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November 30, 2012

Will SolarCity IPO Offer Hope for Renewable Energy Investors?

By Harris Roen

SolarCity, a solar panel installation and finance company, is one of the more promising stories for alternative energy investors this year. SolarCity filed details of its initial public offering (IPO) on Tuesday, making it one of the few alternative energy company IPOs that investors are optimistic about. This article explains what type of business SolarCity is, lays out details of its stock rollout, and reveals important pluses and minuses for investors.

What SolarCity Does

SolarCity’s product is simple; it installs solar systems for homeowners, business (including Wal-Mart, eBay and Intel) and government agencies. In many cases there are little or no upfront costs to the client, just sign the papers and you are on your way to reduced electric bills using clean energy! SolarCity claims that it installs more solar energy systems than any other company in the U.S. Its goal is to reach every home and business to become “the largest provider of clean distributed energy in the world.”

How SolarCity does this, though, is anything but simple. In most cases, the customer does not own solar system. Instead they get the benefits through either a lease, where a fixed monthly fee is paid, or power purchase agreement, where a rate is paid for the actual amount of electricity generated.
SolarCity takes these recurring payments, along with government incentives (including investment tax credits and accelerated tax depreciation), and sells them to investment funds. By doing so, SolarCity has raised $1.57 billion by working with Credit Suisse (CS), Google (GOOG), PG&E Corporation (PCG), U.S. Bancorp (USB) and others. SolarCity then uses part of the cash to cover costs of the solar installation, and reinvests the rest to grow the business.

In other words, if you want solar on your house, one or more global investment funds, with a residual interest by SolarCity, will own the solar panels on your roof. They in turn either lease it back to you, or charging you a rate for its use. To complicate things more, SolarCity plans to expand its current assortment of investment configurations. These configurations now include joint ventures, lease pass-through and sale-leasebacks, but SolarCity plans to add in other debt or equity structures in the future.

The SolarCity IPO

SolarCity will be releasing 10 million shares that will be trading on the NASDAQ Global Market under the symbol SCTY before the year’s end. Shares will be priced at between $13-$15. The company currently has negative net earnings, so determining a fair price for the SolarCity shares can only be based on the hopes of growing future earnings. Its prospects look good, though, as shown on the charts below.

SolarCity has a proven track record of being able to grow its business. Revenues, or sales, have been steadily climbing over the past four years. In fact, in just the first nine months of 2012 revenues came in three times greater than they were in 2009 and 2010. As the company states, its customer payment obligations “have grown at a compounded annual rate of 117% since 2009.” Gross profits have also followed suit.

This rising revenue stream is a result of an increasing customer base, which has also exploded in the first nine months of 2012. The number of buildings that SolarCity services is more than double that of a year ago, and the number of customers is almost triple.

On the down side, SolarCity has incurred increasing expenses, which has caused losses to accelerate as well. One would expect operating expenses to be increasing as revenues rise, but the painfully widening net loss is a concern. To be fair, SolarCity has been reinvesting much of these funds to lay the foundation of its business in order to be able to grow successfully.     

SolarCity’s debt levels are also growing, but are not considered excessive.  Its innovative financing structure has allowed SolarCity to keep debt at bay, a huge positive for this IPO.

Dangers of Owning SolarCity Stock

There are several risks involved with investing in SolarCity, many of which are the standard type encountered by investing in any IP0. Two, though, stand out.

First, much of SolarCity’s current business relies on various government incentives, including rebates, tax credits and performance payments. The viability of these credits over the next five years is a huge moving target, which creates a great deal of uncertainty for this company. As these credits expire, SolarCity’s current business model looks less attractive.

Second, the U.S. Department of Treasury is concerned that it may have over-issued grants and tax credits to SolarCity. The Inspector General issued a subpoena to see if SolarCity overvalued the panels it installed, which would have generated a bigger incentive than it was due. In addition, the IRS is auditing two of SolarCity’s investment funds. The results of these investigations are a big unknown, but if Treasury adjusts the fair market value of the solar systems down, SolarCity could easily be facing repayments in the tens of millions of dollars.

Is SolarCity A Good Solar Sector Play?

Returns on solar stocks have been dismal. Of the 60 solar companies the Roen Financial Report tracks, the average company is down 13.1% for the quarter, with only 25% of companies showing gains. In fact, almost half of the companies posted losses in the double digits for the past 3 months. Much of this carnage is due to the continued oversupply of photovoltaic products, as well as the harsh business climate created by trade wars vis-à-vis the U.S., China and the European Union.

It is these exact conditions, however, that benefit SolarCity. The downward squeeze on solar prices makes deployment of these systems more and more affordable. According to the Lawrence Berkeley National Laboratory, since 1998 installed prices for residential and commercial solar in the U.S. has dropped between 5%-7% per year on average. This means the average project cost is half of what it did 13 years ago. This trend is likely to continue, and my even accelerate as breakthroughs in photovoltaic technologies come to market. This creates a very tough environment for solar manufacturers, but it is all good news for companies like SolarCity. Though the risk of government incentives drying up is a real concern for SolarCity, dropping panel prices, along with rising energy costs, could balance out the damage to SolarCity’s business model.

Also, I like that sentiment on solar is so low now. In fact, the word on the street is so negative on solar I have turned short-term bullish on the sector. Witness that the ETF Guggenheim Solar (TAN) was up over 10% in the last 5 days of trading, while the NASDAQ gained less than 2% over the same time period. SolarCity could experience a downdraft in its stock price due to negative views on the sector as a whole. However, as is often the case on Wall Street, overreaction on the sector as a whole may cause an undue drop in SolarCity’s stock specifically.

Final Rundown

I do not normally suggest investors get involved with an IPO, regardless of the fact that it is difficult for retail shareholders to pick up IPO shares. Having said that, SolarCity strikes me as well positioned to expand its market share in a business area that also has a lot of room to grow. It is still a speculative company, however, and much will be riding on its continued ability to rapidly expand its customer base. It will be a company I will be tracking very closely in the years ahead.

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

DISCLOSURE: Individuals involved with the Roen Financial Report and Swiftwood Press LLC own or control shares Google Inc (GOOG).

DISCLAIMER: Swiftwood Press LLC is a publishing firm located in the State of Vermont. Swiftwood Press LLC is not an Investment Advisory firm. Advice and/or recommendations presented in this newsletter are of a general nature and are not to be construed as individual investment advice. Considerations such as risk tolerance, asset allocation, investment time horizon, and other factors are critical to making informed investment decisions. It is therefore recommended that individuals seek advice from their personal investment advisor before investing.

These published hypothetical results may not reflect the impact that material economic and market factors might have had on an advisor’s decision making if the advisor were actually managing client assets. Hypothetical performance does not reflect advisory fees, brokerage or other commissions, and any other expenses that an investor would have paid.

Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, Swiftwood Press LLC does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness, and makes no warranties with respect to results obtained from its use. Data sources include, but are not limited to, Thomson Reuters, National Bureau of Economic Research, FRED® (Federal Reserve Economic Data), Morningstar, American Association of Individual Investors, MSN Money, sentimenTrader, and Yahoo Finance.

November 29, 2012

Solar City IPO: A Bit Pricey

by Debra Fiakas CFA

191x63logo_green[1].pngRenewable energy retailer SolarCity has filed for an initial public offering of 10 million shares of its common stock and a few shares owned by existing shareholders.  The offering is valued at between $130.0 million and $150.0 million based on an anticipated share price between $13 and $15 per share.  SolarCity expects its shares to trade on Nasdaq under the symbol SCTY.

Proceeds raised by SolarCity will be used support acquisitions of complementary operations.  Proceeds could also be used to support SolarCity’s capital spending program as it seeks to extend its distributed network of solar systems on residential and commercial buildings. SolarCity’s installed base expanded to 33,792 buildings by the end of June 2012.

The majority of SolarCity’s revenue comes from the sale of solar-generated electricity. SolarCity has yet to produce an operating profit.  Indeed in the six months ending June 2012, the company’s operating loss deepened compared to previous periods.  That said, scale is on SolarCity’s side.  Revenue from solar energy system sales increased to $51.7 million in the first six months of 2012, compared to $11.2 million in the same period of the previous year.  Profit margin on this segment increased to 14.9% compared to negative 46.2% in the prior year.

In my view, this a deal worth considering, but only after the shares get some seasoning.  A $13.00 per share price puts a $932 million market value on SolarCity and implies a multiple of 8.4 times revenue.  This seems a bit pricey given that the company has not been consistently profitable.

The deal was expected a month ago, but was delayed when Hurricane Sandy literally fouled up the works on Wall Street.  I will be watching SolarCity carefully.  The company has so far done a good job of building the sort of distributed power generation system our country needs as it moves away from fossil fuels for electricity generation.  Priced right, it could be an excellent long-term hold.
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. 

November 28, 2012

Ceres and Syngenta to Promote Sorghum in Brazil

Jim Lane

Cereslgo[1].jpgCeres, Inc. (CERE) and Syngenta sign a major deal to stimulate sweet sorghum adoption. Brazilian producers seek paths for expanding ethanol production.
What are sorghum’s chances of being the darling of the expansion story?

In California, Ceres, Inc. (CERE) announced that it has signed a sweet sorghum market development agreement with Syngenta. The companies will work together to support the introduction of sweet sorghum as a source of fermentable sugars at Brazil’s 400 or more ethanol mills.

Under the agreement, Syngenta and Ceres intend to collaborate on small-scale trials as well as larger demonstration-scale field evaluations with mills this season. Syngenta will provide its considerable agronomy resources to evaluate its portfolio of crop protection products alongside Ceres hybrids, and Ceres will provide both seed and research support. Both companies will coordinate outreach to ethanol mills and develop industry training programs.

Brazil and sweet sorghum

The prospects of sweet sorghum, once the hybrids have proven themselves in local trials, are robust in Brazil: The crop can extend the ethanol production season by up to 60 days in Brazil, can be grown on fallow sugarcane land and processed using the same equipment, and requires less water and other inputs than sugarcane. Brazil’s government announced in its annual agricultural plan for 2012-2013 that sweet sorghum would be considered a strategic crop.

The geography of Ceres' sweet sorghum product trials in Brazil

Ceres and the Brazilian market

Last season, Brazilian mills planted Ceres sweet sorghum on more than 3,000 hectares (7,400 acres), and the company has completed the registration process in Brazil for its new generation of sweet sorghum hybrids.

Last season in Brazil trials of these new hybrids demonstrated large increases in biomass, extractable juice volume and total harvestable sugar compared to commercial products introduced just last year. In product development trials and at the company’s breeding center, where field evaluation plots are irrigated and managed more closely than commercial fields, these hybrids averaged 80 or more metric tons per hectare. Subsequent field evaluations in the Southeast U.S. this summer have confirmed similar results.

That’s the good news.

A slowdown in adoption

On the negative side, roll-out of Ceres’ new hybrids is slower than expected. Where the company expected planting in the tens of thousands of hectares this year, it will remain in the thousands, according to management, for the 2012-13 cane season.

Accordingly, Michael Cox at Piper Jaffray wrote that “Due to the drought conditions in Brazil during the last growing season, field trial yields for CERE sweet sorghum hybrids were down resulting in a slower adoption of the seed technology in the upcoming FY13 planting season…we are shifting our model out by a year and lowering our price target. Despite the expectation of lower planted hectares in FY13, we believe the likely increase in ethanol blending in Brazil next year will increase demand for sweet sorghum and ramp product adoption.”
The path to stimulating product adoption

In its most recent management call, the company pledged to use creative efforts to market the new hybrid seed. Hence the Syngenta deal – and overall, Ceres said that it expects to work with more than 20 mill customers, up 40 percent from last year.

The bottom line

Brazilian ethanol production needs to grow, affordably – the country’s fuel demand continues to be strong, yet producers would like to expand sugar production to take advantage of high global prices. Sweet sorghum offers compelling options – if the hybrids work economically, and if the adoption is there.

To help push product adoption, CERE is implementing creative means to market the new hybrid seed. Additionally, management expects to work with more than 20 mill groups, which is a nearly a 40% increase in milling customers.

At Raymond James, energy analyst Pavel Molchanov wrote: “It goes without saying that collaboration with a leading agribusiness company like Syngenta represents further endorsement of Ceres’ technology and the viability for rising adoption of sweet sorghum by Brazilian mill owners.”

Given the parallel news this week Raizen is beginning to provide increased visibility on its goal of increasing its production by more than 50 percent, in a $7 billion investment program, sweet sorghum remains at the epicenter of the Brazilian ethanol expansion story – even if its timeline of adoption looks slower in the mid-term as Brazil recovers from drought.

One note in this week’s announcement we’ll continue to track: the emphasis on evaluating Syngenta crop protection products with Ceres hybrids. That could mean fungicides and herbicides – both may be needed to assure a healthy growing environment for sweet sorghum going forward – and the news may generate some ideas about yield shortfalls during last year’s drought-affected season.

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.

November 27, 2012

China Finances Ming Yang Wind in India

Doug Young

Rice farmer in India with wind turbines.  Photo courtesy of Vestas Wind Systems (VWDRY)
With its new energy sector tottering on the brink of collapse, China no longer seems to care if foreign government accuse it of unfairly supporting its sector with low cost loans and other state subsidies. That at least appears to be the message from a new plan by Ming Yang Wind Power (NYSE: MY), which has just announced a massive new tie-up with policy lender China Development Bank to provide financing for wind power projects in India. (company announcement)

While this kind of financing to support developing sectors isn't unique to China, this particular announcement is quite large, with Ming Yang saying in a separate statement that it will team with China Development Bank and locally based power giant Reliance Power (Mumbai: RPWR) to "raise" up to $3 billion in financing for new projects. (English article) I use quotation marks around the word "raise", because I've no doubt that all of the money will come from China Development Bank and other state lenders, which are almost certainly providing the money under direct orders from Beijing to rescue the struggling sector.

Let's quickly have a closer look at this latest news, which comes as China's broader new energy sector suffers due to a big global supply glut, created largely by the massive building of new capacity in China over the last decade with strong support from Beijing. Under this new framework deal, China Development Bank will coordinate and arrange financing for new wind power projects to be co-developed in India by Reliance and Ming Yang. The 2 partners have previously announced plans to co-develop new projects with 2,500 megawatts of capacity over the next 3 years, so this financing deal appears to be an extension of that plan.

This latest news indicates that China Development Bank will likely become the centerpiece for Beijing's broader rescue package for the new energy sector, as this policy lender is already reportedly at the center of a broader plan to rescue struggling solar panel makers. That plan would reportedly have China Development Bank provide emergency financing for about a dozen of the country's biggest solar panel makers, which would then become consolidators for the broader industry that includes many more companies that are posting massive losses.

The sector has also been hit by anti-dumping actions in both the US and Europe, its 2 biggest markets that account for the big majority of its sales. Ming Yang is one of the few new energy companies that is still profitable, reporting a tiny profit of less than $1 million for the third quarter of this year. But that profit was down 97 percent from the previous year, with revenue also down by nearly 60 percent, and it looks like Ming Yang could easily join many of its Chinese new energy peers by reporting a loss in the fourth quarter.

Investors seemed to sense a certain gloom and desperation in this latest announcement, bidding down Ming Yang shares by 2.2 percent after the news came out. That's hardly the reaction that Ming Yang was hoping for, but seems to reflect broader investor gloom towards China's new energy companies as they move closer to a Beijing-led bailout. When that bail-out finally comes, it could easily include conditions that cause these companies' shares to become either greatly diluted or completely worthless, creating big losses for shareholders. Look for that package to come most likely by the end of next year's first quarter, creating further turbulence in the already-weak market for Chinese new energy stocks.

Bottom line: The latest state-led financing for Ming Yang indicates China will bail out the new energy sector using its China Development Bank, with a broader plan likely by the end of next March.

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 .

November 26, 2012

Geothermal Stocks Warming Up

Tom Konrad CFA

the geysers
Geothermal Plant at The Geysers.  Photo Source: Calpine (CPN)

After a couple years of chilly investor sentiment, geothermal stocks are starting to warm up.  The sector has been so beaten down that the small exploration and production players seem to have lost what little following they had, and so recent good news has gone mostly unnoticed.

Last week, industry leader Ormat Technologies Inc. (NYSE:ORA) set the stage by beating analyst expectations for both earnings and revenue per share in the third quarter, and announcing a deal to buy a project in Honduras.  This led to an upgrade by Barclays.

As the only geothermal stock with the size and liquidity needed by large US investors, Ormat has long been too expensive (forward P/E of 23, even after a decline from over $30 in early to less than $17 today) for a relatively low margin utility business, so I prefer the much cheaper small geothermal developers, US Geothermal (NYSE:HTM, TSX:GTH), Ram Power (TSX:RPG, OTC:RAMPF), and Alterra Power (TSX:AXY, OTC:MGMXF.)

It’s hard to generalize from one geothermal company to another.  Each geothermal project is unique, not only because of the local electricity markets and legal structures, but also because of the idiosyncrasies of each project’s geology and chemistry.  Nevertheless, the smaller developers seem to be following Ormat’s lead.

On Thursday, US Geothermal (NYSE:HTM, TSX:GTH) received the $10.7 million cash grant for its San Emidio project, allowing the company to pay down a $7.5 million bridge loan.  A year ago, I would not have considered this significant news, since I assumed the US Treasury would pay all such grants in full.  That was before the Treasury cut the award for Western Wind Energy‘s (OTC:WNDEF, TSX-V:WND) grant by $12 million (3% of the request) after delaying it for almost two months.  After that experience, a cash grant delivered  seems a lot more significant than it once did.  About $1 million of the grant application is still under review by the Treasury.  This portion of the grant is related to some exploratory wells.  Management is uncertain if this portion of the grant will be accepted, but it does not seem to be something that they are counting on.

UPDATE: Since this article was first published on November 16th, US Geothermal announced that it had achieved full commercial operations at its Neal Hot Springs facility in Oregon, and that the plant was operating above expectations.  The stock is up 31% at $0.42 since then.

US Geothermal also reported third quarter earnings on Thursday, and the message was one of steady progress.  Last year, Nevada Geothermal Power (TSX-V:NGP, OTC:NGLPF) and Ram Power were both tripped up by unpleasant surprises at their biggest projects.  US Geothermal, in contrast, has been executing smoothly, and now has two operating projects.  This will make the company less vulnerable to the vagaries of geothermal development at future projects.   Part of that seems to be US Geothermal’s project selection.  San Emidio, for instance, was an existing project with a known reservoir, which they upgraded by drilling some new wells and replacing an aging power plant.  Because it was an operating project, US Geothermal knows a lot more about the idiosyncrasies of the reservoir than they would if it had been a greenfield project, and it was just those sorts of idiosyncrasies at Nevada Geothermal’s Blue Mountain project which ended in the company losing all its equity in the project because there is not enough revenue to repay the loan.

Ram Power (TSX:RPG, OTC:RAMPF) has also been making progress.  Last year, problems developing their Jan Jacinto project caused large cost overruns.  But the project now seems to be back on track with a new contractor.  The company was able to negotiate a 17% increase in the power sales agreement which will make up for some of the extra costs, amounting to an annual $10 million in additional revenues per year when the project is complete.  Despite this, the stock is being held back because steam production at San Jacinto is less than expected, a problem which they hope to remediated using the drilling reserves included in the original project financing.  While there is always a significant risk that such remediation attempts will not succeed (as happened at Nevada Geothermal), the risk seems to be adequately compensated is a stock trading at less than a quarter of its book value.

Alterra Power (TSX:AXY, OTC:MGMXF) is more diversified, and hence safer than Ram and US Geothermal, with six operating geothermal, wind and run-of-river hydro power plants.  Alterra currently hovers near profitability, with quarterly results fluctuating due to the seasonal production of its wind and hydro projects.  Alterra also has a strong balance sheet (unlike Ram) allowing it to fund development and acquisition of additional projects (like a solar project acquired from First Solar (NASD:FSLR)) without returning to the equity markets.

Alterra recently signed an agreement with the Philippines based Energy Development Corporation (EDC) to fund the development six of Alterra’s geothermal projects in Chile and Peru, subject to EDC being satisfied with the results of due diligence field work on the projects.  The stock did not see much of a boost from the announcement, most likely because EDC has not yet committed to the projects.  Yet given Alterra’s current value pricing this seems as good a time as any to buy on the expectation that EDC will chose to go ahead with development at at least one of the projects.


Geothermal developer stocks have remained at beaten-down levels for over a year now, despite the companies making significant progress on their projects.  While geothermal development is a much riskier business than more predictable development of other types of renewables, all of these developers are trading at a fraction of book value, which more than compensates for the risks involved, especially when held as part of a diversified portfolio.

A dip in a hot spring might be just the thing to the chill gripping the worlds stock markets in late 2012.

Disclosure: Long HTM, RPG, AXY, WND

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

November 25, 2012

Seven Indian Clean Energy Stocks

by Sneha Shah

170px-Ravi_Varma-Lakshmi[1].jpg Raja Ravi Varma's portrait of the Hindu goddess of wealth, Lakshmiലക്ഷ്മി ദേവി. via Wikimedia Commons
Why Invest in Indian Green Energy

India is set to become the 3rd largest market for wind energy after USA and China and is set to enter the top 10 club of countries in installing solar energy capacity in 2012. Massive power deficits, millions of people without power, billions of dollars in oil, gas and coal imports imply that India offers massive opportunities for renewable energy generation. In fact Indian solar energy represents one of the biggest energy opportunities in the 21st century. The Indian government target of 20 GW by 2022 will be beaten by a huge margin in our view.

Rocky Present, Sunny Future

However the performance of publicly listed green stocks in India has been quite abysmal in line with what we have seen in the past few years with global cleantech stocks. The solar and wind stocks have been battered by the global oversupply in solar panels and wind turbines respectively. Some of the solar companies like Moser Baer have gone into restructuring of bad loans while other companies are operating at 10-20% utilization.

However one good area of investing in the Indian renewable energy story is through green focused utilities like Greenko, Orient Green Power etc. Most Investment banks and big Private Equity firms have already committed hundreds of millions of dollars investing in renewable energy focused power generation firms. Larger privately owned electricity utilities in India are also investing heavily into green power generation to meet the Renewable Purchase Obligations (RPO) which mandates that 15% of the electricity generation by 2020 should come from clean energy sources. In Summary while the past few years have not been the best for the green sector in India, the future looks very promising indeed. Read why Private Equity firms are investing millions in India's wind energy industry

Some of the top publicly listed Green Stocks in India

1) Suzlon Energy (NSE:SUZLON)– Suzlon Energy is one the biggest wind energy companies in the world and the poster child of India's green story. The company boasted of a market valuation upwards of $10 billion at its peak. However overzealous expansion and expensive acquisitions of European wind players like Repower has left it with an unsustainable debt burden. Read more about the Suzlon Death Spiral.

2) Moser Baer (NSE:MOSERBAER)– Moser Baer which used to mainly deal in optical media made a strong expansion into all parts of solar energy manufacturing such as polysilicon, solar thin film and crystalline silicon panels. However the global solar panel glut has sent the company into debt restructuring. The company now mainly operates in the solar system and integration part of the solar value chain. Read more about hard times being faced by Indian solar companies.

3) Tata Power (NSE:TATAPOWER)- Not strictly a green company, Tata Power is the biggest private utility in India. It recently acquired the Tata BP Solar JV after BP exited the solar panel business. The company has huge plans in wind, solar and geothermal energy. It has also invested in a geothermal energy project in Indonesia.

4) Orient Green Power (NSE:GREENPOWER)- Orient Green Power is one of the biggest green focused utility companies in India focused mainly on wind and biomass power generation. The company's operations have recently turned around and it is now showing a consistent profit. At its recent stock price of Rs 10-11, it represents a good investing opportunity at its current value. Read more about is Orient Green Power turning around?

5) Greenko (LSE:GKO)- Another big green utility  in India with around 200 MW of Electricity Capacity predominantly in small hydro and biomass plants, it is listed London’s AIM Exchange and has a top notch management team. Its recent performance has been quite good and it is expanding rapidly acquiring small hydro plants in India.

6) Lanco (NSE:LANCOIN)The Company through its subsidiary Lanco Solar has aggressively expanded into the crystalline silicon solar panel system right from manufacturing to installation. However the recent travails of infrastructure companies in India has seen Lanco making a loss which has impacted the growth of its solar subsidiary as well.

7) Welspun Energy (NSE:WELCORP) - Welspun Energy is a part of the Welspun conglomerate. It has expanded rapidly into solar and wind energy installation in the last couple of years to become one of the top green developers in India.


There are also a large number of smaller private companies in India operating in the green energy space. There are also a number of bigger industrial companies such as Thermax, Praj Industries, Jain Irrigation which derive revenues from green industry though contribution to overall revenues is quite small. Investing in the green space in India is not easy but offers handsome rewards to those that make the right calls given the massive growth that is going to happen.

Sneha Shah is the editor of Greenworldinvestor.com, a blog about Global Green Industry and Renewable Energy Industry, focusing on Solar Energy, Wind Energy, Energy Storage, Efficiency etc.

November 24, 2012

Incredible Shrinking Solar Stocks

Doug Young

More clouds for solar sector

There's a flurry of news coming from the embattled solar sector, led by a sharp cutback by Suntech (NYSE: STP) at its main US plant that looks suspiciously like it is being ordered by Beijing part of a government rescue plan for the struggling company. Meantime, JA Solar (Nasdaq: JASO) and LDK (NYSE: LDK) are struggling just to stay listed as their market values quickly evaporate. And in a rare but fleeting piece of good news, Yingli (NYSE: YGE), Trina (NYSE: TSL) and others are getting a temporary boost as they reclaim money they previously set aside but will no longer need to use as provisions in the US anti-dumping investigation against them.

Suntech Cuts US Jobs

Let's start with the Suntech news, which looks intriguing because I suspect it reflects intense political jockeying behind the scenes as this former sector pioneer struggles to survive. Suntech says it will shutter two-thirds of the capacity at its plant in the US state of Arizona, bringing production down to just 15 megawatts from the capacity of 45 megawatts. (company announcement)

It blamed the cutback on the industry's huge overcapacity and the higher costs of producing in the US versus China, and said the move will result in the loss of 50 jobs. It's impossible to know what happened behind the scenes in this move, and the explanation of higher operating costs in the US is certainly logical and reasonable.

But the decision also sounds suspiciously like it was at least partly ordered by Chinese government officials who are now negotiating a rescue package to bail out Suntech and want to show their anger at the recent US decision to impose big anti-dumping tariffs on Chinese-produced solar cells. Up until now, Suntech had trumpeted this Arizona facility as proof that it was creating jobs in the US as well as in China.

Suntech had also said it could use its US facility to help it avoid the anti-dumping tariffs imposed by Washington. So its decision now to suddenly idle two-thirds of the plant's capacity seems like a complete reversal of its previous message, leading to my conclusion that the move was at least partly engineered by Chinese government officials. If that's the case, I wouldn't be surprised if Suntech ultimately shutters the Arizona plant completely as part of its eventual restructuring.

Potential Delistings

Moving on to other matters, JA Solar and LDK have both put out announcements regarding their tumbling share prices that have put them in danger of de-listing. In JA Solar's case, the company has just engineered a 5-for-1 reverse share split to bring its New York-listed shares above the $1 mark, a requirement to maintain their listing on the Nasdaq main board. (English article) Meantime, LDK has also announced it has been notified that its shares are in danger of de-listing after they also fell below the $1 level for more than 30 days. (company announcement)

LDK will most likely do its own reverse share split eventually to bring its shares back above the $1 level, assuming its shares are still worth anything when it finalizes its own rescue package now being hammered out with the government. These reverse splits may help each companies' share price, but they do nothing to reverse the fact that their market valuations have tumbled over the last year and a half as the industry struggles with its worst-ever downturn. Both companies now have market caps of about $120 million, representing a tiny fraction of what they were worth before the downturn began.

Rare Good News

Lastly, we'll look quickly at the rare piece of good news for the Chinese solar companies following last month's US finalization of anti-dumping tariffs against them. That news has seen Yingli, Trina and presumably all the others say they will post one-time gains after some provisions they took related to the US tariffs were unnecessary. (English article)

These specific provisions were related to a part of the US investigation that would have made punitive tariffs retroactive back to 90 days before the actual decision. In the end, the US decided not to make the penalties retroactive, making previous provisions taken by the Chinese companies unnecessary. At the end of the day, however, these provisions were relatively small, totaling $13.7 million for Yingli and about double that amount for Trina. And of course these small one-time gains will do nothing to address the much bigger cash shortages and overcapacity now plaguing the industry.

Bottom line: Suntech's cutbacks at its US plant could foreshadow an eventual closure of the facility as part of a government rescue package.

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 .

November 23, 2012

Ceres, Inc.: a 5-Minute Guide

Jim Lane

1535 Rancho Conejo Blvd., Thousand Oaks, CA 91320


Annual Revenues:
$6.6 million (Fiscal Year ended Aug. 31, 2011)

Type of technology:
Plant biotechnology, gene marker-assisted breeding and other genomics

Fuel Type:
Biomass is the common denominator to advanced biofuels, biopower and bioproducts and is independent of the end-fuel molecule.

Major investors:
Ceres is a public company. Its common stock trades on the Nasdaq Global Market under the ticker symbol CERE. Pre-IPO investors include Warburg Pincus, Soros Private Equity Partners, GIMV and Oppenheimer.

Past milestones:
Completed IPO in February 2012.

Demonstrated at commercial-scale that sweet sorghum could be used as a season-extending feedstock for Brazil’s 400+ ethanol mills.

The company’s 2nd-generation of sweet sorghum hybrids significantly outperformed its initial products during the 2011-2012 growing season in Brazil.

The Brazilian government’s agricultural research corporation, Embrapa, selected Ceres to evaluate its leading sweet sorghum variety for use in ethanol production.

The company’s high-biomass and stress tolerance traits have demonstrated biomass yield increases of ~50% under non-irrigated conditions.

Ceres and a research collaborator in the U.K. completed the first high-resolution genetic map of miscanthus. This milestone is expected to speed development of economically viable seeded miscanthus varieties.
Ceres Switchgrass.png
Ceres CEO Richard Hamilton (right) and Dr. Richard Flavell, chief scientific officer, evaluate improved switchgrass (miscanthus). Image source: Ceres

Established world’s largest energy grass trialing network

Future milestones:
Ongoing commercial sales and scale-up in pace with bioenergy industry in Brazil, Europe and the United States.

Ceres Traits to Watch
Enhanced conversion: Substantial reductions in the cellulase enzyme cocktails required to release fermentable sugars from plant biomass.  This trait could be a key enabler of the large-scale use of biochemical processes and fermentation

High-biomass, low-input traits:  High yields and greater yield stability on low-rent, marginal land. Feedstock is 50-70% of operating costs, and land rents can be a significant cost component. These traits could provide a major lever against cost and enable larger volumes/facilities.

Business model:
Seed sales and trait licenses

Competitive edge:
Genetics, intellectual property, early-mover advantage

Distribution, research, marketing or production partnerships or alliances.
R&D: Texas A&M (leading sorghum genetics), Samuel Noble Foundation (Switchgrass genetics) and the Institute of Biological, Environmental and Rural Sciences Institute of Aberystwyth University in the U.K. (Miscanthus genetics).

Development stage: Commercial

Company website : http://www.ceres.net/
Also BladeEnergy.com

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.

November 21, 2012

Exide: Many Alliances, Fewer Results

Debra Fiakas

Alliance photo via BigStock
 Exide Technologies (XIDE:  Nasdaq) is one of the largest transportation and industrial battery suppliers in the U.S., vying for market share with Johnson Controls (JCI:  NYSE) and EnerSys (ENS:  NYSE) among others.  Batteries are a competitive business, even as the automotive sector has attempted a recovery from the 2008 free fall in new car sales.  Electric vehicle and renewable energy storage applications have helped expand addressable market.  However, for a conventional battery producer capturing a share of these markets requires new technology.

A long-time lead-acid battery supplier, Exide makes a show of its research and development effort, but fails to disclose the amount the company spends on R&D.  It could be hidden away in Selling, General and Administrative expenses.  Exide reports SG&A near 14% of sales over the past four years.  If this expense category includes the company’s R&D effort, it is less than impressive.

Of course, internal development programs are not the only way to build a technology base.  In late 2008, Exide acquired Mountain Power, a privately-held developmental-stage company that had a proprietary battery management system with additional monitoring features for proven lithium-ion cell technologies.  This appears to be Exide’s first foray into lithium technologies and represented a big leap from the company’s lead-acid history.

Then in early 2009, Exide entered into a technology development agreement with privately held NanoTerra, a developer that claims particular expertise in the design of nano-materials and their application to surfaces and bulk materials.  It is not clear whether Exide has deployed NanoTerra’s findings in any of Exide batteries.

In the same year, Exide signed a memorandum of understanding with Axion Power Technologies (AXPW:  Nasdaq) for the future purchase of Axion’s PbC batteries and the license of Axion’s lead-carbon electrode technologies.  Exide never got around to formalizing the relationship or ordering Axion batteries, but a few months after the MOU was signed the affiliation made good reading in Exide’s application for Recovery Act funds from the Department of Energy.  The application named Axion as a partner and promised to increase manufacturing capacity at its Columbus and Bristol facilities where Exide was to produce Absorbed Glass Mat (AGM) batteries “using lead-carbon electrodes for micro-hybrid applications.”  In recent discussions Exide has begun referring to the ARRA-funded capacity augmentation in terms of batteries “with or without” lead-carbon technologies  -  enhancements that Axion was ostensibly to bring to the party.

Exide was busy making friends in 2009.  The company also entered into a cooperative research and development agreement with Savannah River National Laboratory and the University of Idaho.  The troika was set up to study the benefits of hollow glass microspheres in lead-acid batteries.  Researchers in Idaho have found that among other benefits the use of these glass microspheres could reduce battery weight, a big plus for the large battery systems needed for electric vehicles and renewable energy storage solutions.

More recently Exide has entered into a “strategic alliance” with Maxwell Technologies (MXWL:  Nasdaq).  The two have pledged to work together on integrating Maxwell’s ultra-capacitor technology with Exide’s batteries for use in storage applications.  It seems like a tall order as the two technologies could not be more diverse.  Ultra-capacitors store energy in an electric field while batteries produce and store energy by means of a chemical reaction.  Like the Axion relationship, there is nothing binding on either Maxwell or Exide.  The press release is probably longer than the ‘alliance’ paperwork, so if any new technologies arise from the collaboration, the two will have to work out who owns what.

Exide is not the first manufacturer to rely on third-party relationships for research and development.  However, if Johnson Controls is successful in acquiring the automotive assets of bankrupt A123 Systems’ (AONEQ:  OTC/BB), Exide may be under more competitive pressure.  The deal would involve the transfer of supporting technologies and could give Johnson Controls an edge over Exide in the transportation market that appears to be centering on lithium ion technologies.  That means Exide will need to do more than bootstrap its reputation as an innovator with press releases and MOUs.
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. 

November 20, 2012

With the Cleantech Hype Gone, the Real Investment Opportunity Begins

David Gold

The bubble has burst. The hype and euphoria of 2008 and 2009 is a distant memory. Fueled in part by the externality of the handouts from the stimulus package, and the (now fleeting) spike of natural gas and oil prices, cleantech has experienced its own mini dotcom era now followed by a dot bomb phase.  

The politicization of Solyndra, the fracking revolution (that has dramatically increased U.S. fossil fuel reserves) and the realities of what it takes to build successful cleantech companies have all brought the cleantech venture capital space crashing back to earth. Available venture capital for cleantech companies has declined dramatically as some diversified funds pull out of making cleantech investments and cleantech-focused funds find it challenging to raise new capital. But this is not the beginning of the end for cleantech venture capital. Rather, it is the end of the beginning. While the cleantech hype has been fueled by a focus on global warming and the anticipation of government policies on carbon, the true underlying dynamics that will drive the explosion of clean technologies in a variety of sectors remain largely unchanged -- the impending extraordinary growth in demand for commodities of all types.

In the 1960s, there was a widely held belief that world population growth would lead to the demise of the human race. In fact, based on the thinking of those experts, many of us should be dead by now. Back then, experts believed the world could not possibly supply the anticipated population with the necessary food for survival. But a wonderful thing occurred -- the thing that separates humans from animals. The necessity of rapidly increased food supplies lead to the invention of disruptive advanced agricultural technologies. The result? In spite of population growth, today the world generates more food per capita than ever before.

It is that same type of dynamic that will be the true underlying driver behind cleantech innovation. Over the coming decade, the world will add about 1.5 billion people to the ranks of the middle class. That’s approximately a 75 percent increase from the number today. Such an increase will mean 1.5 billion more people who will buy cars, electronics, improved housing, higher protein foods, demand clean water and consume more energy. A Brookings Institute study estimated that this will yield a comparable increase in the world population’s overall consumption.           

The authors of the doom and gloom books of the 60s would look at this and forecast extraordinary increases in the prices of all types of commodities, which would lead to global disruption and unrest. I do believe we will see increased volatility in a variety of commodity prices, but I also believe that this dynamic will drive innovation just like it did in agriculture. Rapid increases in demand for commodities, enormous markets and the ability for new technologies in certain segments to provide disruptive advantages will create an environment for compelling venture capital opportunities.

commodity price chart

The New Global Middle Class:A Cross-over from West to East: Brookings Institute

Many cleantech venture capitalists have focused on CO2 as the driving force for innovation. But I have always looked at cleantech as way to drive increased efficiency, reduce waste and create less expensive alternatives -- the things that drive bottom line benefits in the free market. In other words, creating Gold by being Green (hence the name of my blog). The combination of the natural gas boom and the political reality of the unlikelihood of a price on CO2 emissions in the U.S. (or just about any nation that doesn’t already have one) has caused those with a CO2-focused investment thesis to face a very challenging environment.

If cleantech is viewed as synonymous with carbon emissions reductions, then the segment will be challenging from an investment perspective. But through the lens of GreenGold, where cleantech is about reducing the consumption of all sorts of non-renewable commodities, there will be many compelling investment opportunities yet to come. Undoubtedly the devil is in the details of which markets and areas of innovation will hold the best venture potential (ahh… fodder for a future post). But I believe that investors who run from anything remotely cleantech today will find themselves looking back and feeling like those who ran from investments in the Web in 2002. Now that the hype is gone we can focus on building real businesses. The next decade will be the one where real value is created in a number of segments of clean technologies and I, for one, plan to be making money by investing in some of those winners.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

November 19, 2012

Ameresco Revenues Fall Off Fiscal Cliff

Tom Konrad CFA


The climate of uncertainty caused by deadlock in Washington is leading to penny-wise, pound foolish behavior at all levels of government, and Ameresco, Inc. (NYSE:AMRC) felt the pain severely in the third quarter.

Framingham, MA based Ameresco helps institutions, mostly government entities, improve their energy infrastructure and reduce energy use without capital outlays or increases in energy budgets.  It does this by using the cost savings from energy efficiency to finance the capital outlays, allowing schools, hospitals, and the like to insulate or install solar panels while sticking to existing budgets, and often producing some savings.  To take three examples announced in the last month,

  • Four schools in Newton, MA will get solar panels, paying Ameresco only for the electricity generated over the next twenty years.  According to the school chief administrative officer, the schools could see cost savings over the life of the agreement.
  • Reed College in Oregon signed a comprehensive  agreement to improve energy efficiency and water savings  at the century old campus which is expected to save the college $2.7 million over the 10 year life of the agreement, compared to projected energy costs of $7.2 million over the period.
  • The city of Longview on the Columbia river in Oregon will spend $3.9 million (or $3 million after a state grant and utility incentives) to replace aging boilers, lighting, and mechanical systems in city buildings.  The remaining $3 million will be financed by a loan which will be completely paid off in 15 years solely by the energy cost savings, which are guaranteed by Ameresco.  After 15 years, the city will have paid off the debt, but the equipment will have years of life left, and will have already saved $564,000.  The city would not have been able to afford to replace the equipment without the Energy Savings Performance Contract.

These sorts of win-win contracts should make sense at any time, but are even more welcome when budgets are tight, as they are today.  But the deadlock in Washington, and worries over the possibility of drastic automatic Federal cuts caused by the fiscal cliff (or the compromise measures which may replace them) are causing Ameresco’s customers to delay signing contracts.  For an in-depth look at Ameresco’s business, see my profile of the company.

Ameresco management had already expected their quarter 2012 results to be less than 2011, but they did not see just how bad things were likely to get.  While Ameresco has continued to execute well on projects, maintaining or improving operating margins and increasing their backlog of awarded projects to a record level, third quarter revenue plunged as the climate of uncertainty and greater concerns about debt  led customers to proceed with extreme caution finalizing projects.

Total revenue was down 28% in the third quarter to $163.9 million, with operating income dropping 34.7%.  While the election may have ease some uncertainty, the uncertainty caused by the fiscal cliff will almost certainly continue through the end of the fourth quarter, and its effects are likely to persist through December.  Hence, Ameresco revised guidance sharply downward to $640-$660 million for 2012 (compared to $728 million in 2011) with a profit of $22 to $26 million (compared to $35 million in 2011.)


Unsurprisingly, Ameresco stock opened sharply lower today, and is currently down 18% at $8.70.  While I attempted to sell my holdings at $10.30, I was unsurprised that many investors had a much more bearish outlook than I do about Ameresco.

In the mid-term, Ameresco’s prospects are bright.  Obama’s election will ensure four more years of strong demand for Ameresco’s services from the Federal government, while the company’s strong backlog shows that 2012 revenue has just been delayed, not lost.  Tight budgets and improving energy efficiency and renewable energy technology can only expand the demand for the company’s services, while the current market conditions are likely to cause  some of Ameresco’s competitors (most of which are divisions of conglomerates like United Technologies (NYSE:UTX) and Chevron (NYSE:CVX)) to exit the performance contracting business.

Ameresco Biomass Cogeneration Facility at SRS

Ameresco Biomass Cogeneration Facility at (Federal government owned) Savannah River Site (Photo credit: Savannah River Site)

At the state level, Republicans have made slight gains in governors’ races, but these wins were due to “Republican governors… providing the type of results-oriented leadership that is absent in Washington, D.C.,” as Republican Governors Association chairman Bob McDonnell, governor of Virginia put it.  Results-oriented leadership and fiscal conservatism are exactly what Ameresco needs to win new customers at the state level.   Meanwhile, Democrats gained control of more state legislators, so we can expect to see more environmentally friendly policies at the state level, which will also boost the attractiveness of Amereso’s services.

With the long term bright, and the stock price looking increasingly attractive, I plan to increase my holdings of Ameresco over the next few months, after the market finishes digesting the bad news.  I’m not buying yet, however, since I would not be surprised to see Ameresco drop into the $7 range over the next few days, and fourth quarter results are also likely to be bleak.

Disclosure: Long AMRC

This article was first published on the author's Forbes.com blog, Green Stocks on November 8th

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

November 18, 2012

Axion Power – A Battery Manufacturer Charging Forward

John Petersen

Last week Debra Fiakas of Crystal Equity Research published an article titled "No Battery Producer Left Behind" that was based on old information about the relationship between Exide Technologies (XIDE) and Axion Power International (AXPW) and reached several erroneous conclusions. Since I'm a former Axion director, the stock is my biggest holding and I follow the company like a hawk, Tom Konrad asked me to clarify the record and present a high level overview of Axion's business history, stock market dynamics and technical accomplishments over the last four years.

Since Tom's request is a tall order, the article will run longer than usual, but it will tie together several themes I've discussed in the past.

Axion's price chart since September 2009 has been a vision from investor hell. However, I believe the market performance is 180 degrees out of synch with technical and business realities. I've been an Axion stockholder for nine years and my average cost per share is in the $1.25 range, but I've never felt better about my risk-reward profile than I do today.

11.18.12 AXPW Price.png

Business History

Axion was organized in September 2003 for the purpose of conducting basic research and development on a new lead-carbon battery technology. Axion's PbC® battery is a third generation lead-acid battery that eliminates the primary cause of lead-acid battery failure, the rapid accumulation of lead sulfate crystals on the negative electrodes. It does this by replacing the lead-based negative electrodes with carbon electrode assemblies. The PbC battery is basically a hybrid device that's half lead-acid battery and half supercapacitor. It has a number of unique performance characteristics, including:
  • Lower energy density (±25% to 40%) because carbon stores fewer ions than lead;
  • Five to ten times the cycle life because carbon electrodes eliminate sulfation;
  • Ten to twenty times the charge acceptance because carbon electrodes act like supercapacitors; and
  • Self-equalization in long battery strings that reduces the need for complex battery management systems.

Unlike most R&D companies, Axion went public at a very early stage because there were several groups that claimed partial interests in the technology and the only way to consolidate ownership was in a publicly held entity. Like most R&D projects, expectations were high at the outset but faded over time as the challenges of developing a completely new battery technology and proving its value to cautious and skeptical users became clear. The process took far longer than we thought it would, but the market potential turned out to be far greater we originally anticipated.

From 2003 through the spring of 2009, Axion's R&D efforts focused on optimizing the performance of its materials and components, designing an electrode assembly that could be used as a plug-and-play replacement for the conventional lead based electrodes used in battery plants around the world, developing automated manufacturing methods for the electrode assemblies and characterizing the performance of manufactured pre-commercial prototypes.

The first clear sign of R&D success arrived in April 2009 when Axion entered into a multi-year global supply relationship with Exide. The second and more convincing sign of R&D success arrived in August 2009 when the Department of Energy awarded a $34.3 million ARRA battery manufacturing grant to "Exide Technologies with Axion Power International" for the purpose of producing "advanced lead-acid batteries, using lead-carbon electrodes for micro and mild hybrid applications."

The market reacted well to both events and in August 2009, Axion's stock price peaked at $2.75 per share while its market capitalization peaked at $97 million. It's been a long downhill slide ever since.

Axion's relationship with Exide was always complicated because of size disparities. As an R&D company Axion ran a tight ship and in April 2009 it had $8.4 million in assets, $6.1 million in equity and  $1.8 million in annual revenue. Exide, in comparison, had $1.9 billion in assets, $326 million in equity and $3.3 billion in annual revenue. The ARRA grant made a complicated relationship more difficult because Exide didn't want to share the grant proceeds without extracting a pound of flesh and Axion believed its technology was the fundamental justification for the DOE's decision. By the summer of 2010 it was clear that Axion and Exide had different visions and would be following different paths. Current relations between the two companies are competitively cooperative, but far from close.

Stock Market Dynamics

While Axion's technical prospects were bright in the fall of 2009, its financial condition was grim. In its Form 10-Q for the period ended September 30, 2009, Axion reported $283,000 in working capital and $3.6 million in adjusted net assets. With the equity markets still reeling from the impact of the 2008 crash, there was substantial doubt about Axion's ability to survive another quarter. Those uncertainties persisted until late December when Axion announced a $26.1 million private placement of common stock that saved it from imminent collapse and gave it a sound financial footing for the first time in its corporate history. Axion's 10-day moving average price was $1.65 before the offering and the deal was priced at $0.57, a painful 65% discount. The deal terms were hard, but they weren't unfair for a private placement transaction of that magnitude.

I was thrilled when the 2009 private placement came together because 70% of the stock was bought by four big investors who each acquired blocks that were roughly equal to Axion's total reported trading volume for 2009. When one big investor takes 70% of a deal, you need to worry about the stock flowing back into the market. When four big investors split 70% of a deal and they each buy blocks that represent a full year's trading volume, it's generally safe to assume that they're swinging for the fences and the shares won't flow back into the market for years. Unfortunately, things didn't quite work out according to plan.

The market reacted reasonably to the 2009 private placement and during the month immediately following the offering, the price drifted down into the $1.15 range. Based on my prior experience with substantial private placements by public companies, it looked like the market was reacting normally and the retail price for liquid thousand-share blocks would stabilize at roughly twice the placement price for illiquid million-share blocks.

Axion's market dynamic started to get ugly in late-April and early-May when liquidation trustees for two legacy stockholders that held a combined total of 3.5 million shares started to aggressively compete for buyers by dropping the offering price in a market that traded about 45,000 shares a day. By mid-July, the stock price had fallen by 50% while the average daily volume doubled. That price decline spooked other stockholders and increased the selling pressure, which drove the stock price to new lows. The extraordinary selling pressure continued in 2011 and 2012 as one large stockholder after another began to liquidate their positions for reasons ranging from secondary repercussions of the 2008 crash, to fund management changes and even an accidental death. As a result, the annual trading volume progression over the last four years was:

Calendar 2009
7.2 million shares
Calendar 2010
22.0 million shares
Calendar 2011
77.7 million shares
2012 to Date
76.6 million shares

Axion may have been a very illiquid stock that traded by appointment in 2009, but it has developed a solid liquidity base over the last three years. More importantly, information from SEC reports filed by certain large holders combined with daily short sales data published by FINRA has left me highly confident that substantially all of the Axion shares that were previously held by large stockholders who wanted to sell have been absorbed by retail investors who did their homework, climbed their personal walls of worry and accumulated shares despite Axion's dismal market performance. While market activity over the last three years has been dominated by a few large holders that were willing to sell at any price, I believe the future market will be dominated by a large number of retail investors who were greedy when others were fearful and bought Axion's stock based on the fundamental economic potential of the PbC technology.

Technical Accomplishments

Axion's basic research and development work on the PbC technology was substantially complete by the end of 2009. It had advanced the PbC technology from a glorified science fair project to a manufactured pre-commercial prototype that was suitable for delivery to potential customers who wanted to conduct their own testing and determine whether the PbC battery suited their needs. Axion used a portion of the proceeds from the 2009 offering to build a fully automated second generation production line for its carbon electrode assemblies and upgrade its principal manufacturing facility, but most of the proceeds were used to support customer testing activities and pay for a variety of demonstration projects in the new evolving markets summarized below.

Automotive Idle Elimination Systems In response to new emissions control and fuel economy regulations, the auto industry is in the midst of a fuel economy renaissance. The world's automakers are all implementing proven fuel economy technologies at a torrid pace on a fleet-wide basis. One of the most cost-effective fuel economy systems available to automakers is also one of the most sensible – turn the engine off while a car is stopped in traffic and restart it automatically when the driver takes his foot off the brake. Depending on the manufacturer, these stop-start or micro-hybrid systems improve fuel economy by 5% to 15% for a few hundred dollars in incremental cost.

The biggest challenge of idle elimination is that powering accessories during engine off periods and restarting the engine when the light changes puts tremendous strain on the battery and today's best starter batteries simply aren't up to the task. The batteries begin to degrade as soon as they're placed in service and within a few months a car that turned the engine off at every light when it was new can only turn the engine off once or twice during a commute. Idle elimination systems that don't function properly because of weak batteries can't save fuel.

In the summer of 2009 Axion began quietly working with BMW, which wanted to test the PbC battery for possible use in its mainline vehicles with the EfficientDynamics fuel economy package. The first 15 months of testing were conducted in deep secrecy. Axion's stockholders didn't learn about the existence of the BMW relationship until September 2010 when Axion and BMW jointly presented the preliminary results of their testing at the European Lead Battery Conference in Istanbul.

The following graph is an updated and annotated version of the graphs Axion and BMW used in 2010 to show the superiority of the PbC battery in a stop-start duty cycle. They grey lines relate to the left-hand axis and show changes in the dynamic charge acceptance of the batteries as they age. The black lines relate to the right hand axis and show the amount of time the batteries needed to recover from one engine off event in preparation for the next engine off opportunity. As you look at the graphs, it's important to remember that:
  • The "Charge Time" scale for the AGM graph is 10x the scale for the PbC, and
  • The "Equivalent Drive Time" scale for the AGM is stated in months while the PbC scale is stated in years.
11.18.12 PbC v AGM.png

BMW completed its laboratory and vehicle testing of the PbC this summer and was pleased enough with the results that it hired an independent testing organization to confirm them. If the confirmation testing is successful, Axion believes the next logical step will be fleet testing to demonstrate the PbC's performance in a variety of climate and traffic conditions. Based on the stellar results BMW obtained during its three-year testing and validation program, several other automakers have skipped the preliminaries and gone directly to advanced testing of the PbC for their idle elimination systems.

While US automakers are just beginning to implement idle elimination systems, industry consensus holds that the technology will be used in 34 million vehicles a year by 2015 and substantially all internal combustion engines by 2020.

Battery-Powered Locomotives
Freight and passenger railroads in the US use roughly 3.7 billion gallons of diesel fuel per year, which gives them a huge incentive to reduce their operating costs by using fuel more efficiently. Moreover, like other transportation sectors, the railroads are subject to increasingly stringent emissions regulations, particularly for rail yards in urban areas. In 2007 Norfolk Southern (NSC) launched an ambitious program to develop a battery-powered locomotive that could be used as a switcher in urban rail yards, or combined with conventional locomotives to create a hybrid train that would use battery power to augment the conventional locomotives during acceleration and hill climbing and recover a portion of the energy that's currently wasted in braking and downhill grades. Since NS used 476.6 million gallons of diesel fuel in 2011, it believes the potential economic and environmental benefits of battery-powered locomotives are extremely attractive.

In September 2009, NS introduced its first battery-powered switching locomotive, the NS 999. While the early demonstrations showed that the NS 999 could do the required work, the AGM batteries they selected for the locomotive were not able to withstand the tremendous regenerative braking loads of a switching locomotive. When the original batteries quickly failed, NS began its search for a better energy storage alternative. After discretely testing hydrogen fuel cells and nickel metal hydride, lithium iron phosphate, sodium beta and a variety of lead-acid batteries, NS decided that Axion's PbC battery was best suited to its particular needs. Axion announced the initiation of a development relationship with NS in June 2010.

Over a period of two years, NS conducted a grueling sequence of performance tests using its in-house development staff, Penn State University and Axion to obtain double redundant results. In addition to showing that the PbC could handle the regenerative braking loads from a battery-powered locomotive, the testing program also explained why the first generation prototype failed.

Whenever conventional batteries are connected in series, the resulting battery string is only as strong as its weakest link and as the string ages the differences between batteries get harder to control. Unlike all other batteries, strings of PbC batteries tend to self-equalize over time because of their unique charging behavior. The following graph highlights the differences between the long-string performance of conventional AGM batteries and Axion's PbC batteries.

11.18.12 String Behavior.png

In April of this year, NS ordered $475,000 of PbC batteries for their planned rebuild of the NS 999. Their goal is to have the locomotive working this winter. Upon completion of the NS 999 rebuild, NS plans to build a larger six-axle locomotive for testing in long haul hybrid train applications. If the two planned prototypes perform as expected, the next logical step will be statistically valid fleet testing throughout the NS system. Norfolk Southern's locomotive fleet includes 240 switching and auxiliary units and 3,900 multipurpose units. Collectively, the nation's Class I railroads operate a total of 23,500 locomotives.

Stationary Storage Products In November 2011 Axion commissioned its PowerCube stationary energy storage system. While stockholders knew that the product was being developed, they didn't know that Axion, in cooperation with Viridity Energy, had taken all necessary actions to qualify the PowerCube as a behind the meter frequency regulation resource in the PJM Interconnection, the regional transmission organization for Pennsylvania and twelve other States. In September 2012, Axion unveiled a small version of the PowerCube for residential and small commercial customers.

Over the last couple years grid-based energy storage has become a hot topic and most battery manufacturers are launching products for utilities, renewable power producers and commercial and residential power users. It's an intensely competitive market where the principal differentiators are likely to be reliability, total cost of ownership and customer service. Axion's stationary storage systems perform well and respond in milliseconds, but they don't necessarily perform better than products from Axion's competitors. The self-equalizing behavior of PbC batteries in long string applications should be as attractive in stationary systems as it is in rail applications.

As near as I can tell the key features that will differentiate Axion's products are low maintenance and user-centric design. Axion developed the PowerCube in cooperation with Viridity with the primary goal of maximizing the economic benefit to commercial users who want to reduce their power costs while avoiding costly interruptions. Similarly, Axion developed its residential PowerHUB in cooperation with Rosewater Energy with the primary goal of optimizing performance and minimizing maintenance for small-commercial and high-end residential customers who need reliable, stable and clean power for their sophisticated security, entertainment, climate control and other electronic systems.

Trucking Industry Products In October of this year, Axion made a presentation at the SAE's Commercial Vehicle Congress in Chicago that outlined its plans to introduce specialty products for the trucking industry. The first planned product will be battery systems for the auxiliary power units that are quickly becoming industry standards as most states adopt laws and regulations to restrict idling while trucks are parked for driver rest periods. To date, industry experience has shown that AGM batteries fail quickly in APUs and a better solution is needed. Axion's SAE presentation used this graph to highlight the performance differences between AGM batteries and PbC batteries over a six-month period in a simulated APU duty cycle.

11.18.12 PbC APU.png

The primary target-market for APU battery systems is the 650,000 heavy-duty trucks that haul the nation's freight. In 2006, the average long-haul truck idled for 6 hours per day and total national fuel consumption in idling trucks was estimated at 665 million gallons, or a little over 1,000 gallons per truck. Fuel costs alone make four-battery APUs a compelling economic proposition.

In its SAE presentation Axion said that it planned to begin field testing of PbC-based APU systems by 2013, which suggests that a formal announcement of the testing program and its development partner will be made in the next few weeks. Since the SAE presentation used Freightliner's ParkSmart™ System as an example of the target market, I think there's a pretty good chance that Freightliner will be the development partner.

A second trucking initiative Axion briefly discussed in their last conference call was the shipment of 52 PbC batteries for a prototype Class 8 tractor that combines a small diesel engine with a series hybrid drive to deliver fuel economy in the 12 to 14 mpg range, as opposed to the 5 to 6 mpg performance that's currently prevalent in the industry. Preliminary test data from this project is expected this year.

Risks and Uncertainties

Production Capacity Axion's electrode fabrication line was designed to produce enough electrodes for about 150 batteries per shift. While Axion has not disclosed its cost of building and installing the production line, news stories and financial statement disclosures lead me to believe an estimated cost of $3 million per line is reasonable. By the time you account for efficiency differences in a multi-shift operation, I'd estimate the maximum capacity of the single electrode fabrication line at 350 batteries per day, which is adequate to support testing and evaluation activities, but inadequate for commercial sales. When demand for PbC batteries increases, Axion will need up to $50 million in additional capital to expand its electrode fabrication capacity from 350 to 3,500 PbC batteries per day.

Production Costs Axion's electrode fabrication capacity is very limited, which means that it has no significant negotiating power with suppliers and the fixed costs of its electrode fabrication facility are spread over a small number of units. In combination, these factors make current versions of the PbC objectively expensive. I've done some back of the napkin calculations on the bill of materials for a PbC battery and compared those numbers with the bill of materials for an AGM battery. The bottom line is basically a wash when you substitute ounces of expensive carbon for pounds of cheaper lead. Once demand for PbC batteries ramps, Axion should enjoy a stronger bargaining position with suppliers and derive substantial savings from the more efficient utilization of its physical plant. Additionally, the current electrode fabrication line is a second-generation version. As Axion works its way down the normal learning curve for manufacturing enterprises, additional cost savings are almost certain to arise. While management has scrupulously avoided making promises about future cost reductions, the opportunities for real and substantial economies of scale cannot be overlooked.

Anticipated Financing At September 30th, Axion had $4.2 million in cash, $6.8 million in working capital and $13.3 million in stockholders equity. It will require additional operating capital by the end of Q1-2013. Axion's Form 10-Q disclosed that management is currently seeking additional capital from sources that are in alignment with its business objectives and long term strategy. During the recent conference call, the CEO explained that the next financing transaction would probably be a 2013 event and disclosed that the investors who provided $8.6 million of additional capital in February of this year are willing to participate in another round if an appropriate strategic partner is not identified. Since the terms of a future offering will not be negotiated until immediately prior to closing, they're a significant uncertainty.

Investment Conclusions

In a normal case I would have expected Axion's stock price to stabilize in the $1.15 range after the 2009 offering. I would also have expected the price to slowly appreciate from that base level in response to the following significant technical accomplishments:
  • The June 2010 announcement of a relationship with Norfolk Southern;
  • The September 2010 announcement of a relationship with BMW;
  • The November 2011 commissioning of the PowerCube as the first behind the meter frequency regulation resource in the PJM Interconnect;
  • The decision to use the PbC in Norfolk Southern's battery powered locomotive prototypes;
  • The successful completion of BMW's testing activities; and
  • The September 2012 launch of the residential PowerHUB;
While each of these events would have been big news in a typical micro-cap company, they didn't register on Axion's price chart because of the extremely unusual market dynamics that prevailed when the announcements were made. While Axion's stock has been "broken" for the last three years, I believe the market dynamic that caused the problem has been resolved and the only thing that's holding the stock at present levels is fear that higher prices will only give rise to another round of heavy selling. After three years of unrelenting selling pressure despite an increasing body of proof that the PbC is an extraordinary new battery technology, I understand the fear. I also know that Axion has arrived at a key transition point and is poised to shed the R&D company market dynamic that prevailed for the last nine years as the PbC earns a place in several billion-dollar niche markets where competitive battery technologies simply can't do the work.

11.18.12 Gartner.png

Most R&D companies that enter the valley of death never emerge. For the fortunate few that do, the hard times last longer than anyone expected. The one trait all entrepreneurs share is unbridled optimism. The three traits all survivors share are determination, focus and fiscal restraint.

After nine years of hard work, adversity and limited financial resources, I believe Axion has finally arrived at the "Innovation Trigger" for the next stage in its development.

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

November 17, 2012

Solazyme's Hybrid Vigor

Jim Lane

Solazyme logo.pngSolazyme lands monster capacity expansion agreements with Archer Daniels Midland (ADM) and Bunge (BG)– what’s the sector’s hottest company up to now?

Wednesday, Solazyme (SZYM) announced two landmark capacity expansion agreements with Bunge and ADM, respectively.

The Bunge agreement will expand joint venture-owned oil production capacity at Solazyme Bunge Renewable Oils from the current 100,000 metric tons under construction in Brazil to 300,000 metric tons by 2016 at select Bunge owned and operated processing facilities worldwide.

Under the terms of the ADM agreement, Solazyme will initially target the production of 20,000 metric tons of oil in 2014, with an aim to increase production to 100,000 metric tons in subsequent years.

“After building a strong commercial relationship together, we believe there is a broader scope of opportunities ahead of us,” said Ben Pearcy, Managing Director, Sugar & Bioenergy, and Chief Development Officer, Bunge Limited. Specifically, in this round of announcements, in edible food oils.

Let’s look at the scope of Bunge’s operations and current customer base, in this regard.

In their latest quarterly report, Bunge posted $2.395 billion in edible oils sales, representing 1.692 million tons of product sold at $1,415 per metric ton.

In that context, this deal represents $424 million in potential revenues at current prices, using the average edible oils prices that Bunge is currently generating.

Over at ADM

The ADM deal is much smaller, initially, but consistent with Solazyme’s approach to incremental scale-up. It’s capital-light, using the plant that ADM built in order to produce Mirel (PHA) bioplastics in its Telles joint venture with Metabolix, which was recently unwound.

But what is the fundamental nature of both deals?

Fundamentally, the market of customers is beginning to see Solazyme as a particularly efficient hybrid of agroscience company and grower. In the old model, companies like Bunge and ADM depended on companies like Monsanto, Dow AgroSciences, and DuPont’s Pioneer HiBred to come up with seed technologies that optimized oil characteristics, and farmers to grow the oilseeds via their “programmable” farmland.

The old model was slow-moving in product development, slow-moving in adoption, complex in its organization, and subject to risk-building pressures ranging from diesel prices to weather.

For some time, Solazyme has been talking up a comparison to Monsanto, Dow and DuPont – but this week’s deal-making brings the other aspect of the company into a clearer light. That is the ability of the company to replace, via an industrial process, the grower in the field – through large-scale capacity deals that bring tailored renewable oils to market. The company – well, it’s a hybrid, and comes with its own flavor of doublecross hybrid vigor.

Solazyme's platform, compared to traditional agroscience companies

Offtake for growers, vs processors

There has been some bemoaning in the investor and analyst community about of the lack of customer offtake deals within the Solazyme universe. And it’s true – they have a number of contracts, but nothing that would, today, provide complete offtake for the kind of capacity that the company has now set out to build.

But, is that really the right question? After all, Warren Buffett doesn’t have offtake agreements for shares in Berkshire Hathaway, either. It is not offtake, but demand that is the question – especially for growers.

After all, growers don’t generally lock in 100% of their output in offtake deals with end-use customers they might find, one supposes, at weekend Farmer’s Markets. They form relationships with the next set of companies in the supply chain — the processors, with whom they form complex relationships and trades.

Solazyme's complex universe of molecules and applications, seen against the backdrop of everyday life

Solazyme's complex universe of molecules and applications, seen against the backdrop of everyday life
The major traders and processors — the famed ABCDs — ADM, Bunge, Cargill and Dreyfus, they are likely to form a key route to market, for hybrids like Solazyme, just as they do for growers and the seed companies who serve them.

And it’s not hard to see why there’s interest in the new model, from the processor side. It’s the opportunity to access a more tailored product, faster, and eliminate the crushing and extraction steps.

At bunge.com, they make the case: “Bunge knows that today’s consumer have a higher level of health concerns than ever before. Even when it comes to indulging, customers continue to look for ways to feel better about the foods they eat. These reasons, combined with the ban on trans fat in several areas, are why we offer multiple oil and shortening solutions.”

What do they see?  In companies like Solazyme, better solutions for their customers through a microbial platform that grows oil in one step – versus the old route of grow, crush, extract. They see the hybrid vigor.

Solazyme vs Metabolix

The Metabolix problem is part of what is spooking investors, when they consider Solazyme.

Both companies had a promising biotechnology that attracted name-brand partners to establish sizzling joint ventures. In the case of Metabolix, it has never been made entirely clear why the order volumes for Mirel bioplastics never reached very attractive levels in the partnership with ADM. Ultimately, what started as a landmark collaboration eventually unwound.

But let’s make the difference clear. Mirel was a single molecule, and a novel one. Solazyme has a platform technology in triglycerides, not a single waffle iron that runs into problems finding markets for all the waffles when they produce them at industrial scale.

Triglycerides are the dominant form of edible oil, here on Planet Earth – demand is abundant, global and obvious. The only questions are price and performance.

The best judge of those? The companies that see all the prices both upstream from growers and downstream with customers, and measure customer demand. In this sector, that’s the ABCDs.

Bunge and ADM: so whadda they know?

In this case, the majors are betting with dollars and with their existing capacity. Should you bet along with them? Well, you know your portfolio investment goals better than we.

Bet against Solazyme’s understanding of the market? A young, small company just getting on its feet as an industrial-scale concern. Sure, that would be reasonable.

Bet against Bunge’s understanding of the edible oils market? Bet against their understanding of what customers need and what production processes will be the winners in the long-term?

Hmmm, you are betting against a market-maker, whose information is bound to be more complex, production-data based and richly understood than your own. Bet at your peril.

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.

November 16, 2012

Four American Stocks for the Next Economy

Garvin Jabusch

The Green Alpha Advisors' approach to portfolio management utilizes a top-down macroeconomic model reflecting how global economies will evolve to meet demands presented by modern challenges such as resource scarcity, growing populations, land and food management, atmospheric carbon and extreme weather, to name a few.

These emerging challenges are daunting, but fortunately, society is answering and acting to preserve our economies and way of life with a new wave of innovation, the like of which has not been seen since the information technology revolution of the 1990s and the industrial revolution before that. 

The companies providing these innovations will see rapidly increasing demand over the next few years as economies rise to meet big challenges, and capital, as it always does, will flow to the best solutions. This is what defines the next economy: it is comprised of companies providing products and services that can thrive in the future economy as well as they do now (perhaps even better), and/or companies whose business is directly in the path of solving one or more of our main challenges.

It is among these innovators that one may now find the next Googles, Apples and Amazons. And, as with the first to see the promise of information technology, the first investors into the next wave of innovation will be the ones who have the best chance of outsized returns. With that in mind, here are four companies, based here in the U.S., that are timely in their deployment of innovative technologies, ideas and services. The global economy's next leap forward is beginning with firms like these.

Ocean Power Technologies, Inc. (OPTT) designs, makes and deploys ocean buoys that generate electricity from the kinetic energy of ocean waves. Their technology is proven effective, and in places where waves are always present (like the West coast of the U.S.), it doesn't suffer from intermittency as do wind and solar. Among Ocean Power’s best customers and advocates is the U.S. Navy, which has identified wave electricity as a way to power bases and missions, and yet have no reliance on external sources.  Ocean Power has also recently teamed up with Lockheed Martin to deliver two utility-scale projects, one off the coast of Oregon and the other for the Commonwealth of Australia. This is a small company with great growth prospects.

UQM Technologies, Inc. (UQM) makes propulsion systems for electric vehicles (EVs). UQM is not an electric car maker, but provides power systems and drive trains to companies making or converting fleets to electric. FedEx, UPS, London Taxi cabs, Audi and many others have converted portions of their fleets to electric using UQM. UQM's systems are remarkably efficient. FedEx CEO Fred Smith has said his electric delivery vans operate at 75% less cost than diesel vans. As Smith said, "Not 7.5%, 75%. These are big numbers." Recently, UQM has also entered into a memo of understanding to provide its electric propulsion systems to China's "New Energy Vehicles" state program. With its record of quality implementations, strong client list and ability to deliver big cost savings, UQM is a great way to get exposure to the EV sector without betting on any individual car company.

GT Advanced Technologies Inc. (GTAT) is an original equipment manufacturer (OEM) providing the machines that help make light emitting diodes (LEDs) and solar panels. LEDs are bright, adaptable to uses from TVs to phones to streetlights, make light with far less electricity than incandescent or fluorescent, and last as long as 20 years between replacing. As a result, the LED sector is booming. Solar, for its part, is clearly going to be one of the main pieces of our electricity mix going forward, and the guys who make the machines that make the panels should have steady business as this growth accelerates and will be less sensitive to fluctuations in the prices of the panels themselves (as opposed to panel and module manufacturers).

Remarkably, GT was competing just fine toe-to-toe with the Chinese solar industry, long before U.S. tariffs on Chinese solar came along, a fact that inspires confidence in management effectiveness. In both LED and solar, GT Advanced Technologies is a great way to invest in an overall industry without having to select individual product manufacturers. 

Trex Company Inc. (TREX) manufactures and distributes wood-composite lumber substitutes for residential and commercial decking, railing, fencing and similar applications. Trex makes its products from reclaimed wood and plastic waste, and their boards are attractive and very durable. (Trex claims a positive return on investment of its products versus wood is less than 6 years). We consider Trex a prime example of waste-to-value economics that not only keeps huge quantities of waste out of landfills and oceans (Trex used 3.1 billion plastic bags in 2010, and is responsible for 70% of all U.S. plastic bag recycling), but also delivers a superior product with better long term value. In a world of constrained resources, making great stuff from leftovers is the best of all worlds.

Each of these four firms has a great operational story, and they fit well within Green Alpha’s macroeconomic thesis. In addition though, three of the four have to differing degrees suffered share price setbacks recently, providing attractive entry points. Ocean Power and UQM Technologies in particular have suffered long retrenchments but due to recent business improvements have begun to see share prices stabilize. OPTT is trading below both cash and book value and, with several projects upcoming, should be able to reach profitability and expand from there. UQM is expecting to reach profitability in its next full calendar year, and could be poised for rapid growth.

Already profitable and with a much larger market cap, GT Advanced Technologies is less speculative that the OPTT or UQM, yet has seen its share price decline rapidly as well. GTAT’s solar business probably explains that, as solar manufacturing stocks as a group have done poorly since mid-2011, but the market may be mispricing GTAT on this basis for two reasons. First, GTAT is not a panel maker, but a business to business panel equipment provider, where orders have remained more consistent. Further, GTAT’s other business, LED lighting, should be insulating it from the full vagaries of solar valuations. Second, GTAT has a very strong balance sheet which should allow it to withstand solar’s downturn, and the company remains profitable, expecting steady or modestly growing EPS for the next couple of years. Still, the company today trades at only 63% of sales and only 1.6 times book, so there’s plenty of upside potential as the company comes back to objectively reasonable valuation.

Trex is the one firm discussed here to have had outstanding share price performance so far this year, and with good reason. After losing $0.75 per share in 2011, the company is poised to earn $1.58 in 2012 and is forecasting $2.33 EPS for next year. Booming growth by any reckoning, resulting in a forward year PE of 14. Given their earnings growth, TREX need only return to their historical PE average just above 19 to deliver a nice return to forward looking next economy investors.

Disclosure: Green Alpha Advisors is long GOOG, OPTT, GTAT, UQM and TREX, but has no positions in AAPL, AMZN, NSU, FDX, UPS or LMT.

Note: this post first appeared online in Financial Advisor magazine's "Portfolio Manager Insights" section.

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

How New England Can Eliminate Oil Use For Single Family Homes for Less Than We're Spending on Solar PV

Chris Williams

We can use simple, effective, and proven policies that have been used to supercharge the New England solar PV industry to incentivize renewable thermal technologies and eliminate oil use for single family homes. Here's the best part, the policies will be cheaper than solar PV, they will create more local jobs per kW installed and displace more expensive fuel. 

At Renewable Energy Vermont 2012, I delivered a presentation on how a production-based incentive for renewable thermal technologies, like the $29/MWh incentive in New Hampshire, would be cheaper than the current solar PV incentive in Vermont and could have a larger impact. The current incentive for solar PV in Vermont is $271/MWh for 25 years, but we could eliminate oil use for single family homes with a policy for renewable thermal technologies of $100/MWh guaranteed for five years. This policy would be much cheaper than the solar PV incentive and would drastically increase the adoption of biomass, air source heat pumps and ground source heat pumps. It would put a huge dent in oil consumption for single family homes, save money and create local jobs. If you're new or curious about thermal incentives, Renewable Energy World has done some great reporting on it.

As I started to run the numbers when I was creating the presentation, I was blown away by how much energy renewable thermal technologies produced, and how valuable that energy is when displacing oil, propane and electricity. Many attendees at the talk had never seen the numbers broken out in a way that easily compares apples to apples. However, as any engineer knows, converting kWs to tons to BTUs is relatively simple. When we compare these technologies in the same terms, it starts to provide a very clear picture of the results that can be achieved by investing in proven renewable energy thermal technologies. These technologies include solar thermal systems, geothermal/ground source heat pumps, air source heat pumps, and biomass.

For the purpose of this article, I'm going to compare solar thermal and ground source heat pumps to a standard solar PV project in a baseline home. I'm using these technologies because I'm the most familiar with them. However, further analysis should absolutely include air source heat pumps and biomass technology.

Background: Why look at renewable thermal technologies?

We waste a lot of money on oil for space heating. Yes, oil industry, my goal is to put you out of business. But don't worry, we'll train you to install these new technologies. In addition to building and retrofitting buildings to have tighter shells, there are only three technologies, yes three, that can eliminate on-site fossil fuel use: biomass (pellets and cord wood), air source heat pumps, and ground source heat pumps. Here are a few pieces of data on why a focus on oil usage is so important for New England.

The EIA separates the US into five energy regions.

The Northeast uses the most oil for space heating, which also happens to be an extremely expensive fuel source. Six million homes use oil for heat, and the average home uses 800 gallons of oil per year, which equals roughly 4.8 billion gallons per year.

If we assume that the average residential price is $4 per gallon or slightly higher, home oil-heat spending is roughly $20 billion dollars per year. 

These are huge industry trends, so let's break the data down into something more tangible. U.S. census data reveals the number of single family homes in each specific state, this is the "total homes" column. I then broke down the heating fuel mix for each state, provided by the EIA, and found the number of single family homes in each state that use a high-cost fuel (oil, propane). You can see that the numbers are sizable. I then took the total number of homes and divided it by the number of homes using an expensive fuel source, which you can see on the far right. This means that nine out of 10 homes in Maine are using a very expensive fuel source. In Massachusetts, 54 percent, or five in 10 homes, use these sources.   However, Massachusetts-specific data reveals that some communities use natural gas (that's green). However, there are a large number of communities where 60+ percent of single family homes use an expensive fuel source.

Solar PV is a great investment but doesn't address oil use — how can we address this problem?

The goal of this post is to show how we can use policies and incentives that have already been successfully implemented in the solar PV industry to address fossil fuel use for space heating in New England. I'll provide a basic comparison of how solar pv and renewable thermal technologies compare when looking at fuel savings for property owners, direct job creation, and the cost of the incentive.

With that said, let me be clear: solar PV is a great investment. The purpose of this post is to be a "yes...AND"conversation. Solar PV will do nothing to address direct fossil fuel use. Additionally, the solar PV industry is large enough to be a great comparison tool because many people are familiar with the economics of solar PV. Thus, using solar pv as a baseline will make it easier to communicate the value of other technologies.

I'm also looking to address a question I recieve often: If geothermal heat pumps are so great, why aren't more people using them?

How do we look at renewable energy policies?

When trying to understand renewable thermal technologies and the impact of different policies, a small number of variables seem to be critical for policy makers.

  1. Reduction in utility bills for property owners and reduction in fossil fuel use that is imported
  2. Local job creation
  3. Amount that said incentive costs for the state or utility
  4. Water quality and air quality issues
I could be missing something here, so let me know if I am. 

Let's create a baseline home for comparison purposes.
This is the home we'll be dealing with. If you're not into the technical part of things, please feel free to skim over this, I just want to be extremely clear with my methodology and calculations. If anything is unclear, please let me know; I'll be happy to address any questions.
  • 2,000 square feet
  • 180 degrees
  • 10 pitch roof (40 degrees) — enough space for a 5-kW system.
  • Requires 63MM BTU for heating (read average shell)
  • Existing heating system is oil furnace with AC that must be replaced within two years. Replacing the existing oil furnace and AC unit with the same technology will cost $10,000.
  • Electric rate is $.17kWh inflating at 3 percent per year
  • Oil prices are at $4.00/gallon inflating at 5 percent per year
Let's create a baseline with diferent technologies based on current installed costs, incentives and energy costs for an average home. 
1. Solar PV
  • $5.50 per watt times 5 kW = $27,500
  • For those of you who think this is high. Think again. Read more on residential prices in Massachusetts at The Open PV project and the MA CEC's website. Also, I have no reason to make solar PV seem high, I love the technology am a huge supporter of it. 
  • Produces 1,000 kWh per kW installed = 5,000 kWh or 5 MWh
  • Value of energy is $850
  • Local jobs created: 15 man hours per kW installed --> 75 man hours (does not include sales, support and supply chain jobs, just direct construction jobs)
  • Percent of year installed costs driven by rebates: 44 percent
  • Gross installed costs to value of energy: $32
  • Net installed cost to value of energy: $19
  • 20 Year IRR, not considering equipment lifetime or O+M: 9 percent

2. Solar Thermal

  • $110 per square foot gross installed costs
  • 80 square foot system (2 modules @ 40 square feet per module)
  • Gross installed costs = $8,800
  • Net energy production per year: 4,100 kWh (140 therms)
  • Value of energy production displacing #2 heating oil = $443 (140 therms is approximately 110 gallons of fuel oil)
  • Local Jobs Created: 20 man hours per module (this is based on anecdotalle experience not an industry study, because they don't exist) = 40 man hours.
  • Incentives in Massachusetts: ITC, Personal Tax Credit, MA CEC Cash Rebate
  • Percent of year one installed costs driven by rebates: 62 percent
  • Gross Installed Costs to value of energy: $20
  • Net installed costs to value of energy: $7.50
  • 20 Year IRR: 12 percent

3. Geothermal

  • Oil and AC replacement costs = $10,000
  • Geothermal costs = $9,000 per ton X 4 tons = $36,000
  • 4 ton = 14-kW system
  • Geothermal premium = $26,000
  • Oil heating costs = $3,000
  • Geothermal heat costs = $1,000
  • Geothermal Fuel Savings = $2,000
  • Net geothermal energy production from the ground loop = 13,500 kWh
  • Incentives: 30 percent ITC from $36,000 = $10,800
  • 90 man hours per ton = 360 man hours for the job (25 percent of installed costs is labor: $36,000 X .25 = $9,000, and $1,000 is a week's wage for 40 hours, so nine weeks work * 40 hours = 360 man hours / 4 tons)
  • Percent of year 1 installed costs driven by rebates: 41 percent
  • Gross installed costs / value of energy: $13
  • Net installed costs / value of energy: $7.6
  • 20 Year IRR: 14 percent

For those of you that love tables, I've put the data on a table as well.



There's a lot of information in the above graph, so I made a few simple graphs that display and answer some specific questions.

Installed Cost per Watt

Geothermal costs roughly $2.57 per watt, while solar thermal costs $3.96 and solar PV is around $5.50. Yes, a lot of residential solar pv projects still cost $5.50 per watt. You may be able to reduce this to $4.00 per watt on new construction, but this trend is decreasing.

Energy Production per Installed kW

Solar PV generally produces 1 kWh per year for every 1 kW installed. A geothermal system will produce 13,500 kWh net energy from the ground loop, backing out the electric use for the pumps and compressor. A 4-ton system is 14 kW, so it produces slightly less then 1 kWh of net energy for every 1 kW installed. The solar thermal system is only a 2.22-kW system, but will produce 4,100 kWh of energy in one year.

Gross Invested Cost per Dollar of Energy Output

This metric is simple. Without considering any incentives (using just gross installed costs), how many dollars need to be invested to get $1 in fuel savings? Geothermal and solar thermal are clearly the winner here when displacing fuel oil. If they were displacing propane or electric they would be higher.

Gross Installed Cost to Net Installed Cost: How much do incentives drive returns?

This metric looks at how much incentives decrease installed costs by taking the gross installed costs and dividing them by all available incentives. What we see is that in Massachusetts, solar thermal is the most heavily subsidized technology, followed by solar pv and geothermal.

Net Invested Cost per Dollar of Energy Output:

After incentives are considered, we can look at the net energy investment required to get $1 in energy savings. Solar thermal and geothermal become more equal at $7.60 and solar PV is around $19. This means that to replace oil with a geothermal project in Massachusetts, you need to invest $7 to get $1 in fuel savings in year one.

Total Man Hours Needed per Job

This is looking at the total direct construction jobs to install a project. This is not based on any reports (because they don't exist for solar thermal and geothermal), but anecdotal evidence. A typical 4-ton geothermal system will require 360 direct man hours in construction, and a solar thermal system will take 40 hours, and a solar PV project takes around 75 hours.

Direct Jobs Created per kW Installed

When we look at direct man hours per kW installed, geothermal and solar thermal create the most jobs, followed by solar PV. The reason for this has to do with the type of equipment being used. For geothermal and solar thermal technology, commodity equipment is used and repackaged in a different way. Components for these technologies aren't industry specific, except for the actual solar thermal modules and geothermal heat pump, but these are easy to manufacture and thus there are many manufacturers. For the solar PV industry, all main components are specialized: modules, inverters and racking. Thus, equipment costs tend to make up a larger percentage of the installed costs. However, this is declining as economies of scale are reached on the manufacturing side of the business.

20-Year IRR with Current Incentives and Assumptions

This graph shows what the 20-year IRR of these different projects is with our given assumptions. Yes, the IRR of solar PV is getting much lower as installed costs drop and property owners see it as low risk, but also because Massachusetts SREC prices are declining. Geothermal is around 13 percent and solar thermal is around 12 percent.

20-Year IRR of All Technologies Received SRECs

This graph is answering a question I frequently hear: If geothermal is so amazing how come more people aren't doing it? My answer is simple: If geothermal received the same REC prices as solar PV, no one would be using oil, geothermal would just be cheaper. So, if we assume that geothermal and solar thermal get paid $200/MWh for 10 years based on their output, their IRRs skyrocket to 30 percent.


Lessons earned and what implication does this have for policy in New England?

There are a few lessons we can learn from this analysis.

First, renewable thermal technologies can provide as good or better returns than solar PV technologies for property owners.

Second, renewable thermal technologies need more policy support, but they do not need as much support as solar PV. As you can see, a 30 percent IRR is too high. This is good for policy makers because it means that the cost of deploying renewable thermal technology will be CHEAPER than deploying solar PV. Renewable thermal technologies are cheaper and produce more valuable energy per kW installed, so more of the returns can come from displacing fuel than from a subsidy.

Third, renewable thermal technologies create more construction jobs per kW installed than solar PV.

Fourth, if we're serious about incentives for renewable thermal technologies, we must use production-based incentives. Production-based incentives maintain quality control throughout the entire process: manufacturing, design and installation. A huge lesson learned in the solar PV industry is that incentives based on installed costs have huge flaws (installing solar PV projects in the shade is one example). Those modules on the left in the photo below will still receive a rebate even though they won't produce must power.

Fifth, if any policy makers reading this happen to live in New England, my message to you is simple:  If you're bullish on the solar PV industry and believe that it's a wise investment in terms of job creation, reducing emissions and saving property owners money, you should look into renewable thermal technologies as the next area of rapid growth. If you're looking for the next technology that is going to create a huge number of jobs in your state and save a massive amount of money, you must look at renewable thermal technologies.

If you want to chat, I'd be happy to. Here's my contact information: cwilliams@heatspring.com, 800-393-2044 ex. 33.

Chris Williams is the Chief Marketing Officer for HeatSpring Learning Institute a national renewable energy training company, Chairman of the Government Relations Committee for NEGPA and an advisor to Ground Energy Support, a provider of real time geothermal heat pump monitoring technology.

This article was first published on Renewable Energy World and is reprinted with permission.

November 15, 2012

Why Alternative Energy Stocks Are Down Despite An Obama Victory

By Harris Roen

If you follow the energy sector closely, then you know that many questions regarding the direction of alternative energy companies were looming during the 2012 campaign season. Was the country going to continue with the Obama Administration’s “all-of-the-above” strategy with its strong emphasis on renewables, or would there be an accelerated domestic drilling and pipeline bonanza under Republican leadership. When the election finally ended last week, many pundits expected investors to pour money into the beleaguered alternative energy sector resulting in a surge of stock prices. So why, instead, did alternative energy stocks head down?

What Happened?

First, let us look in detail at what happened in the last week of trading. Of the approximately 250 alternative energy companies that the Roen Financial Report tracks, only 21 companies, or less than 9%, were gainers. In other words, losers beat gainers by a 10:1 ratio! On average, alternative energy companies were down 5.8%, with 35 companies showing double-digit losses for the week. Of the 21 gainers, fully half were volatile penny stocks with market caps less than $100 million, so those gains may change very quickly.

Of the six alternative energy industries - wind, solar, smart grid, efficiency, fuel alternatives and environmental companies - wind fared the worst. Only two wind companies posted a gain for the week, Pike Electric Corporation (PIKE) and the highly speculative Quantum Fuel Systems Technologies (QTWW). Otherwise, the average wind company lost 6.0% for the week.


 Why the Decline?

Many people are wondering why alternative energy stocks dropped so dramatically last week. Was it a sell-on-the-news situation? Do investors think alternative energy is doomed as a sector? Was it payback to big oil for all their election contributions? Perhaps some of this was true, but I believe it had more to do with the dog wagging the tail.

Overall, it was a bad week for the entire stock market, with the major averages down in the 4% range. According to Fidelity Investments, all 10 business sectors were down for the week. In fact, energy took the biggest hit of all the sectors, down 5.1%. Of the 68 industries Fidelity lists, only one, Biotechnology, showed a gain.

Most of the loss in stocks came on Wednesday, the day after the election. Apparently, everyone woke up to realize that not much changed concerning the economic crisis de jour – the fiscal cliff. After all the endless political gyrations and hundreds of millions of dollars spent, the country was pretty much back where it started: a democratic white house and a split congress. By Friday some of those losses were recovered, as savvy investors saw the drop as an overreaction, and thus a good buying opportunity.

Why was the energy sector hit in particular? Simply because short term oil price movementa have little to do with supply and demand, but have instead turned into a proxy for the outlook on the economy, and thus the stock market. Since 2009, the correlation between the S&P 500 and oil prices has been ridiculously tight, 1.00 being a perfect correlation. So when people started gazing over the ever-nearing fiscal cliff, the odds of a recession increased, oil futures dropped and energy stocks tanked.


What Lies Ahead?

So where are alternative energy stocks likely to go from here? I remain cautious in the short term, concerned that the broader economic picture will overshadow any sector plays. Between the threat of massive tax hikes and spending cuts in the U.S., and the re-fanning of the dangerous debt embers that are smoldering in Europe, I would not be surprised at all by a market correction in the 15% range or worse. This type of correction would not be surprising, though, considering the S&P 500 reached a high in September that was 33% above its lows at the end of 2011.

I see these market fears as conventional wisdom, however, so the contrarian in me views any major correction as a buying opportunity. As long as the U.S. stays in an ultra-low interest rate environment, as I believe it will for at least the next two years, the long-term trend in the stock market should remain positive.

If Washington continues to move ahead with alternative energy initiatives, and particularly if it takes bold steps such instituting a carbon tax, I believe energy efficiency companies will benefit the most. There is still much low hanging fruit in terms of cost savings and carbon reduction to be gained by reducing current energy usage.

Companies that could benefit include Cree, Inc. (CREE), a well-managed North Carolina based firm that manufactures efficient LED lighting as well as other products. Cree has had growing sales, relatively low debt levels and positive cash flow. A concern is that it has an excessively high PE, but if prices drop from current levels, the stock would become more attractive. Using an average of combined trailing and forward EPS, I see Cree as fairly priced in the $27/share range, and a good value at $25/share.

Because larger economic troubles may continue to put a drag on all sectors, including alternative energy, this looks like a good time for strategic investors to accumulate stocks at the right price.

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

DISCLOSURE: No positions in or plans to purchase any of the stocks mentioned,

DISCLAIMER: Swiftwood Press LLC is a publishing firm located in the State of Vermont. Swiftwood Press LLC is not an Investment Advisory firm. Advice and/or recommendations presented in this newsletter are of a general nature and are not to be construed as individual investment advice. Considerations such as risk tolerance, asset allocation, investment time horizon, and other factors are critical to making informed investment decisions. It is therefore recommended that individuals seek advice from their personal investment advisor before investing.

These published hypothetical results may not reflect the impact that material economic and market factors might have had on an advisor’s decision making if the advisor were actually managing client assets. Hypothetical performance does not reflect advisory fees, brokerage or other commissions, and any other expenses that an investor would have paid.

Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, Swiftwood Press LLC does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness, and makes no warranties with respect to results obtained from its use. Data sources include, but are not limited to, Thomson Reuters, National Bureau of Economic Research, FRED® (Federal Reserve Economic Data), Morningstar, American Association of Individual Investors, MSN Money, sentimenTrader, and Yahoo Finance.

No Battery Producer Left Behind

by Debra Fiakas CFA

In late 2009, nine companies in the battery sector were recipients of American Reconstruction and Recovery Act (ARRA) funds awarded by the Department of Energy to jump start manufacturing capacity.  By the end of December 2011, six of them had made enough progress to begin production.  Three were lagging behind, including Exide Technologies (XIDE:  Nasdaq) and its partner Axion Power International (AXPW:  OTC/BB).  
Exide's Sundancer Electric Car, October 1973. Exide and Axion are not looking so quick today.  Photo by Frank Lodge, EPA. Public Domain

Conventional battery producer and recycler, Exide was awarded $34.3 million by the DOE to advance the production of advanced lead-acid batteries at Exide’s facilities in Bristol, Tennessee and Columbus, Georgia.  The batteries would use lead-carbon electrodes for micro-hybrid applications such as so-called Start-Stop batteries.  By the end of 2011, when the General Accounting Administration last checked in on all the projects funded by Recovery Act funds, Exide had been able to install and commission all the equipment intended for the facility in Columbus.  This is where Exide was to produce its Absorbed Glass Mat (AGM) flat plate batteries.  Exide’s Columbus facility had been a lead recycling plant that was taken out of service in 1999.  It is now part of a larger operation including lead-acid battery manufacturing lines.  The Company has confirmed completion of the new AGM production capacity at Columbus and started shipping out its AGM flat plate batteries in the March 2012 quarter.

When the GAO completed their report, the Bristol facility equipment had been installed and commissioned for production of Exide’s lead-acid batteries, but the company was still validating equipment to be used in production of its Absorbed Glass Mat (AGM) ‘spiral wound’ batteries.  We note Exide is transferring its standard flooded battery production lines to facilities it operates in Salina, Kansas and Manchester, Iowa.  Management refers to these moves as the ‘closure’ of the Bristol facility, but as recently as the Exide’s second fiscal quarter conference call in early November 2012, indicated they are on schedule with installation of a ‘spiral wound’ battery production line at Bristol.  Earlier in 2012, management had expressed confidence in that ‘spiral wound’ AGM batteries will be produced at Bristol yet in 2012 and they have not backed away from that timeline.

Exide is closing certain facilities for the sake of reducing costs.  The company has been historically profitable, although it did report a net loss of $106.5 million on $693.4 million in sales in the June 2012 quarter, after establishing a valuation allowance for future tax allowances of $87.6 million.  Exide has produced positive operating cash flow in each of the last five fiscal years at a rate averaging 3.4% of total sales.  

It is Exide’s partner Axion Power that has real cash flow issues.  The lead-carbon electrodes Exide is using in it AGM batteries is ostensibly based on technology from Axion Power.  The two formed a partnership of sorts in 2009.  Axion has developed advanced ‘five-layer’ electrodes made from micro-porous activated carbon.  Use of Axion’s electrode assembly makes it possible to recharge batteries at a faster rate, a capability particularly for the transportation and industrial batteries Exide produces.

Axion raised $9.5 million through an offering of common stock in February 2012, bringing to $60 million the total amount of equity capital Axion has raised since inception.  At the end June 2012, Axion had $6.3 million in cash on its balance sheet.  I estimate Axion is burning as much as $2.0 million per quarter.  If I am right, Axion will be out of money by the end of the first quarter 2013.  That is, of course, if its fortunes do not improve.

In early August 2012, Axion announced a new distribution agreement with Rosewater Energy, which is targeting the residential energy market.  Axion will provide Rosewater with a battery storage and management system complete with electronics.  Axion has received interest from several corners, including Norfolk Southern for an all-electric, battery powered locomotive.  However, the initial order from Norfolk was $475,000 and there is no visibility on future orders from Norfolk or any other rail operator.  The company has also received a consistent flow of orders to its flooded lead-acid batteries over the past year and recently indicated it expects to continue receiving orders at least through the first quarter 2013.

The DOE appears to have made its grants with the idea of leaving no battery producer behind.  However, investors have to wonder about the ability of Axion to keep up when its order flow is sporadic and one of its most important partners is playing it safe in tough demand conditions.

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. 

November 14, 2012

Solazyme's Parity-Cost, Algae-Based Biodiesel on Sale to Public

Jim Lane

$27 per gallon? $15 per gallon? Fooey! Try algae-based fuels at “the same cost as regular diesel.” Month-long pilot program kicks off in the San Francisco Bay Area.

In California, Propel Fuels and Solazyme (SZYM) are bringing algae-derived fuel to retail pumps for what we believe to be the first time in history. The two leading renewable fuel brands have come together to offer Solazyme’s algae-based SoladieselBD to drivers through Propel’s Bay Area network of retail renewable fuel locations. The month-long pilot program provides the industry’s first opportunity to test consumer response to this advanced renewable fuel.

Solazyme’s algae-based SoladieselBD meets or exceeds ASTM quality specifications and has shown performance enhancements including cold temperature operating performance. The fuel is compatible with existing diesel engines and the fuel’s performance is guaranteed by Propel.


The fuel will be sold at the same price as conventional diesel fuels and will be available exclusively at Propel’s Clean Fuel Points in Redwood City, San Jose (N. First St.), Berkeley, and Oakland.

“Propel is committed to providing our customers with access to the highest quality, most sustainable, domestically produced fuels, so we’re proud to introduce the next generation of fuels to the retail market,” said Matt Horton, CEO of Propel Fuels. “Propel’s growing station network provides the critical link between these future fuels and today’s consumer fuel tanks, giving our customers a chance to make history.”

The Technology

Solazyme’s technology platform converts plant sugars into oils by feeding the sugars to microalgae in standard industrial fermentation equipment. The algae consume the sugars and convert them into oils rapidly and efficiently.

Testing undertaken by the National Renewable Energy Laboratory (NREL) shows that, in a 20% blend, SoladieselBD significantly outperforms ultra-low sulfur diesel in total hydrocarbons (THC), carbon monoxide (CO) and particulate matter tailpipe emissions. This includes an approximate 30% reduction in particulates, a 20% reduction in CO and an approximate 10% reduction in THC.

“Solazyme’s revolutionary algae-based technology platform has supplied our development partners and customers with advanced biofuels that meet or exceed some of the world’s most stringent fuels specifications and requirements, “ said Bob Ames, VP of Fuels, Solazyme. “We’ve successfully demonstrated our land-based fuels in fleet vehicles and corporate busses, and are excited about this pilot program with Propel because it enables us to make these fuels available to the public.”

More on the story.

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.

Neste Oil: a 5-Minute Guide

Jim Lane

Company description:

Neste Oil is a refining and marketing company, with a production focus on premium-quality, lower-emission traffic fuels. The company produces a comprehensive range of major petroleum products and is the world’s leading supplier of renewable diesel. The company has operations in 15 countries. Its growth strategy is focused on producing premium- quality renewable diesel fuel. The company had net sales of EUR 11.9 billion in 2010 and employs around 5,000 people.

 P.O. Box 95

Year founded
Established in 1948

Annual Revenues:
Around EUR 11.9 billion in 2010

Major Investors

Neste Oil’s share is listed on the NASDAQ OMX Helsinki with the symbol NES1V.  It trades as NEF on German Exchanges, and NTOIF on the US Pink Sheets. The company’s biggest shareholder is the Prime Minister’s office.

Neste Oil Rotterdam.png
Image: Neste Oil Rotterdam Facility.  Source: Neste Oil

Type of Technology(ies)

Neste Oil has developed a premium quality NExBTL renewable diesel production technology which allows flexible use of any vegetable or waste oil in the production of premium-quality renewable diesel and aviation fuel. Based on its technical qualities, NExBTL diesel is one of the best diesel fuels in the world. NExBTL is produced by hydrotreating vegetable or waste oils. As a hydrocarbon it corresponds to the chemical composition of traditional diesel.

Neste Oil’s major investment projects are linked to increasing the company’s NExBTL renewable diesel capacity. In 2011, Neste Oil started up the Europe’s largest renewable diesel plant in Rotterdam. The plant has a capacity of 800,000 t/a. Neste Oil already operates a renewable diesel plant in Singapore that came on stream in 2010 and two plants in Porvoo in Finland that came on stream in 2007 and 2009. All Neste Oil’s NExBTL plants are capable of producing both NExBTL renewable diesel and NExBTL renewable aviation fuel.

With the Rotterdam start-up, Neste Oil’s major €1.5 billion investment program aimed at increasing the renewable diesel capacity and the company is very well placed to meet world’s growing energy needs and demand for cleaner, sustainable bio-based fuels.


Neste Oil’s NExBTL renewable diesel production technology allows flexible use of any vegetable or waste oil in the production of premium-quality renewable diesel without compromising on quality.

At the moment, Neste Oil produces NExBTL renewable diesel from a mix of palm oil, stearin and palm oil fatty acid distillate (PFAD) which are by- products of palm oil production, rapeseed oil, jatropha oil, camelina oil, soybean oil as well as waste animal fat produced by the food processing industry.

Widening the raw material base is one of the company’s main future goals. About 80% of the company’s R&D costs totaling approximately 40 million euros annually are directed to researching renewable raw materials. Progress continues to be made and in 2011 Neste Oil expanded the raw material feedstock with jatropha oil, camelina oil and soybean oil. In addition, research has shown that algae oil and microbial oil, together with wax derived from wood-based biomass, can all be used as feedstocks for producing NExBTL renewable diesel.

Notable successes in this area include:
patented a waste-based microbial oil technology
progressed with research on algae oil and produced an initial trial batch
achieved good results at our pilot plant in producing biowax from wood- based biomass and started environmental impact assessments for a possible commercial plant
partnered with the world’s leading research institutes, companies and
universities to find ways to produce renewable raw materials on industrial scale


NExBTL renewable Diesel

Based on Neste Oil’s proprietary technology, premium-quality NExBTL renewable diesel is the most advanced diesel fuel on the market today. It easily outperforms both conventional biodiesel and fossil diesel, and can be produced from a flexible mix of vegetable oils and waste animal fat sourced from the food industry. Neste Oil’s procurement chain ensures that all the raw materials it uses for NExBTL are produced responsibly. NExBTL renewable diesel has been shown to reduce greenhouse gas emissions by over 40% over the product’s entire life cycle when compared to fossil diesel. Its lower tailpipe emissions also make a valuable contribution to enhancing overall air quality.

NExBTL renewable aviation fuel
Neste Oil is a global pioneer in aviation biofuels. The company’s NExBTL renewable aviation fuel meets the very stringent quality standards demanded of aircraft fuel and can be produced in industrial quantities. Production of Neste Oil’s renewable aviation fuel is based on the company’s NExBTL technology.

NExBTL renewable aviation fuel can significantly reduce an aircraft’s greenhouse gas emissions compared to fossil fuel. In addition to a smaller carbon footprint, it also offers lower emissions of other pollutants such as NOx. Neste Oil’s NExBTL renewable aviation fuel is a pure hydrocarbon comparable to fossil-based aviation fuel. NExBTL renewable aviation fuel is fully compatible with all current aircraft engines and no aircraft-related investments or modifications are needed before it can be used.

Past Milestones
1. Compared to fossil diesel, NExBTL reduces greenhouse gas emissions by over 40% over its entire lifecycle. NExBTL is currently being sold to consumers in Finland and to other oil companies in Europe and North America to be used as a premium quality biocomponent. It can be used in blends in any concentration, i.e. 0–100% of the content. The company started up three plants in Finland, Singapore and Rotterdam and increased its total production capacity to 2.0 million t/a.

2. Lufthansa started commercial flights powered by Neste Oil’s NExBTL renewable aviation fuel in summer 2011. This was the first time that renewable fuel is used in regular commercial airline service. Neste Oil is currently one of the only companies in the world capable of producing renewable aviation fuel at commercial scale.

3. Neste Oil is committed to using sustainably produced bio-based raw materials. The company has developed its own sustainability verification system which exceeds the industry standards for renewable raw material procurement and meets the requirements of legislation. The commitment to expanding the raw materials portfoliio has meant Neste Oil has successfully widened its raw material base to produce NExBTL renewable diesel. About 80% of the company’s R&D costs totaling approximately 40 million euros annually are directed to researching renewable raw materials.

New raw materials, such as jatropha, camelina and soybean oils have been introduced. In addition, research has shown that algae oil and microbial oil, together with wax derived from wood-based biomass, can all be used as feedstocks for producing NExBTL renewable diesel. Neste Oil’s work on sustainability has received recognition in numerous international comparisons for many years in succession (e.g. Dow Jones Sustainability Index, Global 100 list, Forest footprint disclosure).

Future Milestones
1. Generate profitable growth in the renewable fuels market by developing global customer base and supply chain, expanding the feedstock base, ensuring smooth operation of the new production plants and taking part in developing and planning new legislation.
2. Continue researching and introducing new raw materials. When selecting its inputs, Neste Oil prioritises suppliers that follow sustainable cultivation and production practices and have a good greenhouse gas balance. The final deployment decision is also affected by raw material availability and consistency of supply, as well as price.
3. Develop new applications, such as NExBTL renewable aviation fuel, that help customers to reduce greenhouse gas emissions and dependence on fossil fuels.

Business Model:

Neste Oil is a refining and marketing company, that produces renewable fuels based on its proprietary NExBTL technology. The company owns and operates four production plants producing NExBTL renewable diesel. The output of the plants is sold to other oil companies in European and Northern American markets to be used as a premium quality bio- component.

Competitive Edge(s):
Neste Oil’s strategy is founded on its unique ability to refine premium- quality fuels from a wide range of different, cost-effective feedstocks. Specialisation and in-depth expertise are central to enabling Neste Oil to
succeed in the international marketplace, despite its small relative size.

Neste Oil’s strengths in renewable fuels business include: cutting-edge NExBTL technology and product, growing production capacity, and industry-leading operations based on sustainable raw material procurement. Additionally, Neste Oil’s expertise in research and technology is one of the company’s key success factors.

Research, or Manufacturing Partnerships or Alliances.

NExBTL renewable diesel, for example, is the outcome of an intensive R&D effort.
Neste Oil has invested around EUR 40 million annually in R&D in recent years, of which around 80% has gone on research into renewable raw materials and technology for refining these inputs.
Neste Oil is involved in research in both completely new raw materials such as microbes, algae, and wood-based biomass, and existing alternatives such as used cooking oil and waste fat from the fish processing industry.

Neste Oil cooperates closely with some of the world’s leading research institutes and companies.

Neste Oil and Stora Enso are collaborating on research into utilizing wood biomass. The partners will decide whether to go ahead with basic engineering on a 200,000 t/a plant when the question of public subsidy for the project is solved.

Neste Oil, Boreal Plant Breeding, and Raisio are developing high- yielding rapeseed varieties that could be used as a raw material for renewable diesel.

Neste Oil has researched waste-based microbial oil in cooperation with the Aalto University School of Technology.

Neste Oil takes part in international algae research projects in Australia and the Netherlands to test various methods for growing algae in outdoor conditions.
Neste Oil and the Finnish Environment Institute have launched a joint algae research program testing the lipid production capacity of different types of algae and analyzing how the quality and quantity of these lipids can be optimized by adjusting the conditions under which algae are grown.

Neste Oil cooperates with approximately 25 universities and research institutes worldwide.

Stage (Bench, pilot, demonstration, commercial)

Company website: http://www.nesteoil.com/

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.

November 13, 2012

Beijing EV Campaign Targets Mass Buyers

Doug Young

byd s6.png
The BYD gas-powered S6 SUV debuted in Chile last month. Image Credit BYD.
Struggling electric vehicle (EV) maker BYD (HKEx: 1211; Shenzhen: 002594, OTC:BYDDF) got a major boost last week when Beijing announced an innovative new plan to stimulate an anemic industry whose sales have failed to take off despite generous government support. The plan this time around looks much smarter than previous ones by focusing on big customers.

Unlike previous campaigns that focused mostly on consumers, this new campaign takes aim at Chinese cities and mass buyers like taxi fleet operators, whose driving patterns are more suitable to using such vehicles and which have the money and resources to invest in expensive but necessary EV infrastructure. (BYD announcement) The new campaign also takes square aim at pricing, another major obstacle that has kept many cash-strapped cities from taking a more serious look at the technology.

Beijing believes that new energy vehicles are the wave of the future and has actively encouraged its development by domestic car makers despite slow progress for most of the world’s major automakers. BYD has been the most active Chinese firm in the space, and many believe its strong focus on the area was a major reason why billionaire investor Warren Buffett decided to buy 10 percent of the company in 2008.

But BYD has stumbled badly in the last two years, partly due to sputtering sales for its traditional gas powered cars and also because EV sales in China have failed to take off. Beijing rolled out generous incentives for EV purchasing in 2010, including direct cash subsidies and tax rebates, and was reportedly considering additional incentives earlier this year.

Yet EV and hybrid vehicle sales totaled just over 8,000 last year, accounting for a tiny fraction of overall domestic vehicle sales that reached 18.5 million. The program’s failure lies largely in its targeting of consumer buyers, many of whom worry about technological constraints that limit EV driving ranges and their ability to be recharged.

By comparison, this new program targets government buyers of electric taxis and buses by offering similar generous financing packages from China Development Bank and other Beijing-backed policy lenders. BYD has already found a willing buyer for its electric buses and taxis with the government in its hometown of Shenzhen, and has also launched trial programs in overseas markets including Germany and Britain, proving that governments and other mass buyers are interested in the technology.

This new program aimed at the domestic market should remove one of the major concerns voiced by many cash-strapped local governments, namely the relatively high cost of buying and maintaining electric buses and taxis compared with gas-powered vehicles. Many of these governments have said if costs were lower they would seriously consider buying such vehicles, since doing so would not only reduce pollution but help to support one of Beijing’s focus industries.

If this current program proves successful, Beijing should consider using more incentives to target not only domestic mass buyers, but also global customers for EVs from BYD and other Chinese manufacturers. By doing so, it can let these bulk buyers build out the necessary infrastructure and help to boost consumer confidence to eventually make EVs attractive for the mass market.

Bottom line: Beijing's latest incentive program for EVs looks like a smart move by targeting mass vehicle buyers who are more willing than consumers to try the technology but worry about high costs.

Editor Note: This same campaign should also help lesser-known China EV maker Kandi Technologies (NASD:KNDI), which already sells to mostly governement buyers, and just sold 100 EVs to government-owned Hangzhou New Energy Taxi Company last week.

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 .

Abengoa Bioenergy: a 5-Minute Guide

Jim Lane

Abengoa Bioenergy Logo Location: St. Louis

Year founded:
USA – 1982
EU – 1998
Brazil – 2007

Type of technology(s):
a. Traditional fermentation of cereal grains and sugar cane for the commercial production of bioethanol

b. Traditional transesterification for the production of biodiesel from cereal and vegetable oils.

c. Multiple technology options for the commercial demonstration of cellulosic fuel production.

Fuel Type:
Bioethanol, biodiesel.

Major Investors

Abengoa is a public company, of which Abengoa Bioenergy is a wholly-owned subsidiary.  Abengoa trades in Madrid with the symbol ABG, and as ABGOF on the US Pink Sheets.

Past milestones:

New Facility start-ups
1. Biodiesel (San Roque, Spain)
2. France ethanol plant (55 MMGPY)
3. Indiana and Illinois grass-roots ethanol facilities (88 MMGPY each)
4. Biomass commercial demonstration facility at BCyL, Spain

Commenced construction:
5. Two 70-MW Cogen facilities at both Brazil facilities
6. 110 MMGPY ethanol facility in Rotterdam

Instituted GHG Inventory system to support Sustainability goal.
7. · EU Parliament approved Renewable Energy and Fuel Quality Directives.
8. Direct Blending of ethanol in Spain

Future milestones:

Completion of cellulosic biorefinery scheduled in Hugoton, KS in 2013

Business model:
Owner / Operator

Fuel cost:
Depends on feedstock cost and energy cost.

Competitive edge(s):
Distribution (own marketing company), economies of scale provides
low-cost, quality (only Fuel Ethanol company that is registered to
ISO-9001), locations (three continents), R&D investments.

Distribution, research, marketing or production partnerships or

Industrial Partners

• NatureWorks
• Novus International
• Monsanto
• Genencor
• Dyadic International (DYAI)


• Auburn University
• Kansas State University
• University of Concepción
• University of Buenos Aires
• Lund University
• University of Sevilla
• University of Nebraska

Research Centers

• Asociación de Investigación y Cooperación Industrial de Andalucía -
• Centro de Investigaciones Energeticas, Medioambientales y
Tecnologicas – CIEMAT
• National Renewable Energy Laboratory – NREL
• Pacific Northwest National Laboratory – PNL
• Argonne National Laboratory – ANL
• Instituto Catalysis y Petroquimicos – ICP
• Instituto Tecnologico de Aragon – ITA
• Centro de Investigacion y Desarrollo en Automocion – CIDAUT
• Washington University – St. Louis

Commercial, pilot and demonstration.

Company website: http://www.abengoabioenergy.com/

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.

November 12, 2012

Tax Payer Investment in Advanced Batteries

by Debra Fiakas CFA

For better or worse various government agencies in the United States have provided significant financial support for advanced battery development and production.  The federal government has a goal of deploying one million plug-in hybrid electric vehicles by the year 2015.  The replacement of gas-burning cars and trucks is expected to reduce economic dependence upon foreign oil and reduce carbon emissions that threaten our health and climate.  We all understand this line of reasoning.

Public funds for battery development have been channeled through a mix of contracts for products and services, research grants, loan guarantees and indirectly through tax credits.  Indeed several of the companies mentioned in my last few posts on advanced battery developers have supplemented shareholders’ capital with proceeds from government contracts, grants and loans  -  A123 Systems (AONE:  OTC/BB), Valence Technologies (VLNCQ:  OTC/PK), Johnson Controls (JCI:  NYSE).

A special report published in August 2012 by the U.S. General Accounting Office found six public agencies involved in advanced battery development in thirty-nine different programs.  In the fiscal years 2009 through 2012, these agencies invested just over $1.3 billion dollars in the battery sector.  A significant portion of public support appears to have been focused on lithium-ion technologies for electric vehicles.   There were also awards for stationary power storage, air space and under-water vehicles.  Government agencies have also supported a range of storage ideas, including flywheels and capacitors.

Public Agency # Programs Awards
Department of Energy (DOE) 11 $853.0 Mln
Department of Defense (DOD) 14 $430.3 Mln
National Aeronautics and Space Administration (NASA) 8 $20.8 Mln
National Science Foundation (NSF) 4 $8.6 Mln
Environmental Protection Agency (EPA) 1 $3.3 Mln
National Institute of Standards and Technology (NIST)
1 $1.4 Mln

Source: Fiscal Year 2011 Annual Progress Report for Energy Storage R&D, January 2012, GAO

Additionally, beginning in 2009 the DOE invested $1.5 billion in twenty projects for advanced battery manufacturing and battery recycling.  These funds were made available through the 2009 American Recovery and Reinvestment Act (ARRA).  The $2.8 billion provided by the 39 agencies and the ARRA represented approximately 0.03% of federal spending in the last three fiscal years.  To put that in perspective that would be equal to $15.42 out of the pocket of an individual making the U.S. median income of $51,413 (beginning of 2012).

As a middle-income taxpayer, as an investor what would you expect for $15.42?

As usual the GAO has been looking out for tax payers to determine if their money is being invested wisely.  In preparing its last annual report on funding for advanced battery development, the GAO paid particular attention to whether disbursements by the six agencies and thirty-nine programs were duplicative.  The GAO found plenty of overlap in terms of technology areas and applications.  However, each project appeared to have fulfilled agency-specific requirements, bringing to an end any concerns for duplication and waste.  Like investments in space travel, computer networking and geo-positioning, much of the resulting technology is expected to eventually end up in the private sector.

Taxpayers want to know more than just whether government agencies duplicate each other’s efforts.  They also want to know if the monies actually accomplished policy objectives.  This takes us to yet another GAO report about the twenty programs funded by the 2009 ARRA called the Fiscal Year 2011 Annual Progress Report for Energy Storage R&D published in January 2012.

It turns out all projects were initiated for battery and materials manufacturing facilities funded by the ARRA.  As hoped for, production was launched at several facilities by the end of 2011.

  •     General Motors (GM:  NYSE) pack assembly facilities in Brownstown, MI
  •     A123 Systems (AONE:  OTC/PK) systems cell and pack assembly in Livonia, MI
  •     Johnson Controls (JCI:  NYSE) cell and pack assembly in Holland, MI
  •     Saft Group (SGPEF:  OTC/PK) cell and pack assembly in Jacksonville, FL
  •     EnerDel (private) cell and pack assembly in Indianapolis, IN
  •     East Penn Manufacturing (private) advanced lead-acid battery plant in Lyon Station, PA
  •     Celgard separator material production at Charlotte, NC
  •     Toda America (cathode production plant in Battle Creek, MI
  •     Pyrotek anode production plant in Sanborn, NY

There were also some technology and performance achievements among the development programs receiving public funding.

  •     K2 Energy Solutions reached energy density targets with 45-Ah energy cells based on LiFePO4.
  •     LG/CPI demonstrated prototype lithium-ion cells using advanced magnesium-rich composite cathode materials, resulting in increased cell density over LG Chem’s previous baseline.
  •     Johnson Controls (JCI:NYSE) developed a new plug-in hybrid electric vehicle prismatic cell system that offers twice the all-electric vehicle range.
  •     Quallion achieved 30% higher specific power with a hybrid battery with separate high power and high energy modules.
  •     SK Innovation achieved exceptional cycle life with a production-ready 25-Ah high-energy electric vehicle cells.
  •     Maxwell Technologies (MXWL:  Nasdaq) developed an asymmetric capacitor with greatly increased energy density with proprietary dry process electrodes.

There is a much longer list of technology achievements in the GAO report, which in sum provides a bit of solace for two constituencies.  Taxpayers can rest assured their hard earned tax dollars have nudged our country a bit closer to an economically independent nation with a healthier, cleaner environment.  Perhaps these accomplishments are not enough, but ‘something’ has been accomplished and ‘something’ represents a positive return on invested tax payer dollars.

Investors are the other constituency that should be ‘all over’ the GAO report.  It provides insight into key sources of demand for advanced batteries.  More importantly the report sheds some light on a few companies with technologies that are heads above products on the market today.    
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. 

November 11, 2012

Gusher! KiOR starts production of US cellulosic biofuels at scale

Jim Lane
Lucas Gusher
The Lucas gusher at Spindletop Hill, South of Beaumont, TX. Jan 1, 1901.

  500 ton per day wood biomass to biocrude plant commences oil production – the long wait for cellulosic biofuels at scale is over.

“With a roar like a hundred express trains racing across the countryside, the well blew out, spewing oil in all directions.”

Well, the startup of biocrude production at KiOR, Inc.’s (KIOR)Columbus plant arrived with less drama than the above-described gusher at Spindletop in 1901. And James Dean was nowhere to be found, in a rain of oil that spread across the flickering screen in Giant.

But the news from Columbus, Mississippi, that cellulosic biocrude production has started up, on schedule, on budget, and at scale — it’s a shocker for the skeptics, not to mention any short-sellers for KiOR.

Cellulosic biofuels, at scale, at parity, — “five years away” for so long that the phrase was assigned to a dustbin also containing President Hoover’s 1932 statement that “prosperity is just around the corner” — has arrived in the United States, via a new generation of catalytic technologies developed by KiOR.

At its Columbus-based 500 ton per day plant, KiOR is processing renewable oil that is on-spec for hydrotreating into gasoline and diesel. With scale-up, total cost per gallon drops to $5.95 by 2013, $3.73 per gallon in 2014, and the magic sub-$3.00 figure in 2015 when it is expected to reach $2.62 per gallon at full-scale.

Reaction from KiORlogo[2].png

“I am pleased to announce that we have commenced operations at the Columbus facility and have produced a high quality oil that is in line with our specifications for upgrading into cellulosic gasoline and diesel,” said Fred Cannon, KiOR’s President and Chief Executive Officer. “More importantly, we believe the high quality of the oil from the Columbus facility validates KiOR’s proprietary biomass fluid catalytic cracking, or BFCC, technology at commercial scale. The facility’s performance to date not only meets our expectations based on our experience at our pilot and demonstration scale facilities, but also gives me confidence that we remain on track to upgrade our oil in order to ship America’s first truly sustainable cellulosic gasoline and diesel for American vehicles.”

“Furthermore, our research and development efforts continue to make progress increasing our yields and reducing our capital intensity. Our work continues on our next generation catalyst platform, which we believe can produce a yield of 72 gallons per bone dry ton of biomass when implemented at our full scale commercial facility in Natchez. Moreover, we believe that this catalyst platform will reduce the amount of coke made in our process by up to 25 percent, which would enhance the capital efficiency of our commercial facilities by giving us the ability to process up to 25 percent more feedstock without significant additional capital,” Cannon concluded.

Analysts react

Rob Stone at Cowen & Company writes: “Yield from the next generation catalyst is expected to be 72 gallons/ton, up from 67 gallons in the prior generation (L-T target is 90+). The related throughput improvement (from reduced coke production) is up to 25%, better than the 20% announced last quarter. This translates into higher production compared to fixed capital and overhead costs. While expected production for Q4 was not in the press release, we believe the fact that oil production has started, along with new catalyst data, greatly reduces the risk profile. We see 50% upside vs. the market in 12 months.”

”The loss per share was 26c vs. St. 25c on higher operating expenses. We don’t believe this is material for the stock,” Stone added.

Over at Raymond James, energy analyst Pavel Molchanov wrote, “Production at Columbus – the first such milestone for any commercial-scale cellulosic biofuel production plant in the U.S. – is a big step not just for KiOR but the entire Gen2 biofuel space. As a cellulosic pure-play, KiOR is well positioned to address the “food vs. fuel” concerns and price volatility surrounding sugarcane and corn. We also like the versatility of KiOR’s biocrude – the ultimate “drop-in” biofuel. Balancing our positive view on the technology platform with scale-up and project financing risks, we reiterate our Outperform rating.

Slowdown rumors addressed

The news from KiOR sharply contrasts with a report from local Mississippi media that the plant was behind schedule – rumors that “clobbered the stock last month,” according to Raymond James’ Molchanov, who added that “Upgrading into cellulosic gasoline and diesel is set to begin in the next week, allowing for first commercial product shipments later in the month. Of note, KiOR recently sold a small amount of fuel from its demo plant near Houston.”

Next steps: new catalyst

In August, management said that they had a new catalyst in development that would lift yields by 20 percent without additional capital requirements on the front end – which would also reduce the yield in the coke by-product — but in fact, KiOR indicated yesterday that the new catalyst had boosted production rates by 25% in terms of feedstock utilization, and pushed biomass capacities at the upcoming Natchez facility to 1875 tons of biomass per day, up from 1500.

Capital raise coming

Molchanov writes, “The cash balance is $74 million, down $33 million during 3Q. With Columbus operating and technology risk therefore reduced, KiOR is in a much better position to access the capital markets. Further operational milestones should provide further validation and derisk the story. We anticipate an equity raise in 1Q13, consistent with management’s previously stated plans.”

Third quarter highlights

KiOR also yesterday announced its financial results for the third quarter ended September 30, 2012. Third quarter 2012 net loss was $27.0 million, or $0.26 per share, compared to a net loss of $23.0 million, or $0.22 per share, for the second quarter of 2012. Net loss for the third quarter of 2011 totaled $14.8 million, or $0.15 per share. KiOR did not recognize revenue during the third quarter of 2012; its activities remained focused on commissioning and start-up of its first commercial facility in Columbus, research and development (R&D) designed to improve production yields, and obtaining necessary financing for its expansion plans.

The bottom line

The question is often heard in the cellulosic biofuels space – where are the gallons? The answer, for now – take Interstate 55 south to Winona, then US Highway 82 east, towards Columbus. A town known in recent years primarily as the home of Columbus Air Force Base and its well-known flight training school – is proving home to the training-up of something as vital to national security, in its own way, as Air Force pilots – namely, the energy security that flows from home-grown biocrude.

More on the story

We looked at KiOR in depth in August in “No Eeyores for KiOR.”

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.

KiOR: a 5-Minute Guide

Jim Lane

logo[2].pngKiOR, Inc. is a next-generation renewable fuels company that has developed a proprietary technology platform to convert sustainable non-food biomass into cellulosic gasoline, diesel and fuel oil. Using standard refinery equipment, KiOR’s products are compatible with the existing fuel infrastructure. KiOR strives to ease dependence on foreign oil, reduce lifecycle greenhouse gas emissions and create high-quality jobs and economic benefit across rural communities.


13001 Bay Park Road, Pasadena, TX 77507

Year founded: 2007

Stock: Nasdaq: KIOR.

As of 8/31/12 Khosla Ventures, Artis Capital, Alberta Investment Management Corporation and other major direct and institutional holders were major investors in KiOR.

3 Top Milestones for 2009 – 2012:

1.       Development and commercialization of the Company’s proprietary biomass-to-cellulosic fuels technology.

2.        Acquire funding for the Company’s capital and operating requirements through the public and private capital markets.

3.        Development, construction, commissioning and operation of the Columbus, Mississippi facility, KiOR’s first commercial scale cellulosic fuel production facility.

3 Major Milestone Goals for 2013 – 2015

1.        Full ramp up of Columbus facility

2.       Development and construction of KiOR’s first commercial cluster of production facilities, consisting of four standard conversion facilities (three times larger than the Columbus facilities) and two upgrading facilities for production of cellulosic gasoline and diesel

3.        Continued research and development on KiOR’s proprietary biomass-to-cellulosic fuels technology platform to reach targeted yield and throughput goals

Business Model:

Owner-operator and “value share” joint venture participant

Competitive Edge(s):

1. Breakthrough technology based on well-established refining processes.

2. World’s first “drop in” cellulosic hydrocarbon gasoline and diesel (as opposed to ethanol or biodiesel) producible at commercial scale.

3. Cellulosic fuel that can be cost-competitive with traditional fossil fuels but with 80% reduction in lifecycle greenhouse gas emissions than fossil fuels.

4. Feedstock flexibility on all types of sustainable, non-food biomass.

5. Enhances energy independence and increases energy security.

6. Significant economic benefits for rural communities.

Research, or Manufacturing Partnerships or Alliances. 


Stage: Commercial

Company website: http://www.kior.com/

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.

November 10, 2012

Report: Solar and Geothermal Projects Have Over 10% Returns, But Finance Remains Difficult

Ryan Hubbell

Despite healthy expected returns, finance-related challenges remain the largest barriers to renewable energy development, according to NREL's Renewable Energy Finance Tracking Initiative (REFTI).

Two recently released reports on solar and geothermal technologies show greater than 10% expected returns for both developers and tax equity investors. Yet roughly half of both geothermal and solar respondents (350 in total) reported financial issues (project economics, PPAs, creditworthiness, and raising capital) as the largest barriers to development. In light of this, only 11%-13% of respondents reported abandoning their projects.

project expected returns by

Figure 1. Expected returns on developer equity for all solar technologies and project sizes Q4 2009 – 2H 2011


Installed Costs
($/W net output)

LCOE ($/kWh)




Solar CSP



Small-Scale PV
(< 1 MW)



Large-Scale PV
(≥ 1 MW)



shows aggregate PPA term (years), PPA escalation rate and
first-year PPA price for geothermal, solar CSP,
large-scale PV and wind, Q4 2009 &ndash; 2H 2011

Figure 2. Average PPA term, escalation rate, and first-year price (measured in ¢/kWh and size of bubble) by technology, Q4 2009–2H 2011

Graph shows construction insurance, interest
during construction, debt set-up, engineering and legal
fees as a percent of total project costs for wind, small-
and large-scale PV, geothermal and biomass-electric, 2H

Figure 3. Project soft costs as a percent of total project costs by type and technology

Source: 2H 2011 REFTI data

Geothermal projects reported the highest returns among all technologies (Figure 1) with both developer and tax equity returns estimated to exceed 15% [1]. Returns were rather comparable between small- and large-scale solar, with concentrated solar power (CSP) reporting the lowest expected tax equity returns. Although some research suggests tax equity investors' returns can be much higher than developers', the rather tight spreads reported by REFTI participants indicate this may not necessarily be the case. Higher developer participation could also be influencing expected returns.

On the cost side, CSP reported lower estimated installed costs and LCOE than PV (Table 1), which could be due to a number of factors, including the timing of panel purchases, estimated nature of total CSP project costs, and storage capabilities. Prior to the second half of 2011, installed PV costs were declining faster than module prices [2], indicating balance-of-system costs were declining as well. This trend reversed in 2H 2011, however. Small PV, for example, reported a 60% increase from the prior period ($0.039 to $0.063/W). Conversely, LCOE reportedly dropped for both PV categories, but large PV is trending down and small PV is trending up over the entire timeframe. Geothermal reported the lowest LCOE, averaging $0.067/kWh from late 2009 through 2011.

In line with LCOE cost data, first-year power purchase agreement (PPA) prices for large-scale PV were also highest among the four utility-scale project sizes and technologies shown in Figure 2 (small PV excluded due to retail/wholesale price differences). Geothermal reported the longest PPA terms and second-highest year one PPA price at $0.098/kW. This is likely due, in large part, to its high capacity factor and dispatchability compared to wind and solar.

Additional insight into balance-of-system (or "soft") costs was gained from the most recent REFTI questionnaire, which asked participants to report various soft costs based on their percentage of total project costs. As illustrated in Figure 3, geothermal reported the largest total percentage of soft costs at 15%. Both PV scales reported lower soft costs with wind recording the lowest—at 4.5%. Combined, engineering and interest costs during construction accounted for the largest portion, ranging between 45% and 67%.

See these links for the reports:

Renewable Energy Finance Tracking Initiative (REFTI) Solar Trend Analysis

Renewable Energy Finance Tracking Initiative (REFTI): Snapshot of Recent Geothermal Financing Terms, Fourth Quarter 2009 – Second Half 2011

This article was first published on NREL's Renewable Energy Project Finance blog, and is reprinted with permission.


[1] Until 2H 2011, "N/A" was not an answer choice, creating a response that could slightly alter the weighted average calculations. For example, if respondents answered 0 – 6% when in fact there was no tax equity being utilized, a 3% value would be used in calculating the weighted average. Effects should be minimal, as approximately only 13% of PV respondents reported 0%-6% over the REFTI timeframe and it's likely only a fraction of those actually had no tax equity.

[2] Module prices as reported by SEIA / GTM's U.S. Solar Market Insights Reports, 2010 – 2011

November 09, 2012

Running from the bear: Making Biofuels From Municipal Solid Waste

By Ed Hamrick

Municipal solid waste in Berlin. Photo by S. Müller via Wikimedia Commons
Remember the one about the two guys in the woods who are seen by a hungry bear?

They start running from the bear, and one guy says to the other guy “Why are we running? Everyone knows you can’t outrun a bear”. The other guy says “I don’t need to outrun the bear, I only need to outrun you”.

Any company can find a market for their ethanol if they can make ethanol much cheaper than the corn ethanol companies in the US or much cheaper than the sugar cane companies in Brazil. If a company carefully counts pennies, carefully uses energy, carefully uses water and finds a cooperation model with incumbents in the MSW market, then it can be quite profitable.

The global MSW market

There are more than two billion tons of MSW produced worldwide every year, with more than 250 million tons per year produced in the USA every year. Disposal of MSW is a thousand year old industry and there’s an efficient and well-established system for collecting it, transporting it and disposing of it. There’s a steady supply of MSW year-round. People pay money for disposing of their MSW. On the surface it looks easy – get a municipality to pay you to take the MSW, make ethanol from it, and pay someone to put what’s left over into their waste dump. It’s not that simple.

The most valuable fraction of MSW is waste paper, comprising up to 40% of MSW in developed countries but only 5% in developing countries. But new Kraft paper pulp costs $800 per ton. Another significant fraction of MSW is food waste, comprising up 20% of the MSW in developed countries and up to 60% in developing countries.

Note that Kraft paper and food waste that haven’t been pulped aren’t good biofuels feedstocks. The wood fibers in paper form a strong mesh of 5 to 50 layers, covered in coatings. Together, this prevents enzymes from accessing the cellulose. Unpulped food waste isn’t a good feedstock either – that’s why we first boil food and then chew it – to form a pulp that enzymes in the body can convert to sugars.

It isn’t difficult to get paper pulp and food pulp from MSW – but it’s very difficult to do this cost-effectively for two reasons: the microorganisms in MSW and the physics of water.

Food waste is ideal for microorganisms – they thrive on the sugar and starch in food waste, and the longer the waste sits in garbage cans or in bags on the curb, the more these microorganisms grow (exponentially). Decomposing food waste stinks and is full of dangerous pathogens, so people want it to be disposed of far from where they live. Where population densities are low, it’s easy to find a ravine to dump it into – this is how MSW has been disposed of for millenia.

Where population densities are high, it needs to be transported to where people don’t live. Even the world’s largest country, Russia, has a severe MSW problem in its large cities because it’s expensive to transport MSW far away to where there’s empty land and because existing waste dumps near the large cities are filling up. Russia has immense expanses of empty land suitable for landfills, but it’s very expensive to transport millions of tons of MSW to this empty land. Garbage trucks don’t get good gas mileage, and it’s expensive to transport MSW long distances.

Why not incinerate MSW?

Municipal solid waste during combustion in a moving grate incinerator. Public domain photo by Ole Poulsen via
Wikimedia Commons
The first thing that comes to mind for solving this problem is “Ok, let’s just burn it and then truck the ashes out of town”. There’s one big problem – food waste is wet and is 80% water. The physics of water are unyielding – it’s very expensive to cause water to go from liquid water to water vapor. It costs about $5 per ton of water to heat water to boiling, and another $15 per ton of water to make water go from a liquid to water vapor, so it’s expensive to burn something that’s wet. The paper and plastics in MSW burn nicely, but the wet food waste uses up a lot of the energy you get from burning mixed MSW.

No sane person would buy MSW to make money from burning it – but it is a way to get rid of the MSW, albeit inefficiently. The other problem with burning MSW is that it gives off toxins, and these toxins are costly to scrub. Plastics burn efficiently, but there’s a small fraction of PVC (polyvinyl chloride) which is toxic when burned. MSW also contains batteries, and these give off heavy metals when burned. To solve this, people want incinerators to be located far, far away from where their children play, but then there’s again the problem of the cost of transporting the waste.

So the technical challenge of making biofuels from MSW is to make biofuels in populated areas without creating an environmental nuisance. Germany is a densely populated country and uses either incineration with stringent environmental scrubbing or anaerobic digestion with odor removal equipment and subsequent disposal of the digestate.

Why not make power?

Toronto, Canada has people put their food waste and other organics in blue bags which get picked up every two weeks, get pulped using BTA pulpers, and processed with anaerobic digestion. However, neither incineration nor anaerobic digestion are a way to make a profit – they both run at a loss. Incineration gets rid of MSW, but the money from selling the electricity it produces is less than the cost of doing the incineration and scrubbing the gasses. Toronto pays millions of dollars every year to dispose of their organic wastes with anaerobic digestion. Anaerobic digestion produces 50% methane and 50% carbon dioxide, but it’s expensive to convert this to pure methane. Even if the methane is purified, nobody will pay enough for the methane to pay for cleaning it.

Burning the methane/CO2 mixture can produce electricity, but Canada won’t pay subsidies for this electricity and it’s more expensive to produce this electricity than to make electricity from natural gas.

What about anaerobic digesters?

The next thing that comes to mind is “Ok, let’s incinerate the MSW or use anaerobic digestion, and find a municipality that will pay us enough to make a net profit.”. This is what fueled the solar industry – governments promised subsidies, people bought expensive solar panels, and then then governments stopped the subsidies. Italians, Spaniards, and others have found themselves saddled with years of payments for their solar panels without getting the subsidies promised them. No rational company depends on subsidies for their future profits, since these subsidies can (and do) go away.

So, what’s the solution?

So what’s the solution to profitably making biofuels from MSW? A solution needs to be located in neighborhoods where the existing transfer stations are located. This minimizes transportation costs and re-uses existing waste collection infrastructure. When the wind blows, the smell can’t annoy the neighbors. It has to be profitable without subsidies, since subsidies can (and do) go away. It can’t emit any toxins into the environment – it has to be something that people won’t object to when it’s located near where their children play. It can’t dump dirty water into the sewers – this is expensive.

The physics of water are at the root of a solution – using hot (but not boiling) water to simultaneously kill microorganisms, pulp food waste and pulp waste paper. Microorganisms die when heated in water at 70 C (158 F) for 30 minutes. When the microorganisms die, the waste stops giving off odors. However, heating MSW above 70 C gives off a strong stench (hence the saying “a steaming pile of garbage”). Boiling water is expensive, so a solution needs to heat the MSW to between 70 C and 95 C while concentrating the odors so they can be put through an odor removal system. Food waste softens at 85 C and above (the pectin is loosened) – drop an uncooked potato on the ground and a cooked potato on the ground to see how the former bounces and the latter pulps. Paper forms a pulp when subjected to shear forces, and this is most efficient above 60 C (140 F).

Pulper. Public domain photo by Patxi Aguado via
Wikimedia Commons
The most cost-effective way to pulp waste paper is using a drum pulper, similar to the Metso OptiSlush or the Andritz (ADRZF) Fibreflow drum pulpers. A drum pulper is a large rotating drum, usually at least 2.4 m (8 feet) in diameter and at least 20 m (65 feet) long. These are used all over the world to take waste paper, add water, and lift and drop the wet waste paper at more than 10 revolutions per minute. This lifting and dropping causes shear forces that separate the wood fibers from the wet paper. Using a drum pulper, it costs about 10 kWh to pulp a ton of waste paper, which costs about $0.80 per ton of waste paper at $0.08 per kWh.

A drum pulper will also pulp food waste using these same shear forces, if the food waste is first heated to 85 C (185 F). A temperature of 85 C will also kill all the microorganisms in MSW. Heating MSW from 25 C (77 F) to 85 C costs about $5 per ton, and rotating the drum pulper for an hour will cost another $2 per ton. Separating the pulped paper and food waste from the inorganic fraction will cost another $1 per ton (using a trommel screen and a dewatering device).

Our solution for separating carbohydrates from MSW is based on this idea. MSW is pulped with process water in a heated drum pulper at high consistency transforming the food waste and waste paper to a pulp. This pulp contains sugar and starch from food waste and paper fibers from waste paper. A screen with additional process water separates clean recyclables from the pulp. A hydropulper removes sand, grit and glass fragments from the pulp. A dewatering device separates paper fibers from the pulp. The remaining pulp is added to the process water. The process water is treated with alpha-amylase enzymes to convert starch to sugar. The overflow of the process water is a sugar and starch solution that reaches an equilibrium concentration. No water is added in this process and commercially available drum pulpers, screens, hydropulpers and dewatering equipment can be used.

This produces three fractions from the MSW. The clean fraction with plastics, metals, glass and other inorganics can be separated using a materials recycling facility (MRF) to get some value from recyclables. The sugar-water fraction and the paper fiber fraction can be used together to produce ethanol or other products using enzymatic hydrolysis. The remainder after enzymatic hydrolysis can be used as a soil improver since there aren’t any heavy metals in the organic fractions.

Our solution removes the odors from the MSW by suctioning the air from the entry to the drum pulper and treating it with commercially available odor removal equipment. Using a drum to concentrate the odors works better than using a positive pressure in the whole building, since buildings aren’t completely airtight.

Our solution doesn’t shred the MSW. Shredding MSW is noisy, the shredders sometimes explode, and shredding MSW puts heavy metals into the waste stream. If you shred MSW, you can’t use the remaining organics after enzymatic hydrolysis for soil improvement or compost because there are strict limits on heavy metals put back into soil. Food waste pulp and waste paper pulp don’t contain heavy metals – tests have shown heavy metals below the limits of detection.

Water treatment is an under-appreciated requirement. Garbage is dirty, and any time you pour water over garbage, it gets very dirty. You can’t just flush this water into the sewer. World Waste Technologies built a factory in Anaheim in 2006 to extract paper fibers from MSW. They went out of business and sold the factory for scrap because they were producing dirty water that would have cost more to clean than the money they’d make from the paper fibers.

Our solution uses process water that’s refreshed by the 80% water in the food waste. No fresh water is used, and no waste water is treated. The water from the food waste is eventually disposed of with the residual organics as soil improvement or compost.

Running from the bear

The economics of biofuels are complicated, with issues like the blend wall (too much ethanol being produced already for blending with gasoline), RINs, etc.

At the Advanced Biofuels Markets conference last week, Philippe Lavielle of Virdia gave a thought-provoking keynote address about the viability of various feedstocks for making biofuels — but he didn’t mention MSW as a viable feedstock.

For sure, if a company does dumb things like using autoclaves (converting water to steam), producing waste water, burning wet MSW, producing a low-value product like methane, or has an otherwise complex solution full of conveyers and sorting equipment, then they won’t outrun the other guy running from the bear.

Ed Hamrick is investor in and a director of Greenworld Fuels, a waste-to-energy technology company – and can be contacted at edhamrick@gmail.com.  This article was first published at Biofuels Digest, and is reprinted with permission.

BP Biofuels: a 5-Minute Guide

Jim Lane

BP alternative energy logo.png Address: 1 St James’s Square, London, SW1Y 4PD. UK.

Year founded

BP Biofuels was set up in 2006.
BP p.l.c. celebrated its centenary in 2009.

Company description:

BP Biofuels is a leading global biofuels player, with a breadth of investment that is unique in terms of both its scale and its reach. Since 2006, BP has announced investments of more than $2 billion in biofuels research, development and operations, and has production facilities operating or in the planning/construction phases in Brazil and Europe.

BP Biofuels has investments throughout the entire biofuels value chain: from sustainable feedstocks, including cellulosic energy grasses, through to advantaged molecules like biobutanol. BP’s close links into other sectors that will be crucial to the development of the biofuel industry, particularly the automotive industry, and its in-depth knowledge of the fuels market and infrastructure, will underpin the biofuels industry’s intentions to grow to be a more material and sustainable part of the global transport fuel market.

In Brazil, the company has have assets (BP-operated and joint venture assets) producing ethanol from sugar cane today. We were the first international oil company to invest in this industry. BP also has a cellulosic biofuels demonstration facility, producing cellulosic ethanol in Louisiana and a purpose-built R&D facility in San Diego, California, where bioscientists are advancing the technology advancing the technology to commercialize cellulosic biofuels.

BP owns a large portfolio of intellectual property rights throughout the cellulosic biofuels value chain, encompassing proprietary conversion technology.

A BP joint venture, Butamax Advanced Biofuels, is developing the advanced biofuel biobutanol and commissioning a technology demonstration facility in the UK. Also in the UK, in partnership with AB Sugar and DuPont, BP is constructing a 110 million gallon per year wheat-to-ethanol facility. In addition, BP has invested $500 million over 10 years in the Energy Bioscience Institute (EBI), at which biotechnologists are investigating applications of biotechnology to energy.

BP is one of the world’s largest energy companies, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemicals products for everyday items. It is the largest oil and gas producer in the US and one of the largest refiners. BP also has a global network of around 22,000 service stations. BP blended and distributed more than 1 billion gallons of ethanol in 2008.

Major Investors

BP is a public company, of which BP Biofuels is a wholly-owned subsidiary.

Type of Technology(ies)
The BP Biofuels strategy focuses on the fermentation of sugars to produce ethanol, biobutanol and biodiesel.

- Sugarcane
- Cellulosic feedstocks, on-purpose energy grasses
- Wheat


- BP is producing ethanol from sugar cane in Brazil at operated assets in Minas Gerais and Goias states and a joint venture in Goias.
- In partnership with DuPont (and via a joint venture Butamax Advanced Biofuels), we are developing the advanced fuel molecule biobutanol, which has a higher energy content that ethanol, can be blended at higher rates into fuel that can be used by vehicles on the road today and may be able to facilitate the adoption of biofuels into the fuel supply chain at a faster rate. The partners are constructing a technology demonstration facility in the UK.
- With AB Sugar and DuPont (through a joint venture called Vivergo Fuels), BP is constructing a 110 million gallon-per-year wheat to ethanol plant in the UK. When operating next year, it will produce one-third of the UK’s requirement for ethanol under the UK’s renewable transport fuel obligation (RTFO). Once the technology has been proven at scale, the partners will look to convert the plant to produce biobutanol.
- BP is collaborating with DSM to advance technology for the conversion of sugars into biodiesel. The technology will convert sugars derived from biomass feedstocks (such as sugar cane or dedicated energy grasses) into diesel fuel molecules.
- BP has committed $500 million over 10 years into the Energy Biosciences Institute – working with the University of California Berkeley and its partners, the University of Illinois, Urbana Champaign and the Lawrence Berkeley National Laboratory. The institute is exploring ways in which biosciences can be applied to produce new, cleaner energy fuels, including advanced biofuels.

Past Milestones

• Safe and reliable operations at operational facilities in Brazil
o Industry leading safety performance. Recordable Injury Frequency rates have fallen from 5.5 (annual frequency per 200,000 hours worked) in December 2008 to 1.2 at the end of April 2011 – significantly lower than industry averages.
o Above-expected production levels.
o Acquired majority control of Brazilian sugar and ethanol producer CNAA in April 2011.

• Development of lignocellulosic biofuels:
o Acquired biofuels operations from Verenium Corporation in 2010, including IP, R&D facility in San Diego and a demonstration facility in Louisiana. Also became 100% owners of commercial project in Florida.

• Sugar-to-diesel technology:
Joint development agreement (JDA) between BP and Martek Biosciences Corporation announced August 2009. JDA will establish proof of concept for large-scale, cost effective microbial biodiesel production through fermentation, from biomass feedstocks.

Future milestones

With their JV partners:

• Demonstrate biobutanol technology and develop next steps for commercial deployment (with their partners DuPont, through the joint venture, Butamax Advanced Biofuels).
• Progress development of sugar-to-diesel technologies in partnership with DSM.
• Begin commercial production at world-scale wheat-ethanol facility in the UK (with partners AB Sugar and DuPont, through the joint venture Vivergo Fuels).
• Commercialize biobutanol technology (through the joint venture Butamax Advanced Biofuels).

Business Model:

BP operates throughout the biofuel value chain. They own and operate facilities in Brazil and the US and have joint ventures and joint development partnerships in the Brazil, US and Europe where this gives us access to expertise in the technologies and markets required to ensure success. BP brings scale, infrastructure and fuels market knowledge to these partnerships to drive long-term development of the businesses.

Competitive Edge(s):

• Global scale and reach, and an intent to develop projects that can succeed on a global platform and make a material difference to supplies of sustainably-produced biofuels.
• Breadth of strategy – covering the entire biofuels value chain, from a range of sustainable feedstocks appropriate to different markets, through to the production of advantaged molecules to meet varied consumer needs: ethanol, biobutanol and biodiesel.
• As one of the world’s largest energy companies and a major blender, distributor and retailer of transport fuels, BP has core expertise and capabilities in fuel infrastructure, fuel markets and the requirements of the vehicle parc. This experience will be crucial in scaling-up the biofuels supply chain to meet the needs of consumers.
• Sustainability has been central to the strategic decisions that BP has made about its biofuels business: the feedstocks to invest in, the geographies to focus on and the molecules to pursue. We are developing ways to ensure and report on sustainability throughout our supply chain – including the development of an effective sustainability management system for our biofuels operations. BP is a member of the Roundtable for Sustainable Biofuels, Bonsucro (formerly the Better Sugarcane Initiative), Roundtable for Sustainable Palm Oil and Roundtable for Responsible Soy.

Research, or Manufacturing Partnerships or Alliances.

• DuPont (DD)
• AB Sugar
• LDC Bioenergia
• Brazil Ecodiesel
• The Energy Biosciences Institute

Stage (Bench, pilot, demonstration, commercial)

• Commercial production of bioethanol from sugar cane in Brazil.
• Commercial production of bioethanol from wheat under construction in the UK.
• Biobutanol technology demonstration facility in commissioning phase in the UK.

Company website

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.

November 08, 2012

US Finalizes China Solar Tariffs

Doug Young

President Obama's election victory has dominated US headlines over the last 2 days, but Washington showed it was still hard at work with news that the Commerce Department has finalized punitive anti-dumping tariffs against Chinese solar panel makers. In a way, this kind of quiet ending seems appropriate for a drawn-out process that began more than a year ago with a Congressional probe into a bankrupt US solar firm. With this trade issue now resolved, China, which produces more than half of the world's solar panels, can now focus on simply saving an industry that is bleeding cash due to a huge oversupply glut.

While much bigger work remains for them, the major Chinese firms were all quick to express their disappointment at finalization of the punitive tariffs, with Suntech (NYSE: STP), Trina (NYSE: TSL) and Yingli (NYSE: YGE) all issuing statements on the ruling by the Commerce Department's International Trade Commission (ITC).

Perhaps not surprisingly, reaction to the final decision was muted on Wall Street, where investors have had a long time to prepare for this inevitable development. Yingli and Trina shares were down 1-2 percent, actually outperforming the broader markets that saw a big sell-off after Obama's victory. Suntech shares were down more than 6 percent, but much of that is due to individual company-specific issues that have led Suntech to seek a state bailout. (previous post)

Let's take a quick look at the latest news, which hopefully will be the last we'll hear from the US anti-dumping investigation. Under its newest move in this saga, the ITC has formally adopted 5-year punitive tariffs of up to 250 percent on Chinese-made solar cells, though most actual duties will be much lower. (English article) The Chinese companies found some consolation in the fact that the ITC decided not to make the tariffs retroactive, meaning the new duties will only apply to imported Chinese solar cells starting from now.

This quiet ending to the story will give everyone the chance to finally move on and focus on the more important task of how to reorganize and salvage a badly damaged global solar panel sector. The sector itself is full of potential, but has become bloated due to a huge state-backed investment binge in China that led to the current state of massive oversupply.

The US and Europe have already worked through much of their problems using market forces, which led to a series of bankruptcies and closures over the last year that has left a handful of only the healthiest players still in the market. China is still trying to figure out what to do with its industry, though there are signs that Beijing is finally stepping in to try to coordinate a national approach to the problem.

China's biggest obstacle to a clean-up is the many local interests involved in the sector. Such interests often strongly support big local solar panel manufactures that are important contributors to their economies. Beijing appears to be trying to take a more active role in the needed sector clean-up by using China Development Bank to make emergency rescue loans for about a dozen major players, presumably leaving them to consolidate the industry. The process will be slow and painful, and is likely to last through most of next year. But at least the US investigation is now officially finished, which will allow everyone to focus on other more important tasks ahead.

Bottom line: The finalization of US anti-dumping tariffs against Chinese solar panel makers will allow Beijing to focus on the more important task of cleaning up China's solar industry.

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 .

LDK CEO Removed in Continuing China-Backed Rescue

Doug Young

ldk logoAfter a week of unusual quiet on the stormy solar panel front, the sector is splashing back into the headlines with word that struggling LDK Solar (NYSE: LDK) is moving one step closer to a state-led takeover of the debt laden company. Meantime, China is also taking its own broader moves against recent protectionist actions in the West by lodging an official complaint at the World Trade Organization against what it is calling unfair treatment of its companies in Europe.

Let's take a look at the LDK news first, as it's the most dramatic and immediate compared with the WTO action that looks largely symbolic and unlike to have much impact over the short- to medium-term. LDK has announced the promotion of its president to the additional role of CEO, while the company's founder and previous CEO Peng Xiaofeng will retain his title of company chairman. (company announcement)

Meantime, the company also announced the naming of 5 new directors to its board. The list includes a financial expert who will be tasked with helping to create a restructuring plan for the troubled company, and several members from the state-affiliated consortium that gave LDK a $140 million lifeline last month. (previous post)

Peng's move from the CEO's office to the chairmanship looks strikingly similar to what happened in August at Suntech (NYSE: STP), China's other major solar panel maker that is facing a major cash crunch. That move saw Suntech founder Shi Zhengrong hand over his CEO position to CFO David King, while Shi retained the chairman's position. (previous post)

I commented at the time that the move looked mostly cosmetic and that Shi would continue to control Suntech from his chairman's post. But based on this strikingly similar move at LDK, it appears that these 2 shifts are perhaps face-saving intermediate steps before both Shi and Peng are completely removed from their companies by the state-run entities that are now providing emergency rescue packages.

Chinese media previously reported that Shi is desperately trying to stay on at Suntech, even as government rescuers seek his removal as part of any rescue package. (previous post) Look for both Shi and now Peng to both ultimately be removed from their companies before any rescues are finalized, though Shi may perhaps put up a fight before his departure.

Meantime, let's look quickly at the second news bit, which has China formally lodging a complaint with the WTO accusing Greece and Italy of unfairly supporting their domestic sollar panel makers. (English article) China's claim is based on policies in those 2 countries that offered special incentives for power plants developers who equipped their plants with domestically-manufactured solar panels.

That policy does indeed seem to discriminate against solar panels from other countries, so perhaps this complaint has a chance of success. But I do find it quite ironic that China is accusing others of unfair support for their solar industries, since it offers far more generous support for its own sector in the form of policies like low-interest loans and export tax rebates. But if other countries are going to accuse China of unfairly supporting its solar panel makers, they should also be ready to show they don't engage in similar practices.

Bottom line: LDK's replacement of its CEO is the first step toward removal of its founder from the company as part of a rescue by the state.

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 .

November 07, 2012

Can We Blame China for Solar Manufacturer Bankruptcies? Yes.

Jennifer Runyon

It really is all China's fault, say most solar experts, but the Chinese government's motivations aren't necessarily malicious.
Pointing at China
Fingering China photo via Bigstock

Today is the last day before the International Trade Commission makes its final ruling on the tariffs that will likely be added to solar panels that include cells that were manufactured in China. We'll report on the specifics as soon as we have them but it's a pretty safe bet that there'll be tariffs in the amount of about 24-36 percent added onto most panels that come from China.

In anticipation of the ruling, both the Coalition for American Solar Manufacturing (CASM), which is led by SolarWorld (SRWRF) Americas who started the initial investigation and the Coalition for Affordable Solar Energy (CASE), led by Jigar Shah have issued statements.  In its statement, CASM quoted an article by Matthew Stepp and Clifton Yen in which they state, “China knows it just needs to dial up the subsidies for only a little while longer until American producers give up or go bankrupt.  Once it knocks out foreign producers, Chinese solar manufacturers will dominate global production and can increase their prices.” CASM also points out that more than 24 U.S. solar manufacturers have already given up the business of making solar panels.

In conducting interviews for an article I recently wrote about mergers and acquisitions in the solar industry (to be published in the next issue of Renewable Energy World magazine and online soon), I spoke with several key solar industry players who made it very clear to me China’s actions regarding the funding it has given to solar panel manufacturers are outside of the scope of what most people would consider normal ways of doing business.

Here’s the situation as Arno Harris, CEO of Recurrent Energy, explained it to me.  Harris admits that his company as a developer has benefitted (and still is) from the low prices that have driven so many manufacturers out of business.  While he is very happy about the low module costs, he recognizes that true market dynamics are not at play. “In solar for the past 5 years, we’ve seen a cycle where the investment in capacity seems almost divorced from any conventional notion of meeting demand,” he said.

“Again, that has been a boon to solar overall, it’s enabled us to reach a price point that I don’t think any of us though we’d reach much, much quicker, but it does suggest that there is a building business problem upstream that we’re seeing reflected in the challenges that all of those businesses are facing.”

Harris explained how market dynamics work in a normal business cycle and he used a poly-silicon plant or memory chip manufacturing as an example:

The industry goes through growth phases. Supply will get tight relative to demand, and that stimulates investment in a new poly-silicon plant or a new memory chip processing facility and then the market moves into a slight overcapacity, prices come down a little bit but then it finds equilibrium again and then it grows until, you know, you reach the limits again and then you repeat that cycle.

Harris believes that the Chinese government, in continuing to lend money to solar manufacturing companies, has really skewed the way normal economics work. “I’d say we’re dealing with companies whose access to capital is somewhat separated from capital markets. So the discipline that capital markets would impose on a company in the western world is not being imposed,” he said.

Raj Prabhu, managing partner at Mercom Capital offered similar comments on the situation.  He said that Asian companies’ continuing to add capacity in the midst of an oversupplied market “defies logic.” He said so far he had tracked more than $50 billion in credit that had been given from the Chinese-owned banks to manufacturers.  He explained further:

Basically China Development Bank is saying we will provide [some large amount] of loan and credit, etc. to one of these Chinese manufacturers and then that doesn’t mean that they give them the money but they have some sort of an agreement that they can draw down upon. This cheap and easy credit being available is one of the factors why it [the solar industry] is overbuilt. You know you didn’t see overbuilding anywhere else.

Finally, GTM Research’s Shyam Mehta said he doesn’t see the situation improving anytime soon.  I asked him if he thought the Chinese government would eventually force companies to merge or consolidate and he offered the following:

At this time we haven’t seen any signs that China is going to enforce consolidation directly.  A couple of weeks ago the China Development Bank announced that it was going to renew a pledge of support for 12 Chinese manufactures and six of them were named and six weren’t.   They are borrowing more money, losing more money and continuing to get supported.  That is not sustainable, basically, not for the entire industry is what I think.

Jigar Shah: Unsustainable but Understandable and Not Illegal

The fact that what China is doing unsustainable is undisputed by all, even by staunch solar advocate Jigar Shah, who founded the Coalition for Affordable Solar Energy (CASE) in order to fight against CASM.

Shah told me that many times throughout history governments have made decisions about what industries to support and then have offered that support outside of market dynamics.  “The truth of the matter is that this is exactly what country after country after country does in the solar industry,” he explained. Shah said that Japan overbuilt solar capacity in 1999 and then cut prices, “and it’s exactly what SolarWorld did in 2004 when the German government decided to provide a 50 percent subsidy to anybody who builds a plant in Germany.”

He doesn’t see this as a malicious attempt to dominate the solar manufacturing industry and put other countries out of business. Rather it’s a job creation bet made by governments all over the world who see solar as the next big moneymaker.

“They all think that they’re going to be the last country to really figure this out and they’re going win solar manufacturing for the rest of time,” said Shah.

He maintains that China will soon give up. “I think China is now saying ‘wow, that didn’t work out for us so well,’ said Shah. “And when that happens Korea is going to take over,” he said. 

Shah thinks that four years after Korea takes up the solar manufacturing torch, India will take over then maybe Brazil, he said.  “This is so common and I don’t think there is anything illegal here.”

Can the matter be boiled down to public sector interests over private sector interests? Perhaps. SolarWorld’s President Gordon Brisner said in a statement that his company would be just fine if it weren’t for the unfair trade practices being employed by the Chinese. “We have no doubt – none – about our ability to compete with Chinese producers on fair footing,” said Brinser. “But we have said all along that U.S. solar manufacturers cannot compete with the Chinese government and, as a matter of basic trade law, should not be confronted with doing so.”

But Shah counters that the public sector sometimes has other interests than the private sector. “This is about China building jobs for the millions of people that are joining urban ventures every month to make sure that they prevent riots from occurring in their country. So they do this in iPads, they do this in computer manufacturing,” he said.

Further Shah believes it’s about solving a global crisis.  He said if the Saudi Arabians decided that they wanted to provide the U.S. with oil at prices lower than the price of oil that we can recover out of the Bakkan Shale then “we would take that all day.” 

He concluded:

So this is happening in China (and I don’t think they are trying to put us out of business – we never had a vibrant solar manufacturing industry anyway) but if they are providing us with panels at a very affordable cost and therefore allowing us to decarbonize our grid, I’m just trying to figure out how this is a bad thing for all of us.

Good or bad, today it is expected that the International Trade Commission will rule that the Chinese government has indeed harmed the U.S. solar manufacturing industry. With that ruling the tariffs will go into effect and the next chapter in solar manufacturing will begin. 

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

This article was originally published on RenewableEnergyWorld.com, and is republished with permission.  The information and views expressed in this article are those of the author and not necessarily those of RenewableEnergyWorld.com or the companies that advertise on its Web site and other publications. The title is AltEnergyStocks' editor's summary of the article.

Is Gevo still Gevolicious?

Jim Lane

gevo logoThough a panic-inducing analyst report circulates on the internet, the consensus among analysts continues to be bullish on the biobased isobutanol pioneer.

With Gevo, Inc.’s stock (NASD:GEVO) in the toilet — as of now, trading at $2.00 — the company has a market cap of $79 million and $92 million in the bank. When any company — much less one with a hot technology — is trading at less than its cash-on-hand value, it’s both rare and a reason to reflect on the financial state of affairs.

Especially since alarming reports such as David Sterman’s “Bankruptcy Watch: Sell Gevo Now” appeared at StreetAuthority.com, suggesting that “A technical glitch could be a death blow for this biofuels firm.”

Regarding Gevo’s third quarter results, energy analyst Pavel Molchanov writes.

“The reported net loss per share of $(0.31) included a $15 million non-cash gain from a change in the convert-related derivative. Adjusting for this gain, the loss per share of $(0.70) was below our estimate of $(0.46) and consensus of $(0.43). In the absence of commercial isobutanol (or ethanol) production during 3Q, revenue was de minimis and consisted of funding from R&D agreements with Coca-Cola and others. The miss was mainly driven by higher SG&A (including Butamax-related legal costs) and interest expense. Adjusting our interest expense assumptions results in slightly wider future losses, though we continue to project operating cash flow turning positive in 2H14.”

Looking at the quarterly result, Sterman wrote:

“Can Gevo work out the bugs? Well, it’s not a hopeful sign that the company’s chief technology officer, David Glassner, decided to resign on Oct. 1. This may have been a sign that a technology fix is neither imminent nor feasible…For now, I give this stock “4″ bankruptcy rating, which means that bankruptcy concerns aren’t imminent, but the company may need to sell stock in the next 12 months. However, if the technology update on Oct.30 proves disappointing, then I may be inclined to move the rating up to “6,” which implies that bankruptcy is possible within the next 12 months.”

The change in technology management – true?

True. Gevo reports that Chris Ryan, Gevo’s President and Chief Operating Officer, assumed the additional role of Chief Technology Officer. Dr. Ryan is no stanger to the role. Prior to joining Gevo in 2009, Dr. Ryan co-founded NatureWorks LLC in 1997 and served as its Chief Technology Officer from 2005 to 2008, where he led the development and commercialization of that company’s proprietary yeast biocatalyst and new biobased polymer from laboratory scale production through completion of a commercial-scale production facility.

How was the technology update?

Molchanov writes: “While the yield optimization program is underway, the target for resuming isobutanol production remains no more specific than 2013, though management has indicated that a more precise timeline should be available by the time of the 4Q12 results next February. Our restart assumption remains April.

At Piper Jaffray, analyst Mike Ritzenthaler penned this to shareholders: “We believe that the new organism will be ready for startup in the commercial plant in 1Q13, and have modeled a production ramp starting in 2Q13 through the end of the year…We are cognizant that Gevo’s current state of development and stage of commercialization can be confusing, especially given the woeful under-delivery at some of Gevo’s peers. Having commercialized similar technologies in the past, we are supremely confident that there is no such confusion at the company.”

The cash burn’s impact

At Cowen & Company, Rob Stone and James Medvedeff write: “Negative EBITDA could consume remaining cash, leaving challenging funding necessities. Management estimates $60-63MM of 2012 EBITDA burn and has $92MM of cash on hand. Unless isobutanol is brought back on line, successfully, in volume, this burn rate would leave less than the $45-55MM needed to build out Redfield. Additional financing may be needed, which could be expensive (if debt) or dilutive (if equity).”

Gevo CEO Pat Gruber’s outlook

“Our goal now is to resume isobutanol production in 2013. While isobutanol production at the Luverne facility is temporarily paused, we plan to take advantage of our flexible technology and temporarily revert the Luverne facility to ethanol production with two goals in mind: a) demonstrate to our partners that our plants can switch between isobutanol and ethanol production, which is important to them and differentiates our technology from others; and b) generate incremental cash flow. Prior to that, if we need to produce more isobutanol for market development reasons and it makes good business sense we can always bring the plant back up to produce isobutanol.”

When will we know on a return to isobutanol at Luverne

Molchanov writes: “Clarity on Luverne likely by February. Gevo has produced over 150,000 gallons of isobutanol and currently has ~100,000 gallons in inventory. The plant is being readied for the (temporary) transition to ethanol. While the yield optimization program is underway, the target for resuming isobutanol production remains no more specific than 2013, though management has indicated that a more precise timeline should be available by the time of the 4Q12 results next February. Our restart assumption remains April.

The bottom line: analysts

Molchanov writes: “GEVO shares have fallen more than 30% since the September 24 news of scale-up delays at the Luverne plant – a “sell first, ask questions later” reaction that needs to be seen in the context of a hyper risk-averse, short-term fixated market. Quite simply, most investors appear to have given up on Gevo. Our view, by contrast, is that the market experienced a textbook overreaction to a delay that is frustrating but in no way unprecedented or shocking. The slower than expected scale-up is entirely normal for industrial biotech. We think the market egregiously overreacted, and we strongly encourage investors with a 12+ month time horizon to view this as a buying opportunity. We reiterate our Outperform rating.”

Ritzenthaler agrees. “We maintain our Overweight rating. Among the positives in the quarter is an additional supply agreement with the Air Force, and following a discussion of energy goals we had with DOD officials last week, the new contract is certainly an encouraging development. Additionally, a new LOI was signed with an affiliate of Great River Energy with access to 130 million gallons of ethanol capacity. This agreement, along with the LOI with BFE announced last quarter, could take the form of technology licenses, as opposed to Gevo putting its own capital to work. We are lowering our price target to $9 (from $15) on sector compression.”

The Digest’s Take – Butamax’s outlook may be highly gevolicious

It’s a lonely view that Gevo won’t have the liquidity or cash-raising power to address its needs. It’s more popular among analysts to suggest that delaying the return to isobutanol production at Luverne into Q3 or later will start to put pressure on Gevo’s ability to finance both Redfield and its litigation with Butamax. Accordingly, Gevo is facing the squeeze on its litigation – and it is not out of the question that the company may have to accept an unfavorable settlement in the suit, simply to boost investor confidence and clear its financial path at Redfield and beyond.

The analysts all agree on this: the February update on Luverne is critical. An early return to isobutanol production will preserve cash, and make the path to financing the conversion at Redfield much more clear. With the stock trading at just 1.5 times the cash required to retrofit Redfield, an equity raise would be painful if needed.

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.

Gevo: a 5-Minute Guide

Jim Lane

gevo logoAddress: 345 Inverness Dr. South; Bldg. C; Suite 345, Englewood, CO 80112

Year founded:


website: www.gevo.com


Type of Technology(ies): Gevo has two proprietary technologies that combine to make it possible to retrofit existing ethanol plants to produce isobutanol, a four carbon alcohol which serves as a  hydrocarbon platform molecule.  We have developed a robust industrial scale yeast biocatalyst to produce isobutanol without typical byproducts operating at parameters equivalent to commercial ethanol producers.  The second piece of technology is a separations unit that operates continuously and removes isobutanol during fermentation.

This helps reduce distillation requirements, thereby reducing process energy consumption. With its exclusive engineering partner, ICM, Gevo completed its first commercial retrofit of a 22 MGPY corn ethanol plant in Luverne, MN and started producing isobutanol in early 2012.

Gevo will produce isobutanol, a four carbon alcohol that can be dehydrated using well known technology to isobutylene, a C4 hydrocarbon.  Isobutanol has 30% more energy content than ethanol and can be blended into gasoline without modifying automobile engines.  Isobutanol is a low RVP blendstock and less soluble in water than ethanol.  It can be transported in pipelines and be dispensed in existing retail pumps.  Isobutanol is a biofuel that carries a RIN value of 1.3 and It can be an advanced biofuel from corn if it achieves a 50% GHG reduction.

Isobutanol also has a market as a chemical solvent.  The opportunity for isobutylene spans many C4 markets in jet fuel, paraxylene, PET and other multi-billion dollar applications in fuels, synthetic rubber, chemicals and plastics.

Gevo has a number of off-take agreements and has announced non-binding letters of intent to supply Total for gasoline blendstock; United Airlines for biojet; Lanxess for butyl rubber; and, Toray industries for p-xylene.

Product Cost: Gevo’s isobutanol should be competitively priced with C4 petrochemical streams and low RVP gasoline blendstock components.

Past Milestones

Gevo successfully commissioned its 1MGPY demonstration plant in late September, 2009 in St. Joseph, MO in cooperation with ICM.  In September of 2010, Gevo completed acquisition of the 22 MPGY ethanol plant owned by Agri Energy in Luverne, MN.  Retrofit construction is planned to begin early in 2011 and be completed by the end of the year.  Isobutanol should begin production in Luverne early in 2012.

Future Milestones

Gevo started commercial production in summer 2012 in Luverne, MN.  They also plan to bring another 50-200 MGPY of capacity into the development pipeline, commencing with the Redfield Ethanol Plant in Redfield, SD. Further commercial supply agreements are expected to be announced.  In 2012-13, Gevo will begin to implement its ex-USA strategy.

Business Model: (e.g. owner-operator, technology licensor, fee-based industry supplier, investor)

Gevo has developed its technology to retrofit ethanol plants to produce isobutanol.  Gevo has a flexible business model, i.e., it will own and operate production capacity or align with others in joint venture or lease arrangements.  Gevo will also license its technology.  We plan to partner with cellulosic conversion companies to develop and commercialize cellulosic isobutanol for the gasoline and jet fuel markets.

Competitive Edge(s):

Gevo’s proprietary retrofit technology is a cost efficient (approx. $0.40/gallon) and rapid (12 months) retrofit of first generation ethanol capacity to make isobutanol.  Gevo’s exclusive collaboration with ICM, the premier engineering services company in the ethanol industry with over 60% of the installed capacity, is another competitive advantage.  Finally, our flexible business model enables us to work with investor owned and farmer owned ethanol producers through acquisitions, joint ventures or lease arrangements.  Gevo will be able to deploy cellulosic butanol technology as soon as conversion technology is available for biomass refineries.

Research, or Manufacturing Partnerships or Alliances.

Gevo has an exclusive collaboration with ICM for the retrofit of ethanol plants in North America.  Gevo also has an exclusive technology alliance with Cargill to develop a yeast biocatalyst for cellulosic isobutanol.

Stage (Bench, pilot, demonstration, commercial): Commercial

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.

November 06, 2012

Maxwell Beats Earnings, But Scares Investors with Guidance

Tom Konrad CFA

320px-2011LamborghiniAventador[1].jpgThe 2013 Lamborghini Aventador will incorporate Maxwell ultracapcitors. (Photo credit: Autoviva.com via Flickr  )

The headline was good: Maxwell Technologies, Inc. (NASD:MXWL) beat analysts’ third quarter (Q3 2012) earnings estimates by 10 cents on improved cost control and revenues in-line with analyst expectations (up 7%).  The good news stopped there, however, and investors are in a panic this morning (the stock is down $1.48 to $6.13 as I write) about some worrying comments made in the earnings call (transcript here.)

Worries About the Chinese Hybrid Bus Market

Revenue growth has been driven in recent quarters by ultracapacitor sales for hybrid buses and wind turbines, mostly in China.  CEO David Schramm discussed worries about both of these markets in his comments.  Part of the problem is uncertainty about subsidies and policy support from the Chinese government given the upcoming leadership change.  According to Maxwell’s Chinese bus customers,

[O]n the one hand, subsidies will be made available to more cities across the country, and on the other, that the Probus subsidy is likely to be lower, shifting some of the investment burden to local and regional governments. Until the leadership transition takes place, and those anticipated adjustments are implemented and digested in the market, it is impossible to forecast future volumes with a high degree of confidence.

Worse, ultracapacitor sales for hybrid buses will be disrupted in Q4 because of potential mechanical problems which Maxwell’s engineers are currently working to fix,

[W]e become aware of some Hybrid Drive System application issues that are impacting our production schedules. There are mechanical vibrations in the system, higher than our module specification, which are causing interface and cabling issues. I should emphasize, that these issues are mechanical, not electrical. And our application engineers are now working with customers to resolve these interface issues, so that normal production can resume in the months ahead.

Potential integration problems like this can be extremely disturbing to investors, despite Schramm’s reassurances that they are mechanical and related to a new racking configuration which puts them higher in the bus.  They have not caused by problems with the ultracapacitors themselves, and are not a problem with previous configurations.  They expect this problem to be resolved by the end of Q1 2013, with improved sales growth again in Q2 2013.

The European Auto Market

Hopes for large sales for stop-start idle elimination technology to European automakers continue to be delayed because of Euopean economic weakness.  Maxwell continues to make technical progress, with sales to smaller automakers like PSA PeugeotCitroen (Paris:UG, OTC:PEUGF) and  Lamborghini, but a major automaker design win remains elusive, although a growing number of automakers are evaluating the stop-start systems.

The truck market is more encouraging, with an ultracapacitor based engine start module in field trials with ten large truck fleets.  Since this is a drop-in replacement for standard Group 31 truck batteries, uptake should be very rapid once fleet operators appreciate the benefits.  Maxwell plans to put significant sales efforts behind this product going forward.

IT and Wind

Maxwell’s IT markets have been down, following recent IT spending in the US, and this market does not have the growth potential to replace hoped-for sales in transportation.

The prospects for wind are much brighter.  Schramm, said,

Wind turbine deployments in China appeared to stabilize following the government imposed slow down, we experienced in the second half of 2011. Looking ahead, China’s five-year plan calls for wind energy to account for 3% to 5% of the country’s total power generation by 2020. And the trend towards larger turbines and offshore installations favors ultracapacitors. So, we anticipate steadily growing demand for our products.


Altogether, Maxwell does not expect any sales growth over the next two quarters, which is a big disappointment to growth investors.  However, long-term potential remains strong.   The mechanical issue with racking in hybrid buses seems a hiccup, not a long term problem.

The recent slower than expected growth has given Maxwell the chance to streamline operations and get a better control of costs, which can be seen in the improved earnings number this quarter.   Cost control will be very important going forward, and is often a problem for companies experiencing rapid growth.  While the current slow-down has been disappointing, it sets Maxwell up to handle future growth much better, while allowing investors a very attractive entry point on the stock.

I had hoped that last quarter would have been the turning point for this battered stock, but that turning point is farther in the future than I expected.  At this point, I think we’re going to have to wait another quarter or two before we again see rapid appreciation in MXWL, but I’ll be watching the stock with an eye to buying more at bargain basement prices as short term investors flee.

Disclosure: Long MXWL

This article was first published on the author's Forbes.com blog, Green Stocks on October 26th.

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.

Has Shale Gas Reduced Carbon Emissions?

Jim Hansen

Last week, I wrote that the U.S. is on course to set a new export record of coal. A few days later the EIA made similar projections and estimate that exports will reach 125 million tons for 2012.

EIA coal exports on course for record 2012-10-23

One side effect of the success of U.S. coal exports is the degree to which may they have cancelled out the carbon emissions reduction experienced in the U.S. as shale gas displaced coal in the power generation sector. This question of displacement was addressed in a study just released by researchers at the University of Manchester.

The Study’s lead author Dr. John Broderick had this comment on how the coal to gas switching is being broadly viewed. “Research papers and newspaper column inches have focused on the relative emissions from coal and gas. However, it is the total quantity of CO2 from the energy system that matters to the climate.”

“The calculations presented in this report suggest that more than half of the emissions avoided in the US power sector may have been exported as coal. In total, this export is equivalent to 340 MtCO2 emissions elsewhere in the world, i.e. 52% of the 650 MtCO2 of potential emissions avoided within the US.” [Link is to full 29 page report pdf]

It is easy to forget that oil is not the only energy resource with global interactions. Changes in nuclear power use in Japan and the linkage of LNG prices to an oil benchmark impacted the price of seaborne LNG putting pressure on European power generators to expand their use of coal. Add this to the drop in the price of North American thermal coal to levels that made it more competitive in foreign markets and the movement of this carbon intensive fuel shifted off shore.

The issues of climate and energy are bonded at the hip. If either side in the debate over climate and energy forget that relationship the outcome will be unsatisfactory for everyone. One sided solutions are destine to fail the test of time.

Jim Hansen is an investment advisor at Ravenna Capital Management based in Seattle, Washington. He has spoken at the ASPO-USA national conference as well given other public and academic presentations. His weekly report The Master Resource Report is available online.

November 05, 2012

November Update: What Will The Election Bring for Clean Energy Stocks?

11 Clean Energy Stocks for 2012

Tom Konrad CFA

October Overview

October brought a gentle fall to my Clean Energy model portfolio, and a slightly-less gentle decline for the clean energy sector and the stock market as a whole. Both the unhedged and hedged versions of my model portfolio fell 2.3% for the month, compared to a 4.1% decline for the widely held Powershares Wilderhill Clean Energy ETF (PBW), which I use as a benchmark for the clean energy sector as a whole, and a 4.0% decline in the broad market, as measured by the Russell 2000 ETF (IWM.)  All returns are as of Friday's close.
For the year, my clean energy model portfolio leads PBW by 25% but lags the broad market by 7%.  The unhedged portfolio is up 4.3% for the year, while the hedged portfolio is down 2.6%, having lost money on the hedge as the broad market rose.  For comparison, PBW is down 20.3% and the IWM is up 11.4%.

For details on the performance of my individual picks, see the chart and discussion below.
11 for 12 Nov.png

Stock Notes

Among individual stocks, only Finavera Wind Energy (TSX:FVR, OTC:FNVRF) and Honeywell, Inc. (NYSE:HON) had positive returns.  Finavera's 6% gain came as the market continued to digest the prospect of an outright sale of the company, as I discussed in some detail in the October update.  Analyst Felix Pinhasov thinks the company is worth about $1.10 per share, and expects investors will " receive a fair offer and a healthy premium" on the current price of $0.38 a share.

Honeywell's 2% gain seems largely due to a contract to equip new Cessna aircraft, and both Deutsche Bank and Barclays initiating coverage on the stock with Buy and Overweight ratings, respectively.

Battered Lime Energy (NASD:LIME) was down another 2% on a dilutive convertible note private placement to a group of investors led by Lime Director and largest shareholder Richard Kiphart.  I thought the timing of this private placement unusual, given that the stock price is currently depressed due to an ongoing internal audit to clean up Lime's books after misreporting of income.  If the placement could have waited until after the results of the audit were announced, the pricing of the placement would almost certainly have been better, making it less dilutive to existing shareholders.  I contacted Lime's CEO, John O'Rourke on October 23rd, to see if he could explain the timing. O'Rourke stated that he was "not ready to have a conversation yet," but promised one "soon."  

Lime management will have to communicate extensively with shareholders soon, since the company will have to seek shareholder approval for the transaction by February 28th at the latest. 

The most significant declines came from Alterra Power (TSX:AXY / OTC: MGMXF, down 13%) and Veolia (NYSE:VE, down 8%).  Alterra's decline did not seem to arise from any news, and even came in the face of  an agreement with the Philippines based Energy Development Corporation (EDC) to fund the development six of Alterra's geothermal projets in Chile and Peru, subject to EDC being satisfied with the results of due diligence field work on the projects.  While I would have expected a funding agreement with a global geothermal leader such as EDC to have given Alterra's stock a significant boost, this announcement only managed to halt the stock's decline, most likely because EDC has not yet committed to the projects.  Given Alterra's current value pricing and the likelihood that EDC will choose to proceed with some of the projects in the next six months, now is probably a good time to buy Alterra if you have not already done so.

Veolia's decline seems mostly due a downgrade of the stock from HSBC Securities from Overweight to Neutral on October 9th.  I took the opportunity to add to my position high dividend paying stock at $10.09 and $9.75.

I did not see significant news for any of the other stocks in the portfolio, most of which traded nearly flat.  Their performance was as follows:

Western Wind Energy (TSX-V:WND / OTC: WNDEF) -1%
New Flyer Industries (TSX: NFI / OTC:NFYEF) -1%
Waste Management (NYSE:WM) +3%
Rockwool International A/S (COP:ROCK-B / OTC:RKWBF) -4%
Accell (Amsterdam:ACCEL) flat
Waterfurnace Renewable Energy (TSX:WFI / OTC:WFIFF) -3%

Conclusion and Election Outlook

While October was a quiet month, the US Presidential election promises to bring significant news both for clean energy and the market in general.   Romney's hostile attitude towards clean energy and Obama's supportive policies mean that PBW is likely to decline significantly on a Romney victory, and gain from an Obama win, while results for the broader stock market will be much more dependent on Congress successfully tackling the looming fiscal cliff during its lame-duck session.  I personally am worried that our dysfunctional Congress may not be up to the task, which is why I recently wrote about how to protect your portfolio with puts.

In terms of the model portfolio stocks, most are relatively immune to domestic politics because their operations are broadly international (ACCEL, VE, RKWBF, MGMXF, FNVRF), or likely to be dominated by company specific news (LIME, FNVRF.)  The exceptions to these rules are Waste Management, whose primary business is far enough removed from clean energy that changes in Federal policy towards renewable energy are unlikely to affect its returns.  Western Wind, New Flyer, Honeywell, and Waterfurnace should all feel electoral effects to varying degrees.

Waterfurnace gets a boost the 30% Investment Tax Credit for geothermal heat pumps, which is currently expected to revert to 10% in December 2013.  However, even an Obama administration is unlikely to be able to extend this in the current political environment, so I expect the stock to follow the real estate market more than the political cycle.

New Flyer's US bus sales are heavily subsidized by the Federal government, and all mass transit subsidies will be at risk under a deficit cutting, car-friendly Romney administration.  Expect NFYEF to gain from an Obama victory or fall in the event of a Romney win.

Western Wind Energy is currently in the process of auctioning itself to the highest bidder, but we can expect those bidders to place significantly more value on the company's wind development pipeline under a wind-friendly second Obama administration than under Romney, although this effect may not immediately show up in its stock price.

Although Honeywell is quite active in building automation and energy efficiency, the stock is more likely to get a boost from expected increases in defense spending under Romney than it is to be hurt by loss of support for energy efficiency.

Overall, this model portfolio might be helped slightly by an Obama win, but traders looking to speculate on the election result would probably do better to buy (Obama) or sell short (Romney) PBW than on any of my relatively stable picks.


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.

Solar Equipment Maker GT Advanced Technologies Lays Off 25 Percent of Workforce

Jennifer Runyon

Responding to projections that the solar panel module overcapacity will continue for at least another year, solar equipment maker GT Advanced Technologies today announced a restructuring plan. The company will lay off approximately 25 percent of its workforce and consolidate its existing business units into a single Crystal Growth Systems (CGS) group.

The company said that when fully implemented, the restructuring would save approximately $13 million in annualized expenses. GT expects to record restructuring charges associated with these actions in the amount of approximately $4.2 million in the December quarter. More details and commentary will be offered at the company’s Q3 earnings conference call, set to take place on November 7th at 8 AM ET.

GT Advanced Technologies CEO Tom Gutierrez, who previously testified in front of Congress in opposition to the anti-dumping and countervailing tariffs, said in a statement that the company’s Asian customers are facing “severe financial difficulties brought on by a number of economic and trade-related challenges.”  

He said that his company is “not immune to these headwinds” and that these actions will help it “prepare for what is likely to be a challenging 2013.”

Gutierrez said he expects to see the solar industry turn around in the long term, "driven in large part by the adoption of new technologies that provide critical cost reductions."

On October 3, Gutierrez testified before the U.S. International Trade Commission (ITC) to explain what he saw as the “misguided nature of government-imposed solar panel ‘dumping’ tariffs.” In his testimony, he warned that the consequences of imposing tariffs on Chinese module manufacturers might be severe.

In addition to the solar market, GT Advanced Technologies' crystal growth equipment and solutions also serve the LED and electronics industries.

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

This article was originally published on RenewableEnergyWorld.com, and is republished with permission.

November 04, 2012

Hurricane Sandy: "It's Global Warming, Stupid"

Garvin Jabusch

On today's broadcast of the news show Democracy Now hosted by Amy Goodman, Cynthia Rosenzweig, co-chair of the New York City Panel on Climate Change, went out of her way to begin her comments on Hurricane Sandy and the effects of global warming to issue a disclaimer: "but first Amy, I need to make something very clear: any one storm cannot be associated directly with climate change…we have to be very careful not to say Hurricane Sandy was caused by climate change." Unfortunately, this could easily be taken to imply that warming and Sandy may have had nothing at all to do with one another. The word "associated" is particularly misleading (as opposed to "caused") because to say a given storm and global warming aren’t associated is flat untrue. Rosenzweig said this right at the beginning of her segment, before she went on to explain about the dangers of climate change (which as a distinguished climate scientist she is qualified to do). This is the kind of overly couched, ass-covering commentary that drives me crazy. Because the fact is that global warming did, unquestionably, influence Sandy. 

Basic chemistry proves carbon dioxide traps heat, primarily infrared wavelengths. This has been known since 1859, and is clearly demonstrated in this great BBC video experiment. (If you have any doubts at all regarding the fundamental science, watch it, and even if you don’t, it’s pretty cool). Since the beginning of the fossil fuels era, the amount of carbon dioxide in the atmosphere has increased close to 43 percent, from 280 parts per million (PPM) to 400 PPM. That is a lot more carbon dioxide holding a lot more heat energy. So much energy that simple calculations reveal that between 1951 and 2011, extra carbon dioxide in the atmosphere has added energy in the amount of 210 sextillion additional joules that would not be here at the old 280 PPM levels.  (Energy or heat wise, a joule is a little less than a quarter of a calorie.) So we've added 210,000,000,000,000,000,000,000 extra joules of heat and counting (we're adding about 34 billion tons more per year), and that energy is in every molecule of the atmosphere. That's how it works. More energy in any system means that system is powered to be more active. If you throw a ball 43 percent harder it will fly with more force. If a gallon of gas gets you and your car 20 miles, 1.43 gallons will get you 28.6 miles. That's what warming is, extra energy rendered as heat.

Small wonder insurers have concluded that the rate of weather-related disasters has quintupled over the last three decades. Yes, there were storms back before warming, when the atmosphere was still at 280 PPM, but they had a lot less energy to work with. There can be no question that the additional energy in the molecules of the atmosphere comprising Sandy influenced her strength. On the contrary, physics indicates that it's impossible for all that energy not to have influence, as if somehow Sandy existed in a 280 PMM atmosphere, as if she grew in a bubble shielded from reality. She didn’t, we don’t. It is worth observing that with energy in the atmosphere at its highest in the era of human recordkeeping, Sandy came ashore with record rainfall and record storm surges.  (Spoiler: as additional carbon dioxide traps still more additional energy in the atmosphere, more extreme weather event records will be set. Soon.) Sandy may well have existed in a 280 PPM world, but there is no way she would have been the same storm with the same energy; implying that all things might have been equal in a pre-warming world and present day is misleading and just wrong.

However well intentioned, comments like Dr. Rosenzweig’s provide the kind of exclamation that gets repeated without context ad nauseum by proponents of climate disinformation. Don’t be surprised if disinformer-in-chief Senator James Inhofe even quotes her on the floor of the Senate to make his case for "drill baby drill." (Don't laugh, Inhofe has applied this tactic using the words of 350.org’s Bill McKibben, Grist’s David Roberts and others; see this year’s Senate Hearing on Climate Change, starting at 1:40 in this video.)

Fortunately, not all media communication on warming is so timid. Enter Mike Bloomberg. His approach to business and government has been empirically rational and evidence based. If data tell him something unequivocally, that's what he seems to believe. His endorsement of President Obama in next week's election was made on the same basis, "I want our president to place scientific evidence and risk management above electoral politics." So for him and his organization it made sense for the post-Sandy cover of their flagship magazine Bloomberg Business Week to read "It's Global Warming, Stupid," above an image of a Sandy-flooded New York City. This is evidence based, real, non-misleading climate communication, from a man not afraid of backlash. Kudos, Mayor Bloomberg. Your unwillingness to temper science in the face of monetarily or ideologically motivated pressure shows us a real way forward.

But still there remains the other end of the communications spectrum. In her effort to be fair and balanced, and qualified as she is, Dr. Rosenzweig seems not to realize that her language plays into the hands of climate change deniers funded by and existing for the benefit of the fossil fuels industry. Many news viewers and listeners don’t get past the first 30 seconds of a segment, so unfortunately all some people heard was an expert say, “we have to be very careful not to say Hurricane Sandy was caused by climate change.” As a result, more people, not less, arguably think climate science must be debatable. It’s not.

We’ve been so conditioned by climate deniers’ chimera of false fairness and by fear of being labeled ‘extremist’ that now even climate scientists are making arguments that seem to encourage doubt. Dr. Rosenzweig, plainly speaking the truth is not extremism. Fear to do so is.

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."

November 03, 2012

Six Simple Steps to Protecting Your Portfolio With Puts

Tom Konrad CFA

Storm Sailor

Storm Sailor (Photo credit: Abaconda)

Sailing into a Storm

Despite the unresolved European debt crisis and America’s fiscal cliff, stock markets remain buoyant.   With politicians bickering, that is mostly due to aggressive action from central banks.  Yet despite the Federal Reserve’s third (and largest) round of quantitative easing (QE3) and the European Central Bank‘s unlimited bond buying program, politicians still have the capacity to throw a monkey wrench in the world economy.  Worse, doing nothing is all they have to do to mess things up.  Doing nothing is what politicians do best.

An even worse prospect would be short term fiscal tightening in the name of reducing budget deficits, something which Mitt Romney says would be high on his administration’s priority list if he were to be elected.  While the US Government spends far too much compared to its revenues, correcting this imbalance should not be tackled abruptly or we risk sudden economic contraction which will make the debt even harder to pay off in the long term.

How to Invest

It’s a market truism that it does not pay to “Fight the Fed.”  That is, when the Federal Reserve is pumping out the monetary stimulus, the market tends to go up, despite risks elsewhere in the economy.  This implies that the place for investors to be is in the stock market: the most likely direction of the market is up.  Yet there remains a significant risk that one or more of the uncertainties which currently worry investors will blossom into a full-scale panic.  If that happens, selling will beget more selling, and falling stock prices will  cut investment, consumer spending (via the wealth effect), and tax receipts.  Such a market panic may be less likely than a slow cruise to new market heights on QE3, but the market ship may be more Titanic than Queen Elizabeth.

Cautious investors will prepare for any such disaster by investing in life boats big enough for their whole portfolios, but not so expensive that they would be better off just staying on the dry land of cash and money market funds.

The remainder of this article is a step-by-step guide to building those lifeboats in the simplest way possible: using puts on a broad market ETF.  Unfortunately, there is a limit to how simple I could make it, and I had to assume that readers have a basic familiarity with what puts and calls are, how they work, and the risks involved in using them.  If you do not already have this knowledge, I suggest you read one of the many Options Primers available in print or online.

Beta Hedging

The Ballad of Beta-2

The Ballad of Beta-2 (Photo credit: Wikipedia)

One of my most enduring articles has been Five Hedging Strategies for Stock Pickers, written over three years ago but still producing feedback from readers today.  While that article touched on a number of ways to hedge (short positions, short calls, short and ultrashort ETFs, and puts), the focus was on constructing a long-short, market neutral portfolio.  That strategy is not the best one when the market is likely to go up, since it removes the chance of gain from a rising stock market.

Today’s market will probably continue upward as central banks on both sides of the Atlantic continue to pump out monetary stimulus, but it contains significant risks of an abrupt and large market decline.  In this context, hedging with put options is a more appropriate response.  The technique detailed in “Five Hedging Strategies” article focuses on reducing portfolio beta to zero.  Beta is a measure of how much a portfolio follows market moves; a beta of zero implies that portfolio moves and market moves are completely uncorrelated.  Beta hedging works well when the hedging tools are short positions or in-the-money options, but fails with out-of-the-money options (including put options).  If followed blindly, beta hedging would lead to overspending on too big a life boat.

This is  how to figure out just how many puts you need.

Step 1: Get Options Permission

If you use an online brokerage, you generally have to apply for permission to trade options.  There are various levels of option permission, but since buying options such as puts limits your risk to the price of the option, getting permission to buy puts is usually fairly simple.  Nevertheless, it may take a week or two for your broker to process your application, so you should do this as soon as you start considering a option based hedging strategy.  There is generally no cost to apply for options permission, even if you later decide this strategy is not for you.

Step 2: Select a Market Index ETF

It’s possible to hedge a portfolio by buying puts on each of the stocks in that portfolio, but the strategy has several drawbacks.  First, not all of the securities in your portfolio will have options available (options are usually only available for widely held securities.)   Even if options are available, they may be too illiquid to purchase in the quantity needed.

Instead, you should choose an index ETF that is a good match for the stocks in your portfolio.  For instance, if you have mostly large-cap U.S. stocks, a good choice might be the S&P 500 SPDR (NYSE:SPY).  A “Dogs of the Dow” portfolio would use the Dow Jones Industrial Average SPDR (NYSE:DIA), while a portfolio focused on solar and wind stocks might use the Powershares Wilderhill Clean Energy ETF (NYSE:PBW.)

If you have an international portfolio, you might consider the Vanguard International Equity Index FTSE All World Ex U.S. ETF (NYSE:VEU).  Although you might want to use the iShares MSCI World (NYSE:URTH) because it also contains U.S. equities, this is not possible, since options on URTH are not available.

In addition to having options available, you should makes sure that the options on your chosen index are fairly liquid, and that some long-term options (called LEAPS or Long-Term Equity Anticipation Securities) are available and liquid.  You will want to see active trading in the puts you plan to buy, otherwise you are likely to end up paying over the odds (or have to wait a long time for a limit order to execute, if executes at all) for your protection.  For this reason, it’s often best to settle for an index ETF which is an imperfect match for your portfolio in order to be able to trade liquid options.

I use a combination of SPY and the iShares Russell 2000 Index (IWM), which tracks small capitalization stocks, to hedge my portfolio, but using multiple ETFs  adds a degree of complication which is beyond the scope of this article.

Step 3: Portfolio Statistics

A proper hedge requires understanding how much your portfolio will be expected to move when the market index moves.  This will allow you to determine how large your hedge needs to be.  For example, if your portfolio is fairly stable, and is expected only go down around 40% when the index you are using goes down 50%, you’ll need a one-fifth (1/5 = (50%-40%)/50%) smaller hedge than you would need if your portfolio moved in tandem with the index.

Using a spreadsheet, you don’t need to understand statistics to do the necessary calculations.  I’ve put one together for you here: ODF format/ XLS format.

Using the spreadsheet

While the spreadsheet can calculate the number of puts you’ll need to hedge you portfolio, you will need to gather a fair amount of data for it to work.  The sheet works by calculating how much your portfolio and chosen ETF move together, and uses that measure to calculate how many puts will be needed for a 100% hedge of the portfolio against market movements.

To do this, you will need to monitor the value of your portfolio and the ETF on a daily basis and input the values into the green columns on the sheet.  Don’t worry if you miss a day here and there; this should not throw off the calculations significantly.

Start by deleting the data I’ve entered into the first 5 columns of the sheet, which are for an example portfolio consisting of 1000 shares of General Electric (NYSE:GE).

Each day, start a new row with the date in the first column (A), enter value of your portfolio in column B, and the value of your chosen ETF in column D.  If you have transferred money into or out of your account since the last entry, enter the amount in column C, using a positive number for money added to the account, or a negative number for money withdrawn.  If your chosen ETF pays a dividend, enter the amount to be paid per share on the ETF’s ex-divided date in column E.

Leave column C blank if you have not transferred money into or out of your account.  Leave column E blank on all but the 4 days a year that the ETF does not go ex-dividend.  If more than one trading day has passed since your last entry, sum all the transfers you’ve made in the interim when entering column C, and enter the per-share dividend in column E if the ETF went ex-dividend in the interim.  Technically, column C should also account for the lag between stocks going ex-dividend and the dividend payment, but this should not significantly effect the calculations unless the dividend in question is a significant part of the change in your portfolio value on any given day.  If you do wish to account for this, enter the value of the dividend payment with a negative sign on the date a stock goes ex-dividend, and add the number back in when the dividend is received.

After you have entered 30 trading days worth of data, the spreadsheet will begin to show estimates of the number of puts on your chosen ETF you will need to fully hedge your portfolio against large moves of the ETF.  To continue entering data beyond the last row I filled in my example, copy columns F through O from the previous row each time you add a new row.

The example portfolio of 1000 shares of GE  would need to be hedged with approximately 1.6 puts, which is the result of the aggregate calculation shown in column O.   There is also a chart on the second sheet of the calculator which displays this calculation graphically in green (example to the left).

Since you can’t buy fractional put contracts, you will need to decide if you want to use 1 or 2 put contracts.  A single SPY put will not provide full protection for this example portfolio, but it will get you more than half the way there, and cost a little more than half as much (after commission) than full protection with 2 puts.

Step 4: Choose an Expiration Date or Dates

Generally, you will want to protect yourself with long term puts, since short term puts, while less expensive, have to be renewed more frequently.  Generally, the longest term puts available have a duration of approximately two years.  For my example SPY, the longest dated puts currently available expire on the 19th of December, 2014.

Step 5: Choose a strike price

With puts, you need to choose a level below which you want to protect your portfolio.   If you want to protect yourself against small moves, you will have to pay more for protection, so it generally only makes sense to buy protection against large drops in the index.

Using my example of SPY, the ETF is trading around $141 as I write.    To protect against a 10% drop, the appropriate strike would be $125 (this is actually a 11.5% drop, but strike prices are only available in $5 increments.)  The ask for SPY Dec 19 2014 $125 puts was $12.99, or $1,299 per contract.  So for a little over two years of full protection (2 contracts) against a greater than 11.5% drop, you would have to pay about 24% of your portfolio, or about 11% per year, which would likely eat up any gains you hope to make.

Hence, you’ll generally want to protect yourself only against much larger drops of over 20% or more.  Protection against drops of over 22% can be had at a strike price of $110, where the ask for December 19, 2014 $110 puts is $8.45, or $845 per contract.  Partial protection for the portfolio (1 put) can be had for $845 for 25 months, making the average cost of protection a little less than 2% per year.  This is still expensive, but no more than a small investor might pay for advice from an investment advisor combined with the management fees of the mutual funds that advisor would likely recommend.  And, in my experience, few investment advisors know how to provide downside protection for their clients’ portfolios.

In a year like 2008, when SPY fell 37%, a single put contract like the December 19, 2014 $110 put discussed above would have paid out approximately $2,200 against probable losses in the portfolio of $8,030.  My $21, 700 example portfolio would have fallen to $15,871 rather than $13,671.  Perhaps more importantly, you would have had cash to invest in early 2009, when the best investment opportunities since 2001 were available.  Two put contracts would have prevented more than half of the losses, but maintaining a hedge like that would cost $1700, or almost 4% of the portfolio’s value per year.

Step 6: Purchase the Puts

Through your broker, enter an option order to buy the number of the specific puts you selected.  I recommend using limit orders, since even the most liquid option orders have wide bid-ask spreads, and I generally place my limit well below the ask and wait for the market to come to me.  If you place your limit at the midpoint of the bid and the ask, you will often find that your order is executed almost immediately, so even if you are worried that the market will move against you, it’s worth giving this a try.


At best, the spreadsheet calculator I’ve provided is an approximation.  Even the most sophisticated calculations often fail to reflect  future market behavior during a crisis, when historical relationships frequently break down.  In particular, just because your portfolio has been moving in a particular way with SPY before a market crisis, does not mean it continue to do so.  You may end up needing more or (with luck) less protection than expected.

There are also a number of systematic flaws in the methodology, which you may need to correct for.

If your portfolio contains illiquid securities that don’t trade very often, the calculator will most likely understate the number of puts you will need to use.  In this case, you are likely to notice that the columns that are based on 3-day and 5-day changes (K and N) will generally be higher than column H (1-day changes.)  If that is the case, you will probably need more puts than shown in column O.

If your portfolio already contains options such as calls and puts which have non-linear return characteristics, the calculations will also be thrown off.  Long puts or short call positions will usually cause the amount of protection needed to be overestimated (i.e. you’ll need less protection than the spreadsheet predicts) while short put and long call positions will lead to underestimates of the amount of protection needed.  These effects will be greater for in-the-money calls and out-of-the-money puts.


Without a doubt, hedging your portfolio with puts can be an expensive proposition.  It works best when your portfolio already has fairly low volatility, and produces a decent income (perhaps from dividends or selling covered calls) to pay for the ongoing cost of protection.  If you are a passive index investor, protecting yourself with puts is probably not worth the expense over the long term; you would probably be better off keeping your money out of the stock market.

English: Tyne Lifeboat. Second ever lifeboat i...

Tyne Lifeboat. Second ever lifeboat in existence. (Photo credit: Wikipedia)

On the other hand, investors who feel that they have some sort of investment edge such as superior stock picking ability might consider protecting themselves with puts in order to reduce their overall market risk.  If puts seem too expensive, they might want to consider one of the four other hedging strategies I outlined in my 2009 article, or consider using short call spreads.  Such strategies tend to have lower ongoing costs (some even produce income), but they either provide less protection in the case of large market declines, or they potentially produce large losses when the market rises.

Just yesterday, Marc Faber told CNBC that he “would not be surprised” if the S&P 500 and Dow Jones Industrial Average plummeted 20% from their recent highs.  I would not be surprised either.  Nor would I be surprised by a decline of 30-40% if the recent bad earnings numbers are aggravated by renewed problems in Europe and/or a failure in the US to deal with the looming fiscal cliff.

I also won’t be surprised if the ominous storm clouds on the horizon produce no more than a sprinkle.  But just in case, I’ve bought a lifeboat.

Disclosure: Long Puts on SPY, IWM, QQQ

This article was first published on the author's Forbes.com blog, Green Stocks on October 24th.

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

November 02, 2012

Honeywell’s UOP: a 5-Minute Guide

Jim Lane

honeywell-uop-logo[1].gif Based in: Illinois


Honeywell’s UOP has developed a renewable jet fuel processing technology, as well as a joint venture. UOP and Ensyn announced the formation of a new joint venture, dubbed Envergent Technologies, that will market technologies and equipment for generating power, transportation fuel and heating oil from biomass using pyrolysis. The joint venture will utilize forest and agriculture residues as feedstocks in a Rapid Thermal process, where feedstocks are heated in the absence of oxygen, to produce pyrolysis oils that can be utilized directly in heating oil or power gen. UOP also owns a Renewable Energy & Chemicals business that produced green diesel using its Ecofining process. UOP and Vaperma announced a partnership to bring Vaperma’s polymer membrane technology to the ethanol industry, where it will reduce energy consumption and emissions for for first-generation ethanol, as well as cellulosic ethanol and butanol.

Model: Licensor; often develops technologies in partnerships.

Owned by: Honeywell (NYSE:HON)

Website: http://www.uop.com/

Past milestones:

In 2006-09, Virgin Atlantic, Continental, Japan Air Lines and Air New Zealand and the group as a whole conducted a series of laboratory, ground and flight tests, indicating that test fuels performed as well as or better than typical petroleum-based Jet A. The tests revealed that using the Bio-SPK fuel blends had no adverse effects on the engines or their components. They also showed that the fuels have an average 1.8 percent greater energy content by mass than typical petroleum-derived jet fuel.

In 2009, at the Paris Air Show Boeing and a series of partners involved in four biofuels-based test flights released the data from the tests, and said that with the release they are on a path towards flight certification of biofuels as soon as late 2010.

Future milestones:

UOP expects to commence licensing its fuel technology in 2009, and said that it has already commenced advanced discussions with multiple potential licensees.

The consistent message from airlines and aircraft manufacturers is that the certification of biofuels for regular commercial flights is in the 2012/13 timeline. Boeing spokesman Terrance Scott said that biofuels could be a regular source for jet fuel with 3-5 years, with algae becoming a common component in 8-10 years.

Metrics: UOP said that it was modeling future refineries for renewable jet fuel using a 60-150 Mgy scale, and said that while this was only a fraction of the typical 4.2 billion gallon per year scale of a typical oil refinery that the size was the most effective given the expected supply chain for renewable jet fuel feedstocks.  UOP said that it expects the cost of refineries to be in the $150 million range.

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.

November 01, 2012

The Rocky Road to Lithium Ion Battery Commercialization

by Debra Fiakas CFA

A bit of history…
Li battery diagram
Schematic of a Lithium Ion Battery by Materialsgrp, via Wikimedia Commons

Lithium ion batteries are a relatively recent innovation.  Scientists and engineers first began working with lithium applications in the 1970s.  A number of companies and laboratories worked through the next decade to perfect lithium ion batteries, using various materials for the business ends of a battery  -  the anode and the cathode.  It was not until the mid 1980s that developers settled on cobalt as an electrode material, which ultimately enabled industrial-scale production of lithium ion rechargeable batteries.  In 1996, Sony introduced the first commercial battery to the market.  Fifteen years later lithium ion batteries accounted for 66% of all portable battery sales worldwide.

Cobalt is not the last word on lithium ion batteries.  Known as LiCoO2 or LCO for short, lithium cobalt oxide is now only one of several solutions for battery cathodes.  Cobalt offers high capacity for its cost.  Manganese (LiMN2O4 or LMO) is used on its own or in combination with nickel and cobalt (LiNiMnCoO2 or NMC).  These materials afford the safest battery application as well as long life, but have lower capacity than cobalt alone.

Some battery producers have tried combining cobalt with nickel and aluminum (LiNiCoAlO2 or NCA).  High specific energy and power densities and long life span have the attention of electric vehicle producers for powertrain applications.  However, high cost and safety issues still need to be addressed.

A few developers have taken an entirely different approach, using lithium titanate (Li4Ti5O12 or LTO) to replace the graphite in the battery anode.  LTOs offer excellent low-temperature discharge, high capacity and lengthy lifespan.
The perfect paring…

Cobalt wins the capacity contest, but when it comes to thermal stability and power or load characteristics lithium iron phosphate chemistry (LiFePO4 or LFP) is heads above cobalt.  For powertrain and electric grid applications, safety and cycle life are more important than capacity.  Thus electric car manufacturers cozied up to LFP developers and the race to build the perfect automotive battery began.

A123 Systems, Inc.(NASD:AONE) tried to commercialize LFP and ended up in bankruptcy court.  I estimate A123 spent more than $300.0 million on research, development and engineering activities since the company was founded in 2001.  A123 did not begin spending heavily on production capacity until after the company’s first product launch in 2006.  At the end of June 2012, A123 reported just over $145 million in property, plant and equipment net of accumulated depreciation and government grant off-sets.  Gross property, plant and equipment on the balance sheet at the end of June 2012, was $425 million, matching closely the $419 million reported capital spending in the last six and a half years.  The company claimed manufacturing capacity to produce 645 megawatts annually.

To its credit, A123 Systems had landed customers before filing for bankruptcy protection in September 2012 and agreeing to a buyout by Johnson Controls, Inc. (JCI:  NYSE).  In the transportation market A123 supplied batteries for Fisker Automotive’s Karma, BMW’s ActiveHybrid, General Motor’s (GM:  NYSE) Chevrolet Spark and SAIC Motor’s Roewe 750, among others.  AES Corporation (AES:  NYSE) and Vestas Wind Systems (VWS:  DE, VWDRY:OTC) had also purchased A123 System battery packs for grid applications.

In early 2012, production problems with A123 Systems’ prismatic battery innovation resulted in a recall and replacement of some batteries packs produced at the company’s Livonia, Michigan facility.  The prismatic battery was being shipped to Fisker Automotive and four other undisclosed automotive producers.  The company claims the problem was not related to its LFP battery technology, but was instead traced to sloppy work on battery cell packs.

Innovation on a budget…

The demise of A123 Systems, does not appear to have cast too dark a shadow on other LFP battery applications.  However, that does not mean others pursuing phosphate chemistries for lithium ion batteries have had smooth sailing.  Valence Technology, Inc. (VLNCQ:  OTC/BB) has been at the development bench since 1989, several years longer than A123 Systems.  Valence began with lithium iron phosphate and later added a vanadium wrinkle (LiVPO4F or LVPF).

Vanadium-enhanced batteries have greater charge capacity. Futhermore, LVPFs can recharged in less than an hour, compared to five to 10 hours for conventional lithium ion batteries.  Vanadium is relatively cheap and abundant, but it is not as inexpensive as iron or magnesium.  BYD Company in China and Subaru in Japan are also using vanadium in their EV battery applications.

Since inception, Valence has reported a total research and development spend of $96 million.  Having spent far less on research and development than one of its nearest competitors, investors might think Valence would have no product on the market and no presence in the market.  However, Valence launched its first battery in 2002 and has growing customer list.  In fiscal year 2012, Segway was Valence’s largest customer, accounting for 21% of total sales. Smith Electric Vehicles, Rubbermaid Medical Solutions, Howard Technology Solutions and truck manufacturer PVI each contributed 12% of revenue.

What is more Valence has managed to turn out products with a significantly lower investment in plant and equipment.  Instead of building to own, Valence leases approximately 173,000 square feet in production space in China.  I estimate the company put a grand total of $148 million in capital investments since the get-go in 1989, to outfit production facilities with equipment and otherwise go into commercial operation.

Unfortunately, even a frugal budget has not spared Valence.  The Company filed for bankruptcy protection in July 2012 and is now operating as a debtor-in-possession.  In September 2012, Valence was able to arrange a $10 million credit facility for working capital.

Valence shares are trading at a penny a share.  Some might consider this an option on management’s success in bringing the company back from the brink.  As enticing as a cheap stock might seem, this one seems to carry a bit more risk than is palatable.

I would like to see management assume bit of that risk themselves with greater personal stakes in Valence.  Valence reports that insiders own a total of 86.5 million or 51% of the company’s 170 million shares outstanding.  After stripping away the options and convertible preferred stock from the calculation, insiders are found to own 42% of the common stock.  Nearly all those shares are owned by Chairman of the Board Berg and his employer, West Coast Ventures.  Less than 1% is owned by the other directors and senior officers.  

When insiders buy VLNCQ, it will be a clear signal the stock offers return for the risk.  Of course, given the present circumstances the window on insider transactions might be closed.  A handy alternative is for Valence to use direct shares as a means of compensation rather than piling on more options.

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. 

« October 2012 | Main | December 2012 »

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