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July 29, 2013

The Sun Breaks Through Stormy Skies of China/EU Trade

sunset breaking
through clouds.jpg
Sun breaks through trade war clouds
China and the West broke a decades-old pattern of troubled trade relations over the weekend with a landmark deal to settle a trade dispute between China and the EU involving Chinese manufactured solar panels. Leaders in China and the West should use this breakthrough agreement as a template for resolving future trade disputes, turning to compromise rather than destructive accusations and punitive tariffs to end their disagreements.

Trade between China and the West has grown rapidly over the last two decades following China’s economic reforms to create a more market-oriented economy. The EU and the US are now China’s two biggest trading partners, with combined exports to both markets totaling more than $700 billion last year – greater than China’s entire exports a decade ago. Disputes are almost inevitable with such rapid growth, and many of those are related to China’s policies of State support for many big companies and key industries.

The solar panel dispute began two years ago when the sector suddenly plunged into a downward spiral after nearly a decade of explosive growth. A major cause of that downturn was a rapid buildup of capacity in China, as China rolled out favorable policies like tax incentives and cheap loans to promote development of a cutting-edge sector with big growth potential. As prices tumbled, a growing number of companies in the US and Europe went bankrupt, with many blaming cheap imports from China for their woes. Washington opened an investigation into the matter, which ended with the imposition of antidumping tariffs against Chinese manufacturers last year. The EU followed with its own investigation, and announced its own tariffs this spring.

China responded with its own countermoves, opening an antidumping investigation into polysilicon, the main ingredient used to make solar cells. It also opened a separate probe into unfair state support for European wines, which many saw as retaliation for the EU solar probe. Meanwhile, the EU has also opened its own separate probe into State support for Chinese telecoms equipment.

Worried that the trade wars were spiraling out of control, several EU leaders finally sought to end the negative cycle by pressuring both sides to negotiate a settlement to the solar dispute. High-level talks began last month, resulting in the new agreement that will see Chinese manufacturers charge a minimum price roughly equivalent to the spot market price for their solar panels. (English article) That price is up to 50 percent more than what some Chinese producers had been charging.

This kind of negotiated settlement is far more constructive than trade wars, which only reduce trade and end up hurting both companies and local economies. The damage is even greater when trade wars involve cutting-edge products like solar cells, which are seen as key to the world’s future energy security. China and the EU should be commended for finally breaking the destructive cycle of trade wars by compromising to end their dispute rather than resorting to punitive measures. They and the US should take advantage of the positive momentum and look for more similar negotiated settlements to their other trade disputes, and relegate the previous cycle of destructive trade wars to the history books.

Bottom line: China and the west need to seize momentum from a new solar panel deal to reach more compromises in their trade disputes.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He 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 author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

July 27, 2013

The Making of a Solar REIT: By the Numbers

Tom Konrad, CFA

Fort Hunter Liggett CA solar project
A solar project at Fort Hunter Liggett in California. Photo: US Army Corps of Engineers
Power REIT (NYSE:PW) announced yesterday that it had closed on a deal to buy approximately 100 acres of land leased to the owners of over 20 MW of solar projects near Fresno, CA.  This will be the company’s second solar transaction and increases the share of its revenue from solar to 21%.  These two solar transactions put PW well on its way to becoming the nation’s first REIT to get most of its revenue from renewable energy.  The balance of its revenue comes from leasing its railroad property.  Whiile not renewable energy, rail is also a green asset in that transport by rail is much more fuel efficient than the alternative: trucking.

Salisbury, MA Transaction

Just last week, PW completed financing for its previous solar transaction, by closing on a $750,000 bank loan.  I thought it would be helpful to dig into the newly released numbers to understand the economics of the transactions.

Below are the details of the completed transaction for land under the True North Solar farm in Salisbury, MA. These, and the details about the Fresno transaction discussed below come from the press releases, interviews with the Chairman and CEO of Power REIT, David Lesser, and my own searches of news stories and public records.

  • Land: 54 Acres. Zoned commercial, near I-95. Potential for commercial development after lease term.
  • Solar Farm: 5.7 MW fixed tilt PV.
  • Purchase Price: $1,037,000
  • Lease: 21 years, at $80,800 with a 1% annual escalator.
  • Financing:
    • $122,000 municipal debt, amortizing over 19 years at 5%.
    • $750,000, 10 year bank loan, amortizing at 5% on a 20 year amortization schedule.
    • $165,000 equity from cash on hand plus new issuance between $10 and $11.
  • Real Estate Taxes: Approximately $9,000 in 2013.

This is nearly enough information to build a full financial model of the investment.   The remaining unknowns are:

  1. How and at what rate will the remaining $508K principal of the $750K loan be refinanced in 2023?
  2. How will property taxes change over the term of the lease?
  3. What will be the land’s value after the end of the lease?

I ran two scenarios, one which I consider conservative (refinancing at 7%, 5% annual increase in taxes, flat land value) and one which I consider optimistic, but not wildly so (refinancing at 4%, 2% annual tax increases, 50% increase in the value of the land over 21 years.)  The first scenario is very conservative in that it’s very unlikely that real estate taxes would almost triple  (a 5% annual increase becomes a 2.8x increase in taxes over 22 years) without some increase in property value.)  Mr. Lesser considers even my “optimistic” scenario to be conservative, since he believes that he acquired the land at half its true, unencumbered value because of the owner’s need to sell quickly.  Corroborating this, a Salisbury reporter I spoke to confirmed that the previous owner needed to sell quickly to pay debt secured by the land.

In both scenarios, net income from PW’s investment starts at over $28,000 per year, or a 17% annual return on invested equity ($165,000 – ROE will be higher on a GAAP basis), and increases from there because the increase in rent increases revenue much more quickly than property taxes rise.   In cash flow terms, both scenarios produce mildly positive cash flow until the loan is refinanced.  The conservative scenario then shifts to mildly negative cash flow, while the optimistic scenario achieves slightly greater cash flows than before.   The cash flow internal rate of return exceeds 10%  for the conservative scenario, and exceeds 13% for the optimistic scenario.  If the residual value of the land is higher, as Lesser expects, an extra $1,000,000 in terminal land value increases the IRR about 2.5%.

Given the small positive effect on cash flow in its early years, the investment has a slight stabilizing effect on Power REIT’s finances, while increasing earnings by approximately 1.6 cents a share, and revenue by 4.8 cents/share.

Fresno, CA Transaction

The Fresno area is currently a hotbed of PV development activity, with 17 utility scale projects having been approved by Fresno County since 2011.  The number of projects under construction makes it impossible for me to determine with certainty which ones occupy the land Power REIT just purchased.  However, we do have significant information about the projects.

  1. They have Power Purchase Agreements (PPAs) with Southern California Edison (NYSE:SCE) and Pacific Gas and Electric (PCG).
  2. They were originally supposed to be in service by October 2013, but it now appears that construction will not be complete until early 2014.  Note that PW is financially protected from such delays by supplemental payments from the developer which will begin in October and continue until the in-service date.
  3. The developer is a major international player, and has completed over 100 MW of other projects.  It has a pipeline of other projects which may lead to future transactions for Power REIT.

While many commercial solar farms have been approved in the Fresno area, the most active international developer is multinational European renewable energy developer Gestamp Solar.  Gestamp has an office in Fresno, and is developing seven solar projects nearby, with sizes between 1.5 MW and 14MW.   I did not find any other developer with projects of the right number and size in the Fresno area.

The financial details of the deal are:

  • Land: Approximately 100 Acres, most likely previously agricultural.
  • Solar Farms: Over 20 MW PV.
  • Purchase Price: Approximately $1,600,000
  • Lease: 25 years, at $157,500 fixed, with two options to renew at “market rate” through 2048.
  • Financing: Acquisition financing has been provided by Hudson Bay Partners, an investment vehicle owned by PW’s CEO, David Lesser.  The financing consists of two tranches:
    1.  Tranche A (Senior): $1,115,000.  Interest only at a 5% interest rate for the first 6 months, with a step up to 8.5% thereafter.  Planned to be replaced by bank financing ASAP.
    2. Tranche B (Mezzanine): $445,000.  Interest only at 9.5% for 6 months, with a step up to 13.5% thereafter.  May be refinanced by issuing new equity, depending on PW’s stock price.
  • No equity on closing, but see tranche B above.
  • Taxes: $27,000 annually.  If taxes rise, lease payment will increase to compensate.

I ran two financial models, both assuming that the first tranche could be refinanced at 5% in the next six months amortizing over the 25 year term of the lease.  In the first scenario, I assumed that Power REIT chooses not to issue equity to refinance tranche B, but instead refinances it with debt in 2020 (at 11%) and 2024 (at 7%) when the increasing equity in Tranche A allows.  In this scenario, increases earnings by $7,338 thousand in 2014 (about 0.4 cents a share), and by increasing amounts in future years.  Cash flow is again marginally negative until the second refinancing of Trance B after 10 years, when it turns slightly positive.  Assuming the terminal value of the land is equal to the purchase price, this scenario yields an internal rate of return on the cash flows of 7.6%.

In my second financial model, I assumed that Tranche B was refinanced at a rate of $100,000 a year by issuing new equity.  This scenario produces an IRR on the cash flows of 9.3%, and returns on equity which start around 40% in the early years, but falling as more equity is invested.  Once the full $445,000 in Trance B has been repaid by issuing equity, the cash flow from the project is $51,300 a year, and the income is $80,600.  This repayment would require the issuance of 54,000 shares at the current price of $8.25, or 42,380 shares at $10.50 , where the stock was trading when the deal was first announced.  At $8.25, each new share would be producing $0.95 of cash flow and $1.49 of income.  At $10.50, each new share would be producing $1.20 of cash flow and $1.90 of income.  This opportunity to invest funds from newly issued shares at an effective P/E of 5.5 is part of the reason I consider PW to be massively undervalued at the current price.

Even at the current price of $8.25, this deal would be significantly accretive to both cash flow and income if tranche B were to be repaid by issuing new equity.  If management refrains from issuing new equity because of the current low share price, the deal will still be accretive to income while putting a burden of approximately $9,000 a year on cash flow.

Although the step-up interest rate on Tranche B is high at 13.5%, this tranche effectively takes the place of new equity which would have to be issued by Power REIT.  At the current share price, I think even paying 13.5% per annum for the flexibility to wait for a more attractive share price is worth while.  I would prefer if the funding had come from a source other than Power REIT’s CEO, but so far, discussions with outside investors have not led to a reliable source of short term funding other than Hudson Bay Partners, even at the rates Power REIT is willing to offer.


Power REIT has now completed two solar real estate acquisitions  which are both accretive to income and at worst put only a tiny burden on cash flow.  Given the current low share price, issuing equity to refinance the Fresno deal does not currently look attractive to me, since it would spread any gains from the resolution of Power REIT’s attempt to foreclose on its rail property over a larger number of shares.

In my opinion, both of these deals seem good for Power REIT, and I’m happy to see the significant progress the company has made over the last two weeks towards its goal of becoming the nations’ first Renewable Energy REIT.

Disclosure: Long PW

This article was first published on the author's Forbes.com blog, Green Stocks on July 17th.

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

July 23, 2013

Did You Just Buy a Sustainable Mutual Fund? No.

Garvin Jabusch

Did you just buy a sustainable mutual fund? No.

The answer is no because human economies are still so far from real sustainability that even a highly idealized portfolio of our most sustainable enterprises necessarily still falls short. Ultimately, the best any portfolio can do is mirror the reality of the world, and today, still, even the best representatives of sustainability can be found wanting compared to what will be required if we would like to keep society thriving indefinitely. At best, whatever fund you just bought can only be described as, to a greater or lesser degree, more sustainable than its non-green counterparts.

Not that we aren’t trying. We work hard to model what a truly sustainable economy - within which civilization could in theory thrive indefinitely - might look like, and then we endeavor to build portfolios of companies that appear to be working toward that world. Unfortunately, this is still anathema to most portfolio managers, who instead subscribe to traditional modern portfolio theory (which can require investing in things like fossil fuels), and even to many 'green' money managers who basically view their job as, for example, to remove Exxon from, and add a solar company to, a regulation S&P500 portfolio, but who are otherwise entirely shackled to traditional portfolio construction methods and who don’t seek portfolio innovation.

In a very real sense our economic theories and practices are far closer to imagining what it will take to keep economies growing and maintaining standards of living for a very long time given earth’s climate tolerances and resource limits, than they are to anything taught in traditional academies of finance. Yet, as far as I can tell, true indefinite sustainability is the only viable long term path for human economies, and therefore our methods of managing capital to be a conduit towards the sustainable world (such as via our mutual fund, NEXTX), represent the only course that provides hope for indefinite growth and also the most likely path for long term competitive investment returns. Because, as opposed to what? Crashing into resource limits? Asset management and capital markets are themselves in need of innovation to be effective conduits of capital facilitating the needed economic transformation.

So, to address the question most frequently asked of us: no, we do not practice negative screening to eliminate things we find to be less than sustainable so much as we apply a positive approach to proactively selecting businesses, techniques, technologies, and innovations that are leading the way toward true sustainability. Again, as a practical matter, since the world remains imperfect, we find that it is not yet possible to construct a broadly diversified portfolio that encompasses only perfect sustainability. So, in that sense, we are striving for a goal that is still impossible to realize from a practical perspective.

We believe, however, that in striving for this idealization we come closer, via our portfolios, to reflecting an economy that might be perpetuated indefinitely than do most other practitioners managing client assets. Pure theoreticians in academia or think tanks may say that our portfolios do not yet reflect perfect sustainability. True. We in turn say that that means human economies, although improving, are not yet capable of perfect sustainability. It is no accident that the list of people upon whose work we base our own theories and philosophies contains few, if any, other asset managers. The list of our guiding thinkers goes: Lester Brown, James Hansen, Joe Romm, Ramez Naam, Bill McKibben, and Elon Musk. Validation of the practical economics of our theses comes to us via Warren Buffett, Google, Goldman Sachs (believe it or not), and Elon Musk.

Daunting as it may be, striving for perfect sustainability is important. Because coming close to large-scale idealized sustainability is the only way our civilization can thrive going forward. So we are determined to keep reaching for practical realizations of this ideal, whether or not others agree with our vision, and whether or not some even believe in the science that to us so clearly demonstrates that present economies of non-sustainability can no longer serve our economic or societal advancement.

Strange as it may seem, there are still many in the investment industry, even among those who represent as “green” portfolio managers, who believe fossil fuels represent a resource that can somehow power civilization for the very long term. We believe in the polar opposite, as was well articulated in a recent Tweet from energy economist Gregor MacDonald: “Friendly reminder: we are in midst of a historic energy transition, away from liquid BTU to the power grid. Oil Age is in steep decline. Fact.”

We simply don’t see fossil fuels as primary power in an indefinite, growing economy, and we think the share prices of fossil fuels firms will, in relative terms, underperform over time as a result. Portfolio managers still clinging to fossil fuels as a source of low risk returns are, in practical terms, in terms of outcomes, no different than those who deny climate change in the first place. To thus simplify the narrative of energy as it is emerging now is to distort reality. We must ignore the rationalizations of these groups and instead hew close to our models of real, long term sustainability.

Ultimately the question becomes one of ‘do we think human society is something worth preserving or not?’ I understand that there are those (perhaps many in fact) who with no small hint of nihilism believe that humanity should just be allowed run its course and that in the end we deserve whatever we get, even if that means we don't go on for very many more decades or centuries. For us, until it can be demonstrated conclusively that society is well past the point of no return on the path to oblivion, we’ll continue to believe in and work with others to bring about a better world. Of course believing that this is the only long term economic path forward means we also believe we have every shot at very competitive investment returns along the way.

Remember, the two key transitions we need to achieve long term sustainability are (1) truly renewable energies and (2) close–to-perfect recycling or circular use of existing resources already in the human economy (waste-to-value economics). These two key disruptions to our current economic system serve the larger goal of getting more and more economic value out of less and less stuff, and less and less energy. Because it's in reaching the point where we have high standards of living without further degrading the ecological underpinnings of our existence that we see the ideal state of the next economy. This is what we strive for; this is what we envision as we select companies with which to build our portfolios.

Renewable energies and waste-to-value economics continue to advance against fierce resistance from human homeostasis, which, based in fear, latches onto the ways of the past in the hope that this somehow will hold the world together. As a result, because of this aspect of our basic nature, we’ll always face the risks of failure and collapse. Thus far, though (with some notable exceptions such as Easter Island), we’ve always managed to innovate ourselves out of trouble and into a better world.  This time will be no different. Yes, we’ll have to struggle to reach our ideals, but that’s what growth is.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha ® Next Economy Index, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, "Green Alpha's Next Economy."

July 22, 2013

What I Learned During Last Week’s Visit With ePower

John Petersen

Last week I spent a couple days with ePower Engine Systems working my way through a variety of business and technical due diligence issues. As always happens with new clients, it was a full immersion course in how ePower’s technology works, what the documented performance of the current tractor is, and how that performance is expected to change as ePower:
  • transitions from a four cylinder engine designed for stationary use to an EPA compliant six cylinder engine designed for the trucking industry;
  • automates a new charge control system that will opportunistically charge the batteries in a more fuel efficient manner;
  • evaluates the potential economic and performance advantages of using a rare earth permanent magnet generator instead of a conventional AC generator; and
  • evaluates the potential economic and performance advantages of using a rare earth permanent magnet drive motor instead of a conventional AC induction motor.
ePower’s original development work was done using a 197 hp John Deere diesel engine and a Marathon generator with a rated capacity of 115 kW that can be over-rated to 128 kW for brief intervals. In all but the most extreme conditions, the ePower tractor is designed to minimize generator over-rating by using an array of 56 PbC batteries from Axion Power International (AXPW.OB) for acceleration and hill climbing boost.

Since the current John Deere engine was designed for stationary use with a generator, it is not EPA compliant and its horsepower rating does not account for parasitic engine loads like power steering, air conditioning, airbrake compressor and other accessory and hotel loads. As a result, the maximum sustained generator output of the current tractor is about 93 kW.

ePower recently bought an EPA compliant 240 hp on-road Cummins diesel engine that was salvaged from a wrecked truck. Unlike the John Deere engine, the Cummins engine is rated on net useful horsepower at the flywheel after parasitic loads. It’s 32 pounds lighter than the John Deere engine and has an advertised fuel consumption of 6.8 gallons per hour at 1,800 RPM. With the Cummins engine, ePower believes they’ll be able to run their existing generator at full capacity without difficulty.

Over the last several months ePower has been conducting fuel economy testing of their current tractor in the Cincinnati region. The topography is best characterized as gently rolling hills with grades of 1% to 3% and typical altitude changes of up to 300 feet. The fuel economy tests were conducted according to SAE J1321 protocols using multiple trips over several 40 to 46.5 mile routes with city, suburban and highway profiles. Data was recorded at average speeds of 55 and 59 mph and any results that deviated from the average by more than 5% were excluded.

The blue bars in following graph show the documented fuel economy of the ePower tractor with a variety of loads ranging from empty to fully loaded. The red blocks at the end of the current fuel economy bars represent ePower’s estimates of the incremental fuel savings that should be realizable with (1) the six cylinder Cummins engine upgrade, (2) automation of the charge control circuitry, and (3) integration of a rare earth permanent magnet generator.

For purposes of comparison, the graph also includes a single line for the national industry average across all weight classes and the goals of the DOE’s Supertruck program.

ePower mpg.png

Since ePower’s ongoing work is by nature a research and development project, there can be no assurances that the planned tractor upgrades can be completed over the next several months or that the third generation tractor will meet current performance expectations.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock. Author has recently accepted an engagement to serve as legal counsel for ePower Engine Systems in connection with certain business planning and corporate finance activities.

July 21, 2013

China Levies Tariffs on US and South Korean Polysilicon

James Montgomery

The Chinese Ministry of Commerce has formally decided to levy antidumping duties on imported solar-grade polysilicon from U.S. and Korean suppliers, turning up the heat yet again in the broader trade disputes simmering between several key markets for solar energy.

The antidumping tariffs, which are said to be effective starting July 24, range from 54-57 percent targeting nine U.S. suppliers and from 2-49 percent for 11 South Korean suppliers. (Here's a roughly Googlized translation of the China MOC announcement.) Here's how the antidumping tariffs lay out:

Not included in these polysilicon tariffs is any mention of European suppliers, which China had hinted at last fall. Reports had suggested China likely will avoid any such sanctions on European polysilicon as the two sides negotiate through the recently imposed penalties on Chinese solar imports. In a statement earlier this week, Chinese commerce ministry spokesperson Yao Jian reiterated that the MOC has laid the groundwork to pursue just such a case, but that "we’ve never changed our position that [the] solar PV trade dispute should be settled through negotiations," and that all sides "are actively endeavoring to consult with each other in hope of properly settling this case through price undertaking negotiations."

These new solar tariffs on U.S. polysilicon, though, were more anticipated as retaliation against last year's decision to impose antidumping and countervailing duties on Chinese solar cells and modules. China's GCL is the world's largest polysilicon supplier with strong government support -- even as rafts of other domestic producers are being quietly shuttered-- and these tariffs will likely deepen its domestic dominance to fuel China's massive solar energy goals.

Still, raising prices anywhere in the supply chain run counter to the solar sector's relentless march to lower costs. "There's no way that module manufacturers can tolerate a 57 percent increase in polysilicon price," emphasized Michael Parker, a Hong Kong-based analyst at Sanford C. Bernstein & Co.," quoted by Bloomberg.

Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

Credit: Chinese Ministry of Commerce

July 20, 2013

Bright Forecasts from Renesola

Doug Young

Renesola logo
ReneSola (NYSE:SOL) boosts revenue and margin forecasts
More good news is coming from the battered solar panel sector, with mid-sized player ReneSola (NYSE: SOL) sharply boosting its revenue and margin forecasts for the current quarter in the latest sign of a sector rebound. ReneSola isn’t forecasting a return to profitability just yet, but the latest signs do seem to indicate the sector’s strongest players could return to the black by the end of this year if current trends continue. Some could also interpret this upbeat news as reflecting growing confidence that the EU and China could soon reach an important compromise that would prevent the former from imposing anti-dumping tariffs on Chinese solar panels.

ReneSola’s upbeat forecast sparked a rally for its shares, which soared nearly 20 percent on the news to levels not seen in more than a year. Still, at $3.44 per share, the stock trades at less than a quarter of highs seen before the current downturn. On another interesting note, ReneSola’s upbeat news didn’t help other solar shares, which were unaffected by the news. That could mean that despite a recent broader rally for solar shares, investors may become more selective about their purchasing in the months ahead, rewarding the companies that can return to profitability the quickest.

Let’s look at the details in ReneSola’s latest forecast, which have it sharply raising both its revenue and margin outlooks for the current quarter. The company said it now expects to ship 760-770 megawatts worth of products in the second quarter, up about 8 percent from its previous forecast. (company announcement) It boosted its revenue forecast by an even stronger 15 percent to $365-$370 million, reflecting improving margins as prices finally stabilize and after 2 years of steady declines. It estimated gross margins for the quarter will come in at 5-6 percent, again a strong improvement over its previous guidance for 3-5 percent.

As an interesting footnote, ReneSola was more conservative in revisions to its full-year forecasts, raising its shipment estimates by just 3.5 percent. That seems to indicate it’s far from certain that the unexpected strength in the current quarter will last for the rest of the year. While some of the uncertainty is based on whether or not prices will remain stable, I suspect a bigger part is based on the uncertainty in the EU that is the industry’s largest export market.

ReneSola’s upbeat forecast is just the latest piece of positive news for a sector that had become far more used to negative reports as prices plummeted and profits evaporated in the current downturn. Canadian Solar (Nasdaq: CSIQ) predicted earlier this month that it would report a profit for all of 2013, and Trina Solar (NYSE: TSL) said around the same time it had sufficient resources to pay off $138 million in bonds coming due this year. (previous post) Those upbeat reports followed news in May that the industry was seeing some of its first sustained price increases in more than 2 years. (previous post)

The positive news follows a recent downsizing that saw former industry superstar Suntech (NYSE: STP) sharply reduce its operations following a bankruptcy filing earlier this year. Struggling LDK (NYSE: LDK) has also sharply cut back operations, as it slowly sells off assets and stock to avoid a similar fate. Beijing has also stepped in by encouraging construction of new solar plants, providing an important new source of demand for these export-dependent companies.

I’ve wrongly predicted an end to the current downturn at least a couple of times over the past 2 years, mostly based on overly optimistic remarks by industry executives. Accordingly, I think it’s still too early to predict the industry is poised for a rebound just yet. But the signs do look increasingly encouraging, and I do expect we’ll see some of the big names finally return to profits as soon as the third quarter.

Bottom line: ReneSola’s raised guidance reflects an improving market for solar firms, but major risk remains due to an EU anti-dumping probe.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He 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 author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

July 19, 2013

The Economics of Biofuels: Three Drivers

Jim Lane

They’re known as the three E’s: emissions, energy security and economic development. But how do they contribute to the economics of biofuels?

And how do those economics compare to the economics of crude?

The financing of biofuels is founded, to put it as simply as possible, upon the economics of substitution. On the one hand, there’s the price of energy currently locked inside biomass; on the other hand, the price of energy currently locked inside crude oil. The monetary rationale for biofuels is a version of vive la difference.

To give a simple example, if renewable sugars are trading at 15 cents per pound, and crude oil is trading at 35 cents a pound — there’s an opportunity for converting sugar to fuels if the refining cost leaves a profit margin worth the agricultural and market risks.

Oh, there are enough complicating factors left over to keep a hive of economists busy for a year. There’s the differential in the energy value of, say, ethanol, compared to gasoline or diesel. The impact of losing mass when you blow off the oxygen to turn a sugar into a hydrocarbon. The impact of bioenergy demand on raw biomass prices. The value of co-products from biomass or oil refining. And so on, practically ad infinitum. It takes an advanced degree and a whole bunch of Tylenol to figure it all out.

But at the end of the day, the point where substitution makes economic sense is going to correlate back to the price of crude. No matter what the hoped-for margins are, or the opex of a biorefinery, or the capex — it all starts with the barrel.

The oil price: 54.40 or fight

In looking at the world of cost — an obscuring factor is that oil is generally quoted in a cost per barrel (42 US gallons), while biomass is generally quoted in a price per metric or US ton. To simplify, we have converted everything to US cents per pound. Plus, we’ve used constant dollars, so that you don’t have to constantly factor out inflation.

Today, the cost of Brent Crude oil is 35.88 cents per pound, and the IEA forecasts that price will increase to 54.40 cents by 2040.

So, here’s the good news or the bad news. If your biomass refining process at scale can beat that price — fully loaded for the raw inputs, capex, opex and margins — you’re going to find a lot of friends in the fuel markets.

Barriers? Even if your technology pencils out, there are the “3 Bewares“.

1. Beware! The technology has not yet reached scale. It may well not have fully de-risked itself, either – being somewhere in the path between concept and scale.

2. Beware! Qualified investors have more attractive options. No matter how attractive 10 percent returns might be to many investors, they weren’t sufficiently attractive to Chevron in evaluating their own solvent liquefaction technology — compared to 17 percent average corporate returns on capital, primarily from oil & gas exploration.

3. Beware! Policy and market risk frighten away investors. It could be that the requisite fuel requires a blending mandate to be assured of a market — mandates which may well be unstable. Or they may require flex-fuel vehicles, which may not be in wide supply. And so on.

If those barriers are addressed either by your technology (for example, by reaching scale, or producing drop-in fuels that negate the infrastructure risk) — then you may well have the basic economics to compete dollar-for-dollar with crude oil, and win.

It’s 54.40 or fight, though. Any technology that can’t compete with crude oil on price — must enter in to the more esoteric and unstable world of what is usually described as the 3 E’s of biofuels – emissions, energy security and economic development.

carbon-price[1].jpeg The carbon price

Whatever your take on the stability or wisdom of carbon prices, they have arrived in key markets such as Australia and the EU, and particularly in the EU there’s no reason to suppose they are going away any time soon.

What’s the value of carbon today? Well, again, we have the problem of carbon credits being generally quoted in euros per metric ton of CO2 avoided. An 8 euro per tonne carbon price works out to 0.65 cents per pound of biofuel — if you assume that an advanced biofuel reduces carbon emissions by 50 percent in a complete lifecycle.

That’s not much of an add-on or game-changer — one of the reasons why biofuels developers generally don’t take them into account when developing technology) the other reason is policy instability).

But, according to the UK government, carbon prices will begin to bite much more sharply in the next few decades. In fact, by 2040, the UK is projecting a carbon price of 12.27 cents per pound.

If you accept their projections — and many may be skeptical — that could raise your threshold “break-even” point with crude oil from 54.40 cents per pound to 66.67 cents, by 2040. That would be of material help.

The energy security price

Now, what about energy security? What’s the price of avoiding the unrest that being short on fuels brings?

Well, there are estimates all over the map. One line of thinking assigns the cost of the US Firth Fleet to the cost of oil — since the Fifth Fleet generally guards the Straits of Hormuz and is dedicated to assuring a flow of oil out of the Gulf.

Another, more conservative approach is to assign the cost of fossil energy subsidies as a cost of energy security. Generally, the subsidies are paid out to keep national populations content in a world of unstable and high energy prices — and to keep national economies producing. Those can be thought of as costs associated with being short on energy, or energy insecure.

Fortunately, the IEA has been tracking fossil energy subsidies — and it comes out to 3.70 cents per pound, if you assume that half of fossil energy subsidies go to fuel (the IEA says that it is “more than half” and leaves it at that), and that about 80 percent of the barrel goes to fuels (as opposed to chemicals and other co-products).

So, if you like to factor in energy security, you might start there, which brings your 2040 target price up to 70.37 cents per pound.

Economic development

The University of Wisconsin estimates that a biofuels refinery generates $1.82 in statewide economic activity for every $1 in sales. Now, “economic multipliers” can be all over the map — but this is a conservative estimate, on the whole — we’ve seen multipliers well north of 2.0 used in biofuels economics.

So, what does that mean? It means that a local biorefinery is going to be worth far more in overall economic impact than just the fuel it sells — and, accordingly, a nation, state, county or town has benefits that range above the direct profits, wages and equipment sales that go into our cents per pound calculation.

Making that refinery valuable to the community in terms of economic impact even if it doesn’t generate a profit.

Now, that’s a controversial benefit to work into the fuel price equation — because biorefineries are not going to be running at a loss simply because they generate overall benefit to the community. That is, unless they are owned by the community — in the same way that the NFL’s Green Bay Packers are owned by local investors, who have been able to maintain a competitive football team in a relatively small market and in 2011 sold $64 million in stock to local investors who know that “the redemption price is minimal, no dividends are ever paid, [and] the stock cannot appreciate in value.”

If you assign all that value into the enterprise — you get some pretty high “break-even” points — 73.22 cents per pound this year, and 128.07 cents per pound in 2040 (in constant dollars). Economic activity is not the same as margin — but it wouldn’t be unfair to assign some 10 percent of that impact as a value-add.

We’ve done that in our chart below. But individual investors, policymakers and technology developers will make their own choices on what to count.

The bottom line

For sure, it’s 54.40 or fight. Above the strict break-even with crude oil prices — that is, if your capex, opex, raw inputs and margin add up to more than 35.88 cents per pound today, or 54.40 cents per pound in 2040 — you’ll have a dogfight on your hands getting traction in the fuel markets.
crude-biofuels-substitution[1].png How much you want — or need to — lean on the impacts of emissions, energy security and economic development — well, it’s a tough call. In the case of economic development — what’s good for Iowa may not make you popular in Texas. What is good for the plant employee may not translate into a desire for In the case of carbon pricing — fickle friends you will find.

Nevertheless there is value in avoiding emissions, generating energy security and stimulating local economic impact. Especially the latter — though it is felt most intensely quite close to the plant, and your offtake contracting would be most successful if it also was kept local.

It may push you out to the higher-margin, lower-volume worlds of chemicals, fragrances, flavors, feed, lubricants and nutraceuticals. That’s where a lot of ventures working with algae and corn and cane sugars are generally heading now — though not all.

There’s good reason to do so. Today, the price of cane sugar is running in the 15 cents per pound range, and corn starch is running in that region as well.

But other forms of biomass look for more affordable — KiOR projects wood biomass in the 3 cent per pound range, as do POET-DSM and other makers of cellulosic ethanol from wheat straw and corn stover. The conversion rates are lower, the capex can be daunting, and there are limits to the ethanol market that are being tested now that pertain to the lack of flex-fuel vehicles — but you can see where the fuel arguments apply.

Disclosure: None.

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

July 18, 2013

Energy Efficiency and Solar Lead Alternative Energy Stocks Skyward

By Harris Roen

Industry Day Week Qtr Year
Energy Efficiency -0.3% 2.3% 18.7% 49.9%
Environmental -0.2% 1.1% 9.8% 11.8%
Fuel Alternatives -0.3% 1.3% 19.6% 29.2%
Smart Grid -0.1% 2.4% 9.5% 31.9%
Solar 0.5% 6.8% 40.3% 52.8%
Wind 0.0% 2.1% 9.7% 21.6%
Average -0.1% 2.7% 17.9% 32.9%
Data as of: 7/17/2013

Alternative energy stocks are up over 30% on average for the year, reflecting impressive gains off of widely oversold lows in 2012. Almost three-quarters of stocks have been gainers, and two-thirds have seen double-digit price growth in the past 12 months. Solar and energy efficiency stocks in particular have done extremely well, both up over 50% annually.


The run-up in solar stock prices exhibit strength and breadth. For example, almost four out of five solar stocks are up in both the past three-month and 12-month time periods.

The best performer is SunPower Corp (SPWR), up 505% for the year! This vertically integrated, California-based solar company works at all levels of the photovoltaic business: from manufacturing to installation to service; and from rooftop residential to commercial to utility-scale. Caution is advised, though, since SPWR is still in negative earnings territory. Because SunPower is well positioned in the growing solar installation market, however, we believe that this energy stock is a good long-term prospect.

Energy Efficiency

Energy efficiency stocks have also done extremely well, with over 70% of companies posting annual gains in the double digits. The return leader here by far is Revolution Lighting Technologies Inc. (RVLT), a company that is worth 20 times what it was a year ago. Investors see RVLT as a strong play in the push for increasing efficiency in electric consumption by greater adoption of LEDs.

As with SPWR, it is hard to suggest investing in this and other high flyers except for a speculative portion of one’s portfolio. Having said that, these and other high-quality green investments will more than likely pay off as a buy-and-hold for the long-term.

Market Bottom?

On a technical basis, alternative energy stock prices look like they have formed a bottom. The chart below shows the WilderHill New Energy Global Index (NEX), which after flying high for a couple of years dropped 66% off its peaks in 2007. The downward pattern, however, shows a clear triple bottom. Three times, a new low occurred below the previous downward trough creating a wave-like pattern. This typically happens in three or four waves before a significant upturn begins.

In addition, the 200-day moving average crossed the 50-day moving average in December 2012, and the NEX has been trading above the 200-day moving average since that time. This can be an early sign of a prolonged upswing, as occurred in September 2006. The crossing marked the start of a 15 month, 83% surge.

Investors should be vigilant and monitor to see if the two moving averages cross again. This can indicate a false bull, as happened with the run between May 2009 and February 2010. Alternatively, it can signify the start of decline. This was foretold by the two moving averages crossing in February 2008, which preceded the precipitous drop later that year.

Unless the NEX starts forming a short-term top, we believe the two moving averages should remain widely apart as the recovery in clean energy continues.


Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

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.
Remember to always consult with your investment professional before making important financial decisions.

July 17, 2013

Is Fracking for Enhanced Geothermal Systems the Same as Fracking for Natural Gas?

Meg Cichon

Advocates for both natural gas and geothermal are up in arms over whether fracking for enhanced geothermal systems should be scrutinized with the same parameters as natural gas.

Ormat sucessfully used EGS technology to increase the capacity of its Desert Peak 2 plant in Nevada by 1.2MW. Photo Source: Ormat

The U.S. geothermal industry recently scored a big win when its first enhanced geothermal system (EGS) project went online in April. ORMAT (NYSE:ORA) was able to stimulate a previously unproductive well at its Desert Peak project with EGS technology — injecting fluid into a well to reopen cracks and create a resource reservoir — and found an additional 1.2 megawatts (MW) of capacity. Renewable energy experts applauded the project, dubbing it a "game-changer" and a "shining moment" for the industry.

Though the project represents a breakthrough for EGS technology and the geothermal industry in general, EGS has come under fire, with opponents accusing it as being just as dangerous as oil or natural gas hydraulic stimulation, commonly known as fracking. While traditional geothermal energy is viewed as clean renewable energy, could EGS technology, with its similar "fracking methodology," coupled with its rocky past, come under the same intensive scrutiny as natural gas fracking?

EGS and Earthquakes

Perhaps the most notorious EGS project is one that was never completed in Basel, Switzerland — constructed on a known seismic fault and suspended in 2006 when it generated earthquakes that reportedly caused millions of euros in damage to local infrastructure. The project was cancelled in 2009 after several reports said that if continued, it would cause more earthquakes and would lead to more damage each year.

"It's easy to generate a lot of fear. You can scare people about things without providing much solid information," said David Stowe, communications director at AltaRock. "The Basel story is dredged up over and over again — but we have learned from it, and it is pretty easy to put safeguards in place that will severely minimize risk."

Since its cancelation, many have pointed to the Basel project as a reason to avoid EGS altogether. However, the U.S. Department of Energy (DOE) remained undeterred, and developed geothermal-induced seismicity protocol and further stringent safety measures with Lawrence Berkley National Labs to prevent major seismic events - the only protocol in place for any sub-surface energy industry, according to Doug Hollet, director of the DOE geothermal energy program.

The DOE has been working on several EGS projects, including AltaRock's innovative Newberry project in Bend, Oregon. To ensure that the Newberry project does not cause significant seismic events, AltaRock has implemented rigorous protocols and created an advanced microseismic network system of about 20 seismometers that surrounds the project both on the surface and in wells 1,000 feet below the earth. The seismometers pick up the sounds that fractures make when they grow, triangulate and then displays the location of the fracture zone on a computer screen — AltaRock has its own modeling software for this, said Stowe.

"We have engineers outside monitoring pumps, two or three geologists on the command trail monitoring computer screens, and additional monitoring equipment," explained Stowe. "It's an intricate operation."

In natural gas, seismic activity is not the major concern when it comes to the fracking process. According to Stowe, the reinjection of the spent working fluid causes the most problems. "It creates a huge bulge when you re-inject all this water; pressure builds and the earth moves to compensate for that, which can cause a seismic event," said Stowe — adding, however, that this isn't a common occurrence.

According to Andrew Place, interim director and president of the Center for Sustainable Shale Development, seismicity is more of a concern for EGS due to the ongoing nature of the technology, whereas natural gas enters a site, fracks for the resource and moves on. "[For natural gas] the strong concern is for disposal wells, and if you don't site them carefully and drill in a close proximity to an existing fault that is highly stressed, you could set off a substantial seismic event," he said. This can be avoided with pre-drill modeling to ensure the avoidance of fracture networks and monitoring for seismic events — similar to the precautions already being taken at the Newberry project site.

Fracking vs Slipping

According to Hollett, the fundamental difference between natural gas fracking and EGS fracking is the injection process. The oil and gas industry injects water and a proppant (a mix of sand and chemicals), at a very high pressure of around 9,000 psi or more, which breaks though the rock and holds the cracks open; otherwise they would close when the fluid stops flowing.

EGS, however, uses water, and sometimes acid, to shear the rock and cause a "slip." "You're trying to make two rock faces slide past each other slightly, which creates a little bit more space between them," said Lauren Boyd, EGS program manager at the DOE. This is where fractures or weaknesses in the rock likely existed already and were plugged by mineral deposits over time. Boyd compared the process to putting an ice cube in a glass of hot liquid: "cracks will form where there are existing deformities in the ice, which is similar to what happens in the subsurface with closed fractures," she said.

As for long-term effects, "we are talking about very small fractures very deep in the earth — there is really little or negligible long-term impact there," said Hollett.

Contamination Concerns

Since many believe EGS technology to be similar to natural gas fracking, the same concerns about leakage, spills and resulting groundwater and soil contamination exist for both technologies. After all, according to Popular Mechanics, in the past two years alone, natural gas fracking has caused numerous surface spills including several projects that have contaminated groundwater.

AltaRock plans to combat these problems at the Newberry project by using a multizone stimulation process. Water is injected into a single well at a pressure of about 2,000 psi to stimulate cracks in the rock, which eventually spider out to create a "zone." Once a zone is complete, pressure is dropped to 1,000 psi and a diverter made of biodegradable plastic (similar to plastic developed that allows water bottles to biodegrade in landfills) is injected into the well to "gum up" the cracks, according to Stowe. Pressure is then increased to 2,000 psi to start a new fracture zone, and then a new batch of diverter is made to plug up holes at hotter temperatures. The process repeats until all zones are created, and water flow is then stopped to allow the well to heat up. It takes about one week for the diverter to break down into water and CO2, which is eventually used to generate power once the plant is built, said Stowe.

According to several experts, many of the issues related to natural gas fracking can be prevented with the same type of proper protocol and procedures in use at the Newberry project. For example, in 2011 Chesapeake Energy (CHK) reportedly lost control of a well in Pennsylvania. The well cracked, spilled and contaminated a nearby stream - this could have been prevented by using stronger cement and casings to ensure an impermeable seal.

The natural gas industry is slowly realizing that it needs to reduce these issues to gain public confidence, said Stowe, so it is working with state regulators to create some of the same regulations that exist for geothermal. Texas became the first state to require companies to reveal what is in its fracking solutions. And more recently, Illinois passed some of the "toughest fracking regulations" in the U.S., and will require companies to reveal chemicals used and test groundwater before and after fracking. "The best way to get around issues is to adequately fund state agencies, employ smart people with decades of experience, gain support from the surrounding regulatory framework and a commitment from the Environmental Protection Agency," said Place.

Though there are far fewer EGS projects compared to the thousands in natural gas, Hollett is confident that if the geothermal sector follows best practices, drills wells properly and works with regulatory agencies, it will mitigate the potential for any adverse environmental impacts.

Place agrees, and points out that both technologies have potential risks, neither of which are served well by avoiding them. Though there are different risk pathways, he said, risks are risks, and the industries not only needs strong regulations, but strong practices and responsible development — it "goes hand-in-hand" for both technologies.

"At Newberry [regulations are] rigorous - that's how it should be, and that's okay. Fracking should be completely safe, and if it isn't then someone is doing a sloppy job," said Stowe. "I'm hopeful that the natural gas industry will [work to create regulations and protocols], because in my opinion fracking is here to stay — I don't see it going anywhere any time soon."

Meg Cichon is an Associate Editor at RenewableEnergyWorld.com, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for RenewableEnergyWorld.com and REW magazine, and manages REW.com social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

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

July 16, 2013

Two Weeks In Cleantech, July 2nd to July 16, 2013

Jeff Siegel

7/2/13: LDK Sells Shares

LDK Solar (NYSE:LDK) is down in pre-market this morning after announcing the sale of 25 million newly issued shares to Fulai Investments Limited for $1.03 per share with an aggregate purchase price of $25.75 million. LDK closed at $1.40 yesterday afternoon.

7/9/13: How High Can Tesla (NASDAQ:TSLA), SolarCity (NASDAQ:SCTY) Go?

  • First Energy Corp (NYSE:FE) has announced that it plans to deactivate two coal-fired power plants in Pennsylvania by the end of the year. The reason? FE claims its weak power prices and the high cost of complying with stricter environmental rules. But let's face it, the primary culprit is dirt cheap natural gas, and this is unlikely to change anytime soon. The two coal-fired power plants that are about to be put out to pasture represent about ten percent of the company's total generating capacity. Interestingly, FE doesn't look like a bad deal right now. I like it below $36.00, particularly with that 6% dividend.
  • It looks like shorts might be getting squeezed again today on SolarCity (NASDAQ:SCTY). The stock is up a little more than one percent this morning, touching $41.50. If it crosses $42, we'll likely see a run up to around $46. Full disclosure: I currently own shares of SCTY.
  • Tesla (NASDAQ:TSLA) crossed $120 for the first time this week. In pre-market, it's now trading above $125. Will it keep heading north? We'll soon find out.

7/15/13: SolarCity (NASDAQ:SCTY) Will Profit from China Announcement

China has announced that it plans to more than quadruple its solar capacity to 35 gigawatts by 2015. Folks, this is massive and should not be ignored. Particularly because China-based solar companies are so heavily reliant upon the actions of the Chinese government. From mind-boggling incentives and subsidies to mandated solar integration, the Middle Kingdom is doing everything it possibly can to keep its solar machine running.

Certainly this is good news for Chinese solar stocks. The major players here, like Trina Solar (NYSE:TSL), Canadian Solar (NASDAQ:CSIQ), and JA Solar (NASDAQ:JASO), are all up in early trading. But this is also good news for solar installers looking to keep those cheap panels rolling in. Certainly solar financing and leasing company SolarCity (NASDAQ:SCTY) has a lot to gain from this, too. SCTY is also up in early trading, and actually crossed $44.40 in pre-market.

7/16/13: Siemens (NYSE:SI) Could Benefit from New Green Bonds

More good news for renewable energy supporters. This morning we learned that the European Investment Bank has issued an $848 million “green bond” which it will use to finance energy efficiency and renewable energy projects in Germany and France. I suspect that with the Germans getting so aggressive on offshore wind, Siemens (NYSE:SI) is likely to benefit from new projects getting financing through the “green bond.”

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

July 12, 2013

Three Keys to Advanced Biofuels at Commercial Scale

Jim Lane

Is your team ready for the summit run?
Take our 3-question, 6 point quiz, and compare your route to the established routes that others have pioneered.

It’s become an cliché of late that “financing is tough” and that “the US is slowing” while “China is speeding up” on advanced biofuels. It’s also become a cliché that “cellulosic biofuels are slow, the economics are unworkable” and that “the next wav of investment will wait until 2015 or 2016, especially for commercial-scale.”

Like all clichés, they have their origin in real experience, but are generally over-broadened to represent a general trend — whether it is “white men can’t jump” or “women are lousy drivers” or “it never rains, but it pours” — it is important from time to time to re-validate the cliché against the hard data.

Here at the Digest, we see a lot of the same conditions that everyone else does. True, not every company is getting all the resources it could use, financially or otherwise. Neither did every US automotive company during the period when 200 carmakers were winnowed down to around five majors between 1920 and 1980. Not that there was anything wrong with a Stutz, DeSoto, DeLorean, Tucker, Packard, Checker or Olds — but the market generally supports a winnowing process, and financing is where it bites.

Key #1: Route to the Summit

In biorefinery financing, we have seen three trends emerge for successful projects.

1. The successful ones are generally integrated with others — so that resources such as infrastructure (e.g. rail, power, water), and biomass or residue aggregation are in place to the extent possible. Even existing refining units that can be utilized in a bolt-on strategy.

Think of this as simplifying the inputs and outputs — feedstocks into the plant and distribution of product out of the plant — so that as much financing as possible goes to the core technology, which often can be as little as 10 percent of the overall cost and footprint of an integrated biorefinery.

For this reason, we see wood biomass, sugarcane bagasse, corn stover and wheat straw projects getting the most traction, now. It’s been easier to use existing residues (bagasse), existing aggregation resources (wood) or at least an existing network of growers and delivery mechanisms (corn stover and wheat straw).

New feedstocks such as carinata, jatropha, sorghum and algae are incredibly exciting and getting closer every day — but it is tough to finance a first commercial plant when there is agricultural risk.

2. The successful projects typically involve a shared financial burden. There have been some notable go-it-alones — DuPont (DD) and Abengoa (ABGOY) come to mind, and they have really “put their back into it” on advanced biofuels in terms of getting a first commercial project going.

But there’s the Beta Renewables group – Novozymes, Chemtex, and Texas Pacific Group. Poet and DSM have teamed up. Shell and Cosan (CZZ) are in their Raizen JV and have Iogen in the mix.Fibria is tied up with Ensyn, Versalis with Genomatica. Darling (DAR) and Valero have tied up in Diamond Green Diesel, as have Tyson and Syntroleum (SYNM) Solazyme (SZYM) and Bunge (BG) have their sugar-to-oils JV. GranBio and American Process are tied in together now. Renmatix has JDAs with both UPM and Waste Management (WM)— and WM is also backing Enerkem and Fulcrum BioEnergy. British Airways has tied up with Solena. BP and DuPont tied up in Butamax.

The trend usually involves a company with access to feedstock — or at least a key cost element like enzymes — teamed up with a processor. In some cases — such as BP, BA and Eni’s Versalis unit, the tie-in is between a downstream marketer and a processing technology developer.

3. The successful projects have, so far, been the ones that are most cost-advantaged in terms of product cost — and cost advantaged within the universe of opportunity available to a given investor.

Carbon anxiety only goes so far, it turns out — it can attract players into the market in terms of inspiring them to investigate a sector. But those players will definitely measure the cost of buying mandatory renewables credits against the returns from a project, as Chevron’s many partners found out.

Enthusiasm and genuine interest will only find its way into project financing if the returns are there — measured against the other returns available to that company in other opportunities it has.

That means, generally, targeting companies not that have strong balance sheets — only — but companies that have low returns from other project opportunities. It means nothing that a biofuels venture can make a 10 percent IRR if this is measured against 18 percent available to that company in terms of its existing upstream opportunities in oil & gas.

Companies that are primarily refiners have smaller option sets than those deeply involved in upstream oil & gas exploration. Pulp & paper industries have fewer options, and challenged ones. Feedstock providers — such as companies that own large tonnages of palm residues or bagasse — see attractive upside economics in biofuels. As do owners of large caches of low-purity CO2, such as flue gas — if their other generation projects have low potential returns.

In short — it is not all about ROI. It is about comparative ROI.

Key #2: The geographies

You can divide the world according to three questions.

1. Is there a lot of carbon feedstock (e.g. biomass, CO2, etc) that has high potential but currently is sold for low values, or wasted? 3 points for Yes.

2. Is there a carbon emissions regime — e.g. mandates, carbon taxes and so on. Discount renewables targets, think only in terms of obligations. 1 point for Yes.

3. Is there a long-term energy shortage looming — e.g. rapidly declining domestic sources of energy, or a fast-growing economy that will outstrip growth in domestic resources. 2 points for Yes.

4-6 points. This region is hot to trot on biofuels, and is probably rapidly developing already, or will be.

2-3 points. This region is looking into biofuels — likes it, but the economics or existing infrastructure will weigh heavily. It’s tough to deploy alcohol fuels, tough to aggregate feedstock. If the resources are there for the products produced — look for biofuels. Otherwise, think chemicals, fragrances, flavors, nutraceuticals and other high-margin, small-volume markets where niche plays will be the order of the day for some time to come.

0-1 points. This region may make a lot of noise about biofuels — but mandates and targets will ultimately be too soft to inspire investor confidence.

Key #3: The players

Obligated customers – downstream.

As we have noted, not a good source of capital unless they lack exploration divisions. They’ll buy upgradable feedstocks – be they crude oil, bio-oil or what have you – if the economics are there. And they may wheel out their balance sheet if they see

Preferential customers – downstream – customers would prefer to use biobased fuels, chemicals or materials, but are not facing a mandate.

If you have a cost-advantaged molecule for them — especially if it smooths out volatility issues with fossil feedstocks — you may well have a winner. Green will be a tie-breaker, no more.

The bigger their balance sheet and the smaller their other opportunities, the more likely they will be to make a direct investment at scale. Otherwise, they may push technology along with a strategic investment and wait to buy the product. Or, they may co-operate in the form of testing and R&D collaboration, but not make a direct strategic investment — especially the consumer product companies will line up this way.

Growers and biomass aggregators

The best source for capital, long-term. After all, they have the real upside of a new market for their feedstock. It’s like getting a country that has discovered oil to get excited about supporting technology development that builds new applications.

The problem here? Usually they are disaggregated, and badly capitalized. Fixed-cost feedstock contracts may well help secure interest from purely financial players who can work within the project finance structure.

But seeking owners of aggregated sources of feedstock and have balance sheets — well, that should be job #1 on the list of any financier looking for dollars for a first commercial.

Government entities

Governments are pretty good at supporting long-term basic research, less so in mid-term advancement of technologies to commercial-readiness, generally terrible at helping companies to go forward to commercial scale. The best regimes are those where government has a cost-share role — limited a project sweetener of, say 20-40% of the total cost, and where there is a clear benefit to the local economy in adding value to biomass.

Carbon tax regimes are virtually useless except to the extent that they force obligate parties to get active in searching for partners. But at less than $10 per tonne for a carbon credit, it’s barely a sweetener for a bioenergy project.

Mandates are too inherently unstable to reduce financial risk. Especially when they have an offset mechanism such as the purchase of a credit in lieu of the fuel. Those regimes allow obligated parties to buy the credits until they can mount enough “why are we obligated to use non-existing fuels?” noise in government circles to tear the mandate down, or otherwise de-fang it.

Processing technology developers, catalysts, enzymes

Good source of capital for first commercial projects — no more. They rarely make early-stage investments, but often recognize that technology is coming along that needs to get through the valley of death to open up some real new market opportunity for the catalyst or enzyme maker. But the appetite for investing will rarely stretch beyond the first commercial.

Financial investors – aggregated (hedge, private equity, VC, institutions)

Good source for early-stage capital for technologies that have low market, policy risk but have technology risk. VCs will take technology risk all day long. Hedge and private equity are more interested in the “I’ll finance your third plant” strategies, if they have an interest in the sector.

Financial investors – disaggregated (retail, IPO)

Small investors beat up on technology stocks, and especially cleantech plays, and extra especially on advanced biofuels. Going public in advance of revenues and cash flow – yikes, the heat will be tough, and must be measured against the reduced cost of capital that a successful IPO can offer, and the opportunities to raise debt and equity through subsequent offerings that public entities have.

Once the revenue and cash flows are in place – once the stock has evolved from “story” to “value” — well, that’s different. But markets can still beat up on cyclical companies, badly. Look at all those revenue-generating ethanol plays.

Vehicle/engine manufacturers

Can join and even lead your R&D consortia — or help immensely with your roadmap to establishing a new fuel. Look at Boeing, practically investing aviation biofuels in terms of fostering the commercial testing and assisting where possible in fostering policy support.

Financial support – well, it will be minimal. GM has done some, Honda and Toyota too. It’s been early-stage, and not a huge amount lately.

Seed/plant developers

Generally, the Big 6 seed and plant companies have been investing where they also have technology arms that see customer sales or technology license sales down the line. BASF has been getting very active of late with companies like Renmatix and Genomatica. So, Dow’s been active as an investor in companies like OPX Bio, while DuPont has been hugely active via its cellulosic ethanol venture and in biobutanol.

Monsanto, Syngenta, Bayer — not much activity – though Monsanto has shown some interest in Sapphire Energy’s algal technologies.

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.

Photo: Mt Everest from Rombok Gompa, Tibet. Taken in 1994 by John Hill.

July 10, 2013

China Won't Impose Tariffs on EU Polysilicon: Solar Trade Tensions Cool

Doug Young

After months of heated rhetoric, the voice of reason is growing between Europe and China as they seek to end their dispute over Beijing’s state support for its solar panel sector. In the latest sign that a potential agreement to resolve the dispute could be near, Beijing has decided not to levy punitive tariffs against European polysilicon, the main ingredient used in making solar panels. (English article) Many had seen China’s launch of an anti-dumping investigation into European and US polycilicon imports last year as a retaliatory move for similar US and European investigations into Chinese solar panels.

Of course the big question now is whether this positive move by Beijing will be followed by the more important step that will see an agreement to end EU punitive tariffs that took effect in June. The signing of such an agreement could also pave the way for talks between the US and China, which could reach their own deal to end similar punitive tariffs.

The latest media reports cite a German government official saying that China won’t impose punitive tariffs on European polysilicon, at least not for now. (English article) China had opened the investigation into European polysilicon last October. The wording used by the official from Germany’s Economy Ministry seems a bit unusual, since she doesn’t say the polysilicon dispute has actually been resolved permanently. That seems to imply that if the 2 sides don’t reach a deal on the broader solar panel issue, then perhaps China could reopen its investigation into European polysilicon.

This latest move by Beijing comes as media have reported that China and the EU are close to such a broader deal that would end the dispute. (English article) According to those reports, such a deal would see Chinese solar panel makers agree to a minimum price for their products above their production costs. The 2 sides opened their negotiations 2 weeks ago, following more than a year of acrimony between China and both the US and Europe. Western governments accuse China of unfairly supporting its solar panel makers through measures like tax rebates and cheap loans, which has undercut many of their North American and European rivals.

Beijing denies providing such unfair support, and has launched a number of its own retaliatory probes in response to the US and European tariffs. In addition the probe against polysilicon makers, China has also recently launched an investigation into unfair support for European wine makers (previous post), and is reportedly considering another investigation into European luxury cars.

These latest reports indicate that after the months of angry rhetoric, both sides are finally realizing that the developing series of trade wars would benefit nobody and could deal a serious blow to the important alternative energy sector. It appears that both sides agree that the solution for now is for Chinese panel makers like Trina Solar (NYSE: TSL) and Canadian Solar (NYSE: CSIQ) to raise their prices to levels that would be more comparable with rivals in Europe and North America.

More long-term, Beijing should work with local governments to try to end strong state support policies that are common in China and often result in this kind of global trade dispute. I do expect that we’ll probably see a resolution to the current conflict in the next few weeks, and that China could quickly drop its wine investigation after that. If Beijing is smart, it will take advantage of momentum from such positive developments to open similar negotiations with Washington to try and end the US punitive tariffs. If all goes well, perhaps we could see all of these solar disputes resolved by the end of the year, allowing everyone to return to the more important business of developing alternate energy sources to traditional fossil fuels.

Bottom line: Beijing’s dropping of a probe against European polysilicon is the latest sign of progress in the 2 sides’ talks to end their solar panel dispute.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He 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 author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

July 08, 2013

The Sustainable Infrastructure Income Trust

Tom Konrad CFA

Jeffrey Eckel

Jeffrey Eckel has an investor relations problem.

No, there has not been any scandal involving fudging the books or sweatshop labor.  Rather, most investors simply don’t seem to “get” his company.

His company recently went public as a REIT, or Real Estate Investment Trust, and the traditional REIT investor likes the familiar.  They invest for income, and for many, a track record of past income and dividends is a must.  While Eckel’s company manages $1.8 billion of securitized energy efficient and sustainable infrastructure assets, it has not been able to invest in such assets itself until the funds from its IPO made that possible.

Dividend Policy
  • Commence dividend in Q2
  • Grow dividend as capital deployed
  • Distribute substantially all net income
  • Ramped yield of 7%
  • Yield targeted to exceed MLPs and infrastructure funds

Eckel’s firm is now in the process of investing those IPO proceeds, and he expects the average investment will yield near 5.5%.  Using a 2 to 1 leverage ratio, he plans to ramp that up to 7% of the IPO price ($12.50.)  This is well above the yields of most other REITs, but given that there are no other REITs which invest in the same asset class, traditionally conservative REIT investors don’t seem to know what to make of it.  Eckel’s predicted yield translates to annual earnings (almost all of which will be distributed to shareholders) of around 88 cents a share.  The two analysts who have initiated coverage so far are predicting 2014 earnings of $0.84 and $1.08, which makes sense given that Eckel is probably being a bit conservative about his earnings projections in order not to disappoint Wall Street.

One other, somewhat less serious, problem Eckel has is the name of his firm.

If you have never heard of “The Sustainable Infrastructure Income Trust” in this article’s headline, that’s because the company does not (yet) exist.  I recently sat down with Mr. Eckel at the Renewable Energy Finance Forum (REFF) Wall Street, and suggested the name to him.  His company is called Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI).  I think the re-branding might make it easier to convey exactly what his firm does.

Many successful public companies have names that don’t describe their businesses.  Proctor and Gamble (NYSE:PG) doesn’t monitor exams at casinos, and Honeywell (NYSE:HON) doesn’t raise bees.  But for every Honeywell or P&G,  there’s a General Electric (NYSE:GE) and a Waste Management (NYSE:WM).

I think small, environmentally oriented, investors might pay a little more for HASI than professional income investors.  The professionals care a lot about the financial sustainability of the dividend, but could not care less about the environmental aspects of the business of funding energy efficiency and other sustainable investments.  Retail investors are more likely to care about both.  It might be easier to attract their attention if  Hannon Armstrong’s name were more descriptive of what it does.  Hannon Armstrong produces sustainable income from sustainable infrastructure investments; the name should reflect that.  Hence, “The Sustainable Infrastructure Income Trust.”

Eckel seemed to take my idea seriously, so there may be some re-branding in HASI’s future.  He got an extra nudge  less than an hour later: The moderator of a panel he was speaking on at REFF Wall Street choked while trying to say “Hannon Armstrong” in Eckel’s introduction.   No doubt it was a coincidence, but it spurred me to write this article.

Pounds of CO2 Equivalent saved per dollar invested. Cogeneration includes fuel cost.
Source: Hannon Armstrong with data from EIA, CME Group, Company filings, HannieMae.


Rebranding or no, real dividends will get the attention of traditional REIT investors even if HASI’s environmental credentials do not.  HASI will announce second quarter results and its first dividend on August 8th.  That will give investors a taste, and I expect the stock price to “ramp up” from there as successive dividends are announced.  My guess is that we’ll see the full dividend by Q1 2014.

I like investing in companies that are having difficulty communicating their stories to Wall Street.  Eventually, the hard earnings numbers will reflect the company’s reality.  Whenever I have a chance to buy a stock before I have to pay full price, I’m as happy as a fashionista who finds a pair of Manolo Blahniks in the clearance bin at Bergdorf.

I don’t know when the sale on Hannon Armstrong Sustainable Infrastructure Capital will end, but it could be as soon as the first dividend announcement on August 8th.

Disclosure: Long HASI, WM.

This article was first published on the author's Forbes blog on June 28th.

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

July 07, 2013

The Next Tesla Or SolarCity

Tom Konrad CFA

Andrew Shapiro

Speaking at the Renewable Energy Finance Forum – Wall Street this morning, Andrew Shapiro, the Founder of Broadscale Group, presented his ideas on how small clean energy companies can succeed: Collaborate with big corporations.  That does not mean going cap in hand looking for the cash those companies can bring, but forging collaborative partnerships where interests are aligned with a corporate investment, and leveraging the reach and scale of those companies to rapidly achieve scale that entrepreneurs have trouble finding on their own.

Stock Market Implications

If you’re wondering how this is relevant to clean energy stock market investors, you need look no farther than the recent blistering performance of Tesla Motors (NASD:TSLA) and SolarCity (NASD:SCTY), two examples he used in his presentation.

Shapiro sees a new stage in the approach of large corporations towards the clean energy space, one which he dubs “transformative.”  Corporations are now looking for new business models of open collaboration, not just in clean energy, but throughout the corporate world.

For small, innovative companies, large corporations can help with what Shapiro says is their greatest need: commercialization and scaling.  Scaling is key to mainstream success.  Without rapid scaling, we may continue to increase investment in clean energy but not fast enough to bring down worldwide carbon emissions.

He sees Elon Musk-backed Tesla and SolarCity as examples of this collaboration with large, established corporations.  Musk realized he needed major strategic partners to make his ideas reality, while the big corporations were able to tap into the small companies’ innovative talents.  For Tesla, Musk brought in Daimler with a 10% stake, Toyota (NYSE:TM) with a $50m investment, and Panasonic  (OTC:PCRFY) with a $30m investment.  These were self-interested investments: Toyota has collaborated Tesla on the technology of its new Electric RAV-4.  Panasonic also collaborated with Tesla on new battery technology, and is now benefiting from Tesla’s rise.  Panasonic will is expected to ship 100,000 automotive grade lithium-ion battery cells to Tesla by the end of the month.

SolarCity (SCTY) also worked in collaboration with big corporate partners. SolarCity’s financing partnerships with Google (NASD:GOOG) and Goldman Sachs (NYSE:GS) are well known, but Shapiro highlights its lesser-known partnership with Honda as the most innovative.   Honda is not only seeking cost savings and green credentials by installing SolarCity systems on its dealerships, but it is also lending SolarCity some of its marketing muscle.  Honda and Acura car owners get a $400 discount on SolarCity systems.


Want to find the next IPO like SolarCity or Tesla?  Look for the company with established corporate partners that are committed to the success of their clean energy partners.

Disclosure: No position in any of the companies mentioned.

This article was first published on the author's Forbes blog on June 25th.

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

July 06, 2013

China Solar Companies: "We Can Survive"

Doug Young

ldk logoA mini flurry of news from embattled solar panel makers seems to have the same singular message, designed to tell investors that they can survive an industry crisis now entering its third year. Of course the companies that emerge when the crisis finally subsidies could be far different from the ones that went into the crisis, which seems to be the message from LDK (NYSE: LDK) in its latest announcement involving its slow takeover by a Chinese investor. At the other end of the spectrum, the message from Canadian Solar (Nasdaq: CSIQ) is a more upbeat, with the company forecasting a return to profit for all of 2013 as it rolls out a new business model. Finally in the middle there’s Trina (NYSE: TSL), which is simply trying to show investors it’s capable of repaying its debt.

Investors responded to this flurry of news by continuing to treat solar stocks as mostly gambling toys rather than real investment instruments, as everyone waits to see what kind of industry will emerge from the ongoing sector retrenchment. Only Trina’s shares managed to rally on its relatively upbeat news, rising 3.5 percent after it said it would repay its debt coming due later this month.

Canadian Solar shares actually fell 2 percent after it forecast that it would turn a profit for all of 2013. But I should also note that the company’s shares have staged an incredible rally over the last few months, nearly quadrupling since late March, So perhaps the stock was due for a break on this latest good news. Lastly, LDK shares fell 5 percent on the latest news that the company is being slowly taken over by another Chinese investor.

Let’s start with a closer look first at Canadian Solar, whose forecast of a return to profits for all of 2013 is part of a larger announcement about the sale of a solar power plant that it built. (company announcement) In this case, Canadian Solar sold the 10 megawatt plant in Canada to TransCanada Corp (NYSE: TRP). The plant is the first in a bigger deal by Canadian Solar to sell a total of 9 similar-sized plants to TransCanada. Solar companies have turned to this kind of deal, in which they build plants for operators, in a bid to generate new business during the ongoing crisis.

This kind of model does indeed look like a good source of new business, assuming buyers like TransCanada actually end up paying for all the new plants they promised to buy.  Canadian Solar says the sale is part of its goal to obtain half of its revenue from building such plants for operators, which is a key part of its strategy for posting a profit for the full-year 2013.

From Canadian Solar, let’s look quickly at Trina, which said it expects to finish paying off $138 million worth of 5-year bonds by their due date later this month. (company announcement) In this case most of the notes have already been redeemed, and Trina still needs to repay $57 million. But the message is clear. Trina is saying it has the money to repay its obligations and will continue to honor its debt, at least for now.

Finally there’s LDK, the weakest of China’s major solar players, which announced it has issued 25 million new shares to Fulai Investments for $1.03 per share. (company announcement) Based on its latest share price, the sale would account for about 12 percent of LDK’s market value. Fulai had previously purchased 19 million shares of LDK (previous post), meaning it should now own about 20 percent of the struggling company. Look for Fulai to keep boosting its stake, most likely at the expense of existing shareholders, as it slowly takes over LDK.

Bottom line: Canadian Solar looks set to survive the solar industry’s ongoing crisis using its new business model, while LDK is slowly being taken over by an opportunistic buyer.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He 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 author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

July 05, 2013

New Flyer Consolidates Leading Position in Transit Bus and Parts Markets

Tom Konrad CFA

On June 21st, leading North American heavy-duty transit bus manufacturer New Flyer Industries (TSX:NFI, OTC:NFYEF) announced the acquisition of its third largest competitor, North American Bus Industries [NABI] from private equity firm Cerberus Capital.

The following Monday, New Flyer management held a call to discuss the acquisition with analysts.   Here are the highlights.

Cost and Financing: The C$84 million cost to New Flyer consists almost entirely of the assumption and discharge of NABI’s existing debt.  This will be funded with C$64 million by issuing to the world’s second largest bus maker Marcopolo S.A. for C$10.50 a share (above the current market price) under the strategic investment agreement announced in January.  An additional C$20 million will be funded using New Flyer’s term loan facility, which has been expanded to reflect the merged company’s larger size.

Effect on Revenues: The combined company’s trailing 12 month (TTM) were C$1,222 million, an increase of 37% over New Flyer’s alone.

Effect on EBITDA: The combined company’s TTM EBITDA would be C$81 million, a 35% increase over New Flyer’s alone.  The transaction should also increase EBITDA and earnings per share.

Leverage: The mostly equity financing should increase New Flyer’s financial strength, lowering its debt-to equity ratio from 2.8x to 2.2x.

Effect on Competition and Regulatory Scrutiny: Although the transaction will reduce the major players in the North American transit bus market to only three, management took pains to emphasize that the market will remain competitive.  The transaction will not face scrutiny from US competition authorities because all the proceeds were for the satisfaction of NABI’s outstanding debt.

The combined entity has approximately 42% of the new transit bus market and 34% of the aftermarket parts market.

Synergies: New Flyer does not plan layoffs, and emphasizes that the acquisition will be accretive to earnings without any cost reduction.  NABI has just been through a multi-year reorganization which removed significant inefficiencies, such as the construction of bus chassis in Hungary for shipment to the US, and the discontinuation of single-customer bus models.

That said, New Flyer expects significant improvements in the efficiency in the combined aftermarket parts operations of New Flyer, NABI, and Orion (acquired earlier this year.)  This will arise mostly from access to the proprietary parts databases of both Orion and NABI, which should allow all three to carry smaller inventories and meet customer needs more effectively.

New Flyer also anticipates the the larger aftermarket parts and service division will be able to provide more attractive service options for customers, and this may improve the competitiveness of it bids for new bus orders.

New Flyer will also not have two Low Floor Transit bus models (NABI’s LFW and its own Excelsior) with different cost structures, which it will be able to fine tune to be competitive with different types of customers.  Although these two bus models can be direct competitors, it sounds to me like the LFW had the advantage in smaller, lower frills bids, although management took pains to deny that NABI’s advantage arose simply because it is “cheaper” to manufacture buses in Alabama than at New Flyer’s facilities in  Winnipeg, Manitoba and St. Cloud Minnesota.

The merger will expand New Flyer’s offerings with  a specialized Bus Rapid Transit (BRT)model stainless steel bus frames.   The BRT model is appealing to certain customers wanting a more unique or custom look.

New Flyer previously only offered industry standard carbon steel buses.   Stainless steel may be preferred by some customers over carbon steel because of longer life and lower maintenance, especially in cold and humid climates with significant salt exposure.    This PDF for more about the relative advantages of stainless steel also claims that stainles steel has the potential to significantly reduce bus weight and manufacturing costs.


Management says “It’s an understatement to say we’re excited by this.”  I think investors should be excited, too.  I added slightly to my already large position Friday evening, right after the deal was announced.  NABI is already a profitable bus business acquired at a price which should increase New Flyer’s earnings per share and allows the company to be competitive when bidding for both new bus and service contracts wit ha broadened and strengthened offering.

The potential synergies from controlling more than a third of the higher margin aftermarket parts and service business are particularly exciting, and I expect New Flyer will see both significant price reductions and growing market share is this counter cyclical segment of the transit bus market.

Disclosure: Long NFI

This article was first published on the author's Forbes blog on June 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.

July 04, 2013

Tesla Motors and the Political Economy of Dealer Franchise Laws

by Lynne Kiesling

The Tesla Model S: Bypassing dealer franchises. For now.
Tesla Motors (NASD:TSLA) is doing more than shaking up the automobile industry by producing an exciting high-end electric vehicle and establishing a network of battery-swapping stations. Tesla wants to sell directly to consumers, bypassing established dealer franchising that dominates the industry. But such dealer franchising has not been a mere transaction-cost-driven Coasian outcome — it’s undergirded by state laws that require manufacturers to sell their automobiles through independent dealers (Francine Lafontaine and Fiona Scott Morton, Journal of Economic Perspectives Summer 2010 (pdf) provides a useful overview of the history of such laws).

Existing dealers object to Tesla’s direct-to-market approach, and are using the dealer franchise laws to stop Tesla from doing so in states like Virginia; see also this Reason post on legislative events in New York. Note that Virginia law prohibits manufacturers from owning dealerships, outlawing vertical integration in the name of promoting competition, which means that a potential competitor can’t use vertical integration as a competitive strategy (yeah, that’ll promote competition …). Think about that restriction, and apply it to another innovative company: Apple. Dealer franchise laws in electronics would prohibit Apple (and Samsung, etc.) from operating its own stores. How would such a law affect competition in electronics? The answer is not clear, which is the point; vertical integration is not inherently anti-competitive at the retail level. In many ways, these laws are a relic, a holdover from a century ago when the economics of vertical integration was not well understood and vertically integrated firms with market power were per se suspect.

Dan Crane has a really nice post at Truth on the Market about the state dealer franchise laws that examines all of the arguments in favor of state dealer franchise laws. After countering them all and finding them wanting, Crane concludes that

Since the arguments for dealer laws are so weak, I’m left with the firm impression that this is just special interest rent-seeking of the worst kind.  It’s a real shame that Tesla—seemingly one of the most innovative, successful, and environmentally correct American industrial firms of the last decade—is going to have to spend tens of millions of dollars and may eventually have to cut shady political deals for the right to sell its own products.

This raises an interesting political economy situation. When innovative and environmentally correct meets the crony corporatism of existing legislation, is the entrenched incumbent dealer industry sufficiently politically powerful to succeed in retaining their enabling legislation that raises their new rival’s costs?

Lynne Kiesling is a Distinguished Senior Lecturer in the Department of Economics at Northwestern University. Her economic specialty is industrial organization, regulatory policy and market design in the electricity industry.  In particular, she examines the interaction of market design and innovation in the development of retail markets, products and services and the economics of “smart grid” technologies. She also teaches undergraduate courses in principles of economics, energy economics, environmental economics, and history of economic thought, and she writes about economics as the editor/owner at the website Knowledge Problem, where this post first appeared.

July 03, 2013

Sixteen Clean Energy Stocks, Two Months

Tom Konrad CFA

As I discussed in the first part of this update, this part will discuss the drivers behind the performance of the individual stocks in my Ten Clean energy Stocks for 2013 and six alternative picks.  I looked into the performance of the portfolio as a whole in part I. The chart below summarizes individual stock performance.  Note that it reflects two more days of trading since I wrote part I.
10 for 2013 H1.png
Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF)

Geothermal heat pump manufacturer Waterfurnace rose 25% but not on any significant news.  Analysts at Canaccord Genuity raised their price target from $24 to $25 in early May, but I think most of the rise was due to WFI's earlier highly depressed levels and the recovering housing market.

Lime Energy (NASD:LIME)

Lime Energy finally announced a filing schedule for its financial reports dating back to 2008, all of which had to be restated after the company's audit committee determined they previous reports could not be relied on.  Lime expects to file the 2012 annual report (including restatements of prior years) and subsequent quarterly reports through the third quarter of last year on or before July 31st.  It expects to publish Its first quarter report for this year by August 8th.

Unfortunately, this schedule does not satisfy the already-extended deadline (June 30) granted by a NASDAQ Hearings Panel, and so the stock could be subject to delisting if another extension is not granted.  In general, investors seemed cheered to finally have a filing schedule.  Although the stock sold off at Friday's close (on low volume), it rebounded on July 1st. 

The extension was granted on July 2nd.  I expect a mild rebound over then next month, but the real move will come when we have some real financial data on July 31st. What little information we have seems to point to the company's business doing well: They are hiring in New Jersey and recently won a national energy efficiency award from the Alliance to Save Energy.

PFB Corporation (TSX:PFB, OTC:PFBOF)

Energy efficient building products company PFB paid its promised $1 special dividend in May, but the stock fell almost as much.  Given the recovering housing market and the fact that the new, lower price effectively makes the (regular) dividend yield 4.7%. I consider the stock attractive around $5 and have added to my position beyond just reinvesting the special dividend.

USD Return
TSX:WFI Waterfurnace Renewable Energy
NASD:LIME Lime Energy
TSX:PFB PFB Corporation
NASD:AMRC Ameresco, Inc. 15%
Amsterdam:ACCEL Accell Group
NASD:ZOLT Zoltek Companies, Inc.
NASD:KNDI Kandi Technologies
TSX-V:FVR Finavera Wind Energy
TSX:AXY Alterra Power
NYSE:WM Waste Management
Alternative picks
TSX:NFI New Flyer Industries
NYSE:LXU LSB Industries
NASD:MXWL Maxwell Technologies 13%
NYSE:HTM US Geothermal
TSX:RPG Ram Power Group

Ameresco, Inc. (NASD:AMRC)

Turnkey energy efficiency and renewable energy solution provider and performance contractor Ameresco purchased a British energy management consulting company in order to expand its services for multi-national clients in June.  This fits with Ameresco's long term strategy of acquiring small, tuck-in, acquisitions in new geographies.  The stock rose a healthy 15% for the two months.

Accell Group (Amsterdam:ACCEL)

Bicycle manufacturer and distributor Accell Group fell 11%, seemingly in sympathy with European markets.

Zoltek Companies (NASD:ZOLT)

Carbon fiber manufacturer Zoltek gave back 17% on lower than expected first quarter sales and earnings.  The shortfall arose from slow sales in the wind industry.  We can expect wind sales to pick up again toward the end of 2013, as turbine manufacturers ramp up production to meet renewed demand from developers wanting to break ground on wind farms before the end of 2013 to qualify for the extended Production Tax Credit.

The big potential mover for this stock is the possibility of a buy-out or big investment from Quinparo Partners, discussed here.  Zoltek's board continues to "review strategic options."  Landing a big customer in the auto industry could also turbo-charge ZOLT.

Kandi Technologies (NASD:KNDI)

Chinese EV and off road vehicle manufacturer Kandi Technologies took investors for a wild ride over the last month, with a strong rally triggered by progress in their joint venture with Geely (the car the JV will produce was approved by the Chinese government), and by the start of construction of a vertical parking structure designed for Kandi cars by the city of Hangzhou.  The structure is intended as the first of many such structures to be used by a new car-sharing service in the city.

As I said I would in the last update, I took a serious look at concerns raised by Kandi's skeptics in May.  My initial plan was to rebut their claims, but I found that they changed my mind instead..  On May 31st, I published an article generally skeptical of Kandi's management.  There aren't any smoking guns, but there are several red flags that make me worry that Kandi's management may not be totally committed to the interests small shareholders.  I concluded,

I no longer consider Kandi a long-term hold.  That said, my concerns about management are long-term in nature, and I think Kandi’s short term trend will be up. ... I expect Kandi’s upward momentum will soon resume.  I intend to maintain my reduced holding to take advantage of that trend.

Shortly after that article was published, the news about the Kandi-Geely JV came out, and Kandi stock took off like a rocket.  I locked in much of my gains by selling $5 covered calls.

Ten days after the article's initial publication on Forbes, I republished it (after Forbes' exclusive copyright period) on AltEnergyStocks.com, with a couple extra paragraphs to reflect the recent action, and re-titled it "Rent This EV Stock and Enjoy the Ride, But Don't Keep it Too Long."  "Too long" came quickly.  Kandi hit an intraday high of $8.50 the next day (June 11), and has trended down since.

Over the last couple trading days, the down-trend has been reinforced by a sale of $26.3 million, consisting of 4,376,036 common shares (13.5% of previously outstanding shares) priced at $6.03, and 1,750,415 warrants with an exercise price of $7.24 per share.  I feel the timing of the offering was fairly astute, as it allowed Kandi to raise needed capital at a significantly higher price than the stock had traded for years, but the larger share base will make it harder for the ride upward to continue, especially for the next 60 days, during which the two investors have the option to purchase another 728,936 shares for $7.24 a piece.  That option will cap the price for two month, since any rise above $7.24 would tempt the investors to buy the shares from the company and sell them on the open market.

I remain long, but with short covered calls in place. My concerns about Kandi's management remain long-term, while I think the short term will continue to show positive news trends.  Despite my concerns about management, I intend to retain Kandi in the model portfolio for the remainder of the year.

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF)

Wind developer Finavera received approval of its sale of two developments projects to Pattern Energy.  I looked at this in some detail last month, including a scenario analysis of Kandi's likely value at the end of the process in late 2014 (C$0.35 a share), and the milestones it needs to hit along the way.  You can find that article here.  Shareholder approval seems to have halted the stock's decline, but it has yet to catch any lift.

Alterra Power (TSX:AXY, OTC:MGMXF)

Diversified renewable energy developer Alterra Power finalized the terms of its joint venture with Philippine geothermal developer and operator EDC.  EDC will earn a 70% interest in the four projects in Chile and Peru, putting the value of Alterra's stake at $25 million, or 5.4 cents a share, approximately book value.  If the whole company were valued at book, it would be trading at $0.78, not $0.31.  Book is probably a low estimate of Alterra's true value, given that it has significant operating assets, not just development projects like the ones in the EDC joint venture.

Hence it's not a surprise that Alterra's Chairman, Ross Beaty bought another 7.6 million shares (1.9%) at the start of June, upping his stake to 30.9%.  As I mentioned in the last update, he has been hinting he will buy the whole company if the share price does not recover.

Waste Management (NYSE:WM)

Waste Management declined slightly despite the rising market because the rumors that the IRS might allow it to convert to a REIT look likely to amount to nothing.

Six Alternative Clean Energy Stocks

New Flyer Industries (TSX:NFI, OTC:NFYEF)

Transit bus maker New Flyer made what I think is an excellent acquisition in fourth-largest North American bus manufacturer, NABI.  The stock, which had been down, ended the two month up 10% on the news. 

LSB Industries (NYSE:LXU)

Chemicals and Climate control conglomerate missed earnings and revenue estimates for the first quarter, although the shortfall was mostly attributable to plant downtime and should be made up in later quarters from insurance proceeds.  The stock decline occurred mostly in the last couple weeks, and does not seem to be news-related.

Maxwell Technologies (NASD:MXWL)

Ultracapacitor maker Maxwell Technologies continued to advance.  The best explanation is have is that it gathered a little solar shine from , seemingly a joint venture with Soitec to demonstration integrate energy storage with Concentrating Solar (CPV) technology.  I find the advance very strange given that the stock is now trading at over 20 time training earnings which we know to be significantly overstated.  The Solitec JV is a demonstration, and will not  significantly effect earnings any time soon, if ever.


Power REIT declined significantly when an article by a new author came out on Seeking Alpha at the end of May which questioned the company's ability to avoid bankruptcy.  At first I thought this author was just a beginner who had not done his research well, and I wrote a rebuttal pointing out problems with his logic and math.  The article was withdrawn because of its factual errors and misleading conclusion.  I'm now wondering if the article was instead an attempt to profit as an undeclared short seller. 
My suspicion was aroused because the author claimed to be fixing the problems with the article to get it reinstated on Seeking Alpha, but he never delivered.  Further he hid his identity behind the Seeking Alpha profile: Although he claimed to want an open discussion, he would not discuss the problems in his article with me or Power REIT's CEO on the phone or by email.

The damage was longer lasting than I expected, most likely because PW's already thin volume has completely dried up.  It has been hovering around $9, well below the $10.50 or more it was trading at before the article appeared.  The company's CEO thinks this is a buying opportunity.  Since the article came out, he has bought 16,000 shares for prices between $8.21 and $9.49.  I added to my position as well.

US Geothermal (NYSE:HTM)

The news has been mostly good at US Geothermal, with some promising preliminary drilling results at its development project in Guatemala.  In conjunction with its first quarter results, management also provided earnings guidance for 2013, predicting full year EBITDA between $12.5 million and $13.4 million.  In the first quarter, ITDA (Interest, Tax, Depreciation, and Amortization) amounted to $2.14 million.  If this is maintained for the full year, we can expect earnings between $3.9 million and $4.8 million, or between 4 and 5 cents a share.  This gives HTM a forward P/E of about 8, which seems ridiculously low for a growing company.

Ram Power Group (TSX:RPG)

Geothermal developer Ram Power, like the other renewable developers, continued its decline despite generally positive news.  At 16 cents, it's now trading for barely more than cash on hand, and only 23% of book value.  With the company producing positive operating cash flow in the first quarter, which should increase by $1 million a quarter after a company reorganization, there is no reason for Ram to be trading at such a gigantic discount to book value, let alone near cash on hand.


The decline of the small renewable energy developers in this portfolio seems totally disconnected from financial reality, and has acted as a significant drag on the portfolio as a whole. 

At the Renewable Energy Finance Forum (REFF) Wall Street last week, I spoke to a wind developer who told me it is hard in the current environment to buy development projects.  In that environment, all four of the developers in this list look like favorable acquisition targets, perhaps with the exception of Finavera, since Pattern has already committed to buying the bulk of its assets.


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

July 02, 2013

Finavera Wind Energy's Path to Cash

Tom Konrad CFA

Location of the Miekle wind energy project. Photo source: Finavera

On June 21st, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) announced the ratification of the sale of its Tumbler Ridge and Meikle wind energy projects to Pattern Energy with 99.63% of votes cast in favor (a 2/3 majority was needed).

The result should have surprised no one, given that the sale was essential to Finavera’s liquidity and ability to fund its operations.  After shareholder, stock exchange, and regulatory approval, Pattern will forgive C$9.3 million of Finavera’s debt.  Shareholder approval is now complete, exchange approval is  expected this week, and regulatory approval should be complete by early September. (See below.)  Pattern is also providing a credit facility which will allow Finavera to continue its operations.

The company’s board of directors was also approved, although not with the same 99%+ of the votes.  Roughly a quarter of the votes for Finavera’s four directors were withheld.  According to Finavera’s CEO Jason Bak in an interview, a large block of the votes withheld from the directors were because one larger shareholder and creditor, Sprott Power Corp. (TSX:SPZ, OTC:STWPF) was registering its disapproval that it was not going to have a $900K loan repaid sooner.  That loan and Sprott’s 2 million share stake in Finavera arose last year, when Sprott was considering doing a deal with Finavera, but instead ended up buying assets from Shear Wind, Inc..


Going forward, there are a number of milestones needed to complete the Pattern transaction and to realize the value of Finavera’s stake in the Cloosh Wind Project in Ireland.  If both are completed, most likely in mid to late 2014, I calculate that Finavera will have between 32 and 44 cents of net cash on hand.  Bak promises a shareholder vote as to the use of this cash: should it be returned to shareholders as a dividend, or used to invest a new opportunity.  The timing of the vote will depend on when Finavera is able to present shareholders with a specific investment opportunity, and will likely precede the completion of the Pattern asset sale.

The next milestones for Finavera will be

  • Next day or two: Approval of the purchase by the Toronto Venture Exchange.  This should be completed in the next day or so.
  • July: Finavera will submit Miekle into the environmental review process.  Tumbler Ridge already has all necessary approvals.
  • Late August/ Early September: Approval by BC Hydro.   BC Hydro needs to update the Power Purchase Agreement (PPA)  for the Miekle and Tumbler Ridge projects to reflect the new owner.  With the business-friendly Liberals returned to power in British Columbia, Bak expects this process to go smoothly.  The defeated NDP had favored the utility to develop its own projects, rather than buying power from independent producers like Pattern.  At this point, Pattern will pay Finavera C$9.3 million which the latter will use  to repay a similar amount of debt to Pattern.  For simplicity, I’ve also been referring to this as loan forgiveness.
  • H2 2013: Shareholder vote on use of net proceeds from Cloosh and Pattern transaction.  Dividend or pursue a new opportunities?  If the vote is to pursue new opportunities, the goal will be to build Finavera’s assets and eventually qualify for listing on a much more liquid exchange than the Toronto Venture.
  • Q4 2013: Financial close of the Cloosh wind farm.  Bak says this process remains on track, and involves finalizing only “minor issues”  around access to the site, grid connections, and landowner agreements.  He says the largest remaining issue permitting of the electrical substation.  Turbine design and layout should be complete by the end of the summer.  When Cloosh reaches financial close, Finavera will receive approximately C$9.3 million (This is confusingly approximately the same amount as the Pattern loan, but a different payment from a different source,) and begin an auction process to sell its 10% stake in the Cloosh wind farm.  Bak estimates this stake will be worth between C$3 and C$4 million.  I used C$3 million in my valuation below.  Bak has a “high degree of confidence” in reaching financial close on Cloosh by the end of the year.
  • Q1 2013.  The environmental approval process  should take six months for Miekle.  This process was  thrown off in the past because the BC auditor general got involved, but now the process is set, and that is unlikely to happen again.  The environmental approval is  followed by ministerial approval, which takes another 45 days.
  • Ongoing: Finavera continues to measure the wind regime at Miekle, and the additional data will be used to optimize the combined design of the Miekle and Tumbler projects.   So far, the the wind regime at Miekle seems better than anticipated, and this may allow Pattern to fill the full power requirement of the PPA with 187 MW of turbines at Miekle, what Bak calls the “Super Miekle” option.  This will be more profitable for Pattern, because it will allow the company to fill the entire PPA with less supporting infrastructure (access roads, substations, etc.)   The other likely option would be to build 117 MW at Miekle and 47 MW at Tumbler Ridge.  This will be relatively less profitable to Finavera because a Super-Mielke project will likely be larger than the two smaller projects combined.
  • Q3-4 2014: Meikle and Tumber Ridge projects or Super-Miekle project shovel-ready.  Final payment from Pattern.

Value on Financial Close of Pattern Deal

Given the different possibilities, I decided to do a quick scenario analysis of the possible outcomes for Finavera, and look at what that means for Finavera.  To be conservative, I not only considered the two options Bak thinks are likely (Super-Miekle or Meikle and Tumbler) but also considered a couple possibilities which he considers very unlikely.

With regards to Cloosh, I gave a 10% probability that something will go horribly wrong, and Finavera will not receive the final C$9.3 million payment or be able to sell its residual stake.   In reality, even if something goes wrong at Cloosh, Finavera should be able to recover some value from this very advanced project, but I wanted to be conservative.  With regards to Miekle and Tumbler, I gave a 5% probability to building only 114 MW at Miekle and none at Tumbler Ridge.  Bak says that the wind regime has now proven strong enough at Tumbler that this is no longer an option being considered, but I decided to throw it into the mix anyway, with a 5% probability.  I then gave a 45% probability to the Super-Miekle option, which Bak considers most likely, and a 50% probability to the Miekle and Tumbler option.  This is again conservative, as I gave the higher probability to the less valuable scenario.

The results are shown in the chart below:

Finavera Valuation.png

In my calculations, I assumed 37.5 million diluted shares outstanding, C$22.6 million in liabilities, C$2 million in current assets, and C$3 million in operating expenses before Finavera receives the final payment from Pattern.


The positive result from the Annual General and Special Shareholder meeting had begun to lift Finavera off its low, only to be reversed by two days over cratering stock markets on Wednesday and Thursday.  Although there is always considerable risk in small companies like Finavera, even discounting next year’s expected cash holdings of C$0.35 per share by 50% gives a value to Finavera today of C$0.175.  Today’s 14 cent share price looks likely to double (or more) over the next 18 months, as Finavera completes the milestones above.

Disclosure: Long FVR, SPZ.

This article was first published on the author's Forbes blog on June 21st.

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

July 01, 2013

Green Diesel At Scale

Jim Lane

A now-complete 142 million gallon green diesel monster project will easily deliver big on renewable energy targets and greenhouse gas emissions reduction.

But it also offers a material path to profits for its parents, Valero Energy and Darling International.

In Louisiana, Darling International (DAR) announced that Diamond Green Diesel, the joint venture between Valero (VLO) subsidiary Diamond Alternative Energy LLC and Darling International , has reached mechanical completion and the startup process will lead to full production of renewable diesel.

Once in full operations, the 9,300 barrel-per-day (142.5 million gallon) plant in Norco, Louisiana will process recycled animal fat and used cooking oil as well as corn oil into renewable diesel fuel that has comparable properties to petroleum-based diesel. The renewable diesel can be shipped by pipeline and meets low-carbon fuel standards.

The Diamond Green Diesel plant in Norco, during construction.

According to company estimates, the facility will reduce greenhouse gases by more than 80 percent over conventional petroleum-based diesel; fulfill almost 14 percent of a national mandate to boost production for biomass-based diesel; and create more than 700 jobs at peak construction in Louisiana.

The plant features Honeywell (HON) UOP’s Ecofining pretreatment and hydrotreating/isomerization process to convert animal-based oils into hydrocarbon fuels — similar but not exactly the same as the hydrotreating processes used by Dynamic Fuels (also in Louisiana) as well at Neste Oil’s massive plants in Singapore, the Netherlands and Finland.

The project will sell diesel into the market on an unsubsidized basis, at the rack price — supplementing its bottom line with the value of renewable energy RINs that are used by obligated parties to satisfy their obligations under the Renewable Fuel Standard.

Darling International Chairman and Chief Executive Officer Randall Stuewe said, “We are proud to report the mechanical completion and startup of Diamond Green Diesel. This joint venture will be a producer of high quality renewable diesel capable of fulfilling the RFS2 biomass-based diesel mandate. Our partnership with Valero will benefit Diamond Green Diesel through multiple operational synergies.”

Renewable diesel – 3 reasons it really, really matters.

As we wrote in “Renewable Diesel Surges” last year:

1. It’s a drop-in biofuel, requiring no infrastructure change – and there are generally no limits on its distribution except those imposed by cost and geography, and the size of the global diesel pool itself, which could absorb capacity from  hundreds of advanced biofuels projects.

2. It’s renewable, here now, made at home, and at-scale today. No need to wait for the promise of algal biofuels, or other hot technologies still in the process of commercializing at scale. More than 600 million gallons of capacity already exists – Dynamic Fuels plant in Louisiana, and three from Neste Oil (NEF.F) in Rotterdam, Singapore and Finland.

3. In the case of Dynamic Fuels, Diamond Green and Emerald Biofuels, all three projects can utilize animal waste residues – a classic case of turning low-value, noxious feedstocks into high-value molecules.

Existing feedstocks rule, scale matters

To work as a financial project, Diamond Green Diesel will be the largest consumer of recycled restaurant grease and animal fats in North America (1.1 billion pounds annually). As much as 11% of US used cooking oils and animal fats will be processed at the Diamond Green Diesel facility

As we wrote in naming this project to our “Diamond Dozen“:

“Overwhelmingly, one trend is clear: all of the projects expected to reach significant scale by 2017 features a feedstock that is already aggregated, or already in existence and easy to aggregate. Novel feedstocks such as energy grasses or canes – that’s a sure ticket to small-scale or the very long term.

“Take the existing US corn ethanol fleet, for example. Three companies are expected to build 1.2 billion gallons of advanced biofuels (Butamax, Gevo (GEVO) and POET-DSM) over the next five years using corn starch, cobs and stover. Then there’s the existent wood basket – which forestry companies have long since demonstrated an ability to grow, harvest and aggregate on a sustainable basis.

“Animal residues and palm oil (already aggregated) represent another 709 million gallons, and then we have more than 600 million gallons from natural gas. Even the advanced fermentation technologies expect to use existing supplies of sugars and CO2.

“The message is clear. The bottleneck in advanced biofuels – the underlying problem in the “Where are the gallons?” equation – lies in the feedstocks. There are. these days, plenty of technologies available that can generate 70-130 gallons per ton of biomass at what, according to their analysis, will be at competitive prices to $100 oil.

RINs matter

In December, Dynamic Fuels filed this with the SEC:

“The economics of the U.S. biomass based diesel industry are currently challenged by significantly lower RIN (renewable identification number) prices. D4 RIN prices averaged $1.39 for the first six months of 2012. As of December 10, 2012, the D4 RIN price was $0.56.   RIN prices at these levels have not been seen since the implementation of the RFS2 program by EPA in July of 2010.

“The regulatory framework underpinning biomass based diesel production remains intact.  The biomass based diesel mandate for 2013 is 1.28 billion gallons, or 28% above the 2012 mandate.  We expect markets to adjust positively in 2013 due to the higher mandate.”

The Economics

In a presentation that Darling made to shareholders and analysts, the company went through the economics of its fuel pro-forma, showing a projected $1.03 in profit per gallon. Note that this is based on operating costs only.

However, the good news is that, on a dollars per gallon of capacity basis, the project is not all that expensive by advanced biofuels standards. Valero projected the cost in 2011 to be $368 million — which works out to be $2.59 per gallon of capacity, or $0.17 per gallon per year if amortized over 15 years (excluding interest costs, because in this case Valero financed the plant without tapping a $241 million DOE loan guarantee.

Items to watch in those profit projections — diesel prices and RIN prices. Gulf Coast ULS diesel is selling at $2.82 this week, down from the $3.07 projection in the Darling forecast. Meanwhile, as Dynamic Fuels indicated, RIN prices were in the $0.56 range in December, though they have subsequently climbed back to more than $0.80 in the past quarter.

One more item – feedstock costs. $0.44 per pound for blended fat. Man, is that price getting high for waste fats.

The Bottom Line

A signature mechanical completion. We hope the commissioning period is short enough that the plant may start making a material contribution to US biobased diesel production figures in the 4th quarter.

But this much is sure. It’s not only transformative fuel— with emissions in the 80% reduction range — but it’s profitable fuel, sold on an unsubsidized basis (no tax credits) although greatly assisted by the economics within the Renewable Fuel Standard. It’s expected to become a material contributor to Darling’s bottom line — and if profits continue to be available, will do much to persuade Valero amongst others of the benefits of continuing to invest in renewable fuels.

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.

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