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July 31, 2012

Senator Inhofe: 9x Cost for Biofuels Is Too Much, but 29x Was OK for Synthetic Fuels

Jim LaneInhofe[1].jpg

Arch-critic of the cost of military biofuels — Oklahoma Senator James Inhofe — comes under scrutiny over earmarks for natural gas-based military fuels that cost 29 times more than conventional fuels.

In Washington, the battle over advanced military biofuels took a turn for the bizarre this week, amidst revelations that a leading Senate sponsor of legislation to restrict Navy purchases of advanced biofuels, James Inhofe of Oklahoma, had previously secured earmarks for Syntroleum Corporation (SYNM) to produce natural gas-to-liquid alternative fuels which were priced 29 times higher than conventional fuels.

Overall, Syntroleum reported receiving nearly $6 million from 2002, 2004 and 2006 joint development contracts with DoD, stemming from the earmarks by Inhofe. Syntroleum also reported a 2006 contract for $2.3 million for the sale of 104,000 gallons of gas-to-liquid jet fuel to DoD, for testing in Oklahoma-based B52s.

According to the most recent disclosures at opensecrets.org, Senator Inhofe is an investor in BlackRock, which is the largest shareholder in Syntroleum as of March 31, according to SEC filings, through BlackRock Institutional Trust and BlackRock Fund Advisors.

Paying 29 times for natural gas fuels than conventional fuels

Adjusting for inflation, the $2.3 million contract in 2002 dollars equates to $2.93 million in today’s dollars, or $28.21 per gallon. Back in 2002, jet fuel was selling at considerably less than today – at an average price of 75 cents per gallon in the second half of the year, according to indexmundi.com.

Overall, the cost of the natural gas-based alternative fuel was 29 times more than the cost of conventional fuels at the time, and cost more, per gallon, in today’s dollars than the Navy’s advanced biofuels program.

At the time, the Senator said “Syntroleum’s gas-to-liquids barge project holds great promise for alternative fuel production in a way that has both civilian and military applications. The benefits of this kind of technology to our country are substantial and I am confident that these funds will aid in the further development of this process for the benefit of our nation.”

The Senator took a different line on the benefits of the military advanced biofuels program.

“A fiscally responsible amendment that I authored in the FY13 NDAA,” he wrote, “prohibits the DOD from purchasing high-cost alternative fuels if traditional fuels are cheaper. I pledge to continue working with my colleagues to ensure that President Obama’s far left agenda does not impact military readiness and our national security.”

In a letter to Navy Secretary Ray Mabus last week, Inhofe wrote, “requiring the Navy to spend exorbitant amounts of an already stretched budget on alternative fuels is impacting our near and long term readiness.”

Alternative fuels: good for military readiness then, bad for military readiness now

At the time of the initial $3.5 million grant to Syntroleum to develop alternative fuels from natural gas, Inhofe took a different line on the impact that developing alternative fuels would have on military readiness and national security.

“Tulsans can be very proud that Syntroleum’s advanced technology is now poised to make a significantly increased contribution to military readiness and national security,” Inhofe said at the time of the 2002 award. “I especially applaud all the workers at this company. Their efforts have been recognized, and their future endeavors are going to make a real difference for America.”

By 2012, Senator Inhofe was no longer applauding all the workers at the company, and predicting that their future endeavors would make a real difference for America.

One of Syntroleum’s future endeavors, as it happens, is its Dynamic Fuels joint venture with Tyson Foods that won the Navy contract for advanced alternative biofuels that attracted such strong criticism from the Senator.

“Sen. Inhofe’s concern in this particular case as it deals with the Department of Defense is that the alternative is cost prohibitive,” Inhofe spokesman Jared Young told CNSNews.com last December. “The Department of Defense should not purchase alternative fuels that are priced 9 time higher than conventional fuels –$26.75 per gallon to approximately $2.85 per gallon — because those extra costs will further eat away at other necessary budget items such as operations, maintenance, training, and modernization.”

The program for Syntroleum’s proposed Flexible JP-8 (single battlefield fuel) Pilot Plant program was remarkably similar in structure to the advanced biofuels program later undertaken by the US Navy with Dynamic Fuels. Joint development grants were given to the company to design a marine-based fuel-production plant, and funding was provided to test synthetically-made (gas-to-liquids) JP-8 fuel in military diesel and turbine engine applications, and a production contract for small batches of alternative fuels was issued to the company.

The bottom line

Well, clearly there’s a credibility gap here.

There seems to be ample evidence that Senator Inhofe is intimately aware of the costs of developing and testing alternative fuels in small quantities. It appears to be a simple case of playing political games, by criticizing Dynamic Fuels for selling advanced biofuels for $26 per gallon, when the Senator himself won an earmark requiring the military to purchase even more expensive natural gas-based fuels from Dynamic’s parent.

Paying nine times as much for test quantities of advanced biofuels? “Far-left agenda.”

Paying 29 times as much for test quantities of alternatives to fossil fuels made from, ahem, more fossil fuels? “A real difference for America.”


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.

Greenshift's New Extraction Technology a 62% Improvement, but Challenges Abound

by Debra Fiakas CFA

Ethanol vs corn
Source:  Chicago Board of Exchange
Two months ago GreenShift Corporation (GERS:  OTC) ambitiously promised to introduce by the end of 2012 an improved corn oil extraction system.   The company has developed technology to extract oil more from corn used as feedstock by ethanol producers.  GreenShift claims its first system is recovering an incremental 0.8 pounds of oil per bushel of corn in current installations.  The new system  -  called COES  II  -  is expected to increase the oil yields to 1.3 pounds  -  a 62% improvement that will put more profits in ethanol producers’ pockets.

Incremental profits can make a difference in the economics of ethanol plants that are squeezed between the costs of natural gas required to fuel to the distillation process and corn feedstock on the one side and ethanol selling prices on the other.  Recently ethanol producers have benefited from low natural gas prices.  However, corn selling prices have spiked in the last couple of weeks on the apparent loss in corn crop due to the 2012 drought. Any hope of lower corn feedstock prices this fall have been pulverized to dust right along with the huge corn plantings farmers had pledged at the 2012 season start.

Those profit-sapping conditions might seem favorable for selling GreenShift’s performance enhancing technology.  However, the system requires capital that some ethanol producers might find hard to come by.  Last year Valero Energy (VLO: NYSE) announced it would be installing corn oil extraction equipment at four of its plants by the end of 2012.  Valero plans to sell the higher-value corn oil into animal feed markets.  It expects to cover the capital expenditure with incremental earnings within two years.

A short payback period may still not be enough to ensure adoption of corn extraction technology.  Besides Valero, the largest ethanol producers  -  Archer Daniels Midland (ADM:  NYSE); POET of Sioux Falls, SD;; GreenPlains Renewable Energy (GPRE:  Nasdaq); and Flint Hills Resources, Inc. of Michigan  -  have balances sheets of varying strengths and can easily pay for the equipment.    However, smaller ethanol producers such as Pacific Ethanol (PEIX:  Nasdaq) or privately-held Patriot Renewable Fuels may not have ready access to resources under current capital market conditions.

Even after ethanol producers gather together enough capital to buy the equipment Greenshift faces a bit of competition. Those four corn oil extraction systems Valero is installing this year are coming from ICM, Inc., which offers a menu of technologies to ethanol producers and grain processors.  GEA Westfalia Separator (a subsidiary of GEA Group AG) specializes in liquids separation across a variety of industries. Likewise Flottwegg AG sells equipment for corn oil extraction among a selection of equipment for the process industries.  Greenshift is sensitive to the competition and has been in legal tussles with all three companies since the U.S. Patent Office awarded GreenShift a patent for its COES I system in 2009.

A legal victory may come too late for GreenShift.  At the end of March 2012, the company reported less than a million dollars in cash on its balance sheet.  GreenShift is not profitable and has an accumulated deficit of $161.9 million.  Its operations appear to need approximately $500,000 in cash support per quarter.  GreenShift has indicated it plans a capital raise this year to make that bridge to the more competitive COES II system.

GreenShift shares are quoted near a penny on an over-the-counter listing service.  It is an illiquid stock and often has no quoted bid or ask price.  Any investor taking a position in the stock on the new product introduction should do so with their eyes wide open and a willingness to risk all.  On top of capitalization issues, both target markets and capital markets present challenges for GreenShift.  

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. GERS is included in the Ethanol Group of our Beach Boys Index for alternative energy sources.

July 30, 2012

SolarWorld Among 20-Plus Manufacturers to File EU Complaint

Steve Leone

Trade War
Trade War. photo via Bigstock
A SolarWorld coalition of European-based manufacturers officially filed a trade complaint in Brussels late Wednesday, eliciting a strong response from leading Chinese manufacturers and setting the stage for a process that could further shake up the global solar industry.

SolarWorld’s (SRWRF) Germany-based operation was certainly emboldened by the thus-far successful initiative launched by its American subsidiary in the United States, where modules with Chinese cells from leading manufacturers are being hit with preliminary tariffs totaling about 35 percent. Now, SolarWorld turns its attention to the far larger European market, which has gone through a remarkable growth period with installations dominated by Chinese products. In 2011, about 74 percent of the world’s new installed capacity came in Europe. Meanwhile, some of the European companies that a few years ago dominated the solar industry have filed for insolvency while citing their inability to keep up with Chinese competitors.

While the scope of the request made to the European Commission remains unclear, SolarWorld has cemented its place as the company that continues to drive the effort to push back against Chinese products. The company for months has been building a coalition of companies willing to file a complaint. The complaint was officially launched by EU ProSun, a group of more than 20 European solar manufacturers. None of the companies was named in a release issued by the newly formed group, but it did indicate that its president will be Milan Nitzschke, a vice president for SolarWorld AG. According to Bloomberg, Nitzschke said the group includes companies from Italy, Spain and Germany, and that it includes German manufacturer Sovello.

“Chinese companies have captured over 80 percent of the EU market for solar products from virtually zero only a few years ago,” he said in a press release. “EU manufacturers have the world’s best solar technologies but are beaten in their home market due to illegal dumping of Chinese solar products below their cost of production.”

A short time after SolarWorld filed its American complaint, a group of American companies and large Chinese manufacturers launched the Coalition for Affordable Solar Energy (CASE), arguing that the low-cost panels are helping the industry achieve its goal of widespread adoption. A similar divide is likely to follow the EU case, especially as many European nations see their goals of a renewable-powered grid coming to life. The European-based Alliance for Affordable Solar Energy (AFASE) so far has 70 members including material suppliers, equipment manufacturers, project developers, installers and maintenance companies.

Findings in the EU are generally less punitive than in the United States, according to a Brussels-based trade attorney, and the commissioners who ultimately make a ruling can take into account external factors such as the impact on the overall economy and the effect on the environment. The U.S. Department of Commerce does not consider those factors when issuing a ruling.

According to published reports following a media briefing in China on Thursday, Yingli (YGE) Solar's chief strategy officer Wang Yiyu said “the investigation would also trigger a whole-scale trade war between China and the EU, which would cause huge losses to both parties.” He was joined at the briefing by SunTech (STP), Trina (TSL) and Canadian Solar (CSIQ). According to the companies, almost 60 percent of its exports went to the European market in 2011, and a trade ruling on behalf of SolarWorld would have a devastating effect on Chinese manufacturers.

A trade investigation in Europe could hasten China’s move to expand into emerging markets. Chief among those is the emerging Chinese domestic market, would could install 6 gigawatts (GW) this year alone with a target of 21 GW by 2015. There’s already talk that those numbers could push upwards as the nation starts its march to become the world’s leading installation market. China is also making efforts to tap into the expanding Japanese and Indian markets while beginning to invest in peripheral Asian nations. China is also moving toward markets like Chile, where the installations are few but the potential is immense.

The European market, meanwhile, has been surprisingly resilient — mostly because of those plummeting PV prices. However, Europe as a whole is on a path to a major scale back in its PV policies as struggling nations look to cut government spending in the face of an EU debt crisis.

Steve Leone is an Associate Editor at RenewableEnergyWorld.com.  He has been a journalist for more than 15 years and has worked for news organizations in Rhode Island, Maine, New Hampshire, Virginia and California.

July 29, 2012

Western Wind Energy: A Matter of Trust, and Value

Tom Konrad CFA

Windstar wind farm
The Windstar Wind Farm. Photo credit: Western Wind Energy

Yesterday, I wrote about Western Wind Energy’s (TSXV:WND, OTC:WNDEF) plans to increase the 1603 cash grant for their Windstar wind farm.  But that was not the only thing discussed in Monday’s conference call.

Investor Frustration

During the Q&A, many investors were concerned about Western Wind’s recent deal to acquire a 4 GW wind development pipeline from Champlin/GEI Wind Holdings.  

The concern was that the company would be issuing 8 million shares for the assets, but the company has revealed very little about the projects.  With the federal Production Tax Credit (PTC) set to expire at the end of 2012, many development projects will not be viable.  In the absence of more information, the entire four gigawatts of potential could effectively be worthless.

On the other hand, the loss of the PTC doubtlessly affected the price paid for the assets.  Champlin/GEI had invested “almost $20 million” in the pipeline so far, and Western Wind is acquiring the pipeline for 8 million shares, at a notional value of $2.50 per share ($20 million.)  At the current market price of only $1.25 a share, that’s $12.5 million, but if we consider Western Wind’s net asset value per share, which I put at over $5 per share, then the company is paying over $40 million for the assets.

What is the development pipeline worth?  I think it’s safe to assume that most of the 4,000 MW of projects will not be built without the PTC.  But the company has spoken of a near term project 75 MW project Hawaii, which they say is viable without the PTC.  Given that Hawaii has extremely high electricity prices (most electricity is generated from oil) and an aggressive renewable energy mandate, it’s quite believable that a project in Hawaii would be economical without the PTC, despite the high cost of building anything in Hawaii.

The company has also claims that other projects in the pipeline will be viable without the PTC, but has given few details.

“Trust Me”

In response to investor’s questions during the conference call, President and CEO Jeff Ciachurski was not particularly forthcoming.  He says he cannot reveal more details about the projects in the pipeline because it would provide ammunition to opponents who want to reduce the price paid for wind power in the power purchase agreements he negotiates with utilities.  Like investors’ concerns about lack of transparency, Ciachurski’s worries are valid.  If the company tells investors it will receive a high rate of return on a project, utility customers will use that statement in front of regulators to try to reduce the amount the utility pays the company for electricity.  In other words, information is a two-edged sword.

From his tone in conference calls, Ciachurski seems offended by the implication that the Champlin/GEI deal will not be a good one for investors.  He asks us to consider his track record, management’s ability to grow its assets and projects.  The value of Western Wind’s projects has been validated in two ways: by the in-depth due diligence of the leading banks among the project lenders, and by the independent valuation the company commissioned last year, on which I based my $5 to $6 valuation of the stock.

Western Wind’s 2004 annual report shows only $200 thousand in liabilities on the balance sheet.  On March 31, 2012, the most recent quarterly report shows $360 million in liabilities.   Over those seven years, the amount of money banks were willing to lend grew at a compound annual growth rate (CAGR) of 187%.  The book value of assets on the balance sheet also grew, from $3.3 million to almost $400 million, a 93% CAGR, although this greatly understates the growth in the value of Western Wind’s assets, since they are shown on the balance sheet at cost, not on a discounted cash flow basis.

WND balance sheet data
Data source: Western Wind financial statements and press releases. Note that assets are shown at book value, and are much lower than they would be in a DCF analysis.

The company has issued shares to fund some of this growth: shares outstanding rose six-fold, a CAGR of 27%, but not in a dilutive way.  Even using just the balance sheet values of net assets, net assets per share grew from $0.29 to $1.85 (after the receipt of the reduced cash grant), or over 30% CAGR.

Given that track record, I’m willing to give Ciachurski and his team the benefit of the doubt on the Champlin/GEI pipeline.  I agree that Western Wind could reveal more about their pipeline than they are without tipping their hand in PPA negotiations, such as a list of projects giving their locations, potential megawatts, wind regime, and a rough idea of how much progress has been made on them.

In short,  I don’t like the secrecy, but I’m willing to put up with it because I’m able to buy Western Wind shares at a tiny fraction of what I see as their true value.

WND per share
Data source: Western Wind financial statements and press releases. Note that assets are shown at book value, and are much lower than they would be in a DCF analysis.


There are some who say any trust in Ciachurski is misplaced.  I’ve received comments on my articles saying that “ the executives have been plundering the company for years with impunity,” but if such plundering occurred on any large scale, we would not have seen the asset growth discussed above.  I was also contacted by a Vancouver-based private investigator, who claimed to be working for a group of investors who had been swindled by Ciachurski.  He asked me to publish his research linking Ciachurski to convicted felons.  But he was unable to substantiate the linkage, other than to repeat hearsay from unidentified individuals.

The company says such allegations are the work of a group of Vancouver based hedge funds, who have been buying the stock near current prices ($1.25 a share) and want to sell the company to a buyer like Algonquin Power (TSX:AQN, OTC:AQUNF), which made and offer of $2.50 a share last October.  Even if the unsubstantiated allegations about Ciachurski “plundering the company” were true, the plundering has been minimal, since shareholder value has increased substantially during the  supposed plundering.  That’s hardly typical of a company with unscrupulous management: Shareholder value in such companies almost always goes down, not up.  We only have to look to wind turbine and solar manufacturers to see many examples of honestly run renewable energy companies with rapidly dropping shareholder value.

Although I’m not averse to a quick profit (most of my stake, like that of the Vancouver hedge funds, was acquired around the current price), I agree with Ciachurski that the best time to sell Western Wind will be after the company’s recently completed projects have been producing cash for a few quarters, and the Yabucoa solar project in Puerto Rico is complete.  The company expects that each of the next seven quarters will be record quarters for revenue and earnings, and they can say this with a good degree of confidence.  The revenue in question depends only on the wind blowing, the sun shining, and utilities with good credit ratings paying for the power generated.

At $1.25 a share, I don’t see much downside.  If the Vancouver funds manage to force an immediate sale, I get a quick 2x profit.  If Ciachurski gets his hoped for sale in 2014, I get a 4x or even 8x profit after only a couple years.  That seems worth the wait.

UPDATE: Western Wind has just announced that they are selling the company. Looks like the disgruntled shareholders (and anyone looking for a quick profit) won.

Disclosure: Long WNDEF, AQUNF

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Western Wind Expects Full Cash Grant for Windstar

Tom Konrad CFA

Windstar wind farm
The Windstar Wind Farm. Photo credit: Western Wind Energy

On July 10, shares of Western Wind Energy (TSX:WND, OTC:WNDEF)plummeted because of a $12.2 million shortfall in the 1603 cash grant from the US Treasury for the company’s Windstar wind farm compared to the application.  In order to reassure skittish investors, the company held a conference call on Monday, July 16.

On the tenth, I thought that investors should write off the 1603 cash grant shortfall, despite the fact that the company intended to send a delegation to Washington consisting of company management along with their advisers in order to argue for the full cash grant.  I wrote,

“I’m sure the company was already engaging in discussions with the Treasury while the grant was being processed.  Why should new discussions achieve a different result?”

Western Wind President and CEO Jeffrey Ciachurski disagrees.  Here is his argument:

  • The Treasury was hit by a flood of 1603 tax grants for rooftop solar leaseback projects with “inflated” developer fees.  As a result, the Treasury went against IRS guidelines and put a 5% cap (as a percentage of other expenses) on all developer fees for both solar and wind projects.
  • Wind projects are generally more complex than solar projects, and typically have developer fees at 10% to 30% of costs.
  • Western Wind’s independent advisers’ opinion is that a developer fee between 27% and 41% of assets would be fair for Windstar, based on the  fair market value of the project.
  • Western Wind applied for a relatively conservative 20% developer fee for Windstar.
  • Western Wind’s earlier Mesa project had a 15% developer fee, which was granted in full.

Ciachurski went on to say that, in 95% of cases, Treasury is right about developer fees, but in the case of Windstar and a few other extremely profitable wind farms, they are wrong, and so he and his advisers need to go to Washington to make the case in person.

Will they succeed?  I hesitate to predict.  For me, I think it’s best to wait and see.

Disclosure: Long WNDEF

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 28, 2012

A123 Systems, An Object Lesson In Toxic Financing

John Petersen

July has been a ghastly month for stockholders of A123 Systems (AONE) who've watched in horror as the stock price collapsed from $1.30 on July 5th to $0.49 at Friday's close. While there was unfavorable news of a director resignation yesterday, all the other news over the last month has been positive, at least at first blush. In my view the market activity was both predictable and directly attributable to recent toxic financing transactions that will have A123 printing stock faster than Ben Bernanke is printing dollars for the foreseeable future. I'd love to be able to tell A123 stockholders their pain is over, but it's not.

Toxic note and warrant financing

On May 11th, A123 announced that it had closed a $50 million offering of convertible notes and warrants. The principal was payable in 26 semi-monthly installments commencing on July 1, 2012 and could, at the company's option, be settled with cash or with shares of A123's common stock valued at the lesser of $1.18 per share, or 82% of the volume weighted average price, or "VWAP," of the common stock for the five trading days immediately preceding a settlement date, but in no event greater than the VWAP of the common stock on the last trading day before the settlement date.

Since the number of shares issuable upon conversion of the notes and exercise of the warrants exceeded the limits of A123's Certificate of Incorporation and the transaction required formal shareholder approval under Nasdaq listing rules, $30 million of the offering proceeds were deposited in a segregated bank account pending:
  • Stockholder approval of the note and warrant transaction;
  • Stockholder approval of an increase in the company's authorized shares; and
  • Effectiveness of a resale registration for the common shares underlying the notes warrants.
The necessary stockholder approvals were received on June 29, 2012 and the resale registration statement was declared effective as of 4:00 p.m. on July 5th. By the time the registration statement was declared effective, the payment terms had been modified slightly to increase the number of installments to 29 and increase the amount payable in each of the first three installments to 1-2/3 the base amount, but the other terms remained unchanged. The segregated funds were promptly released to the company.

The notes are a classic example of "death spiral financing" where payments are made with discounted shares of common stock and the number of shares required for a payment increases as the stock price declines. At an assumed stock price of $1.30 a share, A123 would be able to make a $2 million installment payment by issuing 1,876,173 new shares of common stock. At an assumed stock price of $0.65 a share, it would take 3,752,345 new shares of common stock to make the same $2 million payment. In both cases, the market value of the stock used to make the payment would be about $2.4 million, but only if the noteholder who received stock instead of cash sold quickly enough to capture the current market price.

Toxic equity financing

On July 6th A123 announced that it had signed agreements to sell 7,692,308 shares of its common stock, together with warrants to purchase additional shares of common stock, for gross proceeds of $10.0 million. While the press release had the look and feel of an ordinary financing transaction, I was troubled by a sentence that said, "The number of shares of Common Stock issuable upon exercise of the warrants (which have a nominal exercise price) is based on a fixed 18% discount to the volume-weighted average price, or VWAP, of our common stock on specified trading days during two measurement periods over the next three weeks." Since I was surprised that the offering went off without an obvious discount to the previous day's closing price, I decided to dig a little deeper in an effort to better understand what the "real deal" was.

I found my answers in the SEC registration statement for the equity offering, which included copies of the Prospectus and the associated warrant agreement.

When I read the Prospectus I learned that the "nominal exercise price" of the warrants was $.001 and the structure included an automatic cashless exercise for the warrants. So the investors were effectively buying 7.7 million shares on day one and expecting to receive two additional tranches of "free shares" on the 12th and the 30th of July.

Using the formulas in the Prospectus and warrant agreement, I calculated that 843,628 additional shares would be issued in each tranche if the market price remained stable at $1.30 per share through the exercise dates. By the time I accounted for the warrants, it was clear the original deal would result in the issuance of 9,379,564 shares for gross proceeds of $10 million, or an effective price of $1.07 per share.

In light of A123's recent troubles, I didn't find a discount of 18% from the market price particularly troubling. I was, however, concerned that the terms might create an incentive for aggressive investor behavior, so I made a mental note to re-run the numbers at the end of the month to see how it all worked out.

The outcome was a textbook example of what can happen when the number of shares to be issued in the future is contingent on the future market price of the underlying stock.

During the period between the closing date and the first warrant exercise date, A123's price fell to $0.88. So the VWAP used to calculate the number of free shares issuable to warrantholders was approximately $0.9167 instead of $1.30. When I ran that VWAP value through the calculations specified in the Prospectus and warrant agreement, I got to a net cashless issuance of 2.8 million shares, compared to the 843,628 shares that would have been issued if the price had stayed stable.

By the second warrant exercise date, A123's price had fallen to $0.49. So the VWAP used to calculate the number of free shares issuable to warrantholders was approximately $0.5367 instead of $1.30. When I ran that VWAP value through the calculations specified in the Prospectus and Warrant Agreement, I got to a net cashless issuance of 7.5 million shares, compared to the 843,628 shares that would have been issued if the price had stayed stable.

Between the original issuance and the two warrant tranches, A123 ultimately sold 18 million shares of common stock for gross proceeds of $10 million, or an effective price of $0.56 per share. The market did not respond well to the rapid increase in the number of shares in the hands of willing sellers.

An Excel spreadsheet with the key Prospectus disclosures and important warrant agreement terms, along with market price data and detailed exercise price calculations can be downloaded from my Dropbox.

What it means for stockholders

My first, last and only experience with a price linked conversion formula was in the late 80s when one of my clients sold a preferred stock that was convertible into common stock for 75% of the market price on the conversion date. The investor that provided the financing proved to be far less friendly than management expected. A few months after the offering the investor grew disenchanted with the way things were going. Instead of selling its preferred stock, it began to aggressively sell common stock into the market, which drove the price down to a very distressed level. It then converted the preferred stock into common stock for 75% of a bargain basement price. By the time the smoke cleared, the investor was my client's biggest stockholder and management was seeking new employment.

I've seen dozens of comparable proposals since then and my clients have wisely rejected them all.

The big problem with price linked conversion ratios is that aggressive selling behavior has no negative consequences for the investor. If aggressive selling drives the price down, the investor simply gets more shares at an even lower price. The outcomes aren't always catastrophic for existing stockholders, but they're invariably painful.

Over the last couple months, A123's financing activities have created two scenarios that are likely to result in a year of market problems. While the worst may be over from the equity offering, it's impossible to tell whether the warrantholders have already sold the 7.5 million shares that will be credited to their accounts on Monday. While the equity offering was a problem because it created two discrete opportunities for aggressive selling, the debt offering created 26 opportunities that will come along every other week for the next year.

I'm usually bullish on stocks that have been beaten down to unreasonably low levels by misfortune and unforeseen events. In A123's case, however, the financing structures the company put in place to help it overcome its business problems have created a toxic supply overhang that virtually guarantees significant future price erosion.

Under the circumstances, I believe A123 is not a suitable investment for anybody but professionals.

Disclosure: None

July 27, 2012

Lime Energy, or Lemon Energy?

Tom Konrad CFA

MATS.pngLast week, when Lime Energy (NASD:LIME) announced that an internal investigation by its audit committee had revealed up to $15 million in misreported revenue, my first instinct was to sell, especially because the misreported revenue included not only revenue assigned to the wrong period, but possibly completely fictitious revenue. 

Whenever a company reveals accounting problems, it's bad.  But there are levels of bad. As Garvin Jabusch, Cofounder and CIO of Green Alpha Advisors and manager of the Sierra Club Green Alpha Portfolio put it,

"The revelation that the company may have recorded “non-existent revenue” is a major concern. Somewhat less concerning is “Revenue being reported earlier than it should have been,” which is a violation of the matching principle, and is a relatively easy mistake to make and can be readily forgiven if properly restated. But the term “non-existent revenue” is a major red flag... There are only a couple of reasons phantom revenue could get booked, and most firms have controls in place to make sure that sources of revenue are verified before they’re booked. So at the very least, we can say that there are material weaknesses in LIME’s internal controls. At worst, some relatively senior person may have misinformed the accounting team. "
The stock had closed (after a suspicious day-end decline) at $2.03 the day before, so I put in limit orders to sell my entire position at $1.75 when the market opened.  LIME opened at $0.83, which I found shocking because the announcement also said, "[The company] currently believe[s] that the cumulative adjustment to revenue for the affected financial statements will not exceed $15 million."

I took this statement as an extremely positive sign.  When there are known accounting irregularities, usually all bets are off, and executives know that shareholder lawsuits are going to follow in short order (at least eleven such lawsuits have already been filed.)  For company and executives and the board, the risks of making a statement like "adjustment to revenue... will not exceed $15 million" are large, and one sided.  If they are wrong about the $15 million, there are guaranteed to be additional lawsuits, and, unlike the original accounting problems, they will not be able to say "we had no idea there was anything untoward going on."  So Lime's board is confident that the scope of the accounting problems is limited, and does not affect the entire company's books.

Since the $15 million in question is small (Lime's revenues over the two and a quarter year period were $233 million,) the board audit committee is saying that the problem is isolated to a small part of the company, possibly a single, lower level employee.  This is still bad for management, and particularly the CFO, Jeffry Mistarz, who should have had a system in place to verify all sales.  But it should not put the existence of company at risk, which is why I think the current $0.90 price of the stock is way too low, and why I wrote that any price below $1.25 not only conservatively values the stock, but leaves an ample safety margin to account for the current uncertainty.

To add further evidence that the accounting problems were very limited in scope, senior management and board members were all acquiring the stock, often in large quantities, for the entire period that the accounting problems were taking place.  Not only was Mistarz buying and holding on to all his incentive stock awards, but the former chairman of the board, David Asplund, whose departure from the board for "health reasons" in June raised the suspicions of some observers, also made purchases of the stock shortly before he left his job as CEO, and in March, shortly before his June departure as chairman.  It seems unlikely to me that any of these share purchases would have been made if Mistarz or Asplund had been aware of the accounting problems.

Lime or Lemon? photo via Bigstock
Making Limeade

In short, while it makes sense "to avoid corporate drama that involves unexpected resignations and unscheduled week-end board meetings," as Debra Fiakas put it, I disagree with Jabusch when he says, "until these accounting concerns are addressed - which for us means a thorough review by an auditor not previously associated with the firm and clear corrective measures of whatever the underlying problem turns out to be -  we aren’t interested at any price."

In my opinion, there is strong reason to believe that the accounting problems at Lime Energy are limited in scope, both because of the $15 million limit mentioned (6.4% of revenue over the relevant period in question), and because of the buying of stock by company insiders.  Lime's audit committee will put out a full report on the accounting problems in when they have completed their review, quite possibly with the help of an independent auditor, as Jabusch suggests.  If that report shows that the improper accounting was as limited in scope as I believe, the stock will rally strongly.  If only half of the losses associated with the current uncertainty are recouped, investors who buy the stock at toady's $0.90 price, will see an immediate gain of 74%.

That gain needs to be compared to the downside risk that the accounting problems are pervasive, and the whole company is a Ponzi scheme, and Enron writ small.  But Enron's CFO Andrew Fastow sold 687,445 Enron shares, worth $33.7 million in the three years leading up to the scandal.  He wasn't buying, like Lime's Mistarz.  Even if the problems are more pervasive that I think, the company should at least be able to be liquidated for something resembling its tangible book value of about $1 a share. 

With the stock already below $0.90, even a liquidation should not result in catastrophic losses to investors buying now.   Despite this, the current lack of information is forcing many professional money managers like Jabusch to stay away. Due to the higher standards of caution usually employed when managing client funds, Jabush says he has "no business exposing clients to companies where there is real, public possibility of accounting shenanigans," even though he "would consider buying LIME at this point for a personal account, being fully aware of the risks."

When there is more information out about what has been going on with Lime's books, the return of such cautious money has the potential to quickly boost the stock price.

Disclosure: Long LIME

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 26, 2012

The Efficiency Tango: A Deeper Look at Geothermal Heat Pump Efficiency

Tom Konrad CFA

heat pump
Geothermal heat pump diagram via Bigstock

A couple weeks ago, I compared the efficiency of the two most advanced geothermal heat pumps (GHPs) recently launched by Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) and Climatemaster, as division of LSB Industries (NYSE:LXU).  Like most things in life, it turns out that heat pump efficiency is a lot more complicated than just comparing a couple numbers.

Since I concluded that Waterfurnace’s 7  Series heat pumps were slightly more efficient than Climatemaster’s Trilogy 40 pumps, one of Climatemaster’s district managers pointed me to third party efficiency ratings conducted according to standards set by the Air Conditioning, Heating, and Refrigeration Institute (AHRI).  He compared Waterfurnace’s 4 ton unit (the most efficient 7 Series) to Climatemaster’s 2.5 ton unit (the most efficient Trilogy 40), noting that the former had a 41 EER at ground loop conditions, while the latter had a 42.1 EER, according to AHRI.

He concluded that the Trilogy 40 had a slightly higher cooling efficiency than the 7 Series.

The Efficiency Tango

Had I got it wrong?

I checked with the pros.  Scott Lankhorst, President of geothermal and solar thermal installer Synergy Systems in Kingston, NY said it was “an apples to oranges comparison” between 4 ton and 2.5 ton GHPs.

Lloyd Hamilton, a Certified Geoexchange Designer at Verdae, LLC in Rhinebeck, NY, called this normal marketing.  He says that the only reliable way to compare units is to look at the operational performance data for the designed condition.  The AHRI-compliant EER and COP numbers allow comparison of two units so long as they are at the same capacity, but it does not demonstrate actual performance, “like MPG for cars. … COP, SEER, and EER become worthless when comparing different types of equipment” such as air source and ground source heat pumps, because the testing criteria are different.  He calls the act of picking an choosing GHP models and operating conditions to make your company’s GHP look more efficient the “Efficiency Tango.”

Both agree that the contractor can mess up the rated efficiency of a GHP, or even make it perform above specification, with the wrong (or right) system design and installation.

I don’t have the performance data a geoexchange designer would use, but there are a lot more publicly available efficiency numbers than I used in my last article.  I put them together in a pair of bubble charts:

T40 v 7S Cooling.png T40 v 7S Heating.png

There are three 7 Series models and two Trilogy 40 models, each of which was tested at full load and part load, under two types of conditions.  The “ground water” series are when the ground water is pumped up out of the ground for heat exchange; the liquid water helps heat transmission and results in a higher rating.  The “ground loop” series is representative of the much more common installation, when an antifreeze fluid (usually propylene glycol) is pumped through the geothermal loop, which results in relatively lower efficiency (although still much higher than other types of heating and cooling equipment.)  Even in ground loop conditions, different heat exchange fluids will result in different effective inefficiencies.  The partial-load results are the sets of two or three smaller bubbles to the right (and a little below) sets of larger bubbles of the same color.

Looking at the charts holistically, I reach the following conclusions:

  • The 7 Series is generally more efficient than the Trilogy 40 for heating.
  • The Trilogy 40 is generally more efficient than the 7 Series for cooling.
  • These units operate at dramatically (about 50%)  higher efficiency under partial load.  Two-stage heat pumps show only modest (5% to 15%) efficiency gains at partial load.  This is likely to lead to higher overall efficiency of these GHPs in practice than the numbers alone might lead you to believe.
  • The Trilogy 40 typically operates at lower fluid flow rates than the 7 Series, which should produce some energy savings from pumping.

Hence, I revise my earlier conclusion to say that, based solely on efficiency, the Climatemaster Trilogy 40 will have a definite edge over the Waterfurnace 7  Series in cooling climates, while the 7  Series has an efficiency edge in heating-dominated climates.

Efficiency Isn’t Everything

That said, for most installations, factors other than efficiency will probably dominate the decision.  As noted above, Waterfurnace expects exclusivity from its dealers, and I expect Climatemaster and its other major competitors often do the same.  This will make it nearly impossible for a residential customer to compare the two without having to weigh other factors such as their confidence in the installer who, as noted above, can make or break a geothermal installation.

Then there is the Trilogy 40′s Q-Mode.  As Dan Ellis, president of Climatemaster told me in an interview, the potential savings from using geothermal to generate hot water year round from the Trilogy’s Q-Mode are likely to dwarf the savings from a point or two of EER or a fraction of a point of COP.  In fact, Climatemaster designed the Trilogy 40 with the whole system energy savings in mind, partially at the expense of efficiency ratings.  In a residential setting, Q-Mode (which is patent-pending to Climatemaster) is likely to make the financial returns decisively favor the Trilogy 40 in a head-to-head comparison.

In commercial settings, which typically have year-round cooling requirements, Q-Mode is unlikely to be important.  Furthermore, the two largest 7 Series heat pumps have higher capacity than the larger of the two Climatemaster Trilogy 40 models.  This should also give Waterfurnace an advantage in commercial settings, which typically have larger cooling loads than residential settings.

Ellis promised to send me some data to help quantify the overall energy savings from Q-Mode, which I plan to return to in a future article.


For residential customers in warm climates, Climatemaster’s Trilogy 40 seems like it will be the better GHP value when it becomes commercially available.  In other cases, the comparison is not as clear cut, and a customer should probably focus on finding a contractor who can deliver the best system design and installation possible.  That is the only way to capture the full benefit from either of these incredibly efficient geothermal heat pumps.

Disclosure: Long LXU, WFI

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 25, 2012

Put the LIME in the Coconut

by Debra Fiakas CFA
MATS.pngYou put the lime in the coconut and call the doctor woke him up,
I said Doctor! Is there nothing I can take,
I said Doctor! To relieve this bellyache…

-Baha Men
It is best to avoid corporate drama that involves unexpected resignations and unscheduled week-end board meetings.  At least that is my view.  However, the company soap operas can be entertaining, so I decided to tune into the Lime Energy, Inc. (LIME:  Nasdaq) saga .  Based in North Carolina, Lime provides a menu of energy-saving solutions to utilities and large-facility owners.  Lime's product and service menu includes energy efficient lighting upgrades, efficient mechanical and electrical retrofits, water conservation, building weatherization and other solutions that are aimed at reducing energy bills.

Lime has been relatively successful  -  at least its revenue growth suggests it has been capturing market share.  Reported sales were $120.1 million in the year 2011, an impressive increase over $95.7 million in 2010 and $70.8 million in 2010.  The problem: revenue is now in question.  Last week the company filed a notice with the SEC that an internal investigation determined some revenue reported in the last two years were improperly recorded.  Some revenue was non-existent and other revenue was recorded too early.

The stock dropped by 50% in the days following the announcement and the shareholder lawsuits and law firm investigations were still piling up a week later.  It is a reasonable reaction  -  reduce exposure to loss when financial reports are fraudulent.

Six weeks earlier the chairman of Lime Energy’s board of directors1 had resigned, ostensibly due to health reason.  Coupled with the revenue issue, the resignation added a bit of intrigue to the story and a hint of more wrongdoing.  So even though the amount of bogus and inaccurate revenue amounts to $15 million or less  -  that is no more than 7% of total revenue in the two-year period  -  the corrected share price reflects a far more significant problem.    

It is a matter of trust.  Lime management should all be under suspicion, especially the chief financial officer1 who has a bird’s eye view on contracts, orders, billings and collections.  The energy alternative market place is supposed to be filled with the good guys who are fighting to save the world from global warming.  Instead we find liars who misrepresent sales.  That it is only a 7% fudge makes no difference.

LIME will remain in the Efficiency Group of our Mothers of Invention Index.  The revenue question will get cleared up.  Corrected financial statements will be filed.  Perhaps there will even be changes in the management team.  Then in all probability we will call the stock oversold and investors will have a chance to pick up a good company at a cheap price.  The equity market is a wonderful place!

1EDITOR'S NOTE: For a reason to think the damage may be limited, see Tom Konrad's article on Lime Energy insiders' stock trades.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

July 24, 2012

Book Review: Public Meltdown

Ben Plotzker

The Vermont Yankee Nuclear Power Plant.
The focus on the public’s view of nuclear plant operator Entergy (NYSE:ETR) sets Public Meltdown: The Story of the Vermont Yankee Nuclear Power Plant, by Richard Watts apart from other nuclear energy books.  The book avoids pro or anti-nuclear positions, and focus on scientific aspects of the plant, and instead tells the story of one nuclear plant’s journey through history.  That plant is Vermont Yankee, a General Electric (GE) boiling water reactor type, the same type of reactors which were involved in the Fukushima Daiichi nuclear disaster.  Vermont Yankee has a 620 megawatt rated capacity, and is located located in Vernon, VT, near the corner of the state with New Hampshire and Massachusetts.

The science behind nuclear energy is one thing, but the management of a nuclear plant is another. Public Meltdown outlines the management of a nuclear power plant owner in the United States. You will learn so much from this book. It is very important to understand what is allowing my night light to be on or my laptop to charge. There are usually mixed sources of sources for electricity, but which sources are more controversial?

In 2010, Vermont legislators voted to shutter a nuclear power plant, putting the state at odds with the federal government and the plant’s owner—the Louisiana-based Entergy Corporation (NYSE:ETR).  Public Meltdown explores the debate that roiled Vermont, including the lawsuits and court action that followed. The story starts out with the early days of the plant back in the 1970’s, and draws on more than 1,000 news articles to approach the highly controversial issue with non-bias towards nuclear energy. It is hard to find a book out there that does so like Public Meltdown. Every American citizen who consumes electricity from nuclear generation should read this and understand what is going on with that nuclear power plant.

In rich, well-researched detail, Dr. Watts tells a story that spotlights the role of state governments, citizens and activists in decisions about the nation’s aging nuclear power fleet.  A story that continues today as both Entergy, the nation’s second largest nuclear operator, and the state of Vermont have appealed the case to the U.S. Court of Appeals.

Entergy owns 10 nuclear plants in the U.S., so the issues raised in this book have wider implications beyond just Vermont Yankee.

The book details a series of missteps by the Louisiana-based Entergy Corporation which owns Vermont Yankee, from inadequate follow-up after one of the plant’s cooling towers collapsed to misleading statements to state regulators about tritium leaks from underground pipes.

Each chapter outlines the important aspects of Entergy’s fight to keep the plant open, even though many speed bumps arise. This non fiction book has some cliffhangers of its own because of how history played out. Anyone interested in energy issues or state’s rights is highly recommended to read this book.

Public Meltdown is available on Amazon. You can find more info at www.publicmeltdown.org.

July 23, 2012

Shifting the Cost of Pollution

by Debra Fiakas CFA

The U.S. Environmental Protection Agency has agreed to review the recently enacted MATS Rule  -  Mercury & Air Toxics Standards that went into effect at the end of 2011.  At least two dozen states and forty utility companies have filed suit against the EPA over the rule, which is intended to cap mercury and other toxic emissions as well as particulates.  The rules particularly impact power plants that use coal-fired boilers to generate electricity.  The EPA provides an interactive map to see where these plants are located.  They are predominantly in the eastern half of the country.

Existing plants have three years to comply.  Industry and power generators should find it child’s play given that the EPA has been in the business of setting emissions standards for decades and it appears industry and power generators have for the most part been compliant.  By most accounts emissions standards have been effective in cleaning up the skies over the U.S.  In the years between 1980 and 2008, sodium dioxide and nitrogen oxide emissions from industry have been cut by 57% and from power generators by 40%.  The reduction in emissions by power generators is all the more remarkable given that electricity use in the U.S. increased by 85% during the same period and the use of coal has tripled.

MATS is the EPA’s first attempt to reduce mercury emissions.  Mercury seeps into the water supply and the food chain through fish.  It can cause nervous system damage and is a particular threat for children and pregnant women.  The EPS estimated that the $9.6 billion estimated cost for compliance could be justified by an estimated $90 billion annual savings in healthcare costs.

However, the hue and cry over MATS is the most shrill in history.  At least four companies with new plants on the drawing board have joined the lawsuits:  White Stallion Energy Center, LLC; Tenaska Trailblazer Partners, LLC (owned by Tenaska, Inc. and Arch Coal (ACI:  NYSE);  the Deseret Power Electric Cooperative; and the Tri-State Generation and Transmission Association. The power industry is complaining that new plants in the cue for construction are not able to comply with MATS as the standards are written today.  Most likely, any technological impediments can be overcome with adequate investment.  I am suspicious the added expenditures would change the economics of these new plants to the point that construction financing could be in jeopardy.

Economists have a term  -  cost shifting.  Put simply it means that the costs of a good or service are moved from the person who incurred the cost to another person who is ostensibly in a better position to pay.  Health insurance is often cited as an example where the costs of healthcare are moved from the shoulders of the person who incurred the doctor bill to the insurance company.  However, this is a contractually agreed upon arrangement and the sick person has already paid the insurance company a premium to assuming the obligation.

Polluters shift costs also.  There is no doubt that there is a cost to be borne for toxic emissions.  If left unchecked, toxic emissions exact a price from everyone in the community.  The public pays for the cost of pollution with poor health and high medical bills.  Yet unlike the contractual arrangement between the insured person and the insurance company, there is no formal agreement with the public to assume the costs of pollution.  It is imposed upon them by lobbyists and lawyers who attempt to block standards that would focus responsibility for pollution on the source.

Southern Company (SO:  NYSE), an electricity generator and wholesaler, has been in the forefront of opposition to EPA standards.  Southern Company reportedly spent over $17.5 million lobbying Congress in between the years 2010 and 2012. Among other arguments, Southern supported proposals to disapprove and delay compliance schedules with MATS, as well as to delay the EPA from setting carbon pollution standards.  Southern is among a number of power generators that belong to the American Coalition for Clean Coal Electricity.

No one wants to see promising investment projects go awry.  No one likes to feel the long arm of government regulation.  Certainly no one wants to see their utility bill increase.  Nonetheless, it is time that polluters stop shifting responsibility to innocent bystanders and pass the costs of emissions to those who benefit from their businesses  -  investors and customers.    It is time to comply with regulations and begin emissions abatement.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. VNDM is included in Crystal Equity Research’s The Mothers of Invention Index.

July 21, 2012

Kandi Technologies Bags Largest Single Electric Vehicle Order Ever

Tom Konrad CFA

The Kandi KD501 Mini-EV to be leased in Hangzhou. Photo by Marc Chang.

The city of Hangzhou just signed a strategic cooperation agreement with Kandi Technologies (NASD:KNDI) and nine other companies to supply 20,000 electric vehicles (EVs) for the city’s “pilot” EV leasing program.  Kandi is the only EV supplier to take part; other companies involved will supply the batteries (Air Lithium (Lyoyang) Co. Ltd.) and charging by the local utility.  The utility will fund construction of a charging and battery swap station network as well as paying for the batteries.

The batteries will serve a dual use for grid stabilization, or  Vehicle to Grid (V2G) technology.  The batteries will be financed by charges to electricity customers because of this dual use.  So, in addition to this being the largest EV sale ever announced, the project is also effectively the largest scale trial of the use of EV batteries for V2G.  V2G is a concept  much talked about in academic circles, but so far if has only seen small scale pilot projects in the West.  Part of the problem with implementing V2G is typically the split incentives between battery owners and the utility.  Battery owners naturally worry about reduced performance of their very expensive battery packs if they are used for V2G.  The Hangzhou project neatly avoids this conflict of interest because the utility owns the batteries, and the EVs are only available for lease.

Financial Impact for Kandi

The program will begin in August, and is scheduled to be completed by the end of 2013.  We can expect Kandi to sell EVs at a rate of over 1000 per month during implementation.  Kandi’s revenues for each vehicle will be around $6800 per EV.  Kandi’s gross margins are about 25% on its existing off-road vehicle business, and observers of the company tell me Kandi would be unlikely to undertake a project if it earned substantially less than that.  We can expect an increase in gross profit of about $1300 to $1700 per vehicle, or about $0.70 per share annual gross profit, most of which will flow through to earnings.

Kandi is already profitable, with trailing earnings of $0.20 per share (EPS), so we can expect total EPS for 2012 is likely to be around $0.40 per share, and EPS for 2013 is likely to be around $0.80 per share based just on this deal and zero growth in the company’s existing business.  The existing off road vehicle business has been growing rapidly, and additional EV orders seem likely, so $0.40 and $0.80 EPS in 2012 and 2013 should be considered a lower bound on earnings, which will most likely be higher.

China’s Aggressive EV Goals

Kandi’s  rapid earnings growth could continue if Kandi manages to grab a decent share of the 500,000 EVs by 2015 and 5,000,000 EVs by 2020 goals set by the central government.

China is currently behind in implementing these EV adoption goals, largely because of the high cost of EVs from Kandi rivals such as BYD (OTC:BYDDY), and lack of charging stations.  The Hangzhou pilot project, with its rapid, utility-financed build-out of charging stations and inexpensive mini-EVs from Kandi seems designed to address both these problems.

Kandi’s mini-EVs may be just what the Chinese government ordered.

Disclosure: Long KNDI

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 20, 2012

Next Economy and Faith for Empiricists

Garvin Jabusch

Let's be clear: Justice is not an immutable law of nature. Neither math nor physics nor chemistry recognizes justice as one of the universe's governing principles. The strong, rich, and powerful have, since long before humans emerged, by and large taken what they wanted, when they wanted, and never counted the costs to those they took it from. Despite what Socrates may have said, justice has forever occurred, at best, in fleeting, ephemeral flashes. We yearn for a god capable of seeing and ultimately judging all rights and wrongs -- because we know we can't be counted on to do it ourselves. Small wonder that the legend of Robin Hood – the original 99 percenter -- still resonates after 800 years.


Image courtesy Zach Weinersmith and SMBC

We can say that humanity might change, but that's just another, kinder, more optimistic lie. We can't. Not as a whole, not within the time scales required to preserve ourselves. We are descended, on a time frame of 3.5 billion years, from organisms that succeeded because they were the best at gathering as much as they could in the shortest amount of time possible. This has been true throughout history. And prehistory. And primordial history. It's too deeply ingrained to switch off or even ignore. We just don't work that way, and it's time for us to accept that and start thinking about how to address our problems without relying on an ultimate goodness in our nature.

So, what, then? How can we approach our main challenges? How can we arrive at the sustainable, circular, next economy and learn to live within the various budgets that earth can provide?

In concept, it's simple: Align people's economic interests and sense of well-being with the best interests of Earth's ecological totality. Call it next-economy capitalism.

In practice, that's insanely difficult.

It's difficult, because, again, maximizing short-term profit while ignoring larger costs is humanity's prevailing worldview, and extracting fossil fuels (especially when subsidized) is a fantastic way to earn short-term profits. Consequently, the phalanx of opponents of renewable energy and electric transportation is impressive and daunting. It's the list of industries that stand to lose market share and profits as renewables advance: oil, coal, gas, traditional electric utilities, and makers of internal-combustion cars.

Given this opposition, rather than lament the slow adoption of renewables and electric vehicles, we should be proud and even amazed that we have made as much progress as we have. That's a testament, really, to two things: the tireless efforts of all those working for change and, more importantly, the fact that ultimately renewables just make better economic sense. No matter how much disinformation gets thrown at people, there's no escaping the fact that technologies with a zero cost of fuel will inevitably become cheaper than any extractive industry of the same or even somewhat larger scale, even, ultimately, natural gas.

But there's the rub, renewables are still such a tiny fraction of the size of fossil fuel industries that their true potential does not yet shine brightly in the popular imagination. And when we do see hints that this tide is turning, tactics are swiftly deployed to keep the status quo intact. Is it coincidence that large tariffs are being placed on the world's least-expensive solar modules just as those modules reach cost parity with coal on the U.S. electric grid (see "Why We Pay Double for Solar in America (But Won't Forever)")? Or that in North Carolina "sea level rise" is pilloried as a "liberal buzzword?" Facts of science are not buzzwords. Forbidding developers from planning for accelerated sea level rise will not protect low-lying communities from storms, nor force insurance companies to cover them. Placing authoritarianism ("because I said so" laws) above science and empiricism will simply not work. Folks who plan for sea level rise are outlaws now? Please.

Given the power of our fossil fuels oligarchs, it seems like change toward sustainability faces long odds. Who can doubt the power of the oil plutocrats when there are still huge subsidies for fossil fuels (the most profitable industry in history), while renewables (which are actually still in the "kick start" phase that subsidies are meant to support) get relative pennies. When the temporary denial of the KXL pipeline to cross the U.S.-Canada border quiets critics, while construction both north and south of the border legs continues unabated. (On this point let's not forget that the last major tar sands pipeline spill cleanup is still underway and costing $800 million.) When there are already over 680,000 deep-injection wells that have pushed more than 30 trillion gallons of toxic liquid into U.S. ground, and yet there is scarce examination from policy makers? When the U.S. supported the obviously nondemocratic coup in the Maldives against a popular, democratically elected president, Mohamed Nasheed, who happened to be a tireless worker to limit fossil fuels where possible. Nasheed, who was crusading to limit global warming to such an extent that he held a symbolic cabinet meeting underwater, was illegally removed from office with rhetorical support from U.S. officials.

I think it's naïve to blame this or that administration for our refusal to slow the growth of our carbon emissions, when it's clear that in certain areas, oil executives have as much or more influence as the executive and legislative branches combined. They're the richest organizations in all of human history, so that's simply where power resides.

And one assumes big oil will have seen the writing on the wall of the future by now, and be plotting ways to become the masters of the next great sources of energy. I hope that's the case, but other than Total buying a big piece of Sun Power, I've seen no major moves in that direction. In fact, as recently as October 2011, I heard an oil executive at a conference say something very like "yeah, we tried experimenting with solar in the '70s, but it was just way too expensive to make a decent value proposition," as though he thought the audience was credulous and uninformed enough not to know PV efficiency has improved more than 100 times per dollar's worth since then.

So leaving global warming, pollution, disease, resource scarcity, and war aside, the argument we can win is going to be economic: The best renewables are a better value proposition. At least on a level playing field. The race is, even after we've come all this way, to prove that we still have even small reasons for long-term optimism that we can credibly make this case. 

And, fortunately, we do. For as surely as humans are programmed to maximize short-term gains, we're also fantastic innovators, and we may have a greater capacity for adaptation than any other species. And this is where the most rational of empiricists, who only believe in what they can observe, can place some modicum of faith. Because when it comes down to adapt or fail, we will take a big swing at adapting. And, being much better at adaptation than some of earth's former dominant species, e.g. dinosaurs, we have a far better chance of success.

It's now clear that unrestrained burning of fossil fuels is backing us into an existential corner. Therefore, we will hopefully try to adapt by limiting fossil fuels' use where we reasonably can. (The struggle between short-term individual gain and larger picture group selection that ultimately benefits individuals as well was recently discussed in an editorial by E.O. Wilson, who argued that we're the products of both types of evolutionary pressures, and that we apply whichever is most appropriate to given circumstances. For what it's worth, I believe that the primary ideological divisions in this country are straightforward manifestations of Wilson's approach to this "multi-level natural selection," and that evolution proves that we need both.)

So to tie our remarkable capacities for innovation and adaptation to our economic and social well-being is clearly now, as it has always been, the way forward. Plus ca change… Most directly, we need to accelerate investments into the best, most profitable, most effective renewables, water solutions, agricultural solutions, and all other sustainable manifestations of technologies required to run an economy. And we need to invest in them until it becomes so obvious that they're the most efficient multipliers of human effort that all ideological considerations fall by the wayside, the way oil replaced coal, the way coal replaced water wheels. We know how to be better, more innovative, and smarter at accumulating profits and wealth. As computer science pioneer Alan Kay put it, "the best way to predict the future is to create it."

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

Western Wind Energy Receives $78.3M Cash Grant: Good News, Bad News

Tom Konrad CFA

Windstar wind farm
The Windstar Wind Farm. Photo credit: Western Wind Energy

Western Wind Energy (TSX-V:WND, OTC:WNDEF)recently announced that it had received the much delayed 1603 cash grant for its 120 MW Windstar wind farm, which was completed last year.

Good News, Bad News

The good news is that the grant was finally issued after over a month and a half after the Treasury’s normal 60-day cycle of considering the grants.   This will come as a relief to investors who may have been wondering if the grant might be denied, although I concluded that there was not much chance of Western Wind not receiving the grant when I looked into it two weeks ago.

The bad news is that the amount received is a 12.5% ($12,221,994) less than the amount applied for.  Since the average 1603 grant award is 97% of the amount requested, this shows that there is a serious disagreement between Western Wind and the Treasury about what costs can be legitimately included in the application.  According to the company, the discrepancy was “apparently due to changes in the administration of the program by the Treasury Department which has reduced the suggested guidance on the amount of any developer fee which can be included in the 30% cash grant amount.”

Western Wind management believes that the whole grant should have whole grant should have qualified, despite the changed guidance, and plans to “engage in discussions” with the Treasury in the hope of getting the original amount reinstated.

Of course they would engage in such discussions (it only costs them a little in legal fees, when compared to the eight-digit potential gain,) but I think investors should write that $12M off in their valuation of Western Wind.  If it comes through, it will be a nice upside surprise, but I’m sure the company was already engaging in discussions with the Treasury while the grant was being processed.  Why should new discussions achieve a different result?

(NOTE: Since this article was written, Western Wind held a conference call to answer that question. I detail why management thinks they will succeed in getting the full grant reinstated here, and discuss investor concerns about lack of transparency here.)


What should this mean for the stock?  I think we should look back to the stock price in May, before the grant was delayed.  At that point, WNDEF was trading at about $1.50.  The company has 70.66 million shares outstanding (including the 8 million to be issued in the acquisition of the Champlin/GEI wind pipeline, or about 78 million fully diluted.)   Based on the average grant-to-application for 1603 grants, the “expected” grant was 97% of the $90,556,707 applied for, or $87,840006, putting the shortfall at $9,505,293, or $0.135 a share.

On the other hand, if Western Wind cannot recover the $9.5M, that amount will be subject to 100% bonus depreciation, and so can be used to reduce taxable earnings from the WindStar farm this year.  Assuming a (conservative) effective tax rate of 25%, 4 cents a share will effectively be recouped through bonus depreciation.   So if we totally write off the chance of recovering any of the tax grant, the loss amounts to 9.5 cents a share, and WNDEF should be trading around $1.40 based on prices in May, before the grant was delayed.

This calculation ignores the fact that, even in May, Western Wind was trading well below the value of its assets, which are worth on the order of $400 million, or between $5 and $6 a share.   Even if we ignore Western Wind’s pipeline, the value of the company’s completed Windstar, Kingman I, and Mesa projects comes to $230-240 million, or about $3/share, even after the smaller-than expected tax grant.

That makes today’s sell-off to $1.23 / C$1.26 a share a little confusing.  The market does not like surprises, and may take a some time to digest the actual numbers.   I just bought a little more of the stock, but this is intended as a short term trade, since the purchase brought me above my target allocation.

Disclosure: Long WNDEF

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 19, 2012

A New Competitive Landscape for Solar PV Racking

by Joseph McCabe, PE

KB RackingI've been attending the Intersolar conference in San Francisco for ten years since it was just Semicon, and noticed many of the most interesting trends don’t show up in the headlines.   This year, I noticed that the exhibit halls were packed with metal (racking) peddlers, far more than in previous years.

Solar headlines concentrate on the modules, even though there seems to be less and less differentiation in the module market, with everyone competing for a lower and lower average selling price (ASP). As a friend and PV industry expert told me, "Everyone is trying to position themselves with a better product comparing how their $0.78 per watt is better than the competitions $0.81 a watt". This is a sign of the true commoditization of modules.

Module commoditization leaves companies looking elsewhere to differentiate themselves; this year many companies are bringing new racking. systems to the solar market  There is still room to play, and to be better at marketing structural solutions. Lighter weights, higher wind loading, lower maintenance, and easier installations are just a few of the ways metal peddlers are positioning themselves. Lower balance of systems costs (BOS) are being targeted by the Department of Energy (DOE) as worthy of research and development funding within their Sunshot initiative. Low cost structures should be something that can remain made-in-the-US and not outsourced to overseas manufacturing.

The PV industry has become industrialized, with much more racking and mounting hardware than in the past. You can see who is staking a structural BOS claim in the industry.  Racking, trackers, roof attachments, stand offs and more vendors selling systems that look like PowerGuard. PowerGuard was a product from PowerLight, now the T5 by SunPower (SPWR), that targets flat commercial roofs with a self ballasted aerodynamic structure. The patents for PowerGuard must have expired, or the lawsuit between SunPower and SunLink must have revealed weaknesses in the original PowerLight IP such that others felt it time to get into this market. SunPower is a vertically integrated company that will not be drastically affected by this new competition in the market for commercial roof structural solutions. Is this the begining of healthy profits, then a fierce competition cycle similar to which PV module manufacturers have been experiencing?

SnapNrack is a PowerGuard like product being displayed at Intersolar for the first time. Watch not only for SnapNrack’s innovations, but also their market share; these guys are the AEE wholesale distribution people who know the ins and outs of the PV industry. SnapNrack sells through Lowes, and a host of other electrical companies. Imagine the sales force from the electrical industry now able to sell SnapNrack structures. That is a nice bump in profit to the electrician trade for the same job. Similar new products at Intersolar were KB Racking’s Aerorack, and Panel Claw.

Panel Claw

Many other PV structural attachment companies were at at Intersolar. Quickmount, now at over 60 employees, sells an excellent stand-off for sloped roofs. S5 sells brackets for holding PV on standing seam roofing. A number of major PV module manufacturers have licensed the Zep Solar products. Unirac, Unistrut, Renusol  and S:Flex sell metal systems designed for the PV industry. Dozens of other companies are selling some kind of module attachment, ground screws or tracking system. These structural only companies may have difficulties competing in the mature vertically integrated PV industry, or competing with the well established distributors who have extensive industry experience.

While not metal, Solopower was showing off their flat commercial roof system called Solosaddle. There were many other rotationally molded plastic PV structure products at the show which had better assure UV protection; solar installations can be brutal on materials.

Solo Saddle

Norse Hydro (NHY.OL) had a large booth, but wasn’t showing specific products. They sell aluminum, and a lot of it. Having already established themselves with concentrating solar power companies, they were at Intersolar getting attention of the project and module manufacturers needing extruded aluminum. Even the Aluminum Extruders Council had a booth at Intersolar.

My first day in San Francisco I ran into California Governor Jerry Brown who said that California is aiming for 50 percent grid tied renewables, particularly solar. This is typical political speak, but sets up the tone for the expanding interest in these PV technologies. As an example from the California utilities, the Sacramento Municipal Utility District (SMUD) reportedly is expecting to install between 500 and 800 MW of new PV in the next five years. This on top of their existing 80 MW. With this kind of market pull, many innovations will be reducing the cost to install PV, including the ones mentioned here.

Disclosure: No positions.

Photos by author.

Joseph McCabe is a solar industry expert with over 20 years in the business. He is an American Solar Energy Society Fellow, a Professional Engineer, and is internationally recognized as an expert in thin film PV, BIPV and Photovoltaic/Thermal solar industry activities. McCabe has a Masters Degree in Nuclear and Energy Engineering.

Joe is a Contributing Editor to Alt Energy Stocks and can be reached at energy [no space] ideas at gmail dotcom.

Intermolecular's Solar Strategy Rising During Industry Eclipse

Tom Konrad CFA

solar eclipse
Solar Eclipse at Sunrise photo via Bigstock

Solar module prices have fallen 50% in the last six months.  This is great news for solar consumers, but has meant deep pain for solar manufacturers.  Just last week, GE Energy (NYSE:GE) laid off workers and  put expansion plans at their Colorado factory on hold for at least 18 months while they try to improve the Cadmium Telluride (CdTe) thin film solar technology they plan to produce there.  That move followed the bankruptcy of another thin film producer in Colorado, Abound Solar, by just a week.  And the list goes on.

With pressure on solar manufactures’ margins likely to continue at least through 2013, now is too early to jump in to solar stocks looking for a revival.   But there may be a way to play the turn around.  The falling prices are forcing all manufacturers to put more effort into improving their manufacturing technology and module efficiency in order to get back ahead of the rapidly declining cost curve.  That’s exactly why GE has delayed their plant construction, and rapid technology improvement is part of the plan for virtually every solar manufacturer hoping to survive the industry shakeout.

While it’s too early to buy solar stocks, it may be time to buy into the business of helping solar firms improve their technology.

A month ago, First Solar (NASD:FSLR) announced the first licensing agreement with Intermolecular, Inc. (NASD:IMI) by a solar company.   That agreement allows First Solar to use Inermolecular’s High Productivity Combinatorial (HPC) platform to advance its manufacturing technology and the efficiency of its solar cells.  As I wrote at the time, solar technology leader First Solar’s move served as a large vote of confidence in the HPC platform.

Today, Intermolecular announced an ongoing project with King Abdullah University of Science and Technology (KAUST) in Saudi Arabia for the enhancement of copper-indium-gallium-diselenide (CIGS) thin film solar  manufacturing technology.  While work with an academic institution will serve as less of a vote of confidence for stock market investors, the fact that IMI is working to improve both CdTe and CIGS shows the flexibility of Intermolecular’s technology.  I would not be surprised if more licensing agreements with both CdTe and CIGS manufacturers follow soon.

If more such deals are announced, IMI’s investors may have found a truly rare opportunity: a profitable way to invest in solar stocks while the prices of the industry’s products are plummeting.

Of course, plummeting solar prices open up a much easier way to profitably invest in solar: install a system on your roof.

Disclosure: None

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 18, 2012

A Note to Email Subscribers

On Monday, it came to my attention that AltEnergyStocks.com's email list was not functioning properly, and and our morning emails had not gone out for over a week.  We have fixed the problem, email subscribers received an email containing all the articles we'd published since the the system stopped working.  Since this may have inundated many of our subscribers, I'd like to provide a quick summary of each of the articles to help you pick and choose the ones you'd like to go back and read:

Also in this email:

  • An Actively Managed Green ETF: HECO Tom Konrad looks at the case for active management in a green ETF, and looks at past performance (really!) for the recently launched Huntington EcoLogical Strategy ETF (NYSE:HECO.)

Sorry for any inconvenience the delayed emails caused readers.

Tom Konrad, CFA
Editor, AltEnergyStocks.com

An Actively Managed Green ETF: HECO

Tom Konrad CFA

heat pump
Deepwater Horizon Oil slick, as seen by NASA satellite, May 24, 2010

For a growing number of people, ecological responsibility means more than just recycling and changing our light bulbs.  Many have started to ask, “How much good does saving a few hundred gallons of gas with a hybrid car do, when the mutual funds in your 401k own companies that are allowing 6.6 million barrels of oil to spill into the Gulf of Mexico, or fund misinformation about climate change?”

For most, the answer is, “Not enough,”  and that conclusion has led to a growing interest in ecologically-oriented mutual funds and ETFs.

It’s not cheap being green

Unfortunately, the desire to do right for the environment has often been at odds with the need to see decent returns on many green investments.  Ecologically minded and socially responsible mutual funds, like the Calvert Equity Portfolio (CSIEX),  Portfolio 21 (PORTX) or the Gabelli Green Growth Fund (SRIGX) often charge relatively high management fees (1.2%, 1.45%, and 2%, respectively.)  Many investors may think these fees are worth it, since the returns of such funds have typically beaten the market over long (5 and 10 year) periods, despite the fees and more recent (three years or less) underperformance, especially considering the fact that most of these management fees were considerably higher in the early years when the funds were small.

Market research generally shows that ecological and socially responsible investing provides a long-term edge, which most assume is because the more ecologically and socially responsible companies operate with an awareness of environmental and social risks which can harm the bottom line.

The ETF option

If ecologically and socially responsible investing produces superior returns, only to have these returns eaten up by mutual fund fees, it makes sense to ask if the performance can be replicated in a cheaper ETF option.  Unfortunately, the only socially responsible ETFs which have been around longer than three years, the iShares KLD Select Social Index Fund (NYSE:KLD) and the iShares KLD 400 Social Index Fund (NYSE:DSI) have underperformed the S&P 500 and two of the three mutual funds mentioned above over the last five years.  The two ETFs don’t yet have ten year track records.

The lower five year performance of KLD and DSI occurred despite substantially lower expense ratios, at 0.50% for both, which should give them an edge over the mutual funds of between 3.5% and 7.7% over five years.

Is active management required?

Although the data is too sparse to reach a conclusion, the weaker performance of socially responsible ETFs may be a sign that in order to retain an edge in terms of returns, ecologically and socially responsible investing requires more active judgement than can be had in a passively managed index fund like KLD or DSI.  This makes a certain amount of sense, because judging a company’s sustainability is still far more of an art than a science.

An actively managed ecological ETF

Investors who want the relatively low fees of an ETF, along with ecologically and socially conscious active management now have an investment option.  In June, Huntington Asset Advisors launched the actively-managed Huntington EcoLogical Strategy ETF (NYSE:HECO.)  Fund expenses are capped at 0.95% and will fall if the fund is successful attracting assets.

As a recently launched fund, HECO does not have data on past performance, but I recently spoke to HECO’s lead manager, Brian Salerno CFA about HECO and his strategy, and also attained some past performance data.  Salerno is also an investment advisor, and has been managing portfolios using the same “Ecological” strategy he is using for HECO since 2008, based on Global Investment Performance Standards (GIPS®).  GIPS is not exactly comparable to the total return methodology used to create the past performance data of the mutual funds and ETFs, because it accounts for fund inflows and outflows differently, but for want of anything better, I compare his net-of fees performance for the last three years with the other funds I’ve mentioned in this article in the chart below:


As you can see from the chart, Salerno’s EcoLogical strategy falls at the lower end of the middle of the pack over the three years he’s been managing portfolios using it.  Unfortunately, the differences in performance measures and the short track record mean that I can only conclude that the EcoLogical strategy’s performance is in that “middle of the pack” range.

In short, it’s still too early to conclude if HECO’s active management will allow investors to capture the return advantage of ecological and socially responsible investing without it being all eaten up in high mutual fund fees.  In order to help you decide for yourself, I’ll take a deeper look into Salerno’s strategy in future articles.

Disclosure: No positions.

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 17, 2012

EVs, Batteries and Tales From The Valley of Death

John Petersen

Today is the fourth anniversary of my blog on investing in the energy storage and electric vehicle sectors. Over the last four years I've penned 275 Articles and 45 Instablogs on topics ranging from technical minutiae to broad macroeconomic trends. Since most of my work focuses on challenges and risks instead of lofty and optimistic goals, I'm often derided as a curmudgeon who doesn't understand the dream. Truth is I've been a guide in the Valley of Death for over thirty years and while I love panoramic scenery, I can't overlook the dangers of old mine shafts, cactus patches and the poisonous critters that live in the valley. So I while occasionally gaze in awe at the majesty of the landscape, my big concern is always the next step.

The scary part is knowing that companies I praise rarely live up to my lofty expectations but companies I criticize always perform worse than I think they will.

Most companies that enter the Valley of Death don't emerge. For the fortunate few that do, the difficult times usually last longer than anyone expected. The single character trait all entrepreneurs share is unbridled optimism. The three character traits all survivors share are determination, focus and fiscal restraint. The following graph from Osawa and Miyazaki is a stylized view of the cumulative losses companies suffer as they transit the Valley of Death.

7.17.12 Valley of Death.png

The next graph from the Gartner Group is a stylized view of the Hype Cycle, a well-known but frequently misunderstood market phenomenon that gives rise to extreme overvaluation during a company's early stages that’s frequently followed by a period of extreme undervaluation in later stages when the major development and commercialization risks have been overcome, cash flows are about to turn positive and stockholders have grown so weary of waiting for good news that they're willing to sell at distressed prices despite improving business fundamentals.

7.17.12 Hype Cycle.png

The graphs are not perfect overlays on a horizontal time scale, but they're close, and that's where the dangers lurk. The reason for the differences between the two graphs is a curious split personality of investment markets that was first described by Benjamin Graham who observed, "in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine." Stock prices always peak in early stages of a product launch because the dream is so beautiful. At the Peak of Inflated Expectations, the voting machine personality is firmly in control. When the day-to-day difficulties of building a successful and sustainable business become obvious prices begin an inexorable slide into the Trough of Disillusionment. As they reach the bottom of the trough, the weighing machine personality assumes control.

In combination, these graphs are the reason for Warren Buffet's oft quoted wisdom that "Investors should remember that excitement and expenses are their enemies, and if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."

That's why truly successful investors who understand the Valley of Death usually follow one of two strategies:
  • Venture capitalists buy during the Innovation Trigger and plan on selling during the Peak of Inflated Expectations.
  • Vulture capitalists buy during the Trough of Disillusionment and plan on holding for the long term.
Everybody else is betting on the greater fool theory of investing which holds that no matter the price paid by a fool, there will always be greater fool who's willing to pay an even higher price. The lucky ones can make a few bucks but those who press their luck frequently learn the identity of the greatest fool of all.

As I confessed above my record at predicting short-term success is spotty at best and many companies that I've praised over the last four years have been mired in muddle through survival mode for longer than I would have thought possible. With the sole exception of C&D Technologies, however, they've all survived and they continue to make solid business progress. Companies in the survivor group include Active Power (ACPW), Exide Technologies (XIDE), Maxwell Technologies (MXWL), ZBB Energy (ZBB) and my old teammates at Axion Power International (AXPW.OB). These companies have all had their ups and downs, but they've avoided catastrophic errors and grown their businesses through determination, focus and fiscal restraint. I continue to believe that all five will emerge from the Valley of Death as formidable competitors in their respective sub-sectors and provide market-beating returns for patient investors.

Turning to the other side of the ledger, my track record has been flawless when it comes to identifying companies that were riding the Hype Cycle but unlikely to survive the Valley of Death. Beacon Power, Ener1 and most recently Valence Technologies (VLNCQ.PK) were complete and utter failures that ended up in Chapter 11. Altair Nanotechnologies (ALTI) avoided a total loss by selling control to a Chinese company after its stockholders lost 90% of their value. A123 Systems (AONE) is on the deathwatch and seems unlikely to survive the year after watching its market capitalization shrivel from $2.3 billion in December 2009 to $123 million at yesterday's close. The one trait they all shared was an errant belief that the glory days would last forever and that bullish press releases could obviate the need for determination, focus and fiscal restraint.

Over the last several months I've become increasingly vocal about the risks Tesla Motors (TSLA) faces as it launches its first credible consumer product and begins a long and arduous trek through the Valley of Death. Adherents and advocates are certain that I don't understand the dream. Truth is I understand the dream perfectly but I know that no company can overfly the Valley of Death on the wings of a dragon. The only way through the valley is on foot in sweltering heat.

At March 31st Tesla had $123 million in working capital and $154 million in stockholders equity. Unless it slashed spending during the second quarter, its June 30 financial statements should show working capital and stockholders equity of roughly $65 and $85 million, respectively. At yesterday's close, Tesla's market capitalization was an eye-watering 45 times its estimated net worth, or about ten times higher than it should be at this stage in the company's development.

Tesla is entering the most cash intensive period in its business history where it will have to make cars instead of talking about them. Unless management acts quickly, Tesla will run out of cash this quarter. I was surprised that Tesla didn't close a substantial capital raise during the second quarter because its financial statements were looking so weak at the end of March. Now that we're two weeks into July with nary a peep about additional fund raising, I have to believe Tesla is facing difficult market conditions and significant investor skepticism over immediate execution risks that can't be overcome with happy talk. The potential investors have the upper hand in this particular waiting game because they know that Tesla is trapped between the rock of a down-round financing and the hard place of a going concern qualification on the Form 10-Q it has to file by August 9th.

The clock is ticking.

As a long-term guide in the Valley of Death I've been in that position before and know how the game is played. This is not an opportune time for retail stockholders who aren't paying attention to the carrion birds circling overhead.

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

Capstone Turbine Ramps Revenue, Earnings Not So Much

by Debra Fiakas CFA
Capstone logo.png Capstone Turbine Corporation (CPST:  Nasdaq) made it to the Efficiency Group of our Mothers of Invention Index because of its line of low-emissions micro-turbines.  The company has sold 6,500 of them around the world.  The fruits of this building installed base are evident in Capstone’s top-line, which has increased in each of the last three years and reached $109.7 million in the fiscal year ending March 2012.  The bottom-line has followed in the same direction, but is still in the red.  In the last fiscal year, Capstone recorded an $18.8 million loss.

The $18.8 million loss included a $14.0 million benefit from the change in fair value of warrants Capstone issued in the course of capital raises over the last five years.  Accounting treatment of warrant liabilities is a non-cash item, whether a benefit associated with the write-down of the liability or a charge resulting from a write-up of the liability.  This means the net loss was closer to $32.8 million.  In the previous two years Capstone recorded loss associated with outstanding warrants.

All that marking up and marking down of some illusory warrant liability makes Capstone’s bottom line a bit noisy, not to mention useless.  That is why cash flow from operations is such a valuable measuring stick for companies like Capstone.  In the last fiscal year Capstone used $21.4 million in cash resources to support operations.  The company used a total of $21.9 million in fiscal year 2011 and used $36.6 million in fiscal year 2010.

The take-away from this little stroll through Capstone’s cash flow from operations is this:  the company’s operations are simply not producing the results one might expect for a company with significant installed base.  Investors long in CPST will probably roll their eyes on this statement.

The bull case points to Capstone’s large addressable market and the great promise in the oil and gas industry and manufacturing.  Capstone can point to a variety of applications for its product from powering oil and gas field equipment or providing economical power in remote locations.  Then there is the flexibility of its technology in accepting a variety of fuels from waste gases, to propane, to wet flash gas at gas well heads.

Frankly, I am also impressed with Capstone’s product line.  However, I am disappointed in management’s performance in conserving the company’s ample cash reserves.  Captstone has dipped into the capital market well several times with what has turned out to be dilutive equity offerings.  Total shares outstanding have increased 72% over the last three years.  There are 26.5 million warrants waiting in the wings for exercise that could bloat shares outstanding by another 9%. 

Dilution can be tolerated if at the end of the day there is more value to spread around.  Unfortunately, there is just something about a big bank account that brings the spendthrift out in a management team.  Even if that accusation cannot be made against Capstone’s management them, I would like to see the company undertake a cost-cutting program of some kind and more value falling to shareholders.  Even the Capstone bulls could not disagree with that.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. CPST is included in Crystal Equity Research’s The Mothers of Invention Index.

July 16, 2012

Are IPOs good for early-stage companies and advanced biofuels?

Jim Lane
Money trap photo via Bigstock

 $104 million Elevance private financing round larger than last two IPOs; puts IPOs in focus; do the benefits outweigh the costs?

Do advanced biofuels companies really need to be “thinking IPO”, industry leaders were asking this week after Elevance Renewable Sciences announced that it has raised $104 million in its Series E financing round.

Lacustrine Limited via Genting Genomics Limited, wholly owned by Genting Berhad, based in Kuala Lumpur, Malaysia led the round with Total Energy Ventures International, based in Paris, France also participating in the financing.  Elevance also announced that Tan Sri Lim Kok Thay, Chairman and Chief Executive of Genting Berhad, will join the Elevance board of directors.

Elevance produces high performance ingredients for use in personal care products, detergents, lubricants and other specialty chemicals and fuel markets from renewable feedstocks.

Reaction from Elevance

“The investment will support Elevance’s strategic growth plans, including the continued development of biorefineries in Asia and North and South America,” said K’Lynne Johnson, CEO of Elevance. “The addition of the Genting Group via Lacustrine Limited, compliments the strengths of our existing investors and further emphasizes the key potential that Malaysia and Asia play in our global footprint.”

Are early IPOs necessary?

The Yes view.

In addition to the IPO event itself, IPOs enable companies to tap the broad and liquid public finance channel for follow-on equity raises that enable construction of first- and second-commercial plants- and allow the company to tap the bond market at sharply reduced rates compared to the rates enjoyed by private companies.

Recent public raises

Earlier this month, Gevo (GEVO) announced that it has agreed to sell 12.5M shares of its common stock at $4.95 per share. The gross proceeds to the Company from this offering are expected to be $61.87M. The Company also announced the pricing of its public offering of $40M aggregate principal amount of 7.5% convertible senior notes due 2022.

Last week, Pacific Ethanol (PEIX) announced it has closed its previously announced underwritten public offering of 28.0 million units at a public offering price of $0.43 per unit, for gross offering proceeds of $12.0 million. The warrants are exercisable immediately.

In February, Amyris(AMRS) completed a $58.7 million private placement of its common stock and placed $25 million in 3% senior unsecured notes due in 2017. The purchase and sale price for the shares was $5.78 per share.

The No view.

Industrial biotechnology companies should not be in the IPO markets until they have completed their first commercial plants; the value of their technology can be fairly assessed in dollar terms, and the company is generating meaningful revenues and is on a firm path to profitability.

In addition, premature IPOs cause confidence losses for the companies and the sector as a whole when shares do not hold up well in the secondary market – and industrial biotech stocks have taken a drubbing there. Early IPOs cause companies to “go quiet” and lose visibility in their run-up to IPOs – visibility that is critical to their capital and human capital aggregation. Finally, private placements and venture rounds still offer, for those companies that can access strategic investors, attractive pools of capital that, in many cases, exceed those pools raised in IPOs.

Recent private raises

In April, Sapphire Energy announced that it has secured the final tranche of a $144 million Series C investment funding. The Series C backers include Arrowpoint Partners, Monsanto, and other undisclosed investors.  All major Series B investors have participated.

Last month, Myriant announced that it closed a $25 million private bond placement for the construction of its flagship commercial bio-succinic acid plant located in Lake Providence, Louisiana.

In May, EdeniQ announced it has raised over $30 million in additional capital in the form of both an equity investment and a debt facility. The equity investment was led by both existing investors, including Kleiner Perkins Caufield & Byers, Draper Fisher Jurvetson, Cyrus Capital, The Westly Group, Angeleno Group, I2BF Global Ventures and Element Partners as well as a new investor, Flint Hills Resources Renewables LLC.

In March, Virdia announced $30 million in its latest round of financing, raising over $20 million from insiders, Khosla Ventures, Burrill & Company and Tamar Ventures. In addition, the company closed a $10 million in a venture debt deal with Triple Point Capital.

In February, BioAmber raised $30 million in its Series C round of financing with $20 million invested in November by Naxos Capital, Sofinnova Partners, Mitsui & Co. Ltd. and the Cliffton Group, and a second tranche of $10 million on February 6th, 2012 closed with specialty chemicals company LANXESS.

In January, LanzaTech announced that it has closed its Series C round with new investment totaling US $55.8 million led by the Malaysian Life Sciences Capital Fund. New investors include the venture arm of Petronas, the national oil company of Malaysia, and Dialog Group, a Malaysian technical services provider to the oil, gas and petrochemical industry.

In January, BASF announced plans to invest $30 million in the US technology firm Renmatix, as part of a new $50 million Series C investment round announced by Renmatix.

Five recent IPO raises

Ceres (CERE), $65M
REG (REGI), $72M
KiOR (KIOR), $150M
Gevo (GEVO), $123.3M
Solazyme (SZYM), $227M

Abandoned IPOs

Luca Technologies

Still in the IPO queue

Elevance Renewable Sciences
Fulcrum Bioenergy

The Malaysian wave

The Malaysian surge in biofuels is becoming more and more apparent.

The Elevance financing featured the entrance of Lacustrine Limited into the field, a wholly owned subsidiary of Genting Berhad, the holding company of the Genting Group. Genting is one of the largest multinationals, and invested in leisure & hospitality, power generation, oil palm plantations, property development, biotechnology and oil & gas business activities.

Earlier this year, there was the investment in LanzaTech in January by Petronas, the Malaysian state oil company; also in January, an announcement of a joint venture between Japan’s Toyo Engineering Co, Glycos Biotechnologies and Malaysian developer Bio-XCell to build a 10,000 ton per year ethanol plant in Johor Baru by Q2 2013.

Plus, the announcement last month that Gevo signed a collaborative agreement with the intent to site a cellulosic biomass isobutanol facility in Southeast Asia, with the Malaysian government’s East Coast Economic Region Development Council (ECERDC), Malaysian Biotechnology Corp (BiotechCorp) and the State Government of Terengganu.

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.

July 15, 2012

Natural Gas Liquids are Following Natural Gas Off a Fracking Cliff

Tom Konrad CFA

The unprecedented boom in natural gas supplies over the last few years as been one of the few tail-winds for the US economy over the last few years, as plummeting natural gas prices have lowered costs for both industry and consumers.  Few outside the natural gas industry even understood the shear scale of the shale gas resource, although industry insiders did.

The Shale Gas Glut

In 2008, I recall a natural gas executive complaining about how he could not get policymakers to understand the sheer scale of the shale gas resource.   To be honest, I did not take his comments seriously, either.  That was a mistake.  Shale gas has transformed our economy in many ways, and changed the economics of competing fuels, from coal and nuclear to renewables like solar, wind, and geothermal.  Cheap natural gas is even doing what Pickens failed to do: get a major oil company to invest in natural gas filling stations.

While shale gas transformed our economy, it also transformed the stock market, which is why I should have paid more attention.  Low natural gas prices have not only hurt renewable energy stocks, they have also helped chemical and fertilizer companies that use natural gas as a feedstock.  I first came across LSB Industries (NYSE:LXU), a geothermal heat pump (GHP) and chemical company that uses a lot of natural gas a couple month’s after I heard the natural gas executive’s rant.   I bought both LXU and its pure-play GHP rival Waterfurnace (TSX:WFI,OTC:WFIFF) at the time, but I sold LXU a few months later, congratulating myself on a quick double at $16, while holding Waterfurnace.  Waterfurnace is down a little since I bought it (although it has been paying a nice dividend along the way, while LSB doubled again, in large part because of the tail winds from low natural gas prices.

I don’t plan to make the same mistake again, so I pay more attention to what’s going on with fossil fuels.  To that end, I attended the 2012 Symposium on Oil Supply and Demand: Studying the Wildcards, where industry experts tried to predict the next fossil fuel “surprise” that should not be a surprise, if we’d only been paying attention.  (The presentations and video proceedings are available at oilwildcards.com.)

NGLs: The Next Shale Gas?

If there is going to be another fossil fuel glut to follow natural gas, it will probably be Natural Gas Liquids (NGLs, not to be confused with Liquefied Natural Gas, or LNG).  Natural gas liquids are the slightly larger carbon compounds such as ethane, pentane, and propane, which are co-produced with natural gas, but are usually counted with oil production in industry statistics.  But, as I learned at the symposium, NGLs should not really be counted with oil or gas, or even separately.  Each NGL has its own uses, and its own market, and they need to be considered separately if we are to understand the price dynamics.

Perhaps most importantly for those of us worried about the ability of oil production to keep up with demand, NGLs are not used as transportation fuel (with a tiny exception for propane in forklifts and the like.)  Hence, even though NGLs are often counted as part of the oil supply, they do not ease the constraints on the supply of gas or diesel.

rig count rich vs lean

The reason NGLs are interesting now is because recent low natural gas prices have led natural gas producers to dramatically shift drilling away from “lean” prospects (which produce natural gas but few NGLs) to “rich” ones (which produce significant NGLs along with the natural gas.)  This trend was highlighted at the Symposium by Adam Bedard, Senior Director at BENTEK Energy, an energy markets analytics company (see graph above).  So far, relatively high prices for NGLs have kept many wet gas wells profitable despite low gas prices.  In a sense, gas companies are drilling for NGLs, and producing natural gas a a byproduct.

The problem is that the rapid shift towards NGL-rich plays is liable to produce more NGLs than the market can handle.    According to George Little, a partner at Groppe, Long & Littell, an oil and gas analysis and forecast provider speaking at the Symposium, the leading indicators of periods of NGL oversupply are the relative prices of olefins ethylene and propylene, which are made from NGLs.

US Olefin Prices

When propylene prices are above ethylene prices, it is a leading indicator for ethane being sold for its heat value into the natural gas market, rather than being sold into the chemicals market.  That indicator, according to Little,  is currently “flashing red” (see graph above.)  The problem with selling ethane into the natural gas markets is that, with current low natural gas prices, it will only fetch $0.10 to $0.16 per gallon, a fraction of the current price.

Competition with natural gas for industrial uses and heating has also been eroding the propane market.  The butane market is similarly stagnant.

Stocks to Avoid

With stagnant demand in most NGL markets, it’s no surprise that new supply has been dramatically reducing NGL prices.  The coming flood of new supply will only push NGL prices down further.  Natural gas producers that are counting on high NGL prices to maintain profitability are likely to find it as hard to profit from NGLs over the next few years as it recently has been to make a profit from natural gas.

Which natural gas producers are most reliant on NGLs, and hence vulnerable to a price collapse?  Devon Energy (NYSE: DVN), recently announced a sixth consecutive quarter of increasing NGL production and an 80% year over year increase in NGLs from the Cana Woodford shale.  On the other hand, Chesapeake Energy (NYSE:CHK) may be less vulnerable, since that company recently trimmed its projections for NGL production.

On the green side of the coin, biochemical companies which have turned to these higher-margin businesses in order to escape commodity squeezes in biofuels may see the same story repeating itself in chemicals.  Investors should not count on high-margin biochemicals to remain high-margin if they replace petrochemicals made from NGLs.

Likely Winners

On the other hand, midstream NGL companies should be able to produce increasing profits from NGL bottlenecks.  Pipeline operator ONEOK Partners (NYSE:OKS) and Enterprise Products Partners (NYSE:EPD) have both been seeing increasing margins from their NGL operations.  Those trends are likely to continue as the growing NGL glut increases demand for NGL transportation and processing infrastructure.

Disclosure: Long LXU, WFIFF

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 14, 2012

Rentech Retrenches

by Debra Fiakas CFA

Clean energy solution provider Rentech, Inc. (RTK:  NYSE) is scheduled to report second quarter 2012 results the first week in August.  Usually the seasonally strong period, this year the June quarter has shareholders sweating.  That is because the warm weather conditions sent farmers out into fields earlier than usual to prepare fields.  Orders for fertilizer products from Rentech’s East Dubuque, Iowa facility were coming even before the end of the March quarter.  The net effect was to pull sales forward.  The question now is whether June will now present a weak quarter.

Even though Rentech has positioned itself as a leading edge, renewable energy company, its principal product and primary revenue source is decidedly conventional.  The East Dubuque facility produces a variety of fertilizers such as ammonia, liquid and granular urea and nitric acid from natural gas.  Sales of fertilizer products account for 99.7% of total sales.

Profits from the fertilizer business help support Rentech’s alternative energy projects.  Rentech developed technologies for the gasification of biomass.  The company has a demonstration plant in Commerce City, Colorado. Rentech claims it is the largest synthetic transportation fuel plant in the U.S. capable of producing up to 10 barrels of fuel per day.  Rentech has integrated three different processes:  steam methane reforming, Rentech’s own biomass gasification and Fischer-Tropsch technologies. 

To be fair, Rentech does realize revenue in the alternative energy segment.  However, it is mostly from consulting work, licensing or occasional sales of fuel produced in the demonstration unit. 

July 13, 2012

Waterfurnace 7 Series vs. Climatemaster Trilogy Geothermal Heat Pumps: The Best of the Best

UPDATE: I just looked into the 7 Series vs the Trilogy 40 in more detail here and came to a slightly different conclusion.

Tom Konrad CFA

heat pump
Geothermal heat pump diagram via Bigstock

Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) launched its new highly efficient 7 Series geothermal heat pumps (GHP) today.  The 7 Series commercial release beats Climatemaster’s (a division of LSB Industries (NYSE:LXU)) Trilogy 40 as the first commercially available GHP with a variable speed compressor.  The Trilogy 40 is currently available as part of a pilot program, and is expected to be commercially available later this year.  The variable speed compressor enables a significant jump in efficiency over previous two-stage compressors.

I looked at the technology behind these new heat pumps in the article Geothermal Heat Pumps: The Next Generation in May, soon after Climatemaster introduced the Trilogy.  At the time, we only knew that Waterfurnace expected the 7 Series to be “more efficient” than the Trilogy.   Now we have detailed specs, I thought I’d compare them head-to-head:

GHP Efficiency

As you can see from the chart above, Waterfurnace managed to nudge out Climatemaster in both cooling (EER) and heating (COP) efficiency ratings.  Both are on linear scales, so the Series 7 is 2.5% more efficient at cooling and 6% more efficient for heating than the Trilogy.  With top efficiency ratings, the Waterfurnace GHP will likely appeal to customers who must have “the best” of everything.

Other Factors

The efficiency of  the GHP unit is only one factor in overall system efficiency, and efficiency is only one factor in the decision of what to install.  Price will be an important factor as well, although given the likelihood that these variable speed GHPs will be priced at a significant premium, price sensitive customers will most likely install two-stage GHPs.  Waterfurnace’s Series 5 was launched in March, at a slightly lower price than the previous Envison product it replaced, while maintaining all the features and efficiency of that model.

The most important factor for installers will be dealer support and ease of install, especially for the residential market.  Both Climatemaster and Waterfurnace seem to have simplified installation with the new models, while dealer support is much more a local issue, and is determined by the installer’s relationship with their distributor.

Along with the Series 7, Waterfurnace is introducing  a new “IntelliZone2″ zone controller, which will simplify the installation and use of their Series 5 and 7 products with multiple zones.  On the other hand, Climatemaster’s Trilogy includes a propriatary “Q-mode” which allows the heat pump to create hot water year round.  Most rival heat pumps only create hot water when being used to heat or cool the building.  In new residential applications without an existing water heater, Q-mode could easily give Trilogy the edge over the 7  Series, since it would allow the contractor to dispense with a secondary hot water source.


Neither of these two GHPs is the clear winner, with the 7 Series’ edge in efficiency countered by the year-round hot water of the Trilogy’s Q-Mode.  Waterfurnace’s efficiency edge is more significant in heating-dominated climates, such as the Northern US and Canada, while Climatemaster’s Q-Mode will probably give the Trilogy an edge in new-build markets.  Existing relationships between installers and their dritributers will probably dominate both in many cases.  UPDATE: The Series 7′s earlier commercial availability will make Waterfurnace’s offering the only real choice for installations over the next few months.

The biggest winners will be consumers, who now have both cheaper versions of two-stage GHP technology available, as well as the option to enter a whole new frontier of HVAC energy efficiency.

Disclosure: Long LXU, WFIFF

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 12, 2012

Musings From The EV Black Knight

John Petersen

In June an anonymous blogger at Clean Technica dubbed me the “EV Black Knight,” the mortal enemy of electric cars.  While I was flattered by the tribute, I was deeply offended by the suggestion that I might be foolish enough to impale a lithium-ion battery pack with the burnished broadsword of economics.

Seriously, anybody who’s spent any time studying battery safety knows that shockingly bad things can happen when you puncture a lithium-ion battery pack with a conductor and even a full metal jacket wouldn’t be enough to protect a knight errant from the kind of explosive thermal runaway that did about $5 million of damage to a GM battery testing laboratory that was designed to safely manage catastrophic battery failures.

Truth is I’d rather have an e-bike than a horse, I find pens mightier than swords and I think green eyeshades enhance vision while face visors lead to the kind of tunnel vision I find so appalling in ideologues and Tesla (TSLA) stockholders who apparently think we can waste massive quantities of metal for the dubious luxury of powering a car with coal instead of gasoline.

I think the basic problem is that we’re painfully aware of energy costs but blissfully ignorant of the cost of making the machines that either produce or consume energy.

In the case of the family car, we know it burns 400 gallons of gas a year and hate the fact that each gallon costs $3 to $4. Heck, over a 15-year useful life we’ll spend $18,000 to $24,000 on fuel alone. Spending as much for fuel as you spend to buy the car seems outrageous until you consider that the cost of fuel includes the cost of:
  • Manufacturing the machines that drill for and produce crude oil;
  • Manufacturing the machines that that transport crude oil for refining;
  • Manufacturing the machines that convert crude oil into fuel; and
  • Manufacturing the machines that transport fuel to market.
I’ve never seen a detailed analysis, but I’d give long odds that if you start with the purchase price of the family car and add a proportional share of the cost of the upstream machinery, equipment and processing facilities that keep it running, you’ll find that machinery represents at least three-quarters of total ownership costs.

While I can’t pin down a precise number, most reports that discuss the economics of wind power claim an all-in power production cost of $.05 per kWh. In the typical analysis 25% of total power production cost is attributable to operations. The remaining 75% is attributable to capital cost recovery – the cost of manufacturing the turbines that turn free energy into useful energy.

With the exception of simple devices that burn fuel directly for heating and cooking, the cost of every useful form of energy pales in comparison to the cost of the machines that use the energy and the cost of the upstream machinery, equipment and processing facilities that deliver energy to our machines in a useful form.

If you spend enough time thinking about the supply chain, the issues become obvious.

We don’t have an energy cost and supply problem.

We have a machinery cost and supply problem.

Energy from wind, sun and water may be free, but machines to make that energy useful are anything but free. The same is true for coal, oil, natural gas and uranium. The in-place energy resources cost nothing, but the machines that extract, transport, refine and use those resources are expensive indeed.

Last year we produced 1,996 kg of energy resources for every man, woman and child on the planet. We also produced 214 kg of iron and steel per capita and 19 kg of nonferrous metals.

While energy resources are single use commodities, ferrous and nonferrous metals are essential for the manufacturing of:
  • EP – machines that produce energy and convert it to useful form;
  • EU – machines that use energy to perform useful work; and
  • NM – non-mechanical essentials of modern life including buildings, power distribution grids and an infinite variety of durable and disposable consumer and industrial goods.
The essential conundrum of modern life is that EP + EU + NM can never exceed total metal production. If we increase metal consumption in one category we have to reduce it somewhere else unless one believes in natural resource fairies.

According to a recent McKinsey study, “Resource Revolution: Meeting the world’s energy, materials, food, and water needs,”  the planet supports 1.8 billion middle class consumers. Over the next 20 years that number will increase to 4.8 billion, a gain of almost 270%. Every one of them will demand energy produced by machines, energy using machines and the non-mechanical essentials of modern life. The problem, of course, is there simply won’t be enough raw materials to go around.

Something’s got to give!

Simply stated, the great challenge of our species will be overcoming persistent global shortages of water, food, energy, building materials and every commodity you can imagine.

The McKinsey report argues that available resource productivity improvements could:
  • Offset 100% of the expected increase in land demand;
  • Address more than 80 percent of expected growth in energy demand;
  • Offset 60 percent of anticipated growth in water demand; and
  • Address 25 percent of expected growth in steel demand.
Unfortunately the report is completely silent on more troublesome resources like nonferrous metals that are absolutely essential for:
  • EP;
  • EU; and
  • NM.
Whether we like it or not, supply chain shortfalls will have to be overcome by wasting nothing, recycling everything and making the most efficient possible use of every natural resource.

That doesn’t leave much room for idealists that want to use non-recyclable 1,000-pound battery packs so they can choose coal instead of gasoline to power their car.

In the battery industry the strain on metal supply chains will be immense. The problems won’t be overwhelming for metals like lithium and lead that are abundant in nature but require major new investments in mines and infrastructure, but they’ll be crippling for metals like copper, nickel, cobalt, vanadium and rare earths, which are already in short supply and likely to encounter even more daunting supply chain disruptions over the next two decades.

I’m not a Black Knight wantonly attacking peaceful, frugal and righteous peasants. I’m humble scrivener with enough mining and oil and gas experience to know when the specious assumptions of aspiring eco-princelings can’t work.

I’d certainly never waste hundreds of pounds of steel to protect myself from starry-eyed fools in motley who didn’t endure the cruel tutelage of Sister Mary Angelica in their formative years.

7.13.12 Darasz.jpg

This article was first published in the Summer 2012 issue of Batteries International Magazine and I'd like to thank editor Mike Halls and cartoonist Jan Darasz for their contributions.

Disclosure: I have no direct or indirect interest in Tesla and I have nothing to gain or lose from its stock price movements. While I am a former director and current stockholder of Axion Power International (AXPW.OB), a nano-cap company that has developed a robust and affordable lead-carbon battery for use in micro-hybrid, railroad and stationary applications, I can't see how the success or failure of a fairy tale product like the Tesla Model S could impact the value of my investment in a company that's focused on relevant mainstream markets.

July 11, 2012

Voices from VODville: Lessons learned in the journey towards advanced biofuels

Jim Lane
Mud/salt formations on the Badwater, Death Valley plain. Image by Daniel Mayer.

What makes a winner in advanced biofuels? Five companies – Abengoa (ABGOY), INEOS Bio, Mascoma, Gevo (GEVO), and American Process reflect on the essential ingredients for success.

“We are industrial technology businesses, making a commodity, we have to control costs everywhere and learn, learn, learn.” – American Process CEO Theodora Retsina

You could call it VODville, VOD for valley of death that is – a stretch of hard desert that every project and developer must cross, and, according to conventional wisdom, in the biggest hurry possible.

There are ox skulls along the side of the road to remind you of what happens to those who linger too long, and the bright lights of some Las Vegas ahead to tempt you ever forward, like the kleig lights attending a Hollywood opening.

But is racing across the desert in the fastest possible manner always the best policy? Are there reasons to stage it as a slow, methodical journey, despite the hardships and the boardroom heartache? And, if so, what makes a journey of that nature work.

In Washington this week, the US Department of Energy’s Biomass Program, has gathered together the companies developing advanced biofuels projects in partnership with DOE, and yesterday five companies took the stage to reflect on lessons learned from the pioneering journeys in building demonstration and first commercial advanced biofuels projects.

Christopher Standlee, Executive Vice President, Abengoa Bioenergy

“Cellulosic ethanol for us at Abengoa (ABGOY) – it;’s been a long journey with the DOE, starting back with a pilot that we built in Nebraska, using wheat straw as a feedstock, back in 2007. Then, we built our demonstration plant in Salamanca, Spain in 2009 and started construction on our first commercial scale plant in Hugoton, Kansas, in September 2011. We’ll be operational at the end of 2013.

“In first generation, there were challenges – in technology, financing and it took a long time to persuade lenders to take risks. In 2nd generation ethanol, project financing is an even greater challenge. Aside from the technology risk, there’s the feedstock risk, and the offtake risk – especially because in this commodity market, there aren’t 20-year power purchase agreements and pricing visibility can be, by lending standards, very short term.

“And then there are the RIN values, which are somewhat unproven as yet in the cellulosic area.

“So, it took time to assemble the $133 million loan that we needed for the project. And it’s a loan, its going to be paid back, its backed by the full faith and credit of Abengoa and our company has never failed to repay a loan since it was founded many years ago.

“for us, the primary driver has been the Renewable Fuel Standard,” adding that none of Abengoa’s efforts would have been made without the long-term stability that RFS2 brought, to ensure that there would be a market for the fuel.

“The economic impacts are not insubstantial, even for a first commercial facility. In addition to hundreds of construction jobs, and 65 full time jobs after construction is completed, there is the $17M in biomass that we will acquire from growers in a 50 mile radius around the plant – and that feedstock never really had much of a market before.”

Peter Williams, CEO, Ineos BIO

“The most important lesson learned? Team is the most important factor. Team is every aspect of the operation, from design and construction through to operation.

Williams added that the second most important factor was, in their view, to have a technology that could take advantage of a diversity of feedstock, and a diversity of geography, to ensure the widest possible customer base for the commercialization and licensing phase, after the first commercial plant was completed.

Bill Brady, CEO, Mascoma

Brady emphasized the importance of products that could drive revenue for a company in the early stage, noting how Mascoma’s MGT yeast technology had landed seven customers for the company among traditional ethanol producers, in the years while it was developing its technology and moving from its Rome, NY demonstration to its first commercial plant in Kinross, Michigan, which is expected to be operational in 2014.

“A major lesson learned? First of kind projects usually have a second phase when design flaws a fixed. So, its been important for us to recognize and learn that our journey ought to be completed in two phases. A first phase, where we take out as much risk as we can and save as much capital as we can, and run that project for 24 months, and then make improvements. Making design changes without operating experience can result in real disappointment.

“For us, on the finance side, the power of clear market signals is absolutely critical – signals like tax policies and RFS2.

“You see, in companies there are generally four types of projects that could get funded, once you have shown that you can exceed the company’s basic internal hurdle rate of return.

“There are the low risk, high return projects, which are really rare. There are the projects which have low risk and low return, generally business as usual expansions. Then there are the high risk, high return investments, that generally represent new technologies deployed in existing businesses. Then there are projects like first of kind, advanced biofuels, which are high risk and low return.

“To get projects funded in that kind of environment, you need all the help that policies like RFS2 and tax policies can provide.”

Chris Ryan, President and COO, Gevo (GEVO)

“The most important thing, in our view, is when you find the product that you can make and for which there is a market, you have to find the most economic route of production. You have to understand what the best of biology can give you, and what good chemical engineering can do with that to realize it in the lowest cost way. Some projects get too focused on the biology or the chemistry, and the opportunity of the market, and they overlook the importance of engineering in terms of delivering that lowest-cost product.”
Theodora Retsina, CEO, American Process
“For us, there are five important lessons learned. First, leverage co production wherever you can, and don’t build anything you don’t have to. Second, understand that there is real risk, and perceived risk, and only operating a large demonstration that you keep as simple as possible, will allow you to understand the risks.

“Third, there’s the execution risk, and we have found that it is paramount to keep in-house control of basic engineering and construction management.

“Fourth, a lack of stable policy has great impact. Fifth, in financing, you have to look everywhere, conventional and unconventional.

The Bottom Line

Theodora Retsina put it well, “We are industrial technology businesses, making a commodity, we have to control costs everywhere and learn, learn, learn.”

Shaking out the cost, and de-risking projects, is the abundantly clear message. Whether it is in using bolt-on technologies that leverage existing production, or developing in multiple phases to learn as much as possible at the minimal engineering scale.

Team and experience – whether it is experience gained from multiple stages of development, or the experience that the team brings from projects in the past – was commonly cited.

And the group was clear on the transformational impact of clear, long-term market signals such as the Renewable Fuel Standard – paramount, in their view, to risk mitigation for lenders and project developers.

Is there a market? What’s the best team? How to shake out the costs? Those are the lessons from the grizzled pioneers, the veterans of VODville.

Would-be crossers of the Valley could highly profit from their experience.

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.

July 10, 2012

How to Play the Solar Revival

Tom Konrad CFA

A new report from GTM research, “PV Technology, Production and Cost Outlook: 2012-2016” predicts continued contraction in PV manufacturing.  While recent price declines have driven record-breaking installations, it has also driven most manufacturers’ margins into the red.  You can’t make up for negative margins on volume.

GTM Solar gross

For a stock market investor, the best approach to a cut-throat industry is to stay away until competition and lower prices remove or absorb the excess capacity, and to buy the remaining players just before the industry’s prospects revive.

As you can see from the chart above, the current price leaders are First Solar (NASD:FSLR), Renesola (NYSE:SOL), Trina Solar (NASD:TSL), Yingli Green Energy (NYSE:YGE), and Jinko Solar (NYSE:JKS).  First Solar, Trina, and Yingli have an advantage over the other two because their products are “Tier 1″ bankable, meaning projects using their modules are easier (and cheaper) to finance.

The most important thing for an investor trying to get in on the solar bottom to know is not the most efficient manufacturers today, but the most efficient when the market begins to revive, and when solar manufacturers will return to profitability.  The report puts the year the leading solar manufacturers will return to positive margins at 2014.  If they are right, the best time to buy these stocks will probably come in late 2013 or during 2014.

GTM Efficiency

Based on the chart above, GTM expects Trina to retain positive gross margin for the whole period, while Renesola, JA Solar (NASD:JASO), Sharp (OTC:SHCAY), and Gintech (Tiawan:3514) will regain positive margins in 2014.  If Trina maintains positive margins, First Solar and perhaps Yingli will probably keep positive margins as well.

Hence First Solar, Trina, and Yingli are likely to be the safest ways to play a turnaround, while Renesola looks like the stock most likely to give outsized returns in 2013 and 2014.

With margin pressure continuing in 2012, and GTM forcasting 21 Gigawatts of existing capacity to be retired by 2015, now is probably still too early to get back into solar stocks.  When playing a turn around, getting in too early can make you as broke as Evergreen Solar.

Images from PV Technology, Production and Cost Outlook: 2012-2016, GTM Research
Disclosure: No positions.

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 09, 2012

11 Clean Energy Stocks for 2012: July Update

Tom Konrad CFA

June was a month of recovery for the stock market in general and clean energy stocks to a somewhat lesser extent.  

The Russell 2000 index (^RUT, which I use as a broad market benchmark in this series) was up 9% in June, while the Powershares Wilderhill Clean Energy ETF (PBW) gained 5.3%.  So far for the year, ^RUT has produced a total return of 9.5%, while PBW shows a loss off 12.2%.

My model portfolio introduced in January of 11 equally-weighted clean stocks lost ground yet continues to outperform the clean energy index fund PBW, down only 3.8% for the year (up 2.4% for the month.)  Since the broad market is up for the year and the month, the hedged portfolio trails, down 9% for the year and is flat for the month.

I continue to believe that my model portfolio's out-performance of the sector is largely due to my avoidance of the moribund solar sector, which has declined 40% since the start of the year, even after a 63% decline in 2011, as measured by the Guggenheim Global Solar ETF (TAN).  I don't expect a significant solar stock revival until at least 2013, so I think avoiding solar will remain a good strategy for the second half of 2012.perfomrance chart

Stock Notes

Among the individual stocks in the portfolio, my investment in solid European companies with global sales Veolia (VE, +9%), Rockwool (RKWBF, ROCK-B.CO, +12%), and Accell Group (ACCEL.AS, +4%) continues to pay off, especially in June which saw some easing of concerns about a European breakup, when the three returned 0%, 8%, and 6%, respectively.
In the last month, Rockwool announced a new factory in North America in response to robust demand for their fire-resistant insulation, Veolia continued to make progress in its restructuring with the sale of it's UK water business and discussions with buyers over its US waste business and a stake in its transportation unit.

Relatively weakly capitalized companies Lime Energy (LIME, -30%), New Flyer Industries (TSX:NFI / NFYEF, +20%), Western Wind Energy (TSX:WND, WNDEF, -32%) and Finavera Renewables (TSX-V:FVR, FNVRF, -58%) were mixed in June (-6%,-3%,-2%, and +6% respecitively) but these companies have declined so much in previous months (or the previous year, in New Flyer's case), that all currently look like they are bottoming.

As I wrote in May, I expected a buying opportunity in LIME after the market had digested a first quarter earnings disappointment.  I purchased shares a couple weeks ago at $3.23, near where the stock is currently hovering.

New Flyer gave notice of its long-indicated intent to redeem its 14% subordinated notes in August, the redemption of which will be funded with the proceeds from the much cheaper 6.25% convertible debentures.  The exchange will greatly strengthen New Flyer's cash flow and should make the company more attractive to new investors, especially income investors attracted by New Flyer's 9% forward dividend yield.

Western Wind Energy has still not received an overdue Federal cash grant which had several readers asking me what was going on with the stock.  The company remains confident that the grant is just delayed, and I could find no reason to think otherwise when I looked into it

Finavera recently received the construction permit for its Tumbler Ridge project, but a real recovery of the stock will probably await the announcement of financing for the project.

Alterra Power (TSX:AXY / MGMXF) had the strongest gain in June, up13% after an unsolicited offer for its Icelandic HS Orka geothermal plant and the first equity payment from its Dokie wind farm.  Alterra is up 18% for the year.

Waterfurnace Renewable Energy (TSX:WFI / WFIFF) posted a solid 4% return in June, for an 11% total return for the year.  Waterfurnace recently launched the world's most efficient commercially available heat pump based on variable speed technology.  I'm currently talking to contractors about installing a geothermal system in the oil-heated home I bought in January, and Waterfurnace's Series 7 will definitely be one to consider.

Waste Management (WM) and Honeywell (HON) produced modest gains for the month (+1% and +3%) and year to date (+3% and +2%.)

My Trades

I expect the stock market to continue to be rocky through the second half of the year, but so far I'm happy with the additions to my holdings of New Flyer, Accell, Waste Management, and Waterfurnace I wrote that I'd bought in May. 

With the market strengthening in June, I made fewer purchases from this list, only Waterfurnace at $15.48, Western Wind at $1.15 and 1.20, and Lime at $2.24. 

I sold my shares in Veolia at $12.3-12.50 early in the month, as I had indicated I would probably do when I wrote about trash stock in early May.  Veolia is currently trading at $11.17, and I'll consider repurchasing it if it goes much lower, since I like the progress the company has made on its restructuring since I sold. 

The Western Wind purchase was just speculation that the tax grant would come through, and put me over my target allocation, so I took the opportunity to sell the extra shares for a quick profit when the stock got to $1.32 on Friday, even though we have not yet seen the tax grant.  Part of the reason for the quick turnaround was that this pair of buy/sell trades had the benefit of effectively moving part of my Western Wind position out of my IRA and into my taxable brokerage account.  I'd initially bought the Western Wind in the IRA because that's where I had cash when I was buying the stock last October, but I generally prefer to hold income style investments in the IRA and speculative equity investments in the brokerage account because of differences in tax treatment.


DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Alterra Power: Cash to Invest

Tom Konrad CFA

new_logo1[1].jpg I sometimes think Alterra Power (TSX:AXY, OTC:MGMXF) is unfairly lumped with other small, renewable energy developers.

A typical problem for small developers over the last few years has been raising the funds to invest, even when they have compelling prospects.  For instance, Western Wind Energy stock (TSX:WND,OTC:WNDEF) has been beat up recently because a large Federal cash grant is delayed.  Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) has been declining for most of the year as they look for a strategic partner to help fund their permitted wind developments, despite significant progress permitting those projects and obtaining a bridge loan to fund operations and development in the meantime.

Alterra, on the other hand, has plenty of cash on its books to invest, and does not need to look for partners.  Two news items today drove that point home.  First, they announced that their Dokie Wind Farm (which commenced commercial operations in 2011) had funded its loan reserve and commenced equity distributions back to Alterra.  Second, that the company had received an unsolicited offer for their stake in their HS Orka geothermal plant in Iceland.

With $57 million cash on the books ($0.12 per share), Alterra has no immediate need to sell its 66.6% stake HS Orka, but it has agreed to explore the deal.  Alterra’s VP Corporate Relations, Anders Kruus, stated, “[W]e felt we should consider this unsolicited proposal if it maximizes value for Alterra shareholders and is supported by Icelandic stakeholders.”  In other words, they’ll sell if the price is right and it does not cause political waves in Iceland, where Alterra plans to continue to do business.

It’s a nice position to be in, and maybe investors are starting to recognize it.  The stock is up C$0.05, or 13.5% to C$0.40 as I write, although it’s still trading at only a little more than 50% of book value.

Disclosure: Long MGMXF, WNDEF, FNVRF

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 08, 2012

Special Report on Drought and Biofuels

Jim Lane

Dire US media headlines abound: “Drought!”

What’s real, what’s hype, and what are the impacts?

More importantly, what alternatives does science give us now, and in the future, with more drought-tolerant energy and food crops?

The Reuters report could not have been more stark this week from a field in Illinois.

“We’re in a critical point, could be the beginning of the end,” said Dave Kestel, a farmer, in a Reuters report that ran yesterday. Kestel’s plants in Manhattan, Illinois, the news service reported, “are almost two feet shorter than they should be at this point in the season and the next two weeks are critical.”

A Yahoo report that ran last night and was in the Top Story feed July 6 brought more bad news:  “Just under 56 percent of the contiguous United States is in drought conditions, the most extensive area in the 12-year history of the U.S. Drought Monitor. The previous drought records occurred on Aug. 26, 2003, when 54.79 percent of the lower 48 were in drought and on Sept 10, 2002, when drought extended across 54.63 percent of this area.”

Crop Moisture index

Here’s a drought animation, that gives you a sense of the spread of drought conditions over the past 6 weeks.

Time to panic? The Yes and No arguments

So, should we be hugely worried that – for example, the corn harvest will be massively affected, prices will skyrocket, and food vs fuel concerns will breakout even as US ethanol distilleries, facing escalating feedstock prices and static fuel prices, cuts back on production? Is a disaster in the making?

The Yes argument. In New York, a Reuters report, based on the latest ethanol production numbers, advises that it is so. “The ethanol industry is bracing for its worst spell since the bankruptcy-ridden days of 2007 and 2008,” the news service opined, after US ethanol production dropped to its lowest levels in 10 months. US blend wall issues, corn prices, and falling corn stocks in the face of a persistent hot, dry spell in the US Midwest are among the causes of concern. US ethanol production fell to 857,000 barrels per day as three ethanol plant shutdowns affected production results. Meanwhile, a Linn Group analyst told Reuters that ethanol margins are 20 cents below the minimum viability point. More on that story.


The No argument. So far, the drought is highly regionalized, especially with respect to corn. For example, in terms of corn condition, 50 percent of Indiana corn is rated very poor or poor, while only 10 percent is rated thus in Iowa and 4 percent in Minnesota. The average is 9 percent. This according to the latest weekly publication from USDA, here.

And again, let’s look at last year’s report from NDMC on conditions, just to calibrate that data against a not-so-bad year. How much worse is this year? Well, so far, its better.

“Nearly 12 percent of the contiguous United States fell into the “exceptional” classification during the month, peaking at 11.96 percent on July 12. That level of exceptional drought had never before been seen in the monitor’s 12-year history, ” said Brian Fuchs, UNL assistant geoscientist and climatologist at the NDMC, in assessing July 2011 conditions.

And, last year, the US Drought Monitor warned that “The percent of contiguous U.S. land area experiencing exceptional drought in July reached the highest levels in the history of the U.S. Drought Monitor.”  More on that story.

Ground Water

Stay tuned

“The recent heat and dryness is catching up with us on a national scale,” said Michael J. Hayes, director of the National Drought Mitigation Center. “Now, we have a larger section of the country in these lesser categories of drought than we’ve previously experienced in the history of the Drought Monitor. So far, just 8.64 percent of the country is in either extreme or exceptional drought. During 2002 and 2003, there were several very significant droughts taking place that had a much greater areal coverage of the more severe and extreme drought categories,” Hayes said. “Right now we are seeing pockets of more severe drought, but it is spread out over different parts of the country. It’s early in the season, though. The potential development is something we will be watching.” More on the story.

The corn and soy impact

Overall, the corn crop projection is a mixed bag, with high acreage offset by poor crop condition.

2012 Corn planted is 96.4 million acres, up 5 percent from 201, with projected harvest at 88.9 million acres, up 6 percent. Soybeans planted are at 76.1 million acres,  up 1 percent, while harvest is projected at 75.3 million acres, up 2 percent. Wheat planting is at 56 million acres, up 3 percent. 48 percent of the US corn crop is rated in “good to excellent” condition,  down 8 points from last week and 21 below 2011, in what is the lowest rating since 1988.

Useful links to keep an eye out for

Drought Monitor.
The USDA’s WASDE report is due out July 11.  That will address the impact of conditions on yields.

What’s being done in crop R&D about drought-tolerance

Nature reports new drought tolerant maize strains released by Pioneer. “Last week, DuPont (DD) subsidiary Pioneer Hi-Bred International, headquartered in Johnston, Iowa, announced plans to release a series of hybrid maize (corn) strains that can flourish with less water…Pioneer says that field studies show its new hybrids will increase maize yields by 5% in water-limited environments.” More on the story.

Improvements in plant stress response. “When a plant encounters drought, it does its best to cope with this stress by activating a set of protein molecules called receptors. A team of plant cell biologists — led by Sean Cutler, an associate professor of plant cell biology at the University of California, Riverside — has discovered how to rewire this cellular machinery to heighten the plants’ stress response. It’s a finding that brings drought-tolerant crops a step closer to becoming a reality.” More on the story.

Plants subjected to a previous period of drought learn to deal with the stress thanks to their memories of the experience, new research has found. “This phenomenon of drought hardening is in the common literature but not really in the academic literature,” said Michael Fromm, a University of Nebraska-Lincoln plant scientist who was part of the research team. “The mechanisms involved in this process seem to be what we found.” Working with Arabidopsis, researchers found that pre-stressed plants bounced back more quickly the next time they were dehydrated. Specifically, the nontrained plants wilted faster than trained plants and their leaves lost water at a faster rate than trained plants.” More on the story.

Biofuels and energy crop developments in drought tolerance

Super-performing corn hybrid. In February, University of Illinois researchers developed a new maize hybrid that they report will produce as much as 15% to 20% more biomass given the same amount of fertilizer as commercial hybrids.  The hybrid is a mix of both tropical and temperate maize, with increased drought resistance and sugars in the corn stalk, while lowering vulnerabilities to pests and diseases.  The researchers state that the increased stalk sugars will increase ethanol production. More on the story.

Drought-tolerant corn trait. Last December, the U.S. Department of Agriculture deregulated MON 87460, Monsanto’s first-generation drought-tolerant trait for corn.  Drought-tolerant corn is projected to be introduced as part of an overall system that would offer farmers improved genetics, agronomic practices and the drought trait. Monsanto plans to conduct on-farm trials in 2012 to give farmers experience with the product, while generating data to help inform the company’s commercial decisions. The drought-tolerant trait is part of Monsanto’s Yield and Stress collaboration in plant biotechnology with Germany-based BASF. More on the story.

Stress-related hormones enable plant response. In December, researchers at UC Riverside reported a way to heighten a plant’s cellular response to drought.  Plants under drought stress produce abscisic acid, a stress hormone to help the plant survive.  The research, conducted at the laboratory of Associate Professor Sean Cutler, has now succeeded in supercharging the plant’s stress response pathway by modifying the abscisic acid receptors so that they can be turned on at will and stay on.  This could bring drought-tolerant crops a step closer to becoming a reality. More on the story.

Genetic mutation enables drought endurance. Last year, researchers at Purdue University found a genetic mutation that allows a plant to better endure drought without losing biomass. During drought conditions, a plant might close its stomata to conserve water which also reduces the amount of carbon dioxide it can take in, limiting photosynthesis and growth, but the discovery shows plants with a mutant form of the gene GTL1, did not reduce carbon dioxide intake nor lose biomass. It did have a 20 percent reduction in transpiration, however. More on the story.

Who’s working on drought-resistance energy crops?

In specific bioenergy crops, companies such as Ceres (CERE, switchgrass, energy cane in the Blade energy crop family) and Mendel Biotechnologies (miscanthus) have been garnering the most attention as they bring new traits forward for the new integrated biorefineries utilizing energy crops. SG Biofuels are also working on traits related to jatropha, which has a history of low-water tolerance.

The bottom line

For now, expect panic – more investors will be reading Reuters and Yahoo than Biofuels Digest or AltEnergyStocks, and can be expected to freak out. Impacts may include – corn ethanol production shutdowns, rising corn prices, rising RIN prices as obligated ethanol blenders look around for alternatives, or rising ethanol prices as the blenders chase product with price. Corn stocks may fall as hoarding commences and high prices bring out all the sellers.

It’s real, but not yet dire. For now, know that drought is real and widespread, but not as exceptionally severe today, across the US, as even last year’s more limited drought conditions.

It’s regional, so far. The drought has kept away from major ethanol producing states, by and large, like Iowa, South Dakota, Minnesota – but is hitting Illinois and Indiana hard.

July is key. July always is key – it’s just a critical rain and heat month, for crop yields. This year more than ever.

Science is advancing. Keep in mind that crops are more resistant than in the past to environmental stress.

Be vigilant, investor! When panic and worry spreads, and information is scarce, there’s money to be made in the markets, but it requires nerves of steel to keep your cool when everyone around you in losing theirs.

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.

July 07, 2012

Where's Western Wind Energy's Tax Grant?

Tom Konrad CFA

 On March 22, Western Wind Energy (TSX-V:WND, OTC:WNDEF) applied for a $90,556,707 tax-free 1603 grant from the US Treasury on behalf of the completed 120MW Windstar project.  The press release stated that the grant is subject to approval by the Treasury and payable within sixty days.

The Windstar Wind Farm. Photo credit: Western Wind Energy

It’s now more than three months later, and no tax grant.  The stock is down 24% since May 22, when the grant was expected, but management remains confident they will get the grant.  In the company’s May 30 quarterly earnings announcement, the company said,

Our application has exceeded the 60 day program guidance review period and we continue to monitor our application status on a daily basis. We are not aware of any issues associated with our application and through our network of advisors we believe a majority of the applications are delayed.

The Western Wind CEO Jeffrey Ciachurski had to attest to this statement under the Dodd-Frank rules, so we can be confident he believes the grant is just delayed, and will not be denied.  In a phone interview on Friday, he told me flat out that “There is no risk to the cash grant,” and “most 1603 applications are running late.”   He also told me that the company has attended legal seminars on 1603 grants, and the average deviation (amount the grant is reduced by Treasury) is 3%, so we can expect Western Wind to receive about $88 million.

According to Western Wind, the reason the 1603 grants are running late is because of a flood of solar applications as the program expired at the end of 2011, and because there is pressure on Treasury to vet applications very carefully given the current charged political climate in Washington.

When I was at the Renewable Energy Finance Forum, Wall Street last week, I tried to get independent confirmation of the company’s statement that most 1603 grants are running late.  No one was able to give me direct confirmation.  Most industry insiders told me they would not be surprised if that were the case, but they did not have any personal knowledge.  I also asked Richard Kauffman, Senior Advisor to the Secretary of Energy in the Department of Energy (DOE).   Although DOE helps the Treasury vet 1603 grants, he had not heard anything about grants being delayed.

I also got in touch with a source at Treasury, who was not willing to talk on the record.  That source did say that Treasury’s “policy”  is a 60 day turnaround.  The source said that I should not assume that the grant would be denied just because it had not yet been granted, as there are reasons a grant might take longer than 60 days to process.


Western Wind is still confident they will receive the tax grant, and the Treasury Department did not deny that many 1603 grants are delayed.  It makes a certain amount of sense to me that if most 1603 grants are running late, Treasury is not willing to come out and say that’s the case: it would not make them look good.  The fact that my Treasury source did not deny that grants are running late and was unwilling to go on the record, lends credence to the possibility that many grants are late.  After all, if everything were running smoothly, why not just say so?

Overall, I think the chances of Western Wind receiving the grant are very high.  I recently bought more stock at $1.15 on the gamble that I’m right, but to be perfectly clear, it is a gamble.  While the chances seem very low to me, if Western Wind does not receive the tax grant, it could easily bankrupt the company.  Western Wind had only $272,720 in unrestricted cash on hand at the end of May, and has substantial project-related debt that it plans to pay down with the grant proceeds.  If the tax grant were denied, I can’t imagine there would be many lenders willing to step up and fill the breach.

On the other hand, I can’t find any reason to believe that the Windstar project should not qualify for the 1603 grant.  If the grant were to be denied, what would be the basis for denial?

Disclosure: Long WNDEF

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 06, 2012

GE To Delay Colorado Thin-film Manufacturing Plant

Steve Leone

Delays and cancellations photo via Bigstock

Now, energy giant General Electric (GE) said it is putting plans for its Aurora, Colo., plant on hold for 18 months in reaction to the continued drop in crystalline silicon solar panels. When the company announced its plans to jump into American thin-film manufacturing nine months ago, it did so in grand fashion. Company officials unveiled a plan for a 400-megawatt (MW) facility that would churn out cadmium telluride (CdTe) panels, the same thin-film technology deployed by Abound. It was an American manufacturing success story born out of Primestar, which GE purchased in 2011.

GE wasn’t preparing for a soft launch. It was pushing ahead hard and fast with the goal of becoming a U.S.-based solar manufacturing leader. To that end, it laid out a plan to introduce a module at 14 percent efficiency or higher and that the product would hit the commercial market by 2013. Now, company officials say they will delay the new plant so they can work on beefing up the efficiency. That was the same approach announced by Abound, when it said this winter that it would temporarily shut down its Colorado lines to work on efficiency. Four months later the company announced it would file for bankruptcy

So now, U.S. manufacturing has lost two of its biggest prizes — one a startup and the other an industry leader. In addition to the 400 MW the GE plant was to produce, it would also have created about 350 new jobs. The 640-MW plant that Abound received a Department of Energy loan guarantee to build in Tipton, Ind., represents another 1,000 jobs.

GE, to be sure, is a stable, diversified company. It also remains a player and investor in many renewable technologies. It’s proven to be a company willing to take a chance on technologies that it feels can win a significant segment of the market. Many will surely see the announcement as a lack of confidence in thin film going forward.

The company exuded confidence nine months ago, just as the industry was bracing for trade action against Chinese crystalline silicon panels that were driving down costs and profit margins for American manufacturers. 

“With so much capacity out there, the only companies that can compete are the ones with the right technology and the right cost structure,” said Matt Guyette, GE’s strategy leader for renewables, during a conference call last October. “There’s a lot of companies out there with the wrong cost structure. We see it with their quarterly reports and some of the bankruptcies in the past few months.

“We’ve been watching the space for over 10 years, and we’ve been investing in technologies, and the reason we have not built this plant before is that the technology was not at a point where we were confident that we could compete. We’re there now. We’re confident and we’re scaling up.” 

While the company is saying that it will forge ahead, the delay illustrates once again how rapidly the solar industry is changing.

Steve Leone is an Associate Editor at RenewableEnergyWorld.com.  He has been a journalist for more than 15 years and has worked for news organizations in Rhode Island, Maine, New Hampshire, Virginia and California.

The Next Trend: Integrating PV with Solar Thermal

Tom Konrad CFA

The Once Bright Future of CSP

Solúcar PS10 solar tower. Photo by afloresm via Flickr

Since before I started writing about investing in clean energy in 2006, I’ve been fascinated by Concentrating Solar Thermal Power (CSP.)  CSP held the promise of much cheaper energy than was then available from photovoltiac (PV) solar, combined with thermal storage, which eliminated the variability problems of PV.  Unlike other renewable energy able to produce baseload power (geothermal, biomass, and hydro), CSP is scaleable: The solar resource in areas appropriate for CSP is large enough to easily meet the  world’s energy needs.

Moderately priced, carbon-free, scaleable power with integrated storage?  CSP seemed likely to become a core clean energy solution.

The Darker Present

Today, things don’t look as good for CSP.  Large, central CSP power plants take years to permit and connect to the grid.  They work best in areas with low cloud cover, mostly deserts.  The least expensive CSP plants also require water for cooling (air cooling is possible, but reduces efficiency and so increases the cost of power.)

The large scale of CSP projects also makes it harder and slower to arrange financing.  The loss of the US Department of Energy loan guarantees last year dealt a harsh blow to the industry.  Once-successful CSP developer Solar Millennium, which had been granted a conditional commitment under the program, declared bankruptcy when they could not finance a project within the DOE-imposed deadline.

Slow permitting and financing means that only a few CSP plants have yet been built.  Meanwhile, distributed PV installations have been growing rapidly, giving manufacturers and installers valuable experience, leading to rapid cost cutting.  As a result, the world will install 27 GW of PV in 2012.  Total installed CSP capacity is about 3 GW.

The accelerated learning curve has allowed PV shoot past CSP in cost per kilowatt of power generated.  While CSP was plodding down the cost curve, PV dove off the cost cliff.  As I wrote in November, many planned CSP projects are being displaced by PV or being canceled.

Friend or Foe?

All is not lost for CSP.  While PV is ahead on price, CSP still has one valuable asset PV can’t match: cheap storage.  Micheal Whalen, CFO of CSP company Solar Reserve, said the idea of integrating CSP with PV was “of interest” at the Renewable Energy Finance Forum- Wall Street in response to an audience question.  This might make sense for large scale solar farms, since the integration of PV would allow the overall price of power to be lower than CSP alone, while CSP would be able to compensate for the rapid output changes from PV that occur whenever a cloud passes over, as well as producing power at night, or shifting it ot peak afternoon periods.

CSP/PV hybrid farms might be particularly appropriate in places like Saudi Arabia, which has recently committed itself to large solar investments.  While the low water use and cost of PV will appeal in the desert kingdom, the fact that solar will be displacing power generated from oil means that even CSP based power will produce cost reductions.  Large solar installations like what Saudi Arabia is contemplating could easily destabilize the grid if they were to consist entirely of variable PV.  Mixing in dispatchable CSP power would help maintain the stability of the whole system.

As Mr. Whalen said, “There is a place for CSP even when PV is cheap, if it differentiates itself [with storage].”  The best markets for CSP will be places like Saudi Arabia and South Africa where “they do not have robust grid connections.”  Without robust grid connections, PV’s variability can easily destabilize the grid, giving CSP a role in grid stabilization.

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 05, 2012

Energy Independence Day

Jim Lane
Independence Day Celebration photo via BigStock

 Yesterday, in the United States the bands and bunting were on display, because it was Independence Day. But is freedom really sustainable, without energy independence too?

It would be a sweeter thing, political independence, if it were accompanied by more energy independence. For examples, choices at the pump that didn’t involve wealth transfers to people who oppose the principle of ballot boxes.

But before there is energy independence, there has to be more freedom from the entropy that afflicts the energy business, and especially the bioenergy business.

Hmm, entropy, er, what’s that again?

Well, there are millions of tons of gold in the oceans, so why aren’t fisherman all millionaires? That’s entropy, the tendency of everything to reduce from useful concentrations to a smooth distribution. In the case of gold in seawater, the concentrations are so low, in parts per million,  that the extraction cost exceeds the value of the metal.

The entropy problem in feedstocks

In bioenergy, it’s the chief reason, for example, that otherwise perfectly acceptable fruit waste from citrus harvest is a difficult feedstock for energy production. The process for cellulosic conversion was discovered in the 1990s – so what’s the hold up?  Just not enough fruit waste in a given target area, and the proposed stand-alone refineries are limited so far to an unprofitable 4 million gallons.

Think of what a different world it would be if certain residues were sufficiently concentrated. For example, there is 2 billion tons of MSW produced each year, according to a Columbia University estimate. Right there, you have the means to produce some 160 billion gallons of biofuels.

The entropy problem in capital

So, why is the world not awash in cellulosic biofuels from MSW? Well, capital is subject to its own entropy – it never seems to be in the right hands at the right time, never concentrated enough in the hands of those who can afford big risks. Instead, it is distributed across lots of smaller portfolios that, generally, take much smaller risks. Greenfield biorefineries are a tough sell in tough times. There’s entropy, again.

Which brings us to corn stover and cobs – these days, generally just left in the field.  POET Biomass estimates that you can acquire enough cellulosic feedstock, from the area serving a 100 million gallon corn ethanol plant, to add 25 million gallons in capacity. Right there, you have, in the form of corn ethanol biorefinery bolt ons, the capacity to add 3.5 billion gallons of cellulosic capacity.

Now, that’s entropy at work, again – because about 22 percent of the US corn harvest goes to corn ethanol – meaning there’s an awful lot of cobs and stover lying around, that simply is not near enough to an existing corn ethanol plant. Applying the POET Biomass math, it’s a fair estimate that there is perhaps another 15 or 16 billion gallons in capacity available, by finding ways to aggregate cobs and stover.

Which brings us around to in-field pre-processing. It’s simply going to have to become a given, in combine harvesting, to pick up the cobs and stover in a one-pass system. Which makes it sad to see  small businesses, like the team behind the FARM MAX biomass harvesting technology, struggle for investor attention and support.

Piloting an integrated bioeconomy

Now, that’s something the Midwestern Governors Association, which has a task force on biorefining and biofuels, might usefully tackle. Instead of handing out incentives for plant construction, why not incentivize lower costs for biomass collection, and help put in the pumps. By concentrating demand and supply, you can open up markets – by fighting entropy.

It doesn’t have to be a big government hand-out. Hand-outs, as we have discovered, rarely solve market problems and create new perceptional ones. As if states were awash in money, anyway. It means using the organizational power of government, as opposed to the taxing power.  Organizing one, small area to become an exemplar to a wider world.  Car dealers, growers, processors, financiers and state government, all have a stake in a positive outcome, and could and should be counted on to bear some of the cost.

Not too long ago, Greensburg, Kansas embarked on a hugely ambitious experiment in green living – too ambitious, probably, though many good things have come of its commitment, which followed the devastation wrought by an F5 tornado. The principle of picking out one or two towns, or a small region, is a good one.

Why, towns might vie for such an honor, with a resulting local organization that produces the kind of cooperation and cost-sharing that we see in, say, cities that have organized an Olympics or a world’s fair. Doesn’t have to be a major metropolitan city, as in the case of an Olympics. Blair, Nebraska…Shenandoah, Iowa…well, a lot of small towns could work this kind of magic.

Of course, it’s not something restricted to the United States. Towns from Canada to Denmark, South Africa to China, India to Brazil could mount such an effort.

Been done before

Two hundred years ago, a similar approach – a pilot scheme, using a fledgling, underpopulated United States – worked wonders for the principles of freedom of opportunity and political independence. Whole swathes of the wide world are today organized along the principles established by Washington, Adams, Jefferson, Franklin et al, back in 1776. Democracy and freedom won a worldwide following, once it was proven that liberty, in fact, is a driver of happiness and prosperity.

We suspect a similar effort on energy independence might reap a similarly impressive harvest.  A new birth of energy freedom, my what a good outcome that would be. Especially for all those small towns that have borne such a heavy burden to establish those political freedoms that we enjoy today.

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.

July 04, 2012

When Will Polypore Payoff?

by Debra Fiakas CFA

Diagram of a battery with a polymer separator.
Lithium ion batteries make it possible to recharge your smart phone, camera and a multitude of other have-to-have-with-us-every­-moment devices.  Yet the average person knows very little of the inner workings of something so important to our daily lives.  One little item in a battery is a highly specialized membrane that fits neatly between opposing electrodes  -  the positive and negative poles that make an electrical charge.  This membrane manages the charge and discharge process.

These membranes are so vital and the technology so particular, battery makers rely on membrane experts like Polypore International, Inc. (PPO:  NYSE).  Polypore operates under the Celgard and Daramic brands in this market.  Last year Polypore announced a $105 million expansion of its lithium ion separator manufacturing capacity.  The expansion is expected to be completed in 2013 and become operational in 2014.  Polypore had already expanded production capacity for its polyethylene battery separators used in lead-acid batteries.

With demand for batteries increasing each year, the news should have ignited shareholders.  Instead Polypore shares are trading 46% off the 52-week high.  High net profits and strong cash flows cannot be the problem.  Polypore earned $98.3 million in net profit or $2.08 per share on $751.1 million in total sales over the last year.  Operations generated $137.0 million in cash.  That represents a net income margin of 13.1% and a cash conversion rate of 18.2%.

Shareholder’s tepid response to expansion could be Polypore’s balance sheet.  At the end March 2012, long-term debt was $706.2 million, making Polypore’s debt-to-equity ratio 1.33.  That may not seem particularly weighty, but cash stood at a paltry $79 million.  For some investors, Polypore may appear to have a little financial flexibility.

If there was a time that Polypore needed to be agile it is now. The company has competitors coming at it from all sides.  Besides energy devices, Polypore’s membranes are used for filtration in medical devices such as those that perform hemodialysis and blood oxygenation processes.  Polypore’s filtration membranes also have applications for industrial equipment to clean sub-micron particulates from liquids or gasification processes.  Polypore has competitors in each group.  Asahi Kasei Chemicals Corporation based in Japan is one of the few that competes in with Polypore in all markets.

PPO is currently trading at 19.4 times trailing earnings.  However, analysts following Polypore have plenty of enthusiasm for the company’s future.  They have pegged next year’s earnings at $3.09 per share, implying a forward price earnings ratio of 13.1.  That is a compelling valuation for a stock with a beta of 0.45.

I do not have a precise timing for when Polypore shares will pay off for investors.  However, at the current depressed price level should give investors with the patience for a buy-and-hold strategy to find out.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. PPO is included in the Storage Group of Crystal Equity Research’s Mothers of Invention Index.

July 03, 2012

SunShot Grand Challenge: The SunShot Swerve

Ed Gunther

Has a permanent swerve or shift downward of the PV (Photovoltaic) Learning Curve been caused by PV industry overcapacity, normalized polysilicon prices, and the aggressive SunShot goals?

From SunShot Grand Challenge: The SunShot Swerve

On the second day of the SunShot Grand Challenge Summit and Technology Forum, SunPower Corporation (NASDAQ:SPWR) President Emeritus Dr. Richard Swanson presented “The SunShot Swerve” providing his perspectives on where the PV industry is today and how SunShot has influenced the industry’s direction.

After explaining the book that motivated the title, Dr. Swanson said:

What I have come to believe is we have a modern version of that in the SunShot program where so much intellect has come together that we will actually change the future in a positive way.

In a transformational rethink of solar strategy, the SunShot Initiative set aggressive goals for module and systems costs and elevated the importance of reducing soft costs and the grid integration of non-dispatchable solar resources to the same level as solar technology cost reductions and innovation.

Revisiting the PV Learning Curve
The SunShot goal of $1.00 per Watt ($/W) installed utility scale PV systems and $0.50 per Watt modules was greeted with skepticism by the PV industry and looked impossible relative to the historical PV Learning Curve established over some 35 years predicting a twenty percent (20%) reduction in module manufacturing cost with every doubling of global cumulative installations. The PV Learning Curve was once again validated when polysilicon shortages pushed modules prices higher in 2005 but returned to the trend line in 2009.

From SunShot Grand Challenge: The SunShot Swerve

Recent PV industry developments have challenged the mechanical evolution of the learning curve. In 2011, module prices dipped below the learning curve at $1.25/W followed by IHS iSuppli’s prediction of crystalline silicon solar module prices hitting $1 per Watt by the first quarter of 2012. The PV industry asked: “Where could they have gotten that aggressive a goal? Nothing like that could ever possibly happen.” I too was skeptical of the later prediction at the time.

In fact, silicon module prices have dipped below $1/W in 2012 as a result of fierce competition in a period of significant manufacturing overcapacity and the return of polysilicon pricing to historical levels.

Furthermore, Yingli Green Energy Hold. Co. Ltd. (NYSE:YGE) and Trina Solar Limited (NYSE:TSL) have announced plans to achieve manufacturing costs of $0.70/W or less by the end of 2012. And bids for installing large scale PV plants are now in the $1.20 to $1.70 per Watt range.

Dr. Swanson said:

The learning curve has taken a jog very likely. There are many reasons for this, but I firmly believe that one of the reasons is the slap in the face that these audacious goals that came out of the SunShot program gave our community.

The Swerve” is the only explanation for the shift of the PV Learning Curve along a path aligned with the SunShot goals.

From SunShot Grand Challenge: The SunShot Swerve

The aggressive SunShot goals spurred innovation beyond the SunShot funded companies, and an NREL crystalline silicon (c-Si) roadmap in preparation has manufacturing costs of $0.60/W for modules “baked in”.

Dr. Swanson credits SunShot with accelerating SunPower’s roadmap to $1/W monocrystalline silicon back contact modules by one year to 4Q 2013.

Arranging the c-Si value chain from polysilicon to systems according to cost, the module and installed system portion now account for 59% of the cost: 21% for the module and 38% for the system. Of course, SunPower’s consistent strategy leveraging cell efficiency to reduce module and system costs dovetails with the observation.

After reviewing SunPower’s latest module with greater than 21% total area efficiency based on Gen 3 solar cells, Dr. Swanson said: “It will not be very long in the future before 20% will become the standard silicon solar cell.

Looking at Future Trends in c-Si, Dr. Swanson highlighted kerfless wafers as standing out on the revolutionary side and mentioned SunPower’s investment in the Epi (epitaxial) based kerfless wafer company named Solexel.

By smashing the $1/W module price metric, c-Si has become a front running solar technology in the SunShot race with established scale advantages, a moving target of increasing efficiencies, and a proven technology for manufacturing investments and field installations.

Other perspectives
A week later at TechConnect World 2012 in Santa Clara, California USA, additional viewpoints were expressed on the PV Learning Curve.

E. I. Du Pont De Nemours And Co (NYSE:DD) Global Market & Product Planning Manager, Photovoltaic Encapsulants, Dr. Penny L. Perry said:

On a log scale module reductions have been virtually linear through the growth of the solar industry until 4Q 2011 when it dropped off well below the line.

Dr. Perry observed there was probably not a lot of room left for cost reductions in the material portion of modules. Efficiency improvements, increasing module reliability and durability, and reducing system cost, not just module costs, are the three keys to reducing the overall PV system LCOE (Levelized Cost of Energy). Extending module lifetimes beyond 25 years to 30 or 40 years while maintaining 90% power output was mentioned as a possible, achievable target to further reduce LCOE.

Applied Materials, Inc. (NASDAQ:AMAT) Energy and Environmental Solutions, Chief Marketing Officer & Managing Director, Business Development, Kevin Chen said:

What is interesting is that as we track recent quotations in the market, we are seeing that the price per watt is tracking below all of these trend lines. So the question is can the market sustain this?

Will we come out of this curve because of the oversupply situation or will we continue it, and the answer remains to be seen.

Mr. Chen’s takeaway was “the traditional trajectory of cost reduction is being accelerated” and increasing cell efficiency should be the focus for further reducing the cost per Watt.

However, critics argue the SunShot goals are harmful to the PV industry and the current pricing is unsustainable. These arguments will be confirmed if module pricing returns to the PV Learning Curve as the market shakeout and consolidation resolves itself over the coming quarters and years.

Meanwhile per “High efficiency grabs the headlines, but cost reduction remains the priority” by Finlay Colville in a Guest Blog at PV-Tech.org, the heralded improvements in silicon cell efficiency through advanced cell design will have to wait until “the leading candidates for non-silicon cost reduction have been exhausted” perhaps as late as 2014!

At the Applied Materials 2012 Investor & Analyst Meeting Webcast, the Breakout Session video, The Solar Roadmap: Continuing Cost Reduction, presented by Applied Solar President Charlie Gay, Ph.D., is quite informative regarding developments in crystalline silicon solar technology from an AMAT perspective and references one of Dr. Swanson’s Swerve slides. Per the AMAT “Benchmark Cell Evolutionary Sequence” slide, SunPower’s next step is evolutionary thinner wafers or a discontinuous move to kerfless wafer technology.

DISCLOSURE: No position in any of the stocks mentioned.

Edgar Gunther is a photovoltaic enthusiast who researches and pens the GUNTHER Portfolio under the Photovoltaic Blogger moniker. The GUNTHER Portfolio is an eclectic collection of niche Blog posts about solar photovoltaic technologies, companies, industry developments, and occasional energy politics sprinkled with insight, analysis, and irreverent commentary.

July 02, 2012

Is Ocean Energy More Than "A Very Expensive Hobby"?

Jennifer Runyon
Powerful Ocean Wave photo via Bigstock
That was the question posed to industry experts at the EnergyOcean International conference and exhibition that took place in Danvers, Mass., this week. Referring to three levels of development — Epoch 1, 2, and 3 — Andrew Tyler, CEO of Marine Current Turbines (MCT), a company now owned by Siemens (SI), gave a few key pointers to companies interested getting beyond the “very expensive hobby” stage of ocean energy development.

While his tongue-in-cheek reference to marine and tidal energy development was sarcastic, the sentiment was real.  It’s a pricey endeavor.  The proof-of-concept stage will run about $1 million, he said.  The small-scale stage will run $2 miliion to $5 million and to get to the full-scale prototype stage, a company will need to have $15 million to $30 million at its disposal. Tyler said that for financing companies should look to venture capitalists or government because “banks won’t touch them” since the risk is just too high.

How Can Start-ups Get Funding? 

As with all renewable technologies, especially nascent ones like ocean energy, reducing costs is key to advancing the industry. Tyler said in order to attract any financing, technology risks must be as minimal as possible. Even venture capitalists “won’t touch a science experiment," he said.  He encouraged start-ups to focus on sites that will be easy to develop, instead of those that might be the “juiciest” in terms of energy potential. The ocean energy industry could learn from the offshore wind industry, which started going after resources that were easier to tap rather than deepwater sites that are more complicated to develop.

In order to get financing, start-ups must have an unrelenting focus on reducing the levelized cost of energy (LCOE) to the point where it is “at least in line with other renewable energy sources,” Tyler said. He also encouraged those interested in becoming part of the industry to focus on areas down the value chain where they could reduce costs.  He told me that he often gets calls from inventors who have a patent but no money and who would like Siemens to invest in them. Once in a while, he said he would take a meeting with them to see if the idea truly is a viable one.  And these days, he’s more apt to take those meetings if the inventor has an idea for how to make improvements lower down on the value chain. “There is plenty of room for innovation in the supply chain,” he said.

Partnering with the Big Boys and Reducing Risk

In addition, money for the right technologies can also come from bigger energy companies. Recently Siemens took a majority stake in MCT, showing to the world that it has confidence in the industry. About six months ago global power and automation group ABB (ABB) took a $20 million stake in Greenvolts to help advance its concentrating photovoltaics technology and about a year ago General Electric (GE) purchased small thin-film maker Primestar.  Tyler believes that this trend will continue as larger companies look for innovative technologies to build out their portfolios.

Even the most willing investor needs to feel confident that the potential gains outweigh the risks of losing money.  The ocean energy industry should also, therefore, focus on lowering the risks associated with investing in its technology. 

Amanda Forsythe, a tax attorney with law firm Chadborne and Parke, gave some examples of how the ocean energy industry could help reduce risk. In the U.S., she said, the government hasn’t been able to set a clear course for renewable energy development.  Forsythe explained that right now the biggest risk that companies face is the “change of law” risk, i.e., the expiration and non-extension of important tax incentives for developers.  She encouraged the industry to lobby for key enabling policies like RPS set-asides or “carve-outs” for certain technologies.  For example, if coastal states were to require that a utility meet a small percentage of its RPS with ocean hydrokinetic energy, it would go a long way towards helping the industry get off its feet. She also mentioned feed-in tariffs as a great enabler but pointed out that with the onset of the financial crisis in the EU, FiTs are losing their popularity even in Europe, the region that championed them to begin with.  Finally she said that government loan guarantees also help to reduce risk for investors and encouraged the industry to continue to fight for them in the U.S.

Fabrege Egg photo via Bigstock

MCT’s Tyler said that by 2020, his company would be building and placing in service 100-MW ocean energy facilities and that electricity costs will be in line with offshore wind. He expects to get there by going into large-scale manufacturing and mentioned plans to build a stand-alone facility in the future.

A large-scale manufacturing facility producing 100-MW ocean energy turbines is certainly more than a hobby.  For MCT, which started in 1999 and put its first commercial scale tidal turbine, the 1.2 MW SeaGen, in the water in 2008, the road was long and full of struggles but the payoff — producing cost-effective, clean renewable energy for generations to come — is worth way more than a huge collection of Faberge eggs.

Jennifer Runyon is managing editor of RenewableEnergyWorld.com and Renewable Energy World North America magazine. She also serves as conference chair of Solar Power-Gen Conference and Exhibition and Renewable Energy World North America Conference and Expo. 

July 01, 2012

Two EVs for the Other 99%

Tom Konrad CFA

English: Photo of the Tesla Model S, from the ...
The Tesla Model S, from the unveiling on 26-Mar-2009. (Photo credit: Wikipedia)

An EV for the 1%

The chatter among electric vehicle (EV) enthusiasts and investors is all about the launch of the Tesla (NASD:TSLA) model S.  A cool ride, no doubt, but not many of us are ever going to buy a sedan that starts at $49,900, even after the $7,500 tax subsidy.

Fortunately for the rest of us, this week also brought news about two much more affordable EVs.

An EV for the 99%

Chicago EV enthusiasts will soon not have to stump up $50K to ride an EV, they’ll be able to ride an EV for just $2.  That’s because the Chicago Transit Authority (CTA) just placed the first order for two of New Flyer Industries’ (OTC:NFYEF, TSX:NFI) recently launched battery-electric transit bus. The CTA will pay $2.2 million for the buses, and will begin a pilot program to understand how they will operate in Chicago’s harsh climate.

The buses come equipped with traction drives and components from Siemens (NYSE:SI) and will be delivered in 2013.

An EV for the Chinese Working Class

Kandi EV
Kandi EV. Photo credit: Marc Chang

On the other side of the world, the Chinese press identified  Kandi Technologies (NASD:KNDI) as a supplier to the City of Hangzhou’s 20,000 vehicle EV rental program.  The program will be active in “July and August,” meaning that the first EV purchases will occur within a month.

The vehicles may come from a variety of manufacturers, but only Kandi Technologies (NASD:KNDI) was identified as having a model approved for the program.  The reporter was shown a Kandi tw0-seater, and Kandi’s mini-EVs were identified by a local power company official (which is a partner in the program) to “possibly” be promoted as they are “more suitable for city driving.”

Another official stated that the rental fee would be low and affordable to working class families.  Previous articles have put the monthly rental at 800 yuan a month, or about $126, a price which includes free charging and battery exchanges.   At such low rental prices, Kandi’s $7,500-$8,000 EVs will clearly be favored over their competitors’ EVs, all of which cost more than $20,000.  The next-cheapest competitor, the Zoyte Longhorn currently rents for 2400 yuan, or $380 per month in Hangzhou, a price which does not include free charging.

Another reason to think that Kandi’s EVs will make up the bulk of the program is the emphasis on battery exchange.  Only Kandi’s EVs were designed as electric vehicles from the ground up, with plans for battery exchange.  Competitors such as the Longhorn are modified versions of gas vehicles, and have the batteries under the back seat.  This means that battery exchange would require an empty back seat, and considerably more time and effort than Kandi’s quick battery exchange system.

Although we’ve suspected it for some time, this is the first official word that Kandi has been selected as part of Hangzhou’s rental program.  From the evidence, it seems that Kandi’s vehicles will not only be included in the program, but they will make up most of the planned 20,000 vehicles.

Disclosure: Long NFYEF, KNDI

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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