. They estimate that the current cost differential between manufacturing a conventional car and manufacturing the same car with an electric powertrain is on the order of €16,000 ($21,500) before incentives.

At current vehicle costs and tax rates, oil would need to cost $300/bbl in Europe, $500/bbl in China and $800/bbl in the US before plug-ins would break even with conventional vehicles. Bernstein and Ricardo believe market forces alone are unlikely to provide enough incentive for a demand pull in electrified powertrains. While electric vehicles are likely to benefit from sizable cost reduction opportunities, combustion engines will require more expensive technology upgrades. The combination of the two will lower the break-even point for fossil fuels by ±20% over the next five years and another 35-40% by 2020. By 2025, Ricardo and Bernstein expect EVs to be competitive with conventional vehicles.

Battery cost reductions will be a key driver of future vehicle electrification. Bernstein and Ricardo estimate that currrent battery pack costs range from €4,500 ($6,000) for PHEVs to €13,500 ($18,000) for full electric vehicles, or $750-$800 per kWh of pack capacity. Battery costs will need to halve if EVs are to break even with internal combustion. Historical trends indicate that battery costs will decline by roughly 5% per year, which should bring costs down into the $310-$350 per kWh range by 2025. Until then, governments will need to bridge the gap with subsidies of several thousand dollars per vehicle for electric powertrains to be competitive.

Hybrids, PHEVs and EVs require significant amounts of additional raw materials. Conventional cars are material intensive but batteries and traction motors for HEVs, PHEVs and EVs will require significant additional amounts of raw materials that are far less plentiful and recyclable than the principal metals used in conventional cars.

While lithium supplies are adequate, competing demands for rare earth metals and copper will be challenging. Global lithium supplies are adequate for the foreseeable future, but rare earth metal production is dominated by Chinese producers and prices have skyrocketed. As new mines become productive and recycling technologies are developed, the constraints will become less burdensome, but costs will remain significant. The biggest metal constraint will likely be copper because a conventional car needs 24 kg of copper while an HEV needs 34 kg, a PHEV needs 54 kg and an EV needs 94 kg. As a result the value of the copper in an EV will probably exceed the total value of the steel and aluminum combined.

Stop-start systems offer some of the best value for money CO2 reduction potential. Bernstein and Ricardo expect that virtually every conventional internal combustion powertrain in the mature markets will feature either simple or advanced stop-start systems by 2020.

Almost all widely hyped improvements to powertrain are based on old concepts. The fundamental chemistry and physics of powertrains have not changed significantly over the past 100 years, but design and combustion efficiency gains have provided continuous advances in power density while noise, emission and fuel consumption levels have decreased. The next 15 years will be characterized by an evolution of existing technologies and the co-existence of various powertrain options, rather than the emergence of a disruptive dominant new technology such as electric or fuel cell vehicles. Over the next 15 to 20 years electrification is expected to become commonplace, but Bernstein and Ricardo expect that three out of four vehicles will still have an on-board internal combustion engine.

While I am a frequent and relentless critic of lithium-ion and electric vehicle investments because I believe the investing public has unrealistic expectations about the amount of time that will elapse between introduction and commercial success Bernstein and Ricardo didn't reach any conclusions that I'd disagree with. They expect battery development timelines to be lengthy and improvements to be limited to ±5% per year. They expect manufacturers of electric vehicles and components to lose money for several more years as they try to overcome immense TCO disadvantages and establish a toehold in the mass market. These conclusions are entirely consistent with the industry's experience with HEVs which took almost a decade to achieve a 3% market penetration in the US. The process will be evolutionary rather than revolutionary and investors who pay premium prices for the stock of companies that won't hit their stride for another decade will suffer.

In the energy storage sector, the first big beneficiaries of powertrain improvements will be Johnson Controls (JCI) and Exide Technologies (XIDE) who make starter batteries. Since stop-start technology puts tremendous strain on the battery from starting the engine several times during a commute and carrying accessory loads during engine off intervals, the auto industry is rapidly increasing the per vehicle amount they spend on batteries. Historically a new car used a simple flooded lead acid battery that cost the automakers about $60. Because of the heavier battery demands of stop-start, automakers are rapidly shifting to AGM batteries that cost about $120 and dual battery systems that cost $120 to $180. On a per vehicle basis, JCI expects cars equipped with stop-start systems to generate twice the revenue and three times the profit margin.

While current battery technology may be good enough for basic stop-start systems, it is clearly inadequate for the advanced stop-start systems automakers want to implement to minimize emissions and maximize fuel economy. Those advanced systems will need far more robust energy storage devices like the battery-supercapacitor combination that Maxwell Technologies (MXWL) has introduced on diesel powered cars from Peugeot and the revolutionary PbC battery from Axion Power International (AXPW.OB) which is in advanced stages of vehicle testing by BMW and other automakers.

I continue to believe lithium-ion cell manufacturers including A123 Systems (AONE), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) will be poor investments over the next seven to ten years because these companies are under immense pressure to reduce costs in an industry where materials represent 60% of pack level costs and heavily automated manufacturing methods keep labor and overhead in the 22% range combined. While there are some potential economies of scale to be realized in battery management systems and perhaps a more efficient use of raw materials, the gains are expected to be slow and painful during a period when profit margins are compressed to help heavily electrified vehicles overcome crushing TCO handicaps.

While I'm cautiously negative about battery manufacturers, I don't see any possibility that niche manufacturers like Tesla Motors (TSLA) can possibly live up to outlandishly inflated expectations and maintain clearly unreasonable stock market valuations by manufacturing niche products that can only appeal to a minute fraction of the car buying public. It took three years before Tesla sold its 2,000th Roadster. While there are a respectable number of reservations for the Model S that will debut next year, there is no reason beyond unbridled optimism to believe demand for a $60,000 electric passenger car is a well-spring rather than a puddle. Even NPR, a bastion of conservative thinking, has taken to pessimistic reporting on the near-term potential of the electric vehicle sector now that unlimited government spending on ideology seems to be going the way of the dodo bird. There will be some demand and Tesla may survive as a going concern, but I can't imagine how it will retain a market capitalization that's an eye-watering 11.2 times book value and 16.4 times sales. The law of economic gravity simply cannot be denied and it will not be mocked.

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

November 21, 2011

Will LED Stocks Follow Solar Stocks Over the Commoditization Cliff?

Tom Konrad CFA

One irony of green investing is that doing good (for the planet) does not always do well for investors.  Recently the rewards for do-gooders have been abysmal.  For years, I've been warning that the rapid price reductions we need to make solar mainstream are unlikely to be good for the profits of solar companies

This year a combination of subsidy cuts in Europe and photovoltaic (PV) module oversupply brought those price reductions home to roost.  Recently, PV manufactures have been scaling back expansion plans, which should help reign in module supply and the price cuts which are undermining solar manufacturer profitability.

The LED Industry

LED Headlamp. Photo by author
LED Headlamp.JPG
Light Emitting Diodes (LEDs) are widely assumed to be the lighting technology of the future.  LEDs have found their way into televisions and computer monitors, where they are much more energy efficient than the incumbent LCD and Plasma technologies.  As I discussed in my March article "Ten LED Stocks, and a Wildcard," LEDs are also just beginning to enter the consumer market as replacements for incandescent bulbs and Compact Fluorescent Lights (CFLs).  While LED based bulbs are still much more expensive than CFLs, they have generally superior performance in several ways: They turn on instantly, are fully dimmable, work well in the cold, and last much longer.  LEDs also don't come with any worries about the small amount of mercury contained in fluorescent bulbs (CFLs included.)

Although LEDs are potentially more than twice as efficient as CFLs (and ten times as efficient as conventional incandescents), my experience with replacement bulbs (I own a half dozen of various types) has been that they are only slightly more efficient per unit light output than comparable CFLs. 

LED chips currently produce 100-120 lumens per watt, and typical CFLs produce 60-70 lumens per watt.  But it's clear from the comparison chart from Phillips (PHG) below that the company's LED based bulbs produce only 48 lumens per watt.  That is likely why LED manufacturer comparison charts like the one below only reference incandescents, not CFLs.

The disappointing performance of LED screw-in bulbs is most likely because LED bulb replacements require normal household alternating current (AC) to be converted to direct current (DC), as well as to be kept cool.  These added complexities have so far prevented LED replacement bulbs from achieving their full potential efficiency. 

Dr. Roland Haitz (of the eponymous Haitz's Law-- the Moore's Law of the LED industry), quoted in a Cannacord Genuity research note, "views replacement bulbs as a bridge solution and believes that in 20-30 years there will be no more screw-in light
bulbs. He sees fixtures transitioning into more of an integrated solution."

Given the difficulties of adapting LEDs to a form-factor designed for incandescent bulbs, I'm inclined to agree that replacement bulbs will continue to struggle.  Instead, LEDs will continue to make headway in a growing number of lighting niche applications.  They already dominate flashlights and other battery powered lighting where their preference for DC current is an advantage rather than a disadvantage.  They also dominate in traffic signals, where their directional light and pure colors are an advantage.  Continued price reductions will allow them to dominate an increasing number of niches.

Like PV, LEDs have a lot of promise.  Yet like PV a couple years ago, they need to see significant price reductions in order to fully achieve that promise.  Those price reductions may cause nearly as much turmoil in the LED industry as we're currently seeing in the PV industry.


A dimmable LED downlight. Photo by author
How will the coming price drops evolve, and should investors simply avoid the industry, or will there be ports of refuge in the coming storm?  I asked three green money managers for their perspectives.

Rafael Coven, manager of the Cleantech Index which underlies the PowerShares Cleantech ETF (PZD), thinks prices for LEDs are likely to fall as fast if not faster than  solar PV due to the rapid commoditization of the product.  He thinks  that as prices fall, "LEDs will start to grab share from halogen lamps first and then decorative incandescent lamps.  Eventually LEDs will take share from compact fluorescent lamps where the need for dimming is high, but it will take much longer for LEDs to supplant CFLs because of CFLs longer lamp life/replacement cycle, and the diminished value proposition vs. replacing incandescent lamps with CFLs.  ... [A]nywhere where labor for lamp replacement is high will be excellent applications for LEDs as well."

But there are already niches where LEDs have the advantage at current prices.  Coven says, "I have already seen long-operating hour applications (e.g., Baltimore’s Mount Sinai Hospital) where LED lamps have already been effectively adapted to replace T8 fluorescent lamps with solid economic returns."

He thinks most current LED companies will not be able to survive as high volume/low cost producers, so he suggests looking for companies with strong intellectual property that can earn significant profits from licensing, or companies with superior technology which will allow them to charge higher prices.

Garvin Jabusch of Green Alpha Advisors and manager of the Sierra Club Green Alpha Portfolio, thinks that the PV and LED industries are similar in that they have "perceived oversupply issues," but also rapidly increasing demand.  He says, "The macro case for LEDs rests mainly with incandescent bulb sales being banned in the EU, US and China beginning as early as next year, and phasing to complete ban by 2016. This is significant: China alone consumes 1.07 billion incandescent bulbs per year. LEDs aren't the only alternative but they are the best one in terms of efficiency."

For ports in the storm, Jabusch points to "upstream play Aixtron AG (AIXG) which makes and sells the machines other firms use to make LEDs, and so provides a way to bet on the industry without selecting individual diode manufacturers. We also like Applied Materials (AMAT) whose LED operations include [high efficiency] LED applications for displays, LED manufacturing software designed to shorten production time, and several other tactical plays hitting multiple verticals and diverse uses. AMAT is also well diversified in other next economy sectors such as advanced materials and energy storage, so it's an all around good green economy bet."  Green Alpha Advisors and its clients are long both stocks.

Jeff Cianci, Chief Investment Officer at long-short equity fund Green Science Partners sees parallels between the two industries in that both need to drive down prices, but he also sees contrasts.  He says "solar needs to consolidate the number of players and LEDs need to consolidate the steps in the value chain for faster adoption."  Cianci thinks the winners will be those that can vertically integrate along the value chain, but they will only be relative winners.  He says, "Short term, I don’t see many places to hide."  Longer term, he expects the winners will be acquired by larger industrial technology companies." 

His picks for possible longer term winners are Cree Inc (CREE), or GT Advanced Technologies (GTAT).  While GT is a broad based, mostly upstream company like Jabusch's Aixtron pick, Cianci sees most of the value add in the industry downstream.  He thinks that attractive LED fixtures are likely to drive adoption of LEDs, not just price.

Cannacord Genuity.  As I was finishing this article, Rafael Coven forwarded me a research note from investment bank Cannacord Genuity.  Their LED Analysts believe that investors should avoid upstream names such as Aixtron AG (AIXG) and Veeco Instruments Inc. (VECO), while they have buys on downstream names Cree Inc (CREE), and Acuity Brands (AYI).  Their reasoning is that the industry will not need to greatly increase capacity (and hence not need to buy new equipment) even to achieve high penetration of the lighting market.  This is in large part due to the extremely long lifetimes of LEDs: the replacement market will be minimal.


These green money managers all agree about the coming difficulty for most LED companies... but there is little agreement about which companies, if any, will do well in the short term.   On balance, there seems to be a slight preference for downstream plays, but these stocks may just be the ones which suffer least.

Overall, I think it's currently safer to be an LED consumer than an LED stock investor.

DISCLOSURE: No Positions. 

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.

November 20, 2011

Overcoming Hurdles to Clean Energy Commercialization

by David L. Levy

In the absence of a global framework for regulating emissions, the future of the planet largely rests on choices by private firms and investors regarding which technologies to pursue and commercialize.

Despite the mounting evidence of severe climate change, there is a funding crisis for potential solutions. The Department of Energy released data at the beginning of November showing that global emissions of CO2 rose 6% in 2010, despite the ongoing economic recession. This trajectory is higher than the worst case projections from the Intergovernmental Panel on Climate Change (IPCC) in it’s 2007 Fourth Assessement Report. The impacts are already being felt. A new IPCC report concludes that climate change is causing more extreme weather, especially heat waves, heavy precipitation, and coastal flooding (though the super-cautious IPCC hedged on hurricanes).

beaconpowerstephentown_270x272Yet November also witnessed setbacks for two key clean energy technologies. Beacon Power (BCONQ.PK), a Boston-area developer of flywheel energy storage and power management systems for the grid, filed for bankruptcy the same week that the DoE released the grim emissions data. Just a few days later, the FutureGen 2.0 project, the leading US effort to develop commercial scale Carbon Capture and Storage (CCS) technology, suffered a major setback when the Midwestern power company Ameren announced that it could not provide an old power plant for the project due to financial difficulties.

One important lesson is that public policy must be based on a clear understanding of the challenges facing the clean energy sector and the impact of regulation and programs on investment decisions and corporate business models. In the absence of a global framework for regulating emissions, the future of the planet largely rests on choices by private firms and investors regarding which technologies to pursue and commercialize. The clean energy sector, however, faces a host of risks that make investors wary. The risk is not that climate change is going away as a long-term driver; the problem is that there are large market uncertainties regarding the future of regulation and subsidies, which technologies will emerge as large-scale, low-cost, low-carbon alternatives, how consumers will respond, and how competitors will react.

Despite the woeful underfunding of clean energy research in the US, there is still a plethora of exciting technologies being developed in the laboratories of universities, government centers, and the private sector. For more mature technologies, large subsidies are flowing to commercial installations of solar and wind, perhaps too large, according to a critical New York Times article last week. While these subsidies are reducing costs by accelerating the technologies down the learning and scale curves, they tend to reinforce the dominance of early, low-cost “winners” in the marketplace, and provide little help for less mature but promising emerging technologies, such as Solyndra’s CIGS thin film glass tubes. As a result, these subsidies also tend to suck in a lot of low-cost Chinese imports rather than stimulate US production or research.

A structural problem, as Daniel Goldman wrote in an earlier Climate Inc. post, is the proverbial “valley of death” between lab research and commercial production, where “neither government, venture capital firms nor capital markets have tended to bear the risks associated with providing equity capital, which can amount to hundreds of millions of dollars, for initial deployment of capital intensive new clean energy technologies at commercial scale – described here as “first project commercialization.”  The US venture capital model evolved primarily to support the emergence of the software industry, which has relatively low capital intensity, but there is not currently an adequate private (or public) sector solution for clean energy. It’s far too early to know whether, for example, flywheel technology is better than batteries or compressed gas for power storage – and maybe there is a role for each of them, to meet different needs in different locations. But a market-based system that relies on private sector funding is failing us if it cuts off development of promising technologies before they even reach commercial scale testing.

Beacon Power has not yet closed its doors, and is trying to continue operating under bankruptcy. Since the summer, it has been testing a 20-megawatt flywheel plant in Stephentown, N.Y., which can absorb and supply power from the grid very rapidly, and is therefore valuable in frequency regulation. Another installation is planned for Pennsylvania. The more intermittent wind and solar that is connected to the grid, the greater the need for short-term storage solutions. Flywheels are able to deal with rapid fluctuations and match supply and demand more effectively and reliably than batteries, such as those from A123, or gas-fired plants (while reducing emissions from rapid cycling of gas plants). A few of the the 200 flywheels in Stephentown have experienced problems, but the system has performed well overall.

Until recently, Beacon Power has not been able to monetize the full advantages of flywheel storage. It was only on October 20th that the Federal Regulatory Energy Commission (FERC) approved a change in regulations that makes grid operators pay, not just for the amount of power in reserve, but also for its effectiveness in grid stabilization. According to Bloomberg, this could double Beacon Power’s revenue and make it easier to find financing. But the ruling, which has been in the works since February, was too late to keep Beacon solvent. If we are to rely on price and market mechanisms, we need to build them to serve the planet.

The lack of a clear regulatory framework has also hurt offshore wind power in the US. Even now that the 450 MW Cape Wind project is most likely moving ahead, the damage from more than a decade of delays and uncertainty, resulting in millions of dollars in costs and legal fees, have probably dampened investors’ enthusiasm. The latest delay stems from a court ruling that the FAA needs to take another look at aviation hazards. With further financing still required for the $2.6 billion project and the company still negotiating to sell half the power output, the future is not yet secure. Meanwhile, the European Wind Energy Association expects annual investments in the European offshore wind industry to triple to reach 10 billion Euros by 2020.

Given the urgency of the situation, public policy needs to shape the market context in order to steer private investment decisions. We are not heading in the right direction, however. In the short term, the ongoing recession appears to be diverting attention from the climate issue and draining government, business, and consumers of resources. A new Ernst and Young report estimates that the recession could lead governments to cut spending on climate change by tens of billions of dollars. It’s more important than ever to focus government resources, and commercialization of carbon-reducing technologies is a critical area. But in addition to financial support, the problems facing Beacon Power, FutureGen and Cape Wind highlight the importance of reducing regulatory uncertainty.

David L. Levy is Chair of the Department of Management and Marketing at the University of Massachusetts, Boston. He founded and is currently Director of the Center for Sustainable Enterprise and Regional Competitiveness, which engages in research, education and outreach to promote a transition to a clean, sustainable, and prosperous economy. David’s research examines corporate strategic responses to climate change and the growth of the clean energy business sector. He has published widely on these topics, and co-edited a book with Peter Newell titled “The Business of Global Environmental Governance”, MIT Press, (2005).

November 19, 2011

Stock Picks with a Whole Systems Approach

Tom Konrad CFA

Picking the best energy services stocks.

Fossil fuels are getting more expensive, but so are the industrial metals and other commodities used in the wind and solar farms with which we hope to replace them.   Meanwhile, government and personal budgets everywhere are under strain.  These economic imperatives make energy efficiency the one clean energy sector that may benefit despite rising denial about the existence of climate change among the US political elite and continued economic weakness.

Energy efficiency represents the sort of true win-win-win in that it saves money, reduces the use of scarce commodities and energy, spurs economic activity.  Like any spending, implementing efficiency measures gives the economy a one-off boost, but efficiency is unusual in that it continues to bring economic benefits going forward because it allows money that had formerly been spent on energy to be put to more productive economic use, even after the financing costs of the intial outlay are taken into account.

The Benefits of a Whole System Approach

The problem is that to get the most out of energy efficiency, energy users must go far beyond changing light bulbs.  Only by taking a whole system approach to energy use can all of the benefits of energy efficiency be captured.  For example, a homeowner might be interested in replacing an aging air conditioner or furnace with a more efficient model.  If they do so, they will save on energy bills and probably recoup their initial investment over a handful of years. 

An energy rater using thermal imaging. Photo by Tom Konrad
energy rater.jpg
On the other hand, if the homeowner takes the time to assess the whole home's performance with the help of an energy rater, and improves the home's shell by plugging air leakage and improving insulation, the whole thermal load of the home will be reduced.  The measures to improve the home's shell will typically pay for themselves in a few months to a year or two, and the home will be more comfortable with fewer drafts and cold or warm spots.  More importantly, the reduced heating and cooling load will allow the homeowner to replace the heating and/or cooling system with a smaller and significantly less expensive lower capacity model.

Upgrading the furnace alone might have had a five year payback, while improving the home's shell alone might have had a payback of a year or two, but doing both together allows the furnace to be upgraded at no net cost because of downsizing, making the overall payback of the combined measures quicker than undertaking either measure alone.

Energy Service Providers

Just as the homeowner requires outside expertise to identify the most advantageous combination of energy savings measures, the same is true for larger entities like companies, schools, hospitals and government complexes. 

With this in mind, the companies that help other entities achieve energy savings seem to be well placed for growth even if the economy does not rebound and energy and materials cost stay high.  There are many firms operating in this sector, including energy utilities such as Constellation Energy (NYSE:CEG), equipment providers like Johnson Controls (NYSE:JCI), and Honeywell (NYSE:HON), and IT firms such as IBM (NYSE:IBM).

There are also a number of pure-play energy service providers, both niche players and firms offering comprehensive energy services.  To get a better understanding of the whole sector, I embarked on a series of interviews with the CEOs s of publicly traded, pure-play energy services companies, and published an article after each one.

The companies covered were:
  • World Energy Solutions (NASD:XWES), which helps its clients purchase energy at the best possible price.
  •  EnerNOC (NASD:ENOC) and
  • Comverge (NASD:COMV), two companies which help clients manage energy demand in order to earn incentives from utilities, a service known as Demand Response (DR.)
  • Ameresco (NASD:AMRC) and
  • Lime Energy Co. (NASD:LIME), two companies which help clients improve energy efficiency and make the best use of renewable energy systems.
You can follow the link on each company's name to read the original article.  I learned a lot in the process, and have significantly changed my investments in the sector as a result of my research.  Going in, I owned the two DR companies Comverge and EnerNOC because the stocks looked cheap compared to their prices the previous year, and they seemed to be fairly well capitalized, while DR is one of the most cost effective ways to stabilize the electric grid.

The Commoditization of Demand Response

Unfortunately, the DR industry has become much more competitive in recent years.  Larger players like those mentioned above have been entering the space aggressively.  Electric utilities require significant customer deposits to guarantee the load reductions that DR firms contract with them to deliver.  This can strain the resources of  small firms like EnerNOC and especially Comverge, and so they have to retain a significant portion of the fee the utilities pay for DR in order to cover their costs.  In contrast, larger firms like Johnson Controls can pass on more of the fee because of their lower cost of capital, and firms like World Energy Solutions and Ameresco, which include Demand Response as part of a package of energy services, can also accept lower margins because DR is not their main profit center.

This competitive landscape along with lower-than-anticipated electricity demand because of the economic downturn, has led to rapidly falling prices for DR, and has undermined the profitability of EnerNOC and Comverge, as can be seen in the chart below.
Energy services earnings and CF.png
While it is possible that EnerNOC and Comverge might be attractive acquisitions for a better capitalized company looking to move into Demand Response, such companies seem to prefer to build up their own DR business.  While both Ameresco and World Energy have been making significant acquisitions in the energy services space, both are focused on companies which they consider strategic fits, and neither is interested in pure-play DR.

Addressing Energy Systems

Because DR is a standarized service, the industry has been fairly open to new entrants, and this has contributed to its commoditization.  In contrast, Ameresco and Lime Energy take a systems approach to managing energy for their clients, much like what I outlined in the homeowner example above, except that they serve customers with demand in the megawatts, not the single digit kilowatt demand of a typical homeowner. 

Although it produces the greatest benefits, the systems approach is very knowledge and skill intensive, making it very difficult to commoditize.  These companies' businesses are very much about the skills of their people and the customer service they deliver. 

That does not mean there is no competition, especially among Energy Service Companies (ESCOs) such as Ameresco, where equipment providers like Honeywell (NYSE:HON) and Trane, as well as utilities are active.  While these are heavy weight competitors, Ameresco has a long track record of winning and delivering on large projects, and its independence from equipment manufacturers gives clients confidence that it will use the best equipment available for the job at hand.

The competitive picture is even better for Lime Energy, whose CEO John O'Rourke told me in our interview that competition has actually decreased in the insulation business in the Northeast.

Energy Sourcing

Lastly, World Energy Solutions helps customers find the lowest possible price on energy services using a unique electronic auction platform.  They may also include some green energy, energy efficiency services, and demand response.  World Energy has recently acquired several small companies in the energy efficiency space, but their core business is getting customers the cheapest possible power, something I do not see as particularly green, so I have not been following the company since I profiled it for this series.

Energy services
Balance Sheet.png

Financial Strength

Because of their poor earnings prospect, the two Demand Response firms EnerNOC and Comverge are trading only slightly above book value, and I expect the stocks to continue to decline unless they are acquired by larger firms that can finance their operations at a lower cost of capital. 

Of the three others, the least risky is Ameresco.  The company is already profitable, and its apparently large debt load is in large part project debt which will be removed from Ameresco's balance sheet when the projects are completed and turned over to it.

World Energy would look like a safe bet because of its lack of debt and strong balance sheet, but the low earnings yield implies investors are betting on continued extremely rapid growth.  They may be right, but that's not the sort of bet I'd like to take in the current financial climate.

Lime's business is similar to Ameresco's, but since Lime does not take project debt onto its balance sheet, it's easy to see from the above chart that Lime can easily cover all its liabilities with current assets.  With Lime likely to become profitable in 2012 without the need to raise any additional outside funding, this company has the most potential upside, but only if management is able to deliver.


Of the five, I like both Ameresco (currently trading around $11) and Lime ($3.)  I acquired a significant stake in Ameresco when the stock was in the $9.50-$10.50 range, and I don't have plans to buy more unless the stock falls to $9.  I've been buying Lime near current prices, but given the unsettled state of the current market, I'm not in a rush to build up a large position.

While I currently don't like the prospects of EnerNOC and Comverge, the reason I'm staying away from World Energy is different: the company is not a green enough investment for my taste.  The company might be a great buy at current prices or it might not: I simply have not looked into it.

This article was first published on Forbes.com.


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.

November 18, 2011

BYD Testing The EV Market In China

Clean Energy Intel

BYD at the Central China High-Tech Fair, Shenzhen, November 2009.  Source: Wikipedia / Brucke-Osteuropa.

Over the course of the past few weeks we have seen a couple of noteworthy developments at Chinese auto maker BYD (BYDDF.PK). I have previously discussed the troubles at BYD, which by mid-September had taken the stock down 72% year to date.

However, a couple of developments suggest that the Warren Buffet-backed automaker is at least worth keeping an eye on in the period ahead. In late October, the company opened its US Headquarters and 30,000-square-foot facility in Los Angeles. The aim is to create 150 new jobs and to move towards providing a range of new battery electric vehicles - most importantly the e6 battery-electric SUV. The company will also be marketing a 40-passenger battery-electric bus. One such bus has already been tagged by Hertz for use in shuttling its customers around LAX.

Also in late October, BYD announced that it would start selling its e6 battery electric SUV to the general public in China. Auto Observer points out that with a 190-mile range on a single charge, this will be "the first long-range all-electric vehicle to be offered to the masses in that country". The rough details we have thus far are the following:

  • The e6 is a 5-passenger all-electric SUV.
  • It utilizes Lithium Iron-Phosphate battery chemistry.
  • The car will retail at 369,800 yuan (circa $57,000). However, BYD indicates that after government subsidies in China the net cost should be reduced to $38,000. 
  • It has a range of 190-miles on one charge. Currently only BYD and Tesla (TSLA) offer electric vehicles with a range above the 70 to 100-mile area targeted by most other automakers who appear to be focusing on the second car market.
  • Home charging units will be installed in conjunction with China Southern Grid.
  • A fleet of e6 SUVs have seen significant testing on the streets of Shenzhen, where they have accumulated a reported 3.8 million miles, driven by local taxi drivers.

BYD´s share price has suffered this year as sales of its traditional and hybrid cars have disappointed. Auto Observer  reports that: "For the first half of the year, BYD's profit dropped 89 percent from a year earlier to 275 million yuan ($43.1 million) on a combination of rising costs and an 11-percent drop in revenue. Last year, BYD sold 519,800 vehicles, well short of the goal of 800,000 sales the company had set for itself; it sold just 232,400 vehicles during the first half of this year".

This will be a very interesting initial test for both the EV market in China and BYD itself. The company also has a 50:50 joint venture with Daimler AG for the production of a battery electric vehicle, a prototype of which is scheduled to be produced by the spring of 2012. If sales of the e6 go well, there´s seems plenty of room for BYD to expand. Worth keeping an eye on.

Finally, you can read a more detailed, bigger picture view of the future of the electric car here.

Disclosure: I have no position in BYDDF.PK. I am long TSLA.

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.

November 17, 2011

Electric Vehicles; Ineptitude, apathy ... and piles of taxpayer money

John Petersen

The last few weeks have been a media and political circus in the US as a pair of high-profile Department of Energy loan guarantees wound up in bankruptcy court. In the first case, solar power innovator Solyndra filed two years after closing a $535 million loan for a factory that never quite made it into production. In the second case, flywheel storage innovator Beacon Power (BCONQ.PK) filed about a year after scoring a $43 million loan for a 20 MW frequency regulation plant that was commissioned in June. Both are black eyes for the Obama administration’s green energy policies.

Commentators are quick to note that loan guarantees to undercapitalized companies are indistinguishable from sub-prime mortgages for busboys — the ultimate “heads I win, tails you lose” opportunity for the chosen few. While they’re right, of course, I think a superficial analysis of individual outcomes obscures deeper and more disturbing policy choices that are having a disastrous impact on American innovation, particularly in energy storage.

The ancients taught that necessity is the mother of invention, which is why we have such a wide variety of energy storage technologies. They each serve different needs and they’re each important in their own right because we live in a world where there are no silver bullets and the best we can hope for is silver buckshot. Unfortunately, preferential governmental support for a specific technology or family of technologies is the equivalent of an intellectual abortion clinic. The mere act of choosing one technology group for favorable treatment stifles inquiry and innovation on other ideas that deviate from the government sanctioned path of righteousness.


Lithium-ion has been chosen as the golden child of energy storage and heaven help the innovator who has an idea for a second-generation nickel metal chloride battery, a new flow battery, an advanced lead-acid battery or any other energy storage device or system that doesn’t pay grovelling homage to the official orthodoxy. In the end, society suffers when government chases the pipe dreams and promises of politically connected demagogues, ideologues and snake oil salesmen. The only possible outcome is catastrophic malinvestment that subverts the stated policy goals. While the taxpayers usually get fleeced, investors invariably get gutted.

In August 2009, the US gave a stunning $1.2 billion of ARRA Battery Manufacturing Grants to a handful of battery companies on the theory that good intentions would trump economics and usher in a golden age of electric cars to free America from the tyranny of imported oil. The 95% allocation to emerging lithium-ion technology compared to the 5% allocation to all other battery technologies combined said it all. Pharaoh has spoken – So let it be written, so let it be done!

Nobody bothered to ask whether the world’s mines could produce enough raw materials to make the batteries at relevant scale. In most cases they’re still not asking, even though metal prices are climbing faster than energy prices. Power-drunk political appointees simply assumed there would be no critical supply chain or technology issues and staggered down the primrose path. Similar ill-conceived plans were adopted with reckless abandon by governments worldwide.

We live on a resource challenged planet where six billion people want a small slice of the lifestyle that one billion of us have and take for granted. Our world produces almost two tons of energy resources a year for every man, woman and child on the planet, but it only produces 8.5 kg of non-ferrous industrial metals. Given the stubborn and inflexible nature of metal production constraints, it doesn’t take much math skill to see the problem.

The stark reality is humanity can’t make enough machines to have a significant impact on global energy consumption and CO2 emissions because the world's miners can’t provide the necessary raw materials. It's not just a question of lithium. The physical constraints on global production of aluminum, copper, lead, nickel, cobalt and a host of scarcer metals are staggering and the six billion people who simply want electric lights, a washing machine and maybe a refrigerator will not sacrifice their basic needs so that Tesla Motors (TSLA) can sell electric cars in California financed by a $465 million ATVM loan that it can’t possibly repay without an Exodus-class intervention from the Almighty.

The first fruits are evident. Existing and planned lithium-ion battery plants will be able to manufacture cells for 2.4 million EVs a year by 2015, however, they can only expect 820,000 units of demand in a high penetration rate scenario. While the looming global glut of cell manufacturing capacity is widely recognized, a more pervasive and perverse dynamic exists in the supply chains for several critical components those factories will need if they hope to manufacture cells.

The following graph comes from an August 2011 presentation from Roland Berger Strategy Consultants. It shows that the global supply chain for anodes will be exhausted if cell production reaches 430,000 units per year while the supply chain for separators will be exhausted if cell production reaches 450,000 units per year. It also shows that the supply chain for cathodes and electrolytes will hit ceilings at 660,000 and 770,000 units respectively.

11.17.11 Berger Graph.png

Since it’s impossible to manufacture cells without anodes, cathodes, separators and electrolytes, I have to wonder about the management teams that are building cell manufacturing facilities without first ensuring the integrity of their supply chains. The apparent lack of concern over supply chain issues is staggering. I can’t decide whether it’s reckless apathy or simply a childlike faith that the taxpayers, like doting first-time grandparents, are breathlessly waiting for any opportunity to provide whatever the golden child needs or wants.

How do you justify building cell-manufacturing capacity that’s three times greater than your best-case demand?

How do you justify building cell-manufacturing capacity that’s six times greater than your supply chain can support?

Is government somehow exempt from the duty to conduct reasonable due diligence before investing?

Seriously, where are the adults in this process?

While the media can’t begin to comprehend the magnitude of the impending catastrophe, the dominoes have started to fall.

Ener1 (HEVV.PK) spent about half of its $120 million ARRA Battery Manufacturing grant before an obscenely optimistic investment in Th!nk Motors brought the company to its knees. In the process its stock tumbled from a post-grant high of $7.53 to a current price of $0.11. Now Ener1’s third management team in eight months plans to change the business focus from automotive to heavy-duty transport and grid-based applications. Thanks to $80 million of improvident borrowing and $51.8 million of additional planned goodwill impairments that are buried in an attachment to its recent Notification of Late Filing, Ener1’s fate will probably be decided in a bankruptcy case controlled by its largest creditor Goldman Sachs, which put a $3.75 price target on the stock last March while I was warning readers to run for cover.

How the hell do you default on a grant?

A less dramatic but equally ominous surprise was the Johnson Controls (JCI) - SAFT divorce. Their ambitious plans to make automotive batteries together till death do us part couldn’t even survive the commissioning of a new factory that’s being built with $300 million of DOE grants. In the face of feeble automotive demand, JCI wanted to expand the joint venture's focus to encompass stationary and ancillary markets. SAFT wanted no part of that proposal because it didn’t want yet another competitor for its factory in Florida that was; you guessed it, built with $95.5 million in DOE grants.

While they’re keeping a stiff upper lip in public, I can’t help but feel a little sorry for A123 Systems (AONE), which is building a factory with $249 million in DOE Grants and wants to borrow hundreds of millions more under the DOE's ATVM loan program. Their IPO prospectus spoke of strong relationships with global automotive manufacturers and tier 1 suppliers, but their automotive design wins to date are limited to a $15,000 electric upgrade to the $15,000 GM Spark and the gorgeous but corpulent Fisker Karma, which is being financed with yet another $530 million from the public trough.

While it’s a decidedly pessimistic view I can identify over $3 billion in battery and electric vehicle projects funded by Federal money that have poor to dismal business prospects, including:

$299.2 ARRA Battery Manufacturing Grant to JCI-Saft
$249.2 ARRA Battery Manufacturing Grant to A123 Systems
$118.5 ARRA Battery Manufacturing Grant to EnerDel
$95.5 ARRA Battery Manufacturing Grant to Saft America
$528.7 ATVM Loan to Fisker Automotive
$465.0 ATVM Loan to Tesla Motors
$1,400.0 ATVM Loan to Nissan Motors

I’m a frequent critic of the headlong rush to build electric vehicle manufacturing capacity and infrastructure without any real proof that the planned wonder vehicles will satisfy customer needs, or that the facilities will be used for something other than homeless shelters for displaced green workers.

My fundamental problem arises from the fact that every industrial revolution in history started with a technology that proved its economic merit in a free market and then went on to change the world. Companies and indeed industries that cannot survive without government subsidies can’t thrive with them. Supporting the moribund with the lifeblood of the vibrant may be compassionate, but it can’t produce a good economic outcome.

Over a decade of experience in the HEV market shows that consumer demand ramped sharply for several early years, hit a market penetration rate of about 3% and then flatlined. Over the last three years, clean diesels and plug-ins have begun to cannibalize the HEV market, but they've done nothing to bring new buyers to the fold.

Once again, governments are pushing on a string and trying to force the market to embrace electric drive, the only vehicle class with an unbroken 100-year history of failure. Once again governments will fail, just like they did with other panacea energy solutions including fast breeder reactors, synthetic fuels, hydrogen fuel cells, clean coal and the ever popular corn ethanol and biodiesel that turn food into fuel and make both more expensive.

In late 2008 the world fell into the mother of all recessions as it reached the peak of a decades long debt supercycle. Now the piper is demanding his due and individuals, businesses and governments around the world are being forced to reduce their crushing debt burdens. In the midst of a global deleveraging, I don’t see how insolvent governments can continue to use public funds to subsidize the ideology-based personal consumption of eco-royalty. How many bottomless pits can one nation's taxpayers be expected to fill?

11.17.11 Money Pit.png
Even if our governments are willing to continue this foolishness, I don’t see how a vibrant market for EVs can possibly develop among real world consumers who can buy gasoline versions of a Lotus Elise, Ford Focus or GM Spark for half the price of their electric counterparts.

The transformer Optimus Prime is a big hit with little boys. Spending billions so big boys can pay twice the price for their very own Suboptimus Prime strikes me as a triumph of hope over experience.

This article was first published in the Fall 2011 issue of Batteries International and I want to thank editor Michael Halls and cartoonist Jan Darasz for their contributions.

Disclosure: None.

November 16, 2011

BioAmber’s $150 Million IPO: The 10-Minute Version

Jim LaneBioamber logo

A first-to-market leader in bio-succinic acid comes to the public markets with its IPO.

Can BioAmber translate a lead in succinic acid’s smallish market into leadership in a vast array of high-priced renewable chemicals?

Here’s our 10-minute version of the BioAmber IPO, with a translation of the risks into English.

In Minnesota, BioAmber has filed an S-1 registration statement for a proposed $150 million initial public offering. The number of shares to be offered in the proposed offering and the price range for the offering have not yet been determined. The lead book-running managers for the offering are Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC. The additional book-running manager is Barclays Capital. The co-managers are Stifel, Nicolaus & Company, Incorporated and Pacific Crest Securities LLC.

The company is currently ranked #143rd in the world in the 50 Hottest Companies in Bioenergy. The rankings recognize innovation and achievement in fuels and are based on votes from a panel of invited international selectors, and votes from Biofuels Digest subscribers.

BioAmber, which in the past year lost $12.41M while recording no revenues becomes the 13th company to file for an IPO in the industrial biotech boom, which began with a successful listing on the NASDAQ by Codexis (CDXS) in 2010. IPOs by Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), and KiOR (KIOR) have followed. In recent months, PetroAlgae (PALG.OB), Myriant, Ceres, Genomatica, Mascoma and Elevance Renewable Sciences and Fulcrum Bioenergy have also filed S-1 registrations for proposed IPOs. T

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

Company Overview

From the S-1: “We are a next-generation chemicals company. Our proprietary technology platform combines industrial biotechnology, an innovative purification process and chemical catalysis to convert renewable feedstocks into chemicals that are cost-competitive replacements for petroleum-derived chemicals.

“We manufacture our bio-succinic acid in a facility using a commercial scale 350,000 liter fermenter in Pomacle, France…We have produced 487,000 pounds, or 221 metric tons, of bio-succinic acid at this facility…We believe we can produce bio-succinic acid that is cost-competitive with succinic acid produced from oil priced as low as $35 per barrel, based on management’s estimates of production costs at our planned facility in Sarnia, Ontario and an assumed corn price of $6.50 per bushel.

“We have secured funding to construct the initial phase of our next global-scale facility in Sarnia, Ontario and we intend to build and operate two additional facilities, one located in Thailand and the other located in either the United States or Brazil.

“We expect to begin recording revenue from commercial sales of our bio-succinic acid in the first quarter of 2012…We also intend to leverage our proprietary technology platform and expertise in the production of bio-succinic acid to target additional high value-added products, such as bio-BDO, PBS, de-icing solutions and plasticizers. In addition, we are also working to expand our product portfolio to additional building block chemicals, including adipic acid and caprolactam.

“Since our inception, we have raised an aggregate of $76.1 million from private placements of equity securities and convertible notes.”

The Technology

From the S-1: “Our proprietary technology platform combines industrial biotechnology, an innovative purification process and chemical catalysis to convert renewable feedstocks into chemicals that are cost-competitive replacements for petroleum-derived chemicals. The development of our current organism was originally funded by the DOE in the late 1990s, was further developed and scaled up, and optimized at the large-scale manufacturing facility in France.

“We believe our solution enables us to address multiple large chemical markets, including polyurethanes, plasticizers, personal care products, de-icing solutions, resins and coatings, food additives and lubricants, that are currently being served by petrochemicals.

3 Key Qualities

1. Cost-competitive, renewable chemical alternatives that offer equal or better performance;

2.. Using less feedstock per ton of output than most other sugar-based processes for biochemicals other than succinic acid; and

3. Significantly lower greenhouse gas emissions than the processes used to manufacture petroleum-based products by sequestering carbon dioxide in the process of producing bio-succinic acid.

The Market

From the S-1: “First, we intend to replace petroleum-based succinic acid in applications where it is currently in use, such as food additives, as well as expand into new applications, such as plasticizers, where bio-succinic acid has demonstrated superior performance or economics to incumbent petrochemicals.

“Second, we intend to convert bio-succinic acid to bio-BDO and THF, which are large volume chemical intermediates that are used to produce polyesters, plastics, spandex and other products.

“Third, we intend to use our bio-succinic acid in the production of PBS, which enables this polymer family to be partially renewable, and modified PBS, or mPBS, which provides these products with higher heat distortion temperature and improved strength.

“We believe that these three market opportunities for our bio-succinic acid platform provide us with access to a more than $10 billion market opportunity.”

Current applications for bio-succinic acid include:

Plasticizers. We believe the addressable market for plasticizers exceeds $1 billion.

.   We believe the addressable market for polyurethanes exceeds $1 billion.

Personal Care Products. We believe the addressable market for succinic acid and succinate esters in the personal care industry is approximately $500 million.

De-icing Solutions
. We believe the addressable market for de-icing solutions exceeds $500 million.

Resins and Coatings
. We believe the addressable market for resins and coatings exceeds $500 million.

Food Additives
. We believe the addressable market for food additives is approximately $200 million.

. We believe the addressable market for lubricants is approximately $100 million.

C6 Building Block Chemicals

From the S-1: “We expect to use our flexible technology platform, including our partnership with Celexion, to expand our product base to C6 building block chemicals, starting with bio-adipic acid, by leveraging our extensive experience developing, producing and marketing bio-succinic acid. We also plan to produce biobased caprolactam and biobased hexamethylenediamine (HMDA).  We believe the addressable market for adipic acid is approximately $6.5 billion.  We believe the addressable market for caprolactam is approximately $14.5 billion. We believe the addressable market for HMDA exceeds $3 billion.”

The Strategy

Rapidly Expand Our Global Manufacturing Capacity.
Target the Large and Established BDO Market.
Develop Next-Generation Succinic-Derived Products.
Continue to Reduce the Cost of Our Products.
Expand Product Platform to Additional Building Block Chemicals.

The Commercialization Plan

From the S-1: “In order to support our growth, we plan to rapidly expand our manufacturing capacity beyond the current production at the Pomacle, France facility. We have entered into a joint venture with Mitsui to finance, build and operate a manufacturing facility in Sarnia, Ontario through our Bluewater Biochemicals, Inc. subsidiary in which we own a 70% equity interest and Mitsui owns the remaining 30%. The joint venture agreement also establishes our intent to build and operate two additional facilities with Mitsui, one located in Thailand and the other located in either the United States or Brazil.

“For future facilities, we expect to enter into agreements with partners on terms similar to those in our agreement with Mitsui and we intend to partially finance these facilities with debt. We expect to use available cash and the proceeds of this offering to fund our initial facilities, as well as our commercial expansion and product development efforts. For additional future facilities, we currently expect to fund the construction of these facilities using internal cash flow and project financing.”

The Risks, Translated from SEC-speak

Among the lowlights of reading S-1 registrations are the endless pages of risk disclosures (in BioAmber’s case, 28 pages of them) couched in an alloy of SECspeak and legalese. We offer these excerpts from the original S-1, and a translation into English, prepared by our Digest lexicologists.

In SECspeak: ”We have a limited operating history, a history of losses, anticipate continuing to incur losses for a period of time, and may never achieve or sustain profitability.”

In English: “Our investors have grown tired of losing their money, and have encouraged this IPO in the hope of losing some of yours.”

In SECspeak: “We may not obtain the additional financing we need in order to grow our business, develop or enhance our products or respond to competitive pressures.”

In English: “Now that we are losing some of your money, you might run out.”

In SECspeak: “The funding, construction and operation of our future facilities involve significant risks, which may prevent us from executing our expansion strategy.”

In English: “The Titanic is, after all, practically unsinkable.”

In SECspeak: “Our prior success in developing bio-succinic acid may not be indicative of our ability to leverage our bio-succinic acid technology to develop and commercialize derivatives of bio-succinic acid and other bio-based building block chemicals.”

In English: “To make the real bucks, we got to make all that other stuff that we haven’t actually practiced making yet.”

In SECspeak: “Demand for our bio-succinic acid, bio-BDO and other bio-succinic acid derivatives may take longer to develop or become more costly to produce than we anticipate, and technological innovations in our industry may allow our competitors to produce them at a lower cost, which may reduce demand for our products.”

In English: “We may be kidding about everything in this IPO, except the bits about how tough this market is to crack.”

In SECspeak: “We are dependent on our relationships with strategic partners, licensors, collaborators and other third parties for research and development, the funding, construction and operation of our manufacturing facilities and the commercialization of our products and our failure to manage these relationships could delay or prevent us from developing and commercializing our products.”

In English: “Help, I need somebody, / Help, not just anybody, / Help, you know I need someone, / Help!”

In SECspeak: “Our inability to adequately protect and enforce our intellectual property, or to prevent the operation of our business from infringing the intellectual property of others, may make it difficult or cost prohibitive to carry on our business as currently planned.”

In English: “We bring knives to what may well become a gunfight.”

BioAmber as it sees itself:  7 Competitive Strengths

Proprietary Technology Platform that Addresses a Large Market Opportunity. We own or have exclusive rights to specific microorganisms, chemical catalysis technology and a unique, scalable and flexible purification process.

Selling Commercial Product Today.    We have sold bio-succinic acid to 12 customers in 2011. We believe we are the first and only company selling bio-succinic acid products in commercial quantities.

Proven Cost-Competitive Economics at Large Scale. We expect to produce bio-succinic acid at our planned facility in Sarnia, Ontario that is cost-competitive with succinic acid produced from oil priced as low as $35 per barrel.

Limited Exposure to the Availability and Price of Sugar. Our process requires less sugar than most other renewable products because 25% of the carbon in our biosuccinic acid originates from carbon dioxide.

Established, Diverse Customer Base. We have entered into supply agreements for the sale of over 84,000 metric tons of bio-succinic acid and its derivatives over the next five years.

Third-Party Commitments for Global Manufacturing Expansion. We have signed an agreement with Mitsui to jointly build a facility in Sarnia, Ontario…[and our] agreement with Mitsui contemplates the construction and operation of two additional facilities.

Experienced Management Team with Strong Track Record. Our management team consists of experienced professionals, possessing on average over 25 years of relevant experience in scaling up, manufacturing and commercializing chemicals, at Cargill, DuPont, INVISTA, Dow Corning, GE, Royal DSM and Genencor.

Financing to date

From the S-1: “We issued 11,659 shares of common stock, 33,655 shares of preferred stock and warrants to purchase 18,769 shares of common stock at exercise prices between $37.52 and $100.00.

“On February 6, 2009, we issued secured debentures and warrants for 18,760 shares of common stock at a per share cost of $50.00 for aggregate consideration of $938,000.

“On June 22, 2009, we issued in a private placement a secured convertible promissory note and warrants for 5,970 shares of common stock to FCPR Sofinnova Capital VI for gross proceeds of $4 million.

“On October 22, 2009, we issued in a private placement an aggregate of 59,702 shares of common stock at a per share cost of $201.00 for aggregate consideration of $12 million.

“On February 1, 2010, we issued 5,000 shares of common stock at a price of $201.00 per share to Shanghai KEQI and Sinoven LLC.

“On November 23, 2010, we issued secured convertible promissory notes in a private placement for gross proceeds of $4 million. The promissory notes were converted into 10,833 shares of common stock and warrants to purchase 2,707 shares of common stock at an exercise price of $369.14 with a ten-year term.

“On April 15, 2011, we issued in a private placement an aggregate of 121,904 shares of common stock and warrants for 2,707 shares of common stock at a per share cost of $369.14 for aggregate consideration of $44,999,643.”

“On November 4, 2011, we issued in a private placement an aggregate of 20,061 shares of common stock at a per share cost of $997.00 for aggregate consideration of $20 million to Naxamber S.A., FCPR Sofinnova Capital VI, Mitsui & Co., Ltd. and Clifton Equities Inc.”

The bottom line

Well, it really comes down to this. There isn’t much of a market in succinic acid. About 40,000 metric tons and $300 million. About the capacity of a standard ethanol plant – one.  So, you have to take it, on essentially BioAmber’s say-so, that they can use their low-cost succinic as a base from which to chase everyone’s else’s high-priced other stuff.

On the side of belief, there’s a range of management talent and expertise at BioAmber that Wyatt Earp would have been proud to lean on at the OK Corral. Plus, you have the say-so of Mitsui, a Japanese trading house of long lineage and a distinct “no dummies” hiring policy. And, there’s a nice first-mover advantage.

But then there are the risks. For one, that Verdezyne might wrap up bio-based adipic acid before BioAmber gets there, as Genomatica might wrap up BDO. The risk that BioAmber might not get to C6 building blocks as fast or cost effectively as they hope.

Outside of the C6 platforms, there’s $3.8 billion in addressable markets cited in the S-1. Figure 20 percent for the bio-based products in the near-term, that’s around $700 million. How much of that can BioAmber lock down in the near-ish term to provide meaningful cash flow to finance further expansion, and how much do they need to lock down to provide returns commensurate with a $150 million cash raise in the IPO?

So, it’s a bet – on a pre-revenue company with a hot technology and a meaningful market – if it can get there.  Like many IPOs in this space this past year, it’s a financing event for the company’s expansion, rather than a liquidity event for the current investors. The current investors – well, they’d like to spread the risk by broadening the investor base before the company pushes through to commercial scale. It’s an oft-told tale – nothing daunting in that, per se.

Like a first-mover advantage in succinct acid, one that may translate into a lead in some of the biggest markets that will come by in renewable chemicals? Here’s the train for you.

If the risks are high, the rewards will be high for the daring investor who throughly vets the opportunities in the market, as well as the aptitude of the magic bug for all the work ahead that BioAmber has scheduled it to do.

The complete S-1 registration statement.

All 200-or-so pages in all their glory. The complete S-1 registration statement is here.

Jim Lane is editor and publisher of Biofuels Digest.

November 15, 2011

High Conviction Paired Trade – Short Tesla Motors And Buy Exide Technologies, The Sequel

John Petersen

Last November I broke with tradition for the first time in over 30 years and suggested a paired trade that bought Exide Technologies (XIDE) and shorted Tesla Motors (TSLA). Over the following three months, investors who made the trade and bought four Exide shares while shorting one Tesla share pocketed the following gains.

16-Feb 2011

Buy Four Exide
Short One Tesla
Pair Trade Total

While the paired trade hit its peak value in mid-February of this year, it didn't turn south until early June.

11.15.11 2010 Pair.png

Since June, Exide has fallen to unsustainably low levels and Tesla has climbed to unsustainably high levels, which means it's once again time to recommend a paired trade that buys Exide while shorting Tesla. At yesterday's close the ratio works out to an 11.5 share Exide buy for each shorted share of Tesla. The results this time around should be even better than last year because the valuation disparities summarized in the following table are so immense.

Price Per Share
Market Capitalization
Working Capital
Book Value
TTM Sales
TTM Earnings

A couple days ago I suggested that Exide's Recent Price Collapse Was Unjustified and explained how forced liquidations by a large Exide shareholder have crushed its stock price on two occasions during the last two years. Today I'll summarize a few of the headwinds that Tesla must face and overcome if it hopes to avoid a major price decline.

Battery Safety Questions. Over the last week there have been numerous news stories about an NHTSA inquiry into the safety of automotive lithium-ion battery packs after a GM Volt that had been used for crash testing spontaneously caught fire at an NHTSA facility. While the stories remain optimistic about the outcome, they overlook the inconvenient truth that safety testing of lithium-ion battery packs is not comparable to the procedures automakers used for other batteries.

In the late 90s Ford built a test fleet of electric delivery vans called the EcoStar that used sodium sulfur batteries. As part of their normal testing, Ford took a "Vlad the Impaler" approach to safety and used a hydraulic ram to drive a ten-inch long four-vaned arrowhead wedge into a fully charged 35 kWh battery pack. The sodium sulfur battery passed the test. As far as I know, safety testing for lithium-ion batteries is limited to driving an eight penny nail into a single cell. I have not been able to find any published reports of destructive pack level testing to determine how the failure of one cell might cascade through a battery pack that contains up to 6,800 cells.

To put the safety question into sharper perspective, Japan's NGK Insulators suspended its sodium sulfur battery production and asked its customers to stop using its products until an investigation uncovered the cause of an unexplained battery fire. Before the incident NGK had a flawless 10-year safety record, but it still asked its customers to suspend operations on an installed base of 305 Megawatts of power and over a gigawatt hour of energy storage at 174 locations worldwide because of a single incident where nobody was hurt.

If the NHTSA reaches an entirely reasonable conclusion that pack-level testing of lithium-ion batteries has been given short shrift in the headlong rush to bring electric vehicles to market, the delays and risks of thorough pack level testing and the associated news coverage could be catastrophic for specialty EV manufacturers.

Charging Infrastructure Issues. For several years China has been perceived as a global leader in vehicle electrification. Over the last several months, public statements from Chinese leaders have grown increasingly wishy-washy, suggesting that fuel efficiency and HEV technologies would be easier and less expensive to implement at relevant scale. Just this week Forbes reported that China’s power-grid giants – China Southern Grid and State Grid – may throw another monkey wrench into the works by insisting on battery exchange schemes instead of distributed charging infrastructure. While actions in Mainland China will probably not have much direct impact on Tesla, the risk of similar restrictive decisions by utilities in more important markets cannot be dismissed out of hand.

Resale Value Questions. One of the biggest unanswered questions in the electric vehicle space is resale value. Advocates assure us that EVs will retain their value better than conventional cars despite the fact that the battery packs that represent up to half of the vehicle cost are consumable and wear out over time. Yesterday's Wall Street Journal reported that vehicle leasing firms in Israel were having second thoughts about Project Better Place because of uncertainty over residual value. While leasing and residual value issues may not be critical to buyers of the Tesla Roaster, they're likely to be important to buyers of the upcoming Model S which is targeted to an upscale consumer market where vehicle leasing is commonplace.

The Valley of Death. There are no greater, crueler or more universal truths in the stock market than the hype cycle and the valley of death. While there are exceedingly rare exceptions like Google, substantially all new companies and new industries go through a cycle of inflated expectations followed by profound disillusionment. Substantially all cases where companies have avoided the hype cycle have involved a high level of business maturity and close to flawless execution. The following graph from the Gartner Group illustrates the typical stages.

11.15.11 2010 Pair.png

Tesla's execution to date has been pretty good and as far as I can tell it hasn't encountered any significant delays or setbacks. Unfortunately its stock is priced to perfection and anything less than flawless execution going forward can be a catalyst that pushes the stock off the peak of inflated expectations and into the trough of disillusionment. Given the substantial external risks I've discussed above and the inherent risks discussed in Tesla's SEC filings, I think the downside risk in Tesla's stock outweighs the upside potential by an order of magnitude.

Disclosure: None.

November 14, 2011

Feeling Feeling Blue About Green? Reasons for Cleantech Optimism...

David Gold

There are so many easy reasons to be a pessimist today:  the world financial crisis, the discord and dysfunction in Washington, and the almost certain doom that many scientists claim we are facing from global warming. With the first high profile cleantech company failures, the euphoria of the cleantech bubble has burst creating pessimism about the future of cleantech as a whole. 

I say, hogwash!  History says we have many reasons to be optimistic.  Just because things look bad today doesn’t mean the world is coming to an end!  We humans have a hard time stepping back and getting a perspective on things that span long periods of time and it’s easy to get lost in the fear and distress of the day.  But as a cleantech venture capitalist, I am almost required to be optimistic.  How else could I make high-risk investments in early stage companies?

With renewable energy representing only 8% of consumption in the U.S., no doubt there is work to do.  But I prefer to look at the cup as 8% full.  Consumption of renewable energy has been growing rapidly in the U.S. -- at an average rate of 7% the past several years.  At that pace, renewable energy consumption would double less than every 11 years.

Pessimists will point to forecasts such as those from the Energy Information Administration that project significantly slower growth.  The most recent of those very projections just three short years ago forecast consumption for 2010 that now, by EIA’s own numbers, are known to be about 17% low!  The problem with forecasts of these types is that they systematically fail to account for future disruptive technologies or significant changes to market conditions.

In 2001 it seemed like the days of the dot com were gone as the markets crashed and company after company went out of business.  Yet, the greatest value creation on the Web occurred after the dot bomb.  I don't believe we are doomed; I believe that technology innovation will enable disruptive changes in our energy production and consumption and I believe the greatest value creation for cleantech companies lies ahead.

So, to cheer you up, here are just a handful of examples in which past forecasts of doom were way off and whose combined legacy says, " Don't underestimate the power of human innovation and spirit!"...

We Never Had to Import Liquefied Natural Gas

Just a bit over six years ago our nation was facing an extraordinary natural gas crisis.  As utilities had shifted to gas-fired plants in the ‘90s to reduce consumption of coal, consumption of natural gas boomed.   As the cleanest and lowest CO2 burning fossil fuel, natural gas was (and is) being used as a critical bridge from coal and oil to renewable energy sources.  Yet natural gas production was on the wane because proven reserves couldn’t keep up.

In 2003, Alan Greenspan sounded the alarm to Congress about the potential impact on natural gas prices (which were already on the rise) if significant action to increase imports wasn’t taken.  The problem, though, was that natural gas can only be transported by pipeline or by container and only in a liquid form, but  the reserves were mostly overseas.  So, in 2005 there were plans for as many as 55 Liquefied Natural Gas (LNG)-importing facilities.  Only six were built, and most sit idle today.  Disruptive horizontal drilling and fracking technology opened up enormous reserves of previously unreachable natural gas in shale. Production skyrocketed and prices dropped by over 60%.  Current estimates place U.S. reserves at 100 years or more…without additional technology.

Disruptive Lighting

In the 1960s, Light Emitting Diodes began to come to market for niche applications.  The concept that they would someday disrupt the world of lighting seemed far-fetched.  They were dim, extremely expensive and incapable of generating pleasing white light. My, how the world has changed in just a few decades!  The brightness of LEDs has increased more than five orders of magnitude while, at the same time, their cost per lumen (a measure of brightness) has dropped by about four orders of magnitude.  And, to boot, pleasing warm and bright white light is now the norm.  What seemed impossible just a short time ago is now more than possible – it is changing the way the world thinks about lighting, and the exponential improvement in LEDs shows no sign of slowing down.   

The Population Bomb Didn’t Explode

In the 1960s predictions of world starvation by the 1980s were rampant in books like the best-selling The Population Bomb by Paul R. Ehrlich or theorists like Thomas Malthus.  After all, back then world population was going to double every 30 years or so, meaning we should have had over 11 billion people in the world today! Yet, world population just reached 7 billion. 

World population growth rates are now less than half what they were in the early ‘60s and continuing to decline.  Based on today’s population growth rate and the continued forecasted decline, it will take about 100 years for human population to double again.

OK, you say, but that still means having 14 billion people on the planet in a hundred years!  True, but in the 1960s another reason population doom was the rage was an assumption that agricultural production couldn’t keep up with the exponential growth.  Yet, dramatic agricultural technology innovation that improved crop, soil, water, nutrient, and pest management has enabled the amount of food production per capita to increase by over 30% during that timeframe in spite of a more than doubling in population!  Hunger still haunts parts of the world, but the pessimistic doom predicted in the ‘60s was far from today’s reality, in which the amount of food per capita has increased.  One can only imagine where our technology will be in another century.

200 Countries, 200 Years…

Pessimists will surely find reasons to pan this article… for example, concerns about fracking fluids or the disparity in food distribution around the world.  A pessimist sees these as reasons to stay pessimistic.  An optimist sees them as new areas where we as humans will work to improve because there is rarely a penance for a problem.  So, if you are still feeling depressed and pessimistic, I will leave you with one of the more profound and optimistic views on world progress that I have seen.  Hans Rosling is a professor of International Health at Karolinska Institute in Stockhom and his video 200 Countries, 200 Years is a sure cure for any pessimistic day. 

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.

November 13, 2011

Exide's Recent Price Collapse Was Unjustified

John Petersen

After the market closed on Monday, Exide Technologies (XIDE) released surprisingly poor second quarter results, a $3.6 million loss that included a $5.7 million charge for several years of reporting irregularities at a small Portuguese recycling subsidiary. The market's reaction was absolutely savage as the stock collapsed from Monday's close of $4.48 to Friday's close of $3.01. In my view, the reaction was unjustified and has set up a tremendous buying opportunity for investors who are willing to look beyond the headlines and focus on core business fundamentals.

To put things in perspective, Exide's stock has closed at or below Friday's price on 24 days since October 2007, and 22 of those days were during the depths of the March 2009 market melt-down. The stock is currently trading at a 59% discount to its 200-day moving average of $7.32, a mere 7.6% of annual sales and about 57% of book value. Despite some obvious challenges Exide faces over the next year, this is a blood in the streets buying opportunity.

Since I started blogging in the summer of 2008 Exide's stock has seen more ups and downs than a high-tech roller coaster. The following chart overlays the 10-, 20-, 50- and 200-day weighted moving average price on the 200-day moving average volume since July 2008.

11.13.11 Exide Price.png

To a casual observer the chart looks absolutely chaotic, but most of the blame for bizarre price swings can be attributed to factors that have nothing to do with Exide's business. On December 31, 2009, a family of funds managed by Jeffrey Gendell owned 23,705,133 shares, or about 30% of Exide's outstanding stock. The following is table derived from holding reports and other SEC filings and summarizes the quarterly Gendell stock sales in 2010 and 2011. The timeframes marked with red bars in the chart coincide exactly with the periods of heaviest Gendell selling.

Date Balance Sales
31-Dec-09 23,705,133 -
31-Mar-10 20,738,399 (2,966,734)
30-Jun-10 15,089,230 (5,649,169)
30-Sep-10 12,312,410 (2,776,820)
31-Dec-10 10,295,260 (2,017,150)
31-Mar-11 9,489,476 (805,784)
30-Jun-11 9,489,476 -
26-Sep-11 7,799,476 (1,690,000)

Since the beginning of 2010 a single holder has pushed almost 16 million shares into the market with catastrophic results for the stock price. When the selling abated for a while in the first two quarters of 2011 the stock price tripled, only to crash yet again when the selling began anew. The bottom line reality is that no market can hold up under sustained selling pressure from large stockholders and it doesn't matter whether the sustained selling pressure occurs in an industry leader like Exide or a newcomer like Axion Power International (AXPW.OB). The result is always the same.

I'll not minimize the challenges Exide must face as it idles its flooded lead-acid battery plant in Bristol, Tennessee and restructures its domestic manufacturing and distribution network, but total restructuring costs over the next 12 months should amount to less than half of the average annual restructuring costs Exide incurred over the last three years and the positive impact on short- to medium-term earnings should be substantial. It's also important to note that Exide is just now entering its two strongest fiscal quarters and expects to report significant earnings for the current year.

As Exide gets its house in order over the next two years, its price to book ratio should climb into the 1.75 range and its price to sales ratio should climb into the 55% range, which implies an upside potential of 300% to 500%. The challenges Exide faces are serious, but they're ordinary course of business challenges, rather than existential challenges.

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

November 11, 2011

Solar's Good News: Cut-Backs

by Clean Energy Intel

This year’s period of intense over-supply in the solar sector has continued to pressure solar players, leading to a recent batch of announcements of cut-backs and cost reductions. All of this may simply seem to be a continuation of the recent slew of bad news that has plagued the industry in the past few months. However, in the end, it is likely to be seen as at least one of the antidotes to the sector's troubles.

Global PV Module Demand and Inventory
Source: SolarBuzz, by permission.
The chart above from SolarBuzz illustrates the point succinctly. The initial problem for the solar industry was of course the collapse in demand out of Europe related to cutbacks in the Feed In Tariifs (FITs) in a number of countries such as Italy and Germany. However, we have seen an increase in forecast demand in other countries. The red columns in the chart above in fact point towards a decent increase in demand globally across 2012. So far, so good.

The real problem, however, has been that even with a rebound in demand, the production plans of the main solar players have been far too aggressive - pointing to a rapid continued build out in capacity despite the lack of supportive demand. The yellow line in the chart is the result - a continued and rapid increase in inventories - no doubt to be followed by further price declines across the supply chain. Moreover, even on a reasonable assumption of a cut-back in the intended capacity build (blue line) the calculations from SolarBuzz only managed to show a stabilization of the high levels of inventories across the year. Obviously, without dramatic a adjustment in supply, that points to another difficult year ahead.
The problem is more than clear. However, solar manufacturers have finally begun to adjust their plans for capacity expansion. The most recent example was the announcement by Suntech Power (STP) of cuts likely to be of some 20% of 2012 expenses, including job losses. The press notice, which you can read here, makes the retrenchment clear:
'While continuing to focus on production efficiency, the initiatives target to reduce operating expenses by at least 20% in 2012; hold capacity expansion in 2012; and improve working capital by $200 million by the end of 2011'.

From the point of view of the industry as a whole, the most important issue is of course the decision to hold off from any further expansion of capacity until the end of 2012. This type of action is exactly what the industry needs in order to have any chance of stabilizing and getting the inventory overhang down.

According to further press reports, a range of other leading solar companies have made similar announcements:
  • Suntech Power, as mentioned above, has halted new capacity increases until the end of 2012

This is all good news. With the major players now beginning to bring a halt to capacity increases, the increase in demand over 2012 will have the opportunity to eat into the inventory overhang and produce a much more stable position in the balance between supply and demand.

There are other headwinds facing the industry. However, as we move forward the industry is likely to be in much better shape than would have been the case if the major Chinese players had continued to push ahead with capacity build-outs in the face of a burgeoning inventory position in the industry as a whole.

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.

November 07, 2011

Lime Energy: Delivering Energy Efficiency

Tom Konrad CFA

The high upfront cost of efficient buildings (and efficiency in general) is more than offset by the significant long term rewards, as you can see from the McKinsey chart below.

Despite the long term benefits, the upfront cost is often a barrier, especially to government entities in today's tight budgetary environment.

Performance contracting offers them a way to square the circle between the long term budget benefits of efficient buildings and the often significant capital cost. This works by funding the capital improvement with debt secured by future energy savings. An Energy Service Company (ESCO) guarantees a certain level of energy savings and performance (hence the term Performance Contracting.)

Yet performance contracting comes at a cost.  No ESCO puts its balance sheet behind a promise of energy savings solely out of a desire to green the economy.  That ESCO has a cost of funds just like everyone else, and in the case of a performance contract, this cost of funds is built into the contract price.  Entities which understand what needs to be done and can borrow at reasonable interest rates or have cash can wring greater savings out of energy efficiency services by avoiding performance contracts.

ESCO Business

That's where Lime Energy Co (NASD:LIME) comes in.  Lime (a name derived from "Less Is More Efficient") has been providing energy efficiency services for 20 years, both directly to clients and also as a subcontractor to ESCOs. Lime does not have the balance sheet to guarantee performance contracts itself, but it does have significant expertise in delivering the energy efficiency services that make performance contracts work.

In a recent interview, Lime CEO John O'Rourke told me that his current ESCO clients include Johnson Controls (NYSE:JCI), Honeywell (NYSE:HON), Constellation Energy(NYSE:CEG), Clark Energy, and PEPCO (NYSE:POM).  According to O'Rourke, Ameresco (NYSE: AMRC), the publicly traded pure-play ESCO firm that was profiled in the most recent part of this series, "would probably never use us," because of overlap in certain in-house capabilities and (I suspect) a bit of inter-company rivalry.

In its 20 years of business, Lime has worked with many ESCOs and directly with public sector or institutional customers which do not need performance contracts.  One such example is the United States Postal Service (USPS), which issued competitive solicitations for multiple regions where the USPS financed the work directly instead of a traditional performance contract. Lime was awarded several of these IDIQ contracts with achieved savings in excess of 30 million kWh per year.

While the ESCO business is becoming more competitive, the business of actually delivering energy efficiency has become somewhat less competitive. In Lime's core Northeastern market, several energy efficiency contractors have recently gone out of business or shrunk their operations significantly. These businesses were unable to weather the trough that the ESPC industry experienced over the last three years. Lime survived by re-directing their focus to other areas, and found growth opportunities in the private sector.

Utility Business

Lime has carved out a niche for itself managing Demand Side Management (DSM) programs for utilities.  This is the fastest growing part of Lime's business, which O'Rourke expects to reach about 40% of revenues in 2011.  Part of the reason for the rapid growth is likely Lime's track record, in which the company has "blown savings goals out of the water" over the last three years. 

Utility DSM targets tend to be conservative, since the utility itself usually plays a very large role in setting the regulatory process, and utilities have a vested interest in setting targets low to keep them easily achievable, so Lime's track record may not be as impressive as O'Rourke makes it sound. On the other hand, targets for delivered savings have increased dramatically over the last few years, and utilities face penalties for failure to meet these goals.

The urgency and market opportunity vary widely between utilities and state regulators, but according to O'Rourke, utility spending on DSM programs is increasing consistently by over 20% per year, and he's not exaggerating. I checked O'Rourke's numbers with Howard Geller, the Executive Director of the Southwest Energy Efficiency Project, and he told me that “Based on data collected by the Consortium for Energy Efficiency, utility spending on programs that help their customers save electricity and natural gas has been increasing by more than 25% per year in recent years.”

In addition to this rapid growth, the utility business brings two main benefits to Lime.  First, it is a source of earnings stability, since contracts tend to be multi-year and not seasonal like much of Lime's energy efficiency business. (The energy efficiency business is back-loaded towards the end of the year when many commercial and industrial (C&I) clients decide if they should go forward with energy efficiency projects depending on budget constraints.) The second benefit of the utility business is as a way to reach new C&I clients. Lime may initially contact a C&I client as part of a DSM program, but then go on to provide energy efficiency measures for the client beyond those in the utility program.

Current utility clients include the Long Island Power Authority and National Grid (NYSE:NGG), but O'Rourke hopes to win additional contracts this year.


Finally, Lime has recently introduced a new division (called Lime Energy Asset Development, or LEAD) to develop its own energy projects in-house. These projects involve the development, design and construction of larger alternative energy projects where the clients purchase the energy produced, rather than the asset itself. These larger projects will be limited by Lime's ability to finance them, but doing project development in-house should allow Lime to maintain strong margins on the projects, and Lime need only undertake them when it will not put undue pressure on Lime's balance sheet.

Financial Metrics

Lime is not yet profitable, but O'Rourke says the company has enough capital to grow 30% for the next two years and achieve profitability in 2012 without raising additional capital “anytime soon.” Analyst consensus earnings are for a loss of 8 cents a share this year, and a profit of 21 cents next. The company has $6 million in net cash on the books, no net debt, and a free cash flow of negative $9 million over the last 12 months. Since the third and fourth quarters tend to be the most profitable, cash should increase over the next two quarters, and so O'Rourke is probably right that current assets and credit lines should be sufficient to bring Lime to consistent profitability.

With the stock currently trading at $3, and expected earnings of $0.21 next year, Lime seems quite reasonably valued for a company growing at 30% a year. However, given the current climate of uncertainty, the back-loaded C&I business may turn out to be a little disappointing this year, and possible earnings misses caused by C&I clients deferring energy efficiency projects in order to conserve cash may lead to a somewhat lower stock price in the next few months. The C&I business has been falling as a percentage of revenue, so any such earnings misses are unlikely to be dramatic, but investors are taking any excuse to sell alternative energy stocks in the current climate.


I like Lime's business, and think the company is fundamentally strong, and the valuation is quite conservative. However, I expect the current stock market rally to be short-lived. A renewed market decline, along with a possible earnings miss caused by C&I clients hoarding cash in the climate of uncertainty could easily lead to a lower stock price in the coming months. I'll be watching the stock closely and buying cautiously if either of these comes to pass.

DISCLOSURE: Long AMRC. No position in LIME, but I may initiate one at any time.

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.

November 06, 2011

Tesla Finds Strength In Another Deal With Mercedes

by Clean Energy Intel
Tesla Model S.  Image used with permission from Tesla
Last week was a very good week for Tesla (TSLA) stock - up 13% on the day on Thursday and ending the week at $32.31, up a solid 8.2% from the previous Friday's close. This was partly because the company's earnings statement provided a loss that was below expectations - but probably largely a result of the announcement that the company has secured another deal with Mercedes.

Tesla's third-quarter net loss widened to $65.1 million from $34.9 million a year ago. However, excluding items, the loss was 55 cents a share versus market expectations of 60 cents.The company also raised its forecast for 2011 revenues from a previous range of $180 million to $190 million to a higher range of $195 million to $200 million. Overall the earnings announcement was just enough to keep the market in a forward-looking mode.

What got the market excited was no doubt the announcement by the company in a letter to shareholders of another deal with Mercedes, which sounds like a considerable expansion of the previous agreement between the two companies. As things stand, we have little detail on the deal beyond the following:

  • Mercedes has issued a letter of intent to Tesla on the agreement
  • It relates to the provision of  'full powertrains in the Mercedes line'
  • A fuller announcement will be made towards the end of the year

This deal, alongside the company's deal with Toyota over the electric RAV4, once again illustrates that Tesla can compete effectively in terms of both peformance and cost in terms of both battery packs and powertrains. The deal with Toyota is worth $100m and the deal with Mercedes certainly has the potential to be of a similar magnitude.

Tesla has indicated, in a Company Overview this summer, that its battery pack costs for the Model S are roughly in the 320 to 450 $/kwh range. In 2010 average costs in the industry were 650 $/kWh or higher. Consider this: Tesla is a luxury end provider with what appears to be the lowest costs in the industry for Lithium battery packs on a $/kWh basis.

Moreover, there has been some discussion that there may be another deal with Toyota on the way - with a price tag of as much as $1 billion on it. You can read more about that potential deal here.

Finally, you can read my more detailed thoughts on the outlook for the electric car in general and Tesla in particular here.

The bottom line is that, with its 300 mile range, the Tesla Model S is out on its own in terms of what it can deliver. No other automaker is remotely talking about delivering a pure EV with such a range. The company has already taken deposits for 6,500 units of the Model S and seems set to create a significant niche market for its product. Moreover, the company has plenty of room for growth in its powertrain business, with strong relationships with both Mercedes and Toyota. Given these facts, it certainly seems that Tesla's stock has plenty of room on the upside.

I currently have no position in Tesla having taken profits on a previous holding. I intend to use any lower prices to re-enter that position.

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

November 05, 2011

Could The G20 Deliver A Growth and Clean Energy Pact?

by Clean Energy Intel

It is becoming increasingly clear that the international community fully recognizes the need to ensure that the global economy does not become engulfed by another financial crisis at this critical juncture. Developments with regard to the referendum question in Greece and the fate of MF Global make this issue particularly pressing. There is therefore significant rationale for some kind of coordinated G20 action out of the coming Cannes Summit on November 3-4th.

In an article in early October, I argued that it was clearly in the interests of countries like China to aid the work-out process in Europe:

'....At that point, any discussion of negotiations on a potential deal on European debt at the G20 summit could help the market higher. There is certainly room for such a development and my read of the political tea leaves is that it may well involve a significant commitment from China. If that looks likely to be the case, it should again help the market towards a recovery...'

You can read the original article here and a more detailed assessment of the rationale and likely path forward here and here. That overall assessment looks generally to have been proven to be correct, with China’s willingness to support the EFSF mechanism in some manner now more or less clear (though any significantly negative political developments in Greece could obviously put that support on hold).

Interestingly, another reading of the political tea leaves suggests that the G20 may well decide to announce a further coordinated program – to convince the markets that they can act to sustain global growth. This could involve:

  • An overall stimulus commitment from a number of member countries  - and particularly those currently running current account surpluses
  • In particular, a deal on investment in clean energy (expect a lot from Germany, China and Japan on this) 

How to judge the market’s likely response is difficult in the midst of its confused reaction to both the MF Global and Greek referendum issues. However, four points seem reasonable:

  • If the price action continues to be negative on the S&P and the Euro going into the G20 an announcement of something like the agreement discussed above (or initial talk about it) could produce a decent dead cat bounce of significant proportions at least. Both the SPY and FXE ETFS could bounce sharply.
  • We should also be getting further confirmation of the commitment of China and other BRICs to the EFSF story. 
  • In clean energy, wind and solar and the like would get a decent leg up. Solar has been destroyed in the last few months and a basket of solar players could do very well on an announcement such as that discussed above. First Solar (FSLR), SunPower (SPWRA), Suntech Power (STP) and Yingli Green Energy (YGE) for example together look interesting as an announcement play at current prices. Alternatively, purchasing a solar ETF such as TAN also makes sense. In wind, exposure to market bellwether Vestas (VWDRY.PK) or simply FAN, the best wind ETF probably makes most sense. 
  • In terms of electric vehicles, the most interesting play remains Tesla (TSLA). For a broader discussion see here

The bottom line is that the G20 member countries know that both the global economy and the markets are at a critical juncture. They are therefore likely to pull out all the stops in order to convince the markets that they can prevent a financial crisis of global proportions. And some stimulus from a push on clean energy is entirely possible.

Disclosure: I am long SPY. I intend to purchase a basket of clean energy stocks over the next 24 hours.

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.

November 03, 2011

Western Wind: A Clean Energy Rodney Dangerfield?

Tom Konrad CFA

Renewable energy power producer Western Wind Energy Corp (WNDEF.PK, WND.V) feels it gets no respect.  In particular, they have long felt that the investing public does not recognize the value of the company's existing and nearly completed wind farms. 

Kingman solar and wind.png
Western Wind's Kingman I Wind & Solar park. Photo courtesy of the company.

Independent Valuation

Almost every company will tell you that their shares are undervalued, but what's a bit more unusual in this case is that their assets (Wind farms with a little solar thrown in) are fairly easy to value with a rigorous discounted cash flow (DCF) model.  While wind and solar resources vary from hour to hour and even year to year, the expected energy production from wind and solar farms is fairly predictable over time, and all Western Wind's projects except for Mesa have Power Purchase Agreements (PPAs) with electric utilities that specify the prices those utilities will pay for as long as 20 years, leading to fairly predictable revenue streams over time, and fairly low uncertainty in asset valuation.  The company is currently selling electricity from Mesa at the spot price, but they are in the process of negotiating a longer term PPA.

Last year, company management decided to back up their words by hiring the independent DAI Management Consultants, Inc to value the company's equity stake in their renewable energy projects.  Western Wind has a 30MW operating wind farm (Mesa), an operating combined wind (10MW) and solar (500kW) farm (Kingman I), a 120 MW wind a farm and that is nearing completion and expected to be fully operational by the December 2011, and a 30 MW solar farm in Puerto Rico (Yabucoa) that is expected to be completed by the end of 2012.  Windstar and Kingman have signed PPAs and debt financing in in place, and Mesa is fully financed and operating under a spot price sale agreement. Yabucoa has a signed PPA and the company expects to close financing for it by the end of 2011.


Western Wind has released the results of DAI's valuation in a series of press releases as the valuation of each project was completed.  The complete valuation is not public because it depends on the terms of the PPAs, which are confidential.  (Confidential PPAs are a practice which I believe is counterproductive as well as counter to free market principles.  Nevertheless, keeping PPAs confidential is standard utility industry practice, and could only be banned by utility regulators; it's not something I or Western Wind have the power to change.)  They did, however, release the assumptions on which DAI's valuation was based.  These assumptions are included in the table below.

Assumptions used by DAI in valuation model.



Kingman I



Project type and size

120MW wind

10MW wind, 0.5MW Solar

30 MW Wind

30MW Solar

Commercial operation date in valuation model

Dec 31, 2011

Dec 31, 2011

Existing operations

Dec 1, 2012

Remaining asset life

30 years

30 years

20 years (older assets)

30 years

Power Purchase Agreement  (PPA)

fixed price for years 1 to 20 via signed PPA and merchant prices thereafter

fixed price for years 1 to 20 via signed PPA and merchant prices thereafter

fixed price per CPUC MPR for years 1-20

fixed price for years 1 to 20 via signed PPA and merchant prices thereafter









27 year right of way

40 year lease

Tax incentives

30% cash grant and 100% bonus depreciation

30% cash grant and 100% bonus depreciation


30% cash grant, 50% bonus depreciation and 50% Puerto Rico investment tax credit

Source of key assumptions

Independent engineer

Independent engineer



Debt --to-capital ratio





Term of debt

20 years

20 years

15 years

20 years

Cost of debt





Discount rate on equity returns

Under PPA: 11.48% Merchant generator:15.75%

Under PPA: 11.51% Merchant generator:15.85%

Under PPA: 10.52%
Merchant generator:NA

Under PPA: 10.96% Merchant generator:14.74%

Weighting of income approach vs cost approach





Construction cost contingencies





One assumption that I would have liked to see is the expected capacity factors for each of the wind farms, since that is key to knowing how much energy each project is likely to produce, but otherwise the disclosure seems comprehensive. 

Assuming the capacity factor estimates are accurate, an assumption which shows the fairly conservative nature of the valuation is the second-to-last row "Weighting of income approach vs cost approach."  This row indicates that for each of the incomplete wind farms, only 75% percent of the valuation given is based on a DCF model; the other 25% of the valuation is a replacement cost approach using comparable market transactions.  This is conservative because the DCF model should give a considerably higher value than cost when valuing a wind project because unfinished projects trade at a discount: Why invest money if the expected returns (DCF valuation) are below what you could get by selling the project?

Another row worth noting is the third to last, "Discount rate on equity returns."  This is extremely important because DCF valuations are highly sensitive to the discount rate assumption: a slightly lower discount rate can lead to a much higher project valuation.  Discount rates vary with the riskiness of the project, and with interest rates in the economy in general. (Risky projects should have higher discount rates, and we see this reflected in the fact that when power is to be sold on the spot market rather than under a PPA, DAI used a significantly higher discount rate.) 

As an investor, the simplest way to judge if an equity discount rate is appropriate is to ask yourself if you would be willing to earn that discount rate as an annual return for owning a slice of the project.  For myself, I would be happy to own a slice of a operating or nearly-completed wind farm for 10.5-11.5% per year.  I'm not quite sure why the Yabucoa solar farm is given a lower discount rate than the others even though it is over a year from completion, but I still consider the return to be sufficient.

Given these assumptions, DAI came up with the following project valuations:

Project Valuations from DAI

Kingman I
Project Valuation
$358 million
$32 million
$25 million
$206 million
Project Liabilities
$275 million
$24 million
$152 million
Value of Western Wind's Equity stake
$203 million
$16 million
$24 million
$110 million
Value Per diluted share (70m shares)

I then calculated the implicit value per share of Western Wind and adding in the value of the company's tax loss carry-forward, and assuming that all unexercised share options and warrants with exercise prices below the current stock price would be exercised.  This has the effect of increasing the number of shares outstanding from 60 million to 70 million, and adding $12 million dollars of cash to the company's balance sheet to reflect the cost of exercising the options and warrants.  Note that the fully diluted shares given on Western Wind's website are 71.8 million, but this included the exercise of options and warrants with exercise prices above the current share price: the exercise of those options would result in a net gain to investors who buy at the current price.

Share Valuation

Value (millions $)
Value per diluted share
(70 million shares)
Total DAI Company Valuation (including above projects plus project pipeline)
Tax Asset (loss carry forward)
Value of Cash Paid for Exercise of Warrants & Options
Total $404
Share price (10/31/11)
Appreciation needed to reach fair value

As you can see, I arrived at a per-share valuation of $5.78, three and a half times the current share price.   I think it is unlikely that the company's share price will go quickly to this fair value given the current climate of uncertainty, but even if the company were to remain at this current 3.6x discount, we could still expect the stock to rise over time, for a couple of reasons.

First, if the Windstar is completed on schedule by the end of the year, it should no longer be valued partially based on cost, and should be valued solely based on DCF.  This should lead to an immediate value boost, as discussed earlier.  Kingman is already fully operational, and so should also be valued solely with a DCF model.   Second, as time passes, cash flow will be produced from the operating farms (and Yabucoa will come closer to completion), and this should lead to a gain in value approximately equal to the discount rate on equity returns used in the project valuations. 

Hence, even if a company trading at a 3.6x discount to fair value does not attract takeover offers or the share price does not quickly adjust upwards for other reasons, we can expect at least a 10% annual return just from accrued income and impending project completion.  In fact, since the valuations above were completed in February (Windstar) and May (the other three), the current valuation of the company should be at least $18 million or $0.26 per share higher today than shown in my table above.  But who's counting?

I personally found the calculations above convincing, and began buying the stock in September.


Possible Takeovers

If the relatively slow 10-12% annual growth in the project values is not enough to excite investors, the possibility of a buyout offer seldom fails to do so. 

The first hint we got about takeover offers was on October 1st, when Western Wind asked  the Investment Industry Regulatory Organization of Canada (IIROC) to review the large numbers of matched trades which had been occurring over the previous six months.  In the complaint to IIROC, Western Wind stated "it has been made aware in the past few days, that a certain party would like to make a take-over bid of certain or all of the assets of the Company," with the implication that the company's share price had been manipulated down to make a low takeover offer look attractive to investors.

On October 11, the Company revealed that Algonquin Power and Utilities (AQN.TO/AQUNF.PK), a company I also own, had expressed interest in buying the company at $2.50 a share.

I most recently wrote about Algonquin in a review of the larger alternative energy power producers.  I chose not to discuss Western Wind and another Renewable Energy project developer, Finavera Wind Energy (FNV.V/FNVRF.PK) in that article because they are earlier stage companies, because I was in the process of buying shares of both at the time, and I did not want to raise the price for my own purchases in these relatively thinly traded stocks. 

After the Algonquin offer became public, there followed a series of press releases from Western Wind and Algonquin, with Western Wind basically saying that the price was way too low, and that they were looking around for other offers, and Algonquin making it clear that they weren't ready to raise their price significantly.  Western Wind made the point that Algonquin was not the ideal acquirer because, as a Canadian company, they would not be able to realize approximately $1 per share worth of tax deductions in the form of accelerated depreciation on the company's wind farms.  Before making the bid public, Algonquin had entered into a "lock-up agreement"  with a large Western Wind shareholder owning 18.6% of the company.  The shareholder had agreed to support Algonquin's bid, giving the company the confidence they needed to make the bid public.

At Algonquin's request, Western Wind formed a special committee to consider any formal offer for the company, including Algonquin's.  Nevertheless, on October 26th, Algonquin terminated the lock-up agreement and indicated they were no longer interested in pursuing the deal.  I can only speculate as to Algonquin's reasoning, but my feeling is that they were not interested in a prolonged takeover battle which would probably require them to raise their $2.50 initial offer.

About the same time, Western Wind announced that it was discussing a buyout of a 100 MW wind project, in order to remind investors that there was a lot more to the company than the possibility of a takeover from Algonquin.

It concerned me that Western Wind was considering the acquisition of a wind project if they thought their own shares were so far undervalued.  Why not just buy up the company's own undervalued shares instead? 

I tried to get some details from Western Wind's investor relations contact, but he could not reveal any details of the negotiations, which are at a very early stage.  He did say that the reason the project's owners are willing to sell is because they cannot get the capital to develop it.  Western Wind expects that, if the company proceeds with the deal, it could find a way to develop the property with minimal or no share dilution.  Lack of dilution is no guarantee that such an acquisition would create more value than a share buyback, but it is comforting that they are paying attention to shareholder value.

What it Means

As a long-time Algonquin shareholder, I'm pleased to see that the company was only interested in buying Western Wind at a knock-down bargain price, and hope that they continue to take that approach to all future acquisitions.

As a Western Wind shareholder,  I was a bit disappointed that the deal did not go through.  I'm not immune to the lure of a considerable and very quick profit on my WNDEF shares.  On the other hand, I did not buy those shares because I was expecting a near-term takeover.  Instead, I bought them because I expected (and still expect) long term appreciation based on the fundamental value and earning power of a company with large wind projects just now coming online.
The IR spokesman also pointed out that the company is considering a share buyback in 2012 using some of the proceeds of the Windstar and Kingman federal cash grants, as announced last December.

Give Western Wind Some Respect

Western Wind became profitable only in 2010, and is right in the middle of the transition from being primarily a renewable energy developer to a renewable energy power producer with strong cash flow.  This change means this Rodney Dangerfield of a company will begin to get some respect from a new class of investors, and the attention brought by the takeover offer seems to have attracted the attention of a few such.

Although Western Wind's shares fell when Algonquin decided not to pursue its offer, the shares are still trading higher than they were in September.  But at $1.50-$1.60 per share, there is still considerable room for appreciation to fundamental value. 

In the near term, the free cash flow after operational expenses from Windstar and Kingman alone should be $14 million annually, with the potential for another $4-5 million from Mesa and Yabucoa, or 26 cents a share before company level expenses and the benefits of accelerated depreciation and cash grants.

For that alone, Western Wind deserves a lot more respect from investors.


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.

November 02, 2011

Is Stop-start Idle Elimination Crushing Vehicle Electrification?

John Petersen

Since June of 2009 I've been a voice in the wilderness proclaiming that stop-start idle elimination will become a dominant automotive fuel efficiency technology by mid-decade and represent a tremendous business opportunity for established lead-acid battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE) and emerging energy storage technology developers like Maxwell Technologies (MXWL), Axion Power International (AXPW.OB) and A123 Systems (AONE). In the process I've suffered more than a little abuse, scorn, derision and ridicule from EVangelicals who think it makes sense to propel up to 5,300 pounds of metal at highway speeds with quarter-ton battery packs. With each passing day, however, it becomes increasingly clear that my cautious assessment of electric drive and my optimistic outlook for cheap and simple fuel efficiency is spot-on accurate because, in the words of Vinod Khosla, "Economics matter and nothing that defies the law of economic gravity can scale."

The most recent confirmation that stop-start will leave all other vehicle electrification technologies in the dust over the next decade comes from a Pike Research report titled "Stop-Start Vehicles, Micro Hybrid Technologies, Batteries and Ultracapacitors; Market Analysis and Forecasts," which reports that while stop-start technology is not well known or understood in North America, stop-start vehicles, or SSVs, are already outselling hybrids by a factor of 3.5 to 1 and the stop-start advantage is expected to widen to 16 to 1 over the next few years because of low cost and easy integration.

11.1.11 Pike Graph.png

In its discussion of the business opportunity Pike said, "Global revenue from the sales of stop-start batteries will grow from $827 million in 2011 to $8.9 billion in 2020, at a compound annual growth rate of 30%." The Pike report mirrors similar conclusions from Lux Research in their October 2010, report "Micro-hybrids: On the Road to Hybrid Vehicle Dominance." Both reports are a good deal more conservative than EPA forecasts that stop-start will be implemented in 42% of US light duty vehicles by 2016. In a weirdly ironic Halloween twist, Wunderlich Securities analyst Theodore O’Neill blamed the rapid adoption of stop-start for limiting demand for lithium-ion batteries and plug-in vehicles. “Where it went off the rails," said O'Neill, "is all the major car companies figured out in 2009 that they could use a different technology to meet the emissions standards in the U.S. and in Europe ... That technology is start-stop."

I've always argued lead-acid batteries would remain competitive for decades as the battery of choice for cars with internal combustion engines, but I never expected to read that stop-start technology and lead-acid batteries were crushing vehicle electrification. Score one for the home team!

Even though stop-start has had a hard time catching the mainstream media's attention, it's the most sensible and cost-effective fuel efficiency and pollution reduction technology imaginable. It automatically turns off the engine when your car isn't moving and instantly restarts the engine when you take your foot off the brake. The biggest problem with stop-start is that it's a battery killer because instead of starting the engine once when you begin a trip, it has to start the engine several times during the trip, carry accessory loads during engine off intervals and recover its charge very quickly to prepare for the next engine off opportunity.

The conventional flooded lead-acid batteries that we've all come to know and hate are simply not robust enough for stop-start. So the auto industry needs a better energy storage solution to accomplish the worthy goal of eliminating wasted fuel and useless pollution from idling vehicles.

The auto industry's widespread and rapid adoption of stop-start has come as a big surprise to most battery manufacturers and industry analysts. Historically almost all cars used flooded lead-acid batteries for starting, lighting and ignition. While AGM batteries have existed since the 70s, global production capacity was limited to a few million batteries a year and most AGM batteries were used in aviation, marine and other high-end applications where their sealed design avoided problems with electrolyte leakage, gas generation and maintenance. Simply put, the world's battery manufacturers were not ready for a surge in AGM battery demand from the auto industry which needs about 55 million batteries a year.

Since the world's battery manufacturers didn't have enough factory capacity to make AGM batteries for the auto industry, their first response was to introduce enhanced flooded batteries that don't perform as well as AGM, but can be made in existing plants. Their next response was to go on a huge capital-spending spree to build new AGM battery manufacturing facilities. Between 2002 and 2009, JCI averaged about a million AGM batteries per year. By 2015 it plans to make about 18 million AGM batteries a year. Exide is also expanding its AGM capacity from 500,000 batteries a year in 2010 to 5.5 million batteries a year by 2015. Other battery manufacturers are quickly following suit.

When Citroën and BMW introduced the first stop-start systems in 2006 and 2008, the technology was viewed as a modest advance with an uncertain future. The initial reviews were less than flattering because the systems performed fabulously in new cars but suffered sharp performance declines as the batteries aged. That gave rise to a concerted industry-wide effort to learn why lead-acid batteries failed in stop-start vehicles and find solutions to the problem.

At the 2010 European Lead Battery Conference, BMW and Ford explained the problem of dynamic charge acceptance to the world's lead-acid battery manufacturers and used the following graphs to show how AGM batteries used in stop-start systems begin to lose their dynamic charge acceptance almost immediately and become effectively worthless after a few months. They also explained that unlike traditional vehicle designs, engine starting was only a minor issue in stop-start because over 90% of the energy used during an engine off interval was attributable to accessories, rather than the starter.

11.1.11 BMW Ford Graph.png

While the graphs provide a lot of data the most important line has a burgundy highlight and shows how charge recovery time increases from 30 seconds with a new battery to several minutes with a battery that's been used for a few months. Since stop-start systems disable themselves until the battery has recovered, a battery that can recover in 30 seconds will invariably save more fuel than a battery that needs several minutes to recover.

Today the auto industry and the battery industry find themselves at an impasse over battery performance in stop-start. The automakers have made it clear that traditional AGM technology is not good enough for today's stop-start systems and can't possibly support future stop-start systems that will offer better fuel economy and put even greater strain on their batteries. The battery industry has responded by producing enhanced AGM batteries that are an improvement over traditional AGM technology, but remain inadequate for the demands of future stop-start systems. To solve the problems and accomplish their fuel economy and emissions reduction goals, most automakers are actively evaluating other technology alternatives.

Continental AG and Maxwell Technologies developed the first new approach to energy storage for stop-start. Their system combines a supercapacitor module with an AGM battery to ensure that stop-start diesels from Peugeot Citroën have enough cranking power to reliably restart the engine. In their second quarter conference call, Maxwell's CEO noted that the system would also increase AGM battery life by roughly 30%. While the Continental-Maxwell system can't do much to overcome the dynamic charge acceptance limitations of AGM batteries, Pike believes supercapacitors will be used to complement batteries in stop-start systems for diesel engines.

Axion Power International is presently completing the development of a second novel approach to energy storage for stop-start and preparing to launch their first product. Axion's PbC battery is a hybrid device that replaces the lead-based negative electrodes in an AGM battery with carbon electrode assemblies that eliminate sulfation, the chemical process that causes conventional AGM batteries to lose their charge dynamic acceptance capacity over time. Since the PbC is a third-generation lead-acid device, it can be assembled on any conventional AGM battery line. In over two years of exhaustive testing by BMW and others the PbC has demonstrated remarkably stable dynamic charge acceptance through several years of simulated use in a stop-start vehicle. While the PbC is not currently available for use in stop-start vehicles, the Pike report suggests that the PbC will be available for use in 2013 model year vehicles.

A123 Systems has recently announced the launch of a lithium-ion battery for stop-start vehicles. Their engine start battery combines sixteen of their 20 Amp hour cells with associated control electronics to deliver a kilowatt-hour of energy and the cold cranking amperage necessary for an automotive starter battery. Because of the high cost of lithium-ion batteries, Pike believes their market penetration will be "very limited" and restricted to expensive performance vehicles.

Stop-start presents a rare dynamic for the lead-acid battery industry because the new technology solutions from Maxwell and Axion will complement rather than compete with existing battery products. Supercapacitors from Maxwell will function as add-on component that improves the efficiency of today's AGM batteries. Similarly, carbon electrode assemblies from Axion have been designed for easy integration into existing AGM plants as a plug-and-play component that can make today's AGM batteries better. Both technologies can help established battery manufacturers better serve their customers needs without eating into their revenue from product sales. For both companies, the ability to leverage existing manufacturing facilities, distribution networks and customer relationships should facilitate a much faster ramp rate than one could expect from a new product that needs to overcome entrenched competitors, build manufacturing, distribution and customer service capabilities and divert staff from other lucrative markets.

JCI and Exide will be the first big beneficiaries of the global shift to stop start. Both companies are trading well off their historic highs and have attractive upside potential. As products from Maxwell and Axion prove their merit in stop-start vehicles and increase production capacity, their shares should perform well. Since Axion has a market capitalization of $40 million while Maxwell is valued $550 million, Axion has greater upside potential for risk tolerant investors.

Currently, the media hype is all about lithium-ion batteries and plug-in electric drive, but auto industry's production plans are all about stop-start and other fuel efficiency technologies. Given a choice between chasing sunshine, lollipops and rainbows or investing in an established automotive trend, I'll take the established trend any day.

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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