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January 31, 2012

Controlling Feedstock Costs Creates Value in Biofuel Companies

Jim Lane

Companies creating opportunities in feedstocks are getting lots of love from investors, and giant downstream partners like BP and Shell.

What’s up in the new upstream?

It has not escaped the attention of investors that Renewable Energy Group’s (REGI) IPO resulted in a $262 million valuation for a company actively earning $2.11 per share through the sale of 200 million+ gallons of biodiesel, while Ceres recently increased the target for its IPO to a valuation above $500 million, despite being, in essence, a pre-revenue company.

What gives? The secret, it turns out, is in feedstock. In recent months and years, as more and more advanced biofuels processing technologies have made it through pilots and demonstrations of their technology and head for commercial-scale, investors have been focused on the fact that value-creation in biofuels has generally conferred an awful lot of dollars on feedstock growers, and not so much for the processing technologies and downstream marketers.

Controlling feedstock costs

For that reason, companies like BP Biofuels have been making control of the feedstock costs, through direct grower contracting, a central feature of their business models. And processing companies that have been getting significant traction towards commercialization, are generally those that have spent the most time and attention locking down the feedstock costs.

Examples? Well, there are plenty, such as POET’s Biomass Division, the technologies such as INEOS Bio, Fulcrum and Enerkem that have secured long term, zero-cost MSW supply contracts; companies like LanzaTech and Joule that utilize and have secured long-term supply of low cost, industrial off-gases such as carbon monoxide or carbon dioxide; or companies like Mascoma and ZeaChem that have establish long-term relations with forest biomass companies like JM Longyear and Greenwood Resources.

Over the past five years, there have been a raft of celebrated bankruptcies and shutdowns in the bioenergy sector – restructuring at Pacific Ethanol, Aventine Renewables, and VeraSun, as well as (at one time) the  shut-down of huge percentage of global biodiesel capacity. Many of the companies and plants have revived and re-opened, but consider this: just one generation after the days of FarmAid, hardly a grower (of first generation feedstocks) has not enjoyed pretty good times, throughout the past five years.

Limits there are, as is widely understood, on the availability of first-generation feedstocks. In some cases, pricing pressure, as in the case of maize or soybeans. In other cases, regulatory pressure such as the EPA’s ruling that palm oil biodiesel has insufficiently low greenhouse gas emissions to qualify as an advanced biofuel.

Value creation, value unlocking, value add

In the Digest’s Feedstock Framework, we see three types of companies.

First, those that are chasing value creation – turning low-performing feedstocks into economic rock stars through yield intensification, often through hybridization and unlocking favorable traits that are hidden in the genome.

Second, companies involved in value unlocking. That is, taking next-gen feedstocks already available at scale – generally, residues, and finding processing or extractive technologies that tease out valuable material streams out of what, previously, was thought of as waste, fit only for dispersal and disposal.

Third, companies involved in value adding. That is, taking existing feedstocks already available at scale, and already providing material ROI to their growers and processors, and using synthetic biology to produce higher-value products from the feedback.

In some cases, these are processors, some cases seed developers, some cases developers of magic bugs. But all of them are working on the right side of the value equation in bioenergy and biomaterials – which may help explain why investors are giving them so much attention as they come to the markets for capital – whether it is financial investors, or serious strategic players working in the downstream markets, such as BP Biofuels, Shell, Valero or Tesoro.

A Feedstock Framework

Below, we have parsed the major feedstocks into the buckets of “value creation”, value unlocking and value add.

Note: The companies cited are for illustrative purposes – there are, for example, tons of companies working on micro algae and agricultural residues that we did not have space to mention – and no disrespect is intended if a favorite company of yours is not included. And, yes, some of these feedstocks (e.g. algae) fit to some extent in both the sugars and oils department. But you get the general idea.

Value creation (new feedstocks)
Oil crops
Microalgae Sapphire Energy, Solazyme (SZYM), Phycal, Aurora Algae, many others
Jatropha SG Biofuels
Carinata Agrisoma
Camelina Sustainable Oils, Green Plains (GPRE)
Sugars: cellulosic and otherwise
Macroalgae Sea6/Novozymes(NVZMY.PK), BAL, Kumho
Miscanthus Mendel
Switchgrass Ceres
Woody biomass ArborGen
Sorghum Chromatin

Value unlocking (residues)
Bagasse Codexis (CDXS)
Municipal solid waste Enerkem, Fulcrum, Terrabon, BlueFire(BFRE.OB), INEOS Bio, Coskata
Animal fats & wastes Dynamic Fuels, Neste Oil, Diamond Green Diesel
Wood residues ZeaChem, Mascoma, Cobalt, KiOR(KIOR), American Process
Waste gases Proterro, Joule, LanzaTech
Agricultural waste POET/DSM, Abengoa(ABGOY.PK), Novozymes, Dupont (Genencor)
 
Value adding (existing feedstocks)
Corn starch Gevo(GEVO), Butamax, Green Biologics, Genomatica
Cane syrup Amyris(AMRS), LS9

Disclosure: None.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published.  Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations.  Subscribe here.

January 29, 2012

Ten Reasons Why Electric Drive is Stranded on The Bleeding Edge of Transportation Technology

John Petersen

The first thing every securities lawyer learns is that technology is a two edged sword. On the leading edge, developers of cheap innovations that ramp rapidly over a few years build thriving businesses that deliver market beating returns for investors. On the bleeding edge, developers of expensive technologies that can't be implemented at relevant scale for years morph into financial black holes that suck the lifeblood out of portfolios and teach a new generation of investors about an insidious market phenomenon the Gartner Group refers to as the hype cycle.

1.28.12 Gartner HC.png

The second thing every securities lawyer learns is that business risks are cumulative, and a lot like a leaky roof – unless you can locate and patch every hole, the ceiling will end up in your lap.

Hope is a timeless virtue, but it's a horrible investment strategy.

Last week I traveled to Stockholm and spoke at the Annual Partners Conference for CTEK Sweden, a global leader in smart battery chargers for conventional cars, trucks and motorcycles. It was a different kind of audience that wanted a better understanding of the path their business would take over the next few years. They wanted a high level overview instead of deathless analysis of techno-trivia. After making the presentation, it dawned on me that investors who want to build bullet proof portfolios for the next five years deserve nothing less. So instead of drilling down into the detail like I usually do, I'll focus today on ten fundamental business and economic forces that will leave electric drive stranded on the bleeding edge of transportation technology for decades.

The bottom line is the mainstream media, our fearless political leaders, rainbow legions of Eco-zealots and starry-eyed investment analysts all have it wrong when it comes to electric drive. No matter how badly we might want a clean green transportation alternative that frees us from the tyranny of imported oil, electric drive is hopelessly uneconomic and will continue to be a financial black hole until each and every one of the following problems are overcome.

Since many of these ideas have been discussed at length in other articles, the top ten list contains several links back into my author's archive.

#10.  Rich vs Poor. For most of human history 90% of the world's population lived in crushing poverty and ignorance, but as long as the poor were kept ignorant, the other 10% could consume the lion's share of global economic output with impunity. Our last industrial revolution changed everything because cheap and ubiquitous communications taught the world's poor that there's more to life than deprivation. Now they all want a piece of the comfortable lifestyle that the 10% have always considered a God-given right. The only way that the 90% can have a place at the global economic table is if the 10% change their worst habits and make room for the new well-informed poor. Gluttony, over-indulgence to the point of waste, has long been viewed as a capital vice or cardinal sin. The idea that people in advanced economies can afford to waste anything is an inexcusable relic of a barbaric past that has no relevance to humanity's future.

#9.  Electric drive is not truly clean or green. The amount of energy needed to move a given mass a given distance at a given speed is a constant. It makes no difference whether the energy comes from a gallon of gasoline or a lump of coal. In a country like the US where the substantial bulk of night-time power comes from coal-fired plants, EVs may be marginally cleaner than internal combustion engines but they're dirtier than HEVs that cost $12,000 less and conserve energy instead of simply substituting one dirty fuel for another dirty fuel. I've heard the fervent arguments that EVs can be powered from alternative energy sources, but the arguments all fail for one simple reason. The virtue of green electrons lies in their generation, not their use. Once green electrons exist, it makes no difference whether they're used to power an EV or a toaster oven. One will be cleaner and the other will be dirtier. There is no double credit.

#8.  Energy resources are scarce, but non-ferrous metals are far scarcer. Last year the planet produced 1,920 kg of energy resources for every man, woman and child on the planet, but it only produced 8.4 kg of non-ferrous metals. Those metals are essential in most of the necessities and little luxuries of modern life. There are no spare metal supplies lying around looking for a user. For decades metal prices have been as volatile as energy prices, but most of us don't notice because we don't buy metals in minimally processed form. If we used all of the planet's metal production to build energy saving machines, we couldn't make a dent in energy consumption. Panacea solutions that can't be implemented at relevant scale are nothing more than a cruel hoax.

#7.  Lithium-ion batteries are a recycling nightmare. At $500 per kWh and 125 wh/kg, automotive grade lithium-ion cells cost about $28.50 a pound to manufacture. Unless you're evaluating a cobalt based chemistry, the material values that can be recovered through recycling are less than $1.00 per pound. Since the recycling process uses a lot of energy, net disposal costs for lithium ion batteries are estimated at $0.75 per pound plus collection and transportation charges. There is no such thing as a cost effective recycling process for old lithium-ion batteries. They're a use it once and throw it away technology. Anybody who claims otherwise is lying. The media is full of optimistic stories about second-life uses for old EV batteries. Since there is no proof that those batteries will survive a 10-year first life, the stories are premature. Moreover, chemical systems deteriorate with age, so using new batteries to simulate the performance of old used batteries is little more than a side-show to deflect the attention from the wasteful single-use reality.

#6.  The marginal returns from bigger batteries are terrible. The Prius from Toyota Motors (TM) uses a 1.5 kWh battery pack to save about 160 gallons of gasoline per year. In comparison, the Leaf from Nissan Motors (NSANF.PK) uses a 24 kWh battery pack to save about 400 gallons per year. While the Prius battery saves about 107 gallons of gas per year for each kWh of battery power, the Nissan Leaf only saves 17 gallons per kWh. This shocking example of the diminishing marginal utility of batteries is generous when you consider that Tesla Motors (TSLA) will only save 9.5 gallons of gasoline per kWh of batteries in its flagship Model S.

#5.  The up-front cost of electric drive is roughly $200 per barrel of avoided oil consumption. Bernstein and Ricardo recently published a cost-walk analysis that pegged the cost premium of an electric vehicle at $19,800, or roughly $190 per barrel of avoided future oil consumption. You can get to a similar result with a simpler comparison. The Nissan Leaf costs $12,000 more than a Prius and it will save the equivalent of 60 more barrels of oil per vehicle over the span of a decade. The net premium per barrel of avoided future oil consumption is $200. If you work from the bottom up like Bernstein and Ricardo did, or work from the top down by comparing the difference between a Prius and a Leaf, you end up at the same place. Saving a $100 barrel of oil with an electric vehicle that costs $200 is a deal that can only appeal to the philosophically committed and mathematically challenged.

#4.  Rapid advances in battery technology are unlikely. The phrase is an oxymoron. In 1883 Thomas Edison complained to a reporter, “The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying." We were spoiled by the information and communications technology revolution where performance doubled every 18 to 24 months and costs plummeted. That phenomenon was unique in technological history because different science made it possible to do more work with fewer resources. That science is meaningless in the fields of transportation and chemistry. A hundred years ago Edison built batteries that had specific energy in the 30 wh/kg range. Today's best automotive battery packs can't top 150 wh/kg. In a century when electronic technology saw billion-fold gains, battery technology improved by a factor of five. Expecting that century old trend to change is irrational and ignorant, not reasonably optimistic.

#3.  Electric drive technologies have already reaped their economies of scale. New industries and technologies often give rise to significant economies of scale as manufacturers improve production processes and supply chains become more mature and efficient. The battery industry has had decades to optimize its production processes and supply chains. The same is true for electric motors. There may be modest savings as production rates for a specific SKU ramp, but the underlying industries have already squeezed the economies of scale out of their products and the margin for additional improvement is negligible. This is not a case where flat panel TVs are replacing CRTs. It's more like an upgrade from a 30" flat panel to a 36" flat panel, or from a five pound box of laundry detergent to a ten pound box.

#2.  Increasing fuel efficiency will make EV economics worse. The calculation that electric drive costs $200 per barrel of avoided future oil consumption is based on the 2012 CAFE standard of 29.7 mpg. Using the 2016 standard of 34.1 mpg the marginal cost of electric drive will be closer to $230 per barrel of avoided future oil consumption. If you push the analysis out to 2025 and use a targeted fuel efficiency of 55 mpg, the marginal cost per barrel of avoided oil consumption will be $360. As the world's automakers continue to improve their core vehicle technologies, the marginal cost of electric drive will become increasingly hard to justify.

#1.  The green in consumers wallets is more important than the green in their cocktail conversations. Everyone wants to be clean and green, but they don't want to pay for it. Green products that offer comparable performance at a comparable price are usually a hit. Green products that command premium prices frequently fail. In the US auto market, 3% of the population has demonstrated a willingness to pay a premium price for ultra-high efficiency. That percentage has been stable since 2006 and shows no signs of changing. Nobody wants to suffer for the sake of saving the planet and the most fervent EVangelicals are those who think that buying a high-performance EV from Tesla is a capital idea. These are not useful products for adults, they're high-end toys for the self-absorbed who care nothing for the economy, the environment or common sense as long as they can spend somebody else's money on eco-extravagance. They don't understand the difference between buying a $200 Optimus Prime toy from Hasbro and buying a $70,000 Sub-optimus Prime toy from Tesla.

At heart I’m an incurable optimist who believes that “In America we get up in the morning, we go to work and we solve our problems.”  But I know those problems cannot be solved by exotic electric drive constructs that are stranded on the bleeding edge and promise facile but economically impossible solutions to incredibly complex problems.

When I consider the number and variety of business risks that stand between electric dreams and commercial success I'm shocked at the market values of companies like Tesla Motors which is hemorrhaging cash while catering to the new eco-royalty. I see the odds of commercial success as remote beyond reckoning and believe the best historical analogs are companies like Ballard Power (BLDP) which lost over 99% of its peak market value when hydrogen fuel cells hit the skids, Pacific Ethanol (PEIX) which generated comparable losses in the ethanol space and Ener1 (HEVVQ.PK) which was a DOE favorite in 2009 but driven into bankruptcy by an ill-advised effort to revive the thrice-failed Th!nk Motors. The history of investor catastrophes that flowed from unworkable panacea energy policies is long and colorful. Investors who refuse to learn from the past are condemned to repeat it.

Will Rogers once observed, "There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves." If Will were alive today, he'd have a field day with electric drive.

Disclosure: None

January 26, 2012

Obama’s “All of the Below” Energy Strategy

Jim Lane

Obama unveils an “all-out, all of the above” energy strategy. But is it really “all of the below”? Just election talk? Is ginning up a bioeconomy shelved for a year, or just a week?
Obama delivers SOTU
Meanwhile, hopeful news from Novozymes (NVZMY.PK) and the World Economic Forum.

In Washington, President Barack Obama gave his State of the Union speech, and dashed hopes and expectations of a revival strategy for US industry through encouraging growth of the bioeconomy. His annual presidential address became the first in a number of years to avoid any mention of biofuels, ethanol, the bioeconomy, or biotechnology.

In a speech which mentioned jobs 32 times, the high-export, high-productivity US agriculture sector also failed to score a single mention. The closest the president came to mentioning biofuels was in touting that US oil imports were at their lowest point in 16 years – without mentioning that the key factor in that import achievement was the rise in domestic biofuels production.

Instead, the president proceeded to embrace an “all out, all of the above” energy strategy – focusing on an intense increase in domestic oil and natural gas production, and borrowing the “all of the above” phrase which, until recently, was most closely associated with conservative Texas Republican, Gov. Rick Perry.

The centerpiece of his strategy? Natural gas. “We have a supply of natural gas that can last America nearly 100 years.  And my administration will take every possible action to safely develop this energy.  Experts believe this will support more than 600,000 jobs by the end of the decade,” the president said.

Clean energy? The president opted to give up on hopes for legislation (except for a one-line exhortation for Congress to renew the Section 1603 tax credits that are used for wind and solar development), and focused on authorizing permits for 10 GW of renewable power production on federal land – that’s equivalent to about 1% of US power production capacity.

The focus on oil & gas production was surprising as Obama Administration policy, but unsurprising as re-election strategy: removing a line of attack that the President’s opponents were planning for the 2012 election campaign.

Has the Obama Administration shifted from an “Action News” to an “All Talk” strategy – shifting from policy implementation to framing the election conversation? We think so. We expect to hear a lot more about Mitt Romney’s 14 percent tax rate this year, than about policies and programs to revive manufacturing, or deploy clean energy.

For now, whither goes biofuels?  The word from Washington is that the President will unveil his Blueprint for a Bioeconomy next week – we’ll see then what the Administration has in mind for industrial biotechnology.

And now, a word from Davos: “Moving towards a next-generation ethanol economy”.

From Davos, where the World Economic Forum is gather this week, came something a little more weighty and specific than the State of the Union speech.

Bloomberg New Energy Finance launched its report “Moving towards a next-generation ethanol economy”. Commissioned by Novozymes (NVZMY.PK), the report estimates the socioeconomic prospects of deploying advanced biofuels in eight of the highest agricultural-producing regions in the world, i.e. Argentina, Australia, Brazil, China, EU-27, India, Mexico and the USA.

“An estimated 17.5 percent of the agricultural residue produced could be available today as feedstock for advanced biofuels. With this amount, enough advanced biofuels could be produced to replace over 50 percent of the forecasted 2030 gasoline demand,” said Steen Riisgaard, Novozymes’s CEO.

The report shows that the eight regions analyzed have the potential to diversify farmers’ income, generate revenues ranging from $1 trillion to $4.4 trillion between today and 2050 and create millions of jobs. Including 1.4 million jobs in the USA, according to the report.

Why the Obama shift in the State of the Union?

Why the shift towards fossil fuels? The President is aiming for re-election, by appealing to swing state voters with the hope of economic gains from increased domestic oil production. The focus of the President’s speech – which pinned hopes economic growth on a revival of American manufacturing and energy production – generally focused on reducing inequality between rich and poor through revision of the tax code.

The real all-of-the-above: advanced biofuels as it approaches commercial-scale

As an example of all-of-the-above energy development that works, look these eight projects we profiled recently in the Litmus Test. First commercial projects from newly-minted public companies Solazyme (SZYM), Gevo (GEVO) and KiOR (KIOR). Two trash-to-biofuels projects from INEOS Bio and Enerkem, located in Florida and Alberta. Europe’s largest biosuccinic acid project, scheduled to be opened by DSM in France. The world’s largest cellulosic ethanol project to date, being readied by Beta Renewables in Italy. And a large-scale renewable diesel project from the Darling (DAR)-Valero partnership that is expected to be ready just as 2013 gets underway.

Eight different technologies, a range of feedstocks, deployment around the globe. It’s a flowering of innovation.

State of America’s biofuels industry

For even more perspective, this week, leaders some of the top biofuels companies in the country are offering their thoughts on the state of the advanced biofuels industry, in a special episode of the Advanced Biofuels Association’s Better Fuels Moment online video series.

The episode features Joel Velasco, senior vice president of Amyris (AMRS); Jack Huttner, executive vice president, commercial and public affairs of Gevo; and Michael McAdams, president of the Advanced Biofuels Association, ABFA.

McAdams noted that the special episode emphasizes that, “Washington now has a real opportunity to invest in clean energy fuels, smarter investments based on performance, not a lifetime of subsidized handouts from Washington.  This opportunity can strengthen America’s energy security while creating jobs here at home, today.”

The Bottom Line

The good news – the release of the “blueprint for a bioeconomy”, expected next week, may offer more substantiation of an “all of the above” strategy. And, for sure, commercialization is rapidly moving out of the realm of government support and towards the private sector. Note that both KiOR (KIOR) and POET-DSM dropped their DOE loan guarantees, saying they were unnecessary for their projects.

For industry – it is a reminder that Obama Administration is likely to support in the form of purchase rather than development – government-as-customer rather than government-as-investor. Those that get themselves off the government dope may well find themselves with a significant first-mover advantage, not to mention some hefty government contracts for drop-in diesel and renewable jet fuel.

Disclosure: None.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published.  Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations.  Subscribe here.

Minimizing a Key Threat: State of the Union Address 2012

Garvin Jabusch

Americans, rightly, prefer specifics and plans, as opposed to rhetorical vision and platitudes, from their president in their State of the Union addresses. We couldn't agree more, so here are our thoughts about President Obama's 2012 address, with respect to our area, the next economy and investing therein.

Obama_SOTU_2012
President Barack Obama delivers the 2012 State of the Union Address (Image source: whitehouse.gov)

Two years ago, President Obama in his State of the Union Address said, "The nation that leads the clean energy economy will lead the global economy and America must be that nation." So how are we doing?

From a next economy point of view, the critical parts of last night's State of the Union Address were:

  • Oil and gas development are the centerpiece of the administration's energy plan
  • Natural gas is the primary to the 'clean energy' part of the energy plan
  • America is the leader in battery technologies
  • The president attempted to encourage more development in wind, solar, and other renewables by encouraging clean-energy tax breaks and the removal of subsidies to profitable oil companies
  • The president attempted to leverage American competitive spirit: "I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here."
  • "Differences in this chamber may be too deep right now to pass a comprehensive plan to fight climate change, but there’s no reason why Congress shouldn't at least create a clean energy standard."  So,
  • Major new renewable standards by executive order were announced, three million homes' worth via government land and private development and 250,000 homes' worth per year to be purchased by the Navy
  • Efficiency and conservation were mentioned as easy and as job creators, so the president proposed incentives to businesses to become more efficient, and asked Congress for legislation to that effect

Unfortunately, a lot of these fall more on the rhetorical side, although we do welcome the few specifics that were offered. Unquestionably, it is a partial contrast with the rhetoric coming from Republicans' campaigns, which exclusively pander to big oil and Wall Street by pretending climate change and resource scarcity do not exist, so they can pursue their depletist, dangerous, destabilizing policies.  But, sadly, it’s not nearly enough.

Here's what the president didn't say.  He didn't say that the climatic and resource challenges facing America are the most long-term economically destabilizing risks that exist. He didn't say that three million homes' worth of renewable energy is a good start but tiny next to the progress required to avoid financially disastrous resource scarcity and climate change, and he didn't mention a time frame for that.  He didn't acknowledge that the climate disinformation campaign causing all the disastrous pandering, policy stagnation and partisan gridlock is, in the words of NASA's James Hansen, America's foremost climate scientist, a "crime against humanity."

Since the possibility exists that this could be President Obama's last State of the Union Address, the president should want to make his most full, complete case for his legacy, for what he wants his administration to stand for.  It's easy to see why he would fear taking on the most profitable companies in the history of humankind in a larger way than merely proposing taking away their tax welfare, but he should have wanted to make his strongest case on all fronts. We can only hope the economic realities of pursuing a clean efficient future will speak for themselves, because our policymakers, even the good ones, are way behind.

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

January 25, 2012

Dark Clouds Threaten German Clean Energy Ambitions

John Petersen

During the fourteen years that I've lived in Switzerland, the Germans have been the world's staunchest supporters of green power and alternative energy. Their aggressive development of wind power was breathtaking, as was their warm embrace of photovoltaic power. Over the last few weeks, however, there has been an ominous change in the mainstream German media's tone as the political class finally comes to grips with the unpleasant reality that rooftop solar panels are worthless on short, grey winter days and "For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity." Three recent and highly negative articles from Der Spiegel Online include:
As recently as last year, articles like these would have been unthinkable. Today they're viewed as reasonable discussions of critical issues as the laws of thermodynamics and economic gravity assert their absolute primacy.

The Germans have been trailblazers in all things green since the emergence of the Green Party in the 1980s. In fact, it's hard to name an alternative energy technology that Germany hasn't welcomed with open arms. When it comes to green power and alternative energy, the Germans have been on the far left of the technology adoption curve for a very long time.

1.24.12 Tech Lifecycle.png

If the tone of the recent Der Spiegel articles is a reasonable indicator of public sentiment, the innovators are getting ready to throw in the towel on green panacea solutions and get down to the serious work of conserving energy instead. They're weighing the costs and benefits, and reaching an entirely predictable conclusion that it's impossible to depend on variable and inherently unreliable power sources as the backbone of an industrial economy. As Germany goes, so goes the world.

If the world's standard-bearer for green power and alternative energy abandons the quest and chooses a more sensible path of conservation and energy efficiency, the backlash against the solar power industry will be immense and risks to the wind power industry will skyrocket. After all, it's hard to argue the merits of "One for the Price of Two" power solutions; which is exactly what you get when wind and solar power have to be fully backed up by conventional power plants. If the solar and wind power dominoes fall, they'll almost certainly take out the emerging electric vehicle industry that demands huge amounts of money and natural resources to simply substitute one fuel source for another.

Currently all eyes are on Germany as the epicenter of European efforts to restore fiscal balance in an age of profligate and unsustainable government spending. The apparent German surrender on green power and alternative energy may just be an unfortunate victim of that broader effort. Until the dark clouds dissipate and we have a clearer view of the landscape, I'd minimize my exposure to solar, wind and electric drive and focus instead on less costly energy efficiency technologies that work with the laws of thermodynamics and economic gravity instead of fighting them.

Disclosure: None

January 24, 2012

The Hard Truth About Solar

By Jeff Siegel

Solar Competes With Natural Gas

From 2005 to 2008, I made an absolute fortune in solar.

And it was insanely easy, too.

Hell, back then you could pretty much just pick any random company with the word “solar” attached to it, and watch your money double, triple, even quadruple.

Yes, those were three great years. And I live very comfortably today because of those three years.

But the solar market isn't what it used to be.

Last year, solar stocks got slammed. And while most expect to see a recovery in the space this year, the sector remains as volatile as ever.

Now just a few weeks ago, solar stocks were soaring after some new data came out that indicated a rise in solar installations in Germany in Q4.

The result was a quick run on solar stocks, and certainly traders made out...

But then there were those poor souls who didn't read the fine print, ponied up a few thousand, and are now wondering what happened to the solar run all those analysts on television were talking about.

Yes, a few weeks ago there was some positive data, which apparently cast a shadow over the fact that cell and panel prices were still continuing to fall.

And it didn't take long for the sector to shed its recent gains, then fall even further after Germany's Energy Minister announced that the country's Feed-In Tariff should be adjusted every month instead of twice a year.

In a matter of minutes, we watched solar stocks fall off 10%, 15%, even 20%.

While I continue to remain bullish on the long-term growth picture for solar, unless you can stomach the risk and volatility, the solar space is no space to be right now.

Truth is until we see next quarter's forecasts, I'd be very hesitant about playing solar.

Natural Gas is Still King

There's no doubt that there's still plenty of money to be made in solar.

You just have to know where to look, and of course, not get caught up in all the hype generated by those know-nothing media buffoons who couldn't even tell you the difference between solar thermal and solar PV, much less know how to play the solar market...

Hell, these are the same guys who were telling us just a few years ago that natural gas would never fall below $5.00.

Last Friday, it fell below $2.30.

And now they're scrambling to dig up any bearish news they can find. But nothing they say can stop the natural gas boom.

I've said it a thousand times before, and I'll say it again: Natural gas is king.

And right now, it doesn't take much to make money from this sector. In fact, it reminds me a lot of the solar sector from 2005 to 2008. It's just so easy to make a killing.

Just ask my colleague Keith Kohl, who was touring today's biggest natural gas properties back when the word “hydrofracking” was a term only used by insiders and roughnecks.

This guy's made me — and his readers — some serious coin in the natural gas space...

Especially with his latest find at the Three Forks location in North Dakota. I know it may not look like much.

And I know it may not sound as sexy as solar...

To a new way of life and a new generation of wealth...

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Jeff Siegel is Editor of Energy and Capital, where this article was first published.

January 23, 2012

Understanding Manufacturing Economics for Grid-Scale Energy Storage

John Petersen

I have a new favorite word — AGGREGATION!

At the risk of sounding like a reporter, I’m going to summarize a pre-holiday news story you might have missed but need to know about.

In late November the PJM Interconnect, the largest of nine regional grid system operators in the US, announced that it had begun buying frequency regulation services from small-scale, behind the meter, demand response assets in Pennsylvania.

The first resources brought on-line by PJM were variable speed pumps at a water treatment plant and a 500 kW industrial battery array at a factory. Each of these resources has been configured to respond to PJM’s signals within four seconds and provide 100 kW of frequency regulation capacity.

In the water treatment plant, the operator will change pump speeds as necessary while keeping average throughput at 80% of nameplate capacity. For the industrial battery array, the operator will shift loads to the battery when the grid needs power and charge the battery when the grid has excess power.

The contract operators for both installations envision portfolios of flexible industrial loads that can be aggregated and operated as a distributed virtual utility that responds instantaneously to supply and demand conditions on the grid side of the meter. They’re literally turning grid loads into grid assets.

How cool is that?

I learned about the development because my old team at Axion Power International (AXPW.OB) built the battery array and is using its New Castle plant in Pennsylvania as the test-facility. But this was more than just an Axion event because it opens a world of opportunity for all manufacturers of industrial power quality and reliability systems.

Traditionally, the battery industry’s pitch on industrial energy storage systems focused on ensuring the highest possible level of power quality and reliability for industrial customers. More recently manufacturers have refined their pitch to include other behind the meter benefits like time of use and demand charge management.

This latest twist creates a whole new set of opportunities to reduce the net cost of a customer’s power quality assets by aggregating incremental revenue from grid-side ancillary services. The battery industry is at a tipping point because energy prices have finally reached a level where waste isn’t always cheaper than storage.

It’s still a tough cost-benefit equation because customers hate anything that eats into margins, but as energy storage system (ESS) developers find new ways to aggregate benefits and use their facilities more efficiently, the potential market grows exponentially.

Now it’s time to shuck the reporter’s fedora and give my horns a little room to breathe. Let’s drill deeper into the inherently confusing metrics ESS developers use to describe grid-scale storage systems.

In a recent report on grid-scale ESS costs, the DOE’s Sandia National Laboratories took a bifurcated approach to pricing that separated the costs of the power control subsystem from the costs of the energy storage subsystem. Their summary table of generic ESS costs using the principal battery chemistries breaks down like this.

1.23.12 Sandia.png

The problem arises when battery manufacturers focus on a power metric in their public statements, instead of an energy metric, and fail to give readers any clues about who contributes what share of system value.

To highlight the problem I’ll use Sandia’s numbers to estimate the prices of Axion’s PowerCube and A123 Systems’ (AONE) Laurel Mountain wind farm project.

1.23.12 Projects.png

ESS buyers aren’t stupid. They won’t let battery manufacturers earn the same margin on the power control subsystem that they earn on the energy storage subsystem.

That leads to the inescapable conclusion that a $2 million ESS sale that’s 70% power control systems and 30% batteries is not the same as a $2 million battery sale. At some point the failure to clearly distinguish between purchased components and proprietary components will give rise to stakeholder confusion that could have been avoided. If market participants can’t find a way to effectively communicate the difference between power control subsystem sales and energy storage subsystem sales, they run an enormous risk that investors, analysts, bankers and other stakeholders will over-estimate the relative impact of ESS sales on the bottom line and then be disappointed when their inflated expectations aren’t met. Losing credibility with stakeholders is a luxury that no company can afford.

Life was simpler when UPS systems integrators built their products and bought batteries as necessary components. It gets far more difficult when battery manufacturers sell ESS products where the bulk of the added value comes from upstream component suppliers.

While my cup usually overflows with sage advice for anybody who’ll listen, I don’t see any easy answers to this conundrum. I suppose the industry could take the easy way out and claim that the batteries just keep the turbines turning when the wind dies down, but that’s really not an acceptable answer either.

1.23.12 Toon.png

NOTE: This article was first published in the Winter 2012 issue of Batteries International Magazine and I want to thank editor Michael Halls and cartoonist Jan Darasz for their contributions.

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

January 21, 2012

A123's Elegant Financing Transaction

John Petersen

On Friday A123 Systems (AONE) announced a direct registered offering that's an elegant example of a well-structured financing transaction in a difficult market. A123 had a solid financial base before the offering and the stock was starting to turn a critical corner into an upward trend. The new financing should add momentum to that trend.

The first stage deal terms are pretty straightforward. The investors will buy units consisting of one share of common stock and one common stock purchase warrant for $2.034 per unit, a 10% discount from the closing price of A123's common stock on Thursday. The warrants will be exercisable at $2.71 per share, a 20% premium to Thursday's close, during the 24-month period beginning six months after the closing date. The net proceeds will be approximately $23.5 million after costs and expenses.

An elegant second stage gives A123 the right to require the investors to buy up to 12.5 million additional shares next summer at a 10% discount to the 10-day average market price if A123 calls on the standby commitment and exercises what's effectively a put option. The only substantive limitation on A123's right to require the investors to buy additional shares is that they can't be required to invest more than $100 million, or $8 per share, in the second stage.

The thing I find most fascinating about the transaction is the tension between A123's current sacrifice and the investors' longer-term commitment. 

Last April I wrote that the market over-reacted to an attractive financing transaction and A123's stock was undervalued in the $6 range. The market disagreed with my conclusion and over the next eight months A123's stock price crumbled to an all time low of $1.51 in mid-December before turning to the upside. At Thursday's close, A123 was trading at a 19% discount to its September 30th book value of $2.80 per share. That makes a sale of additional shares at a 10% discount to market painful because the new investors will enjoy a modest accretion to book value while the existing stockholders will suffer a slight dilution, as summarized in the following table.

Book value per share at September 30th $2.80
Estimated fourth quarter loss
($0.46)
Estimated book value per share before offering
$2.34
Estimated book value per share after offering $2.30
Accretion to new investors
$0.27
Dilution to existing stockholders
($0.04)

When you factor in 100% warrant coverage at a 20% premium to Thursday's close, the first stage terms are attractive for the new investors. The second stage terms, however, are very attractive for A123 because they give the company six months to execute on its business plan and require the investors to standby with up to $100 million of additional financing if A123 decides it wants the money. The standby commitment may not be needed, in which case A123 will have no duty to sell the additional shares, but it sure is nice to have a second stage transaction locked, loaded and ready to go if more money is needed.

Earlier this month I picked A123 as a break out stock for 2012. As the following graph shows, A123's 10- and 20-day moving averages have turned up nicely and a simple reversion to the 200-day moving average would suggest a value in the $4.25 range as the stock reverts to a mean.

1.21.12 AONE.png

Since stocks that are significantly undervalued tend to over-correct as they revert to the mean, I would not view a six- to twelve-month target in the $6 range as unreasonable.

Like all battery technology developers, A123 faces a myriad of execution, market acceptance and business risks that each investor will have to assess assess in light of his own expectations and risk tolerance. It is, however, the clear sector leader in the lithium-ion battery space and likely to significantly outperform the market this year.

Disclosure: None.

January 19, 2012

Renewable Energy Group Raises $72 Million in Biodiesel IPO

Jim Lane

In Iowa, the Renewable Energy Group IPO priced last night, and the company’s shares began trading Thursday on NASDAQ under the REGI symbol.

The company sold 7.2 million shares at $10 per share, well below its midpoint target of $14 per share announced last week, with total proceeds of up to $82.8 million if all over-allotments are covered by underwriters. Without over-allotment sales, the offering will raise $72 million.

UBS Securities LLC and Piper Jaffray & Co. are acting as joint book-running managers for the offering. Stifel, Nicolaus & Company, Incorporated and Canaccord Genuity Inc. are acting as co-managers.

Of the shares of common stock in the offering, Renewable Energy Group is offering 6,857,140 shares and selling stockholders are offering 342,860 shares. In addition, Renewable Energy Group has granted the underwriters a 30-day option to purchase up to 1,080,000 additional shares of common stock to cover over-allotments, if any.

Disclosure: None.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published.  Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations.  Subscribe here.

January 16, 2012

Updating My Buy Exide and Short Tesla Paired Trade

John Petersen

On November 15th I suggested a paired trade where investors would buy 11.5 shares of Exide Technologies (XIDE) and short one share of Tesla Motors (TSLA). Over the last two months, investors who made the trade on November 15th would have realized the following gains.


15-Nov-11
13-Jan-12
Net

Entry
Exit
Gain
Buy 11.5 Exide
-$30.59
$36.69
$6.10
Sell one Tesla
$33.93
-$22.79
$11.14
Pair trade total
$3.34
$13.90
$17.24

A conservative trader might very well call it a day and close both positions at this juncture. A less conservative trader might be inclined to push his luck a little further. I'm squarely in the second camp.

Almost half of the gain on the Tesla short came on Friday afternoon when Tesla collapsed in the last 45 minutes of trading and closed at $22.79, down $5.46 from its Thursday close pf $28.25. The apparent reason for the collapse was the loss of two engineering executives over the last month. While no small company likes to lose important employees, I have a hard time imagining any circumstances where the loss of two employees would justify a $570 million market cap beat down. While I've never seen a company schedule an emergency conference call to discuss something this trivial, that's exactly what Tesla has done. The market reaction, or over-reaction if you prefer, coupled with management's extraordinary effort to calm the market strikes me as clear proof that Tesla's unrealistically high share price has become brittle. This is a stock that wants to fall and is looking for almost any excuse to do so. My tracking chart that plots 10-, 20-, 50- and 200-day volume weighted moving average prices is looking just plain ugly as the 10- and 20-day averages have plummeted down through the 200-day average.

1.16.12 TSLA.png

Exide, in comparison, is looking stronger today than it did in mid-November. I've recently explained how the liquidation of a hedge fund that owned over 30% of Exide's stock in January 2009 has been a big contributor to market volatility over the last two years. I've also speculated that a final push to liquidate the hedge fund's position before year end was the primary reason for the fourth quarter price decline. At this point my tracking chart for Exide is looking very strong as the 10- and 20-day averages push up through the 50-day average.

1.16.12 XIDE.png

With Tesla's stock price looking increasingly frangible and Exide's price looking increasingly firm, I'd be inclined to keep the pair trade open until we have a third-quarter earnings release from Exide.

Disclosure: None.

January 15, 2012

Tesla Stock Collapses But Looks Massively Oversold

by Clean Energy Intel

Model S Signature -
Signature Red
Image Source: Tesla Motors, with permission.

Having traded in a tight range for most of the day, Tesla Motors (TSLA) collapsed in the last 45 minutes of trading on Friday. The stock hit a low of 22.64 and closed at 22.79, down 19.3% from its previous close. Although it was reported to have bounced 7% in after hours trading, the price action remains a clear worry. More worryingly, the move took place on what became the third highest volume day of the last 52 weeks - with just over 5.5 million shares changing hands.

The stock indeed closed down 35% from the $35 high it saw twice in November and December of last year.

The move took place after Tesla confirmed that Chief engineer Peter Rawlinson and Nick Sampson, supervisor of vehicle and chassis engineering, had left the company. 

Not much has been said publicly about the moves. However, in an emailed statement attributed to spokesman Ricardo Reyes, Tesla made the following comments to Investor's Business Daily

"Having completed conceptual and design engineering work on Model S, Peter has decided to step away to tend to personal matters in the U.K.,..... Nick Sampson is no longer with Tesla. He had fully transitioned from any Model S activities by the time of his departure."

All of this would imply that the departure of these two players should have little effect on the launch of the Model S in the summer. However, the market may worry about this for a while longer- and that of course would be likely to be reflected in the price action.

Source: barchart

Nevertheless, from a big picture perspective, Tesla looks heavily oversold. As the chart above indicates, we are now in the rough $22 to $24 range that has seen good support in the past 52 week period. Moreover, Tesla has already announced the pricing and broad timely of it´s year´s launch of the model S - for more detail see here.

I already have a small position in Tesla, having recommended the stock on a few occasions last year. However, I intend to use the current weakness in the stock price to build a significant position ahead of what should in the end be a solid launch of the Model S.

Finally, you can read our bigger picture analysis on Tesla and the future of the electric car here.

Disclosure: I am long Tesla.

Clean Energy Intel is a free investment advisory service produced by a retired hedge fund strategist. You can read more at www.cleanenergyintel.com


January 13, 2012

The True Story of Clean Renewable Energy Bonds

Sean Kidney

Where did all the CREBs and QCEBs go? Mystery solved.

The US has for a long time used tax credits to promote the development of oil and gas and other industries. With tax credits the bond issuer still pays a coupon, but their payment is subsidized, effectively lowering the rate of interest paid.

The Obama administration brought in a big program of credits for renewable energy bonds. The plan was that States, large local governments, tribal governments and public power bodies would issue bonds to finance energy efficiency or renewable energy. The US Treasury states that some $5.6bn of allocations to over 1800 applicants have been made for these tax credits. This would seem to suggest that there were $5.6bn of bonds out there, but when we went looking we found we could only find out information about a few of them.

A report late last year by the US National Association of State Energy Officials has helped explain what’s happening. It seems that only a small part of the approved tax credits have actually led to a bond being issued.

The Government allocated $2.4bn for Clean Renewable Energy Bonds (CREBs) and $3.2bn for qualified energy conservation bonds (QECBs). After some investigation, Bloomberg New Energy Finance calculates public issuance at $646m, although they believe there is also a private placement market of up to $400m. That would bring total issuance up to around $1bn. I.e. bonds have been issued for less than 20% of allocated tax credits – that’s a severely under-utilized public finance mechanism!

Renewable energy financing consultant and former Ernst & Young senior partner, Jonathan Johns, has previously written for Climate Bonds Initiative on the benefits of tax-exempt bonds. I asked him what was going on.

First, he said that he’s “not that disappointed”. He says that “these are nudge rather than demand pull measures and require participants to pull schemes together and go through various procedural hurdles involved.  In a way they illustrate the future challenges of the industry as it seeks new sources of capital from the bond markets.”

Jonathan says that nudge mechanisms are often undersubscribed. “It’s interesting to note that those states with a strong record in renewables, e.g. California have used very high percentages of their allocations (which are based on population) whereas some more equivocal states have not. For other states there will be a natural cap on appetite if there are state or local borrowing limits.”

“There are lessons to be learned for the US and other jurisdictions – future schemes need to be more streamlined and remove some of the barriers – and also be accompanied by focus on demand stimulation and distribution channels for the bonds themselves.”

“Tax exempt bonds are a cost effective form of support, as relief is limited to the interest on the capital and not based on the capital itself. There’s also a relatively high payback per job created, with that payback localised when there’s a strong energy efficiency component – that’s been the case in over 50% of QECBs issued.”

A relatively large number of bonds issued are for small schemes in the $1m to $5m range. In other jurisdictions this has been difficult to achieve, with bond issues confined to recycling of large scale project finance portfolios.

Johns thinks it’s important to build on the CREB/QECB story and take the bond market to its next stage of development through the Climate Bonds Initiative and other mechanisms. Positive thinking.

Sean Kidney is Chair of the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

January 12, 2012

An Elephant Hunter's Theory About Axion Power's Price Surge

An Elephant Hunter's Theory About Axion Power's Price Surge

John Petersen

Over the last few days I've been inundated with questions from readers who want to know why Axion Power International (AXPW.OB) has smoothly surged from a low of $0.25 on December 30th to a closing price of $0.58 yesterday. The short answer is the stock is finally emerging from the mother of all supply and demand imbalances and the persistent sellers that punished the price over the last 20 months are almost out of the picture. Since I believe we're witnessing the beginning of an entirely new market dynamic, a detailed explanation seems appropriate.

In December 2009, Axion closed a private placement transaction where four large buyers and 47 small investors bought 45.8 million shares of common stock at a price of $0.57 per share. I was thrilled. At the time I wrote:

"To my way of thinking, the most impressive aspect of Axion's financing is sheer size. Axion had roughly 37 million common share equivalents outstanding before the placement and sold 46 million additional shares. Selling 55% of a company without surrendering control is extremely rare. The more telling fact is that the cumulative reported trading volume in Axion's stock for 2009 has only been 6.6 million shares. In other words, these private placement investors bought roughly seven times the annual trading volume in a single transaction. Nobody in his right mind buys that kind of weight with the expectation that he'll be able to resell at a profit in an illiquid market. That tells me this group of investors is taking a long-term view and swinging for the fences with Axion's other large holders. I'm delighted to have the company, even if they did get a better price."

Based on 30 years in the trenches as a small company corporate finance lawyer I believed the 2009 private placement would put a solid floor of $1.20 under the stock price. The market behaved about the way I expected it would for three and a half months and then all hell broke loose when:
  • A busted hedge fund that owned 2.7 million shares began liquidating;
  • A bankruptcy estate that owned 544,000 shares began liquidating; and
  • Resale registration statements for 2008 and 2009 private placement shares went effective.
All of the sudden there were far more shares in the hands of willing sellers than the market could absorb. As the sellers started pushing their offer prices down in an effort to clear their books or turn a quick profit, the price fell from a 10-day moving average of $1.18 on March 30th to $0.80 on May 30th. By the end of July the 10-day average had fallen to $0.55. There were no problems with Axion's business, but there were a number of large shareholders who forgot the fable of the goose that laid the golden eggs.

A few days ago one of my followers on Seeking Alpha drew my attention to the daily short reports OTCBB market makers file with FINRA. The FINRA data is unusual because the market makers report all sales of shares that aren't under their control as short sales. Therefore, two types of transactions show up in the FINRA reports:
  • True short sales; and
  • Transactions where a selling stockholder has a physical stock certificate that must be converted into electronic form prior to delivery.
Other transaction types are reported from time to time, but they're rare. Since true short selling has never been an issue for Axion, it occurred to me that the FINRA daily short sale reports might provide an accurate and reliable way to track resales by private placement purchasers. On Tuesday my data-mining friend H. T. Love sent me FINRA short data going back to April 1, 2010, just before the resale registration statements for the private placement shares went effective. The accuracy of the FINRA data as a tracking tool for resales of private placement shares is astounding.

Since April 1, 2010, the total of short sales reflected in daily FINRA reports from market makers is 35,888,306 shares. During that period, my best estimate of the shares that have moved from physical certificates to electronic form follows:

Busted hedge fund 2,746,869
Bankruptcy estate 543,600
Deceased stockholder 8,245,614
The Quercus Trust 5,724,978
Special Situations Funds 7,433,411
Weak 2009 small investors
10,800,000
   Total 35,708,594

My best estimate of the shares remaining in the hands of 2008 and 2009 private placement purchasers follows:

Blackrock 7,150,000
Manatuck Hill Partners 7,200,000
The Quercus Trust 2,846,451
Strong 2009 small investors 3,600,000
   Total 20,796,451

The only numbers in the tables that are an outright guess are the shares held by weak vs. strong 2009 small investors, and that guess simply assumes that 3/4 the small 2009 investors were spooked by the market decline and decided to take their cash out of the game at a break-even price. While the data for Blackrock and Manatuck Hill is based on old SEC filings, both should file updated reports by mid-February.

If you look at the Axion chart for the last 20 months there is nothing that would attract a short-term trader, except for a brief run-up in January through March of 2010. In fact, the chart would terrify every trader I know. That means the only people who might have been attracted the stock were investors who attended an Axion presentation and decided to buy, or who've followed my blog for a long time, climbed a personal wall of worry and decided to swing for the fences in hopes of an elephant hunter's return.

I believe my long-term readers have bought the substantial bulk of Axion’s float. Unless Manatuck Hill, Blackrock or the remaining 2009 small investors start selling in meaningful volume, it looks like the only reliable source of supply is the Quercus Trust which will probably sell the rest of its shares over the next few months. From this point forward, I believe the market price is in the collective hands of the investors who bought over the last 20 months.

The last 20 months have been a very trying time for Axion's stockholders because of a highly unusual supply and demand dynamic. In a  normal market I would have expected the floor of $1.20 to hold till the summer of 2010 when Axion announced an important development contract with Norfolk Southern that would normally have boosted the price into the $1.80 range. Last fall I would have expected Axion's disclosure of superior testing results with BMW to boost the price into the $2.70 to $3.60 range. At this point I don't know what an objective fair value for Axion's stock is, but I expect to find out over the next few weeks.

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

January 11, 2012

Sunny Day for Solar Stocks and the Shorts Come Off

L. Myron Clark

Solar energy stocks took a huge jump today in U.S. trading.  While the sheen faded slightly as afternoon skies turned overcast in the eastern U.S., as of the NYSE closing bell about half the sector was up 20% or better.  Absent major industry news or earnings blowouts, short covering is the most plausible explanation for the sudden sharp rise.  Among the biggest winners were:
  • Hanwha SolarOne Co. Ltd. ADS (HSOL)  +36.80%
  • JA Solar Holdings Co. Ltd. ADS (JASO)  +34.72%
  • JinkoSolar Holding Co. Ltd. ADS (JKS)  +31.86%
  • ReneSola Ltd. ADS (SOL)  +30.23%
  • Trina Solar Ltd. ADS (TSL)  +29.18%
  • Suntech Power Holdings Co. Ltd. ADS (STP)  +25.78%

Recently lagging stocks moved to the head of the pack, evidence that short covering helped power the move up.  The graph below shows 3-month stock charts (since shortly after the broad market low in early October) for six stocks that made new 52-week lows in December 2011: FSLR, SPWR, WFR, SOL, HSOL, and JASO.  Three of these - Hanwha SolarOne, JA Solar, and ReneSola were  among the big winners in today's trading.  JinkoSolar nearly fits the pattern, as the stock's December minimum was barely above its 52-week low in September.  Though the big jumps today were not enough to catch up to the sector's better performers over the same interval, this lends credence to the old saw that every dog has its day in the sun. 

"FSLR SPWR WFR SOL
HSOL JASO 3m

Few other catalysts are available to explain the dramatic move.  Last week LDK offered to purchase Sunways, another welcome milestone on the industry's long and tortuous road to consolidation. The announcement seemed to give solar stocks a boost early in the new year's trading.  But this deal by itself it not likely to take much production capacity out of an oversupplied market.  In a contrary vein on the M&A theme, the CFO of Jinko Solar was recently quoted as saying that Chinese solar firms would rather shutter production or operations than be acquired by a competitor.

Many solar stocks were trading well below book value and arguably primed for a jump on that basis alone.  Among today's big winners, several had recently traded at one-third of book value or lower.  The denominators are dubious because not all companies' physical plant and equipment will maintain its value through the end of the supply glut.  But the new year helps resolve some lack of clarity as the lower price for solar panels sustains growth in installations, even with fewer subsidies available.  So some reversion toward nominal book value is reasonable.

The solar sector has been extremely volatile lately, and today's jump somewhat resembles the spike in stock prices in late October, which accompanied (and extended by one day) a big run-up in the broader market.  Most of those gains faded before the recent recovery.  A partial replay of that pattern seems likely: prices for most stocks in the sector will pull back from current or slightly higher levels, and a few hardy short sellers will rush back in.  In the medium and longer term the heavens should smile upon solar stocks, but the industry remains sickly for now.

DISCLOSURE:  I am long TSL, LDK, YGE, ITRI, AMSC

L. Myron Clark is an independent industry analyst based in the Boston area.  He previously covered the technology services industry as an analyst with Gartner Inc.  He has an undergraduate degree from Cornell and also pursued postgraduate studies there.  Mr. Clark has traveled extensively and has a broad range of interests in energy and environmental topics.

Tier One Chinese Solar To Continue To Outperform

by Clean Energy Intel

TAN v STP, YGE and TSL

Source: Barchart

The chart above tells a particularly interesting story. Back in November of 2011, having been bearish on solar for some months, we argued that the market was finally beginning to see a process of rebalancing in the solar sector. A key component of this of course related to a number of announcements from Chinese solar players that they would bring a halt to new plans to expand capacity - at least until the end of 2012.

This factor, alongside the prospects for demand growth outside of Europe, led us to see the potential for a healthier market for solar as 2012 progresses. Nevertheless, it remains obvious that a powerful process of creative destruction remains in place, with low cost module suppliers likely to push out the weaker players. 

As a result, our main call was for an outperformance and recovery of a basket of low cost tier one Chinese solar stocks - Suntech Power (STP), Yingli Green Energy (YGE) and Trina Solar (TSL). The chart above shows the performance of these stocks versus the solar ETF TAN - from the closing prices on Friday November 25th, ahead of the publication of our recommendation to go long on the following Monday.

Clearly the trade has worked well with all three stocks having performed strongly. STP, YGE and TSL are up 36%, 24% and 29% respectively. Moreover, what is most interesting is not just the recovery in the solar sector as a whole but the significant outperformance of these tier one Chinese solar players - must as anticipated. Whilst the the tier one Chinese solar players have seen a very strong performance, the overall solar ETF TAN is only up 5% - a reasonable recovery from the bottom but nothing to match the performance of China's low cost suppliers.

Of course, it is too early to suggest that this is a new trend. However, in many ways it does make sense and perhaps the market is beginning to pick winners and losers in solar's war of attrition as both costs and average selling prices continue to fall.

TAN v STP, YGE and TSL - 1 Year View

Source: Barchart

The second chart above also underlines the fact that this appears to be a new development. During the difficult period for solar over the past year, tier one Chinese solar stocks have, in broad terms, tended to follow the overall market - with TAN down -64%, Yingli doing slightly better at down -56%, and STP and TSL both under performing at down -66% and down -69% respectively. Against this past performance, the recent outperformance of tier one Chinese solar players looks like it may be a new development well worth following.

In terms of where we go from here, it's seems worth repeating our previous analysis pointing to a healthy rebalancing in the sector as a whole:
  • On the demand side, the rest of the world has been making up for slack demand out of Europe. In particular, the latest data points to blistering demand in the US - more detail here
  • Likewise, China and Asia are showing extremely strong demand growth - see our article on the issue here
  • And most importantly, on the supply side, the major Chinese players have drawn a halt to their excessively aggressive capacity expansion plans - more detail here
Finally, survey-based data from SolarBuzz also points to an ongoing consolidation in the industry. You can read a fuller discussion of this data here. In summary, the SolarBuzz survey conducted in Q2 of the current year, pointed to manufacturers' shipping plans of just over 8 GW of modules in Q3 of this year and almost 9 GW in Q4. The somewhat obvious result was oversupply, a continued inventory build and falling module prices. 

However, in the latest SolarBuzz survey, conducted at the end of Q3, those numbers have fallen to just over 6 GW for Q3 and a tad over 5 GW for the final quarter of the year. This level of adjustment is precisely what is required to finally bring the industry back towards balance during the course of 2012. 

All of the data above of course simply highlights this new realism on the production and capacity side of the equation. Taken together, these factors should allow the supply-demand imbalance currently facing the industry to be eroded as 2012 progresses.

Moreover, as consolidation in the industry progresses, the low cost tier one Chinese players should continue to outperform. We continue to recommend being long a basket of SunPower, Yingl and Trina Solar. Separately, we also recommended being long First Solar and would continue with that trade.

Disclosure: I have no positions in the stocks discussed.

Clean Energy Intel is a free investment advisory service produced by a retired hedge fund strategist. You can read more at www.cleanenergyintel.com

Electric Vehicles: No House of Cards

Tom Konrad CFA

Once again, John Petersen  has gone too far with his petrol-head arguments against Electric Vehicles (EVs.)

In a recent article fetchingly titled, , he argues that because "the incremental cost of vehicle electrification [is] an up-front capital investment of $190 for each equivalent barrel of oil saved." Since the oil price currently barely tops $100, he considers this (to put it mildly) a bad investment.  He concludes,
Electric drive proponents are selling a house of cards based on fundamentally flawed assumptions and glittering generalities that have nothing to do with real world economics. Their elegant theories and justifications cannot withstand paper, pencil and a four function calculator.
He's quite right that pro-EV arguments don't stand up to "paper, pencil and a four function calculator."  That's because, in order to use these crude methods, he has to make a number of simplifying assumptions which have the side-effect of understating the benefits of electrified transportation.

False Assumption: The only benefit to EVs is oil savings.

To get his $190 cost for each barrel of oil saved, he divides the barrels saved by the additional cost of an EV.  But if there are other benefits to EVs, then some of that incremental cost should be allocated to the other benefits, not to reducing oil consumption.  Here are a few advantages of EVs he ignores.
  • No oil changes/ less maintenance.  This saves both direct costs, and the owner's time.
  • No trips to the gas station.  How much time do we waste (and extra miles do we drive) going to the gas station (or even going a few miles out of our way to get the best price on gas)?  With all the attention to range anxiety, there seems to be very little attention to the fact that your car recharges while you sleep.  Do you know anyone who enjoys spending time in a gas stations?  Not driving to gas stations probably saves an additional gallon per year, and the driver's time is of course valuable, too.
  • Quieter ride.  Many luxury car owners are willing to pay a lot for a quieter ride, so it must have some value.
  • Potential to make money selling frequency regulation to the grid.  This much-talked about concept still needs regulations and market structures to make it practical, so while I think it deserves a mention, I won't give it any value in my calculations.
  • Batteries in base of car lowering center of gravity and improving handling.
  • No tailpipe emissions.  Since car exhaust often infiltrates into homes via connections to the garage, this should be seen as a benefit to anyone who has an attached garage and cares about their own and their family's health.

Using Peterson's estimated savings of 104 barrels of oil over the course of a decade, each $1040 we attribute to the above benefits of EVs should reduce the cost of a barrel of oil saved by $10.  I'd say $1040 would be a very low-end estimate of the above benefits, while $5200 would be a high-end estimate, so the cost of saving a barrel of oil through vehicle electrification is between $140 and $180 once we take these benefits of EVs into account.

Price Stability

An EV buyer is essentially purchasing her fuel savings up-front, at a fixed price, partly because it costs much less per mile to drive an EV than an conventional vehicle, and partly because electricity prices are much more stable than gasoline prices.

Price stability is valuable in itself, since it allows much more effective budgeting.  Many people buy oil or propane to heat their homes in advance in order to lock in a fixed price, so they must value the price stability.  An EV is an opportunity to lock in most of the fuel price for the life of the vehicle.  Even if that price is $140 or $180 per barrel of oil, it still will have value to some drivers.

Will the price of oil average more than $140 over the coming decade?  I think the chances are high.  There is even a decent chance that oil prices will average more than $180 over the next decade, in which case an EV buyer today will be quite pleased with herself five or ten years from now.

Driving Habits

Finally, as I have discussed previously, not everyone is an average driver.  Drivers with regular commutes who have the opportunity to charge their vehicles more than once per day gain significantly more benefit from plug-in vehicles than drivers who charge their vehicles less often per day.

EVs are not an economic option for everyone, or even for most drivers.  Drivers who can use more than the full range of their vehicle per day by charging more than once, and drivers who place high values on the other benefits of EVs describe above, may find that electric vehicles make economic sense. 

Conclusion

Are electric vehicles a panacea to our car culture woes?  No.  But it is a mistake to call vehicle electrification a house of cards based on a back-of-the-envelope calculation.

DISCLOSURE: None.

January 09, 2012

The Solar Trade Wars: Which Side Are You On?

Marc Gunther

Should we worry about Chinese government subsidies to its solar industry? Or send the Chinese a thank-you note?

A group of seven US-based manufacturers of solar panels is alarmed. These manufacturers, led by Solar World (SRWRF.PK), a German firm with a plant in Oregon, filed a complaint with the United States International Trade Commission, which reached a preliminary conclusion in December that US companies were, in fact, being harmed by subsidized imports. If the Commerce Department goes on to find that Chinese firms have been dumping solar panels on the US market at prices below their costs, it could impose steep tariffs of 50 to 250% on Chinese panels, according to this report in The Times by Matt Wald. The Chinese government provides billions of dollars of low-cost financing and free or cheap land to Chinese solar firms.

Jigar Shah

But much of the solar industry–led by Jigar Shah, the founder of Sun Edison, entrepreneur and environmental advocate–thinks this complaint is a terrible idea. Tariffs  would raise the costs of solar power to US business and consumers, at a time when those are coming down; they could also set off a solar trade war that would harm other US solar companies.

As it happens, the U.S. had a trade surplus of nearly $1.9 billion in the solar sector with China in 2010, as exports of raw material and factory equipment more than offset imports of finished solar panels, according to the Solar Electric Industries Association,. What’s more, Jigar says, most of the 100,000 or so jobs in the US solar industry — he says as much as 97-98% — are downstream of the manufacturing business in project development, logistics, construction and installation.

“SolarWorld’s petition will do far more damage than good to the U.S. solar industry as a whole,” Jigar wrote in this letter to Gordon Brinser of Solar World. “Every morning, thousands of hard-working Americans put on their tool belts and go build solar power plants. Our country needs more of those jobs, not fewer.”

What got me thinking about this brouhaha was an email the other day from a California company called Solar Power Inc., or SPI, that underscored for me just how committed the Chinese are to getting their solar panels onto rooftops in the US.  SPI said it had secured construction financing worth $44 million from the state-owned China Development Bank to fund construction of solar projects in New Jersey.

Why would a Chinese bank finance solar panels in the US? Well, it turns out that SPI is 70%-owned by LDK Solar (LDK), a Chinese company founded in 2005 that now says it “the world’s largest producer of solar wafers in terms of capacity and a leading high-purity polysilicon and solar module manufacturer.” LDK bought its controlling interest in SPI Solar last year in an effort to gain direct access to the US commercial market. With revenues expected to top $90 million last year, SPI is small to mid-sized developer of rooftop PV–it installed panels atop the Staples Center and the Fox Studios in Los Angeles and a Costco in New Jersey. “We’re a downstream market for LDK,” said Mike Anderson, vice president of communications for SPI Solar.

Now consider those solar panels on their way to rooftops in New Jersey–the Chinese manufacturer, LDK, gets low-cost land and financing from the Chinese government, SPI borrows from the state-owned China development bank to construct the solar arrays, the US government grants the panels a 30% investment tax credit and New Jersey’s renewable portfolio standard makes the project that much more attractive to the state’s utilities. No wonder the solar market is growing!

Supporters of the petition filed by SolarWorld, which employs more than 1,000 workers in Oregon and is the only company named in the trade complaint, argue that too much of the solar PV market is going to China. Chinese manufacturers now enjoy better than 50% of the global market for modules, up from single digit percentages in the late 1990s. Cheap Chinese solar helped drive US firms like the now-infamous Solyndra and Evergreen Solar into bankruptcy.

In a blogpost titled Educating Jigar Shah on Solar Trade, Hari Chandra Polavarapu, a solar analyst at a small firm called Auriga USA, declares: “The lower prices of solar cells and modules from China have so far served as a battering ram in destroying overseas solar PV manufacturing competition.”

“It’s true that lower prices benefit all rate payers — but if that is all there is to an economic argument, then the U.S. and the rest of the world should give up all manufacturing to China and services to India,” Polarapu writes.

My reactions:

1. Trade wars are risky. If the US imposes tariffs on Chinese solar panels, the Chinese will retaliate. They have already promised to investigate US subsidies.

2. Speaking of which, it takes chutzpah (that’s a technical term in economics) for US solar manufacturers to complain about subsidies in China since they, too, benefit from government-backed loans (yes, that means Solyndra), buy-American provisions in the stimulus package and favorable state tax treatment. SolarWorld got $40 million in tax credits from Oregon, where it employs about 1,000 people. Today’s Times has an excellent story about how the government pays for worker training programs for individual companies. Until the US brings a halt to crony capitalism (which would be good), US companies are in no position to whine when they find it elsewhere.

3. Maintaining solar panel manufacturing jobs in the US may be a lost cause. Solar cells and modules are not high tech products. They’re more like a flat-screen TV or an iPod than a Boeing jetliner. Chinese PV manufacturers benefit from efficient operations and low labor costs, according to this article in the MIT Technology Review.

4. The Chinese subsidies create a positive externality–lower carbon emissions, to the degree that solar panels replace dirtier fossil fuels. So long as they continue, we all benefit. If and when they stop, there’ll be no reason why other manufacturers can’t gear up to compete.

I’m not ready to send a thank-you note to China. But I’m thinking about it.

Disclosure: I was paid last year to moderate an event for the Carbon War Room, which Jigar leads.

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

January 08, 2012

Why The Electric Vehicle House of Cards Must Fall

John Petersen

A few days ago Alex Planes published an extraordinary article on The Motley Fool titled the "Real Costs of Alternative Energy" that summarized direct US subsidies for our principal energy sources, restated annual energy consumption from each of those sources using equivalent barrels of oil as a standard measure, and calculated the direct Federal subsidy per unit of useful energy consumed. The following table condenses and reorders the data from the lowest to the highest direct Federal subsidy per unit of useful energy consumed.

1.8.11 US Subsidies.png

As I pondered Mr. Planes' work and methodology, the first question in my mind was "How would electric drive stack up using the same methodology?" Today I'll share my answer to that question.

Since the primary goal of electric drive is to reduce gasoline consumption, it seems reasonable to treat fuel savings as equivalent to oil production. On a thermal equivalency basis, 50.4 gallons of gasoline have the same BTU value as one barrel of crude oil. Since gasoline is a refined product while crude oil isn't, we need to adjust the equivalency factor for the energy used in refining and distribution. When we include all costs of refining and distribution, not burning 40.5 gallons of gasoline is the functional equivalent of producing one barrel of oil.

A CAFE compliant new car will offer an average fuel economy of 33.3 mpg while a CAFE compliant new light truck will offer an average fuel economy of 25.4 mpg. The combined fleet standard is 29.7 mpg. To keep things simple I'll round that figure up to 30 mpg. At 30 mpg, the owner of a new light duty vehicle will consume about 420 gallons of gas per year, or 4,200 gallons over the course of a decade. That's the equivalent of 10.4 barrels a year or 104 barrels of over the course of a decade.

Now comes the fun part!

In a recent analytical report titled "Global Autos: Don't Believe the Hype – Analyzing the Costs & Potential of Fuel-Efficient Technology," Bernstein Research and Ricardo PLC performed a bottom-up cost walk analysis that started with a $19,000 gasoline powered vehicle, deducted the costs of unnecessary internal combustion drivetrain components and then added the incremental costs of necessary electric drivetrain components. The end result of this bottom up cost walk analysis was a $38,800 electric vehicle. The following graphic summarizes the Bernstein-Ricardo cost walk.

1.8.11 Cost Walk.png

I've previously shown how an electric vehicle will save the average driver 104 barrels of oil over the course of a decade. When you turn the crank on the incremental cost of vehicle electrification, it works out to an up-front capital investment of $190 for each equivalent barrel of oil saved. It's like Milo Minderbinder's scheme to buy eggs for a dime, sell them for a nickel and make up the difference on volume.

If we forget about the immense capital costs and focus exclusively on the direct Federal subsidy per barrel of oil saved, it works out to $72.11 without including any State, local or indirect incentives.

The ultimate obscenity is that a conversion from gasoline drive to electric drive will not reduce the total amount of energy used in transportation. It merely shifts the energy burden from lightly subsidized oil and gas to more heavily subsidized energy from coal, nuclear and renewables.

Electric drive proponents are selling a house of cards based on fundamentally flawed assumptions and glittering generalities that have nothing to do with real world economics. Their elegant theories and justifications cannot withstand paper, pencil and a four function calculator.

The law of economic gravity cannot be ignored and will not be mocked. Shiny new electric vehicles from General Motors (GM), Ford (F), Nissan (NSANF.PK), Toyota (TM), Tesla Motors (TSLA) and a host of privately held wannabe's like Fisker Motors and Koda are doomed to catastrophic failure. Their component suppliers will fare no better. There is no amount of political or wishful thinking that can change the inevitable outcome.

Disclosure: None.

January 07, 2012

Energy Storage: Four Break Out Stocks and a Short Circuit

John Petersen

On December 16th I wrote "My favorites for a strong 2012 include AONE, MXWL, AXPW.OB, ZBB, JCI, ENS, ACPW and XIDE. They all merit serious attention from investors who want exposure to the energy storage sector." Since then four of my favorites have bottomed and turned sharply higher while the Pride of Palo Alto endures a short circuit. The following table compares today's closing prices with the December 16th closing prices for those five companies.

1.6.12 Table.png

Exide Technologies (XIDE) has been a roller coaster over the last two years. In January 2010 its 10-day weighted moving average price was $7.23. Since then 10-day average has ranged from a high of $12.02 to a low of $2.49. While many are puzzled by Exide's volatility or blame it on operating results, I believe the root cause of the extreme volatility has been the gradual liquidation of a hedge fund that owned 31.4% of Exide's stock two years ago; sold 13.5 million shares in 2010 and sold between 2.5 million and 10.3 million additional shares in 2011. We won't be able to nail down an exact figure for the fund's 2011 sales until the manager files its year-end holdings report in mid-February, but given the volume ramp and price collapse since mid-November, I think it's likely that the fund blew out the balance of its holdings in the fourth quarter.

1.6.12 XIDE.png

Stock markets are creatures of supply and demand and prices always reflect the balance between existing stockholders who want to sell and new investors who want to buy. Any time existing stockholders want to sell more shares than new investors want to buy, price is the first casualty. In Exide's case, a single stockholder increased the total number of shares available to the market by almost 50% over a two year period. The end result was a stock that trades at a 41% discount to book value. I've been upbeat about Exide's future for the last couple years because it's completed a major restructuring that trashed historic earnings and its peers trade at multiples of up to two times book value. Baring a global meltdown, it's not hard to foresee a double digit price for Exide by this time next year.

A123 Systems (AONE) has been a classic example of how the Gartner Group's Hype Cycle applies to stock markets in the short term. After a successful IPO in September 2009, A123's stock price reached its peak of inflated expectations in January of 2010 when the 10-day weighted moving average hit $22.15. Since then it's been a steady downhill slide into the trough of disillusionment where the 10-day average recently hit an all time low of $1.70.

1.6.12 AONE.png

While I'm an unrepentant critic of  electric vehicle hysteria on purely economic grounds, A123 makes a fine battery based on an objectively safer chemistry that's important to our energy future and can offer compelling value in several important markets. Since April of last year I've said the market over-reacted to an important financing transaction and A123's price decline was excessive. Since I argued A123 was reasonably valued in the $6 range, I believe its current price of $2.10, a 25% discount to book value, is attractive for investors who want exposure to the lithium-ion space. It's possible that A123 will suffer further price erosion, but for now it looks like the price is ready to begin an impressive turn to the upside.

Active Power (ACPW) is a fine example of how the Gartner Group's Hype Cycle applies to stock markets over the long term. After a successful IPO in August 2000, Active Power's stock price soared into the $70s before beginning a ten-year slide that took the price to an all time low of $0.25 in late 2008. By January 2010 Active Power's stock price was starting to recover and the 10-day moving average was $1.05. In April 2011, the 10-day moving average peaked at $2.84 before beginning another down cycle that recently reached a minimum of $0.66 before turning positive once again.

1.6.12 ACPW.png

More than anything else, Active Power's price performance is a solid example of the ancient market wisdom that all stocks have three values – undervalued, fairly valued and overvalued – and they only visit fair value briefly during transitions from one extreme to the other. It also lends credence to my belief that as stock prices oscillate around fair value the amplitude and duration of price swings, both to the downside and upside, are roughly proportional. Active Power is entering a new up cycle at a particularly opportune time because it's on the cusp of sustained profitability, revenues are ramping rapidly and global demand for high-end power quality and reliability systems has never been greater.

Axion Power International (AXPW.OB) has finally turned an important corner and begun to emerge from the mother of all supply and demand imbalances. After completing a huge private placement in December 2009, Axion entered 2010 with a 10-day moving average price of $1.42 that stabilized in the $1.20 range (2X the private placement price) by February. When a resale registration statement for the private placement shares went effective in April 2010, the dynamic was like a fire drill in a sumo training stable as several jumbo-sized private placement purchasers tried to flip more shares for a quick buck than the market could absorb. The result was a precipitous collapse into the $0.60 range that lasted through early 2011 when the stock staged a brief rally into the $1.20 range before sliding to an all time low of $0.28 at year-end. The last nine months have been like Exide on steroids as two sumo champions got into an epic shoving match and collectively accounted for about 22% of trading volume, or almost 45% of all stock sales by existing shareholders.

1.6.12 AXPW.png

I don't know whether to laugh or cry when I look at Axion's stock price. At the time of the 2009 offering, the serially patented PbC battery was seen as a potentially disruptive technology, but only if Axion could successfully navigate the transition from product development to commercial production. In June of 2010 Norfolk Southern Railway selected the PbC for electric locomotive applications that ruined top quality AGM batteries from Enersys (ENS) in a matter of weeks. In September of 2010 BMW jointly presented a technical paper with Axion at the European Lead Battery Conference that showed why the PbC is an order of magnitude better than competing lead-acid batteries for automotive stop-start applications. Just before Thanksgiving this year, Axion's PowerCube came on line as the nation's first behind the meter demand response and industrial power quality system to provide frequency regulation services to a regional grid interconnection. In my experience, the 2009 placement at $0.57 should have put a solid floor of $1.20 under the stock prices and each of the subsequent accomplishments should have boosted the stock price. Those increases would, of course, have been tempered by the reality that Axion needs to raise more capital in the first half of 2012, but now that the supply and demand imbalances are resolving themselves, I expect the future price trend to be very different from the past.

Tesla Motors (TSLA) is showing a different pattern from the four breakout stocks discussed above. After a successful IPO in July 2010, Tesla's 10-day moving average stock price stabilized in the $25 range and eventually climbed to a peak of $33.59 in late November. Since the November peak Tesla's price has fallen 23% and plunged down through the 200-day weighted moving average, a clear sign that Tesla has passed its peak of inflated expectations and is headed into the trough of disillusionment.

1.6.12 TSLA.png

When Tesla announced the pricing and battery options for its Model S in November, potential buyers found themselves on the horns of a dilemma as they were forced to come to grips with the immense cost of range anxiety. Compared to a CAFE compliant conventional vehicle, the Model S will save the average driver 400 gallons of gas per year, or 4,000 gallons over the course of a decade. To accomplish this wondrous feat, the base model for Alfred E. Newman types who are happy with a 160 mile range comes with a 40 kWh battery pack that costs $20,000 and represents an up-front investment of $5.00 for every gallon of lifetime fuel savings. For the more paranoid Jerry Seinfeld types who want a 230 mile range, Tesla offers 60 kWh battery pack that costs $30,000 and represents an up-front investment of $7.50 for every gallon of lifetime fuel savings. For the high anxiety Mel Brooks types who want a 300 mile range, Tesla offers a whopping 85 kWh battery pack that costs $42,500 and represents an up-front investment of $10.63 for every gallon of lifetime fuel savings. When you combine those cruel product cost realities with the fact that Tesla's stock price is an eye-watering 9.5 times book value, the price has to fall. While Mr. Market may prove me wrong, I believe Tesla's stock price will intersect Exide's stock price in 2012.

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

January 03, 2012

Top 10 Biofuels Predictions for 2012

Jim Lane

Rewind to 2011 with a “best of” New Year’s story? Bah, humbug! Today, Biofuels Digest looks forward to the sunny possibilities of 2012 in bioenergy.

As the sunset of 2011 gives way to the dawn of 2012, here at the Digest we resist the holiday temptation to look back over the challenges and highlights of the year gone by, and instead once again roll out our crystal ball as we list the Digest’s 10 Biofuels Predictions for 2012.

Top 10 Biofuels Predictions for 2012

10. Advanced biofuels capacity surges to 1 billion gallons, globally. We see 570 million gallons in capacity from Neste Oil alone; 137 Mgy from Diamond Green, 75 Mgy from Dynamic Fuels, 62 Mgy from KiOR, 37 Mgy from Gevo, and 25 Mgy from POET.  New, smaller commercial facilities (8-20 Mgy) are expected from Amyris, Chemtex, Solazyme, INEOS Bio and POET; the rest, 50 Mgy in capacity at Nature Works and Metabolix, and small demonstrations and pilots from nearly 200 other companies.

9. Merger-Mania. 200 companies can’t all continue to march forward, developing advanced bioenergy projects. Projects that have completed pilots are going to be ripe for merger and acquisition as they search high and low for expansion capital and find that the well is getting quite dry, as many oil and chemical giants will have already placed their bets. Look for projects to attempt to tap feedstock providers next – absent that, the projects seeking $100M+ for commercial-scale expansion will be looking to make themselves more attractive to investors by issuing so much equity to investors that it will feel like a merger even if the projects remains technically independent.

8. Selected IPOs go forward. The buzz around Elevance and Genomatica continues to be strong, and Fulcrum and Mascoma have put themselves into very strong positions with financing deals from Valero (VLO) and Waste Management (WM). All of the IPOs in the queue, and there are 10 of them, have merit, but we expect that several of them might opt instead to be acquired.

7. Momentum shifts to Asia. Brazil has ruled the roost for the past two years – now, sugarcane shortages, surging demand, and the fact that many of the partners have already chosen their partners for the Brazilian shuffle – well, momentum is shifting to Asia. For those that can utilize palm oil or palm waste – think Indonesia and Malaysia. Cassava? Thailand or Vietnam. Cane? That’s India. Need industrial partners, coal, or residues from forest, animal or municipality? That’s China. Thinking algae? Think a little farther to the south, in Algstralia, where cane is also in relatively plentiful supply.

6. US Renewable Fuel Standard is revised. Though most US biofuels trade associations have kept strongly to a “don’t mess with the RFS” strategy, its common sense that the forces that opposed the VEETC ethanol tax credit – chicken and beef producers, anti-corn activists and small government zealots – will now pivot their full attention to the Renewable Fuel Standard, showcasing the shortfall in the cellulosic biofuels pool. Oil companies may be divided on the RFS given their increasing investments in the sector, but chemical investors won’t care much, and the algae-based biofuels developers will support a revision of RFS targets.

5. Oil and chemical companies rule. Venture capital is just about maxed out in advanced biofuels, and the players that are making a difference are a handful of visionary feedstock-side investors (ADM, Cargill, Bunge) on light duty, more aggressively so from Waste Management. But the big dollars will be downstream in 2012. Valero and BP are stepping up, Shell expects to deploy billions in Brazil, and Petrobras, too. The major Indian oil companies may go big, and we expect to see more and more interest in the sector from Dow, BASF, Dupont, Rhodia and others in the chemicals businesses.

4. Aviation biofuels capacity increases, but US $510M investment de-funded. Aviation biofuels will continue to get hotter and hotter – more and more airlines will try small purchases to try and stimulate large-scale production and helping costs to come down. But we expect only a series of delays and frustrations in US government efforts to fund its $510M commitment to invest in military and aviation biofuels. It’s going to be “sorry” from the House of Representatives throughout 2012 on the question of either re-purposing funds from earlier appropriations, or granting new funds for the Navy’s and the DOE’s side of the investment. After the US elections, in 2013 – that’s a different story.

3. Ethanol producers begin switch to biobutanol and chemicals en masse. If last year was the year of the IPO, as 2009 was the summer of algae, 2012 will be the year that ethanol producers begin to switch over to higher-value molecules, such as butanol or various organic acids. For ethanol producers, its the path of least resistance in getting around the ethanol blend wall. For the high priests developing the new technologies and magic bugs, its an opportunity to partner with companies that have feedstock, infrastructure, 90 percent of the required steel in the ground, and existing markets for co-products.

2. “Carbon capture & re-use” is the new buzzword. It’s been “carbon capture and storage” for some time, but it is beginning to dawn on technologists that, in the end, the costs are too high and the technology can only help stem the flow of carbon into the atmosphere, not provide a permanently sustainable solution. The problem is not that there is too much carbon. There is exactly as much carbon now as 100 years ago – it is a distribution problem. Carbon that needs to be in the soil, helping to produce food and fuel, is trapped in the atmosphere and in the ground. Technologies that capture carbon emissions before they are vented into the atmosphere, and pipe CO2 to technologies that can utilize CO2 to make products for a fast-growing world – that’s where the action will be.

1. US Farm Bill contains reduced, targeted energy title. A new farm bill is due in 2012, and there continue to be a question as to whether there will be a Farm Bill at all, any kind of Energy title within the bill, and what that title might look like. Our belief? Yes, the grand coalition that brings forth a Farm Bill will re-form, fractiously as ever. Yes, Virginia, there will be an energy title. But, holy Vilsack, will it be smaller or what? Look for the energy title to focus on four key programs programs – a revised biomass crop assistance program, designed to help bring cellulosic feedstocks to market; direct equity to inject in commercializing advanced biofuels for military use, that utilize rural biomass; loan guarantees to ensure that a project finance market emerges for advanced biofuels, at scale; finally, a blender pump program to help industry to circumvent the E10 ethanol blend wall with expanded E30 and E40 availability.

Last year’s predictions: 8.5 marks out of 10

For our 2011 batch of predictions, we give ourselves 8.5 marks out of 10.

We gave ourselves 1 full mark for predicting a new set of USDA Loan Guarantees, the end of the VEETC ethanol tax credit, status quo on the US Renewable Fuel Standard,  the continuation of IPO Fever, the dominance of renewable chemicals among early-breakout strategies, the domination of renewable diesel in production capacity, the advent of numerous “bolt-on” deals including increasing US-Brazilian ties, and for the rise of the strategic investors.

We gave ourselves a half mark on our prediction that Brazil, India and China would dominate the development headiness – not much activity, in the end, in India, and more in the US than expected.

We gave ourselves a zero on expanded capacity in cellulosic ethanol – it expanded, but not nearly as much that would justify including it in our predictions.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published.  Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations.  Subscribe here.

January 02, 2012

Ten Clean Energy Stocks for 2012

Tom Konrad, CFA

There is a silver lining to the horrible year clean energy stocks had in 2011: the opportunity to buy clean energy stocks (often considered a growth sector) at prices one would expect from value stocks.

Each year since 2008 I have published an annual list of ten clean energy stocks I thought were good buys at the beginning of the year.  While the 2008 list was not really intended as an investment portfolio, my annual lists quickly evolved into a mini-portfolio of stock intended for hands-off investors who did not want to pay the high fees of clean energy mutual funds, but who, like me, saw shortcomings in the available clean energy exchange traded funds.  In particular, the clean energy exchange traded funds (ETFs) and most clean energy mutual funds) are far too focused on high profile sectors like solar and have hardly any exposure to the most economic clean energy sectors, such as energy efficiency, alternative transportation, and biomass.  Most clean energy ETFs come with relatively high costs for ETFs (usually around 0.6% to 0.7%), which is expensive enough that a small portfolio of clean energy stocks can be acquired for less over a modest holding period.

With that in mind, I now focus my annual list on the most economic clean energy sectors.  Within those sectors, I include stocks I currently consider relatively good values, similar to the clean energy model portfolio I wrote about in late 2009.

The relative results have been good, when compared to the returns investors would have gotten if they had invested in the clean energy ETFs I use as a benchmark.  (I've currently settled on the Powershares Wilderhill Clean Energy ETF (PBW) as a benchmark, because it is the most widely held of all clean energy ETFs, but I used GEX and ICLN in the early years.)  Over the past four years, my picks have outperformed the benchmark by 12% in 2008, 45% in 2009, 10% in 2010, and most recently by 4% in 2011, despite company-specific bad news for three of the stocks in the portfolio.

The Best Opportunity Since Early 2009

Despite the good relative performance, the last four years have been so bad for clean energy in general that someone who had been following the portfolio since 2008 would still be down because of large losses in 2008 and 2011.  The upside of this poor performance is that now is the best time to buy clean energy stocks since the start of 2009. 

In both 2010 and 2011, I cautioned readers that the stocks I listed were only good values relative to clean energy stocks in general.  This year, as in 2009, I have the pleasure of bringing you a list of ten clean energy stocks I think are good values at current prices.   This does not mean that my current crop of clean energy names can't fall, but it does mean that they have much more upside potential than they did in either of the last two years.  If this portfolio ends 2012 lower than it is now, I'm confident the decline will have been caused by a fall of the stock market as a whole: Bad news specific to clean energy seems to be more than adequately reflected in the current prices of clean energy stocks.

That said, the fragile economy and political paralysis in both the US and Europe hold many risks for the stock market in general in 2012, so investors in these stocks would probably be wise to hedge their positions with puts on broad market ETFs such as SPY and IWM.

The Picks

Energy Efficiency


LED
Downlight
A dimmable LED downlight. Photo by author
Energy Efficiency has long been a staple of my annual lists, because energy efficiency measures make sense in both good times and bad, both as a way to save money, and to stimulate the economy.  Because energy efficiency measures cost less than conventional energy, they stimulate economic activity twice: first when they are installed (as would any investment) and then for years to come, as the energy cost savings are spent on other goods.

My energy efficiency picks are:

 1.Waterfurance Renewable Energy (WFIFF.PK $15.3455, WFI.TO), a perennial favorite because of their profitable business selling geothermal heat pumps.  Waterfurnace recently increased their quarterly dividend to $0.24, for a 6% annual yield.

2. Lime Energy (LIME, $3.18) was one of my two top picks in the energy services sector, the other being Ameresco (AMRC.) I chose to include LIME in this list rather than AMRC because AMRC is already up 35% since I recommended it.  While I still like AMRC at current prices, I think LIME has better potential upside.

3. Honeywell (HON, $54.35) has a strong business providing building controls and efficient heating and cooling equipment, as well as a performance contracting arm.  I currently like the company's relatively modest trailing and forward P/E's of 16 and 12, respectively, strong cash flow, low debt, and 2.7% annual dividend yield.

4. Rockwool International (RKWBF.PK $82.29, ROCK-B.CO 473 DKK10) is an international insulation manufacturer whose share price has fallen because of the EU crisis along with many other Eutopean stocks.  Yet with only 43% of 2010 revenues originating in Europe and headquarters outside the Euro zone, the company seems relatively insulated from the full effects of a Euro crisis.  Rockwool pays an annual dividend, and has a yield of 2% based on the most recent dividend payment.

Biomass

Schrotthaufen Berlin
By S. Müller (Own work) [CC-BY-2.5], via Wikimedia Commons

I think one of the best ways to play cellulosic biofuels is to buy the companies which control the cheapest potential feedstocks.  I'm not sure that the best use of trash is to make biofuel, but whether it is recycled, composted, digested, incinerated, or converted in to biofuel, I see trash as a future source of revenue in a resource constrained world, and who better to profit from trash than the companies that collect it?

Last summer, I highlighted environmental services companies as a way to invest in biomass in my article Trash Stocks Trashed: An Income Opportunity? 

5. Waste Management (WM, $32.71) was my top pick at the time.  Since then, the stock has since risen over $2 while continuing to pay its $0.34 quarterly dividend.

6. Veolia Environnement SA (VE, $11.05) was then trading around $16, and I was cautious about the compnay.  Today, Veolia seems too cheap to pass up, despite the fact that I expect its 2012 annual dividend to be significantly lower than the $1.47 (13.3%) paid in 2011.

Alternative Transport

TriMet 1990 Gillig bus carrying bike
By Steve Morgan (Own work) [CC-BY-SA-3.0 or GFDL], via Wikimedia Commons

Electric vehicles (EVs) may be cool and appeal to early-adopter techies and some conspicuously consuming greens, but I think EV adoption will be a long, hard slog.  The technologies which are likely to advance faster are those that are already economic, but also save transportation fuel.  Alternative transportation such as biking, light rail, and buses top my list.

7. Accell Group (ACCEL.AS, €14.15/$18.33) is a Netherlands based bicycle maker which I recently highlighted as a peak oil investment to buy now, because the  company has been battered by the EU crisis.  Accell is up 11% since then, although the stock still has significant Europe risk.

8. New Flyer Industries (NFYEF.PK $5.6492, NFI.TO) is the largest North American manufacturer of heavy duty transit buses, and currently looks like a steal, despite the fact that the cyclical bus industry is in a downturn, undermining profits. 

Both alternative transportation stocks pay healthy dividends, with Accell's over 6%, and New Flyer's expected to fall next year to a still healthy 8% to 9% at the current stock price.

Renewable Energy Developers

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

With overcapacity among solar module and wind turbine manufacturers, the consumers solar modules and wind turbines seem best placed to benefit.  Low prices are not only good if you are a homeowner looking to put a small PV system on your roof, they are also good for renewable energy developers.

Government subsidies may be cut, but manufacturers still have product to sell, and they'll continue to do so as long as the price exceeds their marginal cost of production... even if that means they'll never recoup the capital invested in their factories.

This is good news for renewable project developers who have projects locked in with the current subsidy regime, and who have the financing to build them.  The improved economics of owning solar farms can not be more aptly demonstrated by the purchase of a second solar farm by Warren Buffett controlled MidAmerican Energy Holdings.

While selling renewable energy equipment can be an extremely competitive business with constantly eroding margins, power production is one of the most defensive businesses there is, with electricity usually sold under long term (15-20 years) contracts at pre-determined prices.  Nevertheless, small renewable energy power producers are looking cheap compared to their future discounted cash flows. 

8. Finavera Wind Energy (FNVRF.PK, $0.409) is a wind project developer in Ireland and British Columbia.  Although the company is small, risk is much reduced by joint development agreements with industry heavyweight like GE Energy (GE), which will be providing the equity needed to develop the company's first 77 MW project in British Columbia, and has indicated interest in additional projects on similar terms.  This outside financial muscle is good, since the company's balance sheet is weak, but the company is working to rectify that:  Finavera just closed a $442M private placement at $0.45 a unit (1 share plus half a 12 month $0.55 warrant.)

9. Western Wind Energy Corp (WNDEF.PK, $1.96) just completed its 120 MW Windstar project in time to qualify for the 30% federal cash grant before it expired at the end of 2011.  Based just on the company's completed and advanced projects, I think the discounted cash flow value of Western Wind is now approximately $6, making the company a safe bet with an easy 2-3x upside.

10. Alterra Power Corp. (MGMXF.PK $0.40, AXY.TO), formed by the merger of Magma Energy and Plutonic Power Corp, Alterra has a solid cash position and a diversified base of producing assets across both technologies and geographies.  As the company continues to develop projects in-house and bulk up through mergers and acquisitions, I expect the stock price to increase towards the value of its assets, leading to outsize gains for investors who buy at the currently depressed price, which is currently half of book value, and includes $0.10 a share in cash.

Hedge

Hedge (PSF)

As discussed above, I think 2012 is a good year to hedge against a broad market decline, and buying puts is the simplest and safest way to do this. 

SPY ($125.50) tracks the S&P 500 and has a fairly liquid options.  In order to be able to hedge ten stocks with an equal investment in puts, we'll need to buy significantly out-of-the money puts.  For a complete hedge, we'd want the notional value of the underlying shares of SPY to be equal to the value of the hedged portfolio times the portfolio's beta.  Since I don't put a lot of faith in such calcualtions because betas and other correlations tend to change during market crises, so I'll just guess and use:

SPY January 2013 $110 Put (SPY130119P00110000, $7.81).  For every $781 put contract, the notional value of the underlyng is $11000.  If we assume our portfolio's beta is 1.1, each such put contract would be sufficient to hedge a $10,000 portfolio.  The beta of 1.1 is just a guess, but it makes for round numbers.  Betas are generally near 1, and are usually higher for riskier stocks.

This hedge not only provides us with some insurance against a large (greater than 13.4% = 1-110/125.5) decline in the S&P 500, it also makes the hedged portfolio greener than the unhedged one.  Puts and shorts are effectively dis-investments in the underlying stock or ETF, and to the extent that companies in the S&P 500 index reflect the generally "brown" economy, the hedged portfolio is greener than the unhedged one.

What will 2012 Bring?

I'm optimistic about 2012.  Unless we see a total economic meltdown (for which I suggest readers hedge their portfolios, as discussed above), I expect strong appreciation of this portfolio of undervalued clean energy stocks in 2012.

As usual, I'll track the performance with quarterly updates, with the stock picks benchmarked against PBW.

DISCLOSURE: Long WFIFF, LIME, AMRC, RKWBF, WM, VE, ACCEL, NFYEF, FNVRF, WNDEF, MGMXF, and puts on IWM and SPY.


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.


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