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September 30, 2012

Geothermal Transmission 101

Paul Schwabe

Among renewable resources, one of the most valuable attributes of geothermal electricity is the baseload characteristic of the energy resource. That is, geothermal electricity generators are able to deliver a stable level of power production over time. Yet for better or worse, this baseload characteristic—along with other notable factors such as size constraints and varying market segments—reveals that interconnecting a geothermal plant to a transmission or distribution system poses unique challenges compared to other renewable energy technologies [1].

A recent report by NREL, "Geothermal Power and Interconnection: The Economics of Getting to the Market," delves into the specialized world of geothermal transmission. Among other things, this report finds that from a transmission perspective, not all types of geothermal energy technologies are treated equally. Conventional hydrothermal technologies likely fit differently into the transmission framework than do emerging geothermal technologies such as enhanced geothermal systems (EGS), co-produced geothermal with oil and gas facilities and geopressured geothermal.

Table 1 shows three geothermal technologies and the corresponding market segment they serve. It also describes how particular attributes of each technology present challenges to connecting to the grid and how they may be considered in long term system planning.

For example, due to their large project size and their proven commercial viability, hydrothermal geothermal technologies offer a wide range of transmission options; the electricity produced by the plants can serve either local grid networks or be exported to other networks (referred to as balancing authorities, "BA," in Table 1). The report's author suggests that until they are proven, emerging technologies such as EGS are best utilized serving their home network, but if successful, electricity from these new technologies could eventually be transmitted to other networks as well. Meanwhile, co-produced and geopressured geothermal are likely restricted to distributed generation applications due to remote project locations, large electrical demand of the oil or gas facilities, and relatively small generation capacities (i.e., less than 5 MW).

Table showing the attributes, challenges and
long term system planning characteristics for conventional
hydrothermal geothermal, co-production geothermal, and
emerging technologies. Table describes each of these
categories for distributed generation, local network
generation, power sales to another balancing authority
using existing lines and power sales to another balancing
authority using new lines.

Table 1. Geothermal Generation Groupings and Transmission Requirements. Source: [1]

The author also finds that there are several emerging markets in the Western United States where there is expected to be a near-term need for new baseload generation. These markets are largely where coal plants are expected to be taken offline in the next 5-10 years.  It is estimated that there will be more than 3,000 MW of new baseload opportunities that will emerge from diminished coal usage across the Western United States [1].  While some of these resources will be replaced with other forms of fossil fuel electricity generation such as natural gas, there is likely enough of a need to also elicit interest from geothermal developers.

The report also shows what the author succinctly describes as "The Uphill Economics of New Transmission." Generally, the cost of new transmission is determined by how much electricity the new line caries. Due to economies of scale, a MW of carrying capability on a large transmission line is cheaper than a MW of carrying capability on a smaller line.  Figure 1 shows the cost of transmission per megawatt served over various transmission line sizes.

Bar chart showing the Dollar per MW capacity of
new electricity transmission. The cost per MW is shown for
both 100 mile and 600 mile lines and at different voltage
levels. The cost per MW generally decrease and the line
capacities’ increase.

Figure 1. Total Line and Substation Costs per Megawatt of Transmission Capability.  Source: [1]

Given that most U.S. geothermal plants are less than 80 megawatts in capacity, they are relatively small energy generators compared to other baseload electricity sources such as coal or natural gas power plants.  Without economies of scale, new transmission for commercially available hydrothermal geothermal is a significant challenge, and in practice, drives even proven hydrothermal geothermal development into areas with existing, but underutilized transmission in place [1].

As each of these geothermal technologies offers the benefit of a stable electricity generation profile, there is likely to be a demand for the energy they produce. However, the role geothermal energy will play in long term transmission planning remains to be seen.

Paul Schwabe is an Energy Analyst with the National Renewable Energy Laboratory’s project finance team and has significant expertise in wind and geothermal projects. He has over 10 years of experience in the energy industry, including electricity market analysis, natural gas forecasting, and financial modeling.
This article was first published on the Renewable Energy Project Finance blog.

September 29, 2012

Will Higher Heat Content in Trash Help Waste-to-Energy Stocks?

Tom Konrad CFA

The US Energy Information Administration (EIA) recently published an article describing an increase in the energy content of municipal solid waste (MSW).  The reason for this increase is an increase in the percentage of waste from “non-biogenic” sources (i.e. plastics) as compared to biogenic sources (paper, cardboard, wood, food and yard waste, etc.)  Biogenic waste has an average heat content of 11 MMBtu/ton, as compared to 23 MMBtu/ton for non-biogenic waste.

Source: U.S. Energy Information Administration, derived from U.S. Enivoronmental Protection Agency, Municipal Solid Waste data.

The EIA attributes the relative decrease in the amount of (biogenic) food containers and packaging (heat content 16.6 MMBtu/ton) and an increase in waste polypropylene (PP, 38 MMBtu/ton.)  PP is the relatively hard-to-recycle plastic #5, found in yogurt cups and other wide-necked containers, and has a much higher heat content that relatively easy-to-recycle plastics #1 and #2 (PETE at 20.5 MMBTu/ton and HDPE at 19.5 MMBtu.)

The higher heat content of MSW should make generating electricity from MSW more efficient, and give a slight boost to margins of waste-to-energy companies like  MSW electricity generators like Covanta (NYSE:CVA) and Algonquin Power and Utilities (OTC:AQUNF, TSX:AQN), which generates thermal energy from MSW in addition to a large renewable energy business.

However, if increasing energy content of waste is to make a difference in the stock prices of MSW-to-energy firms, it will have to be sustained over the long term.  I doubt the trend will continue for long.   First of all, total MSW volumes are flat in the US, and falling on a per-capita basis, even while recycling rates are rising (EIA data.)

I expect increased recycling to begin to reduce the energy content of the remaining waste as less-recycled, higher energy-content materials are increasingly recycled.  Currently, only 13.5% of plastic containers  in the waste stream are recovered, as opposed to 71% of paper and 33% of glass.   Further, high-energy PP is becoming increasingly easy to recycle; I was recently pleased to find that it and LDPE (plastic #4, also with a relatively heat content of 24.1 MMBtu) are now accepted at my local transfer station.

While waste-to-energy companies may be getting a small margin boost from higher MSW heat content today, investors should not count on any such boost being permanent.  That’s a large part of the reason why my preferred investments in MSW are integrated companies like Waste Management (NYSE:WM), which can profit from both increased recycling and waste-to-energy opportunities.

Disclosure: Long AQN, MW

This article was first published on the author's Forbes.com blog, Green Stocks on September 6th.

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

September 28, 2012

EV Woes at Tesla and Toyota: The Week In Cleantech, 9-28-2012

Jeff Siegel

September 25: Toyota (NYSE:TM) Scraps Electric Car

2012 Toyota Prius photographed in Washington, D.C., USA.. (Photo credit: IFCAR via Wikimedia Commons)

Claiming the company misread the market, Toyota (NYSE:TM) is scrapping its plans for a global roll-out of an electric mini-car called the eQ.

To be honest, I'm not particularly surprised. Toyota has not been very aggressive, or interested really, in pursuing the electric vehicle (EV) market. And I get it. When it comes to delivering a superior conventional hybrid vehicle, Toyota still runs the show. The Prius is one of the most popular vehicles in the marketplace, with more than 3 million units sold since the hybrid superstar first launched.

My point is, it doesn't need EVs to lure fuel economy-conscious drivers into showrooms.

Look, it's no secret that when gas prices head north, so do Prius sales.

Hell, back when oil crossed the $140 mark and gasoline was well over $4.00 a gallon, folks were running to Toyota dealers and paying above sticker price to get one of these vehicles. Even today, boasting 50 miles-per-gallon can certainly help provide a nice hedge against unstable gas prices.

So when it comes to superior fuel economy, Toyota's got a good thing going. And I suspect the company has no interest in pouring a bunch of capital into EV development, when all it has to do to keep fuel economy-conscious drivers coming in, is continue to inch those miles-per-gallon up every few years with Prius upgrades.

That being said, I do wish company reps would back off the anti-EV rhetoric – however subtle it may be.

Here's what I mean. . .

In response to this recent decision, Toyota's vice chairman Takeshi Uchiyamada said:

“The current capabilities of electric vehicles do not meet society's needs, whether it may be the distance the cars can run, or the costs, or how it takes a long time to charge.”

Do not meet society's needs?

Roughly 70 percent of US consumers drive no more than 40 miles per day. Every all-electric car from a major automaker on the road today can deliver that – and then some.

How long it takes to charge?

This is such a bullshit argument. Every EV owner I know charges while he sleeps, wakes up, drives to work, returns home and plugs back in. It ain't rocket science, and unless you only sleep for four hours a night, long charging times are really not the deal-breaking issue that some would have you believe.

Look, the thing is, Toyota doesn't need to come at it this way. The company does not need to justify its decision to anyone. And certainly management doesn't need to recite the tired and inaccurate arguments of the anti-EV brigade.

Truth is, Toyota has done a lot to help integrate fuel economy into the car-buying lexicon. The company charged forward with its hybrid offerings when a lot of folks mocked the technology and the ability of Toyota to even make it work economically.

The company proved the naysayers wrong, and today Toyota gets the last laugh.

So if Toyota decides not to pursue electric vehicles right now, that's fine. This doesn't change my opinion of the company or of the Prius, which is a superior vehicle. And it definitely doesn't change my opinion regarding Toyota's leadership role in providing vehicles that can help us reduce our foreign oil consumption.

But putting out those careless and untrue comments about the electric vehicle market? Come on, Toyota. You're better than that!

September 25: Will Tesla (NASDAQ:TSLA) Crash and Burn?

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

Back in March, I was speaking at a conference about the future of personal transportation.

I discussed how a new generation called the Millennials or Generation Y would ultimately force change in the marketplace and present a real challenge to car makers.

You see, there have been a number of studies that have suggested this particular generation, which represents the kinds of numbers that allowed the baby boomers to dictate a lot of our consumer decisions today, is less interested in car ownership than previous generations, preferring public transportation, biking, walking and car-sharing services like Zipcar (NASDAQ:ZIP).

And for those folks who are now around the ages of 19 and 31 that are receptive to car ownership, they account for about 25 percent of the US automobile market. In ten years, that's expected to rise to 40 percent.

So what will they drive?

According to a recent Deloitte study, these folks tend to mock gas guzzlers and embrace hybrid, plug-in hybrid and electric vehicles (EVs).

If you're a regular reader of these pages, you know I've long been a supporter of electric vehicles, and I firmly believe that by the end of this decade, EVs will capture between one and 1.5 percent of the total vehicle market.

On the surface, this may not seem like much. But it's actually a pretty aggressive target, and a pretty big deal.

As a result, we've profited from the early development of this market from every angle. Although most of this was the result of riding the early wave of lithium and high-performance battery plays a few years back. Today, it's a bit more difficult. And while I remain a strong supporter of electric vehicle development, I'm extremely cautious as an investor. In fact, the only EV-related stock I've played this year was Tesla (NASDAQ:TSLA), and I jumped out back in March after the stock started looking a bit top-heavy after crossing the $36 mark.

Since then, I've watched the stock tumble and rise a few times. I've seen a number of trading opportunities (although I did not play the stock this way), and I've read some pretty long and detailed analyses of the company by both credible analysts, overly optimistic bloggers posing as analysts and the typical anti-EV narcissists who get off at watching a game-changing industry struggle with the early bumps and bruises that come with any disruptive technology. The latter, of course, typically provide little more than noise. But I suspect they'll be coming out in full force this week after Tesla's recent announcement that it was cutting its 2012 revenue forecast.

Due to a slower-than-expected rollout of the Model S sedan, the company has adjusted its full-year revenue to come in at around $400 million to $440 million. This is down from Tesla's prior outlook of between $560 million and $600 million.

This is a pretty big discrepancy, and in pre-market the stock has fallen about ten percent.

So today, the haters will be busy little bees, finding as many ways as they can to not only trash Tesla, but the EV market as a whole. We'll hear about how no one wants these cars, how sales are disappointing, how the technology “isn't there yet” and probably a few cheap shots at Washington for supporting the development of something that can ultimately help us displace a decent amount of foreign oil.

It's all bullshit.

Don't get me wrong. I'm not rushing out to buy Tesla. And quite frankly, I think some of these recent upgrades are insane. I was truly surprised, and a bit suspicious, when I read that Morgan Stanley put a $50 price target on this one.

Of course, I don't have access to the same intelligence and data as the suits over there, so perhaps I'm missing something. But I don't believe Tesla will really impress enough to push the stock to those levels until we get some better clarity on Model S volumes and gross margins in Q4.

I remain bullish on Tesla as a small, but growing force in the auto industry. And I definitely wouldn't bet on Tesla to crash and burn. But I'd be hesitant about believing overzealous price targets. At least until we see how Q4 shakes out.

Editor's Note: Also in EVs...

While EVs are struggling in the West, China has a plan for their rapid adoption.

DISCLOSURE: No positions

Jeff Siegel is Editor of Energy and Capital, where these notes were first published.

September 26, 2012

Gevo Switches Refinery Back to Ethanol: Amyris Redux?

Jim Lane

gevo logoAmyris redux, or fiscal caution in the ramp-up process?

We look at the data, as the advanced isobutanol pioneer switches Luverne from isobutanol to ethanol amidst production shortfalls.

In Colorado, Gevo (GEVO) announced that, while making significant progress towards economic production levels, the company does not now expect to achieve its desired year-end run rate – instead it has delayed hitting that target into 2013.

“While we have made significant progress towards economic production levels,” said Gevo CEO Pat Gruber, “we have decided to optimize certain specific parts of our technology to further enhance bio-isobutanol production rates.  Implementing these adjustments while trying to produce product in a plant the size of Luverne makes no sense from a business or technical point of view, particularly when we have better options available.

“In order to maximize cash flow, we believe it makes more sense to temporarily shift to ethanol production. This optionality is a result of Gevo’s patented retrofit design that allows for switching between isobutanol and ethanol. It’s very important to us to introduce this technology to the marketplace in the most considered and responsible way, and do what’s right for our customers, our shareholders, and the long-term needs of the business.”

“In five short years, we have gone from start-up to commercial-scale production at the world’s first commercial bio-isobutanol production facility,” Gruber added. “Production start-ups are never easy, but we are years ahead of our competition and well on our way to realizing economic production levels during 2013.”

Why the switch?

Bottom line, isobutanol has been produced, but not at economically viable yields. The process needs improvement, at scale, which leaves the company with the choice of producing isobutanol at suboptimal yields and losing money – or switching back to ethanol and conserving cash. Since the company had not made any formal performance targets aside from a commitment to reach a 1 million gallon per month throughput by December – which is clearly out the window anyway – the option that offered the lower cash burn clearly looked more attractive to management.

Rob Stone of Cowen and Co writes: “Railcar quantities [of isobutanol] have shipped, and additional inventory should enable customer testing. However, throughput is too low, so continued production while working on the fix would consume cash. Specific issues have been identified, but were not disclosed for competitive reasons. Timing for a solution is uncertain, and Redfield is likely on hold.”

“This is a slightly positive cash margin business under current commodity prices, commented Raymond James energy analyst Pavel Molchanov, “so it’s preferable than the alternative, i.e. making isobutanol at suboptimal rates and generating negative margins.”

Amyris redux?

“Investors who got burned on Amyris (AMRS) over the past year may see this news as a repeat of that company’s initial guidance cut in November 2011 (which was followed by a full-fledged guidance withdrawal in February 2012),” commented Raymond James energy analyst Pavel Molchanov.

“There is a parallel here, of course, in that both companies experienced, in their own ways, the fermentation scale-up issues alluded to earlier. We don’t see the Gevo announcement as a carbon copy of what happened at Amyris. In retrospect, Amyris had laid out production and financial targets (including positive cash flow in 2012) that had been far too aggressive.

“Gevo’s only formal target previously had been the year-end 2012 exit rate of one million gallons per month, and at this point the company is (wisely, in our view) staying away from providing a specific timeline for resuming isobutanol output. Our prior assumptions didn’t show positive EBITDA until well into 2014, although that may need to be pushed out further depending on the progress in optimizing Luverne. We plan to update our near-term estimates for Gevo as part of our 3Q12 alternative energy earnings update next month.”

Molchanov added, “The other important difference compared to Amyris is their relative valuation. On November 2, 2011 – right after its initial guidance cut – Amyris was trading at 85% of our discounted cash flow (DCF) per share estimate. By contrast, Gevo as of yesterday was at only 35% of our DCF estimate – as shown on page 2, the lowest multiple in the peer group. In other words, Gevo is by no means priced for perfection, and while we expect some weakness today, we think it will be moderate.”

The fiscal impact

Rob Stone of Cowen & Co writes: “We believe it may take six months before isobutanol production resumes, and more time will be needed to prove economic viability. This raises uncertainty and likely pushes out future projects. Depending on the length of the delay, additional funding may be needed to reach cash flow break-even. Trading at about 1.2x BV looks fair, given a deteriorating balance sheet and no visible triggers. We lower our rating from Outperform to Neutral.

Impact for Gevo customers

“This delay does not endanger any of Gevo’s offtake agreements with its customers,” said Molchanov.

The Redfield impact

Gevo’s second project is at the Redfield ethanol plant in South Dakota. Analysts are expecting a 6-month delay in that project coming online.

Can Gevo make money producing ethanol?

It appears to be a breakeven.

“Rather than try to solve problems while in production, or idle the plant,” commented Cowen & Co’s Rob Stone, “the decision was made to switch Luverne back to ethanol. This is good for labor, local suppliers, and offtakers, while demonstrating the value of the reversibility feature for potential future partners. If favorable regional prices for corn and animal feed persist, management believes it should at least be able to run the plant at break-even cash flow.

The view from management

Gevo has likley said all it is going to say on the matter. But Molchanov notes, “in mid-August – only a month ago – Gevo’s CEO [Pat Gruber] made a $49,000 purchase. We are always fans of insider buying, particularly at early-stage companies such as this.”

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.

September 25, 2012

Selling Pressure Comes Off Lime Energy

Tom Konrad CFA

Lime logoWhen Lime Energy (NASD:LIME) reported accounting problems, including the possibility of fictitious revenue on July 17th, investors abandoned the stock, unwilling to own a company in which they knew the financial statements to be misstated.   Over the next two weeks, Lime found a floor around $0.90 (down from over $2 on July 16th), as those investors who would sell at any price were replaced by those who, like me, feel that $0.90 is less than any reasonable estimate of LIME’s true value even in liquidation.

Volume then dried up and the stock traded in the $0.90-$1 range until August 21st, when Lime received a delisting notice from NASDAQ, for missing its quarterly reporting deadline.   This was expected, since LIME’s quarterly report is being delayed until the company can fully investigate the accounting difficulties, which run back to 2010.

Despite the fact that Lime has up to 180 days to regain compliance with NASDAQ reporting requirements, this triggered another, smaller wave of selling from August 21st until September 7th, with the stock trading in the $0.70 to $0.75 range.

Starting on September 10, trading volumes again dropped, and the stock price began to jump around in the $0.70 to $0.82 range as volume sellers disappeared, and even small purchases could send the price up as much as $0.10.

With the large sellers gone, I anticipate that LIME will not again dip below $0.70 unless there is more negative news before the company files its second quarter report and corrects the previous accounting filings.

In terms of possible negative news, NASDAQ could issue another delisting notice based on LIME’s failure to maintain a $1 stock price for the last 30 days,  but I expect if this were going to happen, it would have happened already.  LIME will need to get its share price over $1 a share for 10 days, but filing audited financials should take care of both problems (unless the result of the audit is much worse than I anticipate.)


Although a large cloud of uncertainty still hangs over Lime Energy as we await the results of the company’s internal investigation, it looks to me as if we are unlikely to see a stock price below $0.70.   In a worst case scenario, Lime could be liquidated for something near its tangible book value of $1 per share, so the current $0.70 to $0.85 share price range includes a substantial margin of safety.

With selling pressure abated, large investors will be unable to buy the stock without greatly increasing the current price.  On the other hand, patient small investors still have an opportunity to  benefit from a substantial upside move when the company completes its internal investigation and dispells much of the uncertainty which is currently depressing the stock price.

Disclosure: Long LIME

This article was first published on the author's Forbes.com blog, Green Stocks on September 16th.

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

September 24, 2012

Powering Advanced Energy

by Debra Fiakas CFA

ae_header_logo[1].gif Solar power producers have many challenges.  One is the direct current to alternating current dilemma.  Solar panels create power that flows one way in a direct current (DC).  We use electricity in our homes and businesses in alternating current (AC) that flows both directions, forward and backward.  So solar cell producers must use solar inverters that convert the electricity from the direct current in the solar panel into alternating current.

This is where Advanced Energy Industries, Inc. (AEIS:  Nasdaq) comes in. AEIS makes power inverters for the solar power industry.  The inverters transform the power in the solar arrays into a reliable electrical power.  Sales to solar distributors and engineering firms involved in building solar power plants represented 43.5% of total revenue in the first half of 2012, a significant increase from a 36.4% share in 2011 and 23% in 2010.

The rest of Advanced Energy’s sales are to the semiconductor industry.  The AEIC power conversion products can be used in a thin-film deposition fabricator to control the raw electrical power that comes in from a utility. Put simply, the power flow can be customized and made more predictable for the highly sensitive deposition process.

Sales to the chip makers slipped in 2011 and again in the first half of 2012.  Fortunately, there appears to be momentum in the solar power industry that has power producers knocking on Advanced Energy’s door.  Analysts following Advanced Energy have projected 15% annual growth in sales and earnings over the next five years.

If those analysts are right in their collective wisdom, investors could be justified in paying as much as 15 times earnings for AEIS  -  Price Earnings to Growth Rate is 1.00.  Giving the professionals a full vote of confidence, we can use their average projected earnings estimate for fiscal year 2013  -  $1.12 per share.  That yields a target price of $16.80 per share and implies a current value of $14.60.  That is not much higher than the current share price of $13.78 (9-18-12).    Surprisingly, the mean target price among that group of analysts is a bit lower at $13.70.

After all this math, it is hard to get enthusiastic about Advanced Energy from a valuation standpoint.  The stock chart is even more dissuasive.  AEIS is trading very near its 52-week high.  The 50-day average price is dropping day by day and appears poised to fall below the average price over 200 days.  It seems prudent to wait for better days to take a long position in AEIS.  

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. 

September 23, 2012

Melting LDK Solar Looks for a Buyer

Doug Young

There are quite a few developments on the solar energy front today, led by the release of new financial results from LDK Solar (NYSE: LDK), the weakest of China's major solar panel makers, that show a company in the midst of a meltdown. Meantime, Beijing has officially protested a US law that allows Washington to levy punitive tariffs against overseas industries that receive unfair state support, such as China's solar sector. Both the US and Europe believe China supports its solar sector with unfair subsidies and have taken various punitive actions; and now India is also launching its own similar investigation, dealing yet another blow to the struggling sector.

Let's start with the LDK results, which show a company teetering on the brink of collapse as it deals with the worst-ever downturn for the young solar panel sector. Not surprisingly, LDK has filed its second-quarter results just 2 weeks before the US-mandated deadline of the end of September, as it attempts to avoid greater attention to its poor performance. Also not surprisingly, the results were quite ugly, with revenue falling by half from the previous year as LDK's loss ballooned to a massive $254 million.

The company's shares fell by a relatively modest 3 percent after the news came out, reflecting the reality that investors have heard so much bad news already that this latest downbeat report is really nothing special. One of my sources tells me LDK has actually hired investment bank Morgan Stanley (NYSE: MS) to try and sell the company to one of China's big state-owned enterprises.

I wouldn't be surprised if this was true, as LDK is clearly in big trouble and would never be able to attract any private sector buyers. Regardless of the situation, we can probably expect to see some spectacular fireworks from LDK by the end of the year, as the company either collapses or gets bought by an unlucky state-run company under pressure from Beijing or the provincial government of Jiangxi, where LDK is based.

Moving on to the bigger news, China has announced it is lodging an official protest with the World Trade Organization (WTO) over a US law that allows Washington to take punitive actions against overseas industries that receive unfair support from their local governments. China's protest isn't aimed at a specific industry, and indeed the US has used the law to levy punitive tariffs against several Chinese products over the last year. But clearly solar panels are one of the main targets of this new WTO protest by Beijing, after the US earlier this year said it will levy big punitive tariffs on Chinese solar panels that now account for more than half of the world's supply.

While the US has already determined that Chinese solar panel makers receive unfair state support, the European Union also announced last month it is launching a similar probe.  And now it seems that India will launch its own probe over the matter, dealing yet another setback to the embattled sector.  I'll repeat my advice to Beijing once again by saying that rather than repeatedly protesting the accusations by foreign governments, China needs to finally admit that perhaps some of the complaints are legitimate and then find ways to address the concerns.

Bottom line: LDK's latest earnings report shows a company on the brink of meltdown, while Beijing's latest trade complaint shows it is still in denial about its unfair subsidies to the country's solar sector.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China .

September 22, 2012

Solar & Battery Orders; Solar Stock and EV Woes: Two Weeks In Cleantech, 9-22-2012

Jeff Siegel

September 17: Will LDK Solar (NYSE:LDK) Become a Penny Stock?

LDK Solar (NYSE:LDK) has sent a revenue warning and cut its full-year revenue forecast for the second time this year. The company is now expecting Q3 revenue to come in at between $220 million and $260 million. Analysts were expecting more than twice that on the low-end of LDK's estimates with $453.6 million. And to add insult to injury, I overhead an analyst last week saying China solar companies, like LDK, are on a one-way track to penny stock status. Ouch!

I was actually at the Solar Power International Conference last week, where I overheard that analyst, and I'll have some updates on the solar space later in the week.

All in all, the solar industry is exactly where I've been saying it is – maturation mode. Growing pains are really starting to sting, but there are definitely some silver linings, especially for installers. Although some companies falling into the installation category are about to get trounced thanks to a Consumer Reports investigation that'll highlight a handful of shady operations in the solar installation game.

That issue of Consumer Reports is coming shortly, and you can read more about it here. In the meantime, we continue to watch everything unfold from a safe distance, waiting patiently for a bottom sometime next year.

September 18: Walmart (NYSE:WMT) Solar Development

Last week, I attended the Solar Power International Conference in Orlando.

As always, I was overwhelmed with an avalanche of data that continues to illustrate the rapid growth of the solar industry.

There are a few reports I picked up at the conference that I'll be sharing with you throughout the week.

The first comes from the folks at the Solar Energy Industries Association and the Vote Solar Initiative, and it highlights the top 20 commercial solar users in the US.

Check it out. . .


Some key findings of the report include:

  • The top 20 corporate solar users' installations generate an estimated $47.3 million worth of electricity each year. Together, US commercial solar installations have reduced business' utility bills by hundreds of millions of dollars annually.

  • The amount of solar installed by the top 20 solar-power companies could power more than 46,500 average American homes. Combined, US commercial installations could power more nearly 400,000 American homes.

  • More than 1.2 million solar PV panels were used for the top 20 corporate solar users' installations. Combined, these arrays would cover more than 544 acres of rooftops.

  • Walmart and Costco combined have more solar PV installed on their store rooftops than all of the PV capacity deployed in the state of Florida.

  • The top 10 companies (by capacity) have individually deployed more solar energy than most electric utilities in the US.

September 20: GE (NYSE:GE) Lands $63 Million in New Battery Orders

General Electric (NYSE:GE) announced yesterday that its new Energy Storage Unit has landed $63 million in new Durathon battery orders since that particular unit launched in July. In its first weeks of operations, it secured 10 new telecom customer orders in Africa, Asia and the US. These batteries will power more than 3,500 cell towers.

As supporters of the new energy economy, we understand the importance of cost-effective energy storage technologies. And while there are plenty of opportunities out there, GE will remain aggressive. There's just too much at stake for this global behemoth not to.

The batteries that will power those 3,500 cell towers can function in a variety of extreme conditions and store as much energy as lead-acid batteries twice its size, while lasting up to ten times longer.

In other energy storage news, a small UK company called Atraverda, Ltd. just secured its first commercial battery order in the US. The company announced yesterday that it finalized a supply agreement with ZENNRG to supply batteries for a smart grid, distributed energy storage application. The first year of the supply agreement is worth about $1.2 million.

ZENNRG is a Texas-based firm that develops, manufactures and sells energy storage modules for distributed storage markets.

Atraverda produces Bipolar Valve Regulated Lead Acid batteries using a proprietary conductive ceramic technology that results in greater energy efficiencies at lower costs. As well, the construction of these batteries requires 40 percent less lead than traditional lead-acid batteries.

September 21: Can Electric Cars Survive Without Subsidies?

A new Congressional Budget Office (CBO) report has indicated that US federal policies to promote electric vehicles will cost $7.5 billion through 2019 and have little impact on overall national gasoline consumption over the next several years.

It's that last part that I'm pretty sure the media knuckle-draggers will neglect to mention.

I tend to put a lot of faith into what the CBO says. It seems to be one of the few places where partisan influence is absent. So I have little doubt that there is relevance to this report. That being said, priming the pump for a transition away from conventional internal combustion isn't going to result in a major displacement of gasoline and CO2 emissions overnight.

Look at it like this. . .

When the US government plowed an enormous amount of tax payer dollars into developing an infrastructure that would ultimately support an Interstate Highway System, those highways weren't particularly crowded in the first few years following their completion. It took time.

The US government also provided an enormous amount of incentives to automakers in the early part of the last century, as it was clear that taking the lead on auto manufacturing would strengthen the nation's economy and provide a strategic advantage in terms of national security and military initiatives.

I would argue that electric vehicles offer the same benefits.

The world will eventually move away from conventional internal combustion. It won't happen in a matter of a few years or even a few decades, but it will happen. And it's starting now. And as we slowly move away from conventional internal combustion, we can slowly begin the next chapter in taking the lead on the next generation of auto manufacturing.

As well, the more EVs we have on the roads, the less foreign oil we demand. That's an indisputable fact that should not be trivialized. And little by little, as more of these electrified vehicles hit the streets, the more wiggle room we'll have to compete and prosper in a post-peak world.

It's also worth noting that while some may kick and scream about $7.5 billion over the course of about ten years, which works out to about $75 million per year, we continue to charge taxpayers roughly $4 billion a year for oil industry subsidies. And of course, this does not include the blood we continue to spill overseas in an effort to secure those lucrative oil supplies.

So when folks start carrying on about this new CBO report, I would urge you to remind those with partisan blinders that $4 billion a year in oil subsidies does zero to displace gasoline consumption and CO2 emissions, and actually facilitates our continued reliance on a resource that is rapidly being depleted.

$75 million a year, however, actually provides the platform for a strategic transition away from a transportation system that will only cost more tax dollars and more lives as we move forward.

Now I should clarify, I'm no fan of any of these subsidies. Quite frankly, I'd love nothing more than to see every single energy subsidy abolished and allow the market to dictate the winners and losers – not Washington. Because if that were to happen, oh we'd quickly find out just how expensive gasoline really is – and just how lucrative electrified transportation will be.

Electric vehicle production costs will continue to fall as we move forward, while the costs to maintain our reliance on oil will only increase.

Of course, if we do pull back the curtain of subsidies and allow the consumer to pay the real price for gasoline – one that is not the result of both direct and indirect subsidies – you wouldn't need a single tax credit to get folks into electric cars. The price at the pump would be well over $6.00 a gallon, and those EVs would practically sell themselves.

Now I'm not so naïve to believe that will happen anytime soon. The corporate puppet masters that run Washington simply won't allow it. But if we're going to be honest about the value of electric vehicles, we must at least be honest about the fact that Washington continues to funnel more of your tax dollars to a very mature and very profitable oil & gas industry than it does to facilitating the growth of vehicle electrification.

And if we're going to be honest about letting the market dictate winners and losers, than we must stand behind our convictions and hold both sides of the aisle accountable for continuing the illusion that a free market really exists.

DISCLOSURE: No positions

Jeff Siegel is Editor of Energy and Capital, where these notes were first published.

Exide Technologies: Anatomy of a Mistake

Tom Konrad CFA

On June 1st, in the lead up to Exide Technologies’ (NASD:XIDE) first quarter earnings announcement, I made one of my better calls so far this year.  I wrote that the Exide stock was in the “bargain basement” and “ready to pop.” That day, XIDE traded in a range of $2.25 to $2.36, within spitting distance of its 52 week low of $2.22.  Four months later, the stock is up 45% at $3.25, despite two earnings misses in the meantime.

My Mistake

Unfortunately, I missed out on a good chunk of that gain.   A week later, Exide announced disappointing first quarter earnings, but the stock popped.  The company had made good efforts reducing expenses and improving operating margins in its reorganization, and cash flow was also improving, but this did not seem sufficient to explain the big stock price pop when we would normally expect at least a small price decline.

I eventually settled on the theory that it was due to some press confusion between XIDE and Indian auto parts manufacturer Exide Industries (NSE:EXIDEIND, BSE:EXIDEIND,) combined with short covering.  I sold my stock at $2.80 in the expectation that the market would soon sort this out, and another buying opportunity in the low $2 range would soon emerge.

I was wrong.  Over the last five months, XIDE only briefly fell below $3, because of another negative earnings surprise in August and accompanying analyst downgrades.  Yet XIDE resumed its rally, propelled by recent news like a new contract with Pep Boys (NYSE:PBY).

What Really Happened

I think I was right about the stock pop, but I was not the only one to spot Exide as a turnaround story.   Despite the unexpected rise in June, Exide was still a good value at $3, as I wrote in a comment to a reader.  While I was expecting short term market dynamics to propel the stock down, analysts at Wedbush raised their price target and a prominent newsletter upgraded Exide as well (I read about this in an news interview with the newsletter writer a month later, but unfortunately, I can no longer find a copy of the article or recall which newsletter.)

Eventually, I repurchased my stake at an average price of $3.07.


My decision to trade XIDE on short term market dynamics cost me 12% of the potential 45% gain so far from my June 1 call.  This is why I usually avoid short term trading: it adds to expenses, and new information (in this case the upgrades) can lead to rapid changes in market dynamics.  I’ll try to remember that next time I come up with an equally compelling story explaining short term market dynamics.

Disclosure: Long XIDE

This article was first published on the author's Forbes.com blog, Green Stocks on September 6th.

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

September 21, 2012

SMA Solar Delays Microinverter Launch

Ed Gunther [Orlando, Florida USA]

SMA Sunny Boy 240 microinverter delayed again until 1Q13.

From Solar Light Flashes: SPI12 Edition

As I tweeted at the start of the Solar Power International 2012 (SPI12) exhibition, SMA America, LLC, a unit of SMA Solar Technology AG (ETR:S92), delayed the introduction of the Sunny Boy 240-US microinverter system until the first quarter of 2013 (1Q13) despite the webpage continuing to claim “Coming 2012!”

The Sunny Boy 240 is in the midst of US field trials that SMA said are going well. While SMA said the Sunny Boy 240 microinverter system is in the final stages of the launch process, unofficially I heard product changes were required for UL compliance.

From Solar Light Flashes: SPI12 Edition

Photovoltaic (PV) modules with microinverters were displayed at the SMA stand and illustrated the cabling arrangement with the Y cable DC module input to the left, center AC daisy chain input, and AC daisy chain output to the right when viewed from the back of the module. The last Sunny Boy 240 AC daisy chain output connects to the Sunny Multigate-US providing the electrical interface for the daisy chain to the main service panel.

From Solar Light Flashes: SPI12 Edition

Perhaps revealing a limitation, SMA has reduced the maximum number of Sunny Boy 240 microinverters connected to each Sunny Multigate from the expected 15 to 16 units at SPI11 to a daisy chain of up to twelve (12) resulting in a 2880 Watt maximum AC power rating per Multigate. SMA envisions the majority of installations with up to two (2) Multigates and displayed a clear cover wall panel with the Multigates, fuse terminal blocks, and a disconnect switch.

SMA did not demonstrate the module level monitoring software or configuration process at the stand. SMA said: “The monitoring software and tools are not yet public. They have been tested and shown but not to a broad public audience.” A dashboard monitoring screenshot was included in the Sunny Boy 240 printed brochure handed out at SPI12.

SMA was promoting a hybrid approach using microinverters just where partial shading or complex roofs require them and string inverters for the majority of PV modules. The stated goal of the SMA hybrid approach was to optimize cost, performance, and Operations and Maintenance (O&M) in order to maximize return on investment. One installer I chatted with thought the hybrid concept was a nonstarter in most residential installations. Larger commercial rooftop installations might benefit from the hybrid microinverter and string inverter combination.

SMA will manufacture the Sunny Boy 240 microinverter at the SMA America Production, LLC, facility in Denver, Colorado USA, and SMA America will also launch the microinverter product line.

The Fastest Time To Install A Residential Solar Photovoltaic System at RecordSetter.com was achieved by Sierra Pacific Home and Comfort installing a twelve (12) module 2.82 kiloWatt (kW) solar photovoltaic SunSnap System from Sharp Corporation (TYO:6753, OTC:SHCAY). The SunSnap AC modules integrate discrete microinverters and Zep Compatible frames to simplify scalable solar installations. According to SMA, the one hour, fifteen minutes, and 48.17 seconds pending record installation used the Sunny Boy 240 microinverter system.

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.

SMA Solar's Transformerless Inverter Provides Power During Outages

Ed Gunther [Orlando, Florida USA]

From Solar Light Flashes: SPI12 Edition

Sunny Boy TL-US Inverter

SMA Solar Technology AG (ETR:S92) will begin limited shipments of the transformerless Sunny Boy 3000/4000/5000TL-US-22 inverter series for 3 to 5 kiloWatt rated AC power PV systems in 4Q12. The TL-US series has added a unique Emergency Power Supply feature providing daytime power to a dedicated power socket in the event of a grid power outage. The power socket is isolated from the grid during the outage and supplies up to 12 Amps so long as the PV system is generating. Grid tied inverters without battery storage support are supposed to shutdown during grid power outages to prevent islanding. SMA developed the feature in accordance with solar inverter specifications required to enter the Japanese market after the Fukushima Daiichi nuclear disaster.

From Solar Light Flashes: SPI12 Edition

The TL-US series integrate DC AFCI (Arc-Fault Circuit Interrupter) protection meeting the requirements of National Electrical Code – NEC 2011 690.11. I was told the TL-US has a revised CEC efficiency of 97% since the preliminary product datasheet was released.

Well, multiple sources have confirmed the SunPower Corporation (NASDAQ:SPWR) Oasis 1.5 MW AC Stations I saw at the 250 MW California Valley Solar Ranch (CVSR) project were sourced from SMA America and manufactured at the Denver manufacturing facility much like those for another vertically integrated utility-scale PV power solutions provider.

From SunPower’s California Valley Solar Ranch (CVSR)

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.

September 20, 2012

EPA Ups Renewable Diesel Mandate By 30%

Jim Lane

Biodiesel pump photo via Bigstock
What will bigger targets mean for producers, livestock, obligated refiners, and the diesel-using public? In Washington, the EPA issued its final rule for 2013 establishing 1.28 billion gallons as next year’s biomass-based diesel volume requirement under the Renewable Fuel Standard (RFS), up from 1.0 billion gallons in 2012.

“This 1.28 billion gallon level is in-line with what the EPA had originally proposed for 2013 dating back to last year,” commented Raymond James energy analyst Pavel Molchanov. “However, the delay in formalizing this target had led investors and biodiesel industry participants alike to question the EPA’s commitment to this level. The RVO was originally expected to be completed in July, and with the election fast approaching many had thought the final ruling may not occur until mid-November.”
What does this mean in the context of the overall RFS2 targets for 2013?

The 2007 EISA Act called for 2.75 billion gallons of advanced biofuels in 2013 – that’s up from 2.0 billion gallons in 2012. That can come from any qualifying source (a registered fuel that provides a 50 percent lifecycle reduction in emissions, compared to petroleum-baed fuels), and includes sugarcane ethanol, some advanced forms of corn ethanol, biobutanol, and all forms of biomass-based diesel. Obligated parties can also buy RIN credits in lieu of blending “wet” gallons of fuel.

Overall, it means that the diesel side is expected to pick up 40 percent of the increase in RFS2 mandated volumes for 2013 (280 million out of 750 million gallons). That’s relatively conservative – given that biomass-based diesel accounted for 50 percent of the 2012 pool. According to producers, it’s highly feasible to achieve the production volumes.

Do biomass-based diesel fuel mandates cost the public?

The Yes view. Mandates invariably cause fuel prices to increase – in many cases, massively so – by requiring fuel distributors to utilize fuels with favorable environmental or social attributes, instead of choosing the lowest-cost supplies.

The No View. Mandates can reduce fuel costs by reducing demand for imports – and even small reductions in import volumes through alternative production – in these times of tight refining capacity – can have substantial depressive impact on prices.

The social cost view. Fuels cost more than money. They can have impact on air quality and health (particularly among children); energy imports come with hidden social and financial costs in burdening the nation’s military with the task of defending fuel shipping lanes; energy imports also reduce local employment in energy production and reduce the direct and indirect local economic impact that flows from job creation.

The EPA responds. Yes, there is a financial cost – but it’s a rounding error. “The AEO projects that the U.S. will consume 44.9 bill gal of blended diesel in 2013.75 Averaged over this diesel pool, the quantifiable costs of the 1.28 bill gal mandate translate into a per gallon cost of between $0.006 and $0.008 in 2013.”

Why don’t ranchers and poultry farmers freak out over increases in the biomass-based diesel portion of the Renewable Fuel Standard?

Generally, because they use soybean meal rather than soybean oil to feed livestock – so there’s less competition between livestock and fuel on the biomass-based diesel side. Plus, animal residues have to be used somewhere – and they have made an excellent feedstock for fuel production at the 75 million gallon Dynamic Fuels facility (owned by Syntroleum and Tyson), and will be the key feedstock at the 130 million gallon Diamond Green Diesel facility (jointly owned by Darling and Vaero).

Other changes in RFS2 relating to home heating fuel: Amended Definition of Home Heating Oil

This year, the EPA amended its rules to expand the scope of renewable fuels that can generate Renewable Identification Numbers (“RINs”), to include fuel oil that will be used to generate heat to warm buildings or other facilities where people live, work, recreate, or conduct other activities. This rule will allow producers or importers of fuel oil that meets the amended definition of heating oil to generate RINs, provided that other requirements specified in the regulations are met. Fuel oils used to generate process heat, power, or other functions will not be approved for RIN generation.

Industry reaction

Randy Olson, executive director, Iowa Biodiesel Board

“We applaud this smart growth in biodiesel production, which keeps America‚s domestic energy industry moving forward. When the United States manufactures its own products, it benefits society. Encouraging production of American-made fuel brings economic development and energy security – two of our nation’s top priorities. 

”As the nation’s leading biodiesel producer, Iowa stands to gain more jobs and economic growth from this policy. The new biodiesel production will create and support green manufacturing jobs at Iowa’s 13 biodiesel plants instead of sending money overseas for oil. It will also enhance the rural economy by supporting Iowa farmers. This includes livestock farmers, because demand created for soybean oil has the positive effect of lowering meal prices from what they otherwise would be.”

Daniel J. Oh, President & CEO, Renewable Energy Group (REGI)

“This announcement offers certainty throughout the biodiesel supply chain, will grow green collar jobs and enhances our nation’s energy independence. We applaud and thank President Obama and his administration, including Secretary Vilsack and EPA Administrator Jackson and her team, for their public support and due diligence in working with the biodiesel industry to implement these sustainable growth numbers. They have reaffirmed that RFS2 is working as intended for biodiesel and that it will continue to do so.

“We believe the biodiesel industry, and REG specifically, are positioned to utilize the waste, by-products and recycled fats and oils from American agriculture and food production to meet the 2013 RFS2 number.”

John Plaza, CEO, Imperium Renewables

“This policy will be critical in ensuring strong demand for biodiesel nationally and help companies like Imperium increase production going forward. This showcases the leadership needed to increase America’s ability to source our energy right here at home.

“Imperium Grays Harbor employs 45 full time employees, several of whom are veterans of Iraq and Afghanistan, in the production of American-made biodiesel at competitive prices. This policy will enable us to increase production, continue to support family wage jobs in Washington state and result in several million dollars in additional revenue to the county of Grays Harbor and the state of Washington in the form of port fees, payroll and sales taxes and other economic benefits.

“A strong and stable RFS has been key to the development of the US biodiesel industry and is important as the industry continues to grow and provide increased economic benefits and job creation. The biomass-based requirement alone will reduce the import of petroleum-based diesel next year by nearly 31 million barrels and keep over $4 billion in US dollars from going overseas.”

Bipartisan support

In thanking RFS2 supporters on Capitol Hill, Iowa’s Randy Olson pointed to a concerted, bipartisan effort, including support from Sen. Charles Grassley (R), Sen. Tom Harkin (D), Rep. Leonard Boswell (D), Rep. Tom Latham (R), Rep. Bruce Braley (D), Rep. Dave Loebsack (D), and Rep. Steve King (R) — plus the backing of former Iowa governor and now Secretary of Agriculture Tom Vilsack.

Shares impact: Renewable Energy Group

Over at Raymond James, Pavel Molchanov writes, “REGI production margins rely heavily on RIN values, which should increase now that the RVO is in place. Approximately one-third of REGI’s per gallon selling price for biodiesel is tied to the value of RINs – which are the enforcement mechanism of the RFS2 program. Obligated parties are required to deliver RINs to show compliance to the RFS2, as such when mandated volumes increase (and outstrip production levels), the RINs become dear and increase in value – this occurred in mid-2011. In recent months, the lack of clarity around the 2013 mandate has resulted in lower RIN values. Changes in the RIN value have a direct impact on REGI’s production margins. We estimate a $0.10 per gallon increase in the realized RIN value would serve to boost 2013 EBITDA by ~25%.

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.

September 19, 2012

Incremental Advances in Wave Power Technology Not Enough to Temper OPT Q1 Losses

Marsha Johnston

OPTT logo.gif “We’re still at the point where the car industry was of not knowing whether the engine should be at the front or the back,” quips Christopher Barry, chair of the Ocean Energy Technical and Research panel at the Society of Naval Architects and Marine Engineers. “At least a dozen companies are looking into [wave power]…with at least half a dozen main ideas for getting the energy out that are distinctly different and many variants on those themes.  There are lots of opportunities and we don’t know which will be the winner.” 

In contrast, he notes, turbine technology being used for tidal power installations is well developed, with just some tweaking being done around the edges, such as creating floating versions.  “Wave is quite a distance back from that,” he says.  Indeed, tidal installations are beginning to deliver power to grids, such as Ocean Renewable Power Company’s (ORPC) Eastport, Maine deployment on September 13.

The lack of technological maturity hampers even the leaders in wave power, like Ocean Power Technologies, Inc. (Nasdaq: OPTT).  Despite some notable project advances and a 38% decrease in product development costs in its fiscal 2013 first quarter ended July 31, 2012, OPT reported Friday a net loss of $4.4 million. The loss was smaller than last year’s first-quarter loss of $5 million.

But even in the face of continued losses, both Barry and Dr. Paul Jacobson, water power program manager at the Electric Power Research Institute, agree that OPT is the leader in wave power. “In terms of wave power in the US, [OPT] are out in front of everyone else,” says Jacobson.

Specifically, says Barry, OPT is the leader in  “donut on a stick” technology that uses a “latching” technique to maximize the technology’s ability to generate electricity.  “Latching is being widely studied, but [OPT] are probably the only folks commercializing latching technology,” Barry said, adding “whether the donut on the stick technology is the right thing to do is not yet certain.”

OPT’s chosen technology is not the most efficient, he says, extracting only slightly more than 50% of the wave’s total energy because it captures only the up-and-down motion, but he acknowledges that robustness in the ocean environment could ultimately trump higher efficiencies.

In the meantime, the U.S. Federal Energy Regulatory Commission awarded OPT the first license to build a grid-connected wave power station in the U.S. The 1.5-megawatt power station off Reedsport, Oregon will be based on OPT’s 150-kw PowerBuoy (PB150), which is in final assembly and inland testing. OPT expects the PB150 will be ready for deployment in early October, with actual deployment dependent on weather conditions.  Following the Reedsport wave park, OPT says it intends to build up to 100 MW in Oregon. “It’s just a matter of scaling up. They will be gathering information as this first phase is deployed in order to support expansion,” says Jacobson.

OPT said its decline in product development costs was due primarily to the deployment of the PB150 off the coast of Scotland in 2011, and lower costs related to the Reedsport PB150 as it nears completion and deployment.  The firm also says it is undertaking “other initiatives” to reduce the costs associated with wave power – in particular, the Reedsport buoy’s new direct-drive power take-off system that will have lower maintenance costs that the previous hydraulic PTO.

The quarter also brought an agreement with Lockheed Martin to develop a 19-megawatt wave energy project off Portland, Victoria, Australia and a Cooperative Research and Development Agreement with the U.S. Department of Homeland Security to demonstrate the use of its Autonomous PowerBuoy for ocean surveillance. In Australia, the two firms are focusing on permitting activity and getting the financing necessary to secure a previously announced A$66.5 million (US$69.5 million) grant from the Commonwealth.

Barry said it is still not clear which business model OPT intends to adopt.  “Will OPT be a technology developer, build devices and lease them, or sell them to PG&E?  We don’t know,” he said.

Marsha W. Johnston is a freelance writer based in the DC area, specializing in all areas of sustainable development, from renewable energy to agriculture and wildlife conservation.
This article was originally published on RenewableEnergyWorld.com and was republished with permission.

September 16, 2012

Maxwell Technologies: The Bottom is In

Tom Konrad CFA

Maxwell LogoIn the month since Maxwell Technologies (NASD:MXWL) surprised analysts with strong second quarter (Q2 2012) earnings, the stock has maintained a trading range between $7.50 and $8, comfortably above the $6-$7 range in which it had been trading for most of the summer.  Despite the roughly 20% gain, I believe the stock has plenty of upside left as it recovers from its previous depressed levels.

Why the Low Price?

A year ago, Maxwell was a cleantech darling, with analysts predicting rapid growth as the company’s ultracapacitors were used as key components in rapidly growing markets such as hybrid vehicles and wind turbines in China, North America, and Europe.  But the crisis in Europe and delays getting ultracapacitors incorporated in new automotive designs caused management to push revenue growth estimates during the first quarter (Q1 2012) conference call.

What followed was a classic example of the dangers of growth stock investing.  First, investors and analysts used rosy growth projections to justify high forward earnings multiples.  Then rapidly rising stock prices drew in momentum investors seeking to capitalize on the continuation of rapid gains in a virtuous cycle. The rapidly rising stock price served to confirm investors’ and analyst expectations of future growth, and targets were repeatedly revised upwards.  Stock market gains also lent the company an aura of invincibility, and potential risks were increasingly ignored by analysts, investors, and management who interpreted the rising share price to mean that nothing could possibly go wrong.

No company is invulnerable, and something always goes wrong eventually.  In Maxwell’s case, it was the European crisis, which slowed growth in once robust markets, and the much slower-than-expected process of getting Maxwell’s ultracapacitors incorporated in new automotive designs.  In the Q1 2012 conference call, Maxwell CEO David Schramm acknowledged this reality by cutting revenue guidance for 2012 from 25% growth to 15-20% growth, but maintained long term growth projections.

Virtuous Cycle Turns Vicious

Schramm clearly intended to tap on the brakes a little, but just as the positive feedback of investor psychology inflated the stock price on the upside, negative feedback exaggerated the negative effects on the downside.

First, the downward revision of one year’s guidance led analysts and investors to ask the previously unthinkable: If 2012 growth will be lower than we expect, why not future years as well?  Although Schramm only cut short term guidance, investors adjusted their long term models, and in turn cut the multiples they were willing to pay.

As a rough rule of thumb, growth investors are willing to accept a Price/Earnings ratio equal to their projections of long term growth, and optimism can lead them to focus on next year’s projected earnings, rather than current or trailing earnings.  So when long term growth was expected at over 30%, and 2013 earnings were expected to be over $0.50, it felt easy to justify paying over $20 for the stock, which is what it was trading for in February.  $20  is about $0.60 (expected earnings) times 35 (projected growth).

When investors expected long term growth of only 20%, and 2013 earnings projections were revised downward to $0.50 (because of lower short term growth projections), growth investors found it difficult to justify a price over $10 (= $0.50 x 20).

Then the feedback effects kicked in.  Analysts began to consider risks they had previously discounted, lowering acceptable price multiples.  With the stock price plunging, momentum investors sold as well, driving the price lower still.  Growth mutual funds also decided that Maxwell no longer qualified as a growth stock, and sold substantial holdings, driving the price down further, until Maxwell bottomed at $5.88 on July 24, when it traded at less than 12 times then-projected 2013 earnings.

The Cycle Runs its Course

In June and July, negative feedback had run its course, allowing the stock to reach a new equilibrium.  Value investors like myself were attracted by the much more conservative price multiples on offer, and company insiders  were signalling that they thought the stock was a good value with fairly aggressive buying.

When Maxwell reported Q2 earnings at the start of August, investors’ fears that the Q1 guidance revision would be the first of a series of downward revisions were allayed.  Despite slightly lower-than expected quarterly revenues, Maxwell maintained revenue guidance for the year, and showed good progress controlling costs.  Investors had become so pessimistic that even the slightly disappointing revenues combined with good cost control amounted to a positive surprise.

Now, analysts have stopped cutting earnings estimates.  In the last month, eleven analysts have revised expected 2012 earnings upward, and four have made upward revisions to 2013 earnings, with no downward revisions for either year, according to First Call.  Strengthening forward earnings estimates should begin to draw new investors into the stock, as should the continued confidence of company insiders.  Schramm and a director (Mark Rossi) each bought an additional 10,000 shares shortly after the Q2 earnings announcement, for a total of 78,000 shares acquired by insiders since the Q1 announcement and large price declines in late April.

What’s Next

Although the viscous cycle of declining expectations, selling, and increased risk aversion seems to have run its course, it’s unlikely that recently burned investors will return to their former optimism soon.  Fortunately, such optimism is unnecessary to produce decent returns.

Analysts are currently expecting long term growth of 25%, but the current $8 stock price means that MXWL is trading at only 24 times expected 2012 earnings (33 cents), and 17 times expected 2013 earnings.   Such pricing leaves some room for mild earnings disappointments, to which the current set of relatively sober investors will likely respond in a much more measured way than the growth and momentum investors who formerly dominated the stock.  Positive earnings surprises will probably also be greeted with equanimity.

To give a range of estimates of investors’ potential gains over the next three years, consider three scenarios for disappointing, in-line, or better-than-expected earnings growth:

If Maxwell disappoints and produces only 20% growth over the next three years, in September 2015 we will be looking at a stock with current (2015) expected annual earnings of $0.57.  20% growth would likely justify a 20 earnings multiple, for a price of $11.40.  If Maxwell meets expectations for the next three years, expected 2015 earnings will be $0.64 cents, and the price multiple should be around 25, for a stock price of around $16.  In the optimistic scenario of faster-than-expected three year growth, we would be looking at 2015 earnings of $0.72 cents, and the positive earnings surprises would have likely drawn growth and momentum investors back in, meaning that the stock would likely be trading at a 30+ multiple of expected 2016 earnings of $0.94, or $28.

Scenario 2015 Expected Earnings Multiple 9/2015 Expected Price Annual Return
Low growth $0.57 20 $11.40 12.5%
Expected Growth $0.64 25 $16.00 26.0%
High Growth $0.94 30 (times 2016 expected earnings) $28.00 51.8%

I personally consider the “High Growth” scenario unlikely, and prefer to invest in the expectation of the “Low Growth” scenario.  Even that relatively conservative  scenario is not a floor for future stock returns, but the possibility of more optimistic scenarios should be sufficient to compensate for the downside risks.

When a relatively conservative scenario like the “low growth” scenario above still produces 12.5% long term annual expected returns, I consider the stock a buy.

Disclosure: Long MXWL

This article was first published on the author's Forbes.com blog, Green Stocks on September 6th.  Prices and returns in the article reflect the $8 stock price at the time.

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

September 15, 2012

Brookfield Renewable Energy Likely To Vote Against Western Wind Management in Proxy Battle

Tom Konrad CFA

When it emerged that Brookfield Renewable Energy Partners (“Brookfield”, TSX:BRP.UN, OTC: BRPFF) had acquired approximately one sixth of Western Wind Energy’s (TSXV:WND, OTC:WNDEF) stock last Thursday from Western Wind’s largest institutional shareholder, Goodman & Company, investors cheered.

The transaction was seen as a signal that Brookfield intends to bid at least C$2.25 for Western Wind in its upcoming sale, and so the company’s stock has been trading for slightly more than C$2.25 since the announcement.

Despite this, the Brookfield/Goodman transaction may not prove to be a good deal for Western Wind’s other shareholders.  Goodman had not said how it intended to vote in the upcoming proxy battle between Western Wind’s management and 4.78% owner Savitr Capital.  The main issue in this proxy battle is which team is best suited to manage the process of selling the company.

Because the purchase comes with a promise from Brookfield to compensate Goodman if Western Wind is sold for more than C$2.25 in the next year, the transaction only makes sense if Brookfield intends to use its newly acquired votes to influence the vote in its favor.  As a likely bidder in the sale, Brookfield’s incentive is to vote for the management team which it believes will accept the lowest offer for Western Wind.  Savitr has stated that Western Wind management made a mistake rejecting Algonquin Power and Utilities Corp.’s (TSX:AQN, OTC:AQUNF) 2011 offer of C$2.50 a share, so it’s clear that Savitr is willing to accept less for the company than management.

Other shareholders  will want to sell the company for as much as possible.  They should vote for the team they think is best able to interest the broadest range of possible buyers in the company, and best able to advance its Yabucoa solar project and increase the company’s value in the meantime.   I personally think current management has the best team for these two jobs, and will be voting my yellow proxy in favor of management’s nominees on September 25th.

While Brookfield’s stock purchase has been good news for Western Wind shareholders in the short term, if Brookfield casts the decisive vote in the proxy battle, it may well mean that we will end up with less for our shares that we would have gotten otherwise.

Brookfield must think so, or they would not have bothered striking the deal with Goodman.

Disclosure: Long WND, BRP-UN, AQN.

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.

September 14, 2012

PV Still Facing a Bumpy Ride: Working in a Low-incentive World

Paula Mints

Bumpy Road photo via BigStock
To encourage the continuation of necessary incentives as well as utility participation, the PV industry has promised a consistent (and significant) reduction in module prices along with "grid" parity with conventional energy sources. The PV industry has also promised to do this without subsidies — and it may have to keep its promises.

Conventional energy producers have not promised low energy prices without subsidies and are expected to continue to enjoy — without much negative press — indirect and direct subsidies for many years to come. This is the unfortunate irony that all industry participants face: they must participate enthusiastically in a process that leads to low margins, losses, failures and therefore a lack of the very R&D funds necessary to continue innovating.

No one ever said that getting out of bed in the morning was fair, and few worthwhile causes are ever achieved without a fight. But, sadly, a growing list of companies have not been able to compete in a climate of artificial pricing for PV technology along with expectations that prices will fall. That in many cases these expectations come from the very companies that could not compete in the current climate is also ironic.

Manufacturers and demand-side players alike have all participated in the rush-to-the-bottom pricing strategy. As if low margins and company failures were not enough, in March the U.S. imposed preliminary duties on cells and modules imported from China. In May more significant duties were imposed with the final ruling expected in October. Aside from the infighting this action engendered among already beleaguered PV industry participants, it appears that the importers of the technology will be responsible, at least temporarily, for paying the duties outright, or, in the best case, putting up a bond with collateral. In sum, an unexpected outcome of the trade dispute is the financial pressure brought to bear on U.S. system integrators and installers. These small business people are the backbone of the U.S. solar industry.

A tale of two quarters

To highlight the highly competitive environment in which PV manufacturers currently operate, Q4 2011 and Q1 2012 revenue and shipment results were observed for seven manufacturers — First Solar (FSLR), Suntech (STP), SunPower (SPWR), Trina (TSL), Yingli (YGE), JA Solar (JASO) and REC Solar (RNWEF) — providing a representative sample of the pressures currently faced by manufacturers. During this period only Yingli Solar showed an increase in quarterly revenues from Q4 2011 to Q1 2012.

Shipments for the seven manufacturers for the two quarters were flat, at 2.7 GWp in Q4 2011, and 2.6 GWp in Q1 2012, with revenues decreasing by 16 per cent from $3.2 billion in Q4 2011 to $2.7 billion in Q1 2012. In good news for grid parity, but desperately bad news for six of the seven manufacturers observed, continued low average selling prices indicate that 2012 will be a difficult year for solar manufacturers. Cell manufacturer JA Solar's average price in Q4 2011 was $0.78/Wp, falling 10% to $0.70/Wp in Q1 2012. Average prices for the other six manufacturers, considered together, was $1.29/Wp in Q4 2011, falling by 16% to $1.09/Wp in Q1 2012. Removing SunPower's premier product, the five remaining manufacturers had an average price of $1.17/Wp in Q4 2011, falling by 15 per cent to $1.00/Wp in Q1 2012. 

Only Yingli and SunPower showed an increase in shipments for Q4 2011 to Q1 2012.

Where is it going and what is it costing?

At the end of 2012, when the gigawatts are counted, it is likely to be a strong year for shipments and installations and a poor year for profitability. There is a strong likelihood of further failures and consolidations. At the end of the year there will likely be fewer manufacturers and slightly higher prices leading to a flat overall average price in 2012 over 2011.

Average prices from 2001 through a 2012 estimate reflect averages for all buyer categories to the first point of sale in the market. Currently, manufacturers are selling inventory at extremely low prices, as noted earlier. Demand-side inventory is also being resold. In the U.S., some demand participants may need to sell inventory to meet the obligations of the Commerce Department. Inventory is almost always sold at a lower rate than the original price point. For 2012, as indicated by current quarterly pricing, high inventory and expectations for lower prices along with lower incentive rates are holding prices down, and prices will go down further before they tick up. In market conditions where demand-side participants sell inventory, while manufacturers continue selling new product, manufacturers are essentially competing with themselves. This is not a healthy market situation.

The always promising U.S. market for solar installations may suffer in 2012 as installers and system integrators struggle with the previously mentioned cash flow problems. China has announced a plan to install ~5 GWp and, given that the country's manufacturers had 16 GWp of manufacturing capacity in 2011 (46 per cent of the global total), along with continuing losses for most of its manufacturers, installing some of the excess capacity domestically makes sense. There have already been failures among the lower tier manufacturers in China, and it is highly likely that moving forward there will be consolidation among the remaining manufacturers, even first tier participants.

Germany installed 2.3 GWp from January through April and, despite new complexity in its incentive program and more frequent decreases in its tariff, it is on track to install 6-7 GWp in 2012, likely signalling the end to its FiT program. Regarding its FiT, the pioneering efforts of Germany moved the PV industry significantly forward in terms of understanding how to efficiently deploy the technology. That the original FiTs were too generous and have proved unmanageable is not the point. Now the industry needs to catch up with its learning curve and mature some of its hard won knowledge.

High debt levels in Spain (formerly a strong market) and Italy (a strong through wavering market) continue to shake confidence. Though the pro-bailout party won the recent Greek election by a small margin, this does not ensure that austerity measures will succeed in that country. In the U.S., the effects of a slow and bumpy recovery may result in a version of austerity — and election year politics and innovative government spending programs are generally not mutually compatible.

Technology tussle

Continued low pricing for crystalline technologies is stressing the competitiveness of thin films, particularly amorphous silicon (a-Si) and tandem junction amorphous. Closures of a-Si manufacturing pioneers such as Uni-Solar have raised questions in the minds of investors and other observers. Cadmium telluride (CdTe) manufacturer First Solar has shuttered plans to increase capacity and announced plans to focus on stable markets without incentives. Other CdTe manufacturers such as Calyxo, Abound and PrimeStar are apparently struggling to remain competitive in the current hostile market environment.

Investors remain interested in CIGS/CIS technology, with Manz acquiring Wurth Solar, and Nanosolar continuing to garner investment. U.S.-based Stion has licensed its CIGS technology to TSMC, which expects to profitably manufacture the technology at the same capacity level as Japan's Solar Frontier. Good intentions aside, execution will remain difficult while crystalline prices remain low. CIGS players are not immune to failure, with German manufacturer Solecture filing for bankruptcy in May 2012, while an empty parking lot and large company sign and logo remind those driving on Fremont, California's 880 freeway, that Solyndra made a noise beyond its market footprint when it failed in 2011. Manufacturers of CIGS technology that can withstand a two to three year correction may emerge stronger, but it will take a significant effort to survive.

Though it would seem that market-dominating crystalline technology manufacturers have the easy road, low technology prices and slim margins will force consolidation and may bring failure for manufacturers in all regions, including China. Surviving companies will need to make hard choices, and lower margins going forward are likely to become a necessary, though unwelcome, reality.

Securing a market

PV manufacturers are on track to ship ~26 GWp in 2012, most of it at a loss. As the industry is at the beginning of a potentially long correction, longer if global economies slip back into recession, a return to strong margins is unlikely in the near term. Indeed, moving forward the industry may have to adjust to a low margin reality given its promises of grid parity and low pricing.

For much of solar's terrestrial history technology manufacturers have suffered low to negative margins. The most profitable period for PV manufacturers began in 2004, after the German FiT began to stimulate strong demand and this incentive model spread throughout Europe and beyond. During this period, which included a shortage in polysilicon, prices for all technologies increased significantly. Constrained supplies of crystalline technology coincided with an unprepared thin-film sector.

Demand-side participants, system integrators and installers struggled to find affordable technology - or any technology at all. High prices for crystalline encouraged investors to look towards thin films as the future of PV, despite lower efficiencies for thin-film technologies. Equipment manufacturers such as Oerlikon and Applied Materials (AMAT) envisioned a changing industry that included a global landscape dotted with amorphous/micromorph manufacturing facilities. Lost amongst the noise and enthusiasm for low-efficiency and, assumed, low-cost technologies was the fact that increasing efficiency while lowering manufacturing costs remains the crucial twin goal of all manufacturers. These goals are not interchangeable.

Viewing supply and demand in the classic sense, they must be equal: that is, if someone sold it, someone else bought it.

The PV industry has an opportunity now to change the story that it tells its potential customers and supporters. Instead of selling solar as cheap and ever cheaper along with the moving target and nebulously defined goal of grid parity, the high quality of solar electricity should be the primary attribute that marketing professionals use when developing their strategies.

As an energy generating technology, solar electricity is clean, reliable and long lived (with a lifespan of more than 25 years). The fuel is free. Once the means of production — the system — is installed, maintenance is low. All energy generating technologies require maintenance — so solar does not have to be maintenance free in order to be a high-value energy choice.

There are many competing energy substitutes and, as conventional energy will likely continue to enjoy subsidies for many years, it will not be easy for renewables to displace fossil fuels as the primary energy source globally. However, as with all technology revolutions - such as, for example, the railroads, machinery replacing hand work, the telegraph, the telephone, penicillin and personal computers — older technologies are displaced by newer ones, often at a higher cost. It is as a result of this long, painful displacement that lives improve.

The PV industry and its population of technology and business experts has struggled, survived and briefly thrived for almost 40 years. During these years it has continued learning and improving through both good times and bad. The current period of correction, though painful, is simply a brief period on the way to a successful future.

The remaining months of 2012 will be most likely typified by continued low margins as well as macroeconomic risks that should not be ignored. Overselling in Germany this year — which is almost a certainty — may well lead to the end of that country's feed-in tariff, or at least to a cap. Solar professionals will have to learn to work in a low-incentive environment, and this will take time.

The time is now. Seize it. 

Paula Mints is principal analyst, PV Services Program, and a director in the energy practice at Navigant Consulting.

September 13, 2012

The Difference between Reality and Pandering

Garvin Jabusch

Innovation and increasing economic efficiency have always been the keys to profits and wealth. Getting more value out of systems without commensurate increases in inputs is the definition of growing efficiency, and it has been the engine of human economies since someone figured out how to use energy from a water wheel to grind grain instead of doing it by hand with a stone bowl and pestle. With that development (to simplify), a couple family members could run the wheel, freeing up everyone else for other pursuits. This kind of gain is the hallmark, to greater and lesser degrees, of new economies. Many times, the extra bandwidth is used experimenting with the next innovation, and in due course, old tech is replaced with new. When James Watt came up with the steam engine, a few individuals could grind the grain for a whole village, and innovation really began to boom. Trains, internal combustion, electricity, chemicals, and thousands of other efficiency-gaining technologies and techniques emerged in rapid succession. In our own time, the pace has only increased. The advent of computers and more importantly networks means we can in weeks or even days develop, test, share, refine and actualize new tech and ideas that would have taken years or even decades as recently as our grandparents’ time.

These efficiency leaps, with their ever increasing power to do more, faster, with less, are the causes of excess output. They come from real-world observation, trial and error, cause and effect. Applied science, in short, is the source of wealth. 

At Green Alpha, this is where we start the process of building portfolios, by seeking the new drivers of efficiencies and wealth. Our approach asks, ‘what are the key, game changing innovations emerging now? Of these, which will be in the most demand? Which will be instrumental in addressing our emerging challenges around resource constraints, 9 billion people in the next 28 years, and a warming climate with far more extreme weather events? Which are being deployed most profitably and with the best growth rates?’

We look for companies whose businesses live at the intersection of all these. Because one thing is certain: capital flows – as it always has throughout history – to the best new innovations creating greater economic efficiency. This is especially true when there are overriding needs in addition to wealth creation driving new innovation.  We believe our portfolios have outstanding chances of very competitive returns over time because they benefit from the two most powerful tailwinds in human economies: efficiency driven innovation and a critical need for solutions to pressing issues. It’s about identifying solutions and seizing opportunities.

‘Gains in economic productivity’ speaks for itself; the technologies may be new, but the process is ancient. For the other driver, ‘solving key problems’, we identify three key subtopics that are the major, global, macroeconomic conditions currently prevailing:

1) sustainable restructuring for reinvigorated growth of the U.S. and world economies,

2) energy and national security, and

3) economy-threatening climate change

Together, these make a strong case for investing in the best companies leading the way to a next, eco-sustainable, minimal-carbon future economy. By 'next economy,' we refer to the economy as it can function to minimize emerging risks. Our models reflect an economy that maintains security and comfort for society while remaining within the boundaries of what earth’s systems can both provide and tolerate. Far more than investing only in renewable energy solutions, this means looking for opportunities throughout the economy such as in water, smart grid technologies, basic materials research, agricultural improvements, forestry, sustainable commerce, zero-carbon transportation, and so on.  All these things are connected; solving for one issue type doesn't make sense when confronted with multi-part problems. Eco-efficiency has become an inherent part of risk and return for businesses regardless of enterprise size or economic sector of activity, and transition to an eco-efficient economy is the only viable path for global financial health. Investing in companies of this next economy is the clearest path to long-term capital appreciation and competitive portfolio performance.

This may all seem obvious. But there are some in this world, primarily those who make fortunes running the old, inefficient technologies of the 19th century (fossil fuels are the prime but by no means only example) who’d like us to believe that we live in the best of all possible worlds, that our technologies are great as they are, that any new innovations should be limited to new, expanded uses and dissemination of their products (e.g., development of the Keystone XL Pipeline). Further, they’d like us to believe there are no climate, population or resource issues on earth today, or, to the extent that there are, that they can be solved with some increase of their old timey technology.

Unfortunately for the people who promote this point of view, it flies in the face of science and objective reality. So, they’re playing the only card they have: a campaign to discredit science and even reality itself (here’s just one of thousands of good recent posts on this). Then, to make it appear that their anti-science position is credible, they portray that position as a legitimate side that must be considered by anyone who thinks of themselves as a reasonable, open-minded centrist.

To be truly centrist is to take the best of both sides, define your philosophy and make your own (as opposed to an authority figure's) decisions based on what you think is right. It's a reasonable approach to living an honest life on your own terms. But in the world we live in now, to claim we need more debate on topics like global warming, scarce resources, income inequality and the policy prostitution resulting from Citizens United is to be complicit in burying the truth. To meet liars, thieves and oligarchs half way is, in the U.S. plutocracy, nothing more than pandering. Or call it fear to speak truth to power, or going along to get along. The problem is that it's a lie. Meeting a lie half way validates it. If someone tells you it’s nighttime at noon, agreeing to debate the subject doesn’t make you centrist or fair, it perpetuates their delusion. There is no reality now wherein warming can be debated or where unlimited burning of fossil fuels can be ‘centrist.’ I understand it can be hard to see positive innovation when there are those who believe that doubting the word of our plutocrats is anti-American, scary and dangerous to our way of life. But, strange as it may seem to some, authority sometimes only has its own best interests in mind. And yes, Citizens United, allowing as it does unlimited contributions to policymakers, is fundamental since policy now follows dollars rather than the best interests of citizens. Parties in America rarely discuss climate because most politicians are afraid to contradict their paymasters, and fossil fuels are the big gorillas when it comes to super-PAC donations. As the richest companies in history, they would be. 

But there is a growing crowd, led by some of the most successful businesspeople alive, who see a better world and who are not afraid to invest in it. The myth that the next wave of human innovation has to wait until later while we continue to enrich the fossil fuel bosses is just that, a myth. And it’s stalling progress.

Facts matter. Global warming is real. Evolution, to bring up another doubted fact, is real. If even one of the tens of millions of fossils formed over the last 3.5 billion years of evolution was out of place in its developmental sequence, we could have the ‘it’s just a theory’ conversation, but not one ever has been. Genetic relationships between species prove evolution’s reality even more convincingly than fossils do. All rational evidence one can cite point to the truth of evolution. Common, everyday horse-sense observation shows us that. I’m amazed that some anti-science folks have no problem understanding that wolves and Chihuahuas are related, but fail to see chimpanzees and humans could possibly have had a common ancestor.  

The ‘observe, verify and repeat’ approach of science works to explain the world. It's the only thing ever to adequately, reliably and repeatedly help us understand our surroundings and allow us to make more of them. To reject what are by now the basic, undeniable, repeated, objectively demonstrable truths of global warming and evolution is to deny reality. To hold a conviction that repeated scientific conclusion is fraud also means rejecting manifestations of science such as medicine. Evolution is the grand unifying theory of biology, and much of what we know of human health care is the result of what we've learned in the realization of how life takes shape. Yet rare is the ideologue that rejects medicine.

Science now tells us that it is earth’s systems that provide the underpinnings of the human economy. Civilization has now reached a scale where it has begun to threaten the stability of those underpinnings, and we need to adapt. Our economies must evolve to be able to provide us a high standard of living without risking dangerous disruptions from climate and depleted resources.

Similarly, global macro economics informs us that global warming, resource scarcity and all their attendant problems are real and looming, and that running our economies while cooking ourselves and recklessly depleting our ultimate economic underpinnings is not going to work. You go to the doctor if you’re ill, and we change our economics when our economies are threatened.

Fortunately, to greatly improve our means of economic production we need merely embrace the next, now emerging wave of human innovation. Improving efficiencies - getting more out of less - is what people do. From the time we domesticated fire right up through today we've been getting more and more out of less and less. Today is no different. We don't need to rely on things like coal and natural gas electricity plants any more than the developers of the first coal plant needed to rely on their old water wheel. We've moved on. Let's act like humans and capitalize on it.  

GAA Logo Blog (2)

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."

September 12, 2012

Closing the Geothermal Loop

by Debra Fiakas CFA

the geysers
Calpine Plant at The Geysers.  Photo Source: Calpine

In the article “Is Ormat Technologies Misunderstood?”, I outlined a few performance measurement issues, but left out of the story Ormat’s position in the relative position in the geothermal industry.  Naturally I received comments from readers about why I made no comparison of Ormat to Calpine Corporation (CPN:  NYSE), the largest U.S. generator of electrical power using geothermal sources.  On a go-forward basis Calpine shares are valued about the same as Ormat Technologies, Inc. (ORA:  NYSE), at least on the basis of projected earnings per share.  However, besides simply being a larger company with greater longevity in the power generation market, Calpine offers a significantly higher dividend yield and benefits from a sturdier balance sheet.  There are other differences.

Other Differences

Calpine relies on open-loop system that pumps superheated steam out of deep geological formations.  After using the steam to drive turbines that turn electricity generators, the water is sent to cooling towers and is either reused or evaporates.   With existing technology, Calpine recycles approximately 25 percent of the water back into the steam reservoir with the remainder lost to evaporation.  Herein lies Calpine’s problem.

As superheated steam is removed from deep underground the formations lose pressure.  At The Geysers in California were Calpine operates 15 power plants, peak production capacity was 2,000 megawatts in the 1970s.  Calpine is only producing about 850 megawatts today because pressures have reportedly declined.  Indeed, Calpine has made arrangements with nearby local governments to treat and infuse waste water into the formations as a means to restore underground steam pressure.

Calpine describes this practice on its corporate website as if it was just a community service that no one else would undertake.  In reality it is vital to the longevity of The Geysers.
“The company helped develop the Lake County-Southeast Geysers Effluent Pipeline project, which was the first wastewater-to-electricity project in the world. This 29-mile underground pipeline delivers eight million gallons of reclaimed water to The Geysers every day. Since it began operating in September 1997, more than twenty billion gallons of treated wastewater from Lake County have been recycled into the steam reservoir, increasing the long-term productivity of the resource…. In addition, the company helped launch the Santa Rosa Geysers Recharge Project that transports 11 million gallons of reclaimed water per day from Santa Rosa to The Geysers through a 41-mile underground pipeline.”
Calpine makes little mention in its various public filings of the potential demise of The Geysers as a consequence of the open-loop system it uses in the project.  It also does not mention that the agreements with local governments for waste water are subject to renewal.  Local governments are keenly pursuing various technologies and projects to turn waste streams  -   both solid and liquid -  into cash streams.  As a consequence Calpine may have competition for these critical water sources in the future.  The agreement with Lake County expires in 2022 and the Santa Rose arrangement runs through 2038.  Calpine quietly deals with the dwindling water pressure issue by backing off on power generation.  The company has adjusted turbines sizes to the reduced flow levels.

By contrast Ormat relies on a closed loop system that returns water underground after the superheated steam is used.  Ormat calls it the Ormat Energy Converter that is based on proprietary tweaks to organic rankine cycle technology.  Ormat claims its air-cooled condenser technology enables re-injection of almost 100% of all extracted geothermal fluids.  As a consequence Ormat does not have to worry about sourcing external water resources to ensure reservoir life.  There are a couple of other benefits:  no rotten egg smell from the steam brought up to the surface and exposed in an open system and no potentially toxic chemical additives required to treat re-injected water.  Ormat’s systems also have a lower profile against the existing terrain and vegetation.
Enhanced Geothermal Systems

To be fair Calpine is not resting on its open-loop system  -  although investor would never know it by reading Calpine’s public filings.  Even though the quarter and annual reports are silent on the topic, Calpine is actually hard at work on an enhanced geothermal system.  EGS as it is called is expected to sidestep the thornier issues associated with conventional open-loop systems.     

First it has to be acknowledged that geothermal energy compares very favorably to other energy sources in terms of the trade-off between power­ generated and environmental cost.  It does not create CO2 toxic emissions as with coal or natural gas powered utilities.  It does not compete with food crops like ethanol.  It offers consistent 24/7 electricity generation that requires no back-up power source or storage infrastructure like solar or wind.

The U.S. Geological Survey did a bit of math and determined that U.S. geological formations (mostly in the Western section of the country) could yield 16 gigawatts of potential power from easily accessible geothermal formations.  Fine tune certain technologies and the U.S. could wring 725 gigawatts of power out of the Lower Forty-eight.  To put that in perspective the U.S. uses approximately 4,200 gigawatts of electricity each year.  The number could go several times higher if engineers can figure out how to capitalize on the geothermal potential in hot, dry rock that is found abundantly all over the U.S.  MIT estimates that, using EGS, just 2% of the heat below surface in the continental U.S. at depths of 3 to 10 kilometers could supply 2500 times the nation’s current energy needs.

The math has Calpine driving hard to perfect EGS.  Unlike conventional geothermal like that used by Calpine at The Geysers, EGS does not require an existing underground reservoir of steam or water.  Instead fracturing technologies are used to inject cold water under low pressure to expand existing fractures in a hot rock formation.  Another well is drilled at the end of the system to extract the steam that is created.  The water can be cooled and re-used.

A big plus is that EGS requires substantially less water.  However, it engenders a whole new issue.  The fracturing technologies are the same as those that have environmentalists campaigning against the oil and gas industry.  The EGS fracturing process could lead to small earthquakes.  However, the low pressures of the water help reduce the likelihood of substantial quakes.  The water is also free of chemicals.

Calpine has a demonstration site in the works in The Geysers.  It formed a partnership with the U.S. Department of Energy in 2008 to build a $12 million EGS demonstration project.  Calpine started community hearings in August 2011 to bring local residents in to the conversation.

Help may be on the way from Ormat Technologies.  Along with Hi-Q Geophysical, Inc., Ormat is developing surface and borehole seismic methodologies using compression and shear waves for characterizing fractures in EGS.  In 2008, Ormat Nevada started working with GeothermEx and other research groups to stimulate multiple wells at Brady Field in Nevada to evaluate a fracturing system.

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.  ORA and CPN is included in the Geothermal Group of Crystal Equity Research’s Electric Earth Index.

September 11, 2012

Advanced biofuels pioneer Terrabon files for chapter 7 bankruptcy: One-off or trend?

Jim Lane

Closely-watched green gasoline producer collapses as Waste Management (WM) declines next financing round.
What does it mean for companies like Fulcrum Bioenergy, Enerkem, Agilyx, Agnion, Renmatix, Genomatica, and InEnTec? The Digest looks at the inside story.

Super-cali-what?In Texas, Terrabon filed for Chapter 7 bankruptcy protection; the company’s operations will cease and a trustee will be tasked with liquidating the company’s assets for the benefit of creditors.

The complete Chapter 7 announcement is here.

In a statement, Terrabon’s leadership said that company could not obtain additional corporate funding to finish developing and engineering its first commercial-scale plant. Suspension of operations resulted in lay-offs of approximately 60 full-time employees, effective with the bankruptcy filing.

The storyline is clear enough: Terrabon had a financing round planned for this year, which Waste Management was expected to lead. In August, Terrabon learned that Waste Management would not be participating in the round – part of what Terrabon was informed was a cutback in WM’s overall capital investment following a late July corporate shake-up.

What does Terrabon make?

Terrabon produces high-octane gasoline using its MixAlco technology. MixAlco is an acid fermentation process that converts biomass into organic salts. The resulting non-hazardous organic salts, or bio-crude, would be then shipped by truck, rail or pipeline to a Valero refinery or other centralized processing facility where it would be converted to a high-octane gasoline that can be blended directly into a refiner’s fuel pool, avoiding many of the blending and logistics challenges presented by ethanol.

As of last year, Terrabon had exceeded its goal of producing 70 gallons of renewable gasoline per ton of MSW using its patented acid fermentation technology.

And last fall, Terrabon announced that it has been awarded a $9.6 million, 18-month contract by Logos Technologies to design a more economical and renewable jet fuel production solution for the Defense Advanced Research Projects Agency.

More on that project here.

Rumors flying

The announcement capped off a month in which unconfirmed rumors concerning Terrabon’s struggles in its latest financing round increased in frequency and intensity. By Wednesday, the Digest wrote:

“But we expect that we have not seen the last round of rationalization by a major strategic – perhaps not even the last major announcement this month. Watch those companies that have had their strategics on board for three years, or more. It’s hard for strategics to make shifts in less than three years without looking unserious – without the data to make decisions – but three-year time windows are usually enough for portfolio rationalization to occur. Not to mention that effective corporate godfathers often move up or out within three years.”

The WM reorganization

wm logoIn the last week of July, Waste Management announced a decision to eliminate 700 positions – 2 percent of its overall workforce – and a flattening of its management structure as well as reductions in corporate support staff.

The plan was announced after WM profits fell to 45 cents per share for Q2 (down from 50 cents in Q2 2011) and well down from consensus analyst expectations, pegged at 53 cents. It was the fifth quarter in a row of falling margins at WM, and a second consecutive quarter of missing analyst expectations.

At the same time, WM maintained its shareholder dividend – putting presumed pressure on capital outlays such as represented by the investing activities of the Organic Growth Group, tasked with finding growth opportunities synergistic with the WM’s objective of maximizing value from waste, including converting them into biofuels, renewable chemicals and energy.

WM’s representative on the Terrabon board, WM Senior Vice President Carl Rush – chief of the company’s organic Growth Group, took early retirement in the corporate restructuring.

Other financing options at Terrabon

Terrabon quietly laid off 40 staff in late August in an attempt to reduce the cash burn and buy more time for refinancing. Other investors in Terrabon were sympathetic, but unable to fill the void on short notice. Valero, for example, had faced a similar situation at Qteros in the past year – while stepping up at Mascoma with increased investment aimed at helping that company proceed to complete its first commercial plant. Last summer, Valero announced that it OK’d the financing of the Diamond Green renewable diesel project off its balance sheet, and pulled out of the DOE loan guarantee program.

A flutter of hope

In the last week of August, hopes grew that Waste Management would be able to continue to support its complete set of planned investments, when WM and Renmatix announced a joint development agreement to explore the feasibility of converting post-consumer waste into affordable, sufficient-quality sugars for manufacturing biobased materials. At the time, it was reported that WM had joined global chemical giant BASF and Kleiner Perkins Caufield & Byers in Renmatix’s Series C raise, now totaling $75M. More on the WM, Renmatix deal is here.

In addition, WM continued to participate in Genomatica, joining the $41.5M Series D round that was announced August 3rd, and which included Alloy Ventures, Draper Fisher Jurvetson, Mohr Davidow Ventures, TPG Biotech, and VantagePoint Capital Partners – with WM as the chief strategic. But Terrabon was unable, ultimately, to secure another round of WM support.

Reaction at Waste Management

On Friday, Waste Management issued the following statement: “Waste Management has invested over several years in a diverse portfolio of conversion technology platforms to determine if they are scalable and economic. With the prospect of converting organic energy into biofuels still in various stages of development, not every initiative in our range of investments is certain to succeed. We will continue to nurture, evaluate and scale up the most viable conversion technologies that match our ongoing strategy of extracting more value from waste.”

The company also confirmed that former McKinsey partner Bill Caesar, who joined WM as chief strategy officer in 2010 and subsequently became president of Waste Recycling Services, had taken over responsibility for the Organic Growth Group, and the company said that OGG “definitely remains a part of our company post-restructure.”

Reaction at Terrabon

“It is with great disappointment we announce Terrabon has been unable to obtain additional financing and must suspend operations,” said Gary Luce, CEO of Terrabon. “This is a sad day for Terrabon’s employees, partners, suppliers and vendors who never wavered from their robust support of our company and the technology we deeply believe in. We want to thank them and convey how deeply we appreciate their steadfast loyalty during our journey to become an additional source of alternative energy for the United States.”

The company had been aiming for a 5 million gallon small commercial facility by 2013 based on 220 dry tons of feed per day. The copnay had intended to move to 500 ton and 1000 ton per day designs. At 1000 tons per day, they projected $1.00 per gallon operating costs and capital cost per annual gallon is between $6.00 and 8.00. Accounting for the BTU difference between ethanol and gasoline, on an ethanol-equivalent basis that equated to $0.67 per gallon operating cost and $4.00 – $5.33 per annual gallon capital cost.

More on the technology and data here.

Who else is in the WM portfolio?

Besides Terrabon and Renmatix – there are quite a few. Among them: Fulcrum Bioenergy, Enerkem, Agilyx, Agnion, Genomatica, and InEnTec. In the near term, Fulcrum Bioenergy and Enerkem are the closest to fuels commercialization (and the big capital calls).

In the case of Enerkem, they also have parallel investments from Valero and Waste Management (Enerkem Senior VP for Business Development, Tim Cesarek, was until last year the manageing director of the WM’s Organic Growth Group and served for more than a year on the Terrabon board.)

One-off or trend?

We see this as a one-off. WM had a wide range of investments, and though the timing was awful, portfolio rationalization is inevitable for strategics. Terrabon had not have a completed engineering package at commercial-scale – despite being founded in 1995 – and clearly was “a bridge too far” for WM.

Last week, we wrote: “Here’s the problem with big strategic partners for small, early-stage companies – and one of the reasons that, for many years, VC firms didn’t want strategics along for the ride in venture development: strategics change strategy, and small changes at big companies result in big changes for small companies. What is a ripple in the water to a giant is a tsunami to a fly.

“Often, strategy must shift as the result of weak earnings, weak economies, or large-scale acquisitions that come with collateral businesses that must be rationalized, cleaned up, or otherwise fitted under the corporate umbrella. Personnel changes at strategics can have colossal impact on small companies, too. Or just painful rounds of rationalizing investments, after the pleasant couple of years making them.”

The impact on other WM investments?

Too soon to tell. Certainly the company continues to be on a strategic path towards unlocking higher value from waste through advanced technologies that produce fuels and chemicals. With landfill volumes flat (and not helped by a sluggish economy, WM is determined to invest in new markets and higher-value product streams.

We continue to expect WM to take investments on a one-by-one basis – though the patience for long development timelines and the appetite for new technologies may have been reduced by increased capital constraints at WM in the nearer-term.

The bottom line

The company’s assets will be sold by the trustee. Absent a completed engineering package, it will be difficult to easily separate the technology from the laid-off team that had been built up to shepherd it towards commercialization. We’ll wait to see who picks up the Mix-Alco technology – both in terms of Terrabon’s improvements and the technology originally licensed out of Texas A&M. Also, we’ll wait to see the fate of the aforementioned Logos project to design a more economical and renewable jet fuel production solution for the Defense Advanced Research Projects Agency.

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.

September 10, 2012

Is Ormat Technologies Misunderstood?

by Debra Fiakas CFA

Olkaria III Geothermal Power Plant, Kenya
Shares of geothermal power developer and utility Ormat Technologies (ORA:  NYSE) are trading at 24.7 times the consensus estimate for 2013.  That seems pricey on the surface, but the stock is down from a 52-week high of $22.24.  The stock gaps up and down with regularity, suggesting ORA is a battle ground for bulls and bears.  The fact that the 50-day moving average price continues to descend toward the longer-term 200-day average, hints that maybe the bears are now holding sway.

This is one of my favorite companies in the Geothermal Group of our Mothers of Invention Index for energy innovators.  Ormat operates geothermal utilities in the U.S. and around the world.  Electricity sales represent about three-quarters of the Ormat’s sales.  The company also provides engineering and procurement services for third-party energy developers and sells power plant equipment using its proprietary technologies.

Ormat has been profitable for a while, so I was a surprised to see a negative trailing earnings number in a popular financial database.  Taking a closer look, I found that Ormat operations are as strong as ever.  Gross profit margin in the first half of 2012 was at a record 30.5%.  Operating margin also hit a record 19.7%, making it clear management is not squandering the extra profits on unnecessary administrative spending.

Investors need to look carefully at the tax line on Ormat’s profit and loss statement.  It is messy.  In 2010, the company reported a benefit and last year the tax provision was a whopping $48.5 million.  The thing is the tax bill as shown on the income statement is just “reported” taxes.  Investors have to read the fine print in management’s comments and footnotes to figure out the real tax bill.  Alternatively, you can just turn the page to the cash flow statement where the CFO makes all sorts of additions back to net income to come clean on real-time cash expenses.  Turns out $38.1 million out of the $48.5 million tax bill reported in the year 2011 was not paid in cash at all and just sequestered away on the balance sheet for a future date.

Just in case that made sense to you, let me add a bit of complexity to the story.  Last year in 2010, Ormat reported a tax benefit of $1.1 million.  However, it really paid $10.1 million in taxes using the company’s hard earned cash.  Investors can expect more of this sort of uneven reporting of the tax obligation.  It is just part and parcel of Ormat’s business model that leads to deferred tax assets and liabilities.

Given the noisiness in Ormat’s reported net income, it is best to watch cash flow from operations (CFO).  CFO weeds out the ups and downs associated with the accounting treatment for taxes, and delivers a better read than reported net income on what Ormat is delivering to shareholders.  Ormat has converted 28.0% of sales or $417 million into operating cash since the beginning of 2009.  Ormat needs every penny for its capital spending program.  Capital expenditures over the same time period totaled $953.8 million.  The gap has been filled in by debt, most of which is associated with constructing and equipping Ormat’s geothermal plants.

The debt-to-equity ratio at the end of June 2012 was about 1.00, which is on par with the average debt load in the electric utility industry.  Since then Ormat floated another $310 million in debt to finance the Olkaria III power plant complex in Kenya.  The first two phases of the project have been profitable operations since 2000 and 2009, respectively.  The success of the first two projects should mitigate concerns investors have about the increased leverage.  There are risks inherent in geothermal energy production mostly surrounding the unpredictability of Mother Nature, but the Olkaria area has been tested.

Fortunately for people like you and me who are willing to sacrifice a bit of time to read management’s notes, there are plenty of financial reporters and investors who may have only looked rising debt or the red ink in 2011 and decided Ormat is a losing, risky operation.  The stock has traded up and down in the months since the year 2011 results were reported, but has yet to make a recovery to the late 2010 and early 2011 period when the stock was near $30 per share.  Given the shrinkage in valuations across all sectors it is too much to expect a return to ORA’s glory days in 2008 when the price topped $40 per share.

A study of Ormat’s price chart could provide insight into a good entry point for a position in a strong company with solid cash earnings.  ORA offers a dividend yield of 0.90% as a bit of icing on the cake. 

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.  ORA is included in the Geothermal Group of Crystal Equity Research’s Electric Earth Index.

September 07, 2012

The Hocky-Stick Growth of Biobased Intermediates

Super-cali-thali-terpa-butyl-peta what?

Jim Lane

Super-cali-what?The new trend in biofuels is not a biofuel at all – it’s an (usually unpronounceable) intermediate that can be refined into an array of fuels, chemicals, flavors, fragrances, and construction or packaging materials.

Ptera-buta-thalic-what? We can hardly pronounce them, but we sure need to know about them.

Amyris (AMRS), KiOR (KIOR), Renmatix, Virdia, Blue Sugars, Proterro, Sucre Source, Sweetwater Energy, Genomatica – hot companies all, what do they have in common? Instead of making a finished end-product, they make an intermediate which is then upgraded to a finished product, typically by partners.

The range of intermediates is broad.

The hottest category is renewable sugars, which has attracted companies like Virdia, Blue Sugars, Proterro, Renmatix and Sweetwater Energy. Their challenge? Produce low-cost, high-performance renewable sugars that can be sold to synthetic biology companies like LS9, Virent, or Gevo (GEVO), who convert sugars into an array of useful end products ranging from surfactant alcohols, base chemicals like isobutanol, or diesel, jet or alcohol fuels.

Over at Amyris, they are producing biofene – essentially a known molecule that is too expensive to produce using conventional methods, and which they are marketing to partners as an excellent intermediate that can be used in the production of, for example, lubricants.

Over at KiOR, they are producing biocrude, using a pyrolysis process and Southern yellow pine as a feedstock. Their product, in turn, is sold to conventional oil refineries, that can upgrade that product, using fully conventional refinery processes, into a finished drop-in fuel.

At Genomatica, right now they are focused on a biobased BDO, or 1,4 butanediol, used as an intermediate in a host of products ranging from spandex fibers to solvents and printing inks.

One’s intermediate is another’s end-use product

Part of the reason for the trend has been the proliferation of biofuels strategy involving complex end-products, that are traditionally made from intermediates.

Take plastic bottles, for example. That’s PET, or poly(ethylene terephthalate).

(Try saying that three times real fast, and write me after you’ve figured out how to pronounce the “(” because poly(ethylene terephthalate) doesn’t really have any polyethylene in it. Sheesh.)

To make PET, you need monoethylene glycol, which is being made renewably around the world today. But you also need purified terephthalic acid (PTA), and to make that you need paraxylene. Until now, no one has figured out a way to make paraxylene, renewably and affordably – until Coke recently invested in Virent and Gevo, that are developing ways to do it.

In Gevo’s case, they are converting their biobased isobutanol to PX. Now, that isobutanol can also be used in its original form in green chemistry. Or, it can be burned in an internal combustion engine as a fuel molecule.

So you see, end products can be intermediates. And hopelessly confusing to the general interest reader at exactly the same moment that they are potentially transforming the way products are made that general interest readers use in everyday life.

Why intermediates, why now?

Intermediates have become a fashionable strategy for a couple of reasons.

One, the aforementioned complexity of renewable chemistry makes for a lot of intermediate demand in the everyday world of Big Chemicals.

Two, as companies like LS9 and Virent head for scale, they can use renewable sugar intermediates in place of, say, expensive corn syrup.

Three, feedstock companies can participate in the biobased economy without having to pick winners among the host of competing molecules. They don’t need to choose between ethanol, triglycerides, isobutanol, n-butanol, yada, yada, yada. They can make a renewable sugar, and sell it to a host of customers that make end products.

Is that why investing in intermediates companies is becoming more and more popular?

That’s a driving reason. Another is that the intermediate companies are getting better at what they do, and more of them are popping up. Take for instance, Waste Management (WM), which is now getting deeply involved with Renmatix and renewable sugars. That way, they don’t really have to worry as much about, for example, the fate of the Renewable Fuel Standard in their investment decisions. Because not all the customers are going to be making qualifying fuels.

Wait a minute – aren’t all fuel companies really just intermediate companies too, because can’t you make products like ethylene from ethanol?

Well, yep you can, if you have an affordable way to make that conversion, such as Dow has. Or ExxonMobil’s methanol-to-gasoline (MTG) process – and so on. You’ll find that a lot of the companies that are making cellulosic ethanol can make a lot of other products, too – they have focused on ethanol precisely because of the RFS, and because the vast demand for fuels creates assurances for investors that there will be a ready market for the product that is far more difficult to saturate than, for example, the market for succinic acid.

Speaking of succinic acid, isn’t it a big part of the strategy at companies like BioAmber and Myriant that they will be able to use their biosuccinic acid as an intermediate for other products?

Yep. In fact, BioAmber has licensed DuPont hydrogenation catalyst to make biobased 1,4 BDO from succinic acid. And from there, they can get into the same kind of markets that Genomatica is looking at with its direct-to-BDO process.

But aren’t intermediates really a story for biobased chemistry, rather than fuels?

Not at all. In fact, intermediates are a part of the story, to come extent, in the entire story of biofuels. With the exception of the 100% hydrous ethanol market in Brazil, all biofuels today are used in blends – and to an extent, blend ingredients are intermediates, although generally by intermediate we mean a product that will be further refined, rather than blended.

More than that, KiOR’s strategy is a sign of the times. Making affordable biocrude, and partnering with refineries to make finished fuels and chemicals from that point – why, that’s one way to make a the refining industry into happy supporters of instruments like the Renewable Fuel Standard. Remember, they generally oppose the RFS not because they think its bad for the planet, but because its bad for the refining business by cutting into their production volumes and creating all kinds of infrastructure demands on them at the same time. By contrast, they don’t really give a fig where your crude oil comes from – bio or fossil, they’ll happily take it all, if in-spec, and available at affordable prices and with .

Why hasn’t this been done all along the way? What are some of the down sides of intermediates?

A big issue is stability.

Biofuels are a little like wine and champagne – their chemistry can continue to evolve, and in 6 months after sitting in a tank, what you may not have is the same in-spec material you started with. (That’s why, for example, champagne pops when you pull out the cork – it has been fermenting in the bottle and that releases CO2, which is what causes the pressure build-up).

Some molecules attract water, some oxidize. With renewable sugars, there are fears that bacteria will have a field day and gobble up the product if you try and transport renewable sugars via a pipeline – and who knows what you’ll end up with at the other end.

Are intermediates inevitable? Is the integrated model dead?

Hardly. Solazyme (SZYM) is an outlier in this case, and happily so. They aim to make some intermediates – for example, they make an intermediate oil which is hydroprocessed with partners to make Solajet aviation fuels. They also will make ingredients – such as Whole Algalin Flour, that they are making in partnership with Roquette and which will be used in a whole range of food products.

But they are also making finished end products for customers – take for example, their partnership with Dow to make dielectric fluids, which are used in those big power transformers all over the world. They are also, for example, not only making end-use products, but selling them directly on the Home Shopping Network, as in the case of their Algenist line of skin care products.

And take Avantium’s PEF product line, for example. Avantium’s YXY (“icksy”) technology can produce PEF, or polyethylene furanoate, and they believe that can replace traditional clear plastic (PET) altogether. No need, ahem, to produce PX to get to PTA so you can add MEG and get PET.

Or take companies like Mascoma, for example – they see transformational economics in consolidated bioprocessing – extracting sugars and fermenting into products, all at the one time. But they, themselves, might very well be exploring the making of intermediates from their process, even if they are not a big customer for them.

The bottom line

Intermediates are a big trend.

Feedstock players like the optionality it gives them.

Processing technologies like the flexibility of buying intermediates from a host of suppliers, or the option to produce intermediates as well as end-products, in optimizing their production economics.

End-use customers – well, they don’t care except to the extent that they get parity-or-better performance and parity-or-better cost. But, of course, those are the very qualities that optionality are likely to give them.

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.

September 06, 2012

Codexis and Shell Redraw the Advanced Biofuels Map

Jim Lane

codexis logoCodexis, Shell redefine relationship; Codexis gains global rights; will lay off 133 staff; adopts anti-takeover measures; what does it mean for Shell, Raizen, Iogen, Codexis and Dyadic?

What does it say about strategic investors in advanced biofuels?

In California, Codexis (CDXS) announced that Shell has granted Codexis a royalty-bearing, non-exclusive license to develop, manufacture, use and sell cellulase enzymes developed under the companies’ Amended and Restated Collaborative Research Agreement. The scope of the New Agreement is worldwide, except Brazil, for enzymes used in the biofuels field. Codexis already has exclusive rights to commercialize its cellulase enzymes in other fields.

Codexis rights, Shell royalty

In exchange for these new rights, Codexis will be obligated to pay Shell a low single-digit percentage royalty on net sales of CodeXyme cellulase enzymes to customers other than Shell and its affiliates. Codexis will also be obligated to pay Shell a low single-digit percentage royalty on Codexis’ own use of cellulase enzymes in the biofuels field. Shell is also entitled to preferential pricing on purchases of cellulase enzymes from Codexis should the companies mutually agree to enter into a future supply arrangement.

Codexis and Shell have agreed to an early termination of the Shell Research Agreement, effective now, and Shell will pay Codexis approximately $7.5 million in satisfaction of remaining R&D payments. Codexis also remains eligible to receive a one-time $3.0 million milestone payment upon the first sale or use by Shell of such enzymes in the biofuels field in Brazil, or in other fields of use previously specified in the Amended and Restated License Agreement between Codexis and Shell.

The Shell Research Agreement would have expired on November 1, 2012 if not for the early termination effected by the New Agreement.

Shell’s 10-year rights

Shell has also agreed under the New Agreement not to sell any cellulase enzymes to third party biofuel customers using technology developed by Codexis. Shell retains its right to use and manufacture such enzymes, including those enzymes that result from Codexis improvements during the ten-year period beginning on August 31, 2012, for Shell’s own use and use by Shell affiliates, as well as to sub-license the right to manufacture such enzymes to third parties for Shell’s own use.

Codexis to lay off 133 employees

Codexis today announced a workforce reduction of 133 employees effective October 30, 2012. All affected employees will receive advance notice of their employment loss in accordance with applicable law. Codexis estimates that it will incur total charges of up to $3.6 million in the second half of 2012 as a result of this workforce reduction, including $2.9 million in continuation of salary and benefits of the affected employees until their work is completed and their positions are eliminated and $0.7 million of one-time termination and miscellaneous costs, all of which will result in future cash expenditures.

Codexis shareholder rights plan

The Board of Directors of Codexis announced today that it has adopted a short-term shareholder rights plan, which is scheduled to expire on September 2, 2013.

The rights plan is intended to enable all of Codexis’ stockholders to realize the underlying value of their investment in Codexis by guarding against inadequate or unsolicited takeover offers. The rights are not being distributed in response to any specific effort to acquire control of Codexis. The rights are designed to ensure that the Board of Directors has sufficient time to consider any proposal and make sure that all stockholders receive fair and equal treatment in the event of any proposed takeover of Codexis.

In addition, the rights plan will guard against partial tender offers, open market accumulations and other coercive tactics aimed at gaining control of Codexis without paying all stockholders a full control premium for their shares.

Under the plan, one preferred stock purchase right will be distributed for each share of common stock held by stockholders of record on September 18, 2012. Subject to certain exceptions, the rights will be exercisable if a person or group acquires 15% or more of the Company’s common stock or announces a tender offer for 15% or more of the common stock.

More on the rights plan, here.

Reaction from Codexis

“Codexis has developed some of the most cost effective and competitively advantaged cellulase enzymes in the world. Securing the rights to market these enzymes to advanced biofuel companies outside of Shell is a major milestone for the company,” said John Nicols, President and CEO of Codexis. “We also remain focused on the Brazil market, where our discussions with Raízen continue regarding commercialization of our cellulase enzymes for second generation ethanol production.”

Analyst reaction

Piper Jaffray’s Mike Ritzenthaler writes:

Shares of CDXS are down 50% since February 21st, and at this point we believe that most of the news around the new relationship with Shell has been priced in. Over the next 2-3 years, we expect essentially all of the value of the company to be derived from pharma sales. With the lack of clearly defined catalysts (either positive or negative), we have elected to take a Neutral stance. As a result, we have elected to upgrade shares to Neutral, while maintaining our $2 price target. The new agreement stipulates a ‘low, single-digit’ royalty percentage to be paid to Shell out of any future net sales of CodeXyme to third-parties, with no apparent sunset. However, winning new business for CodeXyme will be very difficult, in our view, given the nature of the enzyme supply agreements already in place for current cellulosic biofuel projects.

• New agreement eliminates Shell backstop. Codexis announced yesterday that, as of August 31st, they are free to pursue global opportunities for fuel applications of CodeXyme, and have agreed to pay Shell a percentage of all future net sales. The royalty payments are a mechanism for Shell to recoup their approximately $375 million investment in the development of cellulase enzymes, though it is yet unclear whether the royalty provision has a sunset. We have revised our model to include a final $7.5 million FTE/milestone payment from Shell in 3Q12, and ~$1 million in one-time expenses related to the workforce reduction in 4Q12. In 4Q12 through the end of FY14, we have included revenue contribution only from the pharmaceutical segment.

• Although Codexis can now pursue global fuel opportunities, there are likely no more prospects with or without exclusivity with Shell. As far as Raizen goes, we believe the 2-year development window for 1st gen technology speaks volumes about the conservative nature of Raizen’s management and operations. Cellulosic biofuels could take 2-3x the time to implement (at best) due to the complexity, the need for an intermediate scale, and Raizen’s cautious approach. Projects outside Brazil may take even longer than those with Raizen, since the cellulosic ethanol plants currently under construction already have a contracted enzyme producer, and the next slate of projects likely won’t come on-line until 2016 at the very earliest.

Biofuel Digest’s reaction

We have two thoughts to add – one on the nature of strategic partners and strategic partnerships as a whole. A second, some thoughts on where we believe Shell, Raizen, Iogen, Dyadic and Codexis are headed – in lieu of the companies being able to offer a comprehensive roadmap at this time. We think this does not signal that Shell is abandoning the field – rather, that it is centering its efforts on sugarcane bagasse.

On Shell, Raizen, Iogen, Codexis and Dyadic

The second, first. Our thesis is that, rather than abandoning cellulosic ethanol and the enzymatic path to advanced biofuels, Shell is advancing from supporting R&D to supporting commercialization, via Raizen, its joint venture in Brazil with Cosan (CZZ).

We note, for example, that Codexis can assign rights to an acquiror. However, “any such assignee is required to undertake a certain level of effort to further develop CodeXyme cellulase enzymes, make certain payments to Shell, or otherwise elect to give up its cellulase enzyme license grant from Shell.” We see that as clear evidence of Shell’s intentions to have someone else take up the long-term R&D effort while Shell focuses on commercialization.

(We also note, in another signs of its intentions in Brazil, that Shell built its own pilot plant in Houston to work with Virent’s technology. Now, Virent has its own pilot, so why build one? Our take is that Shell is unwilling to stand in line as Virent juggles campaigns for a variety of investors and clients, such as Coca-Cola)

We expect that Raizen will announce that it will utilize (presumably Codexis-based, and expressed through the Dyadic (DYAI) C1 platform) a C6 enzyme for sugarcane bagasse – and that Raizen and Iogen will ultimately build a plant to support that technology path in Brazil. We further expect that there will be a second path announced with respect to C5 sugars – and that additional partners may well be involved.

Ourselves, we don’t see conservatism in the Brazilian market or at Raizen in particular – we see all kinds of urgency, tempered only by the fact that they are hard-nosed business people who work in two brutally competitive commodity markets.

First order of urgency, sugar prices are high – producers would like to maximize output. But the Brazilian government has lately, through ANP, acquired substantial regulatory influence over biofuels, and that means that to extent that it has acquired some influence over the global sugar trade. Brazil is the world leader in sugar production, and that production occurs at integrated sugar/ethanol facilities.

Diverting as much production to sugar as possible? That’s not the solution that Brazil wants to hear. It puts pressure on oil imports and fuel prices – unpopular.

Long-term, Brazil needs cellulosic production and producers need it too if they are to take advantage of good sugar prices and meet the home fuel needs, too – and make a case that production expansion is a good thing not only for producers, but the country as a whole.

Codexis as acquisition target

Let’s face it – Codexis has invested $375 million in developing cellulase enzymes, the company has a small but lively business in pharma enzymes – it now has freedom to operate anywhere excepting Brazil where it has a mighty partner/investor in Raizen. Management has been rebuilt. Painful steps to maintain liquidity have been taken. All that, and the company’s market value is $81 million. If ever there was a ripe takeover target in biofuels enzymes, this is it.

On strategic partners

Here’s the problem with big strategic partners for small, early-stage companies – and one of the reasons that, for many years, VC firms didn’t want strategics along for the ride in venture development: strategics change strategy, and small changes at big companies result in big changes for small companies. What is a ripple in the water to a giant is a tsunami to a fly.

Often, strategy must shift as the result of weak earnings, weak economies, or large-scale acquisitions that come with collateral businesses that must be rationalized, cleaned up, or otherwise fitted under the corporate umbrella. Personnel changes at strategics can have colossal impact on small companies, too. Or just painful rounds of rationalizing investments, after the pleasant couple of years making them.

You can see it with Shell, for example. There were the fun years. Shell invested in Cellana, Iogen, Codexis, and Virent, just to name several high-profile advanced biofuels ventures. We’ve seen big changes with the first three – that end up causing headaches for the other partners, or management, trying to explain why the relationship has changed – constrained by confidentiality, disclosure rules – often, a highly beneficial change is practically impossible to explain in the positive light it can and should be seen in.

For the last couple of years, strategics have been the darlings of biofuels companies – who have been waving them like crazy at investor and industry presentations. Well they should be proud of them, as those relationships are hard to gain, hard to sustain. They have brought not only dollars, but access to markets, and validation of the technology.

But we expect that we have not seen the last round of rationalization by a major strategic – perhaps not even the last major announcement this month. Watch those companies that have had their strategics on board for three-years or more. It’s hard for strategics to make shifts in less than three years without looking unserious – without the data to make decisions – but three-year time windows are usually enough for portfolio rationalization to occur. Not to mention that effective corporate godfathers often move up or out within three years.

For the smaller company, it is often a blessing in disguise. Though as Winston Churchill was wont to observe, “as a blessing, it is very effectively disguised.”

The most vulnerable of strategics – generally, upstream.

Strategics who are investing because they wish to provide new technologies and products to their existing customer base – well, that is a little like a financial investor, isn’t it – the decision to invest is driven by customer demand than can be readily monetized.

Strategics who are investing because they see opportunities to commercialize their feedstock – these would be broadly more vulnerable to shifting strategy based on a) finding other technologies, or b) feeling that downstream markets, which involve other partners, are not evolving as fast as envisioned, putting a strain on the ROI case for the ongoing investment.

So – it is a double-edged sword. Broadly, it is near-to-impossible to complete a Series C or D venture round these days without a solid strategic partner in the mix. But, companies might well watch that three-year window.

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.

September 05, 2012

Counting Out FuelCell Energy?

by Debra Fiakas CFA

This afternoon FuelCell Energy, Inc. (FCEL:  Nasdaq) is scheduled to report results for its fiscal third quarter ending July 2012.  As its corporate name suggests the company produces fuel cells for use as power plants or grid alternatives.  FuelCell has customers, but has yet to reach profitability.  No embarrassment there.  None of the other U.S.-based fuel cell producers has delivered earnings to shareholders either and two have had to file for bankruptcy protection.

Journalists have made light of fuel cell developers as perpetually unprofitable.  Last year one even made a list of profitable companies.  It was blank.  More recently another reporter in another article spoke only of companies that have thrown in the towel on fuel cell technology.

Should investors give up on FCEL and fuel cell technology?

I think it would be premature.  U.S. investors have a tendency to make decisions from headlines, which often accentuate the negative for attention.  To reach the two newspaper articles one might assume fuel cells are a technology that is not commercially viable.  Indeed, Ballard Power Systems (BLDP:  Nasdaq) may be on the cusp of profitability as the consensus estimates published by Thomson-Reuters suggest an expectation of profit in the December 2012 quarter.  Ballard produces proton exchange membrane (PEM) fuel cells for both stationery and vehicle power solutions and is consistently, even if slowly, winning new customers.      

Investors also often reference only U.S.-based alternative power companies.  They leave out the oft-times exceptional accomplishments of energy developers in other countries.  In the fuel cell space investors should look carefully at SFC Energy AG (SSMFF: OTC) , which reported a solid profit in the first half of 2012. SFC is an ambitious operation with direct methanol fuel cells for stationery, mobile and portable applications.

Most of the fuel cell developers have been toiling away for decades perfecting the complex chemistries that allow fuel cells to convert gases such as natural gas, coal gas or landfill methane directly to electricity.  Then they had to figure out how to insert this technology into the structures of transportation and industry without requiring a costly rework.     The combustion step that has got Earth in such trouble with global warming is completely eliminated.  Instead fuel cells “reform” the gas source into hydrogen that is then electrochemically turned into an electrical charge.    How investors could think it would be possible accomplish this feat in just a few quarters might be just a bit naive.

FuelCell management has great expectations for its own advance to profits sometime in the year 2013.  It is a milestone that has been a long time in coming.  FuelCell has been around since 1969 and did not get a commercial fuel cell off the development bench until 2003.  The company’s annual production rate based on the megawatt power capacity of its units is somewhere in the high 50s.  Management has indicated that it needs to reach a production run rate near 90 megawatts to reach breakeven.

FuelCell’s success now appears to hinge on business development.  It really is not a matter of capturing market share.  Instead FuelCell’s team needs to create a market by convincing potential customers that a fuel cell the size of a small house is a better alternative than a combustion engine and a fossil fuel supply.  The company’s website provides several customer cases, including an educational institution, a power plant and a wastewater treatment plant.  FuelCell has made some progress in better defining target markets and more effectively deploying sales and technical personnel.  Market partners may be an even better weapon.

In April 2012 South Korea’s POSCO Energy took an equity position in FuelCell (20.0 million shares at $1.50 per share).  POSCO’s previous order for 70 megawatts of fuel cells was accelerated and another 120 megawatt order tacked on the end.  FuelCell expects a base of production near 40 megawatts per year from the POSCO deal.  POSCO Energy has also licensed FuelCell’s technology and will manufacture fuel cell components in Korea at its own facility.  I believe the POSCO relationship is a major breakthrough for FuelCell and is clearly a key to securing those elusive profits.

FuelCell can also take some solace from one of the other fuel cell developers.  Neah Power Systems (NPWZ:  OTC/BB) has been struggling.  However, in June 2012, Neah won an order for one its fuel cell units from a U.S. defense contractor.  Dependence upon the U.S. electric grid is a point of vulnerability for U.S. military installations, which are responsible for rapid response in catastrophic events such as terrorist attacks or natural disasters.  Neah’s fuel cell will be evaluated for use in remote power stations, unmanned underwater and aerial vehicles

The market place is clearly more disposed to consider fuel cells as an alternative to conventional power solutions.  It is much too early to count out any of the fuel cell developers.

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.  FCEL, BLDP, NPWZ and SFC are included in the Fuel Cell Group of Crystal Equity Research’s Mothers of Invention Index.

Q-Cells and Hanwha: Solar Geopolitics Gets Messy

Ucilia Wang

The pending sale of bankrupted Q-Cells, once the largest solar cell maker in the world, to Korea-based Hanwha Group is the latest reminder that playing geopolitics in the world of solar will only get harder.

The creditors of the German company agreed to the sale with a vote on Wednesday, though the sale still requires regulatory approval before it’s finalized. Hanwha will gain a sterling silicon solar cell maker by buying Q-Cells, which was the reigning cell maker back in 2008, before it ceded the spot thanks to the financial market crash and the rise of well-financed Chinese solar cell makers.

Though silicon solar technology was the core of its technology portfolio, Q-Cells, when it was in better financial health, experimented with different thin film processes and gambled with the idea of using refined, metallurgical-grade silicon as a substitute for the more expensive and purer silicon to make cells. It also entered into the solar power plant development business. The company filed for bankruptcy in April this year.

Despite its financial trouble, Q-Cells remains a symbol of good Germany solar engineering. And now it’s set to look to a Korean conglomerate for directions about its future. Several Korean conglomerates have scooped up or at least taken a stake in many solar companies in recent years. Hanwha took over China-based Solarfun Power and renamed it Hanwha SolarOne (HSOL). It invested in several American startups, a solar energy system developer tenKsolar, installer OneRoof Energy and silicon wafer makers 1366 Technologies and Crystal Solar. Hanwha bought Solar Monkey to enter the power plant development business — the company formally announced its entry earlier this summer. It also invested in energy storage developer Silent Power.

Hanwha’s aggressive push into the solar market is taking place at a time when tension is rising between Chinese solar manufacturers and some of their rivals in the U.S. and Europe.  SolarWorld (SRWRF), a German solar cell and panel maker, led a trade complaint in the U.S. and Europe against Chinese silicon solar cell makers over the past years. The complaint alleges that Chinese companies have received unfair subsidies from Chinese government and flooded the market with cells that are below fair market value. The trade case reflects the intensifying competition among solar manufacturers in a market that has been plagued by a gross oversupply of solar panels. Many companies in the U.S., Europe and Asia already have filed for bankruptcy or shrunk their operations in the past year and a half.

U.S. authorities already are imposing preliminary tariffs on imported Chinese cells after finding merits to SolarWorld’s case. They are scheduled to make a final decision on the tariffs before the year ends. German Chancellor Angela Merkel, meanwhile, is seeking to play the mediator in the European case.

Which side should a company like Hanwha take in this battle against Chinese companies? Hanwha SolarOne’s executives told me during a meeting at Intersolar in San Francisco in July that the company wasn’t “immune to the challenges of the marketplace” in terms of manufacturing, but they saw good opportunities to invest in different solar sectors at the same time. To avoid the preliminary tariffs on China-made solar cells, the company is using solar cells from Taiwan to make panels for the U.S. market (other Chinese companies are doing the same).

Although the solar manufacturing sector is suffering, the project development and installation business is thriving, particularly in countries with government mandates and incentives, such as the U.S., India, China and Japan. The growth has come in part because of the rapidly declining solar panel prices and efforts to reduce in other areas, such as securing permits and simplify installation methods. For solar energy proponents, all the competition and resulting price reduction of solar equipment is a good thing. They see a trade complaint as an attempt to stall the move toward a greater goal: to make solar electricity as cheaply as power from fossil fuels.

The sentiment that Chinese companies haven’t played fair isn’t coming only from SolarWorld and those who have joined SolarWorld’s trade complaints. But executives at many non-Chinese manufacturing companies will only be diplomatic when they are on the record to discuss the trade dispute. And they do so because they know that drawing a line between China and the rest of the world isn’t a good idea when there is a growing interdependence among companies of various nationalities to grow their business in the global market. Hanwha’s acquisition of Q-Cells is a good reminder of that.

Ucilia Wang is a California-based freelance journalist who writes about renewable energy. She previously was the associate editor at Greentech Media and a staff writer covering the semiconductor industry at Red Herring. In addition to Renewable Energy World, she writes for Earth2tech/GigaOm, Forbes, Technology Review (MIT) and PV Magazine. You can reach her at uciliawang@gmail.com. Follow her on Twitter: @UciliaWang

September 04, 2012

Fly the Bio Skies: 10 Milestones in the Summer of Aviation Biofuels

Jim Lane
Algae powered plane photo via BigStock

We look back on a big summer for biofuels development: There have been many recent algae biofuel developments, the drought, and the policy fight over the Renewable Fuel Standard.

But in many respects, its been a summer about aviation biofuels – starting with the demonstration of the US Navy’s Green Strike Group and continuing to announcements of projects right through the summer. The story has internationalized, the technologies are broadening, and more and more blue-chip players are making serious steps towards commercial deployment.

Here are 10 milestones you might have missed.

1. At the beginning of the summer, the Green Strike Group got underway at RIMPAC. The United States Navy may be laboring under a congressional ban on biofuel purchases that cost more than bargain basement fossil fuels, but no one said the Navy can’t burn the biofuel it’s already got. Nothing would bring that day closer than the naval exercises held off the Hawaiian islands starting June 29, known as the Rim of the Pacific Fleet Exercises, or RIMPAC War Games. The setting of the movie “Battleship”, RIMPAC is a competitive war simulation in which participating fleets and naval vessels attempt to outmaneuver and “sink” each others’ ships, winning or losing tactical points in the RIMPAC scoring system.

Why a big deal: Critics carped over the per-gallon cost, but the demonstration was all about technical performance, and the Green Strike Group performed spectacularly. Next stop for the Navy: parity-performance, parity-cost military biofuels by mid-decade.

2. In mid-June, the DOE released details of a long-awaited funding opportunity announcement for advanced biofuels for aviation and military applications, titled “Innovative Pilot and demonstration-scale production of advanced biofuels.”

According to the DOE, “the intent of this FOA is to identify, evaluate, and select innovative pilot- or demonstration-scale integrated biorefineries that can produce hydrocarbon fuels that meet military specifications for JP-5 (jet fuel primarily for the Navy), JP-8 (jet fuel primarily for the Air Force), or F-76 (diesel).”

Why a big deal:
That’s major dollars these days at the budget-squeezed DOE.

3. Right before (US) Independence Day, the Air Force tested Gevo’s (GEVO) alcohol-to-fuel jetfuel made from isobutanol in an Air Force A-10 Thunder Bolt on June 28 at Elgin Air Force Base. The flight on a 50/50 blend was hailed has a great achievement because of the fuel’s alcohol base rather than oils.

Why a big deal:
The testing and certification effort for alcohol-to-jet fuels is making big strides. It’s hoped that these fuels can provide a low-cost path in the near term.

In early July, Canada’s National Research Council funded test flights in May and June of a Dassault Falcon 20 to test renewable aviation fuel produced from domestically-produced brassica carinata feedstock. The plane was followed by a Lockheed T-33 vintage jet trainer to measure emissions in real time.

Why a big deal:
Canada’s strides towards aviation biofuels are gaining momentum – note that a new Canadian-focused feedstock, carinata, is in the mix here.

5. Also in early July, General Electric(GE) committed to buy 5 million gallons of biofuels annually for its aviation division, starting in January 2015. The commitment totals half of the 10 million gallons used at the company’s jet engine testing facilities near Cincinnati. Many Ohioans see a kickstart for the crop economy, which already has the capability to grow and process miscanthus, camelina, soy, and switchgrass, among other more traditional feedstocks.

Why a big deal:
That’s a ton of testing, indicative of a major effort at GE

6. In mid-July, Lufthansa said that it believes that A1 jet fuel will remain the main aviation fuel for the next 20 years but does expect renewable jet fuel to replace up to 5% of the market in the next five to seven years. With the European economic climate no longer interesting for investors, the airline believes that agricultural investments—for feedstock for aviation biofuel, for example—is an area not yet fully exploited.

Why a big deal:
5 percent may sound small, but its a 60 billion gallon market – that’s 3 billion gallons.

7. In the first week of August, Amyris (AMRS) announced the signing of an amendment to its collaboration agreement with Total. Under the enhanced collaboration, Total reaffirmed its commitment to Amyris’s technology and dedicated its $82 million funding budget over the next three years exclusively for the deployment of Biofene, Amyris’s renewable farnesene, for production of renewable diesel and jet fuel. Total’s commitment includes a $30 million payment to Amyris this year.

In related news,
Amyris announced a Q2 loss of $46.8 million on revenues of $19.0 million, with revenues down from $32 million for Q2 2011.

Why a big deal: Total aims to take Amyris-based jet fuel all the way.

8. Last month, Boeing and COMAC opened a joint Aviation Energy Conservation and Emissions Reductions Technology Center, a collaborative effort to support commercial aviation industry growth. The Boeing-COMAC Technology Center’s first research project aims to identify contaminants in “gutter oil” and processes that may treat and clean it for use as jet fuel. Waste cooking oil shows potential for sustainable aviation biofuel production and an alternative to petroleum-based fuel because China annually consumes approximately 29 million tons of cooking oil, while its aviation system uses 20 million tons of jet fuel. Finding ways to convert discarded “gutter oil” into jet fuel could enhance regional biofuel supplies and improve biofuel’s affordability.

Why a big deal:
Can you say China?

9. Aemetis announced a license agreement with Chevron Lummus Global for the inexpensive, rapid production of renewable jet and diesel fuel by the conversion of existing biofuels and petroleum refineries.

The license agreement grants Aemetis Advanced Fuels Inc., a wholly-owned subsidiary of Aemetis, the use of the Biofuels ISOCONVERSION Process for the production of 100% drop-in renewable jet fuel and diesel in Aemetis biorefineries throughout North America.

Why a big deal:
This is 100 percent drop-in fuel, rather than 50/50 blends that biofuels are currently limited to because they lack aromatics

The Australian Initiative for Sustainable Aviation Fuels (AISAF) was inaugurated on 08 August 2012. It has funding for 12 months in the first instance. The Steering Committee held its first meeting on 20 August 2012. AISAF is a public-private initiative that aims to facilitate sustainable growth of the aviation industry by bringing together Australian leaders in the aviation industry and in the components of the developing supply chain for sustainable aviation fuels, promoting and driving the development of the SAF industry in Australia, undertaking collaborative work under the Memorandum of Understanding on SAF signed by Australian and the USA on 13 September 2011, and undertaking collaboration work with other international partners.

Why a big deal:
Australia makes a huge stride towards an aviation biofuels industry

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.

September 03, 2012

What 11 Clean Energy Stocks Did on My Summer Vacation

Tom Konrad CFA

August Overview

I was traveling for much of the month of August, and so did not keep up with most of my stocks.  But not much happened while I was gone, with the broad market and renewable energy stocks both producing small gains for the month of a little over three percent, as measured by my benchmarks, the Russell 2000 index (^RUT, 3.4%), and the most widely held clean energy ETF, the Powershares Wilderhill Clean Energy ETF (PBW, 3.2%).

My Clean Energy model portfolio also had a relatively uneventful month, producing a total return of 2-3%, only slightly below the general market (2.6% for the unhedged portfolio, 2.4% for the hedged portfolio.)

For the year, my clean energy model portfolio continues to greatly outperform its industry benchmark, but lag the total market.  The unhedged portfolio is up 2.1% for the year, while the hedged portfolio is down 4.2%.  Meanwhile, PBW is down 16% and the Russell 2000 is up 11%.
11 for 12 Sep.png

Stock Notes

Most of my clean energy stock picks also had uneventful Augusts, as shown by the small orange bars in the performance chart above.  From left to right, the exceptions were:

  • Alterra Power (TSX:AXY / OTC: MGMXF) gained 19% on a generally positive second quarter earnings announcement and an analyst upgrade.
  • Western Wind Energy (TSX-V:WND / OTC: WNDEF) gained 17% when it emerged that Brookfield Renewable Energy Partners (TSX:BEP-UN/ OTC: BRPFF) acquired 10.7 million shares and 319 thousand warrants of the company for C$2.25 per share, and the right to acquire an additional 277 thousand shares on the same terms.  The agreement requires that Brookfield compensate the seller if Western Wind is acquired by any party for more than C$2.25 any time in the next year.  Since Western Wind is currently in a proxy battle between two parties, both of which have stated they intend to sell the company, such a sale is very likely, and Brookfield's purchase only makes sense to me if Brookfield intends to bid at least C$2.25 per share for the whole company, and wants to influence the outcome of the shareholder vote in the proxy battle and/or the eventual sale ratification.  Other investors seem to agree, and WND has been trading with a new floor price of C$2.25 since the announcement.  It closed Friday at C$2.31.
  • New Flyer Industries (NFI.TO / OTC:NFYEF) completed the redemption of its outstanding 14% subordinated notes.  This wraps up the financial restructuring which began last year.  New Flyer was up 4% (total return) for the month.  As expected, the annual dividend rate was set at C$0.585; half the previous payout on the company's old IDS securities, giving New Flyer a 7.6% yield at the current C$7.70 share price.
  • Lime Energy (NASD:LIME) fell a further 7% after it received notice of potential delisting from NASDAQ because of its late 10Q filing, which is pending an internal investigation into the company's revenue reporting.  Lime has 60 days to submit a plan to regain compliance, upon receipt of which NASDAQ may grant a further extension of up to 180 days.  As I discussed previously, I considered LIME so cheap at $0.90 that I could see little potential downside in the outcome of the internal investigation.  While the company cannot currently give any timeline for the completion of the investigation, I consider the delisting notice a non-event, since Lime is already taking steps to restate its financial statements.  Because of this, I decided to add to my position in LIME with a purchase at $0.70 on Thursday, and intend to purchase more if the stock falls further.


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

September 01, 2012

Ag Goddess Smiles Favorably on Ceres, Investors Frown

by Debra Fiakas CFA

Recently, in compiling our lists of remarkable small-cap stock trades, I was surprised to find the shares of Ceres, Inc. (CERE:  Nasdaq) among stocks setting new 52-week lows.  Ceres has only been trading since its initial public offering in February 2012, when the company sold 5.0 million shares at $13.00 per share.  After a brief trade higher in the early spring, Ceres shares have been steadily losing ground, finally setting an all-time low of $6.02 last week.

Named after the Greek Goddess of Agriculture, Ceres is a self-styled energy crop producer.  Ceres has developed proprietary seeds for sweet sorghum and switchgrass to be used as feedstock for ethanol production.  Ceres seeds are genetically modified to produce crops that require less water and fertilizer and are tolerant of higher salt levels in soil.  Higher yields and consistent availability lead to improved economics for large-scale ethanol production.

A big part of Cere’s IPO pitch was the market opportunity in Brazil where ethanol production is highly dependent upon seasonal production of sugarcane.  Sweet sorghum is compatible with existing equipment and helps fill in the gap between sugarcane crops.  Ceres worked with a joint venture led by Petrobras in a commercial planting of sorghum that for all practical purposes was successful. 

The Greek Goddess has other reasons to smile on Ceres.  Amyris (AMRS:  Nasdaq) used Cere’s sorghum syrup in its proprietary yeast fermentation system to produce Amyris’ farnesene, an oil used in producing diesel.  Amyris had been widely reported as exiting biofuels to concentrate chemical know-how in the cosmetics sector.  However, in July 2012, Amyris announced a revision of its collaboration with Total, Gas and Power, SA (TOT:  NYSE) to carry the renewable farnesene torch forward.  Total agreed to give Amyris $30 million this year to continue a research and development program.  The verdict is still out on whether the developments at Amyris will make a difference for Ceres.

 With the U.S. corn crop severely reduced by drought this year, ethanol producers may look at sorghum with greater interest.  Sorghum fields are still in relatively good condition this year, demonstrating the plant’s hardiness.  The problem is that farmers do not find sorghum an attractive crop.  Unlike corn, which has many uses, there are few buyers for sorghum.  Thus promoting sorghum in the U.S. probably means a collaboration like that in Brazil with a crop sponsored by an ethanol producer.

  Even if investors have lost confidence in Ceres to make sorghum a favored ethanol feedstock, the Company has plenty of capital to keep trying.  At the end of May 2012, Ceres had $67.7 million in cash on its balance sheet, just a bit more than the $65.2 million it raised in its 2012 IPO.  In the last twelve months Ceres used $25 million of its cash to support operations and continued development work on new seeds.  Even if the company makes no attempt to curtail spending, I estimate Ceres has a big enough nest egg to keep trying to another two years.

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.  CERE is included in the Cellulosic Ethanol group of Crystal Equity Research’s Beach Boys Index.

« August 2012 | Main | October 2012 »

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